BOLIVIA: ECONOMIC PROBLEMS FACING THE BANZER GOVERNMENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030002-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 2
• Publication Date: January 1, 1972
• Content Type: IM

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25X1 ~r
Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Bolivia: Economic Problems Facing the Banzer Government
Secret
ER IM 72-2
January 1972
CopyNo~.
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WARNING
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Its transmission or revelation of its contents to or re-
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
January 1972
INTELLIGENCE MEMORANDUM
BOLIVIA:
ECONOMIC PROBLEMS
FACING THE BANZER GOVERNMENT
Summary and Conclusions
1. The government of Colonel Hugo Banzer Suarez, which came to
power in a bloody revolt on 22 August 1971, has made progress in reviving
business confidence and restoring good relations with the United States.
The populist and extreme nationalist policies of the preceding regimes of
Generals Alfredo Ovando and Juan Jose Torres have been largely abandoned,
and compensation settlements have been near;y reached for two of three
nationalized US business properties. Progress in coping with the politically
difficult economic problems inherited from Torres, however, has been slow,
and some indications of drift have been apparent. A large 1971 budget
deficit is being met with stop-gap measures, including central bank financing,
which could endanger price stability, hamper private investment recovery,
and lead to increased balance-of-payments strains. Although sizable foreign
economic assistance offers, especially from the United States; eventually
will be beneficial, they provide little help in meeting the immediate deficit
problem.
2. President Banzer will have difficulty avoiding an even larger
budget deficit next year. Public investment is slated for a large increase
to help accelerate economic growth and reduce unemployment, and the
large carryover of unpaid 1971 bills compounds the problem. Vigorous
action to ease budget difficulties is opposed by members of his cabinet,
and Banzer probably believes that such action would threaten the
government's already fragile cohesion. Thus, although Bolivia is subject to
international pressures to straighten out its fiscal affairs, Banzer possibly
will avoid decisive action, relying on Washington to bail him ou i some time
Note: This memorandum was prepared by the Office of Economic
Intelligence and coordinated within CIA.
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next year. Moreover, any longer-term solution to the country's economic
problems will require gaining the confidence of both domestic and foreign
investors - a formidable task in view of Bolivia's political history.
Discussion
Economic Policy Under Torres
3. General Juan Jose Torres' seizure of power in October 1970 -
Bolivia's third leadership change in less than two years - immediately
followed a bungled coup by rightist military leaders against the moderately
leftist government of General Alfredo Ovando. Distrusted by business anti
most military leaders, Torres during his ten months in office looked
increasingly to extreme leftist labor unions and students for support. Amid
promises of improved living standards through greater state control of the
economy, Torres boosted miners' and factory workers' pay, placed
marketing of several major crops under government control, nationalized
two of Bolivia's four sugar mills, and threatened to take over other private
domestic holdings in banking, electric power, and manufacturing. When his
anti-business policies encouraged mounting labor disturbances, he failed to
forcefully use state powers to restore order.
4. Blaming Bolivia's backwardness on "imperialist domination,"
Torres accelerated the movement against US-owned business properties
initiated when Ovando nationalized the Bolivian Gulf Oil Company
properties in October 1969.* In January 1971 he took over the $3 million
properties of the International Metal Processing Company (IMPC), and in
June he nationalized the $12 million properties of the 1VIatilde Mining
Corporation, a zinc-mining subsidiary of US Steel and Engelhard Mining
and Chemicals. Pressure against US firms intensified when armed bands of
leftists occupied, without opposition from Torres, the gold-dredging facilities
of the South American Placers, Inc., and the zinc-mining properties of the
Gibralter Huari-Huari Mining Corp. Torres publicly reaffirmed the Gulf
compensation settlement reached by Ovando and promised full'
compensation for the Matilde and IMPC properties, but lie did little to
fulfill these pledges before his overthrow.
5. To promote Bolvia's independence from "imperialist hegemony,"
Torres continued the expansion ;,; relations with Communist countries
initiated by the Ovando government. During their regimes, trade and
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diplomatic relations were established with the USSR and five East European
Communist countries. Exports to Communist countries rose from $2 million
in 1969 to $10 million in 1970 - about 511o of total export earnings -
and entailed some diversion of tin sales from traditional markets. Bolivia
obtained offers of $56 million in Communist economic assistance, including
a $27.5 million Soviet credit covering four tin volatilization plants and other
mining projects and a $4 million Czech credit for an antimony smelter
now nearing completion.
The Economy's Course in 1970-71
6. Torres' measures shook business confidence, which had just begun
to recover from Ovando's Gulf nationalization. From 1969 to 1970, private
investment fell 20%, and in the first three quarters of 1971 probably
declined even more. Net direct foreign investment inflows, which had
averaged $6.5 million annually during 1966-69, dried up, and the availability
of foreign supplier credits from non-Communist sources dwindled. Public
investment also dropped sharply in 1970 and apparently fell further in early
1971. By August 1971, construction had come to a standstill, and the
unemployment rate - already at 22% of the urban labor force in
February had grown further.
7. Despite a 21% rise in Bolivia's export prices in 1970,
balance-of-payments strains became evident after mid-year and mounted
sharply in the first six months of 1971. Although imports were at reduced
levels throughout the period, short-term capital flight and the drying up
of long-term capital inflows caused payments deficits in the last two quarters
of 1970. Together with declining export prices, these factors induced even
larger deficits in the first two quarters of 1971. Net foreign exchange
reserves dropped from $41 million on 30 June 1970 to $30 million at
the end of June 1971. The decline would have been even more pronounced
had. Bolivia not received an additional $4 million in Special Drawing Rights
in January 1971 (see the chart). Reserves recovered slightly in the third
quarter of 1971 because of a windfall refund under the International Tin
Agreement but still were sufficient to cover only about two months'
imports.
8. Government fiscal performance remained strong through the end
of 1970 but deteriorated sharply in.the first eight months of 1971. Although
Ovando granted a large teachers' pay hike in Sept,:mber 1970, expenditures
were held in check -- mainly by cutting public investment - and the budget
deficit was reduced to 14% of expenditures, compared with 1 S% in 1969.
In 1971, however, revenue growth slowed while expenditures &,-ew sharply,
despite continued low public investment. Outlay growth was sparked by
higher teachers' salaries and greatly increased transfers to the State Mining
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Bolivia: Net Foreign Exchange Reserves*
Excluding Special Drawing Rights
n m
1969
*End of period
512796 12-71
n m
1970
Company (COMIBOL), to cover its sharply rising wage bill. By August 1971
a budget deficit equivalent to some $40 million, or about 30% of
expenditures, was in prospect for the year. Monetary restraint - largely
at the expense of private sector credit -- permitted continued price stability
throughout the period but contributed to a substantial reduction in the
economic growth rate.
The Banzer Government's Policy Orientation and Initial Moves
9. The Banzer government - an unlikely coalition of military
officers, businessmen, and traditionally antagonistic political parties - lost
no time seeking foreign financial backing and a strengthened political base.
Striking a moderately nationalistic posture, it announced that the Gulf,
Matilde, and IMPC nationalizations were "irrevocable" and that Gibralter
would be made a joint state-private enterprise but promised that prompt
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steps would be taken to effect satisfactory compensation settlements. The
government also stated that new foreign investment was welcomed and,
while subject to "new responsibilities," would receive adequate guarantees
and new financial incentives. At the same time, the government affirmed
that Communist-financed projects initiated under Torres would not be
suspended, because capital from any source was desired so long as it met
Bolivia's needs.
10. To maintain its own security and to consolidate its support from
moderate elements, the Banzer government jailed or drove into exile most
far-leftist labor leaders. It also eliminated union participation in the
management of COMIBOL and other state enterprises and announced that
the unions wouli be reorganized on a "depoliticized" basis. The marketing
of coffee (but not other crops) was removed from state monopoly and
restored to the private sector. The government maintains that continued
state planning and control is necessary to Bolivia's development and
advocates the formation of some joint state-private enterprises with majority
state control. Nevertheless, it has guaranteed continued operation of
privately owned mines (which still account for about half the metallic
mineral output) and promised to reserve other economic spheres for private
ownership. The Banzer government's restraint regarding politically inspired
promises to redistribute income and the greater emphasis on accelerating
economic growth and reducing unemployment also have pleased business
interests. The business commodity, which played an important role in
financing Banzer's takeover, responded to the government's posture by
adopting self-imposed price controls on manufactured goods and promising
to expand investment immediately.
11. In an effort to restore good relations with the US Government
and improve the investment climate, the government moved quickly to undo
some of the damage caused by the Torres government's attacks against
foreign businesses. It drove the armed squatters from the US-owned mines,
proposed satisfactory compensation settlements for IMPC and Gibralter, and
is negotiating with the Matilde mine owners. It also took a step toward
fully indemnifying Gulf by completing arrangements for $42 million in
foreign assistance to finance a gas pipeline to Argentina. Revenues from
these gas sales - according to the 1970 settlement - are to provide most
of Gulf's compensation. In other efforts to reassure foreign investors, the
Banzer government promised to seek "greater flexibility" in the Andean
Foreign Investment Code as it applies to Bolivia and appointed a commission
to revise the Bolivian Mining Code to give private investors greater latitude.
12. By current Latin American standards, the Banzer government has
agreed to relatively liberal compensation for nationalized foreign properties.
Under the IMPC settlement, as yet unsigned, the government will pay $1.5
million in cash to cancel all prior owner claims, and a new joint venture
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with a 55% government share will be established to operate the IMPC
facilities, which are to be enlarged. In addition to their 45% share in the
profits, which will be taxed at the rate for medium-sized private mines,
the US owners will receive $20,000-$25,000 monthly for managing the
facilities and for use of their patents. Full ownership of the facilities and
patents will revert to the government in ten years. The settlement's main
features -- cash payment for prior claims, majority state ownership in the
new joint venture, the managerial service contract, and the ten-year "fade
out" provision - also are included in the Gibralter agreement, and the
government plans to apply them in the Matilde settlement as well.
The Role of Foreign Aid
13. Because of its moderate policies and forthright action to settle
nationalization cases, the Banzer government can count on significant
foreign economic assistance. The US Government has provided a $22 million
aid package - including an immediate $2 million grant, a $12 million
program loan, and an $8 million agricultural loan. Moreover, in addition
to the $42 million gas pipeline loan approved by the World Bank and the
Inter-American Development Bank (IDB), some $37 million in development
funds have been made available from these two international agencies and
several Latin American and European countries. Several Communist
countries have confirmed aid deals originally extended the Torres regime.
14. Foreign lenders' requirements, however, pose serious obstacles to
Bolivia's utilization of most of the economic assistance proffered. Only the
$2 million US grant directly helps the Banzer government in dealing with
the large budget deficit - its most immediate problem. Utilization of the
non-US aid, in fact, will exacerbate the budget problem because Bolivia
is required to finance the local costs of the projects involved. Even the
usefulness of the US program loan (which does not involve Bolivian
counterpart expenditures) is severely limited by the requirement that the
funds be used only for public investment projects. Financing the few active
investment projects inheri,-d from the Torres regime would absorb only
a fraction of the $12 million involved, and the severe shortage of
experienced technical personnel has hampered the drawing up of new
projects.
Problems and Options
15. Despite the Banzer government's forward movement on some
fronts, Bolivia's chances of easing its economic problems seem dim and
its options limited - perhaps even more than usual. The scanty information
available does not suggest that private investment has fully revived. This
situation may reflect continuing credit and other commercial difficulties
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or, more likely, reaction to unsure political prospects. Although the Banzer
government has reduced the prospective 1971 budget deficit by
approximately one-fourth through expenditure cuts, it has resorted mainly
to stop-gap measures to finance the still large remaining deficit of some
$30 million. This financing has required increases in the floating debt,
borrowing against counterpart accounts, and central bank borrowing; part
of these funds will have to be repaid next year. As of early November,
the equivalent of about $8 million still remained to be covered, possibly
by further central bank borrowing.
16. Excessive recourse to central bank financing could have serious
implications for private investment or price stability - or both. Increased
credit to the government would require either further curtailment of credit
to the private sector, thus holding back any upswing in private investment,
or a more expansionary monetary policy that would raise prices ;f imports
could not adequately supplement domestic supply. Net foreign reserves
undoubtedly have risen since 30 Sep+smber and will continue to benefit
from aid disbursements. Nevertheless, a sharp rise in imports could worsen
the reserve position, forcing the government to choose between
balance-of-payments problems and the price rises that are almost irrationally
feared by many Bolivians because of the runaway inflation in the early
1950s.
17. Avoiding an even larger budget deficit next year will be difficult.
The 1972 budget provides for a large rise in investment outlays to further
President Banzer's goals of stimulating economic growth and alleviating
unemployment. Unless the government takes some counteraction, this
investment increase and the carryover of unpaid 1971 bills will boost the
deficit to at least $50 million. Less than one-third of this deficit is likely
to be financed with foreign assistance funds. Moreover, the government
apparently assumes that receipts from export taxes and COMIBOL profits
will rise, or at least remain firm. If world prices for Bolivia's mineral exports
continue to decline (as seems likely) or if labor disturbances hurt mining
output, the deficit would be even larger.
18. President Banzer has several alternatives for reducing the deficit,
all of which are being opposed by various members of his cabinet. For
example, he could increase taxes. Several cabinet members, including the
business community's principal representative, have sought, however, not
only to avoid increasing taxes but to find ways of reducing them. Nor
are many cabinet members likely to favor paring noninvestment outlays,
since this would require curtailed government services or reduced pay rates
for miners, teachers, and other public employees. A major peso devaluation,
as recommended by the International Monetary Fund (IMF), would ease
Banzer's budget problems greatly by increasing state mine profits and tax
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revenues from private mines and would have some beneficial effect on the
balance of payments. Devaluation, however, could have a seriously adverse
political impact because it would boost the cost of living by increasing
the price of imports. Several cabinet members are opposed to a devaluation,
and many Bolivians take pride in having held to the same exchange rate
since 1958. The general currency realignment presently under way obviously
would provide the opportunity for a major peso devaluation with minimum
domestic political impact. Although the government has not yet announced
its response; it probably will at least maintain parity with the dollar. Such
an adjustment would provide only marginal balance-of-payments benefits.
19. Thus any route Banzer chooses will carry political risks. He
probably believes that strong action to cut the budget deficit would disrupt
the tenuous cohesion of the present ruling coalition. If the military remained
unified, this development might pose no real threat to Banzer's tenure, since
the military continues to provide the muscle behind the government. But
there are already indications that part of the military is not satisfied with
some of Banzer's actions. -Consequently, it is possible that - as predicted
by a recent IMF team - Banzer will take no action at all to cut the deficit.
Although his requests for budget assistance have been refused repeatedly,
he may still count on the United States to bail him out sometime in
mid-1972. Banzer continues to hope that the United States has a special
interest in avoiding another left-wing Bolivian goverment.
.20. Significant progress in solving Bolivia's longer-term problems of
impoverishment and underemployment will require a much greater
improvement in the investment outlook than the country's political
instability seems likely to permit. Because domestic resources are so limited,
development depends largely on the availability of foreign capital, which
under the best of circumstances finds little to attract it in Bolivia.
Widespread disbelief in the permanence of the Banzer government - or
those that may succeed it - fLrther reduces the help that can be expected
from private investors. Political uncertainty and the country's financial and
institutional poverty will also adversely affect both the amount and the
effectiveness of economic assistance. To the extent it is unable to meet
the requirements levied by foreign lending agencies, Bolivia will be forced
to rely on grants and other "soft" foreign aid which are likely to be available
only in limited amounts.
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