LETTER TO DAVID LOW FROM (SANITIZED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00759R000100050009-3
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: June 24, 2010
• Sequence Number: 9
• Publication Date: April 8, 1985
• Content Type: LETTER

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18 Apr 85
TO: (Name, office symbol, room number,
building, Agency/Post)
D/OGI 3G00
Initials
Date
2.
C/Econ Div/OGI
3G46
,
DD/GALA 3F45
C/Research Branch/OALA
L
oom 3F24
on
File
Note and Return
proval
For Clearance
Per Conversation
Requested
For Correction
Prepare Reply
irculate
For Your Information
See Me
mment
Investigate
Signature
1
coordination
Justify
letter and 2 articles MDUM
Brazil:
"Economic Presentations at the Bank Advisory Committee
Meeting" and
Argentina:
Talk by President Alfonsin and Meeting of the Bank
Working Committee
DO NOT use this form as a RECORD of approvals, concurrences, disposals,
clearances, and similar actions
FROM: (Name, org. symbol, Agency/Post) Room No.-Bldg.
7B42, Has.
NI0/Econ (David Low)
STAT
STAT
STAT
STAT
STAT
STAT
6041-102 OPTIONALpyFOAM 41 (Rev. 7-76)
GPO : 1983 0 - 381-529 (301) FPM ((R 41dC1R310011-11.206
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STAT
April 8, 1985
Mr. David Tow
Room 7 E 47
Central Intelligence Agency
?Washington, D. C. 20505
I am enclosing copies of two memoranda. One sum-
marizes comments to the Dank advisory Committee by
Antonio Carlos Lemoruber, President of the Central
?lank of 3razil, The other sets forth comments at a
meeting of the Dank Working Committee on Argentina by
Minister of 'D:conomy Sourroui_lle of that country, as
well as a representative of the IM!T. These were pre-
pared by a member of the Economic Sub-Committees for
the two countries.
I also reviewed the current position of the Banks
with Chile, Peru, Venezuela and Colombia. As you know,
the Banks are now discussing a new program with Chile.
i major problem continues to be disagreement on the
amount of new money the Banks well provide. Chile is
requesting $1156 million. The ?yanks countered with
an offer of $400 million, but are likely to go to
$600 million and perhaps in the end to $700 million
for the next several years. It is believed non-bank
sources should be able to meet Chile's needs there-
after. The World sank in particular should be able
to expand its program. Meanwhile, the Chilean economy
continues to exhibit little or no growth under the
tighter policies adopted after mid-1984.
T,WTith regard to Peru, the Banks expect to enter ne-
gotiations on a new program after the forthcoming
elections. Peru continues to pay $50 million interest
each month on existing debt to the Banks, but is six
months in arrears.
Negotiations with Venezuela have been at a stand-
still recently. Venezuela is preparing a policy paper
on the future handling of private-sector debt. How-
ever, the Banks are now receiving an increased flow
of interest payments on private debt.
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Colombia has not yet formally approached the
Ranks for financing. A meeting currently is set for
the week of April 16. The Banks continue to be unan-
imous in their judgement that Colombia should reach
an agreement with the IMF - a procedure which the
President of Colombia resists. So an impasse may
loom.
Sincerely,
STAT
STAT
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April 2, 1985
BRAZIL
Economic Presentations at the
Bank Advisory Committee Meeting
Antonio Carlos Lemgruber, President of the Central Bank of
Brazil provided an economic briefing to the Brazil Bank Advisory
Committee meeting of April 1. 1985. Accompanying him were Sergio de
Freitas, Director of the Central Bank's International Division and
other Central Bank economic officials.
High Inflation. Mr. Lemgruber was quite direct in stating that
Brazil's recent inflation rate is a "terrible" starting point for
the new Government that took office on March 15, 1985. For the
first quarter of 1985, inflation was at a record high of 11.8% per
month or 284% annualized. However, Lemgruber expects inflation to
decline and hopes that the April rate will be below 10% and that by
end-year it might fall to 180% on an annual basis. The reason for
this good expectation is an assumption that new fiscal restrictions
being taken will reduce money expansion and this will cut inflation.
Economic Growth. The real economy is continuing to exhibit a good
momentum in terms of production, sales and employment. In January
of 1985, for example, industrial production was expanding at a 8%
annual rate. Agricultural output is being paced by good crops of
cotton, cocoa and soybeans. However, the currently strong expansion
will likely be checked by the fiscal restrictions and real GDP for
the year 1985 could be down to 3% from last year's 4.4% real GDP
gain. A recession is not foreseen in 1985 despite the "austerity"
of monetary and fiscal policies because the inflation decline would
have a positive reaction on economic expectations.
Monetary Explosion. Lemgruber cited the "explosion" of money as
another negative element in the economy. In December 1984 the
monetary base grew by a large 36% for the month and by February
1985, the twelve-month expansion was at 267%. This had an obviously
strong impact on rising prices. By mid-March 1985 (the time the new
Government took office) the Central Bank undertook restrictive money
market operations through sales of short-term Government securities
and the increase of reserve requirements. As of mid-march the
monetary base expansion was down to.247% annual rate and Lemgruber
hopes for a further strong decline to a monthly rate of 20% in April.
Fiscal Restraints. The main burden of restrictive policies is being
placed on the Government sector. Among the new measures being
implemented are a 10% cut in Federal Government spending, a freeze
on employment, and a prohibition of further lending by Government
banks except for exports. The aim of these measures is to further
reduce the nominal public deficit, which reflects inflation and
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monetary-exchange rate indexing. The inflation-adjusted
"operational" public sector position would be expected to show a
larger surplus in 1985 as a result of the fiscal restraints.
Control of the public sector nominal deficit is crucial to inflation
control because the assumption is that the monetary accommodation of
the fiscal imbalance quickly leads to higher prices.
Higher Interest Rates. Because of money supply restraints, interest
rates for a time will be high in real terms until the Government
deficit is reduced. With a lower deficit the Central Bank would not
pressure interest rates since it would not have to sell as large a
volume of securities, Funds freed by the limits on government bank
lending will be used to buy government securities. Lemgruber noted
the conflict between savers and investors with respect to interest
rates. High and positive rates are an incentive to savers but
present difficulties to borrowers. The aim of policy is to
differentiate rates between borrowers and lenders, keeping them
lower for borrowers and higher for lenders. How this is to be done
was not explained.
Neutral Wage Policy. In response to a question, Lemgruber said that
the intention on wages is to keep them equal to inflation. He
described this as a neutral wage policy but said that this issue
will be an important element in formulating a new program with the
IMF. He does not want to.rely on wages an an anti-inflation
element, preferring to use monetary-fiscal restraints instead.
Monetary Correction Revised. Lemgruber briefly described a change
in the system of monetary correction. Under the old rule,
correction was based on inflation expectations while in the new rule
it is based on recent inflation. This would tend to provide more
certainty to the market. Lemgruber affirmed that the formula would
still call for the relationship to hold as follows:
Monetary correction = inflation rate = devaluation rate
Noting the devaluation rate, Lemgruber stated that the policy is
to maintain as realistic exchange rate as possible. Changes in the
currency rate will be made on a daily basis and will be known by
exporters at the beginning of each month. A daily mini-devaluation
schedule has already been made public for the month of April.
Lemgruber admitted that because of the cruzeiro's link to the U.S.
dollar, there is a problem of over-evaluation. Switch to a market
basket definition of the cruzeiro would reduce the over-valuation
but it would also be too inflationary for Brazil. For the time
being, the present foreign exchange system of equality between
inflation and devaluation will be maintained.
Smaller Trade Surplus. In the balance of payments projections
presented to the Advisory Committee in February, the previous
Government projected a trade surplus of $12.9 billion for 1985.
However, the evidence of trade transactions during the first quarter
of 1985 has been disappointing with an only $1.8 billion surplus for
the period. This is composed of $5.0 billion of exports and $3.2
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billion of imports. Based on this trend, Lemgruber is now
projecting a lower $11.0 billion trade surplus for 1985. The
services accounts, particularly interest, are doing better than
expected by about $500 million in the first quarter. Consequently,
,the revised current account projection is for a $2.0 billion deficit
in 1985 in place of the previous $1.5 billion shortfall.
No New Money. Under the provisions of refinance worked out between
the previous Government and the Advisory Committee, Brazil would
have no new money needs from the commercial banks during 1985-1986.
The details of this refinance and new money requirements are shown
in the attached table, taken from my memorandum on Brazil of
February 1. 1985.
As can be seen, if the new current account deficit is $2.0
billion instead of $1.5 billion, Brazil still would not need new
money because there is a considerable $1.8 billion reserves increase
assumption built in these projections. Indeed, Lemgruber indicated
that the change in international reserves might be flat between 1984
and 1985 so a further trade shortfall could be made up from the
reserves increase cushion. He also indicated that new money from
non-commercial banks would be $5.0 billion in 1985, just about the
level shown in the attached table. Lemgruber also added that he was
satisfied with the preliminary refinance terms of a 16-year
refinance of the 1985-1991 bank amortizations previously worked out
with the Advisory Committee.
Beyond 1985, Lemgruber cited a number of positive external
assumptions that should help Brazil maintain its position of trade
surplus. These factors include good economic growth in the
industrial countries, some improvement in commodity prices, some
decline of interest rates, moderate.oil import prices, and
depreciation of the U.S. dollar. If any of these items becomes
negative it would amount to a "shock" for Brazil and could upset the
favorable balance of payments projections used in the refinance
scenario.
Status of IMF negotiations. Lemgruber outlined the new phase of
negotiations with the IMF after the Fund suspended its disbursements
for failure to meet end-1984 targets. A group of IMF economists are
in Brazil as of April 1 and will remain there for two weeks in a
pre-negotiation phase. Lemgruber and his team are meeting with IMF
Managing Director J. de Larosiere on April 2. By April 15 the IMF
should prepare a pre-liminary assessment of Brazilian economic
conditions and the start of negotiations on a new program should
take place during April 22-29.
According to Lemgruber, the failure to meet the IMF's 1984
targets was an embarrasment to Brazil and he does not want a repeat
of this experience. Thus, he is going to insist on realistic new
1985 targets rather than signing an.agreement that would fail if the
ceilings and limits were perceived to be non-attainable in advance.
There is a suggestion of protracted negotiations in his statement to
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the Committee: "We will fight for realistic targets!" For example.
he cited the previous IMF targets for end-1985 -- 120% inflation and
60% money base growth -- as clearly un-reachable. He also hopes to
shift the IMF testing period from June 1985 to June 1986 rather than
the December period. Brazil traditionally goes through a holiday
spurt of spending in December so this may be an effort to remove the
significance of end-year performance, although the IMF would still
have quarterly targets. On another IMF point, Lemgruber said that
the practice of IMF "monitoring" was politically sensitive in Brazil
and that a more neutral terminology such as "enhanced consultations"-
might be more preferable.
The expected schedule is for a completion of the IMF
negotiations by the second week of. May 1985 and to resume -
negotiations with the Bank Advisory Committee in the first week of
May.
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BRAZIL
Table 2. Gross New Money Requirements After Multiyear Refinancing (1)
(Million U.S. Dollars)..
Current
Account Deficit
Reserves
Increase
Bank
Amortizations(1)
Non-bank
?A mortizations(2)
Non-bank
Financial Inflows(3)
Gross New Money
Requirements
(+)
(+)
(+)
(+)
1985
1,550
1,832
227.
1,711
5,324
-4
1986
2,331
(593)
454
2,417
4,670
-61
1987
1,978
(300)
680
3,257
5,118
497
1988
1,742
312
907
3,526
5,645
842
1989
1,794
578
1,988
4,652
6,270
2,742
199G
2,117
711
2,405
4,815
6,956
3,092
1991
2,951
762
2,406
4,917
7,609
3,427
(1)The Refinance Terms for the Bank Amortizations Are:
Tenor (Years) = 16
Window (Years) = 7 (1985-1991)
Grace = Variable Amortizations
These terms are those agreed to by the Advisory Committee as of January 7, 1985. They also include an assumption that
interest on rescheduled bank debt is calculated on a serial (year-by-year) basis rather than on a carve-out (7-year total)
basis.
(2)Amortizations to Multilaterals, Bilaterals, Suppliers, IMF.
(3)Inflows From " " .
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ARGENTINA
Talk by President Alfonsin and
Meeting of the Bank Working Committee
President Raul Alfonsin of Argentina and his top officials were
in New York during the week of March 18 and used the occasion to
present some statements on the country's political and economic
situation.
Speaking at an Americas Society luncheon on March 21, President
Alfonsin characterized his election in December 1983 as marking the
transition from authoritarianism "inertia" to "dynamic" democracy.
He said fifty years of political instability preceded this change of
government and his election should be understood as a system change
as well.
President Alfonsin stated that he inherited a catastrophic
economic situation in which speculative activity was dominant. The
previous government failed to meet its own goals, particularly the
emphasis on the private sector, and accumulated a huge external debt
that produced neither economic growth or investment. Inflation was
the second highest in the world (after Bolivia) and the level of
real GDP per capita was 15% lower than in 1975.
Turning to his record in office, President Alfonsin indicated
that it has been a mixed pattern of successes and failures. On the
positive side, the fiscal deficit to GDP ratio has been reduced from
16.5% in 1983 to 8.5% in 1984 and the target is 5% in 1985. The
foreign trade surplus achieved in 1984 was equivalent to 6.5% of GDP
while economic growth was also positive by 2%. Inflation, however,
was not a success and the President affirmed that anti-inflation
efforts are a priority for his current economic program. Speaking
about the external debt, the President said that the negotiations
should not impede economic growth since this would not help either
debtors or creditors. He hopes that 1985 will be another year of
economic recuperation. Completing the description of the economic
program the President listed the following eight goals on a priority
basis:
1.
A better distribution of income
2.
To continue the anti-inflation fight
3.
Reform of the tax system
4.
Improving the financial system
5.
Cutting the fiscal deficit
6.
Expansion
of the private sector
7.
Expansion
of exports
8.
Increased
attraction of foreign investment
9.
Stimulate
savings flows to productive and social sectors
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It may be of significance that income redistribution was
offerred as the highest priority among the President's goals.
Working Committee Meeting. A meeting of the Working Committee on
Argentina was scheduled for the same day as the President's talk.
Accompanying the Presidential party were Juan Sourrouille, the new
Minister of Economy and Mario Brodersohn, Chief Debt Negotiator and
President of the Argentine National Development Bank. These two
officials met with the Working Committee on March 21 following a
report made to the Committee by Richard Erb, Deputy Managing
Director of the IMF.
The IMF. Mr. Erb provided details on the reformulation of the IMF
program for 1985 and 1986. The IMF's delay in providing the March
1985, second disbursement in its $1.4 billion standby is related to
the Argentine failure to meet end-1984 targets and limits on fiscal
and monetary ceilings set out in the Memorandum of Understanding.
An IMF mission is being sent to Buenos Aires in the week of March 25
to obtain a full assessment of the current economic situation. The
key concern is the much-higher-than-anticipated inflation which led
to breaching of the nominal peso limits on the cash deficit of the
nonfinancial public sector and Treasury outlays. What the IMF would
want now are understandings on the policies needed to bring down
inflation. As soon as a new agreement can be obtained, the IMF
staff would evaluate the program in light of at least two months of
actual economic performance. Subject to good performance, a
recommendation for the new program could be sent to the IMF Board
around June-July 1985.
Although the IMF program was not observed in the fiscal and
monetary sector targets and ceilings, Argentina did meet the
external targets on reserves, arrears and external debt.
Consequently, the IMF staff believes that the external part of the
Argentine program is valid and that commercial bank new money needs
for 1984-85 are still $4.2 billion -- the figure agreed to on
December 2, 1984. There may be a need to undertake somewhat more
domestic adjustment and move the exchange rate more rapidly in order
to keep the $4.2 billion financial requirement intact. Any
relaxation of the $4.2 billion should be avoided because of the
difficulties of obtaining greater new money needs from the banks.
.Erb would thus like for the banks to complete their support program
on a contingency basis while the IMF proceeds to reformulate-the
internal economic program. Beyond 1985, the IMF would prefer that
Argentina should reduce its current account deficit so that no net
new money would be required from the commercial banks in 1986.
The Minister of Economy. Minister of Economy Sourrouille repeated
Mr. Erb's description of the Argentina IMF program at end-1984. He
said the Government had met goals with respect to external variables
but discrepancies were evident in the,.,domestic criteria, especially
the quasi-fiscal deficit of the central bank. The inflation rate
has clearly departed from the implicit targets embodied in the IMF
program for the public sector, and in the first quarter of 1985 has
been much higher than projected. A new IMF mission is going to
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3 -
Argentina to review the 1985 program and during April-May the
Government will work on a new agreement. If all goes well, there
could be two IMF disbursements at mid-1985 based on performance
criteria related to December 1984 and March 1985 targets.
Presumably, disbursements would be keyed to actual performance plus
new understandings that would be reached in the current
negotiations. Minister Sourrouille hinted at some disagreements
with the IMF on the use of inflation-adjusted measures of nominal
domestic targets. He said these nominal domestic targets, subjected
to high and erratic inflation, jeopardize the commercial bank
agreements despite the fact the external goals have been met. He
suggested this difficulty could be avoided in the future but he did
not indicate how inflation could possibly be disregarded in an IMF
program. Sourrouille tried to assure the banks that interest
payments will be maintained but added that the low level of reserves
preclude "...promises we can't fulfill".
Mr. Brodersohn, the Chief Debt Negotiator, indicated that he
would like to complete negotiations with the Working Committee as
soon as possible. The immediate task ahead is to complete the IMF
negotiations in order for bank disbursements to be made in line with
Fund disbursements.
Evaluation. The main task ahead for Argentina is to correct the
economy's internal imbalance so as to arrest the hyper-inflationary
spiral. Despite statements by the IMF and the Government that the
external part of the economy is performing well, there is a linkage
between the internal and external sectors. Failure to correct the
internal problems could affect the external sector through the
demand for imports and the propensity for capital flight. In turn,
such failure could increase the balance-of payments gap and add to
the $4.2 billion funding that is to be provided by international
commercial banks. What needs to be done is to use the exchange rate
depreciation more vigoursly while intensifying monetary-fiscal
restraints. This could lead to little or no growth of the economy
for 1985 and could impede the President's desire for economic
recuperation. But there is little choice left to the Argentine
authorities other than to proceed on new understandings with the IMF.
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