The government of peru, largely on the recommendation of an economic and financial mission which a U.S. firm of consultants1 had been invited to send to Peru, adopted in November 1949 a system of dual fluctuating exchange rates: a certificate rate applying to most trade transactions and to some approved nontrade items and a draft rate for all other transactions. Up to October 1954, when the certificate rate was pegged by the Central Reserve Bank at 19.00 soles per U.S. dollar, both rates were permitted to fluctuate (Chart 1). The reform of November 1949 was followed by an immediate strengthening of the sol in both the certificate and the draft markets, although the trend in export prices was unfavorable up to the outbreak of the Korean war. From the outbreak of the war to the end of 1952, when export prices were very favorable, the exchange rates were remarkably stable, despite considerable internal monetary expansion. In 1953, however, the certificate rate depreciated by 28 per cent, because world market prices of Peruvian exports fell sharply while domestic costs and prices continued to rise on account of internal inflation. Exchange rate stability was restored in 1954 as the decline in export prices ended and some internal stabilization measures became effective in the second half of the year. Although it was known that, from time to time, the monetary authorities intervened by buying or selling, in order to smooth out short-term fluctuations in the certificate rate, it was claimed that no attempt was made during this period to prevent long-term adjustments. Thus, for nearly five years, Peru provided an interesting example of a fluctuating exchange rate system.
Mr. Tsiang, economist in the Special Studies Division, is a graduate of the London School of Economics, and was formerly Professor of Economics in the National Peking University and the National Taiwan University. He is the author of The Variations of Real Wages and Profit Margins in Relation to Trade Cycles and several articles in economic journals.
Since this mission was presided over by Mr. Julius Klein, it is commonly referred to as the Klein Mission.
With a pre-reform certificate rate of, say, 17.93 soles (the monthly average certificate rate for October 1949), nonmineral exporters, who had to surrender 45 per cent of their export proceeds at the official rate of 6.485 soles per dollar, received an average of only 12.78 soles per dollar’s worth of their exports. They were thus in effect obliged to pay a discriminatory export tax of 29 per cent ad valorem.
The surrender requirements varied from time to time, however. For instance, on March 21, 1951 the percentage of export proceeds in dollars and French francs that had to be converted into certificates was reduced from 100 per cent to 75 per cent, and on April 23 of the same year it was further reduced to 50 per cent. But it was again raised to 75 per cent on May 10 and 100 per cent on May 16, 1951. The percentage of export proceeds in sterling required to be converted into certificates was reduced to 10 per cent for the period from April 13, 1951 to April 7, 1952.
At first, the period of validity of all certificates was established at 60 days on the recommendation of the Klein Mission. In May 1951, the period of validity for certificates in dollars and French francs was reduced to 15 days. In January 1954, when the sol was under great pressure, the validity period for all certificates except those in Argentine pesos, a perennial surplus currency, was further reduced to only 5 days. Toward the end of the year, when Peru’s balance of payments position had greatly improved and the sol had been stabilized, the validity period of all certificates was established at 10 days, except those in Argentine pesos, which continued to be valid for 60 days.
The types of payment eligible for, and usually permitted in, the certificate market included freight and transit expenses, interest payments and dividends on foreign capital, royalties, agents’ commissions, repayment of commercial debts, payments for insurance related to merchandise trade, remuneration of foreign technicians, etc.
The volume of Peru’s trade is small. The chief exports are cotton, sugar, metals, and petroleum, the markets for which are highly competitive. The prices of these exports in world markets are, therefore, beyond the control of Peru. Similarly, the foreign prices of Peru’s imports are independent of Peru’s actions. Consequently, the argument for a tariff or for discrimination in order to improve the terms of trade is unimportant for Peru.
The negative figure for 1950 may be the result of statistical inaccuracies rather than an actual net withdrawal of foreign investment for that year. In that year there was an unusually large net increase in import collections: $16.3 million, against $6.5 million for 1951, $7.9 million for 1952, $3.3 million for 1953, and $4.2 million for 1954. A considerable proportion of the inflow of direct investment, which consisted largely of imports of capital goods by the investors themselves, had probably been registered as credit for imports and hence inflated the latter to an unusual proportion. From a comparison of this unusually large entry with those of later years, it may be inferred that there may have been a positive though small net inflow of direct investment even in 1950.
The theory is sometimes advanced that the disposal of foreign credits in prepayment for exports may constitute another link between the certificate and draft markets. Such prepayments can be either surrendered to the Central Bank for certificates in advance of exports or sold on the draft market. However, an exporter who sells the prepayment for his future shipment of exports on the draft market is obliged to repurchase the same amount of foreign exchange on the draft market when he actually makes the shipment, in order to fulfill the obligation of surrendering the current export proceeds to the Central Bank in exchange for certificates. Therefore, the usual practice is for an exporter who sells spot on the draft market his export prepayments to cover, at the same time, his future obligation with a purchase of futures of the same amount on the draft market. Whether this operation will represent a net gain to the exporters receiving prepayments for future shipments depends upon whether the spot draft rate minus the futures draft rate plus the futures certificate rate is greater than the spot certificate rate (all exchange rates being expressed in soles per unit of foreign currency). The excess of the spot draft rate over the spot certificate rate by itself is neither a necessary nor a sufficient condition for a profitable arbitrage. By the same token, such arbitrage operations would not necessarily tend to equalize the spot draft rate and the spot certificate rate, except when the futures draft rate is expected to be equal to the futures certificate rate.
A simple correlation between the monthly value of imports in soles and the money supply at the end of the preceding month has been attempted for the period January 1949–December 1950. The correlation coefficient is found to be 0.747.
Weighted arithmetic average of the unit values of 7 items that constitute 90 per cent of Peru’s total exports, computed from trade statistics; the weights equal the 1953 relative value of trade. Another series of export prices from a Peruvian source shows the increases in dollar prices of Peru’s exports as follows: 1950,100; 1951,140; 1952,114; 1953,105; 1954,113. This series, however, is less reliable since it is computed as the unweighted geometric average of the wholesale prices of 15 export commodities in the domestic market, and is not directly derived from trade statistics.
The cost of living index is used here because no wage index is available. The cost of living index, however, tends to overestimate the rise in the domestic cost of production for three reasons. First, the index refers only to the cost of living in the capital city of Lima, where prices presumably tend to rise faster than in outlying areas. Second, the wages of miners and agricultural laborers, who are rather unorganized in Peru, tend to lag behind the rise in their cost of living. Third, the index does not allow for the increase in productivity that might be expected from the substantial investments in export industries after the outbreak of the Korean conflict, particularly during the years 1950-53. When these investments came to fruition, the cost of living index would certainly tend to overestimate the cost of production in export industries. Therefore, the estimated indices of the cost of production per dollar’s worth of exports are probably more reliable for the last two years (1953 and 1954) shown in Table 4 than for the preceding years.
There was some direct intervention on the part of the Central Reserve Bank in 1951, during which year it added $9.5 million to its reserves when the prices of Peru’s exports were particularly favorable.
The cost of living rose by 8 per cent from 1952 to 1953.
This statement is true even when allowance is made for the errors and omissions in the balance of payments statement by assuming that the net errors and omissions for these three years occurred entirely in the totals of short-term capital transactions and by adding the former to the latter. See Table 1.
Afterward, it gradually declined to 7.5 per cent toward the end of 1954. The bond yield, however, represents only the long-term rate. How far the short-term rate in the free money market changed over the period concerned cannot be ascertained statistically. The discount rate of the Central Reserve Bank for commercial paper, however, has remained unchanged at 6 per cent since November 1947.
The annual average certificate rate in 1953 was only 11 per cent higher than that in 1952. However, since in 1953 the certificate rate was permitted to rise freely only in the second half of the year, a comparison of the annual average rate in 1953 with that in the preceding year would grossly understate the forces making for the rise of the exchange rate during that year.
The decrease in bank credit to the private sector during the second half of 1954 was more than offset by the increase in credit to the development banks. This shift in the composition of bank credit was due mainly to the transfer of the financing of the current rice crop from the commercial banks to the semiofficial agricultural bank, which was one item in the stabilization program.
None of these bonds seem to have been bought by the public.
Imports c.i.f. decreased by $42 million from 1953 to 1954.
This category of imports, however, included the subgroup, “Vehicles and Transport Equipment,” which in turn included automobiles, the import of which was prohibited from November 1953 to August 1954. It is not known how much of the decrease in this category of imports was due to the prohibition of imports of automobiles in the first seven months of 1954.
Boletín del Banco Central de Reserva del Peru (Lima), March 1954 and March 1955.
See Table 3. According to the Peruvian export price index, however, average export prices increased by more than 7 per cent between 1953 and 1954. This discrepancy is explained in footnote 10.
The net increase in foreign assets held by Peruvian residents through Peruvian banks plus the net increase in dollar balances of Peruvian residents in the United States was $14.1 million in 1952, $5.3 million in 1953, and $11.4 million in 1954.
Including the so-called “untouchable gold reserve.” The foreign exchange and gold reserve of the Central Reserve Bank at the end of 1952 amounted to US$55.7 million, of which US$18.4 million in gold was considered “untouchable.”