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Peru Balance of Payments and External Debt
Peru's balance of payments has been an almost constant
problem since the early 1970s, or rather two kinds of
problems
alternating with each other. The most frequent difficulty
is that
the deficit on current account--the deficit for current
trade and
services--has increased too fast to be financed by
feasible
borrowing abroad. This situation is the common meaning of
a
"foreign exchange crisis," and it has been a recurring
problem in
Peru. The opposite kind of difficulty is that it has been
too
easy to borrow abroad in some periods in which fiscal
restraint
plus currency devaluation might have served both to
improve the
current account and promote steadier growth. In certain
periods,
especially 1972-75 and 1980-83, the government has been
able to
borrow so much abroad that the plentiful supply of foreign
exchange has reduced pressures to take such corrective
action.
External credit can be so tight that its scarcity cripples
production or so abundant that it encourages waste and
discourages desirable policy change.
Peru's current account deficits and external borrowing
to
finance them were safely low fractions of GDP for the
1960s as a
whole. For both 1971 and 1972, the deficits were barely 1
percent
of GDP. But in the next several years, the rising fiscal
deficits
of the military government spilled over into generalized
excess
demand and the highest current account deficits Peru had
ever
known. The deficit in 1975, at over US$1.5 billion, far
exceeded
the previous peak of US$282 million in 1967. It was equal
to a
record 10 percent of GDP. Peru's external debt
correspondingly
rose well beyond any level known before, pointing the way
to the
rocky road ahead.
The deep deficits on current account in 1974 and 1975
and
their financing were examples of the second kind of
problem
mentioned earlier. Peru had fallen into rising fiscal
deficits
and currency overvaluation, but pressures to take
corrective
action were forestalled because the government could
borrow
readily abroad and avoid changing its policies. By 1975
the
disequilibrium was so great that foreign creditors began
to back
off, creating a foreign-exchange crisis that forced the
government to take corrective action. Fiscal and monetary
restraints and devaluation were finally adopted. These
measures
plus good luck with export prices gradually cut down the
external
deficits and achieved a significant surplus on current
account by
1979.
The new civilian government of President Belaúnde
started in
1980 with a very small external deficit and promptly
turned it
into a very large one. Rapidly rising spending plus
temporary
import liberalization raised the current account deficit
from
US$101 million in 1980 to over US$1.7 billion in 1981.
Once
again, the government's ability to borrow abroad, restored
by the
austerity of the late 1970s, proved to be costly to the
country
by permitting continued excess spending and currency
overvaluation.
The Belaúnde administration was forced to adopt more
restrained spending policies in its later years, slowing
the
economy but bringing the current account deficit down
again. It
left the García government with a small surplus by 1985.
Then the
seemingly inexorable cycle went right back into action:
the
García government plunged into an expansion program that
temporarily revived the economy but raised demand too fast
for
external balance. The surplus of 1985 was replaced by
deficits in
the range of US$1 billion to US$1.5 billion from 1986
through
1988. In 1989 the combination of internal disruption and a
brief
attempt to restrain demand brought down production and
imports so
sharply that the current account moved back into surplus.
The
surplus clearly reflected a severe setback to the economy,
rather
than an achievement based on macroeconomic balance and
rising
exports.
The external borrowing in these repeated periods of
high
current account deficits naturally created a high level of
external debt. External borrowing is normal for a
developing
country and can help increase the rate of economic growth
by
providing additional resources for investment. But the
crucial
questions concern degrees of borrowing and the country's
ability
to finance debt service out of its gains in productive
capacity.
In the periods described, Peru borrowed very heavily and
was
unable to make much headway in its capacity to finance
imports
plus debt service out of its export earnings. That
combination
led to major arrears in making scheduled debt-service
payments.
Total long-term debt of the public and private sectors
combined was estimated by the
World Bank (see Glossary) at
US$2.7 billion at the end of 1970 and US$13.9 billion at the end
of 1988. At the latter level, it was equal to 56 percent of
GDP. Peruvian estimates, including short-term debt as well,
show totals of US$18.1 billion for 1988 and US$19.8 billion for
1989. The great increase in long-term debt between 1970 and 1988
resulted almost entirely from borrowing by the public
sector. The
public sector's long-term debt was equal to 12 percent of
GDP in
1970 but 50 percent of GDP by 1988.
Actual payments of debt service have not been high
proportions of exports or of GDP because both the Belaúnde
government in its last years and the García government
stopped
trying to keep up with scheduled payments. Debt service
had run
at 2 percent of GDP and 12 percent of exports in 1970,
when
payments were being made on schedule, but they were only 1
percent of GDP and 8 percent of exports despite the much
larger
debt in 1988. Using the average rate of interest on
Peruvian
public debt in 1988 (7.6 percent), interest payments due
would
have been US$948 million; actual interest payments were
US$164
million.
The Belaúnde government let scheduled debt payments
slide by
as quietly as possible. But President García converted the
problem into a worldwide challenge to the creditor
countries. In
his inaugural address of July 1985, he declared that his
obligations to the welfare of Peru came ahead of financial
obligations to foreign creditors and announced that Peru
would
not allocate more than 10 percent of its export earnings
to debt
service. The International Monetary Fund
(IMF--see Glossary) and
the World Bank continued for some time to encourage
multilateral
negotiations instead of this unilateral limit, but when
García
persisted the IMF declared Peru to be ineligible for new
credit.
The Fujimori government emphatically rejected García's
position and requested renewed negotiations with external
creditors. The government's willingness to negotiate and
its
accompanying programs of economic reform led the
international
financial agencies to resume discussions. Although the
United
States-led Support Group (Grupo de Apoyo) of nations
failed to
come up with the US$1.3 billion that Peru needed to clear
its
arrears with multilaterals, the IMF nevertheless decided
in
September 1991 to lend Peru the money to clear its arrears
and
then start new adjustment lending. This crucial step
toward more
normal relationships with the international financial and
development agencies was once more put into question in
April
1992, when the Fujimori government suspended democracy in
Peru
and the international agencies responded by suspending
negotiations on external credit.
Data as of September 1992
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