CONFIDENTIAL
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goods, which took effect in May, will not hold for long;
for the year as a whole
inf ion is expected to be at least 30%, compared with 10.1% at end-1986.
Although oil export receipts in H1 were 11% higher than in the corresponding period
of 1986, the Central Bank's international reserves stood at $8.7 bn on 5 June, a
decline of $0.8 bn since the end of last year. In June the Banco Central revoked
the licences of 21 foreign exchange traders to prevent further speculation in the
exchange market. The bolivar nevertheless weakened further, and the free market
rate reached a discount of more than 50% below the official rate against the dollar.
19
Signing of the commercial bank package for Chile (agreed in April) took place on
17 June, as scheduled. Meanwhile, the economy has been showing signs of
overheating: GDP in Q1 1987 was 7.6% higher than in Q1 1986, compared with the 5%
target for the whole of 1987. Consumer price inflation year-on-year to May 1987
was 19.7%, and the IMF revised their projection of inflation for 1987 from 13% to
16%.
(However, inflation in June was only 0.7%, bringing the year-on-year total to
19%.) On the external account the January-April trade surplus was under $400 mn
(cf $500 mn in the same period in 1986), with exports of $1.59 bn (cf $1.43 bn) and
imports of $1.20 bn (c£ $0.94 bn). In spite of the deterioration of the trade
account the IMF have revised their current account deficit projection to $0.95 bn
from $1.0 bn because of the benefits in the commercial banks' package of repricing
and retiming of interest payments. The UK authorities are considering making Chile
eligible for conventional Section 2 export credit cover.
20 Peru's Prime Minister and Minister of the Economy Alva Castro resigned with the
rest of the Cabinet in late June. The new Prime Minister is Guillermo Larco Cox,
the new Minister of the Economy is Gustavo Saberbein (formerly Deputy Minister), and
the new Cabinet is more radical than its predecessor. Leonel Figueroa has been
replaced by Javier Tantalean as Central Bank President. On 5 July President Garcia
confirmed his government's determination to generate economic growth. He announced
a 35% minimum wage increase with similar rises for public sector employees, lower
interest rates, a freezing of the official and financial exchange rates until
end-1987, a rise in the free market rate, and the continuation of the monthly 2.2%
devaluation of the rate for exporters. Petrol prices will be raised by 25%, and
heavy taxes are to be imposed on luxury goods. Garcia also announced a tougher
stance towards foreign creditors: Peru had exceeded the 10% debt service limit by
7-8 percentage points in 1986 as a result of payments in kind; the limit would now
be more strictly applied. Inflation in May was 5.9%, producing accumulated
inflation of 33.8% in the first five months of 1987, and a year on year rate of
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