The International Monetary Fund will vote Monday on whether to declare formally that Peru is "ineligible" to borrow from the international organization until it clears up its $75 million in overdue loan repayments to the agency.
Monetary sources said a formal declaration that Peru is unable to borrow any more from the IMF is nothing more than a "recognition of reality."
But diplomatic sources said that if the IMF votes to declare Peru "ineligible" -- as the agency has done to several smaller countries -- the highly nationalistic administration of President Alan Garcia likely would treat it as a national affront. This could make it difficult for Peru and its foreign debtors to reach an accord on repaying its $14 billion in foreign loans.
Shortly after he was sworn in during the summer, Garcia declared that Peru would pay no more than 10 percent of its exports earnings -- the equivalent of about $300 million a year -- to repay its foreign debts.
He said Peru would make no payments at all to organizations from which Peru could not expect to borrow in the future. Because the Latin American debtor nation refuses to negotiate a loan agreement with the IMF, the international lender of last resort, and because commercial banks have been resistant to making new loans to countries that do not have IMF pacts, Garcia effectvely cut off both the IMF and the banks.
Garcia stopped making payments to the IMF in September. The country has made only sporadic payments to banks for about two years. It is more than $2.2 billion in arrears on repayment of interest and principal.
In recent weeks, however, Peru has made tiny payments to both the IMF and to its commercial bank lenders. Banking and diplomatic officials said it is unclear whether the payments -- which represent a minuscule portion of the country's overdue debt -- are the beginning of a thaw in relations between Garcia and the international financial community.
Garcia, who vowed that he would never negotiate with the IMF, has agreed to allow an IMF team to visit Peru next month to gather information for the international agency's yearly economic review of the country. The IMF does a private review of every member country's economic policies, including those of the United States.
Peruvian Economic Minister Luis Alva Castro and Foreign Minister Allan Wagner are expected to meet with IMF Managing Director Jacques de Larosiere next week during a visit to Washington.
"I doubt they'll do it if the IMF votes Peru ineligible for further borrowing," according to a diplomatic source.
U.S. bank regulators in the fall ruled that loans to Peru were of questionable quality. Banks, for the most part, had put Peruvian assets on their problem lists long before the regulators ruled, and some banks have written off a portion of their Peruvian debt as uncollectible.
Unlike major debtor countries such as Mexico and Brazil -- each of which owe foreigners about $100 billion -- Peru's debt is mainly to official agencies like the IMF and the World Bank or to other governments. Peru has received more official U.S. aid than any other Latin American country.
About $6 billion of Peru's $14 billion in foreign debt is to commercial banks.
Peru, like many other debtor nations, is faced with limited export earnings and high debt payments. But unlike other debtors, which experienced an economic boom in the late 1970s and early 1980s, Peru has been depressed for about two decades -- the victim of economic mismanagement by military and civilian governments alike.
Although Garcia declined to negotiate new, more austere economic policies in return for IMF and commercial bank asssistance, he initiated an economic program designed to bring down inflation and reduce the country's need for outside funds -- the type of program the IMF generally prescribes.