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Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Directorate of Intelligence Peru's Military: Conventional and Counterinsurgency Capabilities A Research Paper ALA 83-]0197C ecem er Copy 2 [] 4 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Intelligence Directorate of Top Secret Peru's Military: Conventional and Counterinsurgency Capabilities ALA, This paper was prepared by the Office of African and Latin American Analysis. It was coordinated with the Directorate of Operations. Questions and comments should be directed to the Chief, South America Division, Top Secret ALA 83-10197C December 1983 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 25X1 Peru's Military: Conventional and Counterinsurgency Capabilities Key Judgments Over the past decade, Peru's extensive arms purchases from both the Soviet /nformation available Union and the West have enabled it to become the dominant Andean as ct/'10 December /983 military power, achieving conventional military superiority over its princi- was used in this report. pal rivals, Ecuador and Chile. We believe that Peru is now capable of defeating either Chile or Ecuador in a strictly bilateral conflict. In the unlikely event of a two-front war-the basis upon which Peru's military formulates its plans and requirements-Lima probably has sufficient strength to defend one frontier while conducting effective offensive opera- tions on the other. Over the next two to three years we believe that, although Chile and Ecuador may make particular purchases of combat aircraft, warships, or armored vehicles from Western sources that could temporarily unsettle Peru's military leaders, neither country will be capable of challenging Peruvian superiority because of inhibiting financial constraints and distracting domestic political concerns. 25X1 Peru's own growing financial difficulties will limit funds available to the military for readiness, training, personnel retention, and procurement- especially of the most advanced equipment. Nonetheless, we expect the political power of the military will be sufficient to garner allocations for one or two major buys for each service every year-enough to meet most strategic requirements and maintain superiority over Chile and Ecuador. The highest priority items are additional armor and new helicopters for the Army, completion of the sale of 26 Mirage 2000 fighters and six Bell transport helicopters for the Air Force, and construction of a major base for the Navy. The two principal criteria determining what Peru buys and from whom will be the level of technology and the degree of concessionary Some of Peru's military needs-helicopters, for example-are made more urgent by the threat the 1,000 to 1,500-man Sendero Luminoso (SL) insurgent group poses. Civilian and military determination to contain the SL is firm and, if most of the planned improvements in counterinsurgency capabilities are implemented, the group probably can be contained in two to three years. Significant fighting is likely to continue for the next year or so, however, and will be an added incentive for certain classes of military Top Secret LJ/~ I purchases. ALA 83-/0/97C December /983 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Top Secret In the near term, we believe the military will look first to the West for new purchases. the present military leadership: ? Believes that Western-and especially US-equipment is superior to that of the Soviets. ? Is ideologically pro-Western. Wants to diversify sources of arms to reduce the heavy dependence on the USSR. ? Is dissatisfied with Moscow's poor logistic support for Peru's Soviet arsenal. Nonetheless, the combination of financial constraints and Soviet sales efforts will inhibit diversification away from Moscow. Moreover, we believe that if the West fails to provide attractive financing or to offer its most advanced equipment, the Army and the Air Force could turn again to the Soviets. Moscow has recently stepped up efforts to sell equipment and provide training to all three services to regain the influence it believes it has lost under the pro-Western Belaunde regime. In addition, if Ecuador or Chile accelerates near-term purchases of advanced equipment, such as fighter aircraft or armor, Lima might be further inclined toward Soviet arms because Moscow's traditionally rapid deliveries would allow Peru to reassert its numerical superiority quickly. We and the US Embassy agree that an increasingly European or Soviet- trained Peruvian officer corps could eventually have little in common with the United States and thus little regard for US interests in the hemisphere. Continued restrictions by the United States on sales of advanced arms to Peru and the unavailability of concessionary American credit for weapons purchases and training programs would further reduce the already limited leverage the United States has with the highly nationalistic Peruvian military. In fact; the present. generation of Peruvian military leaders is probably the last to have had extensive US training. Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Top Secret Conventional Military Capabilities Efforts To Improve Capabilities 19 1. Military Regions and Major Military Installations 2. Zone of Emergency Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Top Secret Peru's Military: Conventional and Counterinsurgency Capabilities Introduction In the past 10 years, Peru has clearly surpassed Chile and emerged as the predominant Andean military power. We estimate that between 1971 and 1980, Peruvian military purchases totaled $2.23 billion, including over $1 billion worth of Soviet arms. The size of the armed forces has increased as well. Since 1973, the Army's strength has almost doubled to 75,000 while the Air Force grew from about 7,000 men to 40,000. Lima has thus achieved a substantial numerical superiority, and an increasing qualitative one, in many areas of conventional military power over its traditional rivals, Ecuador and Chile. Since late 1982, however, the Peruvian military-which returned power to a civilian government in 1980-has become increasingly involved in the growing struggle against the Sendero Luminoso (Shining Path), a Mao- ist insurgent group. Although significant purchases of conventional equipment are still being made, the internal threat has forced the military to partially turn away from concern with external enemies and boost purchases of equipment more suited for counter-. insurgency operations. This paper examines both the conventional and the counterinsurgency capabilities of the armed forces. It assesses the effects of modernization on all three services, compares them with their counterparts in Ecuador and Chile, highlights weaknesses, and identi- fies purchases each service is likely to make in the next two to three years. The paper also evaluates the military's tactics and capabilities for dealing with the internal security threat. Finally, it analyzes the impli- cations for US interests resulting from the military's desire to maintain its current conventional superiority in the region and its determination to eliminate the Sendero Luminoso (SL) insurgency. Peruvian military planning has long been based on a perceived need to~eld jorces capable oJ~ghting a simultaneous two-front war against Chile and Ecua- dor, countries with which Peru has continuing bound- ary disputes. Peru sees Chile as the major external threat, although we and the US Embassy believe there is little chance of an unprovoked attack by Santiago, many of'whoselorces are now deployed against Argentina. Nonetheless, the Peruvians respect the fighting qualities oJthe Chileans, who annexed territory in southern Peru and captured Lima during the War oJ'the Pack (1879-83J. Since the late 19th century, most oj'Peru's ground jorces have usually been deployed near the Chileanjrontier. Ecuador's .use of troops to press its claim to large sections of Peru's northern Amazon region led to briPJ'wars in 1942 and 1981-both won by Peru-and to numer- ous other incidents along the poorly demarcated and extremely rugged border. Traditionally, Ecuador's outnumbered and underequipped military has pre- sented little realistic threat to Peru, but, according to the US Embassy, Lima views the Ecuadoreans as an unpredictable nuisance and maintains sign cant ground and airforces along the northern border. 25X1 The Military Buildup: 1967-83 With an arsenal composed of antiquated US and European equipment, Peru's military initiated in the late 1960s a modernization program for all three services. Lima looked first to traditional suppliers in Europe and the United States, and during 1967-70 purchased ground forces equipment from France, Germany, and Belgium, and aircraft and warships from Great Britain. That Peru was unsuccessful in Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Top Secret obtaining F-5 fighters from the United States in 1967 angered many military officers and led to the pur- chase in 1968 of 16 Mirage V's from France-the first supersonic fighters in South America. In 1973, the military government of General Velasco (1968-75)-which had overthrown civilian President Fernando Belaunde Terry in 1968-turned to the USSR for arms. The decision to buy from Moscow was motivated, in our view, by Washington's refusal to sell advanced arms, the desire of the highly nation- alistic Velasco regime to demonstrate its independ- ence from the United States, and the military's determination to both modernize and avoid heavy dependence on a single supplier. Pragmatic consider- ations-such as Soviet promises of quick delivery of relatively advanced weapons at low cost and on good financing terms-also were influential. The military regime of Morales Bermudez (1975-80), although more moderate than its predecessor, continued to purchase heavily from the USSR, in part because of heightened tensions with Chile during the mid-1970s. During 1973-80 the Soviets emerged as Peru's single largest military supplier by delivering over $1 billion worth of equipment to the Army and Air Force, about half of all Peruvian arms purchases. Accompanying this equipment were Soviet military and technical advisers, who presently number about 150, according to the US Embassy. In addition, the US Intelligence Community estimates that some 2,000 to 3,000 Peru- vian military and intelligence personnel have been trained in the USSR since the mid-1970s, a figure based upon data periodically compiled from US atta- che reporting Peru continued to buy from other sources to avoid exclusive reliance on Moscow. Major West European manufacturers held almost 40 percent of the Peruvian market from 1973 to 1980, but Lima also purchased from Israel, Yugoslavia, Spain, South Korea, and Portugal. Acquisitions from the United States ac- counted for only about 8 percent of all Peruvian arms agreements during this period. By 1980, Peru had emerged as the predominant Andean military power. During 1971-80 it had con- tracted for over $2.23 billion in military equipment and services, only slightly less than the combined purchases of Ecuador and Chile. This allowed Lima to surpass its rivals in such key categories as strike aircraft, armor, artillery, and submarines. Chile's 25X1 need to deploy substantial forces against Argentina- especially after the two countries almost clashed in 1978-further improved Lima's strategic position. The return to power of civilian President Belaunde in 1980 has not halted military modernization, although he and many senior Army and Air Force officers have expressed a desire to reduce Peru's dependence on the USSR-especially through purchases from the United States. In our view, this sentiment reflects the pro-Western orientation of Belaunde and the current military leadership as well as the chronic dissatisfac- tion of the armed forces with Soviet logistic support. In addition,'the demonstrated effectiveness of West- ern weapons in the Falklands and Lebanese conflicts of 1982 has encouraged procurement~of the most advanced systems available. The military has also pointed to recent acquisitions of combat aircraft and armor by Chile and Ecuador to justify its requests. Since Belaunde's accession,' Peru's efforts to wean itself away from reliance on Moscow have had mixed success; indeed, Lima has not hesitated to purchase increasingly advanced equipment from the Soviets. Unable because of US export restrictions to acquire the US AH-1 Cobra attack helicopter, Peru contract- ed for almost $100 million worth of Soviet weapons in 1981, including about a dozen recently delivered MI-24/25 attack helicopters, the first of their type in South America. In a major break with Moscow, however, the Air Force contracted in 1982 to buy 26 Mirage 2000 fighters-which .will be matched in South America only by Venezuela's F-16As-at a cost of over $700 million. the US Embassy, report that Peru would have preferred the US F-16A, but Washington's offer of the less advanced F-16/79, along with the lack of concessionary American financing, led to the decision to buy the Mirage. Nevertheless, the military appears Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Top Secret Peru-USSR: The Arms Relationship We believe that Moscow's objectives in Peru are to gain long-term influence with Peru's military and political elites, deny the United States an ally on international issues, complicate US regional policies, and use the Peruvian arms link to expand military sales to and influence in other South American . countries, especially Argentina. Moscow has derived some important bents to date, including: (I) earning over $1 billion, (2) exposing Peruvian military person- nel to Soviet training, (3J placing numerous advisers and technicians in Peru, and (4J maintaining a market for spare parts and services. Nonetheless, the diplo- matic and political impact of the Peruvian-Soviet connection has been relatively small and Soviet aims are likely to remain out of reach for the short term because, as the US Embassy reports, the Belaunde administration is pro-US and hostile toward the Soviets. After the next civilian administration takes office in 1985, Soviet prospects for wielding greater influence will probably improve. falls between the other two in terms oj.attitude toward the Soviet Union. Soviet advisers in Peru, to our knowledge, have little influence outside the military, and they have been criticized by Peruvian officers for their reluctance to share technical expertise. We believe that Soviet influence resultingfrom intelligence liaison has been limited; indeed, the relationship was severed last not believe the Soviets have any ties to the Sendero Luminoso insurgents. Regionally, Moscow so far has been unable to capi- talize on its Peruvian connection to induce other South American military establishments to purchase Moscow has had only limited success influencing Lima's behavior in the diplomatic arena. For exam- ple, while concern over antagonizing its arms supplier contributed to Peru's refusal to follow the US lead in imposing sanctions on Moscow for the invasion of Afghanistan, Peru voted both in 1981 and 1982 in favor of General Assembly resolutions condemning the intervention. Similarly, according to US defense attache reporting, Peruvian armed forces personnel trained in the USSR have not demonstrated sign~- cant pro-Moscow leanings, although the Air Force, which has sent the largest number of personnel to the USSR for extended training, is more favorably in- clined toward Moscow than the other branches. The Navy, the smallest service with the fewest members trained by the USSR, retains its traditional anti- communist stance. The Army, the dominant branch, weapons from the USSR. In addition; the Soviet presence in Peru has not provided Cuba with a sign cant opening to expand its influence. The USSR, to our knowledge, has made no attempt to smooth relations between Cuba and the Belaunde administration. Peru recalled its ambassa- dor from Cuba in 1980 because of a dispute with the Castro government over the status of Cuban refugees in the Peruvian Embassy in Havana. Even (f the military-which is growing more dissatis- ~ed with Belaunde-were to assume power, we expect Moscow's political leverage would not increase appre- ciably as a result. We believe that the Peruvian military establishment remains basically conserva- tive and nationalistic. As the US defense attache Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Toa Secret moderate elements-which currently con- notes, the high command slated to take over in 1984 is anti-Communist and pro-Western, although it will also be the last generation to have received US training. Even among this group, the new Army commander has received the bulk of his training in Western Europe. The US Embassy reported two years ago that ofjcers advocating radical domestic policies had been purged from the military as it retrenched from its revolutionary programs of the 1960s and early 1970s. While the commanding gener- als would continue to be careful not to jeopardize the arms relationship with Moscow, we believe they would resist Soviet interference in Peruvian cslfairs. Resigned to these circumstances, the Soviets, are banking on more favorable political prospects in the long term. Despite gains by the Marxist United Left coalition in the November national municipal elections, the Soviets probably remain skeptical of the long-range political potential of the traditionally fractured left, in particular the Marxist from assuming the presidency. Consequent- ly, the Soviets are establishing contacts wit i ea ers o the major opposition party, the American Popular Revolutionary Alliance (APRA), which is likely to win the 1985 presidential election. The USSR apparently is counting on APRA's left wing to gain control of the party and agree to cooperate with the United Left. many APRA leaders are receptive to Soviet overtures, but trol the party-are opposed to strong ties. Moreover, APRA politicians, including the leftists, are national- istic and historically committed to steering an inde- pendent international course for Peru. Finally, the party, which, throughout its 60-year history has been blocked by military coups from attaining the presi- dency, is keenly aware of the armed forces' aversion to Communism and longstanding suspicion of APRA's leftist ideology. In addition, we expect that, over the next few years, many Soviet-trained officers-who at present are concentrated in thefeld-grade ranks-will begin to assume positions of ird'luence. Although we have seen no indication that these officers are strongly pro- Soviet-and we expect they will be equally ready to resist foreign interference-we believe that they may 25X1 prove more willing to consider purchases from the USSR if Western weapons are unavailable or ungJ= fordable. In our judgment, the Soviets will continue during the remainder of the Belaunde administration to be able to exert some limited it~lluence on Peruvian actions in international forums, but very little in the domestic sphere. For example, Peruvian officials recently ad- mitted to the US Embassy that Lima did not impose sanctions on the Soviets in the wake of the Korean airliner incident because they feared such action would jeopardize delicate, and ultimately success/'ul, debt renegotiations with Moscow. In our view, APRA leaders would consider even closer cooperation in the international arena to be an appropriate trade-off for 25X1 25X1 continued arms sales and other support from Mos- 25X1 25X1 25X1 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Top Secret Table 1 Ground Forces Order of Battle determined to acquire US equipment, and US defense attache and Embassy reports indicate final negotia- tions are under way for the purchase of 15 US UH-60 Blackhawk and six Bell 214 ST helicopters. Conventional Military Capabilities The Army The Army has almost doubled in size since 1973 to 75,000 men so it can have forces capable of simulta- neous operations on both ostensibly threatened fron- tiers. Consequently, Peru's peacetime Army is now the third largest in South America-behind Brazil and Argentina-and almost as large as the combined ground forces of Ecuador and Chile. Furthermore, Soviet-assisted modernization has enabled the Army to increase substantially its mobility, firepower, and overall offensive capabilities. Lima's armored force, for example, is now the largest in the Andean region and second in South America only to that of Brazil. Air defense and artillery support have been upgraded as well. 25X1 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Top Secret The Peruvian Army has over 100 French AMX-13 light tanks armed with 105-mm guns. Ten of Peru's 14 active divisions are deployed along the Chilean and Ecuadorean borders. These units- which, with 2,500 to 3,500 troops each, are roughly equivalent in strength to a US brigade-are usually maintained at or near full strength and are equipped with most of the Army's heavy weapons. A strategic reserve of one parachute division and one armored division is stationed in Lima and designated for rapid reinforcement of either frontier. Capabilities. In our estimation, Peru's superior forces would quickly overpower Ecuador's poorly trained and equipped Army in a large-scale conflict. Peru maintains opposite Ecuador 20,000 troops equipped with about 100 tanks, substantial heavy artillery, and numerous antitank and infantry weapons. According to details of Peruvian war plans obtained by US Army intelligence sources, these units would strike north to Guayaquil during a general war. Ecuador would probably meet such an assault with elements of four brigades-about 8,000 to 9,000 men-equipped with materiel largely inferior in number and quality to Peru's inventory.Z ' Peru also has about 4,700 combat troops-many of which are in isolated garrisons along the border-in the 5th military region. These forces, which spearheaded Lima's response to Ecuador's incursion onto the disputed eastern slope of the Cordillera del Condor in 1981, could not mount large-scale offensive operations because of their dispersed deployment and the region's difficult Peru's Army also would probably defeat Chile's over- extended forces in a major war confined to northern Chile. Peruvian war plans call for armored thrusts, supported by motorized infantry, across the border toward Arica and airborne assaults behind Chile's extensive network of prepared defenses. Lima's pri- mary objective in such a conflict would be the recap- ture of territory lost to Chile in the late 19th century. To carry out these operations, Peru has deployed 25X1 opposite Chile .about 25,000 men in five divisions- including two armored. Lima also envisions the use of another 4,000 to 5,000 men from its strategic reserve, along with troops from the northern border, assuming Ecuador remains neutral. Peruvian forces in the south are the best equipped and supplied in the Army, fielding over 200 tanks and numerous other armored vehicles, substantial field and self-propelled air de- fense artillery, surface-to-air missiles, and antitank guided missiles. In contrast, Santiago has two divi- sions (about 14,000 men) in northern Chile equipped with about 80 tanks-largely inferior to Peru's-and less heavy artillery than Peru. Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Top Secret Although logistic shortcomings would probably pre- clude more than one large-scale offensive at a time, the Army is, in our estimation, capable of conducting simultaneous operations on both frontiers. Faced with a two-front war, we believe the Peruvians would maintain limited forces in the north to counter Ecua- dor's almost nonexistent offensive potential, while concentrating the bulk of their military strength for an attack against the more formidable Chileans. Following what we believe would be a Peruvian victory in the south, Lima would turn its attention to an isolated Ecuador. D~ciencies. Logistics are the Army's primary weak- ness. The diverse origins of its equipment complicate planning and maintenance. Because the Army has armored vehicles from five nations and artillery of various calibres from at least seven, weapons of different types are often in the same unit. In addition, the Army's major supplier-the USSR-has not pro- vided acontinuous flow of spare parts. According to the US defense attache, this has forced the cannibal- ization of some Soviet tanks. Recent attache reporting also indicates that about half of the Army's 24 Soviet MI-8 helicopters-the mainstay of Army aviation- are usually inoperable because they lack spare parts. Army supply problems are compounded by a lack of statistical records and centralized planning. Despite these problems, Peru has, according to US attache sources, usually been able to obtain an in-commission rate of 60 to 65 percent on most Soviet systems and an services-concerns Army leaders; many inductees lack even elementary education, according to attache . reporting. The current Army priority of expanding the number of technical specialists in order to maintain the increasingly complex arsenal will thus prove diffi- cult. Attache sources indicated in April 1983, for example, that Israeli technicians were pessimistic about the ability of Army personnel to maintain recently acquired Israeli communications equipment. Acquisition Plans. Army procurement priorities re- flect plans to fill gaps in the inventory, replace or modernize aging or inadequate equipment, and reme- dy logistic shortcomings. The US Embassy has report- ed that Army leaders would prefer to purchase US equipment to fulfill many of these requirements. Reasons cited by the US defense attache and the US Ambassador include dissatisfaction with Soviet logis- tic support, a firm belief in the technological superior- ity of US weapons, and generally favorable Army attitudes toward the United States. Replacement of the often inoperable MI-8 helicopters, which perform poorly at Peru's high altitudes, is probably the Army's top priority. The defense attache reported in July 1983 that the Army had accepted an offer of 15 Sikorsky UH-60 Blackhawk assault/transport heli- copters for $110 million, although financing arrange- ments have not et been concluded. even higher rate on certain Western weapons. These and other logistic deficiencies could, however, degrade operational effectiveness significantly in any extended conflict. The US defense attache's office has estimated that Peru has sufficient pre-positioned war stocks for only about two weeks of intensive combat. Although we believe that Peru is continuing to im- prove its support capabilities through stockpiling, expansion of storage and maintenance facilities, and acquisition of needed equipment, financial constraints will undoubtedly prevent rapid progress. In addition, the poorly organized logistic system and the lack of certain specialized equipment would make it difficult to supply forward elements over long distances. ~ US attache and Embassy sources report that armored vehicles are another priority, with the Army hoping to buy 50 US M60A3 tanks. Despite Peru's existing superiority in armor, the Army is concerned over Chile's recent acquisition of 20 AMX-30s from France and 150 Super Shermans from Israel. Also under consideration to bolster the mobility and air defense capabilities of armored formations are up to 263 US M-113 armored personnel carriers and possi- bly Soviet SA-6 or similar mobile surface-to-air mis- sile systems. In addition, US defense attache Even though conventional warfare training has im- proved in recent years, personnel and training contin- ue to pose problems. The low quality of conscripts- who serve for two years in one or another of the three 25X1 25X1 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Sanitized Copy Approved for Release 2011/08/17 :CIA-RDP84S00897R000200090006-2 Toa Secret Economic Constraints on Military Spending President Belaunde's ability to sati.~fy military spending desires will be limited by Peru's declining government revenues and dwindlingloreign exchange reserves. We estimate that natural disasters have triggered a 10 percent contraction in economic activi- ty, which has led totalling domestic revenues and strains on the budget. Fiscal shortfalls and a weak export demand have combined to push Peru out of compliance with its IMF program, complicating rela- tions with international creditors, who have already balked at projected military purchases. The current severe economic decline is in large part attributable to the EI Nino weather phenomenon that unleashed floods in the north and drought in the south. According to US Embassy reports, the climat- ic disasters cost more than $1 billion in lost agricul- tural output and additional public expenditures to repair damages tolarms and roads. Simultaneously, Peru's jscal position has been strained by the loss of tax revenue because of the contractionary effects of the IMF austerity program, inefficient domestic in- dustry, and growth of the underground economy, while the 130-percent irt~'lation rate pushed public spending higher than Peru had anticipated. The slight recovery we expect in 1984 will leave Peru's GDP well below 1982 levels and unable to accommodate heavy military spending. President Belaunde cannot turn to foreign markets to cover these shortfalls in domestic revenue. We expect a sharply reduced fish catch and hood damage to an oil pipeline to result in lost export earnings of some $400 million. The declines in copper prices that most market analysts have projected and uncertain weath- er conditions do not augur well for a substantial increase in export earnings next year. Peru haslallen out of compliance with its three-year IMF agreement. The public-sector d~cit this year, driven by sharp declines in revenue, is likely to be about 9 percent of GDP-double the IMF stipula- tions. Due in part to delays in disbursement of a $200 million World Bank loan, Lima will probably see its reserves shrink by more than the $100 million limit established by the Fund, and this will further restrain its ability to spend next year. The Fund has agreed to negotiate new performance targets, but failure to continue the program in good standing will not only jeopardize over $800 million in external debt resche- dulings and the disbursement of loans arranged earlier this year, but also Lima's ability to obtain new credits in 1984. intends to reschedule loans maturing in 1984 and renew trade credits totaling nearly $3 billion, in addition to seeking at least $400 million in new loans next year. Given Peru's precarious foreign J