Recently, an article in the newspaper La Razón de Bolivia realized that, in the face of the economic crisis facing said country, the population’s need to take refuge in the dollar to prevent their savings from losing value has led to a shortage of the currency, with the sun occupying that void. “He peruvian sun becomes the new dollar”, headlined La Razón on its cover last Sunday.
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If Bolivia, in addition to Peru, maintains borders with Chile, Argentina, Paraguay and Brazil, what generates the preference of its citizens for the sun? The answer, according to experts, is the lower depreciation that the Peruvian currency has experienced over time compared to its peers in the region. If the exchange rate of these economies against the dollar is taken into account, from the beginning of 2000 to the end of last year, the sol has lost value by 7.8%, the Chilean peso by 32.3% and the Brazilian real by 112%.
CAUSES
What makes an economy have a ‘hard’ currency? Rafael Cortez, researcher at the Research Center of the University of the Pacific (CIUP), stated that this is associated with several necessary, although not sufficient, conditions.
He said that an economy is required to effectively control inflation and, to do so, “a central bank with autonomy and institutional arrangements that prevent financing fiscal imbalances of the Government” is essential. He stated that in Peru this has happened thanks to the current organic law of the Central Bank. Cortez added that for the strength of the currency it is also important that the country has a fiscally healthy economy, that is attractive to the financial market and external investors, with a constitutional legal framework that respects contracts.
“In the case of Peru we have a Constitution that supports the market economy. This makes the property right inalienable and contracts cannot be altered,” he commented. He said that other signs of Peru’s macroeconomic strength, which also help maintain the stability of the sun, are the accumulation of a large amount of international reserves and the low ratio of external public debt in relation to GDP, which make Peru a country with an economically solid in the international community.
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MONETARY POLICY
Marco Ortiz, professor of Macroeconomics at the same university, maintained that the strength of the sun is associated with the monetary and exchange rate policy of the Central Reserve Bank (BCR).
He explained that, unlike other countries, the monetary authority follows an inflation targeting policy that focuses its objective on 2% and that it is the same one pursued by the United States, which makes the loss of value of the Peruvian currency very similar to that of the dollar. Ortiz specified that, in addition to the above, the BCR maintains an active policy of exchange intervention that seeks to reduce the volatility of the currency, which avoids a strong depreciation in the short term.
A similar opinion is that of economist Elmer Cuba, who argued that the fact that the BCR’s inflation goal is ambitious has led to inflation being lower on average than those of Colombia and Chile.
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