Economic Stabilization Experiences: The Case of Peru 1990-1991

Similar to other Latin American economies, Peru went through one of the most severe periods of macroeconomic imbalances reflected in inflation rates of up to four digits in the 1980s. After several failed stabilization attempts (called “paquetazos”) to combat hyperinflation with significant exchange rate adjustments (of the multiple exchange rate system) and partial fiscal adjustments, a novel stabilization program was implemented in 1990 coinciding with the change of government, the first in Latin America to use a monetary aggregate control scheme with a permanent abandonment of the fixed exchange rate regime. The program had two clear stages. The first, between August 1990 and January 1991, focused on eliminating Central Bank financing of the treasury, and on reestablishing market mechanisms in determining prices, interest rates and the exchange rate. The second stage began in February 1991 with the complete liberalization of strict exchange and capital controls, which encouraged the repatriation of capital and the return of dollar currency to local banks. A bimonetary system was consolidated in which the national currency gradually regained the confidence of economic agents in a process that continues today. In this process, the establishment of the institutionality of macroeconomic policies was crucial; in particular, the autonomy of the central bank and fiscal discipline. This process constitutes a fundamental milestone for the Peruvian economy, which clearly divides a before of persistent macroeconomic imbalances and inefficient allocation of resources; and an after that presents sustained macroeconomic stability that promotes economic growth.