Dollarization or currency competition? A Peruvian response to Milei and Caputo’s dilemma

Dollarization or currency competition? Pay with dollars for delivery and vegetables? Monthly expenses in pesos and savings in dollars? Only this last question has an answer: it has been happening for some time. The first two cannot yet be answered with certainty.

President Javier Milei and his closest collaborators compare options for the day when, finally, at least the monetary and currency front will normalize, the Central Bank’s balance sheet will be completed and, above all, reserves will increase. On Friday 1 March, when he spoke before the Legislative Assembly, Milei skirted the topic. At one point he stated that reserves were already sufficient to cover 90% of the monetary base. But he did not come forward with a specific announcementas had been hypothesized in the previous hours.

The Minister of Economy Luis Caputo Before any consultation, he insists that at the end of the journey, once Argentina has normalized in macroeconomic terms, Dollarization will appear. He says the same thing Ramiro Marra, Buenos Aires legislator and one of the founders of La Libertad Avanza, deals with the financial markets on a daily basis. Caputo and Marra state it with similar words Dollarization would close the path to the “caste”, which in recent years has benefited from the false issuance of pesos.. But there is no unanimity within the government.

In public, Domingo Cavallo recommends looking at the Peruvian model. They seem to listen to him. The economic team is well aware of the stabilization process that brought Peru from the high inflation of the 1980s, which exploded in a hypereconomic way in 1990, to the macroeconomic stability consolidated in the mid-1990s, and which today translates into Very low inflation and sustained economic growthor, with social indicators that have also improved significantly this century.

There are government officials in Milei, for example, who have favorites tabs on their computers. documents written in the 1990s by the current president of the Central Bank of Peru, Julio Velarde. Specifically, a work written with another economist, Martha Rodríguez, which takes stock of the first year of the economic plan launched in 1990 by Alberto Fujimori.

This work details what it meant to liberate an economy that was in hyperinflation controlled prices (including exchange rate), frozen tariffs and preferential interest rates.

Why the documents from Velarde, the man who has presided over the Peruvian Central Bank since 2006 and who over the years has become synonymous with economic stability amid Peru’s political hypervolatility?

“We analyze everything we can about stabilization plans, and in particular those where we can interact with people who have been affected and from which we can draw applicable experiences” high official sources underline.

In today’s Peru the bimonetary system is fully functional. Peruvians can use dollars or Peruvian soles interchangeably and for any type of transaction. They can save and take out debt in both currencies. But the Peruvian Sol has caught up.

Clarion spoke with the Peruvian economist Alberto Moronewho shared several years of academic activity with Velarde, and also spent the 1990s at the CEMA University Argentinian to do a master’s degree, where he had as professor, among others, the economist Carlos Rodriguez.

“In the 80s and 90s, absolutely all Peruvians used dollars to pay for their daily consumption,” Morón recalls. What was done, after the very harsh “paquetazo” launched by Alberto Fujimori’s government, was, among other things, accept that reality.

In 1991, for example, a law was passed stating that “The State guarantees the free possession, use and internal and external disposal of foreign currency by natural and legal persons resident in the country; as well as the free convertibility of the national currency at a single exchange rate”. The law is respected. Not like in Argentina, which at the time passed a law guaranteeing the intangibility of deposits.

It took years for Peru to lower inflationthat had been 7,500% in 1990: It reached 23% annually in 1994 and took another three years to reach an annual figure. That is, seven years to reach annual inflation below 10%. Is this a sign that we will have to be patient?

In the middle “things happened”. The fiscal deficit was corrected and, no less importantly, in 1991 an article guaranteeing the independence of the Central Bank was inserted into the Peruvian Constitution. Cavallo remembered this this week. “Those who issue currency to finance the Treasury deficit are penalized, something similar to what Milei wants to do here.” The economy has also been opened up and import tariffs have been significantly reduced, for example. And fiscal stability is also maintained.

Throughout this process There has not been a single repressive measure against the use of the dollar.

Morón says that what was normal in Peruvian businesses until the end of the last century was to see prices only in dollars. In 2004, the Peruvian Congress promoted a “disruptive” law.: simply, it imposed that public prices were expressed in dollars and Peruvian soles. “Gradually, in the midst of macro and monetary normalization, dollar prices were disappearing. The Central Bank started in 2002 with a monetary program based on “inflation targets” and to have greater control over the aggregate demand for money it needed people to use the Sol more, but without penalizing those who used dollars” explains the ‘economist.

In other words, low inflation and positive expectations that the macroeconomic rules adopted by Peru would not be broken They gave peace of mind to the Peruvians that, if they wanted it and without impositions of any kind, they could return to their currency, both for daily use and for saving.

“Today one could say that the mind of Peruvians works, in monetary terms, 80% in soles and 20% in dollars” summarizes Moron. “Peruvian banks offer rates of 6% per annum for fixed-term placements which are usually carried out for one year.” It’s a positive rate – it is important to bet on saving in soles – in the face of inflation which is expected to be equal to just under 3%. Furthermore, the loans that ordinary people take are larger in pesos than in dollars. An example: in 2001, 94% of mortgage loans were denominated in dollars. 20 years later, only 12% of mortgages aredollarized. Today for Peruvians the strong currency is the Sol.

Morón defines his position on the debate between pro and condollarization: “Dollarisation doesn’t help, problems will come anyway and sooner or later they will get you into trouble. I told the Ecuadorians that they must get out ofdollarization. In Peru or Argentina what really matters is putting order in the macroeconomy, having fiscal discipline and guaranteeing the independence of the Central Bank”

The Peruvian case could perhaps be taken as such a road map this signals what could one day happen in Argentina.