• by IPS Correspondents (lima)
• Wednesday, December 21, 1994
• Inter Press Service

LIMA, Dic 21 (IPS) - Peru's Economic Minister, Jorge Camet, said Wednesday the Central Bank will help control the exchange rate of the national currencythe solby buying or selling dollars as necessary.

The announcement, made in a telephone interview with a local television station, implies a change from last week, when Camet responded to a financial crisis by saying that the government would not intervene in the exchange market.

He was forced to change his stance by the rapid appreciation of the sol. After two years of slow, steady increases, the Peruvian currency suddenly shot from 2.22 sols to the dollar in November to less than 1.98 last week.

This rise was attributed to the massive quantities of drug money in the country - more than one billion dollars enter Peru each year - as well as speculative capital and the traditional end-of- year exchange of hard currency as businesses seek greater liquidity.

Exporters called for immediate measures, saying that the 10 percent appreciation would drive costs up, rendering their products unprofitable and non-competitive.

The industrial sector that supplies the internal market also protested, claiming that the appreciation favours imports, which pay a low, flat-rate tariff of 15 percent.

In response, the Central Reserve Bank entered the foreign currency market, buying up more than eight million dollars in order to bolster the demand. This pushed the exchange rate back to 2.16 sols.

"We need to keep a stable exchange situation, without large jumps. The Central Bank will intervene as necessary...to keep the rate near 2.20 sols," Camet said.

Peruvian President Alberto Fujimori banned exchange controls in 1990, and theoretically the exchange rate should float freely, governed by the law of supply and demand.

However, the rate is not completely free, as the Central Bank buys or sells quantities of dollars in order to influence the price of the local currency - a technique known as the "dirty" floating rate.

Camet said the recent appreciation was a result of the season, and had been seen in other countries of the region as well, such as Chile and Argentina. He added that each country has its own way of regulating the extremes in the exchange rate.

He acknowledged that state-imposed exchange controls are not the only way to influence the exchange rate, saying that, "in Colombia, for example, there is a (ceiling) rate, while we have opted for the so-called 'dirty' floating rate."

© Inter Press Service (2014) — All Rights Reserved. Original source: Inter Press Service

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