## _wp12166 - 1. Merchandise Exports and Imports, 1890–1929

## Source details

**Canonical URL:** [_wp12166 - 1. Merchandise Exports and Imports, 1890–1929](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12166.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12166.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12166.pdf.json)

---

### Overview and main findings
- Nominal exchange rates in Peru over 1930–1980 were characterized by sequences of broadly stable nominal exchange rate episodes followed by discrete upward adjustments (devaluations). Only the 1930s and 1950s saw periods of enhanced nominal exchange rate flexibility.
- Periods of nominal exchange rate stability (for example, 1940–1948, 1960–67, 1970–75) led to significant real exchange rate overvaluation, rapid growth of commodity imports and domestic demand, growing external current account deficits, and dwindling central bank international reserves.
- Adjustments in the nominal exchange rate were generally complemented by tight financial policies and led to slowing import growth, slowed economic activity, and improvements in the balance of payments.
- International partners (U.S. government, IMF, Bank for Reconstruction and Development) provided policy support, credibility, and precautionary financial resources. Peru was one of the IMF’s founding member countries.
- The Polak model and the monetary approach to the balance of payments were the common analytical framework used by local policymakers and visiting IMF missions from February 1947 onward, emphasizing control of domestic credit expansion.

### Exchange systems and institutional background (early 1900s to post-World War I)
- 1901–1914: operated a “gold coin standard” with the Peruvian pound set at par with the English pound sterling; gold coinage was the general means of payment.
- 1914–1919: suspension of the gold coin standard; Cheques Circulares al Portador issued by private commercial banks regulated by a Supervisory Commission (Junta de Vigilancia).
- Supervisory Commission capped total supply of bank notes at 1.1 million Peruvian pounds.
- Reserve requirements: around 35 percent in gold and 65 percent in other assets (bonds and mortgage certificates).
- January 1919: unlimited increase in bank notes allowed if 100 percent backed by commercial banks’ gold assets.
- Gold content revised in 1919: Peruvian pound set at 7.323 grams of fine gold.
- U.S. dollar parity set by the Supervisory Commission in 1917: 4.86 dollars per Peruvian pound; traded on average above 5 dollars a pound in 1917/19.

### Trade patterns, export composition, and balance of payments (selected data and interpretation)
- Export diversification: exports and imports were nearly evenly divided between Europe and the Americas (together >95 percent of total trade).
- Four commodities dominated export trade through the early 1940s: sugar, cotton, petroleum, and copper. Up to 1920 sugar and cotton were main exports; petroleum and copper became major exports in the 1930s.
- Early 1900s macro profile: strong economic and export growth; inflation in low single-digits in 1901–1914; domestic investment mainly financed by private domestic savings; Peru was a net creditor to the rest of the world (exports > imports).

### Table 1: Merchandise Exports, Imports, and Trade Balance, 1890–1929 (Millions of Peruvian pounds)
- 1890: Exports 1.82; Imports 1.87; Trade balance -0.05
- 1891: Exports 1.75; Imports 2.15; Trade balance -0.40
- 1892: Exports 2.51; Imports 1.97; Trade balance 0.54
- 1893: Exports 1.93; Imports 1.12; Trade balance 0.81
- 1894: Exports 1.10; Imports 0.94; Trade balance 0.16
- 1895: Exports 1.41; Imports 1.04; Trade balance 0.37
- 1896: Exports 2.10; Imports 1.68; Trade balance 0.42
- 1897: Exports 2.78; Imports 1.61; Trade balance 1.17
- 1898: Exports 3.03; Imports 1.93; Trade balance 1.10
- 1899: Exports 3.07; Imports 1.87; Trade balance 1.20
- 1900: Exports 4.50; Imports 2.32; Trade balance 2.18
- 1901: Exports 4.30; Imports 2.72; Trade balance 1.58
- 1902: Exports 3.70; Imports 3.43; Trade balance 0.27
- 1903: Exports 3.85; Imports 3.87; Trade balance -0.02
- 1904: Exports 4.07; Imports 4.36; Trade balance -0.29
- 1905: Exports 5.76; Imports 4.36; Trade balance 1.40
- 1906: Exports 5.70; Imports 5.01; Trade balance 0.69
- 1907: Exports 5.74; Imports 5.52; Trade balance 0.22
- 1908: Exports 5.48; Imports 5.27; Trade balance 0.21
- 1909: Exports 6.49; Imports 4.29; Trade balance 2.20
- 1910: Exports 7.08; Imports 4.98; Trade balance 2.10
- 1912: Exports 9.44; Imports 5.14; Trade balance 4.30
- 1913: Exports 9.14; Imports 6.09; Trade balance 3.05
- 1914: Exports 8.77; Imports 4.83; Trade balance 3.94
- 1916: Exports 16.54; Imports 8.68; Trade balance 7.86
- 1918: Exports 19.97; Imports 9.71; Trade balance 10.26
- 1920: Exports 35.30; Imports 18.36; Trade balance 16.94
- 1921: Exports 16.66; Imports 16.67; Trade balance -0.01
- 1922: Exports 19.97; Imports 10.59; Trade balance 9.38
- 1927: Exports 28.79; Imports 19.36; Trade balance 9.43
- 1928: Exports 28.05; Imports 17.63; Trade balance 10.42
- 1929: Exports 29.30; Imports 18.99; Trade balance 10.31

### Table 2: Main Merchandise Exports, 1914–1939 (Millions of Peruvian pounds; Percent of total)
- Total main exports (millions): 1914 7.8; 1919 4.9; 1924 23.4; 1927 22.4; 1928 27.0; 1929 28.8
- Cotton (millions): 1914 1.4; 1919 6.6; 1924 7.0; 1927 5.2; 1928 8.2; 1929 7.5
- Sugar & derivates (millions): 1914 2.6; 1919 8.3; 1924 5.4; 1927 3.4; 1928 2.7; 1929 4.1
- Petroleum & derivates (millions): 1914 0.9; 1919 2.3; 1924 6.0; 1927 8.7; 1928 12.1; 1929 11.1
- Copper (millions): 1914 1.7; 1919 4.9; 1924 3.7; 1927 3.7; 1928 2.9; 1929 4.3
- Leather (millions): 1914 0.2; 1919 0.6; 1924 0.2; 1927 0.3; 1928 0.3; 1929 0.3
- Rubber (millions): 1914 0.4; 1919 0.5; 1924 0.2; 1927 0.1; 1928 0.0; 1929 0.0
- Wools (millions): 1914 0.5; 1919 1.6; 1924 1.0; 1927 1.1; 1928 0.9; 1929 1.4

- Percent of total (1914 / 1919 / 1924 / 1927 / 1928 / 1929):
  - Total main exports 100.0 / 100.0 / 100.0 / 100.0 / 100.0 / 100.0
  - Cotton 18.2 / 26.7 / 29.7 / 23.0 / 30.2 / 26.1
  - Sugar & derivates 34.1 / 33.4 / 22.9 / 15.1 / 9.8 / 14.3
  - Petroleum & derivates 11.5 / 9.3 / 25.6 / 38.9 / 44.8 / 38.5
  - Copper 21.7 / 19.7 / 15.8 / 16.4 / 10.7 / 14.9
  - Leather 2.3 / 2.5 / 0.9 / 1.4 / 1.1 / 1.1
  - Rubber 5.7 / 1.9 / 0.7 / 0.5 / 0.1 / 0.1
  - Wools 6.6 / 6.6 / 4.4 / 4.7 / 3.2 / 5.0

### Institutional and data sources used
- Primary data and minutes compiled by the Central Reserve Bank of Peru (Banco Central de Reserva del Perú, 1999).
- Complementary sources: IMF staff reports (SMs or EBS), minutes from IMF Executive Board meetings (EBM), and an array of economic publications cited in the paper’s bibliography.

*Source: Excerpt from IMF working paper chapter "Merchandise Exports and Imports, 1890–1929" (tables and figures as provided in the source content).*

### 1. Merchandise Exports and Imports, 1890–1929 .....................................................................7

### _wp12166 - 1. Merchandise Exports and Imports, 1890–1929

### Overview and main findings
- Nominal exchange rates in Peru over 1930–1980 were characterized by sequences of broadly stable nominal exchange rate episodes followed by discrete upward adjustments (devaluations). Only the 1930s and 1950s saw periods of enhanced nominal exchange rate flexibility.
- Periods of nominal exchange rate stability (for example, 1940–1948, 1960–67, 1970–75) led to significant real exchange rate overvaluation, rapid growth of commodity imports and domestic demand, growing external current account deficits, and dwindling central bank international reserves.
- Adjustments in the nominal exchange rate were generally complemented by tight financial policies and led to slowing import growth, slowed economic activity, and improvements in the balance of payments.
- International partners (U.S. government, IMF, Bank for Reconstruction and Development) provided policy support, credibility, and precautionary financial resources. Peru was one of the IMF’s founding member countries.
- The Polak model and the monetary approach to the balance of payments were the common analytical framework used by local policymakers and visiting IMF missions from February 1947 onward, emphasizing control of domestic credit expansion.

### Exchange systems and institutional background (early 1900s to post-World War I)
- 1901–1914: Peru operated a “gold coin standard” with the Peruvian pound set at par with the English pound sterling. Gold coinage was the general means of payment; silver and copper circulated for small transactions.
- 1914–1919: Outbreak of the First World War led to suspension of the gold coin standard. Exports of gold were banned and the gold coin standard was replaced by paper notes (Cheques Circulares al Portador) issued by private commercial banks, regulated by a Supervisory Commission (Junta de Vigilancia).
- The Supervisory Commission capped total supply of bank notes at 1.1 million Peruvian pounds. Reserve requirements were around 35 percent in gold and 65 percent in other assets (bonds and mortgage certificates).
- January 1919: Supervisory Commission allowed an unlimited increase in bank notes provided notes were 100 percent backed by commercial banks’ gold assets. The gold content of the Peruvian pound was revised and set at 7.323 grams of fine gold. The U.S. dollar parity set by the Supervisory Commission in 1917 was 4.86 dollars per Peruvian pound and traded on average above 5 dollars a pound in 1917/19.

### Trade patterns, export composition, and balance of payments (selected data and interpretation)
- Export diversification in Peru contrasted with the concentration typical of other Latin American countries; exports and imports were nearly evenly divided between Europe and the Americas (together >95 percent of total trade).
- Four commodities dominated export trade through the early 1940s: sugar, cotton, petroleum, and copper. Up to 1920 sugar and cotton were main exports; petroleum and copper became major exports in the 1930s.
- Early 1900s macro profile: economic and export growth strong, inflation in low single-digits in 1901–1914; domestic investment mainly financed by private domestic savings; Peru was a net creditor to the rest of the world (exports > imports).

### Table 1: Merchandise Exports, Imports, and Trade Balance, 1890–1929 (Millions of Peruvian pounds; source: Barreto (1943) and Yepes (1992))
- 1890: Exports 1.82; Imports 1.87; Trade balance -0.05
- 1891: Exports 1.75; Imports 2.15; Trade balance -0.40
- 1892: Exports 2.51; Imports 1.97; Trade balance 0.54
- 1893: Exports 1.93; Imports 1.12; Trade balance 0.81
- 1894: Exports 1.10; Imports 0.94; Trade balance 0.16
- 1895: Exports 1.41; Imports 1.04; Trade balance 0.37
- 1896: Exports 2.10; Imports 1.68; Trade balance 0.42
- 1897: Exports 2.78; Imports 1.61; Trade balance 1.17
- 1898: Exports 3.03; Imports 1.93; Trade balance 1.10
- 1899: Exports 3.07; Imports 1.87; Trade balance 1.20
- 1900: Exports 4.50; Imports 2.32; Trade balance 2.18
- 1901: Exports 4.30; Imports 2.72; Trade balance 1.58
- 1902: Exports 3.70; Imports 3.43; Trade balance 0.27
- 1903: Exports 3.85; Imports 3.87; Trade balance -0.02
- 1904: Exports 4.07; Imports 4.36; Trade balance -0.29
- 1905: Exports 5.76; Imports 4.36; Trade balance 1.40
- 1906: Exports 5.70; Imports 5.01; Trade balance 0.69
- 1907: Exports 5.74; Imports 5.52; Trade balance 0.22
- 1908: Exports 5.48; Imports 5.27; Trade balance 0.21
- 1909: Exports 6.49; Imports 4.29; Trade balance 2.20
- 1910: Exports 7.08; Imports 4.98; Trade balance 2.10
- 1912: Exports 9.44; Imports 5.14; Trade balance 4.30
- 1913: Exports 9.14; Imports 6.09; Trade balance 3.05
- 1914: Exports 8.77; Imports 4.83; Trade balance 3.94
- 1916: Exports 16.54; Imports 8.68; Trade balance 7.86
- 1918: Exports 19.97; Imports 9.71; Trade balance 10.26
- 1920: Exports 35.30; Imports 18.36; Trade balance 16.94
- 1921: Exports 16.66; Imports 16.67; Trade balance -0.01
- 1922: Exports 19.97; Imports 10.59; Trade balance 9.38
- 1927: Exports 28.79; Imports 19.36; Trade balance 9.43
- 1928: Exports 28.05; Imports 17.63; Trade balance 10.42
- 1929: Exports 29.30; Imports 18.99; Trade balance 10.31

### Table 2: Main Merchandise Exports, 1914–1939 (Millions of Peruvian pounds; Percent of total; source: Kurbs (1939))
- Total main exports (millions of Peruvian pounds): 1914 7.8; 1919 4.9; 1924 23.4; 1927 22.4; 1928 27.0; 1929 28.8
- Cotton (millions): 1914 1.4; 1919 6.6; 1924 7.0; 1927 5.2; 1928 8.2; 1929 7.5
- Sugar & derivates (millions): 1914 2.6; 1919 8.3; 1924 5.4; 1927 3.4; 1928 2.7; 1929 4.1
- Petroleum & derivates (millions): 1914 0.9; 1919 2.3; 1924 6.0; 1927 8.7; 1928 12.1; 1929 11.1
- Copper (millions): 1914 1.7; 1919 4.9; 1924 3.7; 1927 3.7; 1928 2.9; 1929 4.3
- Leather (millions): 1914 0.2; 1919 0.6; 1924 0.2; 1927 0.3; 1928 0.3; 1929 0.3
- Rubber (millions): 1914 0.4; 1919 0.5; 1924 0.2; 1927 0.1; 1928 0.0; 1929 0.0
- Wools (millions): 1914 0.5; 1919 1.6; 1924 1.0; 1927 1.1; 1928 0.9; 1929 1.4

- Percent of total (1914 / 1919 / 1924 / 1927 / 1928 / 1929):
  - Total main exports 100.0 / 100.0 / 100.0 / 100.0 / 100.0 / 100.0
  - Cotton 18.2 / 26.7 / 29.7 / 23.0 / 30.2 / 26.1
  - Sugar & derivates 34.1 / 33.4 / 22.9 / 15.1 / 9.8 / 14.3
  - Petroleum & derivates 11.5 / 9.3 / 25.6 / 38.9 / 44.8 / 38.5
  - Copper 21.7 / 19.7 / 15.8 / 16.4 / 10.7 / 14.9
  - Leather 2.3 / 2.5 / 0.9 / 1.4 / 1.1 / 1.1
  - Rubber 5.7 / 1.9 / 0.7 / 0.5 / 0.1 / 0.1
  - Wools 6.6 / 6.6 / 4.4 / 4.7 / 3.2 / 5.0

### Institutional and data sources used in the paper
- Primary data and minutes compiled by the Central Reserve Bank of Peru (Banco Central de Reserva del Perú, 1999).
- Complementary sources: IMF staff reports (SMs or EBS), minutes from IMF Executive Board meetings (EBM), and an array of economic publications cited in the paper’s bibliography.

*Source: Excerpt from IMF working paper chapter "Merchandise Exports and Imports, 1890–1929" (tables and figures as provided in the source content).*

### 1920. Testing that hypothesis is, however, beyond the scope of this paper.

### _wp12166 - 1920. Testing that hypothesis is, however, beyond the scope of this paper.

### Creation of the Reserve Bank and banking-system reform (1922)
- The Reserve Bank of Peru (Banco de Reserva del Peru) was created in 1922, inaugurating a new banking system era in Peru while maintaining the inconvertibility of the U.S. Dollars and the Peruvian pound.
- Law #4500, of March 9, 1922:
  - Centralized the sources of monetary emission (previously residing with private commercial banks).
  - Provided central bank functions including provision of rediscount and advances to commercial banks, and establishment of a clearing house for checks and intra-bank transactions.
  - Replaced commercial bank notes with central bank bills.
  - Changed currency backing from 100 percent gold to a system of 50 percent coverage (including gold and other liquid assets).
  - Retained the inconvertibility principle/policy of the Peruvian pound; convertibility of central bank bills into gold required prior government consideration and approval upon recommendation from the central bank board of directors.

### Peruvian pound exchange-rate observations (selected series)
- Per Lp / Pence Per Lp series (as listed):
  - 19024.91247
  - 19064.97246
  - 19104.87244
  - 19114.87244
  - 19124.87244
  - 19134.77239
  - 19144.40239
  - 19164.93253
  - 19175.18266
  - 19185.65292
  - 19195.03288
  - 19214.12277
  - 19223.85206
  - 19233.73169
  - 19283.97189
  - 19294.00200
- Sources: Barreto (1943) and Banco Central de Reserva (BCRP) Boletin Mensual.
- Narrative finding: In 1922–1929 the Peruvian pound gradually appreciated while Peru became a net borrower of world savings to finance expanding public investment under the Leguía administration; rising interest payments on external public debt began to offset external trade surpluses with emerging pressures starting in late-1927.

### Impact of the 1929 global crisis on Peru
- The collapse of Wall Street on “black” Thursday, October 24, 1929:
  - Led to sharp contraction in bank credit and international capital flows to raw material producers such as Peru.
  - Caused a sharp fall in international commodity prices, decline in export earnings, and a depreciation of the Peruvian pound.
  - Rising interest and amortization payments on external public debt exacerbated balance of payments disequilibrium.
  - Domestically, destroyed wealth and employment, triggered continuous decline in tax revenue collections and large fiscal deficits.

### 1930–1945: Battling the Great Depression and the Second World War — overview and macroeconomic patterns
- Period-level summary statement: Relative to the early-1900s, 1930 to 1945 saw a deceleration in real GDP per-capita growth and ensuing fiscal and balance of payments deficits in a harsh international environment.
- 1930–1939:
  - Collapse of Wall Street and worldwide deflation sharply slowed Peru’s investment and overall economic activity.
  - Nominal exchange rate against the U.S. dollar depreciated marginally because U.S. dollar depreciation following U.S. abandonment of the gold standard in 1933 partly countered trade deterioration effects.
- 1940–1945:
  - Second World War further disrupted multilateral trade.
  - War-time bilateral trade and financing agreements with the U.S. government supported selected agricultural and mineral exports.
  - Investment rose largely due to revival of local mining industry responding to premium international commodity prices.
  - Central Reserve Bank fixed the rate at 6.5 soles per dollar in mid-1940 and introduced exchange and trade controls to broadly match Peru’s imports to export receipts.
  - Inflation gradually increased owing to large fiscal deficits mainly financed by central bank credit; recourse to net external borrowing was practically impossible during this period because of global financial uncertainties and Peru’s external debt service moratorium enacted under President Sánchez Cerro in May 1931.
  - Rising monetary financing of the fiscal deficit led to an appreciation of the real exchange rate that boosted imports and pressured central bank international reserve coverage.

### Select period indicators (Table 4 excerpts and series as presented)
- Real GDP growth (avg.): 5.11.9 2.34.26.53.08.95.25.52.0
- Median growth: 4.11.51.83.76.02.98.95.85.41.6
- Population growth (avg.): 1.41.61.71.82.32.72.92.82.82.7
- Real GDP per capita growth (avg.): 3.70.30.62.44.10.25.82.32.7-0.7
- Median growth (per-capita): 2.7-0.20.11.83.50.25.92.92.5-1.1
- Average inflation rate (coste de vida): 4.0-0.310.419.28.08.46.612.68.646.8
- Avg. inflation (indice de precios al por mayor): ......13.122.49.710.26.32.6......
- Terms of trade growth (avg.): -0.1-3.73.61.31.1-5.01.13.38.60.0
  - (Median) 0.3-1.6-0.8-1.53.4-2.20.02.79.3-3.0
- Export growth (goods & services): ...-2.69.614.410.715.022.111.14.921.6
- Import growth (goods & services): ...5.511.218.211.614.925.714.616.617.5
- Nominal exchange rate (level, in soles per U.S. dollar): ...4.46.48.317.022.326.630.143.4172.7
- Real exchange rate index (% change; appreciation -) 1, 2, 3: ...16.7-19.61.65.34.9-6.6-3.6-12.926.1
- Reserve coverage (months of imports G & S): ...2.93.82.21.81.12.12.13.86.7
- Bank credit to private sector: ......12.513.318.27.713.812.313.833.5
- Velocity of broad money (includes dollar deposits): ......4.65.05.14.55.04.64.55.7
- Velocity of national quasi money: ......4.65.05.14.85.45.24.66.4
- Investment: 12.06.710.918.525.624.722.218.715.116.6
  - of which central gvt.'s investment: ............3.02.51.72.75.96.6
  - public enterprises' investment: ..................1.82.42.83.3
- External current account (surplus, -): ...-1.1-0.31.02.54.1-0.32.50.73.1
- Domestic savings: 12.07.811.317.523.020.622.516.314.313.5
  - Public savings5: ...-0.6-3.8-1.42.71.73.30.91.40.1
  - Private savings: 12.08.415.118.920.318.919.215.313.013.4
- Notes from table:
  - Source: Central Reserve Bank of Peru, various sources; Extracto Estadistico del Peru, various issues; Seminario & Beltran (1998); and author's estimates.
  - 1 Index, September 1934 = 100; percentage change between beginning and end of period.
  - 2 For period 1945–1949, data reported refer to 1945–1948, instead, to eliminate the exchange rate depreciation of Nov. 1949 (following the floating).
  - 3 For period 1950–1955, data reported refer to 1949–1955, instead.
  - 4 Macroeconomic identity: (I = S) investment equals domestic plus external savings. External savings are equal to the external current account balance with opposite sign.
  - 5 Due to data weaknesses, refers only to central government savings.

### Policy highlights on currency and convertibility (1930–1933)
- February 1930:
  - The sol-oro replaced the Peruvian pound as the country’s monetary unit.
  - Each sol-oro was made equivalent to one tenth of a Peruvian pound.
  - The parity of the national currency, set at 7.323 grams of gold a Peruvian pound in 1922, was devalued by 18 percent to 6.01853 grams a pound.
  - The revaluation of gold vis-à-vis the sol-oro yielded seignorage to the government; sources indicate the revenue was used to cover the fiscal deficit rather than to improve the central bank’s foreign exchange reserve position.
  - The sol-oro remained inconvertible into gold.
- April/May 1931 and the Kemmerer Mission:
  - The Kemmerer Mission arrived in Lima in January 1931 and advised issuance of a new monetary unit based on the gold bullion standard and establishment of a modern central bank with multiple stakeholders on its board and with lender-of-last-resort functions.
  - Upon the mission’s advice, the official parity of the sol against gold was further devalued by 30 percent and set at 0.421264 grams of gold per sol. The official parity was consistent with the prevailing sol/U.S. dollar exchange rate of 3.6 soles per U.S. dollar.
  - A newly established Central Reserve Bank initiated operations in 1931 with free convertibility of the sol; but a very large balance of payments deficit in 1932, covered by drawdown of central bank gold reserves, produced a heavy deflation.
  - Gold exchange convertibility was suspended in May 1932; monetary authorities moved to let market forces freely determine the exchange rate.
  - The sol appreciated against the U.S. dollar as the United States abandoned the gold standard and fixed its value at US$35 per ounce of gold in early 1933.
  - The exchange rate oscillated freely around 4.9 soles per U.S. dollar through 1937, before gradually depreciating to 6.5 soles per dollar by mid-1940.

*Source: Excerpts from the supplied IMF working paper PDF content unit.*

### 1940. Central bank intervention in the foreign exchange market avoided sharp fluctuations in

### _wp12166 - 1940. Central bank intervention in the foreign exchange market avoided sharp fluctuations in 

### Exchange rate policy and foreign exchange operations
- The Central Reserve Bank fixed the exchange rate at 6.5 soles per U.S. dollar in June 1940.
- Central bank intervention "avoided sharp fluctuations in the sol/U.S. dollar exchange rate," albeit with persistent foreign exchange sales from 1938 onwards as war tensions developed in Europe.
- Exchange controls and import restrictions were introduced during the war, forcing a quick adaptation of Peru’s imports to exports.
- Exports to the United States were framed under temporary contracts (U.S. Commodity Reserve Corporation, the Rubber Reserve Company, the U.S. Defense Supply Corporation, and the Metals Reserve Company) that fixed export commodity prices and guaranteed the supply of cotton, rubber and key minerals (gold, silver, lead, zinc) to the American economy.
- Special trade financing arrangements, including those administered by the U.S. Eximbank, guaranteed the availability of inputs and machinery and equipment to Peru.

### Official reserves and import coverage
- Official central bank reserves rose from about US$12 million (equivalent to 2.3 months of imports) in the late-1930s to about US$24 million in the mid-1940s (equivalent to 3.6 months of imports).
- The rise in official reserve coverage recorded in the early 1940s "was not sustained for long."
- Gross international reserves declined from about five months of import coverage in 1942 to an average of about 3.5 months of imports in 1944–1945.
- During the 1940s, three-months of import coverage was possibly considered a minimum adequate level of international reserves by practitioners.

### Fiscal financing, monetary expansion, and central bank balance sheet
- In 1939–1945, Peru registered continuous fiscal deficits largely spurred by spending overruns vis-à-vis the approved budgets, which led to a one-to-one increase in the national debt.
- Most of the national debt was central bank credit to the government; commercial banks and the Credit and Commission Fund (Caja de Credito y Consignaciónes) also provided deficit financing.
- The government’s recourse to central bank financing boosted the money supply, which "by June 1946, was nearly four times its 1939 level."
- By end-1945, the stock of central bank net credit to the government had reached 570 million soles (up from 130 million soles in 1940).
- During 1941/45, sources of base money growth (percent) were shown in Figure 6 as Net Intl. Reserves, Credit to Gvt., Credit to banks, Other items net (figure referenced for composition).

### Inflation, real exchange rate, and trade outcomes
- Inflation, as measured by the cost of living index, increased at an average rate of 10.5 percent a year during the war.
- The combination of a fixed exchange rate and unremitting inflation led to a significant appreciation of Peru’s real exchange rate (defined as the nominal exchange rate adjusted for Peru’s inflation differential with the United States).
- The appreciation of the real exchange rate triggered a rapid rise in imports, hurt export profitability, and unleashed emerging pressures on the central bank’s foreign exchange position.
- Commodity imports rose at double-digit rates despite foreign exchange and trade controls.
- Reportedly, despite price controls and the recorded import boost, there was scarcity of basic goods and a black market gradually developed for commodity staples.
- Profitability in leading exports, such as cotton and sugar, was impaired by the appreciation of the real exchange rate, although improvements in international terms of trade partly ameliorated the profitability squeeze.

### Real economy: demand composition and sectoral structure
- In 1940–1945, the contribution to growth from total consumption was almost twice that from investment despite a marked rise in gross fixed capital formation mainly in local mining (gold, silver, lead, zinc) compared to 1930–1939.
- A negative contribution to growth from the export sector reflected the detrimental effects of World War II on multilateral trade, although bilateral trade arrangements with the United States sustained export demand of selected commodities.
- Import demand showed a sizeable negative contribution to economic growth in a context of growing fiscal deficits and a strong appreciation of the real effective exchange rate.
- On the production side, the main sources of value added creation remained with agriculture, livestock, and mining, while the share of industries’ value-added in GDP was significantly smaller and about the same as that of the government.
- Peru’s share of manufacturing in GDP (14 percent) was about the same as Colombia’s, but the government’s share in GDP in Colombia (5.5 percent) was about half of that registered in Peru—implying Peru had a larger public sector than Colombia.

### International engagement and institutional developments
- Peru participated in the Bretton Woods Conference (New Hampshire, USA, July 1944) that created the IMF and the IBRD; the Peruvian delegation was led by Manuel Beltrán.
- On December 29, 1945, the Peruvian Congress (Law #10343) approved Peru’s participation in the Bretton Woods Agreement.
- Peru was one of the thirty-five founding member countries of the IMF.

### Transition 1945–1949: from fixed to floating exchange rate regime
- Postwar, rising inflation and growing tensions in the foreign exchange markets dominated the scene, resulting in a coup d'état led by General Manuel A. Odría in October 1948.
- Odría’s military junta abandoned the fixed exchange rate parity of 6.5 soles per dollar and introduced a dual floating exchange rate system in November 1949.
- A temporary appreciation of the exchange rate following the float, combined with monetary contraction and other policy measures, brought down inflation significantly by end-1949.
- The first IMF mission arrived in Lima in February 1947 and began technical consultations that continued into subsequent decades.

### IMF relations and subsequent policy interactions (Box 1 highlights)
- Peru was a protracted user of Fund financial resources during 1954–1980.
- Between 1954 and 1970 there was continuous access to Fund financial resources in Stand-By Arrangements.
- Yearly IMF arrangements listed in Box 1 include repeated Stand-By Arrangements from 1954 through 1970, Compensatory Financing Facility (CFF) in 1972, and various facilities and SBAs through 1979/80 (table referenced for full chronology).

### Policy implications and historical lessons (as reflected in the source)
- Fixing the nominal exchange rate at 6.5 soles per dollar, combined with price controls, was used as a de facto effort to bring about domestic price stability.
- Central bank monetary financing of fiscal deficits can lead to inflation, real exchange rate appreciation, and pressures on foreign exchange reserves.
- Bilateral wartime contracts and trade-financing arrangements can temporarily improve export demand and reserve inflows but may not prevent medium-term reserve deterioration when domestic monetary and fiscal imbalances persist.
- Establishing exchange controls and import restrictions forces rapid adjustments in import composition but can coexist with black market pressures and scarcity of staples when inflation and real appreciation persist.

*Source: _wp12166 - 1940. Central bank intervention in the foreign exchange market avoided sharp fluctuations in*

### 6.5 soles per U.S. dollar and a free market rate that moved erratically between 7.12 soles per

### _wp12166 - 6.5 soles per U.S. dollar and a free market rate that moved erratically between 7.12 soles per

### Exchange rate developments and market segmentation, 1945–1949
- Official parity maintained at 6.5 soles per U.S. dollar; free market rates moved erratically between 7.12 soles per dollar in 1945 to 7.3 soles per dollar by December 1946.
- Mid-1947 measures allowed imports (including luxury goods) financed partly from official reserve holdings and partly from the draft free market, producing:
  - An abrupt rise in the free market dollar rate to 17 soles per dollar (a premium of more than 200 percent above the official rate).
  - A subsequent temporary fall of the free market dollar to 11 soles per dollar in November 1947.
- Supply of foreign exchange into the official market comprised all export receipts turned over to the central bank or to commercial banks; free market receipts included mainly invisibles (tourism, diplomatic expenditure, shipping insurance, commissions, and miscellaneous services).
- Capital flight and high import profits increased the velocity of money and pressured the limited supply of foreign exchange in the free market, sustaining large premiums over the official rate of 6.5 soles per U.S. dollar.
- Administrative rules (mid-1947 and late August 1947) reintroduced import licensing to reduce demand in the free exchange market; revised regulations required import licenses for goods to be imported through the free market.

### Monetary and credit dynamics, 1945–1949
- Net central bank credit to the government increased at high, volatile rates in 1945–47.
- Commercial banks’ lending to the private sector increased rapidly in the same period, financing licensed commodity imports via drawdowns on banks’ excess reserves and automatic discounting of government securities with the central bank.
- The surge in credit and reduced money demand (due to capital flight) contributed to base money growth and exchange market pressures.

### Dual and fluctuating exchange system, November 1949 onward
- By November 1949, with gross international reserves equivalent to less than 2 months of imports of goods and services, Peru abandoned the fixed parity of 6.5 soles per dollar and adopted dual fluctuating exchange rates:
  - A certificate rate applicable to most trade transactions and some approved non-trade items.
  - A draft free market rate applicable to other business (capital account transactions).
- Export certificates:
  - Issued in lieu of 100 percent export surrender requirements.
  - Freely negotiable with importers and authorized users.
  - Original maturity 30 days; maturity lengthened to 60 days to increase the float and reduce exchange rate pressures.
- The liberalization temporarily appreciated the sol because export receipts into the certificates’ market exceeded expectations and import growth abated as traders liquidated inventories.
- The central bank tightened credit controls: established credit ceilings per individual bank borrower and increased banks’ reserve requirements to restrain broad money growth.

### Policy engagement, Klein Mission influence, and FDI promotion
- The Klein Mission Report influenced the November 1949 liberalization and supported Decree-Law No. 11208, which:
  - Abandoned the official parity of the sol.
  - Authorized exporters to receive exchange certificates for the full value of their exports.
  - Recommended that the central bank not intervene in the foreign exchange market, noting a “normal and continuing” free market exchange rate might take time and could temporarily appreciate.
- Policy orientation sought to attract U.S. FDI by fostering a profitable export sector through a competitive exchange rate, benefiting traditional exports (sugar, cotton, copper, petroleum) and nontraditional exports (coal, cement, fish, textiles).
- Legal measures to stimulate mining and FDI:
  - August 1949: mining industry permitted to sell all its exchange at the certificate rate.
  - May 1950: new mining code exempted mining concerns for a period of 25 years from all export taxes except income tax and certain land taxes.
  - July 1951: contract for an iron and steel plant at Chimbote; other mining projects and increased manganese and tungsten production financed by Peruvian Mining Bank and U.S. Eximbank loans.

### Macroeconomic patterns and policy challenges in the 1950s
- Investment and external financing:
  - Investment-to-GDP ratios averaged 25 percent of GDP during most of the 1950s.
  - Large external current account deficits of about 3 percent of GDP financed investment (mainly as FDI inflows).
  - Domestic private and public sector savings totaled some 22 percent of GDP.
  - Recording of positive government savings during the 1950s was noted as unique for Peru.
- Exchange regime and external environment:
  - Peru retained the dual floating exchange rate system introduced in November 1949; certificate and draft free market rates generally depreciated in line with domestic inflation and moved within a narrow spread.
  - Authorities argued the floating system ensured repatriation of export proceeds and availability of funds for current and capital transactions, given volatile export markets and low central bank gross international reserves.
  - Export values and volumes rose with diversification (minerals, coffee, fishmeal), though slowdowns occurred at the end of the Korean War (1953) and in 1957–1959 when terms of trade deteriorated.
- Paradox: balance of payments surpluses and income growth in the early 1950s did not translate into solid improvements in the central bank’s international reserve position.
  - The Polak model was used to interpret the link between credit policy stance and international reserves, and served as a common analytical framework between Peruvian policymakers and IMF staff.

*Source: IMF staff chapter text provided in the content unit.*

### Box 3. The Polak Model

### Box 3. The Polak Model

### Model overview
- Developed in the 1950s by Jacques J. Polak and colleagues in the IMF Research department as an economic model reflecting the monetary approach to the balance of payments.
- Purpose: integrate monetary, income, and balance of payments analysis and provide analytical support for IMF conditionality.
- Core insight: in some countries money and income expansion are positively related; in others the relationship is negative. An expansion of income can be accompanied by a fall in the money supply because higher incomes raise imports (and exports tend to decline), producing a balance of payments deficit and a decline in international reserves that reduces the money supply.

### Analytical mechanics
- Control (policy) variable: domestic credit.
- Target (endogenous) variable example: level of international reserves.
- Fundamental equation: a temporary expansion in domestic credit is matched by a loss of international reserves — characterized as a one-for-one relationship between changes in domestic credit and international reserves.
- Policy formulation procedure:
  - Choose a target value for the endogenous variable (e.g., international reserves).
  - Calculate the value of the exogenous variables (exports and capital flows).
  - Solve for the expansion of domestic credit consistent with the target.

### Peru case study: policy highlights and outcomes
- Initial conditions (late 1940s–early 1950s):
  - The sol strengthened and inflation fell following exchange rate liberalization of November 1949.
  - Output growth and investment expectations rose.
  - Budget deficit was being brought under control.
  - Growth of commercial bank credit decelerated due to increases in banks’ average and marginal reserve requirements and credit ceilings on individual borrowers.
  - Government support of FDI led to capital inflows that financed a rising current account imbalance.
  - Between 1952 and 1954, agreement reached with external creditors on servicing Peruvian bonds in default since 1931.
  - Korean War outbreak boosted export commodity prices, especially for metals.
- 1950–1951 policy responses and indicators:
  - September 1951 banking superintendency measures: increased banks’ average and marginal reserve requirements; enacted selective controls on commercial banks’ import trade credit; curtailed automatic discounting of treasury bills with the central bank; limited banks’ lending for real estate, residential construction, and consumer durables; lowered surrender requirements on export proceeds to encourage private sector holdings of foreign assets abroad.
  - Outcome by end-1951: growth of monetary and credit aggregates slowed; annual inflation rate stabilized below 10 percent; certificate and draft free market exchange rates stood at 15.2 soles per U.S. dollar (compared with 15.4 soles per dollar at end-December 1950).
  - Gross international reserves: rose from US$36 million at end-1950 to US$45 million at end-1951 (equivalent to 1.9 months of goods and services imports).
  - By end-1952: gross reserves remained at around US$45 million; certificate and draft free market exchange rates averaged 15.6 soles per U.S. dollar.
- 1953–1954 developments:
  - 1953: deterioration in international terms of trade after the Korean conflict; exchange rate increased to 19.43 soles per dollar in late-December 1953; export proceeds from sugar, cotton, and main minerals fell; imports rose due to FDI and elimination of import prohibitions.
  - February 1954: Peru agreed to its first Stand-By Arrangement with the IMF; approved by the IMF Executive Board on February 17, 1954.
  - Performance under the 1954 program:
    - Inflation dropped to 5.5 percent.
    - Velocity of circulation of money declined (money demand increased).
    - Exchange rate stabilized at around 19 soles per U.S. dollar.
    - Economic growth remained brisk, supported by sizeable exports and investment spending.
    - Overall balance of payments registered a small surplus permitting marginal increase in gross international reserves.
    - Peru did not draw on the lines of credit provided by the IMF, the U.S. Treasury, or the Chase Manhattan Bank of New York.
- Policy interpretation:
  - The Odría administration’s financial stabilization program applied the Polak model: domestic credit was controlled as the policy variable and international reserves were targeted.
  - Implementation of deflationary policies reduced the contribution of total consumption to economic growth, while investment and exports grew and imports of goods and services grew more slowly than before.

*Source: Box 3. The Polak Model.*

### Box 4. President Odría’s Speech to the Nation

### Box 4. President Odría’s Speech to the Nation

### Summary of the speech (February 22, 1954)
- Announced an economic stabilization program aimed at:
  - restoring confidence to the sol,
  - reducing government expenditures,
  - curbing inflationary credit expansion.
- Emphasized that the program had been put in place by the government and was being backed by the international financial community.

### International financial support and amounts
- Peru obtained credits totaling US$30 million, which included:
  - IMF: US$12.5 million (equal to 50 percent of Peru’s quota at the IMF),
  - U.S. Treasury: US$12.5 million,
  - Chase Manhattan Bank of New York: US$5 million.
- Subsequent IMF and external support referenced in the period:
  - A Stand-By Arrangement in 1958 for US$25 million (i.e., twice the size of the 1954 arrangement and equal to 100 percent of Peru’s quota with the IMF).
  - A line of credit from the U.S. Treasury for US$17.5 million and a line of credit from a consortium of American banks for an equal amount (1958).
  - External funding in 1959 that "totaled a high of US$100 million dollars."

### Domestic economic context and indicators cited in the speech
- Public investment (soles):
  - 341 million soles in 1950,
  - 531 million soles in 1951,
  - 855 million soles in 1952,
  - 1,002 million soles in 1953.
- Identified sources of macro imbalance:
  - growing disequilibrium of the public finances (covered by central bank credit expansion),
  - deterioration of the external current account balance (covered by rising capital inflows),
  - boosted money supply and pressures on the exchange rate.

### Policy measures announced by the government
- The government decided to:
  - curtail public spending, particularly its public investment program;
  - increase taxes;
  - streamline and better monitor the operations of extra budgetary funds and “special fiscal accounts”;
  - watch closely the expansion of commercial credit (including rice crop financing) and avoid any automatic central bank discount of Treasury obligations.
- Assurance given:
  - the credits of US$30 million obtained from abroad, and the gross official reserves held by the central bank, would not be used to maintain an overvalued exchange rate;
  - the exchange rate should continue to be determined by the free interaction of supply and demand forces, while avoiding any violent depreciation spurred by speculation.

### Subsequent policy implementation and outcomes (mid-1950s to 1959)
- Initial success with exchange stabilization led to two consecutive 12-month extensions of the 1954 Stand-By Arrangement.
  - First program extension granted by the IMF Executive Board in February 1955.
  - Second one-year extension granted a year later amid reappearance of inflationary pressures, sizeable hikes in public expenditure, and increased external debt service burden.
- Under Manuel Prado (1956–1963):
  - Introduced deflationary monetary measures that reduced bank credit expansion.
  - Fiscal measures included cutting public investment and limiting government borrowing from the central bank to one-sixth (instead of one-fourth) of the budget.
  - Exchange rate remained at 19 soles per U.S. dollar.
  - Central bank official reserves peaked at US$54 million by end-1956, but remained relatively low at one-and-a-half months of imports of goods and services.
  - IMF granted another one-year extension of the stand-by arrangement on February 6, 1957.
- By 1957, domestic and external imbalances increased:
  - Large budget deficits and rapid expansion of commercial and development bank credit fueled inflationary pressures, appreciated the real exchange rate, and reduced central bank disposable foreign exchange reserves to very low levels.
  - Government measures in late-1957 to address inflationary pressures included:
    - reducing government spending and increasing government revenue (including rises in import duties on luxury items),
    - freezing central bank credit to development banks,
    - arranging timely repayment of commercial bank rediscounts with the central bank,
    - enforcing reserve requirement ratios for commercial banks,
    - shifting a major part of government deposits held with commercial banks to the central bank.
- 1958–1959 stabilization efforts:
  - Peru returned to the IMF in February 1958, committing to enhanced exchange rate flexibility.
  - Lax fiscal policy undermined 1958 efforts; a new IMF-supported program began in February 1959 and eventually delivered price and exchange rate stability.
  - Complementary external financing for the 1959 program reached a high of US$100 million dollars from the U.S. Treasury and other creditors.
  - Price and exchange rate stabilization was achieved in the second half of mid-1959 after Prime Minister Pedro Beltrán Espantoso became Minister of Finance and implemented measures including:
    - consolidating the regular budget with “special accounts”,
    - centralizing all government bank deposit accounts with the central bank,
    - introducing new taxes on the petroleum industry,
    - eliminating government subsidies on domestic petroleum prices,
    - improving bank prudential regulation and compliance with mandatory reserve requirement ratios,
    - arresting growth of central bank financing to development banks (notably the Agricultural Development Bank).
  - By end-December 1959:
    - the nominal exchange rate peaked at about 28 soles per U.S. dollar,
    - growth of imports had decelerated,
    - gross reserves had recovered from earlier lows,
    - central bank credit to the government ceased to be the main source of base money creation because of improvements in the budgetary position.

### Longer-term assessment in the late-1950s (conclusions reported)
- From the first Stand-By Arrangement in February 1954 to the 1959 stabilization, persistent efforts to control central bank financing of government deficits and to restrain commercial banks’ credit expansion yielded an improvement in the central bank’s international reserve position.
- Economic growth in the late-1950s was propelled by higher investment and export growth, with slower growth in total consumption and imports.
- The observed improvement in Peru’s external accounts was consistent with predictions under the Polak model.

*Source: Box 4. President Odría’s Speech to the Nation (from _wp12166).*

### 38.70 soles per U.S. dollar, marked price hikes, and further labor unrest. The dual exchange

### _wp12166 - 38.70 soles per U.S. dollar, marked price hikes, and further labor unrest. The dual exchange rate

### Dual exchange rate system and foreign exchange policy
- The exchange market was divided into two segments:
  - (i) a certificate market with a pegged exchange rate of 38.70 soles per U.S. dollar applicable to trade-related transactions, official payments, and specified capital movements (which together amounted to some 85 percent of all foreign exchange transactions).
  - (ii) a free market with a freely fluctuating rate for all remaining exchange transactions.
- Accompanying trade measures:
  - introduction of an exchange tax on most import payments.
  - various trade measures, including specific import prohibitions.
  - introduction of a 15 percent ad valorem tax on most import payments (implemented during crisis response efforts).

### Exchange rate developments and political change (1967–1968)
- The draft free market rate reached a high of almost 44 soles per U.S. dollar in late-August 1968.
- The depreciation of the sol during 1967–68 led to a recovery in the real exchange rate to its 1964 level.
- During the first half of 1968 the government tried, but failed, to address an emerging foreign exchange crisis in the absence of strong fiscal consolidation.
- President Belaúnde was removed from office by the military junta led by General Juan Velasco Alvarado on October 3, 1968.

### Macroeconomic performance under Belaúnde (overview and structural changes)
- Macroeconomic highlights:
  - Strong economic growth—albeit significantly lower than in 1959–62—propelled by rapidly rising domestic demand.
  - Continuation of the appreciation of the real exchange rate that started in 1960.
  - Marked increase in the relative size of the manufacturing sector and the overall government.
- Demand composition and investment:
  - Total final consumption remained the underlying force supporting economic growth.
  - Gross fixed capital formation in machinery and equipment and a large accumulation of inventories supported overall growth, albeit on a much lower per capita basis than in 1959–62.
- External sector and trade:
  - A sharp appreciation of the real exchange rate, combined with a rising level of protection and tax import duty exemptions, weakened the contribution of exports to overall growth.
  - Imports of goods and services (including food imports) grew rapidly as local entrepreneurs benefitted from a “strong” sol.
- Structural and policy shifts:
  - The share of manufacturing in total GDP (particularly assembly industries for cars, home appliances, paint, artificial textiles, pharmaceuticals) increased significantly.
  - The share of government in GDP rose along with a steady rise in public investment and employment.
  - Import substitution policies and a marked rise in public infrastructure projects were central policy aims.
  - Far-reaching structural changes included a gradual centralization in the state’s hands of the production and marketing of main export commodities and imported industrial inputs and basic staples.
  - Social reforms included the launching of a major agrarian reform and establishment of industrial communities within private enterprises.

### Monetary and reserve developments (1968–1974)
- Sources of base money creation shifted:
  - Increases in net international reserves stemming from improved international terms of trade of Peru’s main exports and central bank credit expansion to the development banks and the Banco de la Nación became the main sources of base money creation.
  - Increases in central bank credit to the government and commercial banks were rather limited.
- Use of reserve requirements:
  - Private banks were empowered, and in some cases required, to discharge part of their reserve requirements in government bonds and/or interest-bearing deposits with the Banco de la Nación and the state development banks, impairing the central bank’s oversight and control over monetary and credit aggregates.
- Monetary controls:
  - Authorities implemented selective credit controls for banks’ loans, including portfolio composition requirements.
  - Controls over banks’ lending and deposit interest rates were retained and adjusted with lags.

### Inflation, growth, and reserve outcomes through the 1970s
- Inflation and exchange rate trajectory:
  - Annual inflation rates had reached about 20 percent by the time of the coup (October 1968).
  - Inflation bottomed to 5 percent in 1970.
  - The 1973 world oil price shock pushed up average inflation to 17 percent in 1974.
  - In 1975–80, the inflation rate soared to 47 percent a year on average.
  - The exchange rate shot up to an average of about 173 soles per U.S. dollar, compared with 43 soles per dollar in 1968–74.
  - By the late-1970s stabilization efforts under Stand-By Arrangements saw average annual inflation reach all-time highs in the range of 60 to 70 percent a year during program implementation and economic stagnation in 1977–1979.
- Reserves:
  - Gross official reserves surged to 5.5 months of imports of goods and services by end-1974.
  - International reserve coverage improved by the end of the decade despite capital flight and dwindling money demand.
- Growth performance:
  - Broad price stability and rapid economic growth through 1974, followed by high inflation and significant economic deceleration afterwards.
  - The economy experienced stagnation during 1977–78, with dwindling money demand and unremitting capital flight.

### IMF engagement and programs (1971–1980)
- 1971: Peruvian authorities did not sign a new Stand-By Arrangement, ending 16 years of continuous financial arrangements with the IMF.
- Peru used IMF facilities for:
  - Compensatory Financing of Export Fluctuations (drawn in 1972, 1976, and late 1978).
  - The Oil Facility (1976).
  - Gold Tranche and the First Credit Tranche (1976).
- Nature of conditionality:
  - Conditionality under compensatory, oil, and tranche facilities was relatively limited compared to traditional Stand-By Arrangements.
- Renewed Stand-By Arrangements:
  - Stand-By Arrangements with the Fund resumed in late-1977.
  - Four consecutive arrangements in support of the government’s stabilization program were put in place between October 1977 and December 1980.
  - Stabilization programs included major revisions of exchange rate and tax policies, elimination of consumer subsidies, and cuts in overall public spending, which improved fiscal and balance of payments positions despite very high inflation.

### Key statistics and exact figures cited
- Pegged certificate market rate: 38.70 soles per U.S. dollar.
- Certificate market share: some 85 percent of all foreign exchange transactions.
- Draft free market high: almost 44 soles per U.S. dollar in late-August 1968.
- Ad valorem tax on most import payments introduced: 15 percent.
- Gross official reserves by end-1974: 5.5 months of imports of goods and services.
- Inflation rates cited:
  - about 20 percent by the time of the coup (1968).
  - 5 percent in 1970.
  - 17 percent in 1974.
  - 47 percent a year on average in 1975–80.
  - average annual rate of inflation in stabilization programs: in the range of 60 to 70 percent a year.
- Exchange rate averages:
  - 43 soles per U.S. dollar in 1968–74 (stable around 43.5 soles per U.S. dollar in 1969–70).
  - about 173 soles per U.S. dollar in 1975–80 average.

*Source: _wp12166 - 38.70 soles per U.S. dollar, marked price hikes, and further labor unrest. The dual exchange rate*

### 1973. In addition, the central bank, in cooperation with the Banco de la Nación and

### _wp12166 - 1973. In addition, the central bank, in cooperation with the Banco de la Nación and

### Monetary and credit policy instruments and institutions (late 1960s–early 1970s)
- The Monetary Policy Council was established by Decree Law 18240 on April 4, 1970; it was superior in authority to the Board of Directors of the Central Reserve Bank and was chaired by the Minister of Economy and Finance; membership included the presidents of the Central Reserve Bank and the Banco de la Nación, and the Superintendent of Banks and Insurance Companies.  
- The Council was in charge of determining Peru’s credit, monetary, and exchange rate policies, setting forth the interest rate scale, and coordinating management of credit institutions according to government economic policies.  
- The Council of State Credit Policy was established by Decree Law 18241 on April 21, 1970, chaired by the Minister of Economy and Finance, with narrower responsibility for guiding the lending policy of the state banks.  
- A state-owned financial intermediary, the Development Finance Corporation (COFIDE), was established in 1971 to hold government shares in state and mixed-enterprises, make new loans and investments in these enterprises, and serve as the financial agent for the public sector in foreign loan negotiations.  
- The central bank, in cooperation with the Banco de la Nación and development banks, engaged in direct lending to the private sector, introduced credit facilities and warrants to pre-finance fishmeal exports and the purchase of the rice crop, and established a special fund for promotion of non-traditional exports.

### Exchange rate regime, dual market, and trade/exchange restrictions (1967–1977)
- Peru retained a dual exchange rate system; the certificate market rate had been pegged at 38.7 soles per U.S. dollar since reintroduction of the dual market in September 1967.  
- The draft market rate was pegged at around 43.5 soles per U.S. dollar starting in May 1970.  
- New exchange and trade restrictions included import prohibitions administered through the National Register of Manufacturers, 90-day to 180-day minimum financing requirements for different types of private sector imports, and a system of import allocations by product category.  
- Under the import allocation system, sector ministers approved annual budgets for private importers; foreign exchange allowances were granted by the Board of Foreign Transactions of the Private Sector; import allocations were extended in 1974 to cover imports financed by foreign credits as well as cash purchases.  
- CERTEX (transferable tax credit certificates) were granted to exporters of nontraditional products equal to 15–30 percent of either the c.i.f. or the f.o.b. export value, depending on whether goods were shipped in Peruvian or foreign vessels; CERTEX supported growth in nontraditional exports but led to miss-reporting and some fraud.

### Base money and credit dynamics (1969–1980)
- Figures and analysis indicate significant roles of NIR, net credit to public sector, development banks & Banco de la Nación, and other banks in sources of base money growth (Figures referenced for 1969/74 and 1976/80).  
- By 1974/75 authorities increased reliance on external public borrowing as growth of banks’ financial resources lagged (significant increase in velocity of money).  
- Debt service payments rose from an equivalent of about 13 percent of export receipts in 1968–72 to about 30 percent by 1975/76.  
- A surge in central bank inflationary financing occurred as external borrowing dried out and public investment program continued, with detrimental effects to internal and external balances.

### Macroeconomic outcomes and crises (mid-1970s)
- General Velasco was deposed by General Morales Bermudez on August 29, 1975 amid economic and financial disarray.  
- Agricultural production accounted for some 15 percent of GDP and remained stagnant.  
- Central bank gross international reserves dropped from an equivalent of more than six months of imports at end-1974 to less than three months by end-1975.  
- Cumulative appreciation of the real exchange rate reached 21 percent between 1968 and 1975.  
- A net international reserve loss of more than US$1.2 billion occurred in the 18 months ending in June 1976; the central bank’s net international reserve position dropped to negative US$500 million, forcing temporary closure of the foreign exchange market.  

### Stabilization attempts, exchange rate liberalization and outcomes (1976–1980)
- Late September 1975: certificate and free market exchange rates unified at 45 soles per U.S. dollar.  
- Mid-1976 program included corrective price adjustments and up-front exchange rate depreciation with subsequent once or twice weekly depreciations; expansionary fiscal policy undermined objectives and reserve losses continued.  
- The mid-1976 to late-1977 deterioration culminated in the central bank’s freely disposable foreign exchange reserves being reduced to the equivalent of a few days of imports by end-3Q1977.  
- Early October 1977: new stabilization program with IMF cooperation abolished import controls, adjusted public enterprise prices and tariffs, and freed the exchange market, triggering a major devaluation; domestic inflation averaged about 45 percent in September 1977.  
- Headline monetary measures included limits on overall banking sector credit expansion and a policy of positive real interest rates; reserve requirement system simplified but retained for credit control if needed.  
- Between October 1977 and December 1980: fiscal and balance of payments positions were corrected through repeated stabilization efforts and three consecutive IMF Stand-By Arrangements; external public debt was rescheduled with foreign commercial banks and governments in bilateral and Paris Club negotiations.  
- Improvements in the balance of payments reflected strong export volume growth after completion of an oil pipeline, opening of a major copper mine, and growth of non-traditional exports; a drastic reduction in imports also aided external current account.  
- Average inflation remained about 60 percent on average in 1978–80; the economy contracted in 1977–1978, recovering in 1979/80 due to the export surge; average incomes per-capita collapsed between 1970 and 1980; private investment was at historical lows as a share of GDP.

### Exchange rate policy mechanics and real exchange rate dynamics (1977–1980)
- October 1977: exchange rate freed; followed by a policy of frequent mini-devaluations (crawling peg) starting May 1978.  
- Exchange rate path: maintained at 130 soles per U.S. dollar since December 1977; devalued to 150 soles per U.S. dollar in May 1978; reached 194 soles per U.S. dollar in December 1978.  
- January 1979: depreciation rate slowed to roughly one half of domestic inflation or to approximately 2.5 percent per month on average.  
- February–March 1979: authorities began preannouncing the exchange rate one to two months in advance and signaled appropriate end-year exchange rate targets.  
- July 1980 (Fernando Belaúnde government): preannounced policy abandoned; policy changed to frequent small-step depreciations approximately in line with the difference between domestic and U.S. inflation.  
- Exchange rate reached 290 soles per U.S. dollar by end-September 1980 and 340 soles per U.S. dollar by end-December 1980.  
- In 1978–1980 the sol appreciated in real terms by about 15 percent because actual inflation exceeded preannounced mini-devaluations; this overvaluation revived imports and reduced international reserve coverage.

### Fiscal stance, savings-investment, inflation and growth (1975–1980)
- Table 13 (percent of GDP, 1975–80) highlights:
  - Investment: 19.7 (1975), 17.8 (1976), 15.0 (1977), 14.6 (1978), 14.6 (1979), 17.8 (1980)
  - of which: public investment: 13.6 (1975), 13.6 (1976), 13.2 (1977), 13.2 (1978), 13.2 (1979), 13.2 (1980)
  - Domestic savings: 8.0 (1975), 10.3 (1976), 8.5 (1977), 14.1 (1978), 21.3 (1979), 18.7 (1980)
  - Public savings: -0.5 (1975), 0.2 (1976), -3.7 (1977), -1.6 (1978), 3.6 (1979), 2.5 (1980)
  - Private savings: 8.4 (1975), 10.1 (1976), 12.2 (1977), 15.7 (1978), 17.7 (1979), 16.3 (1980)
  - External current account (surplus -): 11.8 (1975), 7.5 (1976), 6.6 (1977), 0.5 (1978), -6.7 (1979), -1.0 (1980)
  - Memorandum: Inflation rate (Percent): 23.7 (1975), 33.6 (1976), 38.0 (1977), 58.1 (1978), 67.9 (1979), 59.4 (1980)
  - Memorandum: Real GDP growth rate (Percent): 4.4 (1975), 1.2 (1976), 0.6 (1977), -3.8 (1978), 2.0 (1979), 7.7 (1980)

### Structural and institutional observations
- The government used quasi-fiscal operations in the banking sector and direct public investments through state enterprises to push investment in the absence of private initiative; government intervention of such magnitude had not taken place before in Peru.  
- A genesis of modern sterilization mechanisms appeared during Velasco’s administration, with treasury bills used to mop up banks’ liquidity; however, liquidity was re-injected via quasi-fiscal operations financing development banks and the central government deficit.  
- Central bank independence eroded during 1968–1980 as the Monetary Policy Council held superior authority and fiscal dominance over monetary decisions persisted.  
- Periods of nominal exchange rate stability often led to real exchange rate overvaluation, rapid growth of imports and domestic demand, growing external current account deficits, and reserve losses; discrete upward nominal adjustments combined with tight financial policies led to slowing import growth and improvements in the balance of payments.

### Social and longer-term consequences (concluding observations)
- The stabilization efforts of 1977–80 produced improvements in fiscal and external balances but failed to reduce inflation to low levels; average inflation was about 60 percent in 1978–80.  
- Social costs were substantial: poverty rates rose and there was an exodus of Peruvian citizens seeking employment and better living opportunities abroad.  
- Investment-to-GDP ratios and real GDP per capita showed large swings across decades; Peru’s 1950s investment-to-GDP ratios (25 percent of GDP) were historically high relative to international experience.  
- The review ends in 1980; the subsequent period 1980–85 is noted as dramatic, with output stagnating in 1980–82, then dropping by 16 percent over 15 months, and inflation rising to 120 percent in early 1983 and then to 250 percent in early (text cuts off).

*Source: _wp12166 - 1973. In addition, the central bank, in cooperation with the Banco de la Nación and*

### 1985. Policymakers faced challenges never seen before in Peru during those years. The task

### _wp12166 - 1985. Policymakers faced challenges never seen before in Peru during those years. The task

### Conclusion and closing observation
- "Hay, compañeros, muchísimo por hacer" (Vargas Llosa (2010)).  
- The task of recording and thoroughly analyzing those events by economic practitioners and historians remains and merits attention.

### IMF archives and documents (listed items and identifiers)
- Initial Par Values – Peru, EBD/46/130 of 11/25/1946.  
- Exchange Market in Peru, SM/47/43 of 1/29/1947.  
- Supplementary Material on Peru in connection with the Preliminary Report of the Fund’s Representatives, SM/48/188 of 2/21/1948.  
- Report to Peru, SM/48/212 of 4/2/1948.  
- Report of Fund Representative on Visit to Peru, SM/48/293 of 12/1/1948.  
- The Peruvian Exchange Proposals, SM/48/268 of 8/31/1948.  
- Peru: Recent Economic Developments, SM/49/375 of 7/7/1949.  
- 1955 Consultations – Peru, SM/55/46 of 7/18/1955.  
- 1956 Consultations and Use of the Fund’s Resources– Peru, SM/57/4 of 1/18/1957.  
- 1957 Consultations – Peru, SM/57/99 of 12/6/1957.  
- Request for Stand-By Arrangement – Peru, EBS/59/13 of 2/24/1959.  
- Peru – Unification of Exchange Markets, SM/60/40 of 5/25/1960.  
- Peru – 1960 Consultations, SM/61/9 of 2/14/1961.  
- Peru – Request for Stand-By Arrangement, EBS/62/17 of 2/15/1962.  
- EBS/63/24, Peru – Request for Stand-By Arrangement, 2/14/1963.  
- Peru – 1963 Article VIII Consultations, SM/64/19 of 2/14/1964.  
- Peru – 1964 Article VIII Consultations, SM/65/26 of 3/25/1965.  
- Peru – Request for Stand-By Arrangement, EBS/66/73 of 3/16/1966.  
- Peru – Request for Stand-By Arrangement, EBS/67/162 of 8/4/1967.  
- Peru – Request for Stand-By Arrangement, EBS/68/240 of 9/9/1968.  
- Peru – 1968 Article VIII Consultation, SM/68/153 of 10/9/1968.  
- Supplement 1, Peru – Request for Stand-By Arrangement, EBS/68/240 of 11/1/1968.  
- Peru – Use of Fund’s Resources, EBS/72/178 of 6/1/1972.  
- Supplement 1, Peru – Purchase Transaction, EBS/72/178 of 6/14/1972.  
- Peru – Use of Fund Resources – Compensatory Financing, EBS/76/173 of 4/16/1976.  
- Peru – Recent Economic Developments, SM/72/206 of 8/29/1972.  
- Peru – Request for Stand-By Arrangement, EBS/77/393 of 10/28/1977.  
- Peru – Request for Stand-By Arrangement, EBS/78/447 of 10/18/1978.  
- Peru – Use of Fund Resources – Compensatory Financing Facility, EBS/78/464 of 8/25/1978.  
- Peru – Request for Stand-By Arrangement, EBS/79/360 of 6/28/1979.  
- Par Value-Peru, EBM No. 626 of 12/18/1950.  
- 1952 Consultation –Peru, EBM/52/69.  
- Use of Fund’s Resources – Peru, EBM/54/6 of 2/12/54.  
- 1953 Consultations and Use of the Fund’s Resources – Peru, EBM/54/7 of 2/17/1954.  
- Use of Fund’s Resources – Peru, EBM/55/9 of 2/16/1955.  
- 1955 Consultations – Peru, EBM/55/49 of 7/28/1955.  
- Use of the Fund’s Resources – Peru, EBM/56/10 of 2/10/1956.  
- Peru – 1956 Consultations, EBM/57/6 of 2/6/1957.  
- 1957 Consultations – Peru, EBM/57/61 of 12/30/1957.  
- Use of Fund’s Resources – Stand-By Arrangement with Peru, EBM/58/45 of 9/12/1958.  
- Use of the Fund’s Resources – Stand –by Arrangement with Peru, EBM/59/3 of 2/11/1959.  
- Peru – 1958 Consultations and Use of Fund’s Resources, EBM/59/6 of 2/27/1959.  
- Peru – Acceptance of Obligations of Article VIII, Sections 2, 3, and 4, EBM/61/4 of 2/8/1961.  
- Peru – 1959 Consultations and Use of the Fund’s Resources, EBM/60/7 of 2/29/1960.  
- Peru – 1961 Article VIII Consultations and Stand-By Arrangement, EBM/62/8 of 2/26/1962.  
- Peru – 1962 Article VIII Consultations and Stand-By Arrangement, EBM/63/7 of 2/25/1963.  
- Peru – 1963 Article VIII Consultations and Stand-By Arrangement, EBM/64/11 of 2/28/1964.  
- Peru – 1964 Article VIII Consultations and Stand-By Arrangement, EBM/65/1965 of 4/7/1965.  
- Peru – 1965 Article VIII Consultations and Stand-By Arrangement, EBM/66/21 of 3/30/1966.  
- Peru – Modification of Stand-By Arrangement, EBM/66/42 of 6/15/1966.

*Italic: Source document content as provided from the PDF chapter/section.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12166.pdf_