20.
The Central Bank's Quasi-FiscalDeficit. Foreign exchange losses,
arising from the operation of multiple exchange rates, and financial losses, resulting from the heavily subsidized interest rates granted by development banks (particularly Banco Agrario), have become one of the most important budgetary problems. For the current year, foreign exchange losses alone will amount to between 3 and 5 percent of GDP; the lower bound estimate on the optimistic assumption that multiple exchange rates were unified during the remainder of the year. Unification of exchange rates alone would correct more than one-third of the current budgetary imbalance. In any case, foreign exchange and financial subsi(liesshould ideally be transparent, subject to the budgetary cycle and under the responsibility of the Minister of Finance.
External Sector Policies 21. Exchange Rate. Peru's exchange rate system has been subject to considerable changes in the rules of the game in recent years. Multiple exchange rates were first introduced in August 1985 with the idea of granting more favorable rates to manufacturing exports than to traditional exports. Later, the scope of multiple rates was extended to imports by granting preferential rates to "priority" imports. The total number of rates has varied considerably over the last three years. Almost monthly there have been changes in the structure, and, at one point, there were as many as nine rates for commercial transactions alone. At present (July 1988), there is a total of six rates for commercial transactions with two different rates applicable to exports and five rates to imports. In addition, there is an official financial rate for commercial bank transactions and also a black market rate. The dispersion of the rate structure is large; high priority inputs are given a rate of 33 Intis/US dollar, while some exports are granted a rate of 167 Intis/US dollar, and the black market rate runs at 300 Intis/US dollar. As for the management of exchange rates, from August 1985 to January 1987, the benchmark rates were frozen in an attempt to stabilize inflation. In January 1987, a crawling peg was initiated--at the rate of 2.2 percent per month--that lasted until July 1987. Finally, in December 1987, the rates applicable to exports started to be moved monthly according to inflation of the previous month, while import rates lagged behind. 22. Recommendations. Multiple exchange rates have led to substantial Central Bank losses. In addition, multiple rates entail relative price distortions, duplicate the incentive structure derived from tariff and export taxes, are costly to administer, elicit rent-seeking behavior from economic agents, and draw scarce public managerial talent to a nonproductive task. All these factors imply efficiency losses, difficult to estimate, but likely to be not any smaller than pure budgetary losses. Therefore, the economy stands to gain by unification of rates. Regarding the management of the exchange rate, both a floating-rate regime and a properly managed crawling peg are viable regimes. However, in the current situation of impeded governmental control over fiscal and monetary variables and depleted reserves, a floating rate would probably be a superior and more credible policy approach.
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