- 26
Table 2-2:
PERU
-
-
INFLATION TAX, INFLATION SUBSIDY, AND NET INFLATION TAX
(Percentages of GDP)
Inflation Tax
1980 1981 1982 1983 1984 1985 1986 1987
2.6 2.1 0.9 2.1 0.9 3.2 3.6 4.3
Inflation Subsidy
1.4 1.4 1.7 3.0 1.9 2.9 1.8 3.0
Net Inflation Tax
1.2 0.7 -0.8 -0.9 -1.0 0.3 1.8 1.3
Source: Based on a very detailed calculation presented in Annex 2. 2.05 Several mechanisms at work complicate further the dynamics of the current inflationary upsurge and, in the absence of timely and drastic corrective measures, could make the transition to hyperinflation particularly short. These are the following: (a)
The endogenity of the Central Bank's quasi-fiscal deficit. As noted, the quasi-fiscal deficit--which comprises Central Bank foreign exchange and financial losses--rises as a percentage of GDP with higher inflation. This is so because, on the one hand, foreign exchange losses become larger as inflation accelerates, for under the exchange rate adjustment practice, followed since December 1987, export rates are de facto linked to inflation whereas import rates lag behind inflation. A similar effect occurs with Central Bank financial subsidies; the three recent adjustments to interest rates have raised the cost of funds of the Central Bank (the return on legal reserves) by more than the return on Central Bank assets (in particular, Central Bank credit to development banks).6/ On the other hand, since the public sector is a net domestic debtor in the economy, higher interest rates-reflecting sooner or later higher inflation--will translate into an increase in the interest service of the Government's domestic debt as a percentage of GDP, thereby raising the deficit of the Government (or else the losses of the Central Bank).7/
6/
For this not to happen, not only would interest rates charged by the Central Bank to developmetntbanks have to be raised, pari passu with the cost of funds of the Central Bank, but also rates charged by development banks to their borrowers would need to be raised.
7/
In the case of Peru, higher interest rates mostly increase losses of the Central Bank, since the Government's debt with the Central Bank is set at a fixed interest rate of 0.01 percent.