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3.51 Recommendations. In line with the two issues raised above, the recommendationscan be classifiedunder two headings. The first refers to the structure of exchange rates and the second refers to the management of the real exchange rate. Regarding the structure of exchange, the considerationsmade in the previous section underline that no other price matches the exchange rate in its ability to provide pervasive signals for guiding efficientmicroeconomicallocationof resources. By encumbering the exchange rate with additional functions, its fundamental role is diluted and the comparison of domestic and foreign costs and prices becomes distorted, leading to resourcemisallocation. Besides, as mentioned in above, the Government cannot afford the growing foreign exchange losses implied by multiple rates. The aforementionedconsiderationssuggest that Peru's economic efficiency in resource allocation could be improved by unifying all exchange rates for commercial transactions. Promotion policies are best dealt with through the tariff system. In addition, if the Governmentwishes to continue subsidizingcertain imports, this is better done by either reducing the relevant tariffs or by explicitly granting subsidies through the Government'sbudget, if and when this is financially feasible. 3.52 As far as the management of the exchange rate is concerned, the main issues are whether to allow the exchange rate to float freely or whether to follow a sufficientlyflexible crawling peg, and whether or not there should be controls to capital transactions. In the current Peruvian macroeconomicenvironmentof high and very volatile inflation,and with unsettled fiscal and monetary disequilibria,the possibility of following an independent exchange rate management--forinstance a preannounced crawling peg or tablita--shouldbe ruled out as non-viable. In this regard, recent experience in Peru and elsewhere eloquently shows that using the exchange rate to stabilize inflationaryexpectations,in the absence of financialdiscipline, is tantamountto running against the stream and leads, in all likelihood, to growing overvaluation,severe foreign exchange rationing, loss of reserves, proliferationof parallel markets, and ultimatelyexchange regime collapse. Examined below are the three viable options in exchange rate management: (a) Floating Rate Regime. The adoption of an unrestricted floating regime would probably be the best alternative. In such a context, equilibrium in the balance of paymentswould be attained through endogenousexchange rate adjustment,while allowing the Central Bank to gradually restore international reserves. In addition, it would permit the integrationof the current parallel market into the mainstream, thereby enhancing the supply of foreign exchange. In this framework,policy making would focus on curtailingthe public finance imbalance as the means of gradually reducing inflationarypressures and thus exchange rate depreciation. Furthermore,it would send the private sector a clear signal of the Government's commitmentto niaintainexternal competitivenessand with it serve the interests of the exporting sector. It is true that exchange rate changes would feed-back the inflationaryprocess and vice versa. However, this is inevitablegiven the current expansionary stance of domestic financial policies and inflationarymomentum. Any other exchange rate regime would prompt the same feed-back on inflation, if not through the official exchange rate, through the inevitableparallel market