SUNS  4366 Wednesday 3 February 1999

Lima, Feb 1 (IPS/Abraham Lama) -- Peru has joined Argentina in looking at the US dollar as a haven for stability -- after successive disasters in Southeast Asia, Russia and Brazil exposed the financial vulnerability of many Third World nations.

According to Peru's Superintendent of Banks and Insurance, Martin Naranjo, the Latin American nation could well adopt the U.S. dollar as its currency one day.

"It's not my place to discuss the issue, but I understand that the proposal is being evaluated for the risks it would imply," Naranjo told banking experts last week.

Argentina already has started a dialogue with the United States with the aim of eventually adopting the dollar as its own currency. The idea is to stabilise the exchange rate market, which was the starting point for the 1994 Mexican crisis and the turbulence now affecting Brazil.

Menem also made it clear that he favoured the dollarization of the Free Trade Area of the Americas, a free-trade bloc now being negotiated by the various countries of the Americas.

Menem's suggestion gave rise to sharp criticism of the loss of monetary sovereignty that the measure would entail. The Argentine President responded, however, by saying that "in fact, monetary sovereignty is a fiction, because when there is a rumour about an impending devaluation,
the whole world goes running to buy dollars."

A similar debate over monetary sovereignty took place in mid-January in Lima when Jorge Chavez, the former president of the Central Bank of Reserves, said that "dollarization would provide greater stability to the Peruvian economy."

Independent economists immediately came out in favour or against Chavez's declaration, which the Ministry of Finance refused to comment on. Naranjo, however, could not avoid referring to the pros and cons of dollarization for Peru.

"The banks have no problem, because many of their operations already take place in (dollars)," he said. "But the companies that sell their products in soles ( local currency), and have outstanding debts in dollars face an obvious risk in terms of financing their businesses in future."

Asked to say whether he was thus recommending that local businesses start dollarizing their sales, Naranjo said it was not up to him to make such a proposal, and that "the best course of action is for each business to evaluate its exchange risks".

The recommendation that the superintendent refused to endorse explicitly is, however, an increasingly common trade practice in Peru, not only among importers but also small-scale vendors who often sell their products in dollars.

Savings "are held in dollars by almost 80 percent, a practice that has been adopted by the public since the difficult period of the social democratic government of Alan Garcia (1985-1990), when inflation reached a high of 7,000 percent," said economist Francisco Urrunaga.

"The idea that the dollar is the best way to maintain savings persists, even though last year, for example, those who saved in soles earned more interest than if they had held accounts in dollars," he added.

Proponents of dollarization include Pablo Secada, consultant to a Spanish-owned bank. Secada said such a move was viable in Peru because the country has sufficient international reserves, at around 10 billion dollars. He also said the proposal was convenient because it would reduce the risk of a devaluation and lower the cost of credit.

Sergio Malaga, manager of economic studies of the Banco de Credito, the most important Peruvian-owned financial house, was opposed to the idea. He said adopting the dollar would be very costly and would bring additional risks to the Peruvian economy.

In Malaga's opinion, the complete dollarization of the Peruvian economy would cost more than 12 billion dollars, based on the value of goods that what would have to be exported annually, "with the sole aim of importing U.S. dollars."

"With dollarization, the capacity to manage monetary policy is lost, because while the risk of inflation can be eliminated and local prices frozen, the policies can no longer be corrected. It is a possibility that is perhaps convenient for some countries, like Argentina, but creates more problems than it solves for other countries," he concluded.

Carlos Adrianzen, dean of the Economics Department at the privately owned University of San Ignacio de Loyola, admitted that, for countries that do not exert strict controls over their monetary policies, such as Peru, dollarization could be advantageous.

However, Adrianzen said he favoured other options, including maintaining strict monetary and fiscal discipline and not renouncing the national currency.

During a visit last July, U.S. academic Rudiger Dornbush formulated a radical proposal: all Latin American countries should close their central banks and adopt the dollar as the region's sole currency.

"It would be publicly accepting a reality that everyone accepts in private, because everyone uses dollars. The money of all Peruvians should be in a safe currency and not in an unstable and almost
experimental currency," said Dornbush.

Peruvian sociologist Alberto Panessi commented that if this were to occur, the president of the Federal Reserve of the United States, Alan Greenspan, would become de facto the monetary manager of Latin America.

"This is doubtless a good idea" for the United States, because such a move "would make Latin America completely dependent financially on that country," said Panessi.