Last week, as a third-year Economics student at CUNEF, I faced a midterm in Monetary and Banking Economics, a course delving into how central banks shape real economies and financial stability. During a late-night review with my Peruvian friend Carlos—our session feeling as precise as a Formula 1 tune-up—a particularly relevant theme surfaced: how the reputation of a central bank can mold market expectations.
Carlos shared with me that around 30 years ago, Peru had to launch a new currency, the nuevo sol, after years of rampant public spending and uncontrolled monetary issuance. This reform, he explained, was instrumental in stabilizing inflation, restoring confidence in the financial system, and reducing dollar dependence. Our conversation planted the seed for this article: how the introduction of the nuevo sol (now simply the “sol”) allowed Peru to shift from economic crisis to one of Latin America’s most dynamic markets.
In the 1970s and 80s, Peru’s economy suffered a prolonged and destructive series of crises, slashing GDP and battering its citizens. What set this situation apart wasn’t just the depth of the GDP decline, but the relentless pace of one crisis following another—three times in succession, Peru couldn’t recover to pre-crisis levels before being hit anew. The outcome was bleak: over three decades, per capita GDP averaged zero growth, a dismal track record even by Latin American standards.
Among the culprits behind these crises were successive external shocks, such as plunges in global prices for Peru’s primary exports—minerals and agricultural products—that worsened its terms of trade (the relationship between export and import prices). In the mid-70s and again in the early 80s, these price collapses triggered a balance-of-payments crisis, shrinking Peru’s capacity to fund economic growth.
Yet it wasn’t just the world economy working against Peru; domestic policies compounded the fallout. The Velasco government embraced protectionism and state control, policies intended to foster domestic industry but which only led to inefficiencies and imbalances. Later, in the 1980s, García’s administration deployed heterodox measures, including price and exchange rate controls, alongside aggressive public spending with no fiscal backbone, which accelerated inflation and eroded confidence in the currency.
By 1990, hyperinflation had skyrocketed to over 7,500%, obliterating purchasing power and sending prices of basic goods through the roof, leaving families struggling to meet essential needs. Savings in intis were wiped out, driving many into poverty and forcing the population to seek shelter in the U.S. dollar, which only deepened dollarization and exacerbated the erosion of living standards.
In 1991, Peru embarked on a bold monetary reform, introducing the nuevo sol to halt hyperinflation and stabilize the economy. Carlos Boloña Behr, Minister of Economy and Finance under President Alberto Fujimori, spearheaded this transformation. The exchange rate was initially pegged at 1 nuevo sol per 1 million intis, or about $0.25 USD, with the aim of restoring public trust in the national currency. This reform was underpinned by strict fiscal policies and market liberalization measures.
Between 1990 and 1995, the fiscal deficit shrank from 7.7% to 2% of GDP, while average tariffs fell from 66% in 1990 to 16% by 1992. Non-tariff barriers, such as import quotas and licensing, were also lifted, paving the way for international trade. These reforms attracted foreign direct investment, which soared from $79 million in 1990 to $1.178 billion by 1995, helping to diversify Peru’s economy beyond traditional exports.
The nuevo sol reform quickly brought remarkable stability. In 1990, annual inflation was over 7,500%, yet by 1995, it had plummeted to around 10%. This drastic drop rekindled confidence in Peru’s economy and financial institutions. In 2015, the currency was rechristened simply as the “sol.” Today, the Peruvian sol stands as one of Latin America’s most stable currencies, exhibiting minimal devaluation against the dollar compared to regional peers. For instance, in 2023, the sol appreciated against the dollar, closing at around 3.70 per dollar — well above projections of 3.90.
The legacy of the nuevo sol reform attests to the power of disciplined monetary policy and a credible central bank. By charting a course to economic stability, Peru has cemented its role as a Latin American exemplar of how institutional credibility can transform a crisis-prone economy into a resilient growth story.
