Peru Devalues the Sol, Freezes Exchange Rate : U.S. Bans New Aid Over Late Payments on Goods

President Alan Garcia’s new government has devalued the Peruvian sol by 12% and frozen the exchange rate in an attempt to halt the currency’s 250% decline over the past 12 months, the government news agency Andina reported Friday.

“It is not possible to continue with the present system of mini-devaluations,” Andina quoted Prime Minister Luis Alva Castro, who also is minister of the economy, as saying.

“This has been the clearest sign of the instability of costs,” Alva Castro said. “For that reason, we have decided on a devaluation of 12% and freezing--repeat, freezing--the basic price at that level.”

In a related development, the State Department said Friday that the United States has banned new aid to Peru because the country is more than a year behind on payments for $200,000 in military equipment. Greg Lagana, a department spokesman, said the ban went into effect Thursday.

He said the U.S. Embassy in Lima warned the Peruvian government on July 17 that the arrears were approaching a year and new aid might be threatened.

Federal Law Cited

Under a federal law, if a government falls 12 months behind in its payments on interest or principal of U.S development loans or military purchases, the United States must suspend new aid.

A State Department spokesman, who asked not to be identified by name, said the money in question is “a very small amount relatively.”

The official said that talks were under way with the Peruvian government and that it was likely a late payment would be made, causing the ban to be lifted.

Alva Castro did not give the new rate at which the Peruvian sol would be frozen. The official exchange rate was 12,480 soles to the dollar on July 26, the last day that it was quoted.

On Thursday, the 5-day-old government announced a 90-day freeze on dollar accounts. Under the decree, holders of such accounts can withdraw their money only in Peruvian currency.

Alva Castro said Friday that depositors would be able to withdraw dollars at the end of 90 days but would have to prove that they needed them for legitimate purposes.

Garcia said in his inaugural speech last Sunday that Peru would limit foreign debt payments over the next 12 months to 10% of the value of the country’s exports.

The nation’s banks reopened Thursday after being closed Tuesday and Wednesday on government orders.

Bank officials said they had been ordered by authorities not to buy or sell dollars when they reopened Thursday because the government had not announced what the new exchange rate would be.