FINANCIAL MARKETS : Peru Devalues Currency Hurt by Drug Trade

Peru moved to wrest control of exchange rates from the drug trade Thursday, devaluing the inti by about 1% as the start of a plan to bring order to its currency markets.

The devaluation was the first in a government program of daily mini-devaluations aimed at easing the instability of exchange rates caused mainly by infusions of dollars from the narcotics trade.

“I cannot allow exchange rates to remain in the hands of the drug trade and those who do not care about the country,” Economy Minister Cesar Vasquez Bazan told Congress in speech on Tuesday announcing the plan.

He said the so-called parallel or informal exchange rate had become “driven by supply and demand from the drug trade” and speculation. Peru is the world’s biggest cocaine producer.

The 0.99% devaluation brought the official exchange rate to 2,045.25 intis to the dollar from 2,025.

Artificial Stress

The parallel dollar rate seesawed on the program’s first day, reflecting uncertainty among speculators despite Vasquez Bazan’s goal of stabilizing currency markets. The inti fell to 2,900 to the dollar by early afternoon from Wednesday’s closing rate of 3,125 intis.

Economists praised the mini-devaluation plan as a tool to bring order to exchange rates that have fluctuated widely since late last year. A large infusion of drug dollars puts artificial stress on the banking system.

“We should move towards a realistic exchange rate, not one set by the drug trade or oligarchic groups,” said economist Manuel Lajo, quoted by the local Andina news agency.

But Lajo and other economists said Vasquez Bazan, President Alan Garcia’s sixth economy minister, was too sketchy on what he would do to hold back inflation after it hit nearly 500% in the first four months of the year.

The illicit cocaine trade is virtually the only economic activity currently thriving in Peru, where industry has fallen into its worst slump of this century, economists say.