After the price of fuel has shot through the roof, Peru is trying to keep its economy afloat by temporarily suspending some fuel taxes. This temporary measure is meant to stop the price spike and fight the ongoing conflict between Russia and Ukraine. It’s only a temporary solution and could be extended until December. Ultimately, it will do more good than harm. But what exactly can we expect from the temporary suspension?
After several protests against rising fuel and fertilizer prices, the government has decided to suspend some of these taxes to protect the country’s economy. The government has been responding to the protests by giving subsidies to the transportation industry. This has prevented the price increase from reaching the expected three soles per gallon of diesel and five soles for a ten kilogram gas cylinder. According to Oscar Graham, Peru’s economy minister, the biggest threat facing Peru is the protracted conflict between Russia and Ukraine. Despite the government’s efforts to curb the price surge, he said, the biggest threat to the country is a continuing Russian-Ukrainian conflict. The price of fuel and food have risen to the highest levels in 26 years and inflation has reached a record level.
A curfew has been declared in some provinces, citing the security concerns and constitutional rights. The curfew, which applies to ten million people, is widely criticised as authoritarian. Meanwhile, prices of fuel and fertiliser have rocketed in Peru since the start of the Ukrainian conflict. Last week, lorry drivers began blocking major roads, triggering a spike in food prices.
Despite its political problems, Peru’s economy has been able to thrive in recent years due to improved institutional stability. After a turbulent decade, the country now enjoys improved institutional structures and monetary and fiscal policy. However, poverty still remains a huge source of grievances among poorer communities. Therefore, economic policy in Peru needs to be considered on two fronts: social cohesion and poverty reduction.
The BCP manages the country’s inflation through the overnight interbank interest rate (OTI). It has also been implementing a managed floating regime for the PEN against the USD since September 2015. The high dollar has led to a highly dollarized financial system. The suspension of some fuel taxes is designed to help the country combat the surge in prices. This measure will help the economy stay in a positive state.
The country’s external position is extremely important. The majority of exports come from natural resources and the rest are industrial goods. As a result, the country’s trade balance is largely vulnerable to fluctuations in international trade conditions. Luckily, the trade balance in Peru has improved steadily since 2000. It reached a record surplus of USD 9.8 billion in February 2012.