The Peruvian sol (PEN) is the official currency of Peru, a South American country with a population of about 33 million people. The sol replaced the inti in 1991, after a period of hyperinflation that devalued the previous currency. Since then, the sol has been relatively stable and has appreciated against some major currencies, such as the US dollar (USD) and the Indian rupee (INR).
The Exchange Rate of the Peruvian Sol
According to Xe.com, as of May 10, 2023, one Peruvian sol was equivalent to 0.31 USD or 22.22 INR. This means that the sol has gained about 3% in value against both currencies since the end of December 2022, when one sol was worth 0.30 USD or 21.53 INR.
The exchange rate of the sol is determined by the supply and demand of the currency in the foreign exchange market, as well as by the monetary policy of the Central Reserve Bank of Peru (CRBP), which is the country’s central bank. The CRBP uses a floating exchange rate regime, which means that it does not intervene directly in the market to fix a specific value for the sol, but rather allows it to fluctuate according to market forces.
However, the CRBP does have some tools to influence the exchange rate indirectly, such as setting interest rates, managing foreign exchange reserves, and conducting open market operations. The CRBP’s main objective is to maintain price stability and low inflation in Peru, which also affects the value of the sol.
The Factors That Affect the Value of the Peruvian Sol
The value of the sol is influenced by several factors, both domestic and external. Some of these factors are:
– The economic performance and outlook of Peru: Peru has a diversified economy that relies on various sectors, such as mining, agriculture, manufacturing, tourism, and services. The country has experienced steady economic growth in recent years, averaging about 4% annually between 2000 and 2019. However, due to the impact of the COVID-19 pandemic, Peru’s GDP contracted by 11.1% in 2020, according to the World Bank. The recovery is expected to be gradual and uneven, depending on the evolution of the health crisis and the pace of vaccination. The World Bank projects that Peru’s GDP will grow by 7.6% in 2021 and 4.5% in 2022.
– The fiscal and monetary policy of Peru: Peru has maintained a prudent fiscal policy over time, keeping its public debt at manageable levels. According to the International Monetary Fund (IMF), Peru’s public debt was 27.5% of GDP in 2019, one of the lowest in Latin America. However, due to the increase in public spending to mitigate the effects of the pandemic, Peru’s public debt rose to 36.5% of GDP in 2020 and is expected to reach 39.6% of GDP in 2021. The CRBP has also adopted an expansionary monetary policy to support the economy during the crisis, lowering its policy interest rate from 2.25% in February 2020 to 0.25% in April 2020, where it has remained since then.
– The trade balance and current account balance of Peru: Peru is a net exporter of goods and services, meaning that it sells more than it buys from other countries. This generates a positive trade balance for Peru, which contributes to its foreign exchange earnings and strengthens its currency. According to the IMF, Peru’s trade balance was $6.8 billion in 2019 and $8 billion in 2020. However, Peru also has a negative current account balance, which measures all transactions between Peru and other countries, including trade, income, transfers, and capital flows. This means that Peru spends more than it earns from abroad overall, which puts downward pressure on its currency. According to the IMF, Peru’s current account balance was -$7 billion in 2019 and -$6 billion in 2020.
– The commodity prices and global demand: Peru is a major producer and exporter of commodities, such as copper, gold, silver, zinc, natural gas, and fishmeal. These commodities account for about half of Peru’s total exports and are subject to fluctuations in global prices and demand. When commodity prices are high and global demand is strong, Peru benefits from higher export revenues and foreign exchange inflows.
