By Lina Irawan 
Venezuela’s economic plight is stark. The International Monetary Fund (IMF) reported inflation figures that have consistently ranked among the highest globally, often soaring into multi-million percent territory in recent years, though current rates are in the hundreds. This hyperinflation has systematically eroded the purchasing power of the bolivar, rendering it virtually worthless. Citizens resort to using foreign currency, primarily the U.S. dollar, for everyday transactions, or engaging in barter, effectively dollarizing the economy from the ground up. Essential goods and services remain out of reach for many, and poverty rates have skyrocketed, leading to a profound humanitarian crisis and mass emigration. The bolivar, once a symbol of national sovereignty, has become a tragic emblem of economic collapse, necessitating a fundamental re-evaluation of its future.
Amidst this desperation, some Venezuelan voices have advocated for adopting a monetary system akin to Peru’s, a nation that successfully navigated its own hyperinflationary past. The appeal is understandable: Peru stands out as a rare Latin American success story, having achieved remarkable price stability and sustained economic growth after its own crises in the late 1980s and early 1990s. Its robust performance—inflation consistently hitting or nearing its 1%-3% target range since 2002, with only four breaches in 24 years, three of which were pandemic-related—presents a tantalizing model for a country yearning for stability. Beyond low inflation, Peru’s system has fostered a relatively stable currency, demonstrated resilience against significant economic shocks, and supported consistent growth, making it an attractive, albeit superficially understood, proposition.
However, a closer examination reveals that the Peruvian model, while highly effective for Peru, is the product of a unique confluence of historical, political, and institutional factors that are not only difficult to replicate but fundamentally incompatible with Venezuela’s current context. The notion that simply transplanting Peru’s system could resolve Venezuela’s deep-seated monetary problems is not merely misguided; it is dangerously naive, risking further disillusionment and instability.
To understand why, one must dissect the intricate components of Peru’s monetary regime. The Peruvian central bank, the Banco Central de Reserva del Perú (BCRP), employs a sophisticated combination of monetary tools. These include a flexible interest-rate policy, extensive foreign-exchange intervention to manage currency volatility, the maintenance of large precautionary international reserves, and sterilization operations to offset the monetary impact of foreign currency inflows. Furthermore, the BCRP utilizes countercyclical reserve requirements and macroprudential measures to manage credit growth and systemic risks. At times, it has even imposed extremely high reserve requirements on certain short-term capital inflows to mitigate speculative pressures.
Crucially, the "secret sauce" of the Peruvian system lies in its de facto dual monetary system. While the Peruvian sol is the official legal tender, Peruvians possess a constitutionally guaranteed right to hold and use U.S. dollars. The banking system operates seamlessly with both currencies, allowing individuals and businesses to choose their preferred medium for transactions, savings, and credit. This inherent currency competition acts as an additional, powerful source of discipline for the BCRP. Any perceived deviation from sound monetary policy in sols could prompt a swift flight to dollars, thereby imposing market-driven accountability on the central bank. While this intricate system is far from a textbook example of a freely floating exchange-rate regime combined with pure inflation targeting, its pragmatism and effectiveness are undeniable.
Yet, the success of Peru’s system is inextricably linked to an unusual combination of local, political, and institutional factors that have evolved over more than a quarter-century. These factors are deeply embedded in Peru’s specific historical trajectory and political culture, rendering the system largely unexportable.
At the core of this success is the BCRP’s exceptional management and unwavering independence. Julio Velarde, widely respected and trusted, has led the BCRP since 2006, an extraordinarily long tenure that has spanned governments of vastly different political ideologies. His leadership, combined with a highly professional technical staff possessing deep institutional memory, has ensured continuity, expertise, and credibility. This technocratic stability extends to Peru’s Ministry of Economy and Finance, which has consistently pursued prudent fiscal policies. For instance, during periods of economic prosperity, the government has prioritized accumulating financial buffers rather than succumbing to populist pressures for immediate spending, a stark contrast to Venezuela’s historical patterns. This commitment to fiscal discipline provides a crucial complement to monetary policy, preventing the central bank from being forced to monetize government debt.
Perhaps the most critical, and least replicable, aspect is Peru’s demonstrated capacity to adhere to established rules and institutional frameworks. In countries like Venezuela, where populism has often reigned supreme, and where fiscal dominance over monetary policy is a historical norm, the ability to consistently follow strict, self-imposed rules—both monetary and fiscal—has proven elusive. Peru’s institutional foundations, therefore, are the product of circumstances that are neither easily replicated nor necessarily desirable to reproduce.
The genesis of Peru’s robust institutions traces back to the aftermath of its own hyperinflation and economic collapse. Alberto Fujimori, who came to power in 1990, initiated the "Fujishock," a severe fiscal and monetary adjustment program. However, stabilization was not immediate; it took years to build credibility. The decisive institutional break occurred after Fujimori’s controversial "autogolpe" in April 1992, where he dissolved Congress and suspended the existing constitutional order. The subsequent 1993 Constitution played a pivotal role by establishing the explicit autonomy of the BCRP and imposing crucial restrictions on its ability to extend credit to the government. These foundational elements of today’s successful monetary regime were thus established and cemented during Fujimori’s presidency, which concluded in November 2000, though the current BCRP operational system wasn’t fully implemented until 2002.
This historical context is paramount. It is tempting to observe Peru’s independent, highly professional central bank today and simply recommend that Venezuela create something similar. However, such a recommendation profoundly ignores the complex, often tumultuous political process through which Peru’s system was forged and how it gradually acquired its legitimacy and credibility over decades. It wasn’t a blueprint adopted overnight but an organic evolution shaped by unique political compromises and constitutional reforms.
Furthermore, the timeline for stabilization under the Peruvian model is also a critical consideration. Peru did not achieve price stability overnight. Annual inflation did not consistently remain below 10% until 1997, almost seven years after Fujimori’s initial "Fujishock." This protracted period of disinflation stands in sharp contrast to the much more rapid stabilization and disinflation achieved by countries like Ecuador after adopting full dollarization. Venezuela, in its current state of extreme economic distress, can ill afford a multi-year, uncertain path to stability.
Paradoxically, Peru’s recent political history—marked by extraordinary instability since 2016, with no president completing a full term—has inadvertently reinforced the independence of the BCRP and the continuity of the technical staff at the Ministry of Economy. Governments and ministers have cycled through rapidly, but Velarde has remained at the helm of the BCRP since 2006. This remarkable institutional continuity, despite political upheaval, is yet another highly specific reason why Peru’s monetary system cannot easily be replicated elsewhere. The central bank became an anchor of stability precisely because the political executive was so unstable, creating an environment where radical reforms to economic institutions became practically impossible.
Venezuela, much like Argentina, possesses a long and entrenched history of populism, fiscal dominance, and institutional anomie—a disregard for established norms and rules. Venezuela’s problem has never been a shortage of economists capable of designing sophisticated monetary and fiscal regimes; rather, it has been its chronic inability to adhere to strict rules, whether in times of plenty or scarcity. Peru’s unique capacity to do precisely that, to sustain institutional integrity and discipline across political cycles, is one of the main reasons its system has worked so exceptionally well. The Peruvian system, with its solid institutional foundation legitimized over time and supported by public trust, is thus unique and fundamentally unexportable to other Latin American countries, particularly those with a history as divergent as Venezuela’s. In short, any attempt to clone the Peruvian system in Venezuela is almost certainly doomed to fail.
So, if the Peruvian model is unsuitable, what then should be done to decisively end Venezuela’s inflationary plague? The most pragmatic, immediate, and guaranteed solution is for Venezuela to permanently retire the bolivar, relegating it to a museum, and officially adopt the U.S. dollar as its legal tender. Under a fully dollarized system, there would simply be no Venezuelan monetary rules to break, because there would be no Venezuelan monetary policy to conduct. The power to print money, which has been systematically abused and politicized in Venezuela, would be irrevocably transferred to the U.S. Federal Reserve.
A dollarized system would immediately eliminate the possibility of political manipulation and rule-breaking in monetary affairs, a critical and chronic issue in Venezuela. It would deliver much-needed price stability, a prerequisite for any meaningful economic recovery. While stability alone is not a panacea for all of Venezuela’s complex challenges, it is the indispensable foundation upon which everything else—investment, growth, social welfare—must be built. Without stability, everything else is nothing. This stability, crucially, would be guaranteed by the immutable nature of dollarization. History shows that no fully "dollarized" system, once implemented, has ever failed to achieve its primary objective of price stability. Examples such as Panama (since 1904), Ecuador (since 2000), and El Salvador (since 2001) demonstrate that dollarization provides a credible, long-term commitment to low inflation and predictable economic conditions, attracting foreign investment and restoring public confidence.
While dollarization entails a loss of seigniorage (the revenue generated from printing money) and the ability to conduct an independent monetary policy or act as a lender of last resort, these costs are negligible for a country like Venezuela, which currently derives no meaningful seigniorage from its worthless currency, has no credible monetary policy to lose, and whose central bank cannot function as a lender of last resort due to its own insolvency. For Venezuela, dollarization is not merely a policy option; it represents a decisive break from a destructive past and a clear path toward rebuilding a functional economy based on trust, predictability, and stability.
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