The MUC dollar, whose initials mean Single Exchange Market, was a kind of currency created in Peru, with a similar value to the United States dollar, In the current era of free market and economic liberation in Peru, for operations between the Sol and the dollar there are several exchange rates, such as exchange houses and banks.
However, all these indicated exchange rates are governed by the interaction between supply and demand and the free market. This was not always the case in Peru, since in the 1980s it had what was known as the MUC dollar.
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The moral resulting from this experience is that it can end up being very costly for a nation to interpose itself in the foreign exchange market to artificially establish an exchange rate.
This is because the exchange rate is a reflection of the performance of the economy of one country with respect to another, being in this case that of Peru and the United States.
Origin
The MUC dollar was a parallel currency that was created in the late 1970s and had a certain correlation with the US dollar. It was circulated in Peru at the end of 1977 by mandate of the government of Francisco Morales Bermúdez, through Law No. 21,953.
From 1978 to 1986, the difference between the price of the free market dollar and the MUC was not greater than 10%.
However, in mid-1987, the Central Reserve Bank of Peru failed to stop the rise of the dollar in the free market, through the sale to the public of several million dollars.
This produced an increasing distance between the free price of the dollar and the official price of this currency against the inti, which was the local Peruvian currency. In this way, an overvaluation effect of the inti was established.
Final stage
This became chronic at the end of 1988. The Ministry of Economy and Finance during the government of Alan García decided to devalue the currency to match the market price.
However, in December 1988 the price of the MUC dollar would lag behind the free market. Therefore, since the inti was very valuable, international reserves fell to very low levels.
This situation ended when, at the beginning of the 1990s, the MUC dollar was completely eliminated and it was established that the US dollar could only trade by complying with the interaction between demand and supply, as it continues to trade to this day.
goals
Initially, the MUC dollar was created in order to stimulate the national economy. The aim was to promote national investments, working through the following procedure:
- In the first place, the Peruvian government acquired US dollars at the exchange rate existing in the free market.
- Second, these dollars, with a subsidy, were sold to local entrepreneurs in the country, at a lower price than those who bought them. It was made a prerequisite for them to use them only to fortify their competitive position.
- Finally, the entrepreneurs had to use these dollars in a unique and exclusive way to strengthen their respective industries.
These measures were taken thinking that they would bring more employment. The MUC dollar was intended to enable entrepreneurs to invest in machines and working capital for their companies with this kind of subsidy.
Initially, these measures that were adopted brought positive results. By September 1985, inflation could drop to 3.5%. In 1986, the country's economy grew 10%.
problems
However, after the big growth in 1986 a problem arose. The production capacity of the modest Peruvian industry was reaching its upper limit. More investments were needed to be able to locate new productive capacities and thus continue with the economic reactivation.
Another problem was that at the end of 1986 the trade balance was negative again. Peruvian international reserves fell to $ 860 million for December 1986, when compared to $ 1,410 million for March of the same year.
This lack of liquidity was also due to the fact that the government paid its creditors much more than the 10% that President García had previously announced.
Finally, many people exchanged their intis for dollars. A devaluation of the inti was feared due to the low confidence that citizens had in the economic model.
Who did it favor and who did not
Actually, this currency was just another way to give a subsidy to the Peruvian industry to favor it. During its inception, the difference between the prices of the MUC dollar and the US dollar did not exceed 10%.
However, in the late 1980s, the poor situation of the Peruvian economy caused a greater difference between the market dollar and the MUC dollar. This greatly increased people's mistrust of the government's ability to continue to maintain this subsidy.
In addition to this, businessmen, who had also stopped trusting the Peruvian economy, began to use this money obtained to deposit it in their personal accounts for their own benefit.
This scenario became unsustainable, causing a large reduction in international reserves. Because the entrepreneurs misused the MUC dollar, the Peruvian people were not favored.
Ultimately, this whole situation created considerable corruption in the government. This is because from there it was decided who to grant the MUC dollar, mainly favoring companies owned by government colleagues.
Thus the largest economic crisis in the history of Peru and Latin America was generated. At the end of 1990 an inflation of 2,000,000% had accumulated.
Corruption case
The case of the MUC dollar, from which only some business sectors benefited to remedy the cost overruns obtained by inflation or the price controls applied by the government, resulted in the confession given by businessman Alfredo Zanatti.
This businessman, who owned Aeronaves del Peru, received 87% of the MUC dollars. The condition was to make deposits to the president of Peru, Alan García, for $ 1,250,000 in the two accounts he had at Banco Atlantic Security in Florida and in the tax haven of Grand Cayman.
He also had to cede to President García 65% of the shares belonging to his broadcasting company Canal 13-1161.
In 2001, the Court of Justice finally prescribed the illicit enrichment and bribery charges against García. For this reason, the case ended up being shelved.
References
- Wikipedia, the free encyclopedia (2018). Dollar MUC. Taken from: es.wikipedia.org.
- Daniel Bonifaz (2018). What is the MUC Dollar and How Did It Work? Kambista. Taken from: kambista.com.
- Wayka (2017). What did Alan García do with the MUC dollars? Taken from: wayka.pe.
- Academic (2019). Dollar MUC. Taken from: esacademic.com.
- Perupolitico (2006). The economic management of Alan García: 1985-1990. Taken from: perupolitico.com.