Peru

Peru’s finance minister tells investors: ‘This is a government of change’

Economist Pedro Francke insists ‘reducing inequality’ can coexist with ‘reasonable macroeconomic management’

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Pedro Francke says he believes the sol will recover from its post-election slump: ‘I think we’re going to see greater calm on the markets’ © Angela
Ponce/Reuters

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Gideon Long in Lima AUGUST 11 2021

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Pedro Francke has been called many things in recent weeks: a moderate in a radical leftwing
government, a Marxist who will wreck Peru’s standout free-market economy and a turncoat for

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accepting the finance minister job in President Pedro Castillo’s administration after initially

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refusing.

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Francke prefers the terms “modern leftist” or “moderate leftist”.

“I’m a leftist who believes that reducing inequality is absolutely fundamental and perfectly
compatible with reasonable macroeconomic management,” he told the Financial Times. “The two
things can go hand in hand.”

Ever since Castillo won June’s presidential election Francke, 60, has been centre stage in Peru. The
former World Bank economist was widely tipped to get the finance minister’s job and, now that he
has secured it, he is confronting formidable challenges on every side.

While Peru’s economy has been one of Latin America’s success stories in the 21st century, recent
political instability has taken the shine off. The country has also been hit hard by coronavirus: it
has the highest per capita death rate in the world, and gross domestic product fell 11.1 per cent last
year.

Castillo’s election on a hard-left ticket rattled financial markets and sent capital fleeing, pushing
Peru’s currency, the sol, to record lows against the dollar. The day after a hardline leftist, Guido
Bellido, was named prime minister it registered its biggest one-day drop in seven years. It has since
stabilised but not rebounded.
 The Castillo government has set up a “special
commission” to reverse that trend, and Francke said
This is a government of he expected the sol to recover. “I think we’re going to
change and I understand see greater calm on the markets,” he said. “If I had to
that generates a certain lack make a recommendation to investors, I’d tell them
of confidence, turbulence they shouldn’t sell sols to buy dollars. It seems to me
and misunderstanding they [dollars] are a bit expensive.”

Pedro Francke Francke has been trying to persuade the well-

respected head of the central bank, Julio Velarde, to
stay on. On Tuesday, media reported that Velarde
had accepted, a move that if confirmed would reassure the private sector.

The minister reiterated his commitment to central bank autonomy, saying he did not envisage
significant changes to the relationship between the bank and government. “If it’s not broken don’t
fix it,” Francke said. “We have enough problems in Peru to start fixing things that are working
well.”

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The minister’s other near-term goal is to draw up a macroeconomic plan to be unveiled on August

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20. Francke expects the economy to rebound by 10 per cent this year and 4.8 per cent in 2022.

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He confirmed Peru would soon reactivate its fiscal rule — suspended last year because of the

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pandemic — which calls on the government to reduce the fiscal deficit over time to 1 per cent of

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GDP. It stood at 1.6 per cent before coronavirus but jumped to 8.9 per cent last year. The minister

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declined to say what the new timeframe for implementation would be.

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Julio Velarde has been asked to stay on as Peru’s central bank chief © Miguel Yovera/Bloomberg

Before his appointment, Francke was active on social media and some of his comments have been
used against him as proof of his supposed radicalism. In one YouTube video, he says Peruvians
should have more rights than foreign investors in Peru.
“How can it be that a Chilean, a Chinese or an American comes to Peru and has the same rights as a
Peruvian on economic issues?” he asks. “This doesn’t exist anywhere in the world.”

In other videos he advocates a new constitution, hits out at mining companies and says the state
should have the right to modify contracts with private firms.

Asked about the comments, Francke said they reflected his personal opinions but “I am now in
another role”.

“I’m answering as the minister of economy and finances in August 2021,” he said. He also
acknowledged the new government could “only work within the political space we have” — a tacit
acceptance it might be thwarted by congress, where Castillo’s party has only 37 out of 130 seats.

At the heart of Castillo’s programme is a pledge to replace Peru’s 1993 constitution, which makes it
relatively easy both for congress to impeach the president and for the president to dissolve
congress. His supporters blame it for Peru’s political instability, which has given the country five
presidents in five years.

Francke said that in strictly economic terms, a new constitution was unnecessary and not a priority

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for the ministry. “If you look at the economic measures that President Castillo unveiled in his

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inauguration speech, none of them require a constitutional change,” he said.

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However, he said a new charter would improve governability and that could only benefit the

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economy.

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“It’s very negative that just one week into the new government, people are talking about

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impeaching the president or shutting down congress,” he said. “These are problems that come from

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the constitution.”

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Asked what his message for foreign investors was, Francke said: “This is a government of change

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and I understand that generates a certain lack of confidence, turbulence and misunderstanding.”

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“But we absolutely respect private property and we’re absolutely opposed to any proposal for
exchange rate controls and price controls. We have a clear policy of fiscal responsibility.”

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