The Peruvian paradox: How a fragile democracy built a strong central bank

The story of the Central Bank of the Republic of Peru (BCRP) stands out as one of Latin America’s quiet success stories of building strong institutions in an unstable region. This resilience is all the more remarkable given the country’s exceptionally volatile politics in the last 10 years.

Since the end of the commodity boom in 2016, legislative dominance over the other branches of government has increased. Political control exercised by a fragmented coalition of interest groups in the parliament has produced unchecked legislation that often benefits illegal economic sectors by crippling law enforcement and weakening other state institutions. This dominance has also eroded the executive branch, regardless of who is in power. The present period is marked by an exceptional number of impeachment requests, the removal of key authorities, unprecedented cabinet reshuffles and eight presidents since July 2016 (Rodriguez-Olivari, 2023).

How could such a resilient central bank emerge in this unpredictable environment, and what should the country do to preserve this achievement?

To make sense of this paradox, we must return to a critical turning point for the region: the learning from the 1980s sovereign debt crisis. In the decade following this event Latin American countries enacted institutional reforms to guarantee central bank independence and developed countercyclical toolkits that helped anchor expectations and stabilise growth, with the exceptions of Argentina and Venezuela (Tombini et al., 2023). As a result, inflation, which averaged 168 per cent across the region in the 1980s (Werner, 2023), has decreased to an average of 4.2 per cent since the onset of the COVID-19 pandemic.

In Peru, the 90s reforms culminated in a credible adoption of an inflation-targeting policy framework in 2002 (a bold move for a bi-monetary economy). Since then, inflation has remained in single digits and dollarisation of credit fell from almost 50 per cent in 2013 to 24 per cent in 2022, driven by de-dollarisation policies introduced in 2013 to mitigate FX volatility risks (Velarde & Montoro, 2023). The key to this success has been a “pragmatic orthodoxy” of the BCRP: combining a flexible exchange rate with active use of reserve requirements and FX interventions to smooth volatility and manage financial dollarisation (Velarde, 2023).

It is notable that this progress would have been impossible without the independence granted by the reforms of the 1990s. Legally shielding the bank from direct political pressure is certainly one part of the answer to our initial question.

Nevertheless, in Peru today the leadership of one man has been equally decisive. Julio Velarde has led the Central Bank since 2006, outlasting ten presidents. He has become, as the BBC described, a kind of ‘consensus figure in a polarised country.’ Following Szelnick’s (1957) seminal characterisation, Velarde has delivered on the three core leadership tasks in public administration: (i) shaping the identity of an organisation, (ii) building a workforce that buys into the mission and its underlying values, and (iii) adapting its mission and practices to preserve legitimacy in the eyes of society at large. But can this institution continue to adapt in such a tumultuous political environment after this consensus figure retires?

The ultimate test for Peru’s economic future lies in its ability to transition from reliance on a singular exceptional leader to building a resilient system that can withstand political volatility and sustain technocratic consensus. This challenge is especially critical as the 2026 electoral year approaches, which will require disciplined macroeconomic management despite a populist Congress.

Rodriguez-Olivari, D. (2023). La indiferencia como peso muerto de nuestra democracia. Gestion. https://gestion.pe/opinion/denisse-rodriguez-olivari-la-indiferencia-como-peso-muerto-de-nuestra-democracia-noticia/

Selznick, P. (1957). Leadership in administration: A sociological interpretation. New York, NY: Harper & Row.

Tombini, A., Aguilar, A., Frost, J., Upper, C. & Zampolli, F. (2023). “Lessons from 20 Years of Central Banking in the Americas,” in Central Banking in the Americas: Lessons from Two Decades (Basel: BIS, 2023), 3.

Velarde, J. (2023). “Los retos de la banca central para los próximos años.’’ In Vega & Zegarra (eds.), Historia del Banco Central y la Política Monetaria de Perú. Vol. 2. Banco Central de Reserva del Perú.

Velarde, J. & Montoro, C. (2023). ‘‘Twenty years of inflation targeting in Peru: lessons and challenges ahead.’’ In Central Banking in the Americas: Lessons from Two Decades (Basel: BIS, 2023), 129.

Werner, Alejandro (2023). ‘‘Central banking in Latin America – the next decade.’’ In Central Banking in the Americas: Lessons from Two Decades (Basel: BIS, 2023), 163.