caliguy wrote:i would really like to know what the hell the government is doing with all its reserves. there are plenty of ways to spend money on improving Peru, still waiting.
Perhaps you mistakenly think the reserves are money that the government has saved (from tax revenues or something) and squirreled away. That is not what the reserves are. And spending them to buy stuff is not what they are for.
The BCR acquires reserves (mostly) in the following way. Peruvian businesses export goods and are paid for them in dollars (or euros, etc.). Those businesses need to buy soles with those dollars (or euros) to pay their expenses. If they bought soles in the purely private market that would drive up the value of the sol relative to the dollar. Exporters would not like that and the BCR thinks it should act so as to prevent too rapid a rise of the exchange rate of the sol. So, the BCR creates new soles out of thin air and buys the dollars from the exporters with the newly created money. The dollars the BCR buys this way constitute (most of) its reserves.
The reserves are available to buy back the soles that have been printed, if necessary. That is their purpose; they are to provide "backing" for the Peruvian money issuance. If they were spent then there would be no way to redeem Peruvian money.
The local price inflation you have seen in Peru in recent years is the result of the soles that were created out of thin air by the BCR to buy the dollar revenues of Peruvian exporters. In effect, what has happened is that the inflation of the US money supply by the FED has been exported to Peru. In this way, the price inflation (consequent to Bernanke's QE) appears in Peru rather in the US. Americans get Peruvian goods cheap. Peruvians pay through higher domestic Peruvian prices to subsidize exports for American consumption. Think of Peru's dollar reserves as foreign aid that Peruvians are sending to Americans.