But 1996 was a year of stress. The bank lending boom slowed, real interest rates rose dramatically, and investment demand slumped. Authorities were required to correct fiscal imbalances just as private demand was weakening, a double blow to economic growth. The challenge to policymakers in Colombia and Ecuador is to manage the correction in such a way so as to minimize the likelihood of a major economic downturn. After a quick correction the Peruvian economy is showing little sign of stress.
Money demand continues to rise and capital flows remain high.
Peru has taken steps to curtail an inflated boom in bank lending, which was making it vulnerable to a correction so severe it could destabilize the financial system and derail otherwise respectable economic accomplishments. Growth in Peru is expected to be above 5 percent in 1997, putting in the ranks of Argentina, Mexico and Uruguay as solid achievers in the reform process. Jamaica is another case study of the reform, boom, and correction cycle. When inflation reached 80 percent in 1991, the country began a stabilization program that cut inflation in half the subsequent year and eventually reduced it to the present level of 15 percent. As in the cases of Colombia and Ecuador, gains in the value of the monetary unit helped finance a domestic lending boom, which in turn supported an expansion of domestic spending that brought the current account deficit to nearly 8 percent in 1996.