Peru's military government today abandoned tight currency controls on the sol, its monetary unit, to allow it to float freely against the U.S. dollar.

Bankers here predicted that the sol's value would decline from its previously fixed rate of 80.88 to the dollar to more than 100 to the dollar, or 20 to 25 per cent.

The government decreed the creation of a single exchange market, to be organized by the central bank, at which travelers, importers and bankers will bid for dollars brought into the country.

The military junta said it took the step because "in the critical situation through which the country is now passing, the system of controlled exchange rates was inappropriate."

The latest action follows a tough round of negotiations between the International Monetary Fund and Peru, which is seeking an IMF standby loan package of $120 million.

The immediate impact of today's action is to bring a new round of price increases in a country whose cost of living has jumped about 40 per cent in the past 12 months, to bolster export prices and curb imports at a time when Peru needs large amounts of foreign exchange to pay its debts.