Despite his initial popularity among Peruvian voters, García's term in office was marked by bouts of hyperinflation, which reached 7,649% in 1990 and had a cumulative total of 2,200,200% over the five years, thereby profoundly destabilising the Peruvian economy. Owing to such chronic inflation, the Peruvian currency, the sol, was replaced by the Inti in mid 1985, which itself was replaced by the nuevo sol ("new sun") in July 1991, at which time the new sol had a cumulative value of one billion (1,000,000,000) old soles. During García's administration, the per capita annual income of Peruvians fell to $720 (below the level of 1960) and Peru's GDP dropped 20%. By the end of his term, national reserves were negative $900 million.

According to studies of the National Institute of Statistics and Informatics and the United Nations Development Programme, around the start of his presidency, 41.6% of Peruvians lived in poverty. During his presidency, this percentage increased by 13% (to 55%) in 1991. García also made an attempt to nationalise the banking and insurance industries. He incurred the wrath of the International Monetary Fund and the financial community by unilaterally declaring a limit on debt repayment equal to 10% of the Gross National Product, thereby isolating Peru from the international financial markets.

The economic turbulence exacerbated social tensions in Peru and contributed in part to the rise of the violent rebel movement known as the Shining Path, which launched the internal conflict in Peru and began attacking electrical towers, causing a number of blackouts in Lima. The García administration unsuccessfully sought a military solution to the growing terrorism, allegedly committing human rights violations, which are still under investigation. These include the Accomarca massacre, where 47 campesinos were gunned down by Peruvian armed forces in August 1985, the Cayara massacre (May 1988) in which some thirty people were killed and dozens disappeared, and the summary execution of more than 200 inmates during prison riots in Lurigancho, San Juan Bautista (El Frontón) and Santa Bárbara in 1986. According to an official inquiry, an estimated 1,600 forced disappearances took place during García's presidency. His own personal involvement in these events is not clear. García was allegedly tied to the paramilitary Rodrigo Franco Command, which is accused of carrying out political murders in Peru during García's presidency. A US declassified report, written in late 1987, said that García's party, APRA, and top government officials were running a paramilitary group, responsible for the attempted bombing of the El Diario newspaper, then linked to Shining Path, had sent people to train in North Korea and may have been involved in executions. According to investigative journalist Lucy Komisar, the report made it clear that it believed that García was giving the orders.

García's presidency left the country with hyperinflation, isolated from the international financial community, with negative reserves of US$ 900 million, continuous subversive activities by the Shining Path, a great increase in poverty levels and a multi - million dollar investment in an electric train in Lima that was not finished during his first government, and is still under construction as of 2011. His critics claim the many poor decisions he took while in office created an environment that led to the rise of an authoritarian leader like Alberto Fujimori.

In order to keep him away from future elections, García was accused of multiple charges of corruption during Fujimori's government. Investigations were archived without verdict and the statute of limitations has expired.

In 1992, García went into exile in Colombia and later in France after Fujimori's auto - coup during which the military raided his house. The new government re-opened charges against him for allegedly taking millions of dollars in bribes. He denied the charges, and in 2001 Peru's Supreme Court ruled that the statute of limitations had run out following a recommendation by the Inter - American Court of Human Rights. There were charges of corruption involved in this decision, as at the same time a law was struck down by Congress which prevented anyone who had been investigated for charges of corruption in a public office to run for president (what his supporters in Congress dubbed the "anti - Alan law"). García could not justify how he had homes in the richest neighbourhoods of Bogotá and Paris, in addition to having his daughter enrolled in a top private school in France, if his only income was from being an occasional guest speaker and the author of a few books with poor sales. His long time ally Jorge Del Castillo represented him as his lawyer and performed very heavy lobbying to allow García to legally return to Peru. After Castillo was elected to Congress, he had much more leverage for García's defence. The main accuser and enemy of García, Fernando Olivera, left Peru after Fujimori's fall and is still being sought for corruption charges.

After living eight years and ten months in neighbouring Colombia and in France, he returned to Peru in 2001, following Alberto Fujimori's resignation from the presidency. As it had been rumoured for many years, García ran for president in the new elections called by transitory president Valentín Paniagua, with Jorge Del Castillo as his campaign manager. García competed against some of his harshest critics and worst political enemies, including Lourdes Flores Nano and Fernando Olivera. García's theme during this election campaign was that he was the most experienced candidate and thus the most prepared, as he had made mistakes before as President, and had learned from them. He attributed all the problems of the Peruvian economy in his first presidency to the economic problems of Argentina and Brazil at the time. He distanced himself from accusations that he had been protected by Fujimori during his exile, and he would switch the topic when he was asked about his endorsement of Fujimori in the 1990 election.

He finished a distant second in the first round, far behind Alejandro Toledo, but just slightly above Flores Nano (by 1%), enough to take him to a run - off, as Toledo had failed to obtain the 50% majority. During the campaign for the run - off Toledo's popularity decreased, while García's popularity increased with his characteristic rhetoric and classical oratory delivery, which had helped him to get elected in 1985. García managed to obtain 48% of the vote in the run - off, losing by a close margin to Toledo. This was despite the movement "Voto Nulo" ("blank" or void vote), led by Jaime Bayly, a popular writer and TV presenter, and Álvaro Vargas Llosa, son of the famous novelist, in which celebrities asked Peruvian voters to vote for neither candidate and instead intentionally damage their vote cards or leave them blank. After the 2001 election, García, as leader of the APRA party, led the main opposition.

García officially started his campaign for the April 2006 presidential election in Lima on February 18, 2005. Ollanta Humala won the initial election with 30.62% of valid votes, followed by García, who got 24.32% (against Lourdes Flores' 23.81%). As no candidate won a majority, a run - off election was held on June 4, 2006 between Humala and García. Preliminary official results gave García an advantage over his run - off opponent, who conceded defeat.

On April 28, 2006, prior to the run - off, García had become involved in a dispute with Venezuelan President Hugo Chávez. As Chávez, for the second time in the Peruvian Presidential elections, declared his support for Ollanta Humala, García's opponent, and referred to García as a "robber", a "bandit", and "the Carlos Andrés Pérez of Peru". In response, García stated that Chávez was "not acting as a statesman" and challenged Chávez to a debate to be hosted by CNN. García also called on the Organization of American States to intervene in the matter.

On May 31, 2006, a few days before the run - off election García's economic adviser Enrique Cornejo told the media that if García won in the second round, his government would renew a $422 million aid package with the International Monetary Fund. Anoop Singh, the IMF's Western Hemisphere Director, responded positively by saying he was "impressed by the vision of the president - elected for Peru, especially his commitment to applying prudent economic policy."

On July 28, 2006, García was sworn in as the new president of Peru, after winning approximately 53% of the nationwide vote in the elections held on June 4. He had huge support in Lima and the northern coast, but did not get the votes of Humala's strongholds such as the southern region (mostly impoverished but including major cities as Cuzco and Arequipa) and the rain forest areas. A third of the voters said that voting for him was "voting for the lesser of two evils": although many Peruvians had a very negative impression of García after his first government, they were scared by rumours that Humala would create a government based on Fidel Castro's Cuba and would turn Hugo Chávez, President of Venezuela, into the virtual ruler of Peru, due to Chavez's patronage of Humala's party. Humala denied these rumours, but his conflicting statements about his government's vision and Chávez's strong campaigning for him created enough suspicions among voters to cost him the ballotage.

With 36 seats, APRA has the second largest bloc in the 120 seat unicameral Congress which was sworn in a couple of days before the President. With 45 seats, Humala's Union for Peru Party had the largest bloc, although it had divided itself up into three factions.

Following his victory García stated that he sought good relations with Venezuela and did not intend to start a movement in the region against Venezuelan President Hugo Chávez. He stated that he would review a trade agreement with the US established by the Toledo administration before deciding to ratify the agreement. Although APRA's position towards the free trade agreement was qualified as ambiguous by their detractors, APRA had always maintained that they would approve the agreement with proper compensations for wheat, cotton and yellow corn producers. On June 28, one month before García was sworn in, his party gave 25 of the 79 votes (almost one third of the votes) that ratified the agreement in the Peruvian Congress, one month prior to the swearing  in of the new legislature that would include the Union for Peru congressmen, who were opposed to the agreement with the USA. The new Congress still included a majority favourable to the free trade pact. Peru now awaits the agreement to be voted in the United States Congress.

In his first speech as President, García said that he would appoint a Finance Minister who was neither "an orthodox market liberal" nor a person "excessively in favour of state intervention in the economy". The position of Prime Minister was given to Jorge Del Castillo, his long time collaborator. According to the BBC, in private interviews García had stated his interest in a possible future trade agreement with Brazil and considered himself "an admirer" of Brazilian President Lula da Silva.

In press conferences with the foreign press, García has acknowledged that the support Humala received in the election "could not be ignored". García, in a recognition of future domestic politics with a UPP controlled Congress, was quoted as saying "Mr. Humala is an important political figure, and a President should consult with different political factions". However, Mr. Humala said he would not salute the winner personally, adding that "he and his party will constitute the principal opposition bloc, not to fight Mr. García, but to defend the interests of the State and watch the government".

President Chávez of Venezuela responded to García's comments on his show Aló Presidente by stating that it was García who owed him an apology saying "the only way relations between the two countries can be restored is if Peru's elected President [García] gives an explanation and offers an apology to the Venezuelan people. He started throwing stones". Chávez also questioned the legitimacy of the election, citing 1.2 million invalid ballots and a margin of victory of 600,000 votes, although he did not offer evidence for his remarks. García, attending an invitation to meet Brazilian president Lula da Silva, responded to Chávez: "accept your defeat in silence. Don't ask me to apologize for something arising from interference and remarks that are unacceptable under international law."

Differences with Chávez were left behind after García and he ended their controversy at the II South American Community of Nations Summit.

On July 20, 2006 García named as Finance Minister Luis Carranza, a former executive at Spain based Banco Bilbao Vizcaya Argentaria and Central Bank director and deputy finance chief from August 2004 to August 2005 in Alejandro Toledo's government. The appointment was welcomed by some detractors of García's fiscal policies during his first administration. But Mario Huamán Rivera, the President of Peru's largest trade union the Confederación General de Trabajadores del Perú (General Workers Confederation of Peru), has attacked the appointment stating that "it looks as though Alan García is not going to fulfil his promise to change economic policy".

On the day before his inauguration, García formally named his cabinet including former Secretary - General of the APRA party and re-elected Congressman Jorge del Castillo as Prime Minister, Luis Carranza as Minister of Finance and Economy, and José Antonio García Belaúnde as Foreign Affairs Minister. García was inaugurated as President of Peru on July 28, 2006.

During his campaign, García declared that he supported the death penalty for rapists of minors; he has repeated this stance while in office. He has even proposed a polemic law on the matter, which would modify the Criminal Code. Although the issue seemed to be stalled, García has widened the range of his proposal for the death penalty, by including terrorists in the list of those who could receive it.

García faced his first major political defeat of his second term in office on January 11, 2007 when his proposal to introduce the death penalty as a punishment for captured Shining Path rebels was rejected by Congress in a vote of 49 to 26. García had promised to introduce the death penalty for Shining Path rebels during the 2006 Presidential election. Following the defeat of the proposal, García suggested a national referendum on the issue but a referendum is expected to be blocked by Congress. Legislators who voted against the bill stated that it would be a breach of the American Convention on Human Rights to which Peru is a signatory. Approximately 3000 supporters of the proposal marched in Lima holding up photos of victims of attacks by the Shining Path.

On June 5, 2009, President Alan García ordered Peruvian Police and military forces to stop Amazonian Indigenous protesters from blocking roads in the Bagua region. The natives had been demonstrating against the signing by Alan García of special decrees that allow foreign corporations to enter Indigenous lands for oil drilling, mining and logging. As a result of the protests, 10 native civilians and 24 policemen were killed. With several policemen, who had surrendered their weapons, being brutally slaughtered at "estacion 6". It has since been proved, however, that members of the main opposition (nationalist) party, were behind these protests. Eyewitnesses claim that the bodies of the murdered amazon Natives have been dumped into the rivers.

After being elected, in the months prior to his inauguration, García sought to heal the relationship with Chile, which was stressed due to the differences between the governments of Alejandro Toledo and Ricardo Lagos and severely impaired by the former Peruvian President Alberto Fujimori's extradition affair. García's intentions were well received by Michelle Bachelet, President of Chile, as she and García met and struck some pre-agreements. These conversations eventually led to the final draft of a landmark economic agreement with Chile a month after García was sworn in.

On November 9, 2006, García signed 12 commercial agreements with President Luiz Inácio Lula da Silva of Brazil, strengthening the relationship between the two countries. As part of the IIRSA program and continuing integration efforts - including the August 2006 negotiations between Petrobras and Petroperú - these new agreements seek to further bilateral cooperation. García offered Peruvian hydropower to meet Brazil's growing energy needs, although further details were not disclosed.

García mended relations with President Hugo Chávez of Venezuela on December 9, 2006 during the second South American Community of Nations summit in Cochabamba, Bolivia. García told the Peruvian broadcaster Radio Programas del Perú that "the two of us are well mannered and cordial people, so any kind of argument, any previously made statements, remain a closed chapter" referring to disputes between the two leaders during the 2006 Peruvian presidential election where Chavez supported García's opponent Ollanta Humala.

Alan Garcia returned in 2006 to the presidency of Peru July 28, 16 years after his first, disastrous term in office ended. During the second government of Garcia, Peru was ranked as Latin America's third best country for business on the 2008 Latin Business Index from Latin Business Chronicle.