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IMF Concludes 2004 Article IV Consultation with Peru

International Monetary Fund
Published Date:
May 2004
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On February 23, 2004, the Executive Board concluded the 2004 Article IV consultation with Peru and completed the fourth program review under the Stand-By Arrangement for Peru approved on February 1, 2002.1


The Peruvian economy has been significantly transformed since 1990, enabling it to weather the recent regional financial turbulence. During that period, Peru ended hyperinflation and a debt crisis, carried out fiscal consolidation with important tax and pension reforms, and comprehensively liberalized and privatized the economy. Real per capita GDP is now about 30 percent higher than in 1990. Inflation fell steadily through the 1990s and has remained low since.

In 2003, real GDP grew by 4 percent, with inflation of 2.5 percent and a further strengthening of the external position. Net international reserves rose by US$600 million, and official reserves now cover more than 200 percent of short-term debt and over 100 percent of dollar deposits in the banking system. Inflation has been kept low under the central bank’s inflation targeting framework, permitting a gradual reduction of interest rates. However, the recent rebound in economic activity has not translated into rapid job creation, reflecting weaknesses in the overall investment climate and the concentration of private investment in capitalintensive industries such as mining.

Fiscal reforms have progressed well over the last two years, including the creation of a sound legal framework for fiscal decentralization, strengthened fiscal rules, improved fiscal transparency, and further pension reforms. Important advances have also been made in tax reform, although the goal of eliminating regional and sectoral tax exemptions remains to be accomplished, and the latest round of tax reforms also included a new financial transactions tax. Commercial banks’ prudential indicators continued to improve in 2003, and bank oversight and prudential regulations have been further strengthened, with particular focus on guarding against vulnerabilities from financial dollarization. Financial system credit to the private sector grew for the second straight year in 2003 (after contracting for several years), with the expanding domestic capital market providing firms an alternative source of financing to traditional bank lending.

The authorities’ economic program for 2004 foresees continued economic growth, based on a further recovery of investment and strong export growth. Inflation is projected to remain within the central bank’s target range of 1.5-3.5 percent, and the external position is expected to strengthen further, with the current account deficit falling below 1.5 percent of GDP.

In line with the authorities’ strategy of gradual medium-term fiscal consolidation, the combined public sector deficit is targeted to decline to 1.5 percent of GDP in 2004 (reflecting mainly the effect of tax reform measures implemented in 2002 and 2003). Fiscal reforms are set to continue in 2004, as the authorities intend to improve the efficiency of public sector operations, proceed with their cautious plan for decentralization, and deepen tax and pension system reform. Bank supervision will be strengthened further, and the reform agenda includes important institutional reforms to improve the investment climate.

As part of the Article IV consultation, an assessment, prepared by staff, of the Fund’s longer-term program engagement in Peru was discussed with the authorities.2 The assessment considers this engagement as having been, on the whole, beneficial for Peru. It highlights that Peru has made significant progress in reforming its economy during the period of engagement, although it also notes that vulnerabilities remain, especially from the still relatively high levels of public debt and financial dollarization. Therefore, the assessment underscores the need for further fiscal consolidation, prudent monetary policy and a high official reserves cushion, and continued vigilance in financial sector supervision.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the Peruvian authorities for their continued strong performance in achieving macroeconomic stability, solid growth, and improved economic resilience in a difficult external environment. Going forward, the economic outlook remains favorable. The authorities’ strategy of continued fiscal consolidation and structural reforms is appropriately designed to manage the remaining risks associated with the still relatively large public debt and high financial dollarization, while sustaining rapid growth and progress on reducing poverty. Directors encouraged the authorities to continue to look for broad political support for the steadfast implementation of the economic program.

Directors stressed the importance of ongoing fiscal consolidation to keep the public debt dynamics under control. They recommended further action to strengthen the tax effort and make expenditure more flexible, in particular by reforming the preferential public pension regime and restraining wage bill growth. This would also create room for important social and infrastructure spending. Directors were encouraged by the authorities’ renewed efforts to grant operating concessions for public works and to pursue privatization where feasible. They noted the importance of proper risk sharing and transparent accounting of public-private partnerships. They welcomed the authorities’ commitment to avoid using the dollar deposits of the pension reserve fund held at the central bank to finance fiscal operations.

While welcoming the significant improvements made to the tax system, Directors saw a need for further progress in eliminating regional and sectoral tax exemptions and broadening the income tax base. They urged the authorities to work towards eliminating or revising the Financial Transaction Tax (FTT) as soon as possible to minimize the risks of financial disintermediation and negative effects on investment, growth, and the collection of other taxes.

Directors emphasized that careful implementation of decentralization will be crucial for fiscal sustainability. They welcomed the progress made in establishing a sound legal framework for the fiscal decentralization process. They encouraged the authorities to maintain a close dialogue and consensus with the regions, and to continue to collaborate closely with the World Bank and Inter-American Development Bank in assigning expenditure responsibilities to subnational governments, enhancing local implementation capacity, and ensuring proper monitoring of the implementation process.

Directors supported the authorities’ plans to reduce the currency and rollover risk of public debt by gradually shifting the composition of public debt toward local-currency instruments and extending amortization payments over the medium term. They also welcomed the inclusion of collective action clauses in the recent sovereign debt placement.

Directors commended the central bank for maintaining inflation at low levels under the inflation targeting framework. They viewed as appropriate the authorities’ goal of further raising official reserves, in light of the still relatively high levels of public dollar-denominated debt and financial dollarization. It will be important to pursue this goal in a manner that is transparent and consistent with appropriate exchange-rate flexibility.

Directors welcomed recent steps to further strengthen bank supervision, particularly in managing the risks of dollar lending. They looked forward to a swift passage of draft legislation to grant legal protection to bank supervisors, and to steps intended to ease credit access for borrowers. Some Directors also recommended a gradual increase in the limits on private pension fund investments abroad to widen their investment options.

Directors encouraged the authorities to make further sustained progress on a range of structural reforms that will be key to strengthening the environment for private investment, growth, and employment creation. They stressed the need to bolster the legal and regulatory framework, including by establishing a commercial court system, enhancing the legal framework for independent regulatory agencies, and strengthening property rights. Directors underscored the importance of steps to reduce the relative cost of creating formal sector jobs. In this regard, the phased elimination of the special payroll tax rate is welcome, and Directors encouraged the authorities to extend to larger firms the recent measures to lower non-wage labor costs in very small enterprises. Swift reinstitution of unemployment protection would be an important safeguard against potential temporary costs of reforms. Directors commended the authorities’ continued commitment to open trade, and welcomed the planned start of negotiations on a free trade-agreement with the United States.

Directors noted that Peru’s economic statistics are timely and adequate for program monitoring and surveillance. They welcomed the recent publication of the data Reports on the Observance of Standards and Codes and the authorities’ intention to publish the fiscal ROSC.

Directors welcomed the opportunity to review Peru’s performance under Fund-supported programs since 1993. During this period, Peru has restored macroeconomic stability, and has achieved strong growth and important progress with structural reforms. Directors considered that Fund involvement has, on balance, been beneficial, with the Fund playing a useful creditor assessment role and providing an anchor for policy credibility. Going forward, many Directors expected that Fund engagement in support of a strong precautionary program could continue to be helpful in the coming years, in particular to further entrench the consensus for sound macroeconomic policies and structural reforms in a challenging political environment. A number of other Directors, however, while recognizing the advantages of a successor program, also considered that exiting from Fund support would further strengthen the market confidence which Peru has regained in recent years.

It is expected that the next Article IV consultation with Peru will be held on the standard 12-month consultation cycle.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2004 Article IV Consultation with Peru is also available.

Peru: Selected Economic Indicators


(Annual percentage change, unless otherwise indicated)
Real economy
Real GDP2.
Inflation 1/3.7−
Terms of trade−2.1−
Real effective exchange rate (depreciation -) 1/2/7.24.4−5.5−7.9
Nominal exchange rate (in soles per U.S. dollar) 1/3.533.443.513.48
Money and credit
Base money−4.07.911.09.67.0
Liabilities to the private sector 3/4/
Credit to private sector 3/4/−1.2−
(In percent of GDP, unless otherwise indicated)
Savings and investment
Gross domestic investment20.118.618.418.518.5
National savings17.216.416.316.917.1
External savings2.
Balance of payments
Current account−2.9−2.2−2.1−1.7−1.4
Capital and financial account2.
Gross official reserves (in months of imports of goods and services) 1/10.710.710.810.89.7
Gross official reserves (in percent of broad money) 1/
Public sector
Combined public sector primary balance 5/−0.9−0.1−
Combined public sector overall balance 5/−3.2−2.4−2.2−1.9−1.5
Public sector medium- and long-term external debt36.535.736.837.035.5
Sources: Central Reserve Bank of Peru; and IMF staff estimates and projections.

At end of period.

Based on Information Notice System. Data for 2003 correspond to November.

Flows in foreign currency are valued at program exchange rate.

Corresponds to the financial system.

Revenue excludes privatization receipts.

Sources: Central Reserve Bank of Peru; and IMF staff estimates and projections.

At end of period.

Based on Information Notice System. Data for 2003 correspond to November.

Flows in foreign currency are valued at program exchange rate.

Corresponds to the financial system.

Revenue excludes privatization receipts.

1Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.
2Such assessments are required for members with longer-term program engagement. Peru has had arrangements with the Fund almost continuously since 1993, including three extended arrangements (1993–95, 1996–98, and 1999–2001) and two stand-by arrangements (2001 and 2002–03).

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