IMF Executive Board Concludes 2017 Article IV Consultation with Peru

June 28, 2017

On June 16, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Peru.

With average growth of over 5¼ percent since 2000, Peru has significantly reduced unemployment and poverty. Inflation is in low single digits, the fiscal position has strengthened, and dollarization has declined markedly. In the context of the commodity boom, sound macroeconomic management and structural reforms have played an essential role in this improvement.

The current juncture is, however, a difficult one, given domestic headwinds and challenging external conditions. The Odebrecht corruption scandal that broke in December 2016 is weighing on investment and confidence. And one of the worst flooding and landslides in over 50 years (related to el Niño) has affected a significant part of the population, caused widespread infrastructure damage, and raised domestic food prices. On the external side, although commodity prices have recovered somewhat since late 2016, they remain significantly lower than during the commodity boom.

While slowing in the short term given sizable domestic shocks and a smaller contribution from new export projects, growth is expected to remain high relative to the region. In particular, GDP growth is projected to slow to about 2.7 percent in 2017 (supported by a significant fiscal stimulus) before bouncing back to over 3¾ percent in 2018, as reconstruction spending filters through the economy and projects delayed due to the Odebrecht scandal start to catch-up. Inflation should gradually return to the target range as weather-related factors abate and food price inflation declines.


Executive Board Assessment [2]

Executive Directors commended the authorities for steadfast implementation of sound macroeconomic policies and reforms which have helped Peru achieve high growth and significant improvement in social indicators over the past two decades. Directors noted, however, that recent external and domestic challenges, including those arising from lower commodity prices, the Oderbrecht scandal, and the devastating floods, are expected to adversely affect the economy in the near term. They praised the authorities for their immediate countercyclical response to these shocks, and concurred that continued sound macroeconomic management and strong structural reforms are key to sustaining growth and enabling Peru to reach its goal of high‑income status in the long run.

Directors supported the short‑term fiscal stimulus plan to address flood‑related reconstruction needs, stressing that such spending should be underpinned by strong public investment management. They took note of the transparency gains in the modified structural balance fiscal rule, and advised the authorities to remain vigilant given the new rule’s potential for procyclicality. Directors welcomed the authorities’ commitment to gradual medium‑term fiscal consolidation and supported their plan to establish a medium‑term budget framework as a tool to enhance fiscal discipline and the predictability of the budget process. They encouraged the authorities to push forward with their efforts to raise the tax‑to‑GDP ratio, particularly by strengthening tax administration and reducing VAT exemptions and economic informality. They also welcomed the recent reforms to the frameworks for public investment and public‑private partnerships, which would help address the infrastructure gap.

Directors considered the accommodative monetary policy stance to be appropriate at the current juncture. They encouraged the authorities to continue to make decisions depending on data and to monitor inflation expectations closely. Directors stressed that clear communication of the temporary nature of existing price shocks and the inflation outlook would be essential to anchor inflation expectations. They welcomed the increased exchange rate flexibility and recommended that future interventions be limited to cases of disorderly market conditions.

Directors observed that the financial sector remains stable, while noting the need for continued focus on reducing dollarization to further mitigate currency mismatches and balance sheet vulnerabilities. They encouraged further action to formalize the financial stability council and to broaden the financial supervisory perimeter. While emphasizing that financial stability should remain a priority, Directors highlighted the importance of enhancing financial deepening and inclusion.

Directors emphasized that implementation of strong structural reforms is critical to raise growth potential and achieve the high‑income status. Along with efforts to close the infrastructure gap, they called for further efforts to increase labor market flexibility, reduce economic informality, and improve business environment and fight corruption. Directors also emphasized the need for stronger implementation of anti‑corruption and AML/CFT measures.



Table. Peru: Selected Economic Indicators

Projections

2011

2012

2013

2014

2015

2016

2017

2018

Social Indicators

Life expectancy at birth (years)

73.8

74.0

74.2

74.4

74.6

…

…

...

Infant mortality (per thousand live births)

16.0

17.0

16.0

17.0

17.6

…

…

...

Adult literacy rate

92.9

93.8

93.8

93.7

94.0

…

…

...

Poverty rate (total) 1/

27.8

25.8

23.9

22.7

21.8

20.7

…

...

Unemployment rate

7.7

6.8

5.9

5.9

6.5

6.7

…

...

(Annual percentage change; unless otherwise indicated)

Production and prices

Real GDP

6.5

6.0

5.8

2.4

3.3

3.9

2.7

3.8

Real domestic demand

7.7

7.3

7.3

2.2

3.1

0.9

2.4

3.7

Consumer Prices (end of period)

4.7

2.6

2.9

3.2

4.4

3.2

2.9

2.5

Consumer Prices (period average)

3.4

3.7

2.8

3.2

3.5

3.6

3.1

2.6

External sector

Exports

29.5

2.2

-9.6

-7.8

-12.9

7.6

12.9

4.5

Imports

28.9

10.4

3.3

-3.1

-9.0

-5.9

6.3

5.0

Terms of trade (deterioration -)

7.0

-2.3

-5.2

-5.4

-6.4

-0.7

5.0

-0.8

Real effective exchange rate (depreciation -)

-1.4

8.1

-0.2

-1.6

0.8

-2.3

…

…

Money and credit 1/ 2/

Broad money

15.1

12.5

15.3

9.5

11.6

4.3

5.2

7.8

Net credit to the private sector

21.6

13.3

18.3

13.2

14.0

5.0

5.2

6.5

(In percent of GDP; unless otherwise indicated)

Public sector

NFPS Revenue

27.5

28.3

28.4

28.0

25.1

23.2

23.1

23.2

NFPS Primary Expenditure

24.2

24.8

26.4

27.1

26.0

24.7

24.8

25.3

NFPS Primary Balance

3.3

3.5

2.0

0.9

-1.0

-1.5

-1.7

-2.1

NFPS Overall Balance

2.1

2.4

0.9

-0.2

-2.0

-2.6

-3.0

-3.5

External Sector

External current account balance

-1.9

-2.7

-4.4

-4.4

-4.8

-2.7

-2.1

-2.1

Gross reserves

In millions of U.S. dollars

48,859

64,049

65,710

62,353

61,530

61,731

61,731

62,931

Percent of short-term external debt 3/

559

496

536

534

523

450

410

604

Percent of foreign currency deposits at banks

228

300

274

258

224

230

233

236

Debt

Total external debt

25.9

27.8

27.2

30.6

34.6

33.5

30.0

28.8

NFPS Gross debt (including Repayment Certificates)

23.3

21.6

20.8

20.7

24.0

24.4

25.2

26.4

External

11.5

10.0

9.0

8.7

11.1

10.3

9.9

10.6

Domestic

11.8

11.6

11.8

12.0

12.9

14.1

15.3

15.7

Savings and investment

Gross domestic investment

24.9

24.7

26.5

24.9

24.6

22.8

22.2

22.2

Public sector 4/

4.9

5.5

5.9

5.5

5.0

4.8

5.2

5.6

Private sector

19.3

20.7

21.2

20.1

19.3

17.7

16.7

16.5

National savings

23.0

22.0

22.0

20.5

19.8

20.1

20.1

20.1

Public sector 5/

7.5

8.2

7.2

6.0

3.8

2.7

2.7

2.7

Private sector

15.5

13.7

14.8

14.4

16.1

17.4

17.3

17.4

Memorandum items

Nominal GDP (S/. billions)

464.8

498.5

534.7

576.3

612.8

658.7

703.9

747.8

GDP per capita (in US$)

5,731

6,396

6,629

6,586

6,168

6,199

6,568

6,872

Sources: National Authorities; UNDP Human Development Indicators; and Fund staff estimates/projections.

1/ Corresponds to depository corporations.

2/ Foreign currency stocks are valued at end-of-period exchange rates.

3/ Short-term debt is defined on a residual maturity basis, and includes amortization of medium- and long-term debt.

4/ Includes Repayment Certificates (CRPAOs).

5/ Excludes privatization receipts.


[1] Under 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.

[2] 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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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