Press Release No. 04/34

Press Release: IMF Completes Fourth Review of Peru's Stand-By Arrangement and Grants Waiver

February 23, 2004

In completing the review, the Executive Board also approved Peru's request to waive the nonobservance of the end of December 2003 performance criterion related to the contracting or guaranteeing of nonconcessional external public debt.

Following the Executive Board review of Peru, Agustín Carstens, Deputy Managing Director and Acting Chairman, said:

"Peru's economic performance under the 2002-03 program has been favorable. Real GDP growth averaged 4.5 percent, with inflation in the low single digits and a robust external position. The outlook for 2004 and the medium term is favorable, supported by the authorities' commitment to continue to implement prudent macroeconomic policies and structural reforms. Their efforts to maintain broad domestic consensus on key reforms will help support continued growth with low inflation, while ensuring debt sustainability and further progress on de-dollarization.

"Fiscal consolidation is a key element of the authorities' medium term strategy. In 2003, the fiscal deficit was reduced to 1.9 percent of GDP as programmed, and the medium-term objective of limiting the deficit to no more than one percent of GDP will set the public debt-to-GDP ratio on a firm downward path.

"Monetary policy under the inflation targeting framework has succeeded in meeting the target, with an annual inflation rate converging to 2.5 percent. The authorities' goal of further raising official reserves is appropriate, in view of the still relatively high public debt and dollarization, and it will be important to pursue this goal in a transparent manner that allows appropriate exchange rate flexibility.

"Progress was made with the structural agenda under the program. The recent framework law provides a sound basis for the fiscal decentralization process. It will now be important to follow through with additional legislation on the assignation of expenditure responsibilities to subnational governments, and with careful implementation to ensure broad fiscal neutrality. While many improvements have been introduced to the tax system, work should continue to broaden the consensus for the elimination of regional and sectoral tax exemptions, and the impact of the financial transaction tax will need to be monitored closely.

"Continued improvements in the prudential framework are helping to reduce the risks associated with the high degree of financial dollarization. Welcome steps in this regard are the new regulations related to managing the risks of dollar lending, and the plan to grant bank supervisors appropriate legal protection in the discharge of their duties.

"The authorities' strategy rightly focuses on continued fiscal consolidation, de-dollarization, reforms of government operations, labor markets, the judicial system, and trade openness. The plans to improve public infrastructure, including through greater private sector participation, are also appropriate. Implementation of these reforms and continued prudent macroeconomic management will provide the foundation for sustained high growth, employment creation and poverty reduction," Mr. Carstens stated.