Press Release No. 03/44

Press Release: IMF Completes Second Review of Peru's Stand-By Arrangement, Approves US$38 Million Disbursement

March 31, 2003

The Executive Board of the International Monetary Fund (IMF) has completed the second review of Peru's performance under a two-year SDR 255 million (about US$347 million) Stand-By Arrangement, approved on February 1, 2002 (see Press Release No. 02/6). The completion of this review enables the release of SDR 27.87 million (about US$38 million) to Peru, bringing the total amount available to SDR 143.5 million (about US$196 million). So far the country has not made any drawings under the arrangement.

Following the Executive Board review of Peru on March 28, 2003, Eduardo Aninat, Deputy Managing Director and Acting Chairman, said:

"Peru's economic performance under the program has been strong, despite the difficult external environment. The outlook for 2003 and the medium term is also favorable, assuming continued implementation of sound economic policies.

"The authorities' economic program for 2003 aims at supporting the recovery in economic activity while keeping inflation low. Real GDP is projected to grow by 4 percent, with inflation around 2 ½ percent and the external position remaining robust. The fiscal deficit is targeted to decline moderately, in line with the authorities' medium-term fiscal consolidation goals.

"The structural reform agenda for 2003 includes introducing a sound fiscal decentralization law, beginning to phase out regional and sectoral tax exemptions in exchange for investment in regional infrastructure, and strengthening the law on fiscal prudence and transparency. The authorities also intend to rationalize public expenditure and improve the quality of social spending, with the assistance of the World Bank and the Inter-American Development Bank. These reforms will contribute importantly to medium-term fiscal sustainability, growth, and poverty reduction, and it will be crucial to ensure a broad political consensus for their effective implementation.

"The continuing improvement in the financial performance of banks is encouraging, although the high degree of dollarization remains a source of vulnerability. To address this risk, the authorities intend to maintain a high level of official international reserves and to continue strengthening oversight of the banking system. New regulations recently adopted on foreign-currency risk management and the draft law in congress to provide adequate legal protection to bank supervisors are also important in this regard.

"The inflation targeting framework and the stance of monetary policy are consistent with the goal of maintaining low inflation. The floating exchange rate system, with intervention limited to smoothing operations, will continue to serve Peru well in adjusting to external shocks and limiting external vulnerability," Mr. Aninat said.