Press Release No. 18/308

IMF Executive Board Concludes 2018 Article IV Consultation with Peru

July 25, 2018

On July 9, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation^[1] with Peru. 

Peru has been one of the top performers in Latin America since the turn of the century. Robust growth has helped close the income gap with the largest regional economies and reduce poverty significantly, while inflation has remained low. Sound macroeconomic and structural reforms have played an indispensable role in this. 

After a difficult 2017, the economy is recovering. Extreme weather caused by El Niño and spillovers from the Odebrecht investigation led to subpar growth in 2017, and the poverty ratio increased. While high commodity prices are currently supporting investment and broader economic activity, domestic headwinds have continued. The Odebrecht case led to the resignation of President Kuczynski. The authorities have also been facing the challenge of rebuilding infrastructure damaged by El Niño. In the face of this, the new Cabinet has moved quickly to implement various measures and receive special legislative powers from Congress to speed up the reconstruction and implement needed reforms. Recent indicators suggest a pickup in economic activity. 

Against this backdrop, growth in 2018 is expected to increase to 3.7 percent, supported by countercyclical fiscal and monetary stimulus. In 2019–20, the recovery of private domestic demand is expected to push growth above 4 percent, even as gradual fiscal consolidation takes place. In the medium term, growth is projected to converge to its potential of 4 percent. Headline inflation is expected to gradually increase to the center of the central bank target range of 1–3 percent by end-2018.

Executive Board Assessment^[2]

Executive Directors commended the authorities for implementing sound macroeconomic policies and key structural reforms over the past two decades, which have helped keep inflation low, raise incomes and reduce poverty. While medium‑term risks are tilted to the downside, high copper prices and reduced political uncertainty create a window of opportunity for addressing remaining challenges and increasing potential growth. 

Directors agreed that the fiscal policy stance should remain countercyclical in 2018. Given the negative output gap, Directors supported the authorities’ objective to expand public investment to meet the significant reconstruction needs after the flooding and landslides, while also stressing the importance of increasing implementation capacity of subnational governments. 

Directors welcomed the commitment to medium‑term fiscal consolidation, under the fiscal responsibility framework. They supported the focus on revenue mobilization through strengthening tax policy and administration, and streamlining current expenditures to help free up space for much needed public investment. 

Directors considered that the accommodative monetary policy stance remains appropriate and that monetary policy should remain data dependent. While the central bank has improved the communication of its policy guidance, it could consider further enhancements in this area. Directors underscored that exchange rate flexibility is an important shock absorber, and foreign exchange interventions should continue to be two‑sided and limited to addressing disorderly market conditions. 

Directors observed that the financial sector remains sound and resilient to severe macroeconomic shocks, as shown by the stress tests, thanks to a robust supervisory framework, although high concentration, off‑balance sheet positions, and common exposures call for continued monitoring of risks and for increasing capital surcharges for systemically‑important banks. Directors welcomed the reduction in financial dollarization, but stressed the importance of taking steps to reduce it further. Directors recommended further improvement of the macroprudential framework, including by giving enhanced mandates for macroprudential policy to the central bank and the financial supervisor. 

Directors underscored the need for continued structural reforms to tackle the long‑standing challenge of high informality and low productivity. Directors called for further efforts to strengthen governance, improve education, increase labor market flexibility, and enhance financial deepening and inclusion. They highlighted the importance of reforming the pension system to enhance social protection and reduce inequities.

[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.