IMF Executive Board Concludes 2021 Article IV Consultation with Peru

March 22, 2021

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Peru on March 19, 2021.

Peru entered the COVID-19 pandemic with a sustained track record of implementing very strong policies amid very strong economic fundamentals and institutional policy frameworks. Prudent fiscal management, supported by fiscal rules, has helped contain government debt within the 30-percent-of-GDP ceiling until 2019, at the lowest level in the region. Under the inflation targeting framework, inflation has been low and stable and financial dollarization has declined while strong supervisory and macroprudential policies have contributed to preserving financial stability. Supported by rising commodity prices and strong macroeconomic policies, growth averaged 5.2 percent in the last 15 years, poverty was halved, and external vulnerabilities reduced.

The COVID-19 shock led to very strict containment measures and hit economic activity hard, with a sharp decline in GDP in the second quarter, one of the deepest in the world. The recession was accompanied by large falls in employment and participation, particularly among women, and increasing informality and poverty. A coordinated fiscal, monetary, and financial sector policy response helped stabilize financial markets, contain insolvencies, and support the recovery in the second half of 2020, when the containment measures were eased. As a result, the output contraction narrowed to -11.1 percent in 2020, with core inflation within the target range.

The ongoing second wave of the pandemic is likely to dampen the economic recovery, but the economy is expected to rebound in 2021, assuming the health emergency is brought under control by end-March. Under this scenario, restrictions could be gradually eased in the second quarter, and activity could regain momentum led by domestic demand and historically favorable terms of trade. Under these assumptions, GDP growth would reach 8.5 percent in 2021. The outlook is highly uncertain and downside risks prevail, but policy buffers are ample.

Executive Board Assessment [2]

Executive Directors noted that Peru entered the COVID-19 pandemic with very strong economic fundamentals and policy frameworks. The pandemic, however, inflicted a heavy human and economic toll. Directors commended the authorities for their decisive response in mitigating the impact of the crisis. Noting the significant risks ahead, they encouraged the authorities to continue efforts to limit the scarring effects, promote a robust recovery, and implement structural reforms to achieve a more broad-based, inclusive growth.

Directors advised the authorities to avoid premature withdrawal of fiscal support to help contain the pandemic, mitigate its impact on poverty, and support recovery. Once the crisis abates, priority should be given to addressing fiscal risks and rising spending pressures. In this context, Directors underscored the need to anchor fiscal policy to a credible medium-term framework. They emphasized that revenue mobilization will be key to preserving fiscal sustainability and welcomed the authorities’ request for Fund Technical Advice to identify measures to increase fiscal revenues. Going forward, they noted that any recalibration of the fiscal rules should preserve debt sustainability, strengthen credibility, and be clearly communicated.

Directors agreed that monetary policy should remain accommodative while macroprudential policies should encourage banks to focus on clients' viability. In addition, they considered that greater exchange rate flexibility would have benefits, especially as financial dollarization continues to decline. Directors noted that the banking system remains resilient. They commended the progress in implementing the 2018 Financial Sector Assessment Program recommendations and encouraged the authorities to move ahead with the remaining recommendations, especially to accelerate legislative and regulatory reforms to further strengthen financial sector supervision.

Directors emphasized that the reform agenda should focus on structural fragilities exposed by the pandemic and on promoting stronger and inclusive growth. Priority could be given to (i) boosting productivity by improving education, enhancing infrastructure, facilitating labor reallocation, and improving the business climate; (ii) enhancing social protection while reducing incentives to informality from the tax-benefit system, including through investment in health care and pension reform; and (iii) strengthening governance with additional transparency in the public sector and robust anti-corruption and AML/CFT frameworks.


[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 .

Peru: Selected Economic Indicators

Prel.

Projections

2018

2019

2020

2021

2022

2023

Social Indicators

Poverty rate (total) 1/

22.3

21.7

27.5

...

...

...

Unemployment rate for Metropolitan Lima (period average)

6.7

6.6

13.6

...

...

...

(Annual percentage change; unless otherwise indicated)

Production and prices

Real GDP

4.0

2.2

-11.1

8.5

5.2

4.8

Real domestic demand

4.2

2.4

-9.8

9.4

5.4

4.8

Consumer Prices (end of period)

2.2

1.9

2.0

2.0

2.0

2.0

External sector

Exports

8.0

-2.8

-11.1

27.5

3.7

3.7

Imports

8.1

-1.9

-15.6

19.9

5.0

4.8

External current account balance (% of GDP)

-1.7

-1.5

0.5

-0.4

-0.7

-1.0

Gross reserves

In billions of U.S. dollars

60.3

68.4

74.9

75.1

75.1

75.0

Percent of short-term external debt

363.5

432.6

496.4

518.7

505.4

494.2

Money and credit 2/ 3/

Broad money

9.6

8.8

27.5

13.0

9.6

7.8

Net credit to the private sector

10.3

6.4

14.5

4.0

4.0

6.2

(In percent of GDP; unless otherwise indicated)

Public sector

NFPS Revenue

24.5

24.8

22.1

22.4

23.1

23.1

NFPS Primary Expenditure

25.5

25.0

29.3

25.6

24.7

24.0

NFPS Primary Balance

-1.0

-0.2

-7.2

-3.3

-1.6

-0.9

NFPS Overall Balance

-2.3

-1.6

-8.8

-5.0

-3.4

-2.8

Debt

Total external debt

34.6

34.7

43.1

39.0

36.6

34.2

NFPS Gross debt (including Rep. Certificates)

26.2

27.1

35.4

35.4

36.2

36.7

External

8.9

8.5

15.0

14.1

13.9

13.4

Domestic

17.3

18.6

20.3

21.3

22.3

23.2

Savings and investment

Gross domestic investment

21.7

21.5

18.8

21.1

22.0

22.3

National savings

20.0

19.9

19.3

20.7

21.3

21.3

Memorandum items

Nominal GDP (S/. billions)

740

770

712

815

872

929

GDP per capita (in US$)

7,000

6,958

6,084

6,678

7,051

7,389

Sources: National authorities; UNDP Human Development Indicators;

and IMF staff estimates/projections.

1/ Defined as the percentage of households with total spending below

the cost of a basic consumption basket.

2/ Corresponds to depository corporations.

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


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