Mission Concluding Statement 

Peru: Staff Concluding Statement of the 2025 Article IV Mission

March 27, 2025

Washington, DC: An International Monetary Fund (IMF) mission met with the Peruvian authorities and other counterparts during March 11 – March 26 to discuss recent economic developments and policy priorities. This concluding statement summarizes the mission’s main findings.

A strong recovery and contained inflation

The economy recovered in 2024, with inflation firmly within the target band. Growth accelerated to 3.3 percent, supported by a robust recovery in primary sectors, rising private consumption, and strong public investment. The BCRP continued with its cautious monetary policy easing and inflation is strongly anchored inside the target band. The financial sector remained sound and profitable. The external current account surplus further improved to 2.2 percent of GDP, underpinned by strong terms of trade. However, the fiscal deficit increased to 3.5 percent of GDP, well above the revised fiscal rule deficit target of 2.8 percent of GDP, due to lower tax collection and higher public investment execution. International reserves remained at a comfortable level of about 27 percent of GDP.

Growth is expected to moderate in 2025, amid global policy uncertainty and pre-electoral tensions. Real GDP growth is projected at 2.9 percent in 2025, supported by a favorable momentum in private consumption, while public investment decelerates. Despite historically high metal prices, pre-electoral tensions would weigh on the private investment recovery. Thereafter, growth would converge to its estimated potential of about 2.5 percent. The current account balance is envisaged to remain in a surplus in 2025 and to gradually return to its norm—a deficit of about 1.5 percent of GDP—over the medium term, as private investment recovers and terms of trade normalize. Credit growth is expected to rebound modestly, due to limited private investment. With a closed output gap and firmly anchored inflation expectations, headline inflation would remain within the target band.

Risks are tilted to the downside given elevated external uncertainty, but Peru has ample buffers to cope with shocks. In the short term, key domestic risks include an intensification of political uncertainty, social unrest over security concerns, and weather-related shocks. Key external risks include trade policy uncertainty, tighter financial conditions, and commodity price volatility. Recent government initiatives to accelerate private sector involvement in investment projects and streamline burdensome regulations could revive private investment and unblock long-delayed mining and infrastructure projects. However, the risk balance is dominated by the potential for large impacts on global growth and commodity prices from global policy uncertainty. Peru’s macroeconomic resilience is reinforced by very strong buffers including low public debt, abundant international reserves, and access to international capital markets on favorable terms.

Ensuring Sustained and Resilient Growth

The BCRP’s monetary policy stance is appropriate. With well-anchored inflation expectations and a closed output gap, a broadly neutral monetary policy stance is adequate. Given the recent decline in inflation expectations, additional monetary policy easing is possible. However, given heightened external uncertainty, monetary policy should continue to be data dependent. Continued exchange rate flexibility should be maintained to help cushion the impact of external shocks.

Meeting the 2025 fiscal deficit target would require additional efforts in a pre-election year. The 2025 Budget reflects the authorities’ commitment to reduce the fiscal deficit to meet the revised target of 2.2 percent of GDP. However, with most of the consolidation relying on cyclical and one-off tax revenue gains, expected revenue gains would likely fall short and additional measures of about 0.4 percent of GDP would be required to comply with the 2025 target. Greater reliance on spending measures would make the consolidation more credible and balanced. Reforms to significantly reduce Petroperú’s costs and enhance its transparency and governance are also needed to safeguard fiscal credibility.

Without measures, complying with the medium-term fiscal targets will be challenging. To comply with the fiscal rule deficit target of 1 percent of GDP by 2028 and the debt ceiling of 30 percent of GDP by 2035, the authorities’ medium-term consolidation plan envisages a reduction of current spending by about 0.4 percent of GDP per year between 2026 and 2028. The authorities plan to introduce measures to improve spending efficiency, including the new procurement law that becomes effective in April 2025. However, the adjustment mostly relies on unidentified measures. Possible measures could include cutting the wage bill, discretionary transfers, and inefficient public investment but could also rely on revenue measures, such as curtailing tax expenditures. Recent legislative initiatives have introduced non-negligible fiscal costs and further complicate the attainment of targets, while lack of costing has reduced fiscal transparency. Moreover, proposals to establish zero-tax special economic zones and tax benefits for the agricultural sector could further erode the tax base. In the absence of measures, public debt would gradually rise over the medium term, while remaining relatively low compared to peers.

Enhancing Financial Sector Resilience

The financial system is sound and systemic risks are limited. Banks are profitable, with ample liquidity and capital buffers. The non-performing loan (NPL) ratio started to improve in the second half of 2024 but remains elevated for small- and medium-sized firms. Credit growth has been sluggish amid weak corporate investment and a cautious lending stance towards loans for lower-income households and small- and medium-sized firms.

Focused macroprudential policies could reduce financial vulnerabilities from remaining dollarized credit. While the aggregate value of unhedged dollarized credit is low, it tends to be riskier and concentrated in large- and medium-sized firms in the construction, commerce, and manufacturing sectors. To contain vulnerabilities, the financial supervisory authority is revising the regulation to impose higher risk weights to unhedged dollar exposures. The effectiveness of these measures could be enhanced by improving the identification of unhedged positions. To ensure the stability of dollar funding for financial institutions, the authorities could consider introducing currency-specific Net Stable Funding Ratio (NSFR) to complement the existing currency-specific Liquidity Coverage Ratio (LCR) limits.

Policy efforts are needed to revive the domestic capital market. Since the pandemic, public offerings in the domestic capital market have remained low. A recovery has been curtailed by seven rounds of private pension withdrawals, most recently in 2024, which limit pension funds’ investments. It is critical to maintain the prohibition against new private pension withdrawals, as approved in the recent pension reform, as they undermine the functioning of the domestic capital market, increase financing costs, and elevate the risks of old-age poverty. Authorities’ plans to introduce new retail investment products, such as sovereign exchange-traded funds (ETFs), could help to attract funds back into the securities market.

Operationalizing new regulations and addressing remaining gaps would enhance financial resilience. Most institutions already comply with Basel III capital requirements. The authorities have made progress in revising the Basel III risk-weight framework and reviewing the countercyclical capital buffer (CCyB) activation criteria to combine data-dependent signals with expert judgement. Recovery plans for domestic systemically important banks have been submitted for review and should be later extended to the financial group level and to their resolution planning thereafter.

Reviving the Critical Mineral Sector and Potential Growth

Further investments in developing and exporting critical minerals would increase potential growth. Peru holds the second-largest global reserves of copper, a critical mineral projected by the International Energy Agency to face a worsening global supply shortage. However, a US$62 billion pipeline of mining investment projects has been mostly stalled for many years due to bureaucratic complexity and social conflicts. Unlocking these projects and channeling the additional fiscal revenues from expanded mining operations to growth-enhancing public investment could permanently boost potential growth. Authorities should strive to adopt the highest international environmental standards for mining. Advancing pathways to formalizing small-scale miners and combatting illegal mining are essential to ensure a stable environment to foster investments.

Updating the fiscal decentralization framework could help ensure that mining dividends translate into greater development. Although local governments receive nearly 2 percent of GDP in natural resource revenues and account for over 40 percent of public investment, the impact on economic development has been limited. Efforts should focus on enhancing the scale and impact of projects; improving coordination between local, regional, and central governments; revamping the capacity of regional and local authorities with project formulation and implementation; replacing discretionary transfers with rules-based transfers; tracing the final use of expenditure of transfers at local government level; and increasing accountability and oversight from the central government.

Natural resource revenue-sharing formulas should be redesigned. The share of natural resource revenues allocated to subnational governments is relatively high compared to peers. Revenue-sharing formulas should be revamped such that a share of these revenues co-finances, with the central government, high-impact regional projects; benefits accrue more equitably outside of producing districts; and the volatility of these revenues is reduced.

Structural reforms are urgently needed to durably lift potential growth. Authorities’ initiatives to unblock large transportation and irrigation infrastructure projects are welcome, but enhanced efforts are needed to curb the low but rising level of insecurity, reform labor and tax regulations that impose excessive costs for formalizing or growing a business, enhance the independence and integrity of judicial bodies and tools to combat corruption impunity, and build resilience to natural disasters. The OECD accession process provides a clear roadmap for other critical reforms to boost the business climate, reduce informality, and reform the civil service.