News Brief No. 00/19

News Brief: IMF Completes Peru Review Under the Extended Arrangement

March 30, 2000

The Executive Board of the International Monetary Fund (IMF) completed the first review under the Extended Fund Facility (EFF)¹ arrangement for Peru. The Peruvian authorities are treating the arrangement as precautionary. In treating the EFF arrangement as precautionary, to date the authorities have not drawn any of the IMF credit that is available under the arrangement, which was approved on June 24, 1999. With the completion of the review, the cumulative undrawn amount available to Peru is the equivalent of SDR 95.75 million (about US$129 million).

In commenting on the Executive Board's discussion of the review, Eduardo Aninat, Deputy Managing Director, made the following statement:

"The Peruvian authorities have maintained a steady course of economic policy despite a larger than expected contraction in domestic demand in 1999. Output growth and inflation performance in 1999 have both been better than expected. At the same time, the reduction in domestic demand lowered tax revenues, which led to a widening of the fiscal deficit.

"The policy framework for 2000 aims at a broadly based growth of GDP with continued low inflation, and targets a reduction in the fiscal deficit that is to be achieved through restraint in government expenditure as well as some projected recovery of revenue. The authorities are encouraged to seek further reductions in the fiscal deficit as the recovery of the tax base becomes more firmly established and tax administration continues to improve. The new law on fiscal responsibility sends a positive signal of the authorities' commitment to continued fiscal prudence over the medium term.

"The strategy for the banking sector combines prompt corrective action through the close surveillance of banks by the banking superintendency with emphasis placed on encouraging market-based solutions to continue strengthening the banking system. Some bank mergers point to positive results of the strategy. However, as the expected recovery in the quality of bank loans does not appear to have materialized yet, it is very important to remain vigilant in monitoring banks' performance closely.

"The authorities' plan to step up the pace of privatization and concessions in 2000 is welcome, and they are encouraged to implement other structural reforms, including better targeting of social expenditure for a more effective anti-poverty strategy," Aninat said.