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Peru—Letter of Intent and Technical Memorandum of Understanding

Lima, Peru
January 18, 2002

The following item is a Letter of Intent of the government of Peru, which describes the policies that Peru intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Peru, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. This letter describes the economic policies that the Government of Peru intends to follow during the period January 1, 2002 to December 31, 2003. Through prudent macroeconomic policies and a step-up of structural reforms, the government aims at supporting a sustained recovery in economic activity and employment, maintaining low inflation, limiting external vulnerability, and laying the basis for a marked reduction in poverty over the medium term.

2. The Government of Peru seeks support from the International Monetary Fund for its economic program and hereby requests a Stand-By Arrangement for the period February 1, 2002 through February 29, 2004 in a total amount of SDR 255 million (20 percent of quota on an annual basis). The successful implementation of the economic program supported by the Fund should generate the required external resources for a moderate accumulation of international reserves while meeting our external debt-service obligations as scheduled. Accordingly, the government intends to treat the arrangement as precautionary.

BACKGROUND

3. While Peru made significant progress during 1991-97 in stabilizing the economy and implementing structural reforms that helped boost economic growth, this performance then deteriorated in the context of adverse external shocks, which included the El Niño weather phenomenon, a weakening in the terms of trade following the Asian crisis, and a liquidity squeeze stemming from international financial turmoil. Importantly, the economy was also affected by serious domestic political difficulties that led to the removal from office of the president and the appointment by congress of an interim government in late 2000 and new presidential elections in the first half of 2001.

4. In this environment, real economic activity grew at an annual rate of only 1 percent between 1998 and 2000, while the 12-month rate of inflation declined to 3.7 percent by end-2000. Concurrently, the banking sector weakened, as the share of nonperforming loans doubled, profitability fell, and bank credit to the private sector stagnated (despite various measures to support the banking system and promote lending). The fiscal situation also deteriorated, as the combined public sector position moved from balance in 1997 to a deficit of 3.2 percent of GDP in 2000, above the limit of 2 percent of GDP established under the Law on Fiscal Responsibility and Transparency. Owing to weaker domestic demand, the external current account deficit fell to 3 percent of GDP by 2000, despite a deterioration in the country's terms of trade. During 1998-2000, the central bank's international reserves declined by US$2 billion, but still remained at comfortable levels. The structural reform effort slowed considerably over this period, particularly in the area of privatization.

5. The interim government that took office in November 2000 implemented an economic program, supported by a Stand-By Arrangement with the Fund, that aimed at ensuring macroeconomic stability in the transition to a new government. In the first half of 2001, inflation continued to decline, international reserves increased, and all program performance criteria were observed. Some progress was made in the structural reform area, including the awarding of the operating concessions for the Camisea natural gas project, the Lima airport, and specialized telecommunications services. Notwithstanding these developments, in the first half of the year, real GDP contracted 1.6 percent (year-on-year), mainly as a result of a weakening in domestic demand that included a sharp fall in private investment, and several measures were introduced that had negative fiscal implications (particularly for the medium term). These included a reduction in personal and corporate income tax rates; a lowering of selected import duties; a widening of the duty drawback system; the elimination of the value-added tax on certain tourism services; a reduction in the rate of excise taxation on cigarettes; the elimination of import duties on public transportation vehicles; and an increase in the rate of revenue-sharing with the provinces and local governments (Ley del Canon) without any parallel transfer of spending responsibilities.

6. The government that took office in July 2001 inherited a situation of depressed economic activity and a weakened medium-term fiscal outlook. In response, the government implemented a fiscal stimulus package to spur economic growth, which focused on improving the domestic labor market situation by reducing from 5 to 2 percent the special payroll tax (IES), starting a temporary jobs program in areas of the country hardest hit by the recession, and moderately hiking public sector pensions and wages by 9 percent (the first pensionable wage increase in a quarter century). At the same time, to improve the fiscal outlook over the medium term, the government reversed most of the tax reduction measures introduced during the interim government and introduced new measures to strengthen revenue collections (including raising fuel taxes). Notwithstanding the impact of the fiscal stimulus implemented in the second half of this year and the continued sluggishness in economic activity for most of the year, the deficit of the combined public sector in 2001 is estimated at 2.4 percent of GDP, close to one percentage point of GDP lower than in 2000.

MACROECONOMIC PROGRAM

7. In order to effect a steady reduction in poverty, the government's strategy for the next two years is to lay the basis for sustainable high growth over the medium term through the implementation of sound macroeconomic policies and structural reforms, including a substantive program of privatization and private-sector operating concessions and a strengthening of the country's legal framework, which will spur private investment. To ensure that the fiscal finances are placed on a sustainable basis over the medium term and that adequate resources are available to address pressing social needs, a tax reform will be implemented during the program period. Monetary policy will continue to be geared at maintaining low inflation.

8. Over the program period, real GDP is projected to grow between 3.5-4 percent in 2002 and by about 5 percent in 2003, while the 12-month rate of inflation is envisaged at 2.5 percent in 2002 and 2 percent in 2003. The external current account deficit would widen temporarily in 2002-3, owing to the pickup in economic activity, but would stay below 3 percent of GDP. International reserves would remain at sound levels, with gross reserves covering about 10 months of imports of goods and services and close to one and a half times the stock of short-term external debt on a residual maturity basis.

9. The combined public sector deficit is targeted to fall to 1.9 percent of GDP in 2002 and to 1.4 percent of GDP in 2003. These levels would be consistent with the availability of multilateral and bilateral funding, receipts from privatization, and a limited placement of government debt in the domestic market. In 2002, should privatization receipts exceed the baseline projection of US$700 million (1.2 percent of GDP), the fiscal deficit target would be raised by the excess, up to 0.3 percent of GDP, to allow for additional expenditure on infrastructure. The fiscal objectives of the program through end-2002 will be monitored on a quarterly basis through ceilings on the public sector borrowing requirement as set out in Table 1. The government will stand ready to take additional measures that may be needed to ensure that the fiscal deficit targets are observed.

10. The fiscal program envisages an increase in general government tax revenue from 12.1 percent of GDP in 2001 to 12.6 percent of GDP by 2003. This increase will result from measures already adopted, tax reform measures (described below) to be introduced in 2002 that would have full effect in 2003, and the elimination of the excise tax exemption for automobile imports in special trade zones (Ceticos) in 2002.

11. During the program period, consistent with the projection for revenue and the fiscal deficit targets, general government noninterest expenditure is projected to grow by an average of 3 percent a year in real terms. The quality and composition of these outlays would improve, owing in large part to reforms being supported by the World Bank, the Inter-American Development Bank and the Andean Development Corporation (CAF) that would focus on eliminating the duplication of government social services and a reduction in real military outlays on defense and national security of about 14 percent in 2002.

12. Monetary policy will be consistent with the objectives of GDP growth, inflation, and the balance of payments of the program. In the near term, the intermediate target for monetary policy will continue to be base money; however, the Central Reserve Bank of Peru (BCRP) is considering the possibility of introducing a formal inflation targeting framework. The BCRP will continue to manage prudently reserve requirements on U.S. dollar deposits in a manner consistent with the monetary program and the maintenance of a sound level of international reserves. The program will include quarterly ceilings on the expansion of net domestic assets and floors on the accumulation of net international reserves of the central bank as performance criteria during 2002 (as indicated in Table 1).

13. The BCRP will maintain the floating exchange rate system that has served Peru well in helping the economy adapt to terms-of-trade and other external shocks. Moreover, it will continue to intervene in the spot foreign exchange market to limit volatility in the exchange rate, while continuing the practice of not intervening in the forward foreign exchange market.

STRUCTURAL REFORMS

14. In the program period, the Government of Peru will intensify the structural reform agenda in order to improve economic production efficiency, foster private investment, and reduce public sector borrowing needs. The areas to be covered will include tax system reform, privatizations and concessions, strengthening banking supervision, revamping the nation's fiscal responsibility law, helping local governments achieve self-sufficiency in their finances, reforming the public and private pension systems, initiating adjustments to the trade regime for Peru's eventual entry into the western hemisphere free trade area, raising the efficiency of the public sector, and promoting private-sector activity. Selected elements of the government's program will be subject to structural benchmarks as shown in Table 2.

15. The centerpiece of the government's structural reform effort will be the introduction of a tax reform in 2002 that will improve the system's neutrality and equity and will put the fiscal finances on a sustainable basis over the medium term, while generating the necessary resources to address the country's pressing social and infrastructure needs. The reform will cover both tax policy and tax administration measures. Regarding tax policy, the government will reduce the dispersion of excise tax rates on alcoholic products, work with local governments to strengthen their real estate tax regimes, eliminate special sectoral tax exemptions, narrow the list of allowable deductions under the corporate income tax, and allow the expiration of certain tax exemptions and benefits, for both direct and indirect taxes, which are up for renewal by end-2002. With the support of the Inter-American Development Bank (IDB), the government will introduce a system of mining royalties that takes into account Peru's competitive position in commodity markets. Furthermore, the government will seek congressional approval for the elimination of the IES, the implementation of an alternative minimum income tax mechanism on corporations, the inclusion of tax expenditures in the 2003 budget, and the elimination of regional tax exemptions and tax benefits. The elimination of these exemptions and benefits will help reduce tax evasion and will generate additional resources needed for the provision of infrastructure and social services in those regions. Consistent with this reform, the government will grant no further tax relief to particular sectors or regions nor introduce any measures to widen the scope for rescheduling of tax liabilities beyond the current legislation being considered in congress. More generally, it will not introduce further tax measures that imply lower collection of tax revenue.

16. The tax collection agency (SUNAT) will be vigorously supported in its efforts to improve tax administration. With the support of the IDB, SUNAT will take steps to strengthen the tax collection unit, implement a system of private-sector collection agents (basically larger-scale firms in the chain of production) for value-added taxes, improve the control of tax rebates to avoid refunds to firms with tax debts, intensify audits, including with the use of an electronic information system, and streamline auditing and collection procedures. Auditing will focus on VAT and income tax collections, especially for corporations and independent professionals, and the SUNAT will carry out 17,000 audits of corporations and independent professionals in 2002.

17. An essential element to generate investor confidence and to help finance the fiscal deficits in 2002 and 2003 will be the implementation of a sizable program of privatization and granting of operating concessions to the private sector. Privatizations will focus in the energy sector, particularly in the generation, transmission and distribution of electricity. In infrastructure, the government will accelerate the transfer to the private sector of the operation of several state-owned assets, including regional seaports and airports and highway projects. Proceeds from asset sales and concessions are expected to be at least US$700 million a year in 2002 and 2003.

18. With support of the IDB, the government will complete a draft revision of the Law on Fiscal Responsibility and Transparency by March 2002 (that will be submitted to congress by June 2002). The revised law will establish a path for the evolution of the fiscal balance following a recession and will strengthen compliance incentives by requiring the immediate implementation of measures (in periods of positive growth) to address revenue shortfalls or expenditure overruns. The fiscal targets under the program are consistent with the path specified by the law.

19. The government aims at reducing the public-sector debt (as a percentage of GDP) over the medium term and, with the support of the World Bank, is undertaking efforts to improve domestic and external debt management. In this context, the Treasury has established a periodic auction of domestic currency bonds that has broadened the choice of investment vehicles for domestic capital market participants and has lowered the Treasury's exposure to exchange rate risk. Also, the ministry of economy and finance (MEF) is elaborating a plan for the issuance of sovereign debt in international capital markets (the first such emission in decades), which would establish a benchmark for the evaluation of country risk, thereby facilitating Peruvian firms' access to international capital markets. To monitor external debt developments in 2002, the program places ceilings on the contracting or guaranteeing of nonconcessional medium- and long-term external public debt and on the outstanding short-term debt of the nonfinancial public sector as described in Table 1.

20. With respect to the banking sector, the Superintendency of Banks and Insurance (SBS) will continue to apply strictly its current prudential norms and standards, will maintain its policy of strengthening capital requirements, will continue with its efforts to strengthen consolidated supervision of financial conglomerates, and will begin to introduce standards for the banking system's management of country risk. In support of the SBS, the government will continue to grant it budgetary independence and, in the first year of the program, will submit legislation to congress to: (i) provide legal protection to SBS staff in the discharge of their responsibilities; (ii) strengthen banks' capital requirements by deducting goodwill items from regulatory capital; and (iii) reduce banks' single credit exposure limits by lowering the legal limit on leasing operations. The SBS will continue to seek ways for further improving the supervisory framework, including its ability to take timely action to resolve banking system issues.

21. The government has begun to introduce legislation to congress for a phased reform of the public and private pension systems (the costs of which are included in the fiscal program). The first phase, already implemented, aims at: (i) standardizing survivor benefits across the two principal plans (D.L.19990 and D.L. 20530-Cédula Viva) by reducing the generous provisions in the Cédula Viva for new beneficiaries; (ii) raising the minimum pension in D.L.19990, which is well below the standard consumption basket; and (iii) ensuring a minimum pension for a group of workers older than 55 years who moved into the private system and did not have sufficient time to accumulate an adequate pension. The second phase, will focus on lowering the operating costs of private pension administrators and expanding their investment options.

22. The government is formulating plans to streamline the trade tax regime that would aim at a gradual reduction in the level and dispersion of import tariff rates in order to reach an average rate below 10 percent over time. Furthermore, the government will not create new free trade zones or expand existing ones.

23. The World Bank, IDB, and the CAF are supporting the government's efforts to strengthen poverty alleviation programs, modernize infrastructure, and improve the efficiency of the public sector. Reform programs that aim at poverty alleviation include: strengthening social protection programs, expanding rural education services and improving rural infrastructure, and focalizing social services in urban areas. Infrastructure programs concentrate on an overhaul and expansion of the national highway system. Finally, to improve the efficiency of the public sector, the government is undertaking a public sector expenditure review, developing a fiscal decentralization strategy, and reforming the public education system.

24. In November 2001, the state-owned Banco de la Nación (BN) created a temporary consumer-lending program (Multired) to aid low-income public sector employees and pensioners that would also help to spur economic activity. As this program is viewed as an exceptional measure, it will be closed, as announced, by end-2002. Furthermore, the program's original lending ceiling, prudent eligibility requirements and lending terms will be maintained, and the BN will not create any new lending programs to the public. The limit on the net lending of the Multired operation will constitute a performance criterion under the program (as indicated in Table 1).

25. With the aim of improving the financial and social situation in the agriculture sector, in late 2001 the government created an agrarian bank that will oversee the management of financial assistance programs to agricultural producers. For small-scale producers, it will provide technical assistance and undertake direct lending using, exclusively, funds allocated in the budget for this purpose. For other producers, the bank will channel international lines of credit through financial institutions regulated by the Superintendency of Banks and Insurance (SBS), to which it will apply prudent lending standards and customary procedures in this type of on-lending operation. Apart from this institution for agricultural support, the government will not use public resources for the establishment of new financial institutions for direct lending to the public, leaving financial intermediation activities to the private sector.

26. In order to address the scarcity of affordable low-income housing, the government will establish an insurance program for mortgage securities, to be backed by deposits in the banking system of the MIVIVIENDA program. The design of the program (e.g., percentage of the guarantee, foreclosure procedures, and eligibility rules) will aim at limiting moral hazard problems; nevertheless, the government intends to contain its contingent liabilities by limiting the stock of government guarantees for housing support programs in 2002 to no more than US$150 million (about 0.3 percent of GDP). This limit would constitute a performance criterion under the program (as indicated in Table 1).

27. The Government of Peru believes that the policies described in this letter are adequate for meeting the objectives of the program, and will take additional measures that may be necessary for this purpose. For the period of the arrangement, we will maintain the customary policy dialogue with the Fund, and will take any steps that might be needed to promote the achievement of the government's economic policy objectives in light of evolving circumstances. The first review with the Fund, to be completed by August 31, 2002, will cover the implementation of the economic program described in this letter, including in particular an assessment of: (i) progress made in the implementation of a tax reform; (ii) advances in the privatization and concession program; (iii) the timing for submitting legislation to strengthen banking supervision; and (iv) the operations and impact of the government's plans to aid specific sectors, including: agriculture, housing, and lending to government employees. At the time of the second review with the Fund, to be completed by February 28, 2003, the quarterly performance criteria and structural benchmarks for the program in 2003 and the timing of the third review will be established.
/s/

Pedro Pablo Kuczynski
Minister of Economy and Finance

 

/s/

Richard Webb, President
Central Reserve Bank of Peru

 

Table 1. Peru: Quantitative Performance Criteria, 2002


 

Mar. 31

Jun. 30

Sep. 30

Dec. 31


(Cumulative amounts from December 31, 2001, millions of new soles)

         

Borrowing requirement of the combined public sector 1 2

750

1,800

2,850

3,915

         

Net domestic assets of the Central Reserve Bank 3 4 5 6 7 8 9

-690

-920

-1,535

180

         

Net consumer lending of Banco de la Nación 10

200

340

430

360

         

(Cumulative change from December 31, 2001, in millions of U.S. dollars)

         

Net international reserves of the Central Reserve Bank, excluding foreign- currency deposits of financial institutions
3 4 5 6 7 8

55

125

315

30

         

Stock of government guarantees for housing support programs

150

150

150

150

         

Outstanding short-term external debt of the nonfinancial public sector 11

50

50

50

50

         

Contracting or guaranteeing of nonconcessional external public debt with maturity of at least one year 12

1,100

1,400

1,700

1,950

         

Of which: [1-5] years' maturity

200

200

200

200

         

External payments arrears of the public sector (on a continuous basis) 13

0

0

0

0


1 Including the operating balance of the central bank; privatization proceeds are included below the line.
2 The limits on the borrowing requirement of the combined public sector will be adjusted upward, to the extent that privatization proceeds exceed US$110 million by end-March, US$490 million by end-June, US$680 million by end-September, and US$700 million by end-December 2002. The maximum adjustment will be the equivalent in local currency to US$40 million by end-March, US$90 million by end-June, US$130 million by end-September, and US$170 million by end-December 2002.
3 The targets for the net international reserves will be adjusted upward, with commensurate downward adjustments to the limits on net domestic assets, by the amount of privatization proceeds in foreign currency in excess of US$150 million by end-March, US$580 million by end-June, US$810 million by end-September, and US$870 million by end-December 2002. The amounts in excess will be deposited at the BCRP.
4 The targets for the net international reserves will be adjusted upward, with commensurate downward adjustments to the limits on net domestic assets, by the amount that net foreign borrowing of the nonfinancial public sector exceeds US$180 million at end-March, US$150 million at end-June, US$420 million at end-September, and US$410 million at end-December 2002. The amounts in excess will be deposited at the BCRP.
5 The targets for net international reserves will be adjusted downward, with commensurate upward adjustments to the limits on net domestic assets, for shortfalls from programmed amounts of privatization proceeds in foreign currency. This downward adjustment will not exceed US$45 million at end-March, US$150 million at end-June, US$110 million at end-September, and US$70 million at end-December 2002.
6 The targets for net international reserves will be adjusted downward, with commensurate upward adjustments to the limits on net domestic assets, for shortfalls from programmed amounts of net foreign borrowing. This downward adjustment will not exceed US$125 million at end-March, US$125 million at end-June, US$275 million at end-September, and US$200 million at end-December 2002.
7 The targets for net international reserves will be adjusted downward, with commensurate upward adjustments to the limits on net domestic assets, for withdrawals for portfolio management purposes of deposits held at the Central Reserve Bank by the Consolidated Pension Reserve Fund (FCR) and any other funds managed by the ONP. This downward adjustment will not exceed US$200 million at any time in 2002.
8 The targets for the net international reserves will be adjusted downward, with commensurate upward adjustments to the limits on net domestic assets, by the amount used to prepay external debt, including debt equity swaps in the privatization process.
9 This limit will be changed, accordingly, should the monetary authorities adopt a full-fledged inflation targeting regime.
10 This operation will be closed by end-2002, as indicated in paragraph 24.
11 The term "debt" has the meaning set forth in point No. 18 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 (Board Decision No. 12274-(00/85).
12 The limit would be adjusted upwards by any amount of debt issued for, and used in, a debt-exchange operation.
13 Excluding arrears associated with nonrescheduled debt to foreign creditors outstanding as of end-2001.

 

Table 2. Peru: Structural Benchmarks

 

To be completed by March 31, 2002

1.

Carry out 3,400 tax audits of corporations and independent professionals.

2.

Completion of draft legislation of a revision to the Law on Fiscal Transparency and Responsibility consistent with the objectives stated in paragraph 18 of the Letter of Intent.

   

To be completed by June 30, 2002

1.

Submission to congress of a revision to the Law on Fiscal Transparency and Responsibility consistent with the objectives stated in paragraph 18 of the Letter of Intent.

2.

Submission to congress of legislation eliminating regional tax exemptions. 1

3.

Submission to congress of legislation to include tax expenditures in the 2003 budget.

4.

Privatization of the electricity transmission company Etecen.

5.

Privatization of the electricity distribution company Jorbsa.

6.

Carry out 6,800 tax audits of corporations and independent professionals.

   

To be completed by September 30, 2002

1.

Privatization of the electricity generation company Egasa.

2.

Carry out 11,900 tax audits of corporations and independent professionals.

3.

Submission to congress of legislation to provide the necessary statutory protection to SBS staff in the discharge of their responsibilities.

   

To be completed by December 31, 2002

1.

Carry out 17,000 tax audits of corporations and independent professionals.

 

Technical Memorandum of Understanding (TMU)

This Memorandum includes definitions of concepts and the format for periodic reporting to the Fund on performance under the program for 2002 described in the letter of the Government of Peru dated January 18, 2002.

I. Definitions of Concepts

1. The borrowing requirement of the combined public sector (PSBR) will be measured as: (a) net domestic financing of the nonfinancial public sector, plus (b) net external financing of the nonfinancial public sector, plus (c) privatization proceeds, less (d) the operating balance of the BCRP. The PSBR will be adjusted to exclude the impact of data revisions that do not represent a change of its flows during 2002. The nonfinancial public sector (NFPS) comprises the central government, the autonomous agencies, the local governments and the nonfinancial public enterprises. The components of the PSBR (Table 1), will be defined and measured as follows:

(a) The net domestic financing of the NFPS is defined as the sum of: (i) the increase in net claims of the domestic financial system 2 on the nonfinancial public sector (excluding Peruvian Brady bonds and other government bonds initially sold abroad); (ii) the net increase in the amount of public sector bonds held outside the domestic financial system and the nonfinancial public sector, excluding Peruvian Brady bonds and other bonds initially sold abroad; and (iii) the increase in the floating debt of the nonfinancial public sector due to expenditure operations and tax refund arrears; less (iv) the accumulation of stocks, bonds, or other domestic financial assets by the nonfinancial public sector. In the case of enterprises that are privatized after December 31, 2001, the net credit of the financial system to these enterprises will be recorded, for the remainder of the program period, as unchanged from their level at the time of privatization.

(b) The net external financing of the NFPS comprises (i) disbursements of loans; plus (ii) receipts from the issuance of government bonds abroad; minus (iii) cash payments of principal (current maturities of both loans and bonds); minus (iv) cash payments of arrears (principal and interest); plus (v) the net increase (or, minus the decrease) in short-term external debt; minus (vi) debt buy-backs or other prepayments of debt (at market value) not included in the following item (including repayments of short-term external debt assumed by the government at the time of the privatization of public enterprises, net of the proceeds from the sale of inventories of privatized enterprises); minus (vii) debt-equity swaps used in the privatization process accounted at the market value of these papers as defined by the Comisión de Promoción de la Inversión Privada (COPRI); minus (viii) the net increase (or, plus the decrease) in foreign assets of the nonfinancial public sector (including those held abroad by the Fondo Nacional de Ahorro Público (FONAHPU), the Fondo Consolidado de Reservas (FCR), and any other fund managed by the Oficina de Normalización Previsional (ONP)) (Table 2).

    (c) Privatization proceeds are defined as (i) the cash payments received by the Treasury (including proceeds transferred to the FCR, FONAHPU, and any other specialized funds) valued at the program exchange rate, plus (ii) debt equity swaps used in the privatization process, accounted at market values as defined by COPRI. Privatization proceeds also include up-front payments received by the Treasury for the granting of concessions for public services but exclude the annual payments under the concession program, which are part of central government non-tax revenue. A list of elements of the privatization and concession program is included in Table 3.

    (d) The operating balance of the BCRP includes: (i) cash interest earnings of the BCRP minus cash interest payments by the BCRP, in both domestic and foreign currency; (ii) the administrative expenses of the BCRP; and (iii) any realized cash losses or gains from activities in currencies, financial instruments, and derivatives.

2. The net domestic assets of the BCRP are defined as (i) currency in circulation, less (ii) the net international reserves of the BCRP. The end-December 2001 stock of net domestic assets is shown in Table 4.

For the purpose of the program for 2002, the operations in foreign currency will be valued at S/. 3.54 per U.S. dollar, US$1.257 per SDR, and foreign currency assets and liabilities of the BCRP in other currencies will be accounted at the exchange rate of December 31, 2001.

3. The net consumer lending of the BN will be defined as disbursements of loans under the "Multired Program", established in November 2001, less cash amortizations under the loan program. Interest payments on these loans are excluded from the definition of net lending.

4. The net international reserves of the BCRP, excluding foreign-currency deposits of financial institutions, are defined for the purpose of the program as: (a) the foreign assets of the BCRP (excluding subscriptions to the IMF and the Latin American Reserve Fund (FLAR), Pesos Andinos, credit lines to other central banks, Corporación Andina de Fomento (CAF) bonds, and foreign assets temporarily held by the BCRP as part of swap operations); less (b) reserve liabilities, defined as the sum of: (i) the BCRP's external liabilities with an original maturity of less than one year, and (ii) its liabilities to the IMF, to the Inter-American Development Bank (IADB) and to the FLAR; and less (c) deposits in foreign currency by the banking system, other financial intermediaries and the private sector, net of repos of Treasury bonds with the financial system.

The BCRP's silver holdings will be included in the net domestic assets and excluded from the net international reserves. The gold holdings of the BCRP will be accounted at US$ 234.685 per troy ounce (the average book value as of December 31, 2001). Net international reserves will be adjusted to exclude any valuation gains or losses resulting from net sales or deliveries of gold by the BCRP. The end-December 2001 level of net international reserves is shown in Table 5.

5. The stock of government guarantees for housing support programs will be defined as the portion of the face value of mortgages backed by government guarantees, issued starting January 1, 2002.

6. The flows of the short-term external debt of the NFPS are defined as the net change in the NFPS's outstanding external indebtedness with a maturity of less than one year (including instruments with put options that would be triggered within one year of the contracting date), measured, in part, on the basis of the operations of a selected sample of public enterprises comprising Petroperú, Centromín Perú, and Electroperú. These limits exclude normal import financing but include forward commodity sales. In the case of newly privatized companies, the short-term debt of these entities will be recorded, for the remainder of the program period, as unchanged from their level at the time of privatization. The end-December 2001 stock of short-term external debt of the NFPS is shown in Table 6.

7. The contracting or guaranteeing of nonconcessional external public debt with a maturity of at least one year refers to all external obligations of the NFPS, COFIDE, the BCRP, the BN, and any other state development bank, except for loans classified as reserve liabilities of the BCRP. The program limits on nonconcessional debt will exclude: (i) any new loans extended in the context of a debt rescheduling or debt reduction operation; and (ii) any lending at concessional terms.

The performance criterion on the contracting or guaranteeing of external public debt applies also to commitments contracted or guaranteed for which value has not been received. For the purpose of this performance criterion, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time: these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the performance criterion, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. Under the definition of debt set out above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt (i.e., grant element is equal to (nominal value minus NPV) divided by nominal value). The NPV of debt at the time of its disbursement is calculated by discounting the future stream of payments of debt service due on this debt. The discount rates used for this purpose are the currency specific commercial interest reference rates (CIRRs), published by the OECD. For debt with a maturity of at least 15 years, the ten-year average CIRR will be used to calculate the NPV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR will be used. For the purposes of the program through December 2002, the CIRRs published by the OECD in December 2001 will be used (Table 7).

The concessionality of loans in currency baskets will be assessed on the basis of U.S. dollar interest rate tables. For loans with interest rates based on the internal policy of the creditors, the relevant interest rate to define concessionality will be the interest rate for each creditor at the time of the commitment. Loans or portions of loans extended in the context of a debt rescheduling or a debt reduction operation will be excluded from the ceiling.

8. The external payments arrears of the public sector include arrears to multilateral financial institutions, to Paris Club creditors, and to other foreign creditors with whom debt restructuring agreements have been concluded. They exclude arrears outstanding at end-2001 that were not covered under restructuring agreements. The public sector will be defined to include the NFPS, COFIDE, the BCRP, the BN, and any other state development bank.

9. Definitions for the calculation of adjustments to limits and targets for net domestic assets and for net international reserves:

  1. Privatization proceeds in foreign currency are calculated as (a) privatization proceeds as defined above in Section I.1.c, less (b) domestic currency privatization proceeds from citizens (Participación Ciudadana) and from Administradoras Privadas de Fondos de Pensiones (AFPs).

  2. Net foreign borrowing (Table 2) is defined as the sum of disbursements of loans (I.1.b.i), plus receipts from the issuance of government bonds abroad (I.1.b.ii); minus cash payments of principal (I.1.b.iii); minus cash payments of arrears (principal and interest) (I.1.b.iv); plus the net increase (or minus the decrease) in short-term external debt (I.1.b.v).

  3. The withdrawals for portfolio management purposes of deposits held at the BCRP by the FCR and any other fund managed by the ONP, mentioned in footnote 7 of Table 1 attached to the letter of intent refer to placements of funds that are in accord with an investment plan approved by the Board of the FCR, excluding deposits in public financial institutions and government securities.

II. Periodic Reporting

10. The regular reporting will include the following:

    (a) The latest Boletín Semanal of the BCRP
    (b) Monthly Report

      (i) Performance criteria
          Data on the program's quarterly performance criteria.

      (ii) Financial sector

        (a) Balance sheets of the consolidated financial system, consolidated banking system, BCRP, BN, commercial banks, Banco Agropecuario, and      development banks in liquidation.
        (b) Disaggregation of the net domestic assets of the BCRP and BN with details of the other net accounts.
        (c) Monthly balance sheet of COFIDE and data on COFIDE guarantees.
        (d) BCRP daily operations.
        (e) Monthly balance sheet of the private pension system.
        (f) Evolution of gross disbursements and amortizations of consumer loans made under the "Multired Program".
        (g) The stock of government guarantees for housing support programs and the monthly balance sheet of Mivivienda.

      (iii) Fiscal sector

        (a) PSBR as defined in Table 1.
        (b) List of domestic and external debt instruments contracted or guaranteed by the public sector, including data on the amount, lender, grace period, maturity, and interest rate (refinancing credits should be labeled as such), collateral guarantees, any instrument enhancements (such as but not limited to put or call options) that affect the price or maturity of the debt instrument.
        (c) Summary of disbursements and interest and amortization due and paid (identifying the payments of arrears) of loans included in the records of the General Directorate of Public Credit by creditor and debtor, indicating foreign origin (distinguishing between financial and nonfinancial public sector debt) and domestic origin (Table 8).
        (d) Cash operations of the treasury (which includes floating debt, with a memorandum item on tax refund arrears).
        (e) Data on privatization revenue, which will include gross receipts, costs of privatization, use of debt-for-equity swaps, commissions received by COPRI and the resulting cash receipts received by the Treasury, FCR and Fonahpu. In addition, the report will include debts assumed by the government in connection with the privatization.
        (f) Operations of the Central Government, Central Government Current Revenue (SUNAT Format); Central Government Non-interest Expenditure; and Transfers from the Central Government to the Rest of the General Government.
        (g) Fuel prices of PETROPERU and RELAPASA, and international prices of products commercialized by PETROPERU including tariffs, indirect taxes and distribution margins (prices would be listed for all grades of gasoline, diesel fuel, kerosene and fuel oils.)
        (h) Stocks of the central government privatization accounts in the BCRP and the BN.

      (iv) External sector

        (a) Summary of imports and exports by product (volume and price).
        (b) Daily exchange rate statistics.

      (v) Quarterly data of fiscal and external accounts, and public sector debt, distinguishing between total public sector debt and total NFPS.

      (vi) Other

        (a) Summary of legislative changes pertaining to economic matters.
        (b) BCRP circulars.


See Tables 1-8 of the TMU (528 kb PDF file, use the free Adobe Acrobat Reader to view this file)




1 It is expected that approval of this legislation would provide additional resources for infrastructure and social spending for those regions.
2 The financial system comprises the banking system, the Corporación Financiera de Desarrollo (COFIDE) and all other nonbank financial intermediaries. The banking system comprises the Central Reserve Bank of Peru (BCRP), the commercial banks, the Banco de la Nación (BN); Banco Agropecuario, and any development bank in liquidation.

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