Peru and the IMF

Press Release: IMF Completes Second Review of Peru's Stand-By Arrangement, Approves US$38 Million Disbursement

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Peru—Letter of Intent and Technical Memorandum of Understanding

Lima, March 17, 2003

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.

Use the free Adobe Acrobat Reader to view the TMU Tables 1-6 (334 kb PDF file).

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

Dear Mr. Köhler:

1. In our letters of January 18 and November 26, 2002, the Government of Peru described its economic program supported under the current Stand-By Arrangement. This letter describes performance under the program in 2002 and discusses the economic policies that will be pursued during 2003 in order to achieve the program's objectives. Continued prudent macroeconomic policies and structural reforms will sustain the recovery in economic activity that began in the second half of 2001, maintain low inflation, limit external vulnerability, and lay the basis for a marked reduction in unemployment and poverty over the medium term.

2. In 2002, the Peruvian economy experienced a broad-based recovery in economic activity, weathering well the turmoil in the region. Macroeconomic performance was strong, and all end-December and continuous performance criteria were observed. GDP growth in 2002 exceeded program expectations, coming in at around 5 percent. Inflation ended the year at 1.5 percent, at the low end of the inflation target range of 1.5-3.5 percent. The combined public sector deficit was 2.2 percent of GDP. The external position was robust, with the current account deficit remaining at 2 percent of GDP and official reserves rising by some US$1 billion (owing to substantial public and private capital inflows). Interest rates were at historical low levels for most of the year, and the exchange rate was relatively stable during the year (with the Nuevo Sol depreciating by 2.3 percent). In the banking system, both local and foreign currency deposits rose, and prudential indicators improved.

3. Progress was made in implementing the Government's structural reform agenda, including the initiation of a comprehensive reform of the tax system. Administrative measures were implemented in mid-2002 that have improved the collection of value-added taxes by using large private firms as tax retention agents, strengthening control of taxpayer registries and paperwork, expanding the tax agency's auditing rights, and improving the monitoring of taxpayer transactions with government agencies. Tax measures were also introduced last year that rationalized excise taxes on petroleum products, expanded the income tax base (including through the elimination of certain deductions from the corporate income tax), raised the maximum marginal personal income tax rate from 27 to 30 percent, and created a new minimum income tax advance payment scheme for larger taxpayers. These measures yielded around 0.4 percent of GDP (on an annual basis) in 2002 and are expected to yield 0.8 percent of GDP in 2003.

4. Further, Peru embarked on an important decentralization process. In July 2002, the legal framework for decentralization was established that set specific principles on fiscal decentralization, including that the process be carried out in a gradual and fiscally-neutral manner, that external borrowing by regional administrations requires a state guarantee, and that 60 percent of the proceeds raised through the Private Investment Promotion Program (PIPP) be earmarked for the regional development fund (FONCOR) and the decentralization fund (FIDE). The framework called for additional implementing legislation, the first of which was approved in the last quarter of 2002 that details the exclusive and shared responsibilities of regional governments and grants the central government authority to oversee the fiscal situation of regional governments. On November 17, 2002 elections were held for the regional governments that took office on January 1, 2003.

5. Significant progress was made in implementing other structural fiscal reforms. The tax audit program of corporations and independent professionals exceeded the program goal of carrying out 17,000 audits in 2002, and tax expenditures were incorporated in the 2003 budget. Reform of the public pension system (which aims at equalizing benefits across the various public pension plans over the medium term) continued in 2002—survivor benefits were standardized across the two principal plans, replacement rates were lowered and the pensionable base standardized under the general pension plan; the minimum pension was raised to protect the poorest pensioners; and a minimum pension was established for certain older workers who moved to the private pension system. Draft legislation was submitted to congress (and approved by the Budget Commission) to revise the Law on Fiscal Prudence and Transparency that establishes a realistic path for the evolution of the fiscal balance following a recession (allowing a three year adjustment to the medium term deficit limit of 1 percent of GDP), strengthens compliance incentives by requiring the immediate implementation of measures (in periods of positive economic growth) to address revenue shortfalls or expenditure overruns, and sets prudent fiscal rules on regional and local governments. On the other hand, the PIPP was reoriented away from outright sale of assets to focus on operating concessions and joint ventures. In 2002, PIPP receipts reached US$420 million.

6. Further steps were taken to strengthen bank supervision in 2002. Draft legislation was submitted to congress that would provide the necessary statutory protection to the staff of the Superintendency of Banks (SBS) in the discharge of their responsibilities. Regulations were introduced on country and operational risk and to increase competition in the financial system, and prudential requirements were applied on a consolidated basis. Also a Financial Intelligence Unit to prevent money laundering in the financial sector was created, and the SBS promoted the transparency in banks' publication of interest rates.

2003 Program

7. The near-term outlook for 2003 points to continued economic growth, low inflation, and a robust external position. For 2003, real GDP growth is projected in the range of 4-5 percent, and inflation is projected at 2½ percent. The external current account deficit is expected to decline slightly to under 2 percent of GDP on the basis of continued strength in traditional and nontraditional exports. Capital inflows are projected to slow somewhat from last year, but would still result in an accumulation of official reserves.

8. In this context, the program for 2003 will aim at maintaining prudent macroeconomic policies, including a moderate fiscal adjustment that would be a first step in our medium-term plan of fiscal consolidation. The overall public sector deficit is to decline from 2.2 percent in 2002 to 1.9 percent in 2003, reflecting the tax reform measures taken in 2002. Tax revenue is projected to rise from 12.2 percent of GDP in 2002 to 12.7 percent of GDP in 2003. To enhance taxpayer compliance, the government will not introduce any tax amnesty schemes. Current expenditure will remain under strict control, with no generalized wage increase planned for 2003, while general government non-interest expenditure is projected to grow by only 2 percent in real terms in 2003. The fiscal objectives of the program through end-2003 will be monitored on a quarterly basis as set out in Table 1 through ceilings on the combined public sector borrowing requirement, the contracting or guaranteeing of medium and long-term external public debt, and on the stock of short-term external public debt; and a continuous performance criterion will prohibit the accumulation of external payment arrears. The government stands ready to take additional measures that may be needed to ensure that the fiscal deficit targets are observed.

9. The government's gross financing requirement in 2003 of US$ 2.6 billion has been basically secured, with US$1.8 billion coming from external sources. The World Bank, the Inter-American Development Bank, the Andean Development Corporation, and bilateral creditors are expected to make disbursements in 2003 of around US$1.1 billion (a similar amount to that in 2002) in support of the government's efforts to improve the delivery of social programs, key structural reforms, and public investment projects. Building upon the successful reentrance into the international private capital market in 2002, the government has placed so far this year US$750 million of sovereign debt in international markets. Financing for 2003 would be complemented by issuing bonds in the local market for around US$400 million (resulting in a small net placement) and proceeds from the PIPP projected at US$400 million. The government will not cover its financing needs with resources of the pension reserve fund (FCR) that are held at the central bank and that form part of its international reserves.

10. The central bank (BCRP) will continue its prudent management of monetary policy under the inflation-targeting framework. The BCRP will maintain the current consultation mechanism on inflation, as described in Table 1, and quarterly performance criteria (floors) have been established for the net international reserves of the central bank. The BCRP will continue to maintain the floating exchange rate system, intervening in the spot foreign exchange market only to limit volatility in the exchange rate. It will also continue the practices of not intervening directly in the forward foreign exchange market and of limiting the use of exchange rate-indexed certificates of deposit to cases of unusual volatility in the spot exchange rate. Reserve requirements on U.S. dollar deposits will continue to be managed prudently to ensure that the high level of coverage of dollar deposits in the banking system by the international reserves of the BCRP is maintained.

11. In 2003, the Government of Peru will press ahead with its structural reform agenda. The agenda will focus on continuing to reform the tax system, implementing a sound fiscal decentralization plan, reactivating the domestic government bond market, strengthening the legal framework for fiscal policy, continuing with the PIPP, fortifying governance and the transparency of government operations, raising the efficiency of public expenditure, strengthening bank supervision, and continuing to open the economy. Key elements of the government's structural reform program will be subject to structural benchmarks as shown in Table 2.

12. In 2003, the government will continue working cautiously on a legal framework for decentralization that will ensure that the process is implemented in an orderly manner to protect the public finances over the medium term. The introduction of a fiscal decentralization law is a key element of this strategy. Draft legislation is being prepared that would define the allowable revenue collections at each level of government, coordinate the transfer of expenditure assignments and revenue consistent with local and regional governments' institutional capacity, introduce criteria for inter-governmental transfers, include provisions on full and uniform reporting (along the lines of those for the central government) for all regional and local governments, and place controls on regional and local government borrowing. In 2003, we will work toward implementing the reporting requirements for all regional and local governments.

13. Tax reform in 2003 will aim at phasing out regional and sectoral tax exemptions (in exchange for investment in infrastructure) and reducing tax evasion by broadening the coverage of the retention and withholding schemes implemented in 2002 and continuing to implement tax audits. The key step in the introduction of the phasing out of regional and sectoral tax exemptions is the fiscal decentralization law noted above (to be approved by congress) that will define this process and will be consistent with the government's objectives in the area of tax reform. The current estimate in the 2003 budget of the cost of the exemptions (on an annual basis) to be phased out by end-2004 is 0.7 percent of GDP, with exemptions costing 0.3 percent of GDP to be phased out by end-2003. Full implementation of the comprehensive tax reform introduced during 2002-2004 is expected to yield around 2 percent of GDP on an annual basis over the medium term.

14. The 2004 budget and the revamped law on fiscal prudence and transparency will be key signals of the government's commitment to its medium-term goal of fiscal consolidation. In this context, the 2004 budget will be consistent with the government's plans noted above in the areas of fiscal decentralization and tax reform, as well as with the medium-term macro framework.

15. The government will embark on a reform of the state that in 2003 will concentrate on rationalizing spending to reverse the recent trend of declining capital expenditure as a percentage of total outlays. Toward this end, an inter-ministerial team has been established to identify nonessential outlays and to recommend a restructuring of government spending. In addition, the team will formulate medium-term strategic guidelines for each government program that will also aid in prioritizing the allocation of government expenditure.

16. Bank supervision will continue to be strengthened in 2003. The SBS is working toward strengthening exchange rate risk management and monitoring for dollar lending to clients whose operations generate income streams in local currency. Norms were issued in March requiring banks to increase their information base and their analytical internal risk models so that they can explicitly incorporate an evaluation of exchange rate risk in their overall credit risk calculation. The SBS is also consolidating and rationalizing regulations on provisioning and loan classification, with a view to improving the transparency and consistency of the regulations. Legislation has been passed that increases the penalties for intent to destabilize the financial system, and statutory protection to SBS staff in the discharge of their responsibilities will be granted.

17. The government will refrain from creating new sectoral support programs and continue to manage prudently existing programs. The government has extended for two years the consumer-lending program (Multired) of the Banco de la Nación (BN) in order to support the continued recovery in economic activity. However, the program will continue to be managed under the same prudent regulations as last year. The limit on the net lending of the Multired operation will constitute a performance criterion under the program (as indicated in Table 1). The agriculture bank, Banco Agropecuario, will continue to limit direct lending to small-scale producers with funds exclusively allocated in the budget and for other producers will channel international lines of credit through SBS-regulated institutions. Cofide will maintain its operations as a second-tier development bank, channeling officially-borrowed resources through private financial institutions. The government will not use public resources to establish new financial institutions for direct lending to the public.

18. An important element of the government's structural program for 2003 is to improve the functioning of the domestic market for government securities in local-currency, and in particular, the auction system. In March 2003 a system of primary dealers for auctioning government paper will begin operating. Moreover, to best ensure a well-functioning market, a calendar of scheduled domestic bond auctions will be published in March 2003.

19. The government will continue to implement its trade policy strategy of reducing the average level of import tariffs, always with a view to ensuring that such reductions are consistent with the fiscal program. In 2002, the average tariff level was reduced from 11.8 percent to 10.9 percent, and the government intends to lower this further. Negotiations to reduce tariff barriers with our Andean Community partners and bilaterally with Mexico and Brazil will continue. The government's longer-term objective is to enter into a hemispheric free-trade arrangement by 2006.

20. The government will continue to work toward strengthening governance. In 2003, the government intends to continue in its efforts to root out corruption in all levels of government (having passed last year important anti-corruption legislation), and work toward strengthening the independence and efficiency of the judiciary.

21. In addition to the policies outlined in this letter, the Government of Peru stands ready to take additional measures as appropriate to ensure the achievement of its program's objectives. During the period of the Stand-By Arrangement, the authorities of Peru will maintain the usual close policy dialogue with the Fund, and to this end, the program will have two more reviews. The third review with the Fund, to be completed by August 31, 2003, will cover the implementation of the economic program described in this letter and our letters of January 18, 2002 and November 26, 2002 and will establish the timing of the fourth review. The third review will focus, in particular, on: (i) progress in implementing the tax reform and fiscal responsibility law; (ii) developments in the decentralization process; (iii) the functioning of the domestic bond market; (iv) steps being undertaken to strengthen banking supervision; and (v) the operations and impact of government initiatives to aid specific sectors.

Sincerely yours,

/s/


Javier Silva Ruete
Minister of Economy and Finance
 

/s/


Richard Webb, President
Central Reserve Bank of Peru


Table 1. Peru: Quantitative Performance Criteria and Inflation Consultation Mechanism, 2003

 

Mar. 31

Jun. 30

Sep. 30

Dec. 31

(Cumulative amounts from December 31, 2002, millions of new soles)
Borrowing requirement of the combined public sector1,2 780      1,400     2,595     4,130    
Net consumer lending of Banco de la Nación -15      40     30     75    
(Cumulative change from December 31, 2002, in millions of U.S. dollars)3
Net international reserves of the Central Reserve Bank, excluding foreign-currency deposits of financial institutions4,5,6,7 98      -50     -146     -148    
Outstanding short-term external debt of the nonfinancial public sector 50      50     50     50    
Contracting or guaranteeing of nonconcessional external public debt with maturity of at least one year8 950      1,680     2,015     2,200    
      Of which: [1-5] years' maturity 250      250     250     250    
External payments arrears of the public sector (on a continuous basis)9 0      0     0     0    
(Consultation bands for the 12-month rate of inflation, in percent)10
Outer band (upper limit) 5.5      5.5     5.5     5.5    
   Inner band (upper limit) 4.5      4.5     4.5     4.5    
      Central point 2.5      2.5     2.5     2.5    
   Inner band (lower limit) 0.5      0.5     0.5     0.5    
Outer band (lower limit) -0.5      -0.5     -0.5     -0.5    

1Including the operating balance of the central bank; PIPP proceeds are included below the line.
2The limits on the borrowing requirement of the combined public sector will be adjusted upward, by a maximum amount of S/. 200 million, for completion of a public investment project financed with concessional lending under the PIPP.
3The quantitative performance criterion on government guarantees for housing support programs has been deleted as these programs will not be put into place.
4The target for net international reserves will be adjusted upward by the amount of PIPP proceeds in foreign currency in excess of US$15 million by end-March, US$57 million by end-June, US$157 million by end-September and US$400 million by end-December 2003. The amounts in excess will be deposited at the BCRP.
5The target for net international reserves will be adjusted upward by the amount that net foreign borrowing of the nonfinancial public sector exceeds US$380 million at end-March, US$510 million at end-June, US$660 million at end-September and US$720 million at end-December 2003. The amounts in excess will be deposited at the BCRP.
6The target for net international reserves will be adjusted downward for shortfalls from the combined program amounts of PIPP proceeds and net foreign borrowing. This downward adjustment will not exceed US$100 million at end-March, US$320 million at end-June, US$500 million at end-September and US$400 million at end-December 2003.
7The target for the net international reserves will be adjusted downward 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$300 million at any time in 2003.
8 The limit would be adjusted upwards by any amount of debt issued for, and used in, a debt-exchange operation, and by up to US$375 million for prefinancing of government operations in 2004.
9Excluding arrears associated with nonrescheduled debt to foreign creditors outstanding as of end-2002.
10Should inflation fall outside the inner band, the authorities will discuss with the Fund staff the appropriate policy response. Should inflation fall outside the outer band, the authorities will also complete a consultation with the Executive Board of the Fund on the proposed policy response before requesting further purchases under the arrangement.


Table 2. Peru: Structural Benchmarks

To be completed by June 30, 2003

1. Submission to congress of fiscal decentralization legislation consistent with the objectives for decentralization stated in paragraph 12 and with the objectives for tax reform stated in paragraph 13.

2. Implementation of the revised rules on fiscal prudence and transparency.

3. Granting statutory protection to SBS staff in the discharge of their responsibilities.

To be completed by September 30, 2003

1. Submission to congress of a 2004 budget consistent with the objectives for decentralization stated in paragraph 12 and with the objectives for tax reform stated in paragraph 13 and the revised rules on fiscal prudence and transparency.

2. Identification of regional and sectoral tax exemptions to be phased out by end-2004 that in the 2003 budget are estimated to have an annualized cost of 0.4 percent of GDP.



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 2003 described in the letter of the Government of Peru dated March 17, 2003.

I. Definitions of Concepts1

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) proceeds from the Private Investment Promotion Program (PIPP), 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 2003. The nonfinancial public sector (NFPS) comprises the central government, the autonomous agencies, the local and regional governments, fiduciary trusts (Fideicomisos) overseeing the concessions program such as Fonfide-Vial, 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 system2 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 divested after December 31, 2002, 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 the PIPP.

(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 (as defined for program purposes); 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 divestiture of public enterprises, net of the proceeds from the sale of inventories of such enterprises); minus (vii) debt-equity swaps used in the PIPP accounted at the market value of these papers as defined by ProInversión; minus (viii) the net increase (or, plus the decrease) in foreign assets of the nonfinancial public sector (including those held abroad by the Fondo Consolidado de Reservas (FCR), and any other fund managed by the Oficina de Normalización Previsional (ONP)) (Table 2).

    (c) PIPP proceeds are defined as (i) the cash payments received by the Treasury from the sale of state-owned assets (including proceeds transferred to the FCR, and any other specialized funds) valued at the program exchange rate, plus (ii) debt equity swaps used in the PIPP, accounted at market values as defined by ProInversión. PIPP 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 nontax revenue.

    (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 consultation bands for inflation are based on the 12-month rate of change in consumer prices as measured by the Indice de Precios al Consumidor (IPC) at the level of Metropolitan Lima by the Instituto Nacional de Estadística e Informática (INEI). Should inflation fall outside an inner band of two percentage points around the central point of 2.5 percent, the authorities will discuss with the Fund staff on an appropriate policy response. Should inflation fall outside an outer band of three percentage points around the central point, the authorities will also complete a consultation with the Executive Board of the Fund on the proposed policy response before requesting further purchases under the arrangement.

3. The net consumer lending of the BN will be defined as disbursements of loans under the "Multired Program", established in November 2001 and extended in December 2002, 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.

5. BCRP's silver holdings will be excluded from the net international reserves. The gold holdings of the BCRP will be accounted at US$346.8667 per troy ounce (the average book value as of December 31, 2002), SDRs at US$1.35458 per SDR, and foreign currency assets and liabilities of the BCRP in other currencies at the exchange rate of December 31, 2002. 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 2002 level of net international reserves is shown in Table 3.

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. For the purposes of this performance criterion, the term "debt" has the meaning set forth in point number 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, which is defined in detail in 6 below. In the case of companies sold to the private sector under the PIPP, 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 the PIPP. The end-December 2002 stock of short-term external debt of the NFPS is shown in Table 4.

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.

8. 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" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with respect to Foreign Debt adopted on August 24, 2000 (Board Decision No. 12274-(00/85)). Thus, 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.

9. 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 2003, the CIRRs published by the OECD in December 2002 will be used (Table 5).

10. 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.

11. 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-2002 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.

12. Definitions used in Table 1 of the letter of intent dated March 17, 2003 for the calculation of adjustments to limits and targets for net international reserves:

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

b) 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).

c) 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.

d) Prefinancing mentioned in footnote 8 is understood as the portion of nonproject related external public debt, contracted or guaranteed, that is issued in 2003 but will be used in 2004 or later.

II. Periodic Reporting

13. The regular reporting will include the following:

    a) The latest Nota 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 any government guarantees for housing support 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 6).

      Cash operations of the treasury (which includes floating debt, with a memorandum item on tax refund arrears).

      (d) Cash operations of the treasury (which includes floating debt, with a memorandum item on tax refund arrears).

      (e) Data on PIPP revenue, which will include gross receipts, costs of the PIPP, use of debt-for-equity swaps, commissions received by ProInversión and the resulting cash receipts received by the Treasury and the FCR. In addition, the report will include debts assumed by the government in connection with the PIPP.

      (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.)

      Stocks of the central government PIPP accounts in the BCRP and the BN.

      (h) Stocks of the central government PIPP accounts in the BCRP and the BN.

      (i) Fideicomisos for operating concessions—balance sheet; summary of operations, including revenue, outlays, and guarantees; and copies of contracts engaged in for operating concessions.

    (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.

      (c) BCRP inflation report.


    1For purposes of the program for 2003, operations in foreign currency will be valued at S/. 3.57 per U.S. dollar.
    2The 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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