IMF Executive Board Concludes 2006 Article IV Consultation with Peru

Public Information Notice (PIN) No. 07/12
January 29, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 26, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the 2006 Article IV consultation with Peru.1


The Peruvian economy has been reaping the benefits of sound policies, in the context of a favorable external environment. The economy is enjoying its longest expansion on record, with low inflation, a solid external position, and declining indebtedness ratios. During the first 11 months of 2006, real GDP grew by about 7½ percent year-on-year, propelled by strong exports and domestic demand—supported by growing investment as well as higher incomes and rising employment (Table 1). After peaking at 2.9 percent in April, 12-month inflation abated to 1.1 percent in December, reflecting tightening monetary conditions, a favorable food supply shock, and a decline in domestic fuel prices. Core inflation has remained at the lower end of the inflation target range and inflation expectations are well anchored.

The external position has strengthened, vulnerabilities have declined, and financial market conditions have been favorable. The current account surplus is estimated to have risen to 2 percent of GDP in 2006, while foreign direct investment remained strong. At end-2006, net international reserves stood at US$17.3 billion, equivalent to 390 percent of short-term debt and 150 percent of foreign currency deposits with the banking system. Public sector debt is estimated to have declined to 31½ percent of GDP by end-2006, or 15 percentage points below its end-2002 level. The structure of this debt has also improved, with the share of local currency-denominated debt now equivalent to one-fifth of total. In recent months, two credit ratings agencies upgraded Peru's sovereign rating to BB+ (one notch below investment grade) and Moody's changed its outlook from neutral to positive. Sovereign bonds have hovered close to all-time low levels and stock market prices have increased sharply. The Nuevo Sol has been fluctuating within a narrow margin against the U.S. dollar and the real effective exchange rate has remained broadly stable, close to the average of the past five years.

This favorable performance reflects to a large extent the prudent conduct of fiscal policy in recent years. The deficit of the combined public sector was gradually reduced, from 2½ percent of GDP in 2001 to ⅓ percent of GDP in 2005. During the first three quarters of 2006, the combined public sector balance achieved a surplus equivalent to about 3 percent of GDP, partly reflecting rising central government revenue, which was boosted by higher than anticipated corporate income tax payments. However, expenditure grew by 11 percent in real terms during this period, compared with the same period in 2005. Expenditure is expected to pick up in the last quarter of the year, reflecting the adoption of a supplementary budget focusing on capital outlays and government plans to advance outlays initially planned for 2007. For 2006 as a whole, the combined public sector is expected to register a surplus of 1½ percent of GDP compared with a deficit of ½ percent of GDP initially envisaged under the 2004-06 program.

The new government remains committed to sustaining fiscal consolidationto entrench macroeconomic stability, while boosting infrastructure and social spending to decisively reduce poverty, as well as advancing other reforms to enhance medium-term growth prospects. To support their policies for 2007-08, the authorities have requested a new 25-month Stand-by arrangement, which they intend to treat as precautionary.

Executive Board Assessment

Executive Directors commended the Peruvian authorities' commitment to sound economic policies and structural reforms, which has contributed to high rates of economic growth, low inflation, and declining external vulnerabilities. The favorable external environment, particularly high commodity prices, has also helped drive exports and Peru's longest economic expansion on record.

At the same time, Directors noted that major challenges remain, including the high rate of poverty, regional income disparities, and the still-high dollarization of the economy. These call for further efforts to strengthen the macroeconomic policy framework, address social and infrastructure needs, and promote structural reforms.

Directors underscored the critical importance of decisively tackling high poverty levels, to strengthen social cohesion and ensure the sustainability of economic policies. They welcomed the creation of a high-level committee to develop a strategy to combat poverty, and called for more effective targeting of social assistance programs.

Directors underscored the crucial role of fiscal policy, and supported the authorities' intention to continue saving part of central government revenue that exceeds the budgeted amount, as part of the strategy to contain demand pressures, accelerate the pace of public debt reduction, and achieve investment grade status for Peru. Directors supported the steps being taken to improve tax policy and administration, including reducing tax exemptions and simplifying the tax regime to broaden the tax base. They welcomed plans to introduce performance-based budgeting and improve public financial management, and the emphasis on increased spending on infrastructure and social assistance programs without compromising the fiscal consolidation goals.

Directors stressed that fiscal decentralization should be implemented cautiously to minimize risks to public finances. In this regard, the administrative and technical capacity of subnational governments needs to be strengthened, and shared expenditure responsibilities clearly specified. In decentralizing the National System of Public Investment, close coordination with subnational governments would help ensure selection of high-quality investment projects, especially in light of the envisaged sizable increase in capital spending.

Directors underscored the importance of establishing a legal framework for public-private partnerships (PPPs), to provide clear guidelines for project selection and conflict resolution. They stressed that the issuance of new securities associated with PPP projects should be monitored closely to minimize future fiscal commitments and risks, and that all public sector obligations associated with PPPs should be clearly recorded.

While Directors felt that the current exchange rate system has served Peru well, a number of Directors encouraged the authorities to manage the exchange rate more flexibly. They considered that this would help economic agents better internalize currency risks and provide more incentives for hedging, thus assisting to reduce dollarization and develop domestic capital markets. Other Directors stressed that any increased flexibility should be introduced gradually, given the risks that depreciation poses for sectoral balance sheets and the external debt in a highly dollarized economy like Peru.

Directors welcomed the strengthening of Peru's financial system in recent years. They commended the progress made in identifying foreign exchange-related credit risks in the banking system, and encouraged the authorities to implement their reform agenda aimed at reducing the risks from dollarization. The proposed changes to the MiVivienda mortgage lending program would aim at discouraging mortgage lending in foreign currency to unhedged borrowers. These efforts, along with plans to strengthen the payments system and the regulatory framework would help lessen vulnerabilities. Directors welcomed reforms being implemented to deepen the domestic capital market.

Directors were encouraged by the progress made in improving Peru's business environment, but stressed that much more needs to be done. In particular, they urged the authorities to take steps to reduce the high level of informality in the labor market, including the reduction of high severance payments, the better alignment of non-wage benefits with job tenure, and the removal of other legal restrictions that prevent dismissals. Directors also commended Peru's growing integration into the global economy.

The proposed stand-by arrangement is expected to provide a welcome policy anchor for the new authorities. Several Directors also noted that continued strong implementation of policies and improvement in economic performance should lay the basis for Peru's eventual exit from the use of Fund resources.

Peru: Economic and Financial Indicators

        Prel. Projection
  2002 2003 2004 2005 2006 2007

Social Indicators


Life expectancy at birth (years)

69.8 70.0 ... ... ... ...

Infant mortality (per thousand live births)

30.0 26.0 ... ... ... ...

Adult literacy rate

87.3 87.7 87.8 ... ... ...

Poverty rate (Total) 1/

53.8 52.2 51.6 50.6 ... ...

Unemployment rate

9.4 9.4 9.4 9.6 ... ...
(Annual percentage change; unless otherwise indicated)

Production and prices


Real GDP

5.2 3.9 5.2 6.4 6.5 5.5

Real domestic demand

4.4 3.4 4.4 5.5 8.8 6.2

Consumer Prices (end of period)

1.5 2.5 3.5 1.5 1.1 2.5

Consumer Prices (period average)

0.2 2.3 3.7 1.6 2.0 1.5

External sector



9.8 17.8 38.8 36.7 37.2 4.4


2.8 11.2 19.0 23.0 23.9 17.7

Terms of trade (deterioration -)

3.1 1.3 9.2 6.9 26.1 -5.3

Real effective exchange rate (depreciation -) 2/

-1.2 -6.8 1.9 -3.9 2.3 ...

Money and credit 3/ 4/


Liabilities to the private sector

4.4 1.9 11.5 15.2 9.5 9.3

Net credit to the private sector

-1.5 -3.5 3.6 12.0 12.1 8.0
(In percent of GDP; unless otherwise indicated)

Public sector


General government current revenue

17.0 17.4 17.5 18.3 19.6 18.5

General government noninterest expenditure

17.2 17.1 16.7 17.0 16.4 17.4

Combined public sector primary balance

0.0 0.5 1.0 1.6 3.5 1.3

Interest due

2.1 2.2 2.0 1.9 2.0 2.0

Combined public sector overall balance

-2.2 -1.7 -1.1 -0.3 1.5 -0.8

External Sector


External current account balance

-1.9 -1.5 0.0 1.3 2.0 0.2

Gross reserves


In millions of U.S. dollars 5/

9,690 10,206 12,649 14,115 17,329 18,479

Percent of short-term external debt 6/

214.2 214.4 161.2 288.5 388.6 371.4

Percent of foreign currency deposits at banks

100.6 107.3 128.3 129.4 150.5 153.9



Total external debt

48.9 48.1 44.9 36.1 30.7 28.4

Combined public sector debt

46.6 47.0 44.4 37.7 31.5 30.7


10.1 10.0 9.2 9.7 7.4 8.1

External 7/

36.5 37.0 35.1 28.1 24.6 23.1

Savings and investment


Gross domestic investment

18.9 18.8 18.9 18.6 19.0 21.2

Public sector

2.8 2.8 2.8 2.9 2.4 4.3

Private sector

14.7 15.0 15.2 16.0 16.6 16.9

Inventories changes

1.4 1.0 1.0 -0.2 0.0 0.0

National savings

17.0 17.2 18.9 19.9 21.0 21.4

Public sector 8/

0.8 1.2 1.7 2.6 3.9 3.3

Private sector

16.2 16.0 17.2 17.3 17.1 18.1

External savings

1.9 1.5 0.0 -1.3 -2.0 -0.2

Memorandum items:


Nominal GDP (S/. billions)

200.6 213.9 237.8 261.6 298.9 317.9

GDP per capita (in US$)

2,194 2,330 2,599 2,917 3,297 3,496

Sources: Central Reserve Bank of Peru; Ministry of Economy and Finance; ECLAC 2002-03; National Statistical Institute (INEI); and IMF staff estimates/projections.

1/ Defined as the percentage of households with total spending below the cost of a basic consumption basket.

2/ Based on Information Notice System. Data for 2006 reflect the 12-month change of the REER up to October.

3/ Corresponds to the banking system.

4/ Foreign currency stocks are valued at program exchange rate.

5/ Gross international reserves exceed net international reserves by the stock of Fund credit outstanding.

6/ Short-term debt is defined on a residual maturity basis, and includes amortization of medium- and long-term debt.

7/ Includes debt by the Central Reserve Bank of Peru.

8/ Excludes privatization receipts.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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