Peru and the IMF
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The International Monetary Fund (IMF) today approved a three-year credit for Peru in an amount equivalent to SDR 248.3 million (about US$358 million) under the extended Fund facility (EFF) to support the Government's medium-term economic and reform program during the period 1996-98. An amount equivalent to SDR 148.97 million (about US$215 million), will be available for disbursement during the first year of the credit.
The Government that took office in 1990 started to address the crisis facing the Peruvian economy by carrying out a program of macroeconomic adjustment and structural reform aimed at sharply reducing inflation, and creating the conditions for sustained economic growth and a progressive return to external viability. The program was initially supported by an IMF-monitored rights accumulation program (RAP) through the end of 1992. Building on the improvement in economic performance under the RAP, the Government developed a three-year economic program that was supported by an extended arrangement from the IMF in an amount equivalent to SDR 1,018 million (about US$1,467 million), which expired on March 17, 1996. After an initial disbursement of SDR 642.7 million (about US$926 million), Peru opted not to make any further drawings. All quantitative performance criteria through December 1995 were met with margins. Performance under this program was impressive: during 1993-95, output growth averaged 8.5 percent a year, inflation was reduced to 10 percent during 1995, and the net international reserves position of the Central Reserve Bank improved significantly. This performance can be traced to a large extent to prudent fiscal and monetary policies, a comprehensive program of structural reforms, and the continued support of the international financial community. During 1995, however, the external current account deficit widened to 7.2 percent of GDP from 5.2 percent in 1994, reflecting a strong increase in domestic expenditure, particularly in private investment. The decline in inflation subsided in the second half of 1995, and, in the first five months of this year, inflation edged up--reflecting in part a short fall in the supply of food products--while output growth came to a halt.
Medium-Term Strategy and the 1996 Program
The Government's medium-term strategy aims at consolidating the gains made between 1993-95 by lowering inflation to industrial country levels by the end of the program period; by creating the conditions for sustained real output growth, which will rise to at least 6 percent by 1998 from 3-4 1/2 percent in 1996; and by consolidating progress toward external viability by reducing the external current account deficit to below 5 percent of GDP in 1998 from 7.2 percent of GDP in 1995.
To achieve these goals, the program relies strongly on an improvement in the overall position of the combined public sector, which is projected to move to near balance in 1998 from a deficit of 2.6 percent of GDP in 1995. Achievement of these objectives will require a further strengthening of tax administration and the continued implementation of tight expenditure policies. The authorities will continue to pursue a disciplined monetary policy.
The program for 1996 aims at containing inflation at 9 1/2-11 1/2 percent and at narrowing the external current account deficit to 5.7 percent of GDP. Real GDP growth is assumed to slow to 3-4.5 percent in 1996. The overall deficit of the combined public sector will be halved to 1.3 percent of GDP and monetary policy will be consistent with the attainment of the program's inflation and balance of payments objectives.
The Government will deepen its structural reform efforts. Significant progress has been made in the privatization of public enterprises and this process is expected to be stepped up, for completion by end-1998. During 1996-98, the Government will complete the reform of the pension system that was undertaken in recent years, and, as part of its program of modernization of the State, intends to decentralize its wage policy and to introduce a system of remuneration that links wage increases to performance and productivity. The Superintendency of Banks and Insurance will continue its efforts to improve banks' capitalization and provisioning. To promote private investment, the authorities are improving the regulatory framework, and, in the trade area, they intend to maintain their current policy of trade liberalization.
Addressing Social Needs
The Government will continue its efforts to reduce extreme poverty, and will increase expenditure in education and health and strengthen the safety net that protects poorer segments of the population. During the program period, the Government will redirect public spending in primary health care and other basic services toward the poorest areas of the country.
The Challenge Ahead
Peru's return to external viability by the end of the program period will require the steadfast implementation of agreed policies and the continued support of the international community. Despite a projected improvement in its external position, Peru will need to continue to rely on exceptional financing. Covering the financing gaps will require external debt rescheduling from Paris Club and other bilateral creditors.
Peru joined the IMF on December 31, 1945. Its quota1 is SDR 466.1 million (about US$672 million). Its outstanding use of IMF credit currently totals the equivalent of SDR 643 million (about US$926 million).
Sources: Peruvian authorities; and IMF staff estimates.
1. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT