Press Release No. 03/181

Press Release: IMF Completes Third Review of Peru's Stand-By Arrangement, Approves US$40 Million Disbursement

November 3, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the third review of Peru's performance under a two-year, SDR 255 million (about US$367 million) Stand-By Arrangement that was approved on February 1, 2002 (see Press Release No. 02/6). This decision enables the release of SDR 27.87 million (about US$40 million) to Peru, which brings the total amount available to SDR 199.25 million (about US$287 million). So far the country has not made any drawings under the arrangement.

Following the Executive Board review of Peru, Agustín Carstens, Deputy Managing Director and Acting Chairman, said:

"Peru's economic performance under the program continues to be favorable. Real GDP is projected to grow by 4 percent in 2003, with inflation around 2 percent and a robust external position. The outlook for next year and the medium term is also positive, assuming continued implementation of prudent macroeconomic policies and structural reforms. At the same time, it will be important to sustain a broad domestic consensus on key reforms to promote growth, keep inflation low, and continue to reduce economic vulnerabilities originated in the current levels of public debt and financial dollarization.

"Good progress has been made with the structural reform agenda under the program. The law on fiscal prudence and transparency has been strengthened; a sound legal framework for fiscal decentralization is being put in place, with two key laws expected to be passed by the end of the year. The authorities intend also to implement a comprehensive tax reform, improve the performance of public sector operations, and reform the preferential public pension plan. These reforms, together with increased flexibility on expenditures, concessions, and prudent debt management, will support continued medium-term fiscal consolidation, promote growth, and improve the quality of public services. It will be relevant though, for the authorities to limit as much as possible the distortionary effects of new taxes.

"Monetary policy has kept inflation low, consistent with the inflation targeting framework. The floating exchange rate system will continue to serve Peru well in adjusting to external shocks and limiting external vulnerability. In line with the authorities' announced policy, intervention in the foreign exchange market should be limited to smoothing excessive volatility in the exchange rate.

"Banking sector indicators continue to improve, although the high degree of financial dollarization, while declining, remains a source of vulnerability. To address this risk, the authorities intend to maintain a high level of official international reserves and to further strengthen prudential oversight. New regulations recently adopted on dollar lending and foreign-currency risk management by banks, as well as a draft law currently in congress to provide adequate legal protection to bank supervisors, are welcome steps to this end," Mr. Carstens said.