Peru and the IMF
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The Executive Board of the International Monetary Fund (IMF) has completed the second review of Peru's economic performance under a 26-month Stand-By Arrangement (see Press Release No. 04/112). The completion of the review makes available a total amount equivalent to SDR 149.1 million (about US$219.8 million), but the Peruvian authorities intend to continue treating the arrangement as precautionary.
In completing the review, the Executive Board also approved Peru's request for a waiver of the nonobservance of a performance criterion and the modification and resetting of another performance criterion. In addition, the Board also approved a rephasing of the country's future disbursements into five equal amounts of SDR 27.6 million (about US$40.7 million).
"Peru's economic performance has continued to be strong in 2004 and the first half of 2005. Inflation remains low and official reserves are at a comfortable level. The outlook is positive, as the economy is expected to continue to benefit from the global recovery. In addition, Peru has built important buffers to mitigate vulnerabilities associated with public debt and financial dollarization. In the context of the national elections scheduled for early 2006, it will be important to maintain the consensus for policies aimed at promoting sustained growth and reducing poverty over the medium-term.
"Prudent fiscal management is at the core of the authorities' economic strategy, and fiscal policies are consistent with further consolidation in 2005. Given that part of the revenue increase projected for 2005 is expected to be temporary, the authorities need to avoid boosting expenditures on a permanent basis. They are also encouraged to keep expenditure in the supplementary budget to a minimum, and to use part of any excess tax revenue to reduce the fiscal deficit below program levels. This will help reduce Peru's public debt-to-GDP ratio and further bolster investor sentiment. The authorities are committed to strengthening the institutional framework to ensure efficient and transparent use of scarce resources for public investment. In this context it is important that procedures to identify projects eligible under the Private-Public Partnerships program be strictly observed.
"The central bank remains committed to keeping inflation low. Allowing the exchange rate to move more freely will be important to help insulate the economy against external shocks and speculative capital flows. It is also important that the central bank continues to gradually raise the limit on pension funds' investments abroad and further strengthen domestic capital markets in order to help diversify the risks of these funds.
"The authorities are making progress in increasing the resilience and efficiency of the financial sector. They are strengthening prudential regulations on lending to unhedged economic agents and improving the supervision of offshore bank subsidiaries. The authorities also intend to discourage mortgage lending in foreign currency, and are promoting greater efficiency in financial intermediation, including through the development of the domestic capital market. It will be important that the authorities strictly observe the limit on consumer lending by the state-owned bank, Banco de la Nación.
"Progress is continuing in the implementation of growth-enhancing reforms. In recent months, the authorities' focus has been on reforming the Cédula Viva public pension regime and on bolstering private investment by awarding infrastructure transportation in concession under transparent and fiscally-responsible procedures. The establishment of a commercial court in April 2005 and the centralization of collateral registries by end-September are expected to further enhance the business climate. Progress has also been made in strengthening the legal framework for prudent fiscal management, and the authorities have continued to actively pursue trade liberalization through bilateral and multilateral negotiations," Mr. Carstens said.
IMF EXTERNAL RELATIONS DEPARTMENT