IMF Executive Board Completes Second Review under Peru's Stand-By Arrangement

Press Release No. 07/297
December 19, 2007

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Peru's economic performance under a 25-month Stand-By Arrangement in the amount equivalent to SDR 172.4 million (about US$270 million).

The authorities have indicated that they are treating the arrangement as precautionary. The arrangement was approved on January 26, 2007 (see Press Release No. 07/15).

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:

"Peru has been enjoying strong economic growth, a solid external position, low inflation, and declining vulnerabilities, reflecting the implementation of prudent macroeconomic policies in the context of a favorable external environment.

"The authorities appropriately intend to preserve fiscal prudence and improve the quality of public spending, while addressing social and infrastructure needs. They will continue to save part of revenue overperformance, strengthen budget execution, and preserve fiscal transparency. Of particular importance will be to build capacity at subnational governments, allow for greater private sector participation in public investment, and allocate canon resources to sound investment projects in a prudent manner.

"The authorities' program continues to address important structural fiscal issues, including: establishing a comprehensive legal framework for public-private partnerships to ensure more balanced risk-sharing between the public and private sectors, ensuring consistency of expenditure limits set in the Fiscal Responsibility and Transparency Law and the Decentralization Law, and implementing a new regime for tax incentives to broaden the tax base.

"To strengthen poverty reduction efforts, the authorities are bolstering the capacity of the Interministerial Committee for Social Assistance. They will also continue to address regional income disparities and to build consensus for the reform of social programs.

"Greater exchange rate flexibility has been important to strengthen the effectiveness of monetary policy. A more comfortable level of reserves and the increased resilience of the banking system to exchange rate movements provide scope for keeping this flexibility ahead. This would help better internalize currency risks and improve the inflation targeting framework.

"Strengthening the financial sector remains an important priority. To maintain a level playing field, the authorities intend to monitor public institutions' lending practices and align the regulatory and supervisory frameworks of public and private banks. The envisaged reforms to deepen capital markets are an important step forward to promote diversification, mitigate systemic risks, and contain currency appreciation pressures.

"The recent ratification of the Free Trade Agreement with the United States is an important step. It underscores the importance of enhancing external competitiveness, including by tackling high labor market informality and improving the business environment," Mr. Portugal said.



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