## 1perea2020001

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**Canonical URL:** [1perea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1perea2020001.pdf)

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### Outlook and Risks
- GDP growth projected to be "3.2 percent in 2020, underpinned by some improvement in net exports and resilient private demand."
- Short-term forecast: GDP growth projected to close 2019 at "2.4 percent," with inflation well within the central bank’s target range.
- Medium term: growth would converge to potential rate of "3½ percent."
- Short-term risks:
  - Exposure to deteriorating external environment (trade tensions, volatile international financial markets, softer commodity prices) and domestic political uncertainty.
  - Output gap expected to become more negative; inflationary pressures to remain subdued.
- Policy buffers described as adequate to mitigate the impact of shocks.

### Policy Advice and Recommendations (Overview)
- Near-term stance:
  - Policy stimulus justified given slowdown and heightened uncertainty.
  - Monetary policy easing particularly appropriate given absence of inflationary pressures.
  - Accelerated budget execution would mitigate the procyclical fiscal stance.
- Fiscal policy:
  - Fiscal stance currently procyclical owing to higher-than-expected revenues and low execution of public investment.
  - Medium term: additional fiscal space from tax revenues and effective expenditure control needed to address infrastructure and social spending priorities.
- Exchange rate and structural reforms:
  - Gradual transition to greater exchange rate flexibility to foster financial market development.
  - Structural reforms to improve governance and fight corruption, boost competitiveness, and reduce informality.

### Recent Developments — Real Sector and Inflation
- Real GDP:
  - Grew by "4 percent in 2018."
  - Growth slowed to "2.2 percent in 2019Q1-Q3," with signs of recovery in fishing and mining in Q3.
  - Peru grew on average "5.4 percent" over the past fifteen years prior to recent slowing.
  - Growth dropped to "3¼ percent on average in the last four years" before 2019.
- Inflation and monetary policy:
  - Headline inflation "1.9 percent in November."
  - Core inflation "2.3 percent."
  - "12-month inflation expectations at 2.2 percent in October."
  - BCRP cut policy rate by "¼ percentage points in August and November to 2¼ percent."
- Labor market:
  - Unemployment stable at "6.4 percent in the Lima metropolitan region in October (3-month moving average)."

### External and Fiscal Developments
- External sector:
  - International reserves at approximately "26 percent of GDP" (end-2018).
  - External and public debt at "35 and 26 percent of GDP at end-2018," respectively.
  - Trade balance surplus fell from "US$5.3 billion" (January–September 2018) to "US$3.7 billion" (January–September 2019).
  - Central bank interventions: bought foreign exchange "US$0.2 billion" by end-September.
  - Nominal exchange rate appreciated on average by more than "1 percent" by end-September.
- Fiscal sector:
  - Cumulative 12-month fiscal deficit of the NFPS fell to "1.6 percent of GDP in October," down from "2.3 percent of GDP recorded at end-2018."
  - Projected fiscal deficit revised down from budgeted "2.7 percent of GDP" to "2.2 percent of GDP" and the 2020 budget targeted a fiscal deficit of "2 percent of GDP."

### Financial Sector and Stability
- Credit and banking indicators:
  - Financial sector credit growth to the private sector moderated from "8.7 percent at end-December (2018)" to "8.3 percent at end-September."
  - Capital to risk-weighted assets ratio about "14.8 percent as of August 2019."
  - Nonperforming loans around "3.1 percent of total loans."
  - Return-on-assets about "2.2 percent."
  - Dollarization of bank deposits and loans reached "35 and 27 percent respectively by end-September."
- Vulnerabilities: financial dollarization, concentration, off-balance sheet exposures, high banking sector concentration, low financial inclusion.
- Overall assessment: risks to financial stability declined slightly.

### Migration and Growth Impacts (Box 1)
- Venezuelan migration:
  - UNHCR estimate: "800,000 immigrant arrivals between early 2017 and mid-June 2019," representing "2.5 percent of the population of Peru."
  - 2017 census: "83 percent of the migrant population is of working age" and "50 percent has attained technical, graduate or post-graduate education."
  - Employment rate among migrants was over "90 percent" at the time of the census.
- Labor market frictions:
  - Competition from migrant workers affected young, low-skilled workers in service and commerce sectors where wages have declined.
  - Only "3 percent of the Venezuelan skilled workforce has received accreditation for their qualifications."
  - Nearly "90 percent of Venezuelan migrant workers were working without formal contracts" (2018 INEI survey).
- Growth impact estimates:
  - BCRP estimates "0.3 percentage points of the GDP growth registered in 2018" attributable to private consumption of the immigrant population in Lima and Callao.
  - Staff growth decomposition estimates an impact of at most "0.4 percent in 2021" under a scenario with frictions.
  - Scenario assumptions: migrant labor stock growing to "0.9 million individuals in 2019 and 1.4 million by 2023"; effective employment increases only by half the flow of active migrant population due to displacement; TFP impact initially very negative and gradually turns positive.

### Growth outlook and macroeconomic trajectory (Section 10)
- GDP growth projections:
  - "3.2 percent in 2020 and 3.7 percent in 2021."
  - Medium term: revert to potential of "3½ percent."
- Recovery drivers:
  - Moderate strengthening of growth in trading partners and dissipation of political uncertainty.
  - Negative output gap projected to close gradually; inflation expected to return to "2 percent in 2020."
- Exports:
  - More than half of Peru’s exports directed to China ("32.6 percent") and the U.S ("19.6 percent").

### Risks and buffers (Section 10)
- Downside risks:
  - Global uncertainty, external risk-off events, exchange rate movements magnified by partial dollarization, domestic political impasse and corruption investigations.
- Buffers:
  - Low public debt and significant financial assets.
  - Large stock of international reserves.
  - Solid financial sector.

### Key financial sector indicators (latest values reported)
- Overall Financial Sector Rating: M
- Credit cycle: L
- Change in credit / GDP ratio (pp, annual): 1.3
- Growth of credit / GDP (%, annual): 3.6
- Credit-to-GDP gap (st. dev): 1.5
- Deposit-to-loan ratio: 90.5
- FX liabilities % (of total liabilities): 38.8
- FX loans % (of total loans): 27.6
- Leverage ratio (%): 12.3
- ROA: 2.2
- ROE: 17.8
- NPL ratio: 3.4
- NPL ratio change (%, annual): 1.4

### A. Making Fiscal Policy More Agile
- Findings and constraints:
  - Long-term fiscal position strong; government on track to comply with fiscal rules.
  - Fiscal buffers include bank deposits (a stabilization fund of "2½ percent of GDP").
  - Vulnerability: large share of foreign-currency denominated debt ("33.8 percent").
  - Escape clause from fiscal deficit ceiling of "1 percent of GDP" invoked after 2017 El Niño; allows exceeding ceiling until 2021.
  - Projected temporary deficit reach "1½ percent of GDP in 2020," below the budgeted "2 percent."
- Short-term recommendations:
  - Ensure the 2020 budget is fully executed by unblocking inactive projects and removing financing and capacity constraints to local and regional governments.
  - Address structural constraints hampering large infrastructure projects; increase budgeted resources for local and regional governments; provide technical assistance.
  - As growth strengthens, undertake moderate consolidation to attain deficit target of "1 percent of GDP in 2021."
- Medium-term fiscal strategy and revenue:
  - National Plan of Infrastructure: infrastructure gap of "15 percent of GDP" with comparable countries and "47 percent of GDP" with OECD countries.
  - 52 priority projects amounting to "13 percent of GDP" (including PPPs and government-financed projects).
  - Need improvements in revenue administration, performance of public enterprises, and reduced current spending per 2020–23 projections.
- Revenue mobilization and VAT:
  - Recent measures (excise increases in mid-2018 and electronic invoicing) supported tax revenues.
  - VAT compliance gap increased during 2015–17 and remains above "30 percent" despite some improvement in 2018.
  - Recommendations: reduce VAT compliance gap, develop integrated control strategy for income taxes and VAT, exploit e-invoicing data.
- Considerations for fiscal framework:
  - Options:
    - A modest increase in the deficit ceiling, with existing expenditure rules constraining current spending so additional space used mainly for investment.
    - Replace headline deficit ceiling with a structural deficit ceiling (as in 2014–16).

### B. Choosing the Right Mix — Monetary, Exchange Rate, and Macroprudential Policies
- Monetary policy:
  - Recent easing appropriate; policy rate reduced by "25 basis points in August and November to 2¼."
  - Real interest rate close to zero; stance expansionary.
  - Authorities should be prepared to ease further if downside risks materialize while remaining vigilant on financial vulnerabilities.
- Macroprudential and FX intervention:
  - Reserve requirements reduced one percentage point to "35 percent" in June 2018 (marginal requirements on FX liabilities).
  - Countercyclical capital buffers and dynamic provisioning switched off in 2014.
  - Reserve requirements on FX derivative transactions relaxed in early 2019; other CFM/MPMs unchanged since 2015.
  - FX intervention frequent but limited and broadly symmetric; smoothed exchange rate volatility and been two-way and contained.
- Exchange rate flexibility and dollarization:
  - Dollarization has fallen substantially; loan dollarization now well below "30 percent."
  - As dollarization declines, BCRP should allow greater exchange rate flexibility and limit FXI to cases of disorderly market conditions.
  - Higher risk weights for FX loans would help reduce dollarization.
- Framework enhancement:
  - Recommend continuous review of CFM/MPMs and phasing out the remaining CFM; consider alternative measures addressing systemic risks without limiting capital flows.

### C. Improving Financial Sector Oversight
- Progress and reforms:
  - New law on credit cooperatives effective January 2019; over "400 cooperatives" registered.
  - SBS to determine regulatory requirements by size and work towards a deposit insurance scheme.
  - SBS implementing FSAP recommendations: enhance monitoring of off-balance sheet exposures, strengthen stress test models, improve institutional arrangements, consolidated and risk-based supervision, crisis management, and financial integrity frameworks.

### Legislative and Regulatory Reform (Section 23)
- Gaps and priorities:
  - Advance legislative agendas to:
    - (i) strengthen legal protection of supervisors and former SBS staff;
    - (ii) grant SBS powers for consolidated supervision;
    - (iii) enhance AML/CFT framework, including dissuasiveness and proportionality of sanctions.
  - Continue improving risk-based supervision for AML/CFT compliance.
  - Bring regulations in line with Basel III (capital surcharges for systemic banks; risk weights for foreign currency loans).
- Governance and informality:
  - Reforms to strengthen integrity: strengthen Integrity Secretariat; implement robust income and asset declaration for high-level officials; strengthen due diligence on PEPs; ensure accurate beneficial ownership registry; simplify and increase transparency in procurement; reform National Control System; introduce independent internal auditors and strengthen external audits.
- Structural reform priorities:
  - Legal system and product market reforms prioritized to address weak productivity growth.
  - National Policy for Competitiveness and Productivity (late 2018) established nine priority objectives; National Plan issued in late July (authorities should consider narrowing focus).
  - Reduce informality: informal employment nearly "70 percent of total employment" (Peru vs LAC average "54 percent").
  - Size-dependent labor regulations create disincentives to formal firm growth at the "20 salaried employees" threshold; recommendation to redesign regulations to support formalization.

### Social Protection and Inclusion (Section 38)
- Key needs:
  - Pension system sustainability and coverage.
  - Equitable distribution of natural resource revenues across regions.
  - Deeper financial development and inclusion.
  - Reduce labor market rigidities preventing formalization.
- Policy recommendations:
  - Reform pension system to ensure sustainability and enhance coverage.
  - Implement measures for equitable distribution of natural resource revenues.
  - Deepen financial development and inclusion as prioritized in the National Competitiveness Plan.
  - Enact reforms to reduce labor market rigidities.

### Staff Appraisal: Outlook, Risks, and Policy Recommendations (Summary)
- Recent performance:
  - Peru remains one of the best-performing Latin American economies but activity lost momentum due to less benign external environment and adverse domestic factors (2017 El Niño, Lava Jato).
  - Growth expected to strengthen gradually driven by recovery in net exports and resilient private demand in 2020 and following years; outlook clouded by global swings and domestic political uncertainty.
- Policy stance:
  - Additional fiscal support desirable in short term; monetary and macroprudential policies provide adequate stimulus (policy rate near zero in real terms; reserve requirements low; macroprudential instruments switched off since 2014).
  - Fiscal policy procyclical partly due to budget under-execution; government should use fiscal space under the fiscal rule, emphasizing improved public investment implementation.
  - Medium term: consider more flexibility in fiscal framework while increasing revenue mobilization.
- Financial sector and regulatory recommendations:
  - Further strengthen financial sector resilience.
  - As dollarization declines, allow greater exchange rate flexibility.
  - Complete legislative and regulatory reform agenda: reinforce legal protection of supervisors; mandate consolidated supervision by SBS; enhance AML/CFT effectiveness.
  - Bring regulations in line with Basel III, including risk weights for foreign currency loans.
- Structural reform implementation:
  - Focus on key priorities in National Competitiveness Plan with clear timelines.
  - Continue improving public sector transparency and governance; address infrastructure gaps and improve public investment management.
  - Strengthen anti-corruption enforcement and foster economic diversification; extend agriculture promotion law and improve business climate.

### Projections and Key Macroeconomic Series (Selected)
- Real GDP (annual growth): 2019: 2.4; 2020: 3.2; 2021: 3.7; 2022: 3.7; 2023: 3.7; 2024: 3.7.
- Output gap (percent of potential GDP): 2019: -1.5; 2020: -1.3; 2021: -0.9; 2022: -0.5; 2023: -0.3; 2024: -0.1.
- Consumer prices (end of period): 2019: 1.9; 2020–2024: 2.0 each year.
- NFPS overall balance (percent of GDP): 2019: -1.7; 2020: -1.5; 2021–2024: -1.0 each year.
- Public gross debt (percent of GDP): 2019: 26.8; 2020: 27.0; 2021: 26.6; 2022: 26.1; 2023: 25.7; 2024: 25.3.
- Gross international reserves (billions of U.S. dollars): 2019: 68.1; 2020–2024: 68.1 each year.
- Nominal GDP (S/. billions): 2019: 774; 2020: 816; 2021: 864; 2022: 916; 2023: 970; 2024: 1,027.
- GDP per capita (in US$): 2019: 7,097; 2020: 7,292; 2021: 7,597; 2022: 7,926; 2023: 8,279; 2024: 8,661.

### Annex I — Export Diversification: The Agro-Exporting Boom (Selected)
- Agricultural exports expanded from "0.4 percent of GDP in 2001" to estimated "US$6 billion or 2.7 percent of GDP in 2019."
- Seasonal exports of high-value fresh fruits and vegetables total "US$2.5 billion or 1.2 percent of GDP in 2019."
- Agro-export sector provides "0.8 million formal agricultural jobs," up from "0.46 million in 2004," and supports indirectly another "0.7 million jobs."
- Poverty trends: rural poverty fell from "80 percent in 2004 to 36 percent in 2018"; coastal-area poverty fell from "67 percent in 2004 to 19 percent in 2018."
- Agriculture promotion law (Law 27360) features:
  - Corporate income tax of "15 percent" (instead of 30).
  - Social security contributions for health of "4 percent" (instead of 9).
  - Accelerated "20 percent" depreciation of investments.
  - Temporary contracts with "15 days of vacation" (instead of 30) and severance pay of "½ the monthly pay" for unjustified dismissal (instead of 1½).
- Constraint: law was set to expire in 2021, stalling large investments due to disagreement; later extension noted (see below).

### Annex VI — External Sector Assessment (Selected)
- Current account deficit increased to "1.6 percent of GDP in 2018" (from "1.2 percent in 2017"); expected to stabilize at about "1.5 percent of GDP" over medium term.
- Net FDI averaged "2.9 percent of GDP" in the past 5 years.
- Peru’s external assets are "54 percent of GDP," including central bank foreign assets of "27 percent of GDP" and financial system holdings of "16 percent of GDP."
- Liabilities include FDI liabilities of "47 percent of GDP," public and private external debt of "35 percent of GDP," and other liabilities of "9 percent of GDP."
- Gross international reserves: "US$60.1 billion (27 percent of GDP) at end-2018"; equals "240 percent of the ARA metric."
- Overall CA gap for 2018: about "0.7 percent of GDP." Preliminary 2019 overall CA gap: about "0.4 percent of GDP."
- REER diagnostics: REER-based estimates show range of potential overvaluation; CA-based approach given more weight by staff.

### 2020 Programs and Recommendations (Selected)
- Crisis management and bank resolution:
  - Strengthen institutional and staff capacity for crisis management; working group to report to CERF in progress.
  - Require payout of most insured deposits within "seven working days" and provide legal protection to FSD staff/agents — status: Not implemented.
- Emergency Liquidity Assistance (ELA):
  - Recommendation to specify eligibility and collateral requirements — not in authorities' plans; BCRP uses circulares (022-2015-BCRP and 052-2013-BCRP) and a variety of collateral instruments.
- Financial integrity (AML/CFT):
  - Strengthen risk-based AML/CFT supervision and sanctioning powers — status: In progress; amendments to Banking Law being considered.
- Financial deepening and pension reforms:
  - Deepen repo markets; by October 2019 interbank repo operations using CDBCRP and BTPs accounted for "52 percent" of total O/N money market volume.
  - Design reforms to improve the private pension system — status: In progress with a commission created.

### Extension of the Agriculture Promotion Law (Selected)
- Government issued a decree extending the agriculture promotion law for an additional ten years (until "2031").
- Decree applies some provisions to forestry and aquaculture and includes modifications:
  - Increase in vacation days from "15 to 30."
  - "8 percent" increase in minimum daily remuneration.
  - Increase in employers’ health care contributions gradually converging to "9 percent."
- Extension aligned with staff’s policy advice and submitted to Congress’ Permanent Commission.

*International Monetary Fund — Peru staff report (discussions took place in Lima during November 5-18, 2019). Edited extracts and IMF staff calculations as presented in the source PDF.*

### 3.2 percent in 2020, underpinned by some improvement in net exports and resilient

### 3.2 percent in 2020, underpinned by some improvement in net exports and resilient

### Outlook and Risks
- GDP growth projected to be "3.2 percent in 2020, underpinned by some improvement in net exports and resilient private demand."
- Over the medium term, growth would converge to its potential rate of "3½ percent."
- Short-term forecast: GDP growth projected to close 2019 at "2.4 percent," with inflation well within the central bank’s target range.
- Risks:
  - Exposure to several downside risks, including deteriorating external environment (trade tensions, volatile international financial markets, softer commodity prices) and domestic political uncertainty.
  - Output gap expected to become more negative; inflationary pressures to remain subdued.
- Policy buffers described as adequate to mitigate the impact of shocks.

### Policy Advice and Recommendations
- Near-term stance:
  - Current slowdown and heightened uncertainty justify policy stimulus.
  - Monetary policy easing is particularly appropriate given the absence of inflationary pressures.
  - Accelerated budget execution would mitigate the procyclical fiscal policy stance.
- Fiscal policy:
  - Fiscal stance is currently procyclical owing to higher-than-expected revenues and low execution of public investment.
  - In the medium term, additional fiscal space from tax revenues and effective expenditure control is needed to address priorities in infrastructure and social spending.
- Exchange rate and financial development:
  - A gradual transition to greater exchange rate flexibility would foster financial market development.
- Structural reforms:
  - In addition to infrastructure investment, key reforms are needed to improve governance and fight corruption, boost competitiveness, and reduce informality.

### Recent Developments — Real Sector and Inflation
- Real GDP:
  - Real GDP grew by "4 percent in 2018."
  - Growth slowed to "2.2 percent in 2019Q1-Q3," with signs of recovery in fishing and mining in Q3.
  - Peru grew on average "5.4 percent" over the past fifteen years prior to recent slowing.
  - Growth dropped to "3¼ percent on average in the last four years" before 2019.
- Inflation and monetary policy:
  - Headline inflation was "1.9 percent in November."
  - Core inflation was "2.3 percent."
  - "12-month inflation expectations at 2.2 percent in October."
  - The Banco Central de Reserva del Perú (BCRP) cut its policy rate by "¼ percentage points in August and November to 2¼ percent."
- Labor market:
  - Unemployment remained stable at "6.4 percent in the Lima metropolitan region in October (3-month moving average)."

### External and Fiscal Developments
- External sector:
  - International reserves at approximately "26 percent of GDP" (end-2018).
  - External and public debt at "35 and 26 percent of GDP at end-2018," respectively.
  - Trade balance surplus fell from "US$5.3 billion" (January–September 2018) to "US$3.7 billion" (January–September 2019).
  - Central bank interventions: bought foreign exchange in the order of "US$0.2 billion" by end-September.
  - Nominal exchange rate appreciated on average by more than "1 percent" by end-September.
- Fiscal sector:
  - Cumulative 12-month fiscal deficit of the NFPS fell to "1.6 percent of GDP in October," down from "2.3 percent of GDP recorded at end-2018."
  - Projected fiscal deficit revised down from budgeted "2.7 percent of GDP" to "2.2 percent of GDP" and the 2020 budget targeted a fiscal deficit of "2 percent of GDP."

### Financial Sector and Stability
- Credit and banking indicators:
  - Financial sector credit growth to the private sector moderated from "8.7 percent at end-December (2018)" to "8.3 percent at end-September."
  - Capital to risk-weighted assets ratio about "14.8 percent as of August 2019."
  - Nonperforming loans hovered around "3.1 percent of total loans."
  - Return-on-assets about "2.2 percent."
  - Dollarization of bank deposits and loans reached "35 and 27 percent respectively by end-September."
- Vulnerabilities noted: financial dollarization, concentration, off-balance sheet exposures, high banking sector concentration, low financial inclusion.
- Overall assessment: risks to financial stability declined slightly.

### Migration and Growth Impacts (Box 1)
- Venezuelan migration:
  - UNHCR estimate: "800,000 immigrant arrivals between early 2017 and mid-June 2019," representing "2.5 percent of the population of Peru."
  - 2017 census: "83 percent of the migrant population is of working age" and "50 percent has attained technical, graduate or post-graduate education."
  - Employment rate among migrants was over "90 percent" at the time of the census.
- Labor market frictions:
  - Competition from migrant workers affected young, low-skilled workers in service and commerce sectors where wages have declined.
  - Only "3 percent of the Venezuelan skilled workforce has received accreditation for their qualifications."
  - Nearly "90 percent of Venezuelan migrant workers were working without formal contracts" (2018 INEI survey).
- Growth impact estimates:
  - BCRP estimates "0.3 percentage points of the GDP growth registered in 2018" attributable to private consumption of the immigrant population in Lima and Callao.
  - Staff growth decomposition estimates an impact of at most "0.4 percent in 2021" under a scenario with frictions.
  - Staff migration scenario assumptions include migrant labor stock growing to "0.9 million individuals in 2019 and 1.4 million by 2023."
  - Scenario also assumes effective employment increases only by half the flow of active migrant population due to displacement of local workers, and that TFP impact is initially very negative and gradually turns positive.

*International Monetary Fund — Peru staff report (discussions took place in Lima during November 5-18, 2019).*

### 10.      Growth is expected to strengthen gradually after 2019 before reaching its potential

### 10.      Growth is expected to strengthen gradually after 2019 before reaching its potential

### Growth outlook and macroeconomic trajectory
- GDP growth is projected to rise to 3.2 percent in 2020 and 3.7 percent in 2021.
- Over the medium term, growth would gradually revert to its potential of 3½ percent.
- The recovery in late 2019 should carry forward into 2020, underpinned by a moderate strengthening of growth in Peru’s trading partners and the dissipation of political uncertainty.
- The negative output gap is projected to close gradually, while inflation is expected to return to 2 percent in 2020.
- More than half of Peru’s exports are directed to China (32.6 percent) and the U.S (19.6 percent).

### Risks and buffers
- Risks are tilted to the downside, including:
  - Global uncertainty and exposure to shocks to global growth and financial conditions.
  - External risk-off events that could cause sudden tightening of financial conditions and contagion.
  - Exchange rate movements magnified by partial dollarization in the financial system.
  - Domestic risks from prolonged political impasse and corruption investigations that could stifle private investment and growth.
- Policy and balance-sheet buffers that mitigate adverse shocks:
  - Low public debt and significant financial assets.
  - A large stock of international reserves.
  - A solid financial sector.

### Key financial sector indicators (latest values reported)
- Overall Financial Sector Rating: M
- Credit cycle: L
- Change in credit / GDP ratio (pp, annual): 1.3
- Growth of credit / GDP (%, annual): 3.6
- Credit-to-GDP gap (st. dev): 1.5
- Deposit-to-loan ratio: 90.5
- FX liabilities % (of total liabilities): 38.8
- FX loans % (of total loans): 27.6
- Leverage ratio (%): 12.3
- ROA: 2.2
- ROE: 17.8
- NPL ratio: 3.4
- NPL ratio change (%, annual): 1.4

### Policy discussions — overall
- The slowdown and heightened uncertainty justify policy stimulus, but the fiscal stance has been procyclical and should be corrected by accelerating budget execution.
- Given the negative output gap and the absence of inflationary pressures, accommodative monetary policy is appropriate and should remain data-driven.
- In the medium term, additional fiscal space from tax revenues and effective expenditure control is needed to address priorities in infrastructure and social spending.
- A gradual transition to greater exchange rate flexibility would facilitate financial market development.
- Key structural reforms are needed to improve governance, boost competitiveness, and reduce informality.

### A. Making Fiscal Policy More Agile
Findings and constraints:
- The long-term fiscal position is strong; the government is on track to comply with fiscal rules.
- Peru holds fiscal buffers including bank deposits (a stabilization fund of 2½ percent of GDP).
- Vulnerability: large share of foreign-currency denominated debt (33.8 percent).
- An escape clause from the fiscal deficit ceiling of 1 percent of GDP was invoked after the 2017 El Niño; it allows exceeding the ceiling until 2021.
- Difficulties in raising public investment execution are projected to cause the deficit to reach 1½ percent of GDP in 2020, below the 2 percent deficit envisaged in the budget.

Short-term recommendations:
- Ensure the 2020 budget is fully executed by unblocking inactive projects and removing financing and capacity constraints to local and regional governments.
- Address structural constraints hampering large infrastructure projects, increase budgeted resources for local and regional governments, anticipate their deliverables, and provide technical assistance on administrative systems.
- As growth strengthens, undertake a moderate consolidation effort to attain the deficit target of 1 percent of GDP in 2021.

Medium-term fiscal strategy:
- The government plans an expansion of public investment to improve competitiveness and address infrastructure gaps.
- The National Plan of Infrastructure for Competitiveness estimates an infrastructure gap of 15 percent of GDP with comparable countries and 47 percent of GDP with OECD countries.
- The plan identifies 52 priority projects to be executed in the next decade amounting to 13 percent of GDP (including both PPPs and government-financed projects).
- Projections in the 2020–23 Multi-Annual Macroeconomic Framework indicate that improvements in revenue administration, performance of public enterprises, and reduced current spending would be necessary.

Revenue mobilization and expenditure control:
- Recent measures (excise increases in mid-2018 and electronic invoicing) have supported tax revenues; mining revenues expected to increase as new production comes on stream.
- The VAT’s compliance gap increased during 2015–17 and remains above 30 percent despite some improvement in 2018.
- Recommendations: focus on revenue administration, reduce the VAT compliance gap, develop an integrated control strategy for income taxes and VAT (including withholdings), and exploit e-invoicing data.
- Expenditure control should protect capital spending and other priority areas by enforcing multiannual budget allocations, limiting incorporation of unbudgeted expenses, strengthening project design, improving integration with budget preparation, enhancing project execution information systems, promoting concurrent control procedures, and enhancing local/regional implementation capacity.

Considerations for the fiscal framework:
- Authorities could consider introducing more flexibility in the fiscal framework to accommodate infrastructure needs.
- Options discussed:
  - A modest increase in the deficit ceiling, with existing expenditure rules constraining current spending so additional space is used mainly for investment.
  - Replacing the headline deficit ceiling with a structural deficit ceiling, similar to the framework in place during 2014–16.

### B. Choosing the Right Mix — Monetary, Exchange Rate, and Macroprudential Policies
Monetary policy stance:
- With the absence of inflationary pressures and weakening growth, recent monetary policy easing is appropriate.
- The policy rate was reduced by 25 basis points in August and November to 2¼.
- The real interest rate is now close to zero and the monetary stance is expansionary.
- Authorities should be prepared to ease policy further if downside risks materialize while remaining vigilant against financial sector vulnerabilities.
- Forward guidance from the central bank indicating that the last cut did not necessarily imply further cuts is useful to signal data-dependence.

Macroprudential and FX intervention:
- Reserve requirements were reduced one percentage point to 35 percent in June 2018 (marginal requirements on FX liabilities).
- Other macroprudential instruments (countercyclical capital buffers and dynamic provisioning) were switched off in 2014 after credit growth moderated.
- One CFM/MPM—reserve requirements on FX derivative transactions—was relaxed in early 2019; other CFM/MPMs and a CFM have not been adjusted since 2015.
- Foreign exchange intervention (FXI) has been frequent but limited in size and broadly symmetric; interventions have smoothed exchange rate volatility and been two-way and contained.
- The external sector assessment concludes that in 2018 the external position was broadly in line with fundamentals and desirable policies; preliminary results suggest confirmation for 2019.

Exchange rate flexibility and dollarization:
- Dollarization has fallen substantially from historical peaks; loan dollarization is now well below 30 percent.
- As dollarization declines, the BRCP should allow greater exchange rate flexibility to absorb external shocks and promote financial market development.
- Limiting FXI to cases of disorderly market conditions would reduce dollarization, foster hedging instruments, and strengthen the interest channel of monetary policy.
- FXI would remain a key defense against disorderly market conditions; higher risk weights for FX loans would also help reduce dollarization.

Framework enhancement:
- The multi-instrument framework could be enhanced by evaluating costs and trade-offs of different tools and fully considering interactions across instruments under different shocks.
- Continuous review of CFM/MPMs is recommended; the remaining CFM should be phased out, and authorities should consider alternative measures that directly address systemic financial risks without limiting capital flows.

### C. Improving Financial Sector Oversight
Progress and reforms:
- New law on credit cooperatives became effective in January 2019; the Superintendence of Banks, Insurance, and Pension Managers (SBS) initiated the registering process for those institutions.
  - Over 400 cooperatives were registered; SBS is determining regulatory requirements which vary by size.
  - SBS will work with cooperatives towards establishing a deposit insurance scheme.
- SBS progress in implementing FSAP recommendations, including:
  - Enhancing monitoring of banks’ off-balance sheet exposures and strengthening stress test models (systemic risks and macroprudential policies).
  - Institutional arrangements for SBS (internal governance and control framework).
  - Bank and insurance supervision (consolidated and risk-based supervision).
  - Crisis management (crisis preparedness and management arrangements).
  - Financial integrity (financial sector law).

*Source: IMF staff calculations and country report text.*

### 23.      Completing the legislative and regulatory reform agenda requires additional efforts.

### 23.      Completing the legislative and regulatory reform agenda requires additional efforts.

### Legislative and regulatory reform: gaps and priorities
- Further steps needed to advance three legislative agendas:
  - (i) strengthen the legal protection of all supervisors and former SBS staff;
  - (ii) grant the SBS powers to exercise consolidated supervision;
  - (iii) enhance the effectiveness of the AML/CFT framework, including ensuring the dissuasiveness and proportionality of sanctions.
- Continue efforts to improve risk-based supervision to ensure AML/CFT compliance by financial institutions.
- Bring some regulations in line with Basel III, including:
  - capital surcharges for systemic banks; and
  - risk weights for foreign currency loans (noted as helping reduce dollarization further).

### Strengthening governance and reducing informality
- Continuing legal reform is critical given expected growth payoff and popular support.
- Authorities’ actions and reforms to date:
  - Improved public sector transparency and governance following Lava Jato.
  - President Vizcarra submitted four political and judicial reforms to referendum; three were approved.
  - An Anti-Corruption Plan (2018-21) is being implemented to strengthen institutions and transparency.
  - Creation of invierte.pe and Proinversion reform to strengthen public investment and PPP mechanisms and ensure functioning of payment chains for contractors implicated in corruption probes.
- Additional reforms recommended to mitigate governance vulnerabilities and limit corruption:
  - Strengthen the Integrity Secretariat within the Presidency of the Council of Ministers to promote coordination and implementation.
  - Implement a robust system of income and asset declaration for high-level public officials to prevent and detect illegal enrichment and laundering of corruption proceeds and identify conflicts of interest.
  - Strengthen due diligence and investigations of politically exposed persons (PEPs) and increase sanctions for non-compliance.
  - Ensure accurate and up-to-date information in the beneficial ownership registry.
  - Simplify, increase transparency, and enhance competitiveness of the procurement system.
  - Reform the National Control System to better manage risks and increase accountability.
  - Introduce independent internal auditors in some entities and strengthen external audits.

### Structural reform priorities and competitiveness (Box 2 & related)
- Weak productivity growth is a long-standing concern; priorities identified include legal system and product market reforms.
- Prioritization approach referenced: combines TFP impact estimates with public support indicators.
- Key priorities and findings:
  - Legal system and product market reforms are top priorities where reform gaps are most evident.
  - Reforms in trade openness are less likely to yield large productivity payoffs given past progress.
  - Within legal system, impartiality of courts is a major concern.
  - Concrete steps to improve legal system: increase efficiency and transparency via technology and institutional changes to reduce scope for corruption.
- National Policy for Competitiveness and Productivity (late 2018) established nine priority objectives with measurable indicators; a National Plan was issued in late July (authorities should consider narrowing focus to achieve tangible progress).
- Authorities collaborating with the World Bank on a subnational Doing Business assessment to identify regional competitiveness needs.
- Reforms needed to ensure agro-export continuity and promote diversification including tourism.
- Reducing informality requires a comprehensive package balancing lower costs of formality with higher benefits; attenuating differences in labor regulations across firms of different size is important (see Box 3).

### Informality and size-dependent labor regulations (Box 3)
- Informal employment comprises nearly 70 percent of total employment in Peru (compared with Latin American average of 54 percent).
- World Bank Enterprise Survey (2017) findings:
  - 75 percent of manufacturing firms face competition from unregistered firms.
  - 39.1 percent of Peruvian companies cite business practices of informal competitors as the single largest obstacle (versus 31.3 percent in LAC and 28.2 percent globally).
- Size-dependent labor regulations:
  - When firms exceed 20 salaried employees, new obligations apply (sharing profits, permitting firm-specific union creation, setting up health and safety committee).
  - These obligations increase costs and may prevent firm growth or hiring beyond the threshold.
- IMF study findings: distribution of firms by size is discontinuous at the 20-employee threshold; number of non-salaried employees increases dramatically in firms with at least 20 salaried employees. These regulations create incentives to remain small and hire informally, lowering demand for formal labor and associated wages.
- Recommendation: improve design of these labor regulations to support formalization, wages, and productivity.

### Social protection, fiscal and monetary policy, and public investment
- Further efforts needed to improve social protection:
  - Reform pension system to ensure adequate social protection.
  - Provide a more equitable distribution of natural resource revenues across regions.
  - Provide technical support to regional governments for timely execution of their mining canons.
  - Deepen financial development and inclusion (identified as a priority in the National Competitiveness Plan).
- Authorities’ views:
  - Broad agreement on deterioration of the growth outlook; authorities more optimistic on short-term prospects expecting stronger public investment rebound and resilient consumption in 2020.
  - Authorities estimated delays in reforms and public investment reduced potential growth to about 3½ percent.
  - Recognized that delays in public investment limited fiscal policy ability to support growth and committed to improving budget execution (reallocating resources, reactivating stagnant projects, increasing government-to-government agreements in reconstruction).
  - Expected improvements in tax administration from electronic invoicing and measures to combat base erosion and profit shifting; additional tax revenues from new mines expected to create space for public investment while complying with the fiscal rule.
  - Monetary policy viewed as data-dependent; further easing may be needed if downside risks to inflation materialize. FXI use has declined significantly and remains limited to episodes of disorderly conditions. Authorities consider remaining dollarization largely reflects dollar invoicing of intermediate goods and services and may be irresponsive to exchange rate volatility.
  - Noted that reinforcing legal protection of supervisors and mandating consolidated supervision requires changing the Banking Law, not a current priority; other measures being considered include increasing risk weights for foreign currency loans.

### Staff appraisal: outlook, risks, and policy recommendations
- Recent performance and outlook:
  - Peru remains one of the best-performing Latin American economies but economic activity lost momentum due to less benign external environment and adverse domestic factors (2017 El Niño disruptions, Lava Jato findings).
  - After weakening in 2019, growth expected to strengthen gradually driven by recovery in net exports and resilient private demand in 2020 and following years; outlook clouded by significant risks from global swings and domestic political uncertainty.
- Short-term policy stance:
  - Additional fiscal support would be desirable in the short term.
  - Monetary and macroprudential policies provide adequate stimulus: policy rate near zero in real terms; reserve requirements low by historical standards; macroprudential instruments switched off since 2014.
  - FXI has been two-way and contained; external position broadly in line with fundamentals and desirable policies.
  - Fiscal policy has been procyclical partly due to budget under-execution; government should use fiscal space under the fiscal rule, emphasizing improved public investment implementation. In the medium term, consider more flexibility in fiscal framework while increasing revenue mobilization.
- Financial sector and regulatory recommendations:
  - Further strengthen the financial sector to increase resilience.
  - As dollarization declines, central bank could allow greater exchange rate flexibility to absorb external shocks and promote financial development.
  - Complete legislative and regulatory reform agenda: reinforce legal protection of supervisors; mandate SBS to exercise consolidated supervision; enhance effectiveness of AML/CFT framework.
  - Bring regulations in line with Basel III, including risk weights for foreign currency loans to help reduce dollarization further.
- Structural reform implementation:
  - Focus on key priorities to facilitate progress on the broad reform agenda; National Competitiveness Plan covers a large spectrum and may require a focused approach with clear timelines.
  - Continue improving public sector transparency and governance; address infrastructure gaps to boost productivity through significant improvements in public investment management.
  - Strengthen anti-corruption enforcement to improve growth and investment climate.
  - Foster economic diversification; extend agriculture promotion law and further improve business climate.

*Source: 1perea2020001 - 23. Completing the legislative and regulatory reform agenda requires additional efforts.*

### 38.      Improving social protection is necessary to make growth more inclusive and

### Improving social protection is necessary to make growth more inclusive and sustainable

### Key findings
- Peru has made significant progress in reducing poverty since the turn of the century.
- Critical needs remain in social protection and inclusive growth:
  - Pension system sustainability and coverage.
  - Equitable distribution of natural resource revenues across regions.
  - Deeper financial development and inclusion.
  - Reducing labor market rigidities and other costs that prevent workers and firms shifting from the informal to the formal sector.
- The authorities have identified deepening financial development and inclusion, and related measures, as priorities in the National Competitiveness Plan.

### Policy recommendations
- Reform the pension system to ensure its sustainability and enhance its coverage.
- Implement measures to provide a more equitable distribution of natural resource revenues across regions.
- Deepen financial development and inclusion as prioritized in the National Competitiveness Plan.
- Enact reforms that reduce labor market rigidities and other costs preventing formalization of workers and firms.

*Source: IMF staff chapter — "Improving social protection is necessary to make growth more inclusive and sustainable."*

### 39.      Staff recommends that the next Article IV consultation take pla

### 1perea2020001 - 39.      Staff recommends that the next Article IV consultation take pla

### Consultation timing
- Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

### Real sector developments
- After a bounce back in 2018, growth slowed again in 2019 due to weak export performance and lower than expected government expenditure.
- Real GDP (annual growth): 2014: 2.4; 2015: 3.3; 2016: 4.1; 2017: 2.5; 2018: 4.0; 2019: 2.4; 2020: 3.2; 2021: 3.7; 2022: 3.7; 2023: 3.7; 2024: 3.7.
- Output gap (percent of potential GDP): 2014: -0.2; 2015: -0.9; 2016: -0.6; 2017: -1.4; 2018: -0.9; 2019: -1.5; 2020: -1.3; 2021: -0.9; 2022: -0.5; 2023: -0.3; 2024: -0.1.
- Real domestic demand (annual change): 2014: 2.2; 2015: 2.6; 2016: 1.1; 2017: 1.4; 2018: 4.2; 2019: 3.3; 2020: 3.2; 2021: 4.0; 2022: 3.9; 2023: 3.8; 2024: 3.8.
- Unemployment rate: 2014: 6.0; 2015: 6.5; 2016: 6.7; 2017: 6.9; 2018: 6.7.

### Inflation and monetary policy
- Consumer prices (end of period): 2014: 3.2; 2015: 4.4; 2016: 3.2; 2017: 1.4; 2018: 2.2; 2019: 1.9; 2020–2024: 2.0 each year.
- Consumer prices (period average): 2014: 3.2; 2015: 3.5; 2016: 3.6; 2017: 2.8; 2018: 1.3; 2019: 2.1; 2020: 1.9; 2021–2024: 2.0 each year.
- The central bank lowered the policy rate as headline inflation has stayed within the target range; core inflation has similarly remained within range.

### Fiscal sector developments
- NFPS revenue (percent of GDP): 2014: 27.7; 2015: 25.0; 2016: 23.3; 2017: 22.9; 2018: 24.5; 2019: 25.1; 2020: 25.4; 2021: 25.7; 2022: 25.7; 2023: 25.7; 2024: 25.6.
- NFPS primary expenditure (percent of GDP): 2014: 26.9; 2015: 26.0; 2016: 24.7; 2017: 24.8; 2018: 25.4; 2019: 25.4; 2020: 25.4; 2021: 25.2; 2022: 25.2; 2023: 25.2; 2024: 25.3.
- NFPS primary balance (percent of GDP): 2014: 0.8; 2015: -1.0; 2016: -1.4; 2017: -1.9; 2018: -0.9; 2019: -0.3; 2020: 0.0; 2021: 0.5; 2022: 0.5; 2023: 0.4; 2024: 0.3.
- NFPS overall balance (percent of GDP): 2014: -0.3; 2015: -2.1; 2016: -2.5; 2017: -3.1; 2018: -2.3; 2019: -1.7; 2020: -1.5; 2021: -1.0; 2022: -1.0; 2023: -1.0; 2024: -1.0.
- Public gross debt (percent of GDP): 2014: 20.6; 2015: 24.1; 2016: 24.5; 2017: 25.4; 2018: 26.2; 2019: 26.8; 2020: 27.0; 2021: 26.6; 2022: 26.1; 2023: 25.7; 2024: 25.3.
- Primary balance has been increasing faster than anticipated, leading to a negative fiscal impulse; recovery in tax revenues and lower-than-expected government expenditure contributed to this.

### External sector developments
- Exports (U.S. dollar percent change): 2014: -7.8; 2015: -12.9; 2016: 7.8; 2017: 22.5; 2018: 8.0; 2019: -5.4; 2020: 3.5; 2021: 4.3; 2022: 4.8; 2023: 5.0; 2024: 5.1.
- Imports (U.S. dollar percent change): 2014: -3.1; 2015: -9.0; 2016: -5.9; 2017: 10.2; 2018: 8.1; 2019: -1.7; 2020: 2.7; 2021: 4.8; 2022: 5.6; 2023: 6.1; 2024: 5.8.
- Terms of trade (percent change, deterioration -): 2014: -5.4; 2015: -6.9; 2016: -0.3; 2017: 7.5; 2018: -0.2; 2019: -1.2; 2020: 0.8; 2021: 0.8; 2022: -0.1; 2023: -0.6; 2024: -0.4.
- External current account balance (percent of GDP): 2014: -4.5; 2015: -5.0; 2016: -2.6; 2017: -1.2; 2018: -1.6; 2019: -1.8; 2020: -1.6; 2021: -1.4; 2022: -1.3; 2023: -1.3; 2024: -1.4.
- Trade surplus has been shrinking on account of lower terms of trade and stagnating export volumes; current account deficit expected to widen in 2019.
- Gross reserves (billions of U.S. dollars): 2014: 62.4; 2015: 61.5; 2016: 61.7; 2017: 63.7; 2018: 60.3; 2019: 68.1; 2020–2024: 68.1 each year.
- Net international reserves (millions of U.S. dollars): 2014: 62,308; 2015: 61,485; 2016: 61,686; 2017: 63,621; 2018: 60,121; 2019: 67,067; 2020–2024: 67,067 each year.

### Financial sector and markets
- Credit growth moderated with expansion almost exclusively in local currency credit.
- Depository corporations credit to the private sector (12-month percent change): 2014: 13.2; 2015: 13.9; 2016: 5.1; 2017: 5.1; 2018: 10.3; 2019: 7.3; 2020: 6.9; 2021: 7.1; 2022: 6.6; 2023: 6.7; 2024: 6.8.
- Financial soundness indicators (as of December): Capital to risk-weighted assets: 2014: 14.2; 2015: 14.3; 2016: 15.1; 2017: 15.2; 2018: 15.3. NPLs to total gross loans: 2014: 2.9; 2015: 2.9; 2016: 3.1; 2017: 3.3; 2018: 3.4.
- Depository corporations remain well capitalized with low NPL ratios; profitability and liquidity indicators remain high (ROE and ROA series shown in figures).

### FX and capital market developments
- Exchange Rates Index (LC/$US, Jan 2012=100) shows the sol more stable than other Latin American currencies.
- Country risk spreads have remained low (Peru EMBI vs LAC4).
- Sovereign yield curve shifted down in 2019 relative to prior years.
- Equity prices have been stagnant while market capitalization declined again.

### Balance sheet and vulnerability indicators
- Net international investment position remained stable in 2018 despite fluctuations in liabilities to foreign banks.
- Financial dollarization continued to decline.
- Total external debt (percent of GDP): 2014: 34.2; 2015: 38.2; 2016: 38.4; 2017: 35.7; 2018: 34.5; 2019: 35.4; 2020: 34.8; 2021: 33.6; 2022: 32.5; 2023: 31.5; 2024: 29.8.
- External debt service (percent of exports of goods and services): 2014: 31.9; 2015: 36.8; 2016: 38.6; 2017: 43.7; 2018: 33.6; 2019: 35.0; 2020: 33.6; 2021: 32.3; 2022: 31.4; 2023: 29.8; 2024: 28.4.
- Gross external financing need (in billions of U.S. dollars): 2016: 19.1; 2017: 22.7; 2018: 19.3; 2019: 19.0; 2020: 18.3; 2021: 18.3; 2022: 18.7; 2023: 19.0; 2024: 19.4.
- Gross international reserves coverage: percent of short-term external debt: 2014: 522; 2015: 472; 2016: 424; 2017: 306; 2018: 364; 2019: 461; 2020: 466; 2021: 462; 2022: 450; 2023: 446; 2024: 442.

### External debt sustainability and scenario outcomes
- Baseline external debt (percent of GDP): 2014: 38.4 (shown in chart context); baseline projections and scenario shocks presented in bound tests (interest rate shock, current account shock, growth shock, combined shock, real depreciation shock) with scenario averages and historical comparisons shown in figures.
- Scenario summaries (figures): examples of average projections in boxes include values such as Baseline: 30; Interest rate shock scenario: 31; Growth shock scenario: 32; Current account shock scenario: 35; Combined shock scenario: 35; Real depreciation shock scenario: 43 (figures reflect chart annotations).

### Key projections and medium-term framework highlights
- Medium-term GDP growth projections: 2020: 3.2; 2021: 3.7; 2022–2024: 3.7 each year.
- Gross domestic investment (percent of GDP): 2019: 22.1; 2020: 22.3; 2021: 23.1; 2022: 23.6; 2023: 23.9; 2024: 24.0.
- National savings (percent of GDP): 2019: 20.3; 2020: 20.8; 2021: 21.7; 2022: 22.3; 2023: 22.5; 2024: 22.7.
- Nominal GDP (S/. billions) projections: 2019: 774; 2020: 816; 2021: 864; 2022: 916; 2023: 970; 2024: 1,027.
- GDP per capita (in US$): 2019: 7,097; 2020: 7,292; 2021: 7,597; 2022: 7,926; 2023: 8,279; 2024: 8,661.

*Source: National authorities; and IMF staff estimates/projections (figures and tables as presented in the chapter).*

### Annex I. Export Diversification: The Agro-Exporting Boom

### Annex I. Export Diversification: The Agro-Exporting Boom

### Expansion of agro-exports: scale and composition
- Agricultural exports expanded from 0.4 percent of GDP in 2001 to an estimated US$6 billion or 2.7 percent of GDP in 2019.
- Seasonal exports to the northern hemisphere of high-value fresh fruits and vegetables (mostly grapes, avocados, blueberries, and asparagus) total US$2.5 billion or 1.2 percent of GDP in 2019.
- Exports of other agricultural products (including citrus, bananas, cacao, and pomegranates) are also rising rapidly.
- Mining, oil and gas exports still account for about 2/3 of total exports and 22 percent of GDP.

### Employment and poverty impact
- Traditional agriculture employs 4.5 million workers (25 percent of the labor force), mostly in non-salaried or informal jobs, and is characterized by low productivity.
- The agro-exporting sector provides 0.8 million formal agricultural jobs, up from 0.46 million in 2004, and supports indirectly another 0.7 million jobs.
- Poverty trends:
  - Rural poverty fell from 80 percent in 2004 to 36 percent in 2018.
  - Coastal-area poverty fell from 67 percent in 2004 to 19 percent in 2018.
- Development of the agro-exporting sector has been particularly beneficial for coastal areas where it is located.

### Drivers of the boom
- Comparative advantages:
  - Year-round good weather.
  - Abundant cheap land near the coast.
- Public goods and policy actions that enabled the boom:
  - Construction of irrigation districts converting desert areas near the coast into farmland.
  - Existence of several free trade agreements that opened markets.
  - Diligent work of the phytosanitary authority (SENASA) which contributed to opening new markets.
  - The agriculture promotion law (Law 27360), promulgated in December 2000, providing fiscal benefits and more flexible labor regulation for the sector.
- Specific features of the agriculture promotion law (Law 27360):
  - Corporate income tax of 15 percent (instead of 30).
  - Social security contributions for health of 4 percent (instead of 9).
  - Allows for an accelerated 20 percent depreciation of investments.
  - Introduces temporary contracts for planting and harvesting, where workers are paid a daily rate (inclusive of the extra salaries and payroll insurance for regular workers), with 15 days of vacation (instead of 30, inclusive of holidays), severance pay of ½ the monthly pay for unjustified dismissal (instead of 1½).

### Structural constraints to further expansion and policy implications
- Policy uncertainty and institutional time-bounds:
  - The agriculture promotion law expires in 2021; large investments have stalled owing to disagreements between government and congress on whether it should be extended.
- Market diversification and seasonality:
  - SENASA will need to continue opening new markets to reduce the seasonality of demand.
- Infrastructure and logistics:
  - New investments in irrigation, roads, and ports are needed to extend farmland and reduce transportation and logistics costs.
- Market structure and inclusion:
  - Elevated vertical integration of the sector leads to dominance by large enterprises; accessing export markets remains extremely difficult for small-scale producers.
- Financing and property rights:
  - Difficult access to affordable long-term financing and adequate land titles may prevent expansion into new areas with comparative advantages, such as forestry and aquaculture.

*Source: IMF staff (Annex I. Export Diversification: The Agro-Exporting Boom).*

### Annex VI. External Sector Assessment

### Annex VI. External Sector Assessment

### Background: current account, trade, and terms of trade
- The current account deficit increased to 1.6 percent of GDP in 2018 (from 1.2 percent in 2017), driven by a fall of 0.4 percentage points of GDP in the service balance.
- The trade balance remained broadly unchanged as a share of GDP.
- Terms of trade remained broadly unchanged as the rise in copper and other commodity prices were balanced by higher import prices.
- Over the medium term, the current account deficit is expected to stabilize at about 1.5 percent of GDP after some widening in 2019.
- Trade and price dynamics noted in staff charts: export and import price movements and export/import volume year-on-year changes (BCRP and IMF staff estimates).

### Real effective exchange rate (REER), capital flows, and IIP
- REER:
  - The average REER in 2018 was 1.7 percent weaker than in 2017 but remained marginally higher than the 20-year average.
  - The REER strengthened somewhat in 2019 and is on average 1 percent higher than in 2017.
- Capital and financial account:
  - The capital and financial account deteriorated in 2018 (continuing since the peak of the commodity price boom) but recovered in 2019.
  - The current account is mostly financed with net FDI inflows; net FDI averaged 2.9 percent of GDP in the past 5 years.
  - The capital and financial account was close to zero in 2018, as net FDI inflows were compensated by net portfolio and short-term private flows; it turned positive in 2019 due in large part to strong private portfolio flows.
- International Investment Position (IIP) and external composition:
  - Peru’s external assets are 54 percent of GDP, including central bank foreign assets of 27 percent of GDP and financial system holdings of 16 percent of GDP.
  - Liabilities include large FDI liabilities of 47 percent of GDP, public and private external debt of 35 percent of GDP, and other liabilities of 9 percent of GDP.
  - Historical IIP: improved from -54 percent of GDP in the late 90s to -24 percent of GDP in 2011; since then IIP has been on a declining trend driven by FDI accumulation.
  - The IIP is projected to slightly improve to about 34 percent of GDP in the medium term.

### Reserve adequacy and FX liabilities
- Gross international reserves:
  - US$60.1 billion (27 percent of GDP) at end-2018.
  - Reserves equal 240 percent of the ARA metric, well above the 100–150 percent adequacy range.
  - Reserves exceed an augmented ARA metric that incorporates copper and gold volatility and commodity reliance by about 200 percent of the ARA metric after subtracting large FX liabilities to the banking sector.
  - If public sector deposits are excluded, reserves would be about 160 percent of the ARA metric.
  - These ratios remained largely unchanged in 2019, when gross international reserves increased by around 11 percent.
- FX liabilities and central bank intervention:
  - Large FX liabilities to the banking sector include reserve requirements and deposits from de-dollarization swaps.
  - The BCRP is an active participant in the foreign exchange market but does not target a specific exchange rate level.
  - In 2018, the BCRP purchased US$0.2 billion (0.1 percent of GDP) in the spot market and was more active using non-spot instruments.
  - Intervention in 2019 remained two-sided and limited, aimed at reducing exchange-rate volatility.

### Assessment: external position and valuation diagnostics
- Overall assessment for 2018:
  - Peru’s external position in 2018 was broadly consistent with fundamentals and desirable policies, though different approaches show some uncertainty.
  - EBA current account model: current account norm of -2.8 percent of GDP.
  - Cyclically adjusted current account: around 2.1 percent of GDP (with a standard error of 1 percent of GDP), considering output and terms of trade gaps.
  - Overall CA gap for 2018: about 0.7 percent of GDP (with the policy gap around zero as different gaps offset each other).
  - The positive CA gap implies that in 2018 the REER was broadly in line with the level consistent with fundamentals (CA regression-based approach given more weight).
  - REER regression results: index-based regressions point to REER broadly in line with fundamentals; level-based regression indicates REER is overvalued.
- Preliminary 2019 results:
  - External position for 2019 is expected to remain broadly in line with fundamentals as the current account had a small deterioration (bringing it closer to the norm).
  - Preliminary overall CA gap: about 0.4 percent of GDP (with a standard error of 1 percent of GDP).
  - REER gap under the current account regressions: 2 percent in 2019 (from 3 percent in 2018).
  - REER-based estimates (expect movement toward overvaluation):
    - Index-based regressions suggest an overvaluation of 4 percent.
    - Level-based regression suggests an overvaluation of 10 percent.
  - The assessment gives more weight to the CA-based approach, considered more reliable.
- Additional diagnostics and parameters reported in staff tables/figures:
  - CA gap definition: cyclically adjusted CA minus CA norm.
  - Elasticity reported: -0.22.
  - CA regression REER gap (in percent): 2/-3-0.66 (as presented in staff table).
  - REER range (in percent) incorporates uncertainty around estimates (+/-5 percent).

*Source: IMF staff estimates and BCRP (Annex VI. External Sector Assessment).*

### 2020. Programs include strengthening the

### 1perea2020001 - 2020. Programs include strengthening the

### Crisis management and bank resolution
- Recommendation: Strengthen institutional and staff capacity for crisis management.
- Action: Enhance information-sharing between SBS and FSD. (SBS, FSD) (MT)
  - Status: In progress. The working group to report to CERF is evaluating international practices to propose a comprehensive bank resolution framework.
- Recommendation: Require payout of most insured deposits within seven working days and provide legal protection to FSD staff/agents. (SBS, MEF) (MT)
  - Status: Not implemented. The authorities do not see the need for binding law as the payouts in practice are done much faster.

### Emergency Liquidity Assistance (ELA) framework
- Recommendation: Enhance the ELA framework by specifying eligibility and collateral requirements, and by providing for enhanced supervision, to ensure its effectiveness. (BCRP) (ST)
  - Status: Not in the authorities’ plans. According to the authorities, current provisions address the FSAP’s concerns.
  - Authorities’ description of current practice:
    - BCRP uses a large variety of collaterals in its lending operations.
    - The eligibility and requirements for their use are detailed in circulares enacted by the BCRP (022-2015-BCRP and 052-2013-BCRP).
    - This regulation establishes a comprehensive list of instruments to inject liquidity:
      - i) short-term and long-term repo operations that use high quality assets as BTPs and CDBCRPs as collateral;
      - ii) short and long-term fx-swaps, which use foreign currency as collateral;
      - ii) repos that use bank's loans as collateral through two instruments:
        - a) repos with loan portfolio operations represented in securities; and
        - b) repos with preferential participation certificates.

### Financial integrity (AML/CFT)
- Recommendation: Strengthen risk-based AML/CFT supervision (including sanctioning powers to enhance effectiveness) for banks and other high-risk reporting entities, focusing on preventive measures for mitigating risks of laundering of proceeds of corruption and drug trafficking. (MEF/SBS) (ST/MT)
  - Status: In progress. Working on amendments to the Banking Law in order to increase penalties which may include suspending dividends, restricting asset growth and operations in certain sectors of activity.

### Financial deepening and pension reforms
- Recommendation: Deepen repo markets, improve clearing and settlement infrastructure, prioritize medium- and long-term issuance around benchmark tenors. (BCRP/MEF) (ST/MT)
  - Status: In progress. The repo market is expanding.
  - Key statistic: By October 2019, interbank repo operations that use as collateral CDBCRP and BTPs accounted for 52 percent of the total volume of operations in the O/N money market.
- Recommendation: Design reforms to improve the private pension system. (MEF) (ST/MT)
  - Status: In progress. A commission is created to evaluate a comprehensive reform package under the leadership of the Ministry of Economy and Finance.

### Fund relations — membership and financial positions (as of October 31, 2019)
- Membership Status: Joined 12/31/1945; accepted the obligations of Article VIII, Sections 2(a), 3, and 4 on 2/15/1961.
- General Resources Account: Quota 1334.50 SDR Million 100.00 percent of Quota
  - Fund holdings of currency 1089.12 SDR Million 81.61 percent of Quota
  - Reserve Tranche Position 245.43 SDR Million 18.39 percent of Quota
- SDR Department: Net cumulative allocation 609.89 SDR Million 100.00 percent of Allocation
  - Holdings 531.81 SDR Million 87.15 percent of Allocation
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements (selected):
  - Stand-By Jan. 26, 2007–Feb. 28, 2009 Amount Approved 172.37 (SDR Million) Amount Drawn 0.00
  - Stand-By Jun. 09, 2004–Aug. 16, 2006 Amount Approved 287.28 (SDR Million) Amount Drawn 0.00
  - Stand-By Feb. 01, 2002–Feb. 29, 2004 Amount Approved 255.00 (SDR Million) Amount Drawn 0.00
- Projected Payments to the Fund:
  - Charges/Interest: 2019 0.17; 2020 0.64; 2021 0.64; 2022 0.64; 2023 0.64
  - Principal: 2019–2023 all 0.00

### Exchange arrangements and key market rates (specifics)
- Exchange arrangement: Peru has a de jure floating exchange rate arrangement.
- Market rate example: On October 30, 2019 the average of interbank buying and selling rates was 3.35 soles per U.S. dollar.

### FSAP, ROSCs, and technical assistance chronology (selected)
- FSAP and ROSCs: FSAP missions and updates occurred periodically (September 2000–January 2001; follow-up February 2005; FSAP Update July 2017–February 2018).
- Technical assistance examples (FAD, LEG, STA) include missions in years: 2014, 2015, 2016, 2017, 2018, 2019, and 2020 covering macro-fiscal issues, treasury management, tax administration, budgeting, governance, AML/CFT supervision, monetary and financial sector statistics, and national accounts.

### Statistical issues and data quality (as of November 30, 2019)
- General assessment: Macroeconomic statistics are broadly adequate for policy formulation, surveillance, and monitoring. Peru subscribes to the SDDS.
- Areas for improvement:
  - (i) coordination among agencies compiling official statistics to avoid duplication;
  - (ii) publishing a single official measure of inflation for Peru with component regional indexes;
  - (iii) redeveloping the wholesale price index (WPI) as a producer price index (PPI);
  - (iv) finalizing migration to standardized report forms for monetary data related to other financial corporations;
  - (v) expanding the scope of data sources for compiling financial flows of individual residents.
- National accounts: INEI released a new national account series in 2014 implementing the 1993 SNA with 2007 base year; INEI expected to finalize time series estimates by early 2020 for quarterly sector accounts.
- Price statistics: Official CPI for Metropolitan Lima uses weights based on the 2008/09 ENAPREF; national level CPI published separately since February 2012; WPI would ideally be redeveloped as a PPI.
- Labor market statistics: Authorities monitor five indicators: open unemployment, underemployment, employment, employment in the formal sector, and remunerations. Nationwide unemployment and underemployment are surveyed quarterly; broader regional coverage published based on ENAHO.
- Government finance statistics: BCRP compiles GFS following GFSM2001; revenues on cash basis and expenditures on accrual basis; financial assets and liabilities reported at face value.
- Monetary and financial statistics: Reported monthly to STA using SRFs; OFCs data recently reported and under review; reported statistics broadly in line with MFSM methodology.
- External sector statistics: BCRP compiles quarterly BOP and IIP following BPM5; timeliness to STA should improve (currently reported once a year rather than quarter by quarter); recommendations include migration to latest methodological standards and improving data coverage, valuation, instrument classification, delineation of reserves, and consistency among external datasets.
- Reporting frequency and data quality notes (selected):
  - Exchange Rates: Latest observation 11/28/19, Date Received 11/29/19, Frequency D, Reporting M, Publication D.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest observation 11/15/19, Date Received 11/22/19, Frequency D, Reporting M, Publication W.
  - Broad Money: Latest observation 10/31/19, Date Received 11/22/19, Frequency W, Reporting M, Publication W.
  - Consumer Price Index: Latest observation October 2019, Date Received 11/08/19, Frequency M, Reporting M, Publication M.

### Statement by the Staff Representative (January 8, 2020)
- Recent activity and growth signals:
  - Monthly GDP data for October shows a 2.1 percent y-o-y growth, with growth for January–October at 2.2 percent (y-o-y).
  - The October data showed recovery in primary sectors but weakening in nonprimary sectors, particularly manufacturing and construction.
  - BCRP revised down its 2019 growth projection from 2.7 percent to 2.3 percent in its quarterly inflation report issued on December 20th. BCRP left its 2020 growth forecast unchanged at 3.8 percent.
- Fiscal rule and escape clause:
  - The government invoked the escape clause of the fiscal rule framework to relax the fiscal deficit ceilings for 2021–23.
  - New fiscal deficit ceilings: 1.8, 1.6, and 1.3 percent of GDP in 2021, 2022, and 2023, respectively.
  - The deficit ceiling for 2020 remains unchanged at 2 percent of GDP.
  - The temporary modification has been legislated via a government decree and submitted to Congress’ Permanent Commission.
- Staff assessment:
  - The relaxation is considered appropriate to allow short-term fiscal easing and to create room for higher capital expenditure.
  - Peru’s sound fiscal position—with low public debt and significant fiscal assets—limits risks to debt dynamics.
  - Key caveats: the impact depends on the government’s capacity to reverse budget under-execution; frequent revisions to the fiscal rule may weaken its credibility.
  - Recommendation: consider adding additional flexibility to the fiscal framework in the medium term rather than relying on frequent uses of the escape clause.

*Prepared by the Western Hemisphere Department (content as provided in the source PDF).*

### 4.      The government has also extended the agriculture promotion law until 2031,

### 4.      The government has also extended the agriculture promotion law until 2031,

### Extension of the agriculture promotion law — provisions and implications
- The law was set to expire in 2021; uncertainty about its future was affecting investment decisions.
- The government issued a decree extending the law for an additional ten years (until 2031).
- The decree applies some provisions to the forestry and aquaculture sectors.
- Modifications included:
  - an increase in the number of vacation days from 15 to 30;
  - an 8 percent increase in the minimum daily remuneration;
  - an increase in employers’ health care contributions (which will gradually converge to the 9 percent rate applicable economy wide).
- The extension is aligned with staff’s policy advice.
- The decree has been submitted to Congress’ Permanent Commission, which will bring it to the new Congress once it is in session.

### Macroeconomic background — recent performance and buffers
- Economic growth reached 5.4 percent on average for the last 15 years.
- Peru’s GDP growth is expected to decelerate to 2.2 percent in 2019, a decline largely associated with temporary and/or idiosyncratic factors, mainly in mining and fishing.
- Non-primary industries are expected to grow by 3.2 percent (down from 4.2 percent in 2018).
- Gross international reserves reached USD 68 billion.
- Net public debt remains low at 12.6 percent of GDP (26.7 percent in gross terms).
- Between 2001 and 2019:
  - credit dollarization declined by 54 percentage points (from 80 to 26 percent);
  - financial intermediation (credit-to-GDP ratio) increased from 23 to 42 percentage points of GDP.

### Recent developments — growth, sectors, and expectations
- Domestic demand slowed to 2.5 percent annual growth in 2019 (from 4.2 percent in 2018).
- Non-commodity exports, mainly agricultural products, continued to rise (Peru among top exporters of blueberries, citrus, grapes, avocados and others).
- Expected drivers of recovery in 2020-2021: normalization of production in major mines, phasing-out of “base effects” affecting fishing growth, and the start of operations of new mining projects.
- Authorities project a faster narrowing of the output gap relative to staff forecasts as confidence recovers and public investment rebounds.
- Political economy factors affecting confidence included corruption allegations, difficulties between government and congress, and delayed implementation of regional projects due to new local authorities; these factors are expected to diminish as frictions resolve and new congressional authorities are elected at end-January.

### External sector — balances and capital flows
- The external current account deficit in 2019 remained unchanged relative to 2018.
- The current account deficit is expected to remain stable in 2020 and 2021, below the average for the last 8 years.
- Foreign direct investment continues being the main source of external financing.
- Foreign portfolio investors allocated US$2.1 billion to the private sector assets and US$4.2 billion to sovereign securities in 2019.

### Monetary policy — stance and instruments
- The Central Reserve Bank of Peru (BCRP) reduced its policy interest rate in August and again in November to 2.25 percent.
- In 2019, inflation was 1.9 percent and the estimated output gap around -1 percent on average.
- Inflation target range: 1-3 percent (policy aims to maintain inflation and inflation expectations around the midpoint).
- Use of unconventional instruments: reserve requirements and foreign exchange intervention (FXI) complement policy rate decisions to limit risks from financial dollarization and volatility in capital flows.
- FXI frequency decreased significantly during 2018 and 2019 (intervention days declined to less than a week in both spot and derivative markets).
- Non-residents’ share in sovereign bonds holdings reached 47 percent towards the end of the year.

### Fiscal policy — outcomes and medium-term trajectory
- The overall fiscal deficit is expected to decline to 1.7 percent in 2019, mostly because of higher revenue.
- The structural fiscal balance improved by 0.8 percent of potential GDP.
- The November 2019 local currency issuance: 10 billion soles (about USD 3 billion) with maturities of 15 and 21 years, attaining interest rates of 4.95 and 5.35 percent respectively.
- The government revised the trajectory of the overall fiscal deficit to smooth the transition towards the one percent fiscal deficit rule; the new trajectory aims at reaching a 1 percent overall fiscal deficit by 2024.
- Measures to enlarge fiscal space and improve revenue include:
  - Digital Transformation Plan;
  - encouraging voluntary compliance;
  - introducing anti-elusion measures;
  - expanding electronic invoicing.

### Financial sector — credit, risks, and supervision
- Ratio of credit to GDP: 44 percent (up by 3 percent from 2014).
- Nonperforming loans remain low at 3.5 percent of total.
- The SBS introduced an additional capital charge equivalent to an 8 percent increase in the risk weight for foreign exchange credit risk exposures.
- The SBS is enhancing monitoring of banks’ off-balance sheet exposures, considering additional surcharges for systemic banks, and incorporating more than one thousand financial cooperatives under its supervision.
- Pension fund reform proposals are being coordinated among the SBS, Ministry of Finance, and Ministry of Labor.

### Structural reform — productivity, infrastructure, and labor market
- The National Plan of Competitiveness and Productivity approved last July identifies nine priority objectives: improving infrastructure, human capital, innovation, financial deepening, labor markets, the business environment, international trade, government institutions, and environmental sustainability.
- The National Infrastructure Plan for Competitiveness identifies 52 priority projects to narrow the infrastructure gap estimated at about USD 100 billion.
- Informal employment remains large; national unemployment was 3.7 percent of the labor force in the third quarter of 2019.
- The agrarian promotion law’s extension is noted as successful in driving labor formalization in the sector; it retains flexibility in labor contracts while increasing benefits to workers.
- Medium-term need to formulate policies for more efficient absorption of Venezuelan immigrants into the formal job market.
- Anti-corruption and governance initiatives:
  - Implementation of the 2018-21 Anti-corruption Plan;
  - Creation of the Council for Judicial Reform in May 2019;
  - Suspicious activities reported to the Financial Intelligence Unit more than tripled between 2013 and 2018 (and expected to have increased further in 2019).

*Statement by Mr. Lopetegui, Executive Director and Mr. Morales, Senior Advisor on Peru — January 8, 2020*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1perea2020001.pdf_