## 1. Fiscal Support Measures to Mitigate the Impact of Social Unrest ## Source details **Canonical URL:** [1. Fiscal Support Measures to Mitigate the Impact of Social Unrest](https://www.imf.org/-/media/files/publications/cr/2023/english/1perea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1perea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1perea2023001.pdf.json) --- ### Context - Peru’s macroeconomic performance described as "one of the strongest in Latin America" over the last quarter century, supported by stabilization in the 1990s, structural reforms, inflation targeting, and fiscal rules. - Outcomes attributed to these policies: - Public debt burden "lowered in half." - Poverty reduced "by two thirds." - Economy grew at an annual rate of "almost 5 percent" over the last two decades prior to the COVID-19 pandemic and "multiplied its size by about 2½ times." - Inflation averaged "2½ percent" over the same period. - Reforms coincided with commodity supercycle enabling large FDI inflows and macroeconomic buffers. ### Impact of COVID-19 and External Shocks - COVID-19: - Peru recorded "one of the highest pandemic-related mortality rates globally." - Lockdowns caused "devastating impact" in 2020; strong policy response enabled rapid recovery. - Real GDP grew "13.6 percent in 2021" ("the highest growth rate among peer countries"). - Russia–Ukraine war: - Direct trade exposure small; main channels: imported inflation and global slowdown. - Indirect effects: higher energy prices, global supply bottlenecks, high inflation, tighter financial conditions, slower demand from key partners (notably China). ### Recent Political Developments and Social Unrest - Political events: - Dina Boluarte became President in December 2022 after Congress impeached former President Castillo. - Violent protests followed, with "the killings of around 60 people." - Early elections proposed for "October 2023" after initially considering "April 2024"; Congress has not approved Constitutional amendments, prolonging uncertainty. - Policy priorities to address unrest and restore confidence: - Restore confidence across the political spectrum. - Ease elevated social tensions. - Tackle inequality, poverty, and weaknesses in education and health systems. - Accelerate structural reforms to boost economic activity. ### Macroeconomic and Policy Frameworks — Key Statistics - Fiscal and macro fundamentals: - NFPS deficit: "1.6 percent of GDP in 2022" (down from "2½ percent of GDP in 2021"); below fiscal rule limit of "3¾ percent of GDP." - Tax revenues rose "over 13 percent (y/y)" in 2022. - Public debt: "33½ percent of GDP in 2022" (from "36½ percent of GDP in 2021"). - Public assets: "some 12¾ percent of GDP." - One-off tax payments contributed "about ½ percent of GDP." - Financial buffers and markets: - International reserves: US$72.2 billion (late December 2022) — around 240 percent of the ARA metric. - External debt at end-2022: "43percent of GDP" (noting source text formatting). - Financial markets reaction to political turmoil: "muted" — stock prices increasing, exchange rate weakening slightly, EMBI spread broadly stable. ### Flexible Credit Line (FCL) and Safeguards - FCL arrangements: - IMF Board approval: May 2022 on "very strong fundamentals and institutional policy frameworks." - Access under two-year successor FCL: "SDR 4 billion (300 percent of quota)" (reduced from SDR 8 billion (600 percent of quota)). - Arrangement intended precautionary; FCL mid-term review scheduled for "May 2023." - Safeguards: - KPMG Peru issued an "unmodified (clean) audit opinion" on BCRP’s 2021 financial statements. - Staff completed safeguards procedures; "No significant safeguards issues emerged." ### Recent Developments in Growth, Labor, and Inflation - Growth: - Post-2021 rebound slowed: "3½ percent (y/y) in the first half of 2022" and estimated "1¾ percent (y/y) in the second half of the year." - Annual growth 2022 estimated at "2.7 percent." - 2023 projection: "2.4 percent" (staff); potential convergence to 3 percent thereafter. - Labor and poverty: - Unemployment: "around 11 percent in 2021," estimated "7¾ percent in 2022" (pre-pandemic ~ "6½ percent"). - Poverty: peaked at "30 percent in 2020," declined to "26 percent in 2021," pre-pandemic around "20 percent." - Extreme poverty: "5 percent in 2020" to "4 percent" (still above pre-pandemic ~ "3 percent"). - Inflation: - Headline inflation: peaked "8¾ percent (y/y) in June 2022," declined to "8½ percent (y/y) in December 2022," then increased to "8¾ percent in January 2023" (supply shocks from unrest). - Core inflation: "5¾ percent (y/y) in January 2023"; annualized over 3- and 6-month horizons "between 3 and 4 percent." - Wholesale price inflation: fell from "13¾ percent in May 2022 to 8½ percent in January 2023." - Select inflation indicator excerpts (annualized rates, percent): - Jun 2021: Headline 2.8 (3-mo.), 4.4 (6-mo.), 3.3 (12-mo.); Core 1.9 (3-mo.), 2.3 (6-mo.), 1.9 (12-mo.) - Dec 2021: Headline 7.1 (3-mo.), 8.5 (6-mo.), 6.4 (12-mo.); Core 4.9 (3-mo.), 4.2 (6-mo.), 3.2 (12-mo.) - Jun 2022: Headline 10.6 (3-mo.), 9.1 (6-mo.), 8.8 (12-mo.); Core 7.9 (3-mo.), 5.7 (6-mo.), 5.0 (12-mo.) - Dec 2022: Headline 6.8 (3-mo.), 7.8 (6-mo.), 8.5 (12-mo.); Core 5.2 (3-mo.), 5.4 (6-mo.), 5.6 (12-mo.) - Jan 2023: Headline 6.3 (3-mo.), 6.3 (6-mo.), 8.7 (12-mo.); Core 3.3 (3-mo.), 4.0 (6-mo.), 5.8 (12-mo.) ### Monetary Policy Response and Guidance - Actions taken: - Policy rate increased by "750 basis points (bps) in 18 consecutive steps" to "7¾ percent in January 2023." - Authorities paused tightening in February 2023 to assess effects. - 12-month forward inflationary expectations declined from "5½ percent in June 2022 to 4½ percent in January 2023." - Staff guidance: - Data-driven monetary tightening remains appropriate. - Avoid premature or permanent end to tightening if inflationary pressures persist. - Communication improvements recommended: publish more information on policy intentions and consider minutes of policy meetings. ### Financial Sector Resilience and Supervisory Measures - Banking indicators (as of December 2022): - ROE: "16¼ percent" (compared with "17¾ percent in February 2020"). - ROA: "2 percent" (compared with "2⅓ percent in February 2020"). - NPLs: stabilized "around 4 percent"; SMEs NPLs "7 percent." - Credit growth: decelerated to "3½ percent (y/y) in December 2022" and turned negative in real terms. - Prudential measures: - LCR reinstated. - Minimum capital ratio phasing back to "10 percent" in "½ percent increments every semester." - Top-down stress tests (2018 FSAP and authorities' exercises) suggest resilience "even under severely adverse scenarios." - Remaining supervisory priorities: - Enhance supervision of financial groups. - Require resolution planning for D-SIBs and improve money market functioning. ### External Position, Current Account, and Outlook - 2022 external assessment: - Cyclically adjusted current account balance for 2022: "-3.0 percent of GDP." - Current account norm (multilateral model): "-1.9 percent of GDP." - Current account gap: "-1.1 percent of GDP." - Current account deficit estimated at "about 4.5 percent of GDP in 2022" (double the level a year earlier). - Terms of trade declined "by some 10 percent in 2022." - Import prices: rising, notably refined oil products, industrial inputs, and food (increasing "14 percent"). - Export prices: almost flat; copper prices declining "5 percent on average over the year." - International reserves: US$72.2 billion (around 240 percent of ARA metric) in late December 2022. - External debt at end-2022: "43percent of GDP." - Staff macro projections (selected): - GDP growth (%Δ): 2022 est. 2.7; 2023 proj. 2.4; 2024 proj. 3.0; 2025-28 average 3.0 - Inflation (%Δ): 2022 est. 8.5; 2023 proj. 3.0; 2024 proj. 2.3; 2025-28 average 2.0 - Credit growth (%Δ): 2022 est. 3.6; 2023 proj. 6.1; 2024 proj. 5.4; 2025-28 average 5.8 - Fiscal balance (Percent of GDP): 2022 est. -1.6; 2023 proj. 2.0; 2024 proj. -2.0; 2025-28 average -1.1 - Public debt (NFPS, Percent of GDP): 2022 est. 33.4; 2023 proj. 33.0; 2024 proj. 33.3; 2025-28 average 32.6 - Current account (Percent of GDP): 2022 est. -4.5; 2023 proj. -2.1; 2024 proj. -2.3; 2025-28 average -1.8 - Outlook: - Real GDP growth projected at "2.4 percent in 2023" before converging to potential of "3 percent" in subsequent years. - Output gap forecast to be closed in 2024 after a small negative output gap of "½ percent (of potential GDP) in 2023." ### Policy Buffers and Recommended Policy Mix - Policy buffers: - Public debt remains lowest in the region. - Sizable international reserves (about 30 percent of GDP). - Access to international capital markets and FCL arrangement. - Robust financial sector. - Recommended approach: - Integrated Policy Framework (IPF) with coordinated monetary, fiscal, and exchange rate policies to alleviate tradeoffs. - FX intervention role highlighted under different conditions to alleviate policy tradeoffs; encourage development of deeper forward FX markets and targeted interventions. ### Fiscal Policy: Short- and Medium-Term Guidance - Recent fiscal stance and expectations: - Authorities modified fiscal rule for 2023-25, delaying gradual fiscal adjustment by one year (starting 2024) to achieve NFPS deficit objective of "1 percent of GDP by 2026" (instead of 2025). - Debt limit set at "38 percent of GDP" aiming to return to "30 percent of GDP by 2030." - Short-term fiscal stance: - A slightly expansionary fiscal stance is appropriate in the short term. - 2023 budget envisions NFPS fiscal deficit of "about 2.4 percent of GDP." - Staff estimates NFPS deficit could reach "2 percent of GDP" implying a small fiscal impulse of about "0.4 percent." - Guidance on additional support: - Any additional fiscal support: temporary, targeted, and small to avoid adding to aggregate demand and inflationary pressure. - Upside growth surprises should be used to build further fiscal buffers. - Box — Con Punche Perú (January 2023): - Program size: "about 0.6 percent of GDP." - Measures: support vulnerable households and firms (agriculture, tourism), support subnational governments, accelerate shovel-ready public investment execution. - Household support: additional direct cash transfers to Juntos, Contigo, and Pension 65 beneficiaries; accelerate national program to widen access to natural gas. - Firms: temporary tax relief, extension of access to pandemic-era guaranteed credit programs, removal of bureaucratic procedures. - Subnational support: technical assistance and hiring experienced project managers. ### Fiscal Credibility, Risks, and Recommended Measures - Risks requiring contingency planning: - Revenues may underperform. - Higher default rates from pandemic-era guaranteed loan programs if activity slows. - Failure to stabilize Petroperu could demand additional central government resources. - Sizable spending pressures from unfunded expenditure initiatives by Congress (example: restitution of FONAVI funds) and public-sector collective bargaining. - Recommended actions: - Prepare contingency plans and identify financing to address risks. - Upgrade MTBF by identifying and quantifying policy and administrative measures to support convergence to fiscal targets. - Explore scope for rolling back tax expenditures (estimated "about 2 percent of GDP") after comprehensive review. - Improve tax administration (digital tax registry introduced in 2022) and increase transparency in public procurement. - MTBF strategy: - Envisions gradual fiscal consolidation of "about ½ percentage points of GDP per year during 2025-26." - Staff view: plans feasible with limited impact on activity; risk of overestimation of tax revenues exists. ### Pension System: Challenges and Reform Options - Early withdrawals since 2020: - "About 50 percent of the private system’s assets (a cumulative 10 percent of GDP) have been withdrawn." - After withdrawals, "about 2.3 million people have no savings" and "1.8 million people have relatively low balances." - Reform options and guidance: - Budget-neutral expansion to the basic pension (possibly a universal “solidarity pension”) financed by additional taxation. - Any reform proposal should remain within the current fiscal framework. - Multisector Commission expected to present evaluation and reform proposal. ### Structural Reforms, Growth, and Inclusion - Reform priorities: - Education: reverse pandemic-related learning losses and improve outcomes. - Improve business environment, infrastructure investment, reduce regulatory uncertainty, and accelerate reforms to boost investment and productivity. - Reduce informality via human capital, labor market reforms, simplified tax and business regulations, and greater labor market flexibility. - Governance: enhance transparency in COVID-19 spending, strengthen anti-corruption institutions, improve public finance management and procurement, and digitalize government services. - Estimated impact: - Significant reforms in labor market, governance, and domestic finance could increase GDP by "up to 8 percent over time." - Caution: - Restrictions on outsourcing risk increasing informality; minimum wage adjustments should align with average productivity growth. ### Climate Change Mitigation: CPAT Scenarios and Policy Implications - Emissions and targets: - LULUCF largest source; LULUCF emissions in 2016: "109 million tons of CO2eq" (~53 percent of total). - Updated NDC 2030 targets: absolute unconditional 208.8 MtCO2eq; absolute conditional 179 MtCO2eq. - CPAT-modeled scenarios to meet 2030 NDC: - Just Land-Use: cut land-use change emissions by "41 percent by 2030"; carbon tax not required. - Proportionate: all emissions cut about "25 percent from BAU"; carbon tax starting at "$25 per ton of CO2 in 2023" rising to "$155 per ton of CO2 by 2030." - Hybrid: land-use change emissions cut by "35 percent by 2030"; carbon tax starting at "$20 per ton of CO2 in 2023" rising to "$50 per ton of CO2 by 2030." - Fiscal and macro trade-offs: - Proportionate scenario: additional fiscal revenues in 2030 equal "1.88 percent of GDP"; cumulative additional revenues 2024-2030 "bn USD 28.3." - Hybrid scenario: additional fiscal revenues in 2030 equal "0.70 percent of GDP"; cumulative 2024-2030 "bn USD 11.6." - GDP impact in 2030: Proportionate pure mitigation cost "-1.0 percent of GDP"; Hybrid "-0.3 percent of GDP." - If "50 percent of revenues collected from the carbon tax are recycled effectively through productive public investment," the negative GDP impact would be completely offset. - Price impacts by fuel (selected 2030 comparisons vs. 2022 baselines): - Gasoline $/L: 2022 Price 0.71; 2030 Proportionate 0.92; 2030 Hybrid 0.64 - Diesel $/L: 2022 Price 1.26; 2030 Proportionate 1.45; 2030 Hybrid 1.13 - Coal $/GJ: 2022 Price 13.33; 2030 Proportionate 23.89; 2030 Hybrid 13.97 - Electricity $/kWh: 2022 Price 0.11; 2030 Proportionate 0.12; 2030 Hybrid 0.10 - Distributional design: - Carbon pricing is regressive without revenue recycling; targeted revenue recycling (e.g., unconditional cash transfers to bottom four deciles) can make reform pro-poor and equity enhancing. - Policy recommendation: - Prioritize rapid reductions in deforestation and land-use change emissions to lower required carbon price burden; combine forestry and agriculture interventions with carbon pricing for energy-related emissions. ### Risk Assessment and Main Risks - Global risks (selected): abrupt global slowdown (Likelihood: Medium; Impact: High); commodity price volatility (Medium; Medium); monetary policy miscalibration (Medium; Medium); systemic financial instability (Medium; Medium). - Domestic risks (selected): social unrest (Likelihood: High; Impact: High); natural disasters related to climate change (Medium; Impact: High). - Staff view: risks to inflation and growth tilted to the downside; policy buffers (low public debt, ample reserves, FCL) help mitigate tail risks. ### Staff Appraisal — Summary - Outlook highly uncertain but Peru has ample buffers to face adverse shocks. - Staff expect growth to remain below potential in 2023 due to moderating world growth, lower commodity prices, tighter financial conditions, political uncertainty, and road blockades. - Inflation is well above target, eroding real incomes; risks tilted to the downside. - Preliminary assessment: Peru’s external position in 2022 moderately weaker than level implied by fundamentals and desirable policies, with uncertainty due to multiple shocks in 2022. - Peru continues to show very strong fundamentals and institutional policy frameworks and remains committed to maintaining very strong policies. *Source: 1perea2023001 — 1. Fiscal Support Measures to Mitigate the Impact of Social Unrest* ### 1. Fiscal Support Measures to Mitigate the Impact of Social Unrest ______________________________ 15 ### 1. Fiscal Support Measures to Mitigate the Impact of Social Unrest ### Context - Peru’s macroeconomic performance over the last quarter of a century is described as "one of the strongest in Latin America," supported by stabilization in the 1990s, structural reforms, inflation targeting, and fiscal rules. - Outcomes attributed to these policies: - Public debt burden "lowered in half." - Poverty reduced "by two thirds." - Economy grew at an annual rate of "almost 5 percent" over the last two decades prior to the COVID-19 pandemic and "multiplied its size by about 2½ times." - Inflation averaged "2½ percent" over the same period. - Reforms coincided with the commodity supercycle and enabled large FDI inflows and large macroeconomic buffers. - Political instability and natural disasters have moderated convergence; Annex I provides further detail on convergence episodes. ### Impact of COVID-19 and External Shocks - COVID-19 effects: - Peru recorded "one of the highest pandemic-related mortality rates globally." - COVID-19 lockdowns caused "devastating impact" in 2020 but strong policy response enabled a rapid recovery. - Real GDP grew "13.6 percent in 2021" (described as "the highest growth rate among peer countries"). - Russia–Ukraine war impacts: - Direct trade exposure to Russia and Ukraine is small; main channels are imported inflation and global slowdown. - Indirect effects include higher energy prices, global supply bottlenecks, high inflation, tighter financial conditions, and slower demand from key partners, notably China. ### Recent Political Developments and Social Unrest - Political changes and unrest: - Former Vice-President Dina Boluarte became President in December 2022 after Congress impeached former President Castillo. - Violent protests followed, with "the killings of around 60 people." - Early elections were proposed for "October 2023" after initially considering "April 2024," but Congress has not approved the Constitutional amendments, prolonging uncertainty. - Policy priorities to address unrest and restore confidence: - Restore confidence across the political spectrum. - Ease elevated social tensions. - Tackle inequality, poverty, and weaknesses in education and health systems. - Accelerate structural reforms to boost economic activity. ### Macroeconomic and Policy Frameworks - Strong fundamentals and policy frameworks remain in place: - Public debt-to-GDP ratio is at "the lowest level in the region." - Peru reintroduced fiscal targets after suspension of the fiscal rule during 2020-21. - Inflation and inflationary expectations are "among the lowest in the region" despite recent rises. - Financial markets reaction to political turmoil: "muted," with stock prices increasing, exchange rate weakening slightly, and EMBI spread broadly stable. - Fiscal position: - NFPS deficit fell to "1.6 percent of GDP in 2022" (from "2½ percent of GDP in 2021"), below the fiscal rule limit of "3¾ percent of GDP." - Tax revenues rose "over 13 percent (y/y)" in 2022. - Public debt fell to "33½ percent of GDP in 2022" (from "36½ percent of GDP in 2021"). - Public assets amounted to "some 12¾ percent of GDP." - One-off tax payments contributed "about ½ percent of GDP." ### Flexible Credit Line (FCL) and Buffers - FCL arrangement details: - Approved by the IMF Board in May 2022 based on "very strong fundamentals and institutional policy frameworks." - Access under the two-year successor FCL arrangement: "SDR 4 billion (300 percent of quota)" (a reduction from SDR 8 billion (600 percent of quota) under the previous arrangement). - Authorities expect to treat the arrangement as precautionary and to exit it over time, conditional on external risk developments. - FCL mid-term review scheduled for "May 2023." - Safeguards and audits: - KPMG Peru issued an "unmodified (clean) audit opinion" on the BCRP’s financial statements for 2021. - Staff completed safeguards procedures for Peru’s FCL arrangement; "No significant safeguards issues emerged." ### Recent Developments in Growth, Labor, and Inflation - Growth: - After 2021 rebound, real GDP growth slowed: "3½ percent (y/y) in the first half of 2022" and an estimated "1¾ percent (y/y) in the second half of the year," with the annual growth rate in 2022 estimated at "2.7 percent." - Drivers of 2022 slowdown: withdrawal of policy stimulus, erosion of terms-of-trade gains, slowing external demand, tightening financial conditions, and road blockades/strikes reducing copper production and exports. - Labor and poverty: - Unemployment rate: fell to "around 11 percent in 2021," and estimated "7¾ percent in 2022" (pre-pandemic level around "6½ percent"). - Formal employment surpassed pre-pandemic levels in early 2022; share of informal labor declined slightly in 2022 but remains very high. - Poverty: peaked at "30 percent in 2020," declined to "26 percent in 2021," but remains above pre-pandemic levels of around "20 percent." - Extreme poverty: declined from "5 percent in 2020 to 4 percent" but remains above pre-pandemic levels of around "3 percent." - Inflation: - Headline inflation peaked at "8¾ percent (y/y) in June 2022," declined to "8½ percent (y/y) in December 2022," then increased again to "8¾ percent in January 2023" due mainly to supply shocks from social unrest and road blockades. - Core inflation reached "5¾ percent (y/y) in January 2023," but annualized over shorter horizons it was "between 3 and 4 percent" (3- and 6-month annualized). - Wholesale price inflation fell from "13¾ percent in May 2022 to 8½ percent in January 2023." - Inflation indicator table (annualized rates, percent) excerpts: - Jun 2021: Headline 2.8 (3-mo.), 4.4 (6-mo.), 3.3 (12-mo.); Core 1.9 (3-mo.), 2.3 (6-mo.), 1.9 (12-mo.) - Dec 2021: Headline 7.1 (3-mo.), 8.5 (6-mo.), 6.4 (12-mo.); Core 4.9 (3-mo.), 4.2 (6-mo.), 3.2 (12-mo.) - Jun 2022: Headline 10.6 (3-mo.), 9.1 (6-mo.), 8.8 (12-mo.); Core 7.9 (3-mo.), 5.7 (6-mo.), 5.0 (12-mo.) - Dec 2022: Headline 6.8 (3-mo.), 7.8 (6-mo.), 8.5 (12-mo.); Core 5.2 (3-mo.), 5.4 (6-mo.), 5.6 (12-mo.) - Jan 2023: Headline 6.3 (3-mo.), 6.3 (6-mo.), 8.7 (12-mo.); Core 3.3 (3-mo.), 4.0 (6-mo.), 5.8 (12-mo.) ### Monetary Policy Response - Monetary tightening: - Central bank increased policy rate by "750 basis points (bps) in 18 consecutive steps" to "7¾ percent in January 2023." - Authorities paused tightening in February 2023 to assess effects. - 12-month forward inflationary expectations have declined from "5½ percent in June 2022 to 4½ percent in January 2023." - Policy normalization described as "one of the longest tightening cycles." ### Financial Sector Resilience - Banking sector performance and indicators: - Return on equity (ROE): "16¼ percent as of December 2022" (compared to "17¾ percent in February 2020"). - Return on assets (ROA): "2 percent as of December 2022" (compared to "2⅓ percent in February 2020"). - Credit and nonperforming loans: - Credit growth decelerated to "3½ percent (y/y) in December 2022" and turned negative in real terms. - Nonperforming loans (NPLs) stabilized at "around 4 percent," with SMEs exhibiting the highest NPLs at "7 percent." - Policy adjustments and supervision: - Withdrawal of borrower-based support measures (government-guaranteed loans and flexible loan adjustment terms) contributed to credit deceleration. - Authorities reinstated the liquidity coverage ratio (LCR). - Minimum capital ratio is being phased back to "10 percent" in "½ percent increments every semester." - Stress test assessments: - Top-down stress tests from the 2018 FSAP and recent authority exercises suggest the banking system is resilient "even under severely adverse scenarios." *Source: 1perea2023001 - 1. Fiscal Support Measures to Mitigate the Impact of Social Unrest* ### 13. Financial market volatility has increased in line with global trends. Asset prices lost value ### 13. Financial market volatility has increased in line with global trends. Asset prices lost value ### Financial market developments and asset prices - Asset prices lost value in the first half of 2022, driven by falling metals prices, the global financial environment and, to a lesser extent, by political uncertainty, before regaining lost ground in the second half of 2022. - The exchange rate has appreciated slightly, with swings reflecting monetary policy tightening in Peru, liftoff in advanced economies, and global metal price trends. - Exchange rate volatility remained among the lowest in the region, with fewer and smaller foreign exchange interventions relative to 2021. - The cost of government funding has increased in line with policy rate hikes and an increase in risk premia that reflect a global rebalancing of risks as well as heightened political uncertainty. - Peru’s sovereign spreads remain among the lowest in the region. ### Corporate sector: recent performance and balance-sheet indicators - After suffering heavily during the pandemic, the corporate sector is showing signs of strength. - Corporate profitability now exceeds pre-pandemic levels and is one of the highest in the region. - Corporate leverage is the lowest in the region: it increased significantly in 2020 but then declined. - The cash ratio is well above the pre-pandemic levels. - Peru’s interest coverage is the highest in the region and exceeds pre-pandemic levels. - The share of debt at risk has fallen to pre-pandemic levels and is not high by regional standards. ### External position and current account - Peru’s 2022 external position is assessed to be moderately weaker than the level implied by medium-term fundamentals and desirable policies. - The estimated cyclically adjusted current account balance for 2022 is -3.0 percent of GDP; the current account norm from the multilateral model is -1.9 percent of GDP; the resulting current account gap is -1.1 percent of GDP (marginally outside the +/- 1 percent range). - The current account deficit is estimated to have widened to about 4.5 percent of GDP in 2022, double the level a year earlier, reflecting: - a deterioration in the terms of trade, - higher demand for non-durable goods as the economy reopened, - higher freight payment rates, - and large profits by foreign companies. - Peru’s terms of trade declined by some 10 percent in 2022. - Import price developments in 2022: higher import prices—especially prices of refined oil products, industrial inputs, and food (increasing 14 percent). - Export price developments in 2022: almost flat export prices mainly on account of a downward correction of copper prices (declining 5 percent on average over the year). - International reserves: US$72.2 billion or around 240 percent of the ARA metric in late December 2022 (compared to 78.5 billion at end-2021 or some 270 percent of the ARA metric). - External debt at end-2022 was at 43percent of GDP. ### Outlook and key macro projections - Growth and output: - Real GDP growth projected at 2.4 percent in 2023 before converging to potential of 3 percent in subsequent years. - Output gap forecast to be closed in 2024 after a small negative output gap of ½ percent (of potential GDP) in 2023. - Current account: - Projected at close to 2.1 percent in 2023 and to gradually decline to 1.5 percent in 2028. - Macroeconomic framework (selected staff projections and estimates): - GDP growth (%Δ): 2022 est. 2.7; 2023 proj. 2.4; 2024 proj. 3.0; 2025-28 average 3.0 - Inflation (%Δ): 2022 est. 8.5; 2023 proj. 3.0; 2024 proj. 2.3; 2025-28 average 2.0 - Credit growth (%Δ): 2022 est. 3.6; 2023 proj. 6.1; 2024 proj. 5.4; 2025-28 average 5.8 - Fiscal balance (Percent of GDP): 2022 est. -1.6; 2023 proj. 2.0; 2024 proj. -2.0; 2025-28 average -1.1 - Public debt (NFPS, Percent of GDP): 2022 est. 33.4; 2023 proj. 33.0; 2024 proj. 33.3; 2025-28 average 32.6 - Current account (Percent of GDP): 2022 est. -4.5; 2023 proj. -2.1; 2024 proj. -2.3; 2025-28 average -1.8 ### Inflation outlook and risks - Inflation expected to moderate, but broad-based inflationary pressures are expected to persist in the near term due to: - still high U.S. dollar inflation, - high energy and food prices, - lingering supply disruptions, - and rising nominal wages. - Proactive policy tightening already in place and weakening global and domestic demand are expected to bring inflation within the target range in late 2023-early 2024. - On balance, risks to the inflation outlook are to the upside. ### Downside and upside risks to the outlook - Main external risks (downside): escalation of Russia’s war in Ukraine, an abrupt global slowdown and commodity price volatility, monetary policy miscalibration with possible de-anchoring of inflation expectations, and systemic financial instability. - Key domestic risks (downside): intensification of political uncertainties, social unrest over political developments, and natural disasters which could hinder economic activity and risk planned fiscal consolidation. - Upside risks include a “soft landing” in key trade partner countries and an acceleration of structural reforms at home that could increase Peru’s medium-term growth potential. - Despite risks, external financing and debt rollover risks remain low. ### Policy buffers and recommended policy mix - Policy buffers: - Public debt remains the lowest in the region despite its increase during the pandemic. - Sizable international reserves (about 30 percent of GDP). - Access to international capital markets. - A robust financial sector. - Complemented by the FCL arrangement. - Under downside scenarios, tradeoffs between supporting output and reducing inflation become more acute; the appropriate policy mix depends on shock nature and initial conditions. - An integrated policy framework (IPF) approach with coordinated use of monetary, fiscal, and exchange rate policies may help alleviate policy tradeoffs; the IPF highlights the role of foreign exchange intervention under different conditions to alleviate policy tradeoffs. ### Policy discussions — Monetary policy - The BCRP’s data-driven monetary tightening remains appropriate. - Monetary tightening chronology: - 25 bp increase in July 2021, - followed by twelve consecutive rate hikes of 50 bps through August 2022, - attenuated with five additional 25 bps hikes through January 2023. - The decision to pause and re-assess is appropriate since the ex-ante real policy rate has entered contractionary territory (currently at over 3 percent, compared with an estimated neutral level of about 1½ percent). - Credit to the private sector is contracting in real terms. - Inflationary expectations have declined, and longer-term expectations remain relatively well-anchored. - Recommendation: avoid a premature and permanent end to tightening, especially if inflationary pressures persist, to prevent loss of credibility. - Communication recommendations: - Consider publishing more information on policy intentions and the possible path underlying macroeconomic forecasts (as working projections, not commitments). - Consider publishing minutes of policy meetings ahead of subsequent meetings. ### Policy discussions — Foreign exchange intervention - FX interventions have continued to limit exchange rate volatility within a floating exchange regime and are appropriate in response to disorderly market conditions in shallow markets with high dollarization (deposit dollarization stood around 35 percent in 2022). - FX interventions fell dramatically in 2022; efforts should be made to use FX intervention more sparingly. - Development of a deeper forward foreign exchange market and fewer, more targeted interventions could foster private-sector hedging. ### Policy discussions — Fiscal policy and fiscal framework - Authorities modified the fiscal rule for 2023-25, delaying the expected gradual fiscal adjustment by one year (starting in 2024) and achieving NFPS deficit objective of 1 percent of GDP by 2026 (instead of 2025). - Debt limit set at 38 percent of GDP with aim to return to 30 percent of GDP by 2030. - Rationale for modification: prevent undue adjustment in 2023; adopt gradual medium-term adjustment; signal commitment to achieving deficit target of 1 percent of GDP. - Short-term fiscal stance: - A slightly expansionary fiscal stance is appropriate in the short term. - 2023 budget envisions an NFPS fiscal deficit of about 2.4 percent of GDP. - Staff estimates the NFPS deficit could reach 2 percent of GDP due to difficulties in implementing capital spending plans with new local government authorities, implying a small fiscal impulse of about 0.4 percent. - Guidance: - Temporary, targeted, and small fiscal impulse is appropriate to balance support for a weak economy, supply shocks, and social costs of unrest. - Any additional fiscal support should remain targeted and temporary to avoid adding to aggregate demand and inflationary pressure. - Upside growth surprises should be used to build further fiscal buffers. - Box 1 — Con Punche Perú (fiscal support program launched January 2023): - Program size about 0.6 percent of GDP. - Measures to support vulnerable households and firms in affected sectors (agriculture and tourism), support subnational governments in most impacted regions, and accelerate execution of shovel-ready public investment projects. - Household support: additional direct cash transfers to Juntos, Contigo, and Pension 65 beneficiaries; accelerate national program to widen access to natural gas. - Firms: temporary tax relief, extension of access to pandemic-era guaranteed credit programs, removal of bureaucratic procedures. - Support to subnational governments: technical assistance and hiring experienced project managers to increase investment project execution. ### Fiscal tables and selected fiscal figures - Fiscal Deficit (selected cells from staff table): - 2022 actual overall balance: -1.6 (Percent of GDP) - 2023 Budget (RuleProj.): -2.4 - Staff projection for 2023 overall balance: -2.0 - Fiscal Policy (Percent of GDP) — 2023 staff projections: - Revenues: 25.3 - Expenditures: 27.3 - Current: 20.9 - Capital: 6.4 - Overall Balance: -2.0 *Source: IMF staff report excerpts (content unit 1perea2023001).* ### 26. The authorities should prepare plans to strengthen the credibility of the gradual fiscal ### 1perea2023001 - 26. The authorities should prepare plans to strengthen the credibility of the gradual fiscal ### Fiscal credibility and medium-term plans - Authorities should prepare plans to strengthen the credibility of the gradual fiscal adjustment over the medium term. - Risks that require contingency planning: - Revenues may underperform. - Potentially higher default rates from pandemic-era guaranteed loan programs if economic activity slows further than expected. - Failure to stabilize Petroperu could demand additional central government resources; oversight should be strengthened and a strategy to fully restore viability (or divest state participation) put in place. - Potentially sizable spending pressures from passage of unfunded expenditure initiatives by Congress (examples: restitution of FONAVI funds) and collective bargaining in the public sector. - Recommendation: prepare a plan—possibly requiring identification of financing—to address these risks. ### Fiscal consolidation strategy and supporting measures - MTBF fiscal strategy envisions a gradual fiscal consolidation of about ½ percentage points of GDP per year during 2025-26. - Staff view: fiscal plans are feasible and would have a limited impact on economic activity. - Risk: moderate risk of overestimation of tax revenues, prepared with a growth rate assumption above authorities’ recent estimates of potential GDP growth. - Recommendation: upgrade the MTBF by identifying and quantifying policy and administrative measures to support convergence to fiscal targets; additional measures to strengthen revenue mobilization and/or expenditure rationalization necessary to achieve fiscal targets beyond 2024. ### Tax administration and tax expenditures - 2022 measures to enhance tax administration included introduction of a digital tax registry and notices of tax due, leveraging big data tools and exchange of information treaties. - Marginal yields from electronic invoicing and measures adopted in 2018 are likely decreasing. - Key statistics: - Peru’s tax intake: about 16 percent of GDP. - Tax expenditures: estimated at about 2 percent of GDP (including tax credits, allowances, deferrals, returns, exemptions, and rate reliefs). - Recommendation: explore scope for rolling back tax expenditures after a comprehensive review of fairness and effectiveness; reduction in sectoral tax breaks may be warranted. - Authorities have signaled preference to avoid tax policy adjustments in the near term. ### Public spending effectiveness and procurement transparency - Independent evaluations estimate inefficiencies in public spending at 2-2½ percent of GDP, with 90 percent of inefficiencies explained by weaknesses in procurement processes. - Recommendations: - Improve transparency of public procurement systems (including beneficial ownership information). - Support improved targeting of social benefits and pursue civil service reform. - Prioritize capital and social spending to meet infrastructure and social needs and strengthen public investment execution capacity. - Public investment management gap: 2017 PIMA estimated an efficiency gap in management of public investment of about 37 percent (above global 27 percent and Latin America 26 percent averages). ### Fiscal Council (FC) reforms - Recent legislation enhances effectiveness of the FC; elevation to a regulatory agency for civil service purposes should enhance technical capacity. - Recommendations to strengthen FC independence and traction: - Introduce budget safeguards to secure financial resources and grant autonomy in budget execution. - Hold regular hearings before congress. - Undergo peer reviews and ex-post assessments. ### Pension system challenges and reform options - Successive Congress-mandated early withdrawals from private pension accounts since 2020: - About 50 percent of the private system’s assets (a cumulative 10 percent of GDP) have been withdrawn. - Following withdrawals, about 2.3 million people have no savings in their accounts, and 1.8 million people have relatively low balances. - Withdrawals exacerbated low coverage and adequacy; sales of treasury bonds likely negatively impacted demand for and interest rates of public debt. - Institutional developments: - Discussions on a reform proposal by the Multiparty Commission stalled after new Congress in 2021. - A new Multisector Commission is expected to present an evaluation and reform proposal shortly. - Reform option: a budget-neutral expansion to the basic pension (possibly a universal “solidarity pension”) financed by additional taxation. - Recommendation: any reform proposal should be within the current fiscal framework. ### Public debt sustainability and financing needs - Staff assessment: public debt is low and sustainable. - Debt sustainability analysis (Annex IV) shows public debt sustainable with a high probability under baseline. - Key statistics: - Public debt ratio expected to stabilize at about 33 percent of GDP over the medium term. - Assets of the public sector may reach around 15 percent of GDP. - Gross financing needs would average 3.3 percent of GDP over the forecast horizon. - Over 85 percent of public debt contracted at fixed interest rates with an average duration of 13.2 years. - About 46 percent of public debt denominated in local currency. - Highly liquid assets of about 8 percent of GDP. - Roll-over risks are low. ### Financial system health and vulnerabilities - Financial system emerged from the pandemic in good health with adequate buffers, but pockets of vulnerability exist. - Observations: - Pandemic-era prudential measures largely unwound; profitability has returned to pre-pandemic levels and NPLs stabilized. - In tightening financial conditions, monitor bank portfolios and lending standards closely. - FX mismatches contained through adequate reserve requirements; FXI from the BCRP generally consistent with IPF guidelines. - Rural microfinance institutions have weaknesses (insufficiently diversified portfolios); they comprise less than ½ percent of total assets of the financial system. - Regulatory and supervisory improvements taken: - Expanded oversight of financial co-operatives, monitored off-balance-sheet exposures, new risk monitoring tools, risk-based supervision for insurers, strengthened crisis preparedness, deposit insurance for credit unions, enhanced emergency liquidity assistance. - New capital structure for banks activated January 2023 including capital conservation and systemic risk buffers, in line with Basel III. - Remaining priorities: - Enhanced supervision of financial groups. - Requirements for resolution planning for domestic systemically important banks and financial groups. - Enhance functioning of money markets per 2018 FSAP recommendations. - Improve payment system infrastructure, increase access to electronic banking, and conduct robust risk assessment before adopting a central bank digital currency in the medium term. ### Structural reforms, growth, and inclusion - Need further structural reform to address pandemic scarring and increase growth potential. - Policy priorities: - Education: reverse pandemic-related learning losses, improve outcomes. - Business-friendly policies: continue infrastructure investment, reduce regulatory uncertainty to boost investment and productivity. - Increase efficiency of government spending (including Con Punche program). - Estimated impact: implementation of significant reforms in labor market, governance, and domestic finance could increase GDP by up to 8 percent over time. - Informality: - Reducing informality critical for sustainable and inclusive growth. - Key actions: enhance human capital, reduce labor market frictions, simplify tax and business regulations, introduce greater labor market flexibility. - Caution: restrictions on outsourcing risk increasing informality; minimum wage adjustments should align with average productivity growth. - Governance and rule of law: - Continue transparency measures for COVID-19 spending, strengthen anti-corruption institutions, improve public finance management and procurement, digitalize government services, strengthen corporate regulatory framework for SOEs. ### Climate change and natural hazard risks - Climate change risks expose Peru to severe economic and welfare losses. - Public investments and private sector facilitation needed; regulatory environment and financing/insurance tools should be improved. - Specific actions: - Improve access to export markets for smallholders in the Sierra and strengthen links with large exporters on the Coast. - Strengthen land tenure security to facilitate productivity-enhancing investments with long-term payoffs. - Implement power sector regulatory reforms to facilitate private investments in solar and wind energy. - Increase requirements for financial sector assessment and disclosure of climate-related risk and develop a green financing ecosystem. ### Authorities’ views (summary) - Growth outlook: authorities somewhat more optimistic; BCRP believes real GDP growth in 2023 could be ½ percent higher than staff, Ministry of Finance believes growth could be as much as 1 percent higher than staff; cited Quellaveco mine (>½ percent additional growth) and Con Punche fiscal impulse (another ½ percent of GDP). - Inflation: authorities confident inflation will return to target range by end of year; recent uptick viewed as temporary due to domestic supply shocks from protests. - Fiscal policy: authorities agreed with staff’s fiscal advice; slightly expansionary stance warranted given fiscal space and need to improve social cohesion; fiscal policy will resume consolidation trend; authorities requested technical assistance on fiscal risks. - Pensions: authorities acknowledged challenges and agreed to analyze options and work with stakeholders; Fund to provide technical assistance. - Financial system: authorities do not see systemic risks; banking sector well-capitalized; new capital framework aligns with Basel III; most FSAP recommendations implemented. - Structural reform: authorities agree on need to deepen reforms but note transition government has limited political capital. - Climate: authorities view climate change as threat and joined NGFS network; exploring Fund technical assistance. ### Staff appraisal (summary) - Outlook highly uncertain but Peru has ample policy buffers to face adverse shocks. - Staff expect growth to remain below potential in 2023 due to moderating world growth, lower commodity prices, tighter financial conditions, political uncertainty, and road blockades. - Inflation is well above target, eroding real incomes. - Risks tilted to downside, but large policy buffers (low public debt ratio, ample reserves) and strong policy frameworks help protect the economy. - Preliminary assessment: Peru’s external position in 2022 moderately weaker than level implied by fundamentals and desirable policies, with uncertainty due to multiple shocks in 2022. - Peru continues to show very strong fundamentals and institutional policy frameworks and remains committed to maintaining very strong policies. *Source: 1perea2023001 - 26. The authorities should prepare plans to strengthen the credibility of the gradual fiscal* ### 48. Data-driven monetary management is appropriate. Although the recent surge in inflation ### 1perea2023001 - 48. Data-driven monetary management is appropriate. Although the recent surge in inflation ### Monetary policy stance and guidance - Data-driven monetary management is appropriate. - Recent surge in inflation is mainly driven by external supply factors. - Core inflation and inflation expectations remain outside the target range (1-3 percent). - Large and sustained rate hikes have taken the ex-ante real neutral rate into contractionary territory, while inflation and inflation expectations have stabilized. - Policy guidance: - Maintain data-driven tightening to insure against risks of disorderly adjustment to global financial conditions. - Avoid a premature ending of the tightening to prevent potentially high costs of a loss of credibility of the BCRP. - Ensure fiscal and financial sector policies are mutually supportive with monetary policy to increase monetary policy effectiveness. ### Foreign exchange policy - Foreign exchange intervention is broadly appropriate under current volatile market conditions with existing currency mismatches and shallow markets. - Consider tradeoffs with market development and interactions with other policies explicitly in the central bank’s decision-making process. - Persistent dollarization in the private sector warrants foreign exchange intervention to avoid excessive volatility in response to uncertainty shocks. - Observed interventions: - Sterilized interventions over the past year have occurred on both sides of the foreign exchange rate. - Interventions have addressed volatility from pension fund withdrawals, external financial conditions, and exchange rate appreciation due to early monetary policy tightening. - Market development objectives: - Building a deeper and more developed foreign exchange market requires fewer and more targeted interventions. - Achieving a lower structural rate of dollarization would limit the need for frequent interventions, allowing the exchange rate to play a larger role as a shock absorber. ### Fiscal policy stance and risks - Fiscal stance is appropriate. - Short-term policy: - A temporary, targeted, and small fiscal impulse should help support a weak economy over the short term while avoiding adding to inflationary pressure. - Medium-term policy: - Planned fiscal consolidation will be necessary to stabilize the debt ratio and preserve fiscal sustainability. - Contingency planning: - Authorities should prepare contingency plans to address policy slippages from underperforming revenues stemming from an optimistic GDP projection, and emerging fiscal risks, including from the passage of unfunded spending initiatives by Congress, and a large state-owned enterprise. ### Strengthening the fiscal framework - Further enhancing Peru’s very strong fiscal policy framework will help strengthen macroeconomic resilience. - Recommended measures: - Identify measures that support the announced fiscal consolidation to enhance credibility. - Improve tax administration and streamline tax expenditures. - Strengthen control of public spending and enhance execution of public investment. - Institutional improvements for the FC: - Passage of legislation to strengthen the role of the FC is welcomed. - Additional measures to enhance operational independence and accountability include securing adequate resources, scheduling regular hearings before Congress, undergoing peer reviews, and ex-post assessments. ### Pension reform - Pension reform remains a critical priority. - Continued early withdrawals from private pension funds are unwarranted as the Covid-19 emergency has been brought under control. - Risks from withdrawals: - May add to inflationary pressures. - Exacerbate system weaknesses of low coverage and adequacy. - Could endanger fiscal sustainability over the medium term. - Reform guidance: - Building social consensus will be hard but key to sustaining macroeconomic gains. - Any reform proposal should be within the current fiscal framework. ### Prudential policy and financial stability - Prudential policies should continue to maintain a tightening bias to create space for renewed support in a deteriorating financial environment. - Observations: - Withdrawal of broad policy support provided during the pandemic has not resulted in an increase in NPLs. - Reintroduction of capital buffers has not impeded the flow of credit as voluntary provisioning was maintained at high levels. - Preparedness: - Impact of tightening financial conditions domestically and abroad is likely to materialize with a lag. - Authorities should be ready to provide new targeted and time-bound support to ensure the flow of credit if needed. ### Regulatory, supervisory, and market infrastructure reforms - Close remaining regulatory and supervisory gaps and continue progress on systemic risk assessment to enhance financial resilience. - Recommended actions: - Finalize surcharges for systemic banks and align them with the Basel III framework. - After passage of the draft law granting the SBS powers for full consolidated supervision, enhance supervision of financial groups. - Strengthen risk-based AML/CFT supervision via the new Companies Authorization Regulation. - Continue development of repo markets to provide greater depth and stability to local money markets in times of stress. - Improve payment system infrastructure and access to electronic banking. ### Structural reform priorities linked to OECD accession - OECD accession process presents opportunity to define a structural reform agenda to address pandemic scarring and enhance growth potential. - Focus areas: - Boost productivity by reversing pandemic-related learning losses, enhancing infrastructure, reducing regulatory uncertainty, eliminating barriers to outsourcing, and improving the business climate. - Enhance human capital while reducing incentives to informality. - Improve governance through digitalization and enhanced transparency, stronger anti-corruption institutions, and corporate sector regulatory reforms. - Reduce climate risks through both public investments and private sector contribution. *Source: 1perea2023001 - 48. Data-driven monetary management is appropriate. Although the recent surge in inflation* ### 56. Staff recommends that the next Article IV consultation take place on the standard 12- ### 1perea2023001 - 56. Staff recommends that the next Article IV consultation take place on the standard 12- ### Real sector developments: growth, inflation, labor, and confidence - After a strong recovery in 2021, growth is slowing; Real GDP: - Real GDP growth (Table 8): 2.2 (Est. 2022), -11.0 (2023), 13.6 (2024), 2.7 (2025), 2.4 (2026), 3.0 (2027), 3.0 (2028), 3.0 (2029), 3.0 (2030), 3.0 (2031) — note table shows series through 2028. - Inflation: - Consumer prices (end of period, Table 1 / Table 8): 1.9 (2022), 2.0 (2023), 6.4 (2024), 8.5 (2025), 3.0 (2026), 2.3 (2027), 2.0 (2028), 2.0 (2029), 2.0 (2030), 2.0 (2031). - Core and broad-based price increases indicated in figure captions: “... price increases have become broad based.” - Labor market: - Unemployment rate for Metropolitan Lima (Table 1): 6.6 (2022), 13.0 (2023), 10.7 (2024), 7.8 (2025). - “The labor market is improving, but the unemployment rate is above pre-pandemic levels.” - Demand composition: - In 2022, growth is driven mainly by private consumption (Figure 1). - Business confidence: - “Business confidence has weakened.” (Figure 1; Business Confidence Index interpretation: index values of 50 and greater indicate growth.) ### Fiscal sector: consolidation path, revenues, expenditures, and debt dynamics - Fiscal stance and projections: - NFPS revenue (percent of GDP, Table 1): 24.7 (2022), 21.9 (2023), 25.6 (2024), 25.7 (2025), 25.3 (2026), 25.2 (2027), 25.1 (2028), 24.9 (2029), 24.7 (2030), 24.7 (2031). - NFPS primary expenditure (percent of GDP, Table 1): 24.9 (2022), 29.2 (2023), 26.6 (2024), 25.8 (2025), 25.7 (2026), 25.6 (2027), 24.9 (2028), 24.3 (2029), 24.3 (2030), 24.3 (2031). - NFPS primary balance (percent of GDP, Table 1): -0.2 (2022), -7.3 (2023), -1.0 (2024), -0.1 (2025), -0.4 (2026), -0.4 (2027), 0.1 (2028), 0.6 (2029), 0.5 (2030), 0.4 (2031). - NFPS overall balance (percent of GDP, Table 1): -1.6 (2022), -8.9 (2023), -2.5 (2024), -1.6 (2025), -2.0 (2026), -2.0 (2027), -1.5 (2028), -1.0 (2029), -1.0 (2030), -1.0 (2031). - Debt and financing: - Total external debt (percent of GDP, Table 1): 34.8 (2019), 44.2 (2020), 45.1 (2021), 42.5 (2022), 38.8 (2023), 37.6 (2024), 35.6 (2025), 34.2 (2026), 32.9 (2027), 32.3 (2028). - Gross non-financial public sector debt (percent of GDP, Table 1): 26.9 (2019), 35.0 (2020), 36.4 (2021), 33.4 (2022), 33.0 (2023), 33.3 (2024), 33.2 (2025), 32.8 (2026), 32.3 (2027), 31.9 (2028). - “... will guide the fiscal deficit to the 1% of GDP target ... and stabilize the debt ratio.” (Figure 2) - Fiscal composition and adequacy: - Peru: Economic Classification (Percent of Total, 2021, Figure 7): Goods and Services 27.0, Compensation of Employees 26.5, Interest Bill 5.9, Other Current Spending 19.4, Capital Spending 21.2. - LA5 median comparison (Figure 7): LA5: Goods and Services 16.9, Compensation of Employees 21.7, Interest Bill 10.4, Other Current Spending 40.8, Capital Spending 10.3. - Expenditure assessment highlights potential reprioritization to improve social outcome variables: “There is opportunity for spending programs to have a higher impact on poverty reduction ... Reprioritizing spending allocation may help Peru to catch up to peers in several social outcome variables.” ### External sector: trade, current account, reserves, and capital flows - Current account and trade: - Current account balance (percent of GDP, Table 6 / Table 7): -0.7 (2019), 1.2 (2020), -2.3 (2021), -4.5 (2022), -2.1 (2023), -2.3 (2024), -2.1 (2025), -1.8 (2026), -1.6 (2027), -1.5 (2028). - Merchandise trade (Table 6): Exports (billions of US$, Table 6): 48.0 (2019), 42.9 (2020), 63.2 (2021), 65.8 (2022), 68.0 (2023), 69.3 (2024), 71.5 (2025), 73.6 (2026), 75.9 (2027), 78.4 (2028). - Imports (billions of US$, Table 6): -41.1 (2019), -34.7 (2020), -48.2 (2021), -56.3 (2022), -56.8 (2023), -59.1 (2024), -61.3 (2025), -63.4 (2026), -65.8 (2027), -68.3 (2028). - Trade balance declined from record-high levels; export volumes and weakening external demand combined with lower primary production (Figure 3). - Reserves and exchange: - Gross international reserves (billions of US$, Table 6 / Table 7): 68.4 (2019), 74.9 (2020), 78.5 (2021), 72.2 (2022), 71.9 (2023), 73.3 (2024), 74.8 (2025), 76.6 (2026), 79.0 (2027), 80.7 (2028). - Average exchange rate (S/. per US$) entries present; figure caption: “The PEN remains stable relative to the USD, with low levels of volatility compared to peers.” (Figure 4) - Capital flows: - Portfolio flows and financial account dynamics: “... portfolio inflows started to stabilize after large withdrawal of pension funds from abroad.” (Figure 3) - FDI inflows associated with reinvested profits helped cushion pressure on the financial account (Figure 3). ### Financial markets, banking sector, and corporate sector indicators - Market indicators: - Peruvian equities have recovered after monetary tightening domestically and abroad (Figure 4). - “Spreads in January 2023 have widened relative to last year, reflecting cycles of political uncertainty ... While CDS spreads have followed the same trend.” (Figure 4) - Banking and balance sheet indicators: - International investment position: The IIP has held broadly stable (Figure 6). - Deposit dollarization: “Deposit dollarization has recently increased slightly.” (Figure 6) - Nonresident holdings: “Non-residents continue to pull back from local sovereign debt.” (Figure 6) - Nonperforming loans have begun to stabilize (Figure 6). - Apartment prices in Lima: housing prices in local currency are rising on the back of recovering mortgage demand (Figure 6). - Corporate sector: - Rebound in profitability since pandemic lows; corporate leverage remains below peers; cash ratio above pre-pandemic levels; Peru outperforms peers on interest coverage for much of the last two decades (Figure 5). - Share of debt at risk has fallen to pre-pandemic levels (Figure 5). ### Monetary and financial soundness indicators - Monetary aggregates (Table 4 highlights): - Broad money (percent change, Table 1 / Table 4): 8.8 (2022), 29.2 (2023), 2.7 (2024), -0.3 (2025), 7.0 (2026), 6.0 (2027), 6.7 (2028), 5.6 (2029), 6.0 (2030), 5.0 (2031). - Net credit to the private sector (percent change, Table 1 / Table 4): 6.4 (2022), 14.0 (2023), 6.5 (2024), 3.6 (2025), 6.1 (2026), 5.4 (2027), 5.4 (2028), 5.7 (2029), 5.5 (2030), 6.6 (2031). - Financial soundness (Table 5, as of December series): - Nonperforming loans to total gross loans: 2.9 (2014), 2.9 (2015), 3.1 (2016), 3.3 (2017), 3.3 (2018), 3.4 (2019), 4.2 (2020), 3.9 (2021), 4.2 (2022). - Return on equity (ROE): 18.2 (2014), 21.1 (2015), 19.2 (2016), 17.7 (2017), 17.9 (2018), 17.9 (2019), 3.1 (2020), 12.1 (2021), 16.5 (2022). - Capital to risk-weighted assets: 14.2 (2014), 14.3 (2015), 15.1 (2016), 15.2 (2017), 14.8 (2018), 14.7 (2019), 15.6 (2020), 15.0 (2021), 14.5 (2022). - Liquidity and dollarization: Share of foreign currency deposits in total deposits: 43.4 (2014), 49.5 (2015), 44.1 (2016), 39.3 (2017), 35.9 (2018), 35.2 (2019), 34.6 (2020), 39.5 (2021), 36.9 (2022). ### Social indicators and expenditure assessment - Poverty and social protection: - Poverty rate (total) (Table 1): 20.2 (2019), 30.1 (2020), 25.9 (2021). - Expenditure assessment (Figure 7) indicates Peru’s social protection spending is relatively balanced across sectors but suggests: - Peru falls below the LA5 median with regard to beneficiary incidence for the poorest quintile. - Benefit adequacy falls on or below the median at each quintile. - “There is opportunity for spending programs to have a higher impact on poverty reduction ...” - Simulated impacts (Figure 7): - Simulated poverty headcount reduction by annual social assistance spending shown by quintile; the figure indicates scope to increase impact by reallocating spending. ### Balance of payments and medium-term outlook - Balance of payments (Table 6): - Current Account (billions of US$, Table 6): -1.6 (2019), 2.4 (2020), -5.1 (2021), -10.9 (2022), -5.7 (2023), -6.3 (2024), -6.2 (2025), -5.6 (2026), -5.1 (2027), -5.1 (2028). - Capital and Financial Account Balance (billions of US$, Table 6): 8.9 (2019), 7.7 (2020), 16.0 (2021), 7.2 (2022), 5.4 (2023), 7.7 (2024), 7.7 (2025), 7.4 (2026), 7.5 (2027), 6.8 (2028). - Medium-term macroeconomic framework summary (Table 8 highlights): - GDP at constant prices: 2.2 (2022), -11.0 (2023), 13.6 (2024), 2.7 (2025), 2.4 (2026), 3.0 (2027), 3.0 (2028). - External current account balance (percent of GDP): -0.7 (2019), 1.2 (2020), -2.3 (2021), -4.5 (2022), -2.1 (2023), -2.3 (2024), -2.1 (2025), -1.8 (2026), -1.6 (2027), -1.5 (2028). - Public sector NFPS primary balance (percent of GDP): -0.2 (2022), -7.3 (2023), -1.0 (2024), -0.1 (2025), -0.4 (2026), -0.4 (2027), 0.1 (2028), 0.6 (2029), 0.5 (2030), 0.4 (2031). - Public sector debt (percent of GDP): 26.9 (2019), 35.0 (2020), 36.4 (2021), 33.4 (2022), 33.0 (2023), 33.3 (2024), 33.2 (2025), 32.8 (2026), 32.3 (2027), 31.9 (2028). *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1perea2023001.pdf* ### Annex I. Episodes of Economic Convergence and Divergence ### Annex I. Episodes of Economic Convergence and Divergence ### Background - Peru is an emerging market economy with per capita GDP (PPP, 2017 international dollars) estimated at some $13,000 in 2022, about 15 percent lower than the average for Latin America. - This PPP estimate is over 80 percent higher than the unadjusted nominal level of US$7,100, reflecting a relatively undervalued real exchange rate in absolute PPP terms. - Convergence ratio (per capita GDP PPP relative to the U.S.): Peru reached 0.20 in 2022, about 50 percent higher than three decades earlier. - Peru’s 2022 convergence ratio is similar to Brazil and Paraguay, but much lower than Panama, Chile, and Uruguay. ### Peru’s experience (V-shape of (non) convergence) - Episode of divergence (1975-1990): - Convergence ratio fell from 0.28 in 1975 to 0.13 in 1990. - Causes: adverse oil shocks of the 1970s, rising U.S. interest rates in the early 1980s, expansive monetary and fiscal policies, price controls, exchange restrictions, multiple currency practices, default on public debt, balance of payments crisis, domestic terrorism, and public health problems. - Episode of convergence (1991-2022): - Real GDP estimated to have grown at over 4½ percent in that period. - Coincided with almost two decades of uninterrupted IMF-supported programs (1991-2009), fiscal rules (1999), and inflation targeting (2002). - Public debt fell by about ½ (as a ratio of GDP); public bonds achieved investment grade. - Poverty rate fell by about ⅔ and income distribution became less unequal. - Convergence ratio increased from 0.13 in 1990 to 0.20 in 2022. - Overall outcome (1975–2022): - Convergence ratio moved from 0.28 in 1975 to 0.20 in 2022, a mild long-term divergence. - Conclusion: recent convergence did not offset the earlier divergence; calls for ambitious structural reforms to improve potential growth and accelerate convergence. ### Latin American experience and patterns - Regional leaders (historical): - Venezuela led 1975-93, reaching 0.75 in 1976, then dramatic decline. - Argentina led 1994-2001 and 2005-11; highest convergence 0.67 in 1975. - Mexico led 2002-04; highest convergence 0.50 in 1981. - Panama led 2012-22, peaking at 0.51 pre-COVID-19. - Patterns over last half century: - Divergence: about ½ of countries (9 out of 17) — Argentina, Bolivia, Brazil, Ecuador, El Salvador, Guatemala, Mexico, Peru, Venezuela. - Stagnation: about ⅓ (5 out of 17) — Colombia, Costa Rica, Honduras, Paraguay, Uruguay. - Convergence: about ⅙ (3 out of 17) — Chile, Dominican Republic, Panama (Dominican Republic the fastest converger). ### Latin America: Convergence ratios (select data points from table) - Peru: 1975 = 0.28; 1990 = 0.13; 2025 (WEO projection) = 0.21. - Latin America aggregate: 1975 = 0.32; 1990 = 0.22; 2025 (WEO projection) = 0.25. - Classification thresholds used: Convergence if Δ convergence > +0.05; Stagnation if between +0.05 and -0.05; Divergence if Δ convergence < -0.05. ### Growth outlook and reform priorities - Potential growth estimates reduced from around 6 percent (2002-13) to 3 percent in the next several years. - Scope for higher potential growth if political and social uncertainties are resolved and an ambitious structural reform agenda is implemented: - Higher investment could raise contribution to growth by 1 percentage point. - More reforms could raise total factor productivity (TFP) by up to 2 percentage points. - Combined effect could increase potential growth to 5 or 6 percent. - Structural reform priorities listed: - (i) advancing the quality of education; - (ii) improving the business environment to attract investment; - (iii) facilitating absorption of foreign talent; - (iv) fostering innovation to adopt better technologies; - (v) reducing institutional vulnerabilities. ### Growth Accounting (percent) - Periods and components (Labor includes human capital): - 1981-1990: Labor 3.0; Capital -1.1; TFP -2.6; GDP -0.7. - 1991-2001: Labor 3.3; Capital -0.8; TFP 1.2; GDP 3.7. - 2002-2013: Labor 1.8; Capital 0.4; TFP 3.9; GDP 6.1. - 2014-2019: Labor 1.4; Capital 1.0; TFP 0.6; GDP 3.0. - 2020-2022: Labor 1.2; Capital 0.6; TFP 0.0; GDP 1.8. - Proj. 2023-30: Labor 1.4; Capital 0.8; TFP 0.8; GDP 3.0. ### Implementation of Past Fund Advice (select highlights) - Fiscal Policy: - Stance: Neutral fiscal stance recommended; misalignment between fiscal rules and medium-term framework to be resolved. Implemented: fiscal impulse negative in 2022; fiscal rules reintroduced in 2022 with gradual consolidation about 0.5 percent of GDP per year during 2025-2026. - Fiscal Council: Implemented via Law 31681 to enhance operational independence (elevated to a regulatory agency for civil service purposes). - Taxes: Partially implemented. Current administration ruled out tax adjustments. Multisectoral Commission recommendations for civil service are under implementation. Governance plan for Petroperu pending. - Pensions: In progress. Commission tasked to present reform by January 2023; deadline extended to May 2023. - Monetary and Exchange Rate Policy: - Tightening: Implemented. Monetary tightening into contractionary territory; signs of taming inflation and expectations. - FX intervention (FXI): Partially implemented. Fewer and smaller interventions; tradeoffs in multi-instrument framework not yet explicitly considered; authorities continue discretionary interventions while providing ample information. - Financial Policies: - Macroprudential: Implemented. All pandemic-era prudential policies unwound. - Regulation: In progress. Close regulatory/supervisory gaps per 2018 FSAP (see Annex IX in source). - Structural Policies: - Productivity: Partially implemented. Education spending significantly increased under 2021 and 2022 NFPS budgets; in-person schooling resumed. Some policies (second agrarian reform law, restrictions on outsourcing) may have worsened business climate. - Informality: Partially implemented. Informality reduced from 2020 levels but remains very high. - Governance: In progress. Anti-corruption efforts continue; National Board of Justice fully operational; civil service reform pending. - Infrastructure: Partially implemented. Public investments increased significantly after Q1 2022 until local elections in October; sustainability uncertain given changes in local governments. ### External Sector Assessment (2022) - Overall assessment: Peru’s external position in 2022 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. Reserve coverage remains adequate despite dependence on commodity prices and substantial domestic FX liabilities. Estimates are preliminary and subject to uncertainty from multiple 2022 shocks. - Policy response: Authorities responded appropriately to Covid-19 with coordinated fiscal, monetary, and financial support. In 2022 BCRP proactively tightened monetary policy and fiscal consolidation advanced to return to the fiscal rule. Acceleration of structural reforms (growth-enhancing investment, measures to reduce informality) could increase competitiveness and support a balanced external position. Foreign assets and liabilities: position and trajectory - Net IIP path: - Improved from -54 percent of GDP in the late 1990s to -24 percent of GDP in 2011, then declined; 2022 net IIP = -40 percent of GDP. - Net IIP projected to stay at about -40 percent of GDP over the medium term. - 2022 composition (percent of GDP): - Gross assets: about 65. - Reserve assets (central bank): 30. - Financial system foreign assets: about 10. - Gross liabilities: 106. - FDI liabilities: 56. - External indebtedness (public and private external debt): about 43 percent of GDP. - Equity securities: 7.3 percent of GDP. - Assessment: - Gross external financing needs rose to an estimated 10 percent of GDP in 2022. - Estimated medium-term non-interest current account balance required to stabilize NIIP at end-2021 level: -2.7 percent of GDP (below baseline medium-term projections). Current account (2022) - Current account deficit estimated at 4.5 percent of GDP in 2022, worsening by 2.2 percentage points from 2021. - Trade balance declined by 2.7 percentage points of GDP from 6.6 percent of GDP in 2021, reflecting a large deterioration in the terms of trade (about 10 percent). - Exports of goods increased by about 2.5 percent (both prices and volumes decelerated). - Imports of goods grew by about 17 percent (volumes recovered ~2.5 percent; prices increased about 13.5 percent). - Investment income outflows declined by 1.3 percentage points of GDP but remained high at 6.8 percent of GDP. - Services trade deficit worsened by 0.2 percentage points of GDP due to higher freight costs and low tourism revenues. - Medium-term current account deficit expected to stabilize at about 1.5 percent of GDP. Current account assessment details (2022, percent of GDP unless stated) - Actual CA: -4.5. - Cyclical contributions (from model): -0.8. - COVID-19 adjustor (temporary impact on travel and transport): +1.9. - Adjustor for impact of protests on mining (Las Bambas and Southern mines): +0.3 (noted in text as 0.26 percent of GDP in a footnote). - Adjustor for impact of fertilizers (higher import prices): +0.2 (noted in text as 0.18 percent of GDP in a footnote). - Cyclically adjusted CA: -3.0. - CA norm (EBA CA model): -1.9. - CA gap (cyclically adjusted CA minus CA norm): -1.1. - Policy gaps contribution: 0.4. - Excluding the policy gap of 0.4 percent of GDP, CA gap would be -1.0 percent of GDP. - Relative fiscal policy gap contributed +0.7 percent of GDP to overall CA gap. - Relative credit gap contributed -0.5 percent of GDP to overall CA gap. - Staff view: assessment reflects high uncertainty and foreign influences on Peru’s current account and exchange rate. Real Exchange Rate (REER) (2022) - Average REER in 2022 was about 8 percent stronger than in 2021 and converged back to its 20-year average. - Nominal exchange rate: average 3.8 S/USD in 2022, a depreciation of about 1.2 percent versus 2021. - EBA REER approaches: - Overvaluation of 5.3 percent (index method) in 2022. - Overvaluation of 20.9 percent (level method) in 2022. - REER gap implied by IMF staff’s CA gap assessment with estimated elasticity of 0.22 implies a REER overvaluation (exact implied percent not provided beyond methods above). *Source: IMF staff calculations and WEO data as presented in Annex I.* ### 5.0 percent. In line with the assessment implied ### 1perea2023001 - 5.0 percent. In line with the assessment implied ### Real Effective Exchange Rate (REER) Assessment - Staff assesses the REER gap in 2022 to be in the range of 3.2 and 6.8 percent, with a midpoint of 5.0 percent. - The estimated REER overvaluation of 5.0 percent is described as small, especially given elevated model uncertainty and multiple shocks affecting the Peruvian economy in 2022. ### Capital and Financial Accounts: Flows and Assessment - Net inflows into the capital and financial account are estimated to have declined in 2022 to 3 percent of GDP after record highs of 7.1 percent of GDP in the previous year. - Inflows were dominated by a sharp increase in FDI (about US$12 billion), reflecting: - increases in reinvested earnings associated with high metal prices, and - liquidation of portfolio investments abroad by pension funds. - These inflows were offset by: - sales of sovereign bonds by non-residents, - public sector debt amortization, and - purchases of short-term net foreign assets. - Assessment: Strong economic fundamentals and diversification of creditors underpinned capital inflows, including around periods of stress. Peru’s attractiveness as an investment destination should allow investments to pick up in the medium term. ### FX Intervention and Reserves Level - BCRP intervention behavior: - 2020: intervention limited. - 2021: BCRP sold US$18.3 billion (8.1 percent of GDP), including US$11.6 billion on the spot market (5.1 percent of GDP). - 2022: interventions limited, with the central bank selling US$1 billion on the spot market (0.4 percent of GDP). Interventions on the non-spot market were mainly through FX swap transactions. - Peru’s gross reserves: - Declined by about US$6.3 billion in 2022. - Were US$72.2 billion (30 percent of GDP) at the end of 2022. - Represented 240 percent of the ARA metric, well above the 100–150 percent adequacy range. - Exceeded an augmented ARA metric that incorporates volatility of copper and gold prices and Peru’s heavy reliance on commodity exports. - Assessment: The flexible exchange rate has long served as the primary mechanism of adjustment to external shocks. Peru’s international reserve coverage exceeds adequacy metrics. ### Annex IV — Monetary Policy Analysis and Forecasts Based on a DSGE Model: Model Overview - Model family: semi-structural, builds on linear quarterly projection models (QPMs) / new-Keynesian-type models with rigidities and rational expectations. - Model structure: - Domestic and foreign blocks; foreign block exogenous. - Four main domestic equations: aggregate demand, aggregate supply (Phillips curve), uncovered interest rate parity (UIP), and monetary policy rule. - Expectations: combination of lagged effects and model-predicted future outcomes (rational expectations). - Foreign economy is approximated by the US economy; foreign interest rate approximated by the Federal funds rate. - Calibration: parameters chosen to match observed data and coefficients in related studies; parameter table provided in source. ### Model Equations and Key Components - Aggregate Demand: - Output gap (ŷt) depends on lagged output gap, monetary conditions index (mcit), and foreign output gap (ŷt*). - mcit is a weighted average of the real interest rate gap (r-r*), credit premium (cr_prem), and the real exchange rate gap (zt − zt*). - Equation: ŷt = b1 ŷt−1 − b2 mcit + b3 ŷt* + εt y - mcit = b4 (r̂t + cr_prem t) + (1−b4)(−ẑt) - Aggregate Supply (Phillips curve): - Quarterly annualized inflation (πt) depends on πt−1, expected πt+1, and real marginal costs (rmc). - rmc is function of output gap, real exchange rate gap, and international oil and food prices. - Inflation composed of core, food, and energy components with separate equations and rmc definitions. - Uncovered Interest Parity (UIP): - RER dynamics: st = (1−e1) Et st+1 + e1 (st−1 + 2/4(πtT − π̅t* + Δz̄t)) + (it* − it + premt)/4 + εt s - st denotes RER; e1 = 1 implies a pure float. - RER expectations are weighted average of model-consistent expectations and past values; affected by inflation expectations bias. - Policy Reaction Function (Freely Floating Exchange Rate): - Short-term interest rate responds to deviations of the 3-quarter-ahead year-on-year inflation forecast from target, and the output gap, with interest-rate smoothing. - Equation: it = g1 it−1 + (1−g1)(it n + g2 (Et πt+3 − πt+3 T) + g3 ŷt) + εt - Policy-neutral rate: it n = r̅t + Et πt+1 ### Model Diagnostics and Historical Interpretation - Historical drivers of inflation: - Recent surge in inflation driven mostly by very high food and energy prices; core inflation also picked up starting in late 2021. - Monetary conditions: - Highly expansionary during COVID-19 pandemic; became neutral in recent months due mainly to narrowing of the interest rate gap. - Output gap decomposition: - Output gap negative during the global financial crisis, near zero until COVID-19, turned negative during the pandemic. - After pandemic onset, lower interest rates and currency depreciation stimulated output; higher premium had adverse effects. - Foreign output gap adversely affected Peru’s output gap in 2020 but partly reversed since then. - Large fiscal package in 2020 appears as a positive unmodeled shock in mid-2020. - Phillips curve decomposition: - Forward-looking component (rational expectations / inflation expectations) played an important role, indicating monetary policy credibility. - Backward-looking component (past inflation) has recently increased, indicating limited room for complacency and a need to continue tightening monetary policy until this trend reverses. - Supply shocks and a declining relative price trend explain a significant share of core inflation since the beginning of the COVID-19 pandemic. ### Forecast Scenarios and Key Results - General: Results suggest BCRP’s data-driven monetary policy is appropriate. - Scenario 1 (no expected declines in global food and energy prices in 2023-24): - Headline inflation expected to decline to about 5 percent in Q4, 2023, and to slightly above 3 percent in Q4, 2024. - Policy rate will increase to slightly above 8 percent by mid-2023 to reduce inflationary pressure. - Exchange rate appreciates as interest rate differential increases (via UIP). - Monetary tightening causes growth to fall and negative output gap to widen. - Policy rate starts to fall in second half of 2023 as inflation declines toward target range. - If g2 set below 1 (less hawkish central bank), inflation would be higher. - Scenario 2 (no expected declines in global food and energy prices, and central bank does not respond / slightly reduces policy rate and keeps it unchanged during 2023): - Expansionary policy leads to depreciation of the currency and stronger growth compared to baseline, resulting in higher inflation. - Scenario 3 (expected declines in global food and energy prices in 2023-24 taken into account): - Inflation falls within the target range by end-2023 and to center of target range in late 2024. - Interest rate is reduced throughout forecast period as inflation/inflation expectations decline. - Slight depreciation of the currency. - Declines in interest rate and currency depreciation lead to stronger growth; negative output gap closes at end-2024. - Scenario 4 (expected deceleration in global food and oil prices plus stronger policy response than baseline): - Central bank increases current policy rate to 8 percent and keeps it unchanged during 2023. - Real interest rate increases to more than 6 percent by end-2023. - Tighter policy leads to lower inflation and stronger exchange rate. - Growth is weaker; negative output gap widens until early 2024. ### Conclusions and Policy Implications - Decomposition of inflation indicates: - Monetary policy has been credible (significant forward-looking component). - Recent increase in backward-looking component implies no room for complacency; monetary stance should remain tight until trend reverses. - Output gap decomposition indicates easy monetary policy and exchange rate depreciation supported growth in 2020–22. - Model-based forecasts imply: - BCRP’s recent data-driven tightening and expected global food and energy disinflation can reduce headline inflation to the target range. - Overly easy policy can lead to higher inflation. - Overly tight policy can lead to a larger negative output gap. *International Monetary Fund — content from the chapter/section provided.* ### Annex V. Risk Assessment Matrix ### Annex V. Risk Assessment Matrix ### Global Risks - Abrupt global slowdown or recession - Likelihood: Medium - Time Horizon: Short term - Impact: High. "Peru would be affected by a reduction of global trade and rising import prices. Lower exports and falling terms of trade would dent growth and exert downward pressure on the exchange rate." - Policy Response: "Use existing policy space to soften the impact on growth and protect the most vulnerable. Allow the exchange rate to play its role as shock absorber. Exchange rate interventions could be used to prevent excessive volatility." - Commodity price volatility - Likelihood: Medium - Time Horizon: Short term - Impact: Medium. "Peru would be affected by volatile export and import prices. Food and energy prices account for over 40 percent of the consumption basket in Peru." - Policy Response: "Allow the exchange rate to play its role as a shock absorber. If inflationary pressures build up, extend the tightening cycle within the inflation-targeting framework. Provide targeted fiscal support the most vulnerable." - Intensification of regional conflict(s) - Likelihood: High - Time Horizon: Short term - Impact: Medium. "Peru has been affected by the war in Ukraine mainly through the commodity price channel, with a negative impact on Peru's terms of trade." - Policy Response: "If inflationary pressures build up, extend the tightening cycle within the inflation-targeting framework. Allow the exchange rate to play its role as a shock absorber. Provide targeted fiscal support to the most vulnerable." - Monetary policy miscalibration - Likelihood: Medium - Time Horizon: Short term - Impact: Medium. "A tightening in financial conditions abroad could lead to large capital outflows from Peru. The risk is mitigated by large policy buffers, including access to an FCL. The financial sector can absorb major shocks." - Policy Response: "Extend the monetary tightening cycle and continue communicating a strong commitment to the inflation target. Allow the exchange rate to play its role as shock absorber. Exchange rate interventions could be used to prevent excessive volatility. Use fiscal buffers to provide targeted fiscal support to the most vulnerable." - Systemic financial instability - Likelihood: Medium - Time Horizon: Short term - Impact: Medium. "Peru is vulnerable to a sudden exit of foreign investors, which hold a large share of its sovereign bonds. The risk is mitigated by large policy buffers, including access to an FCL. The financial sector can absorb major shocks." - Policy Response: "Extend the monetary tightening cycle and continue communicating a strong commitment to the inflation target. Allow the exchange rate to play its role as shock absorber. Exchange rate interventions could be used to prevent excessive volatility. Use fiscal buffers to provide targeted fiscal support to the most vulnerable." ### Domestic Risks - Social unrest - Likelihood: High - Time Horizon: Short/Medium term - Impact: High. "Political uncertainty and social conflict could stifle private investment and generate capital outflows in the short-term. A decline in political support for key institutions and policies could have significant medium-term implications." - Policy Response: "Strengthen governance and enhance anti-corruption enforcement efforts. Accelerate structural reforms aimed at increasing potential GDP." - Natural disasters related to climate change - Likelihood: Medium - Time Horizon: Medium term - Impact: High. "Peru is highly vulnerable to natural disasters related to climate change, ranking amongst the top 25 percent of most vulnerable countries due to the impacts of extreme weather events, with large adverse impacts on human life, economic activity, and fiscal costs." - Policy Response: "Preparedness in the immediate aftermath and building resilience in economic activities and infrastructure would reduce the medium-term impact. Countercyclical policies should be deployed as needed." - Note on RAM probabilities: "The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent)." *Source: 1perea2023001 - Annex V. Risk Assessment Matrix* ### Annex VI. The Integrated Policy Framework and Underlying Frictions ### The Integrated Policy Framework (IPF) - Context and scope: Peru follows an inflation-targeting regime since 2002, adapted for financial dollarization, with a managed floating exchange rate. The IMF Integrated Policy Framework (IPF) allows a structured, frictions-based approach to the use of foreign exchange interventions (FXIs). - General IPF principles for FXI: FXI should: - "be undertaken only in the presence of well-identified frictions;" - "be used only if shocks are large enough to pose significant risks to central bank price and financial stability objectives;" - "not substitute for a warranted adjustment of macroeconomic (fiscal and monetary) policies;" - "be integrated within the overall policy response which includes other IPF policies;" - "be accompanied by strong central bank governance and communication;" - "consider intertemporal trade-offs in spending and accumulating reserves;" and - "consider multilateral effects." - Specific IPF use cases for FXI: - "(i) to address premia from arbitrage frictions in shallow FX markets;" - "(ii) to counter financial stability risks from FX mismatches;" and - "(iii) to preserve price stability when exchange rate changes risk de-anchoring inflation expectations." ### Peru’s Multi-Policy Framework - Design features: "Fiscal policy is anchored in a fiscal rule, while monetary policy follows an inflation targeting regime adapted to respond to two key vulnerabilities associated with financial dollarization." These vulnerabilities are: - Capital outflow episodes triggering foreign currency liquidity shortages and pressure on international reserves. - Currency mismatches in balance sheets of non-tradable firms and households amplifying depreciation effects on credit risk. - Toolkit and instruments: - Sterilized FXIs to reduce exchange rate volatility. - Preventive accumulation of international reserves. - High reserve requirements on foreign currency liabilities to mitigate liquidity risk. - Macroprudential instruments managed largely by the Superintendence of Banks; reserve requirements managed by the central bank. - Historical evolution: - 2002-07: "increasing the policy rate and reserve requirements, along with FXI to smooth appreciation pressures"; countercyclical fiscal policy; macroprudential activation. - 2008-11: fiscal impulse, deactivation of some macroprudential rules, FXIs to smooth depreciation; policy rate initially reduced then hiked when inflation breached target; FX reserve requirements increased and de-dollarization tools introduced. - 2012-2019: more aggressive macroprudential deployment and more exchange rate flexibility. - 2020-2022 (COVID-19): fiscal impulse and historic low policy rate; FX liquidity provided during stress; macroprudential easing (reducing countercyclical capital buffer); weekly threshold for FX derivatives operations raised; 2021 saw FXIs to smooth volatility and accumulate reserves amid capital outflows; 2022 policy rate raised to respond to inflation from energy and food import prices and currency depreciation. - FXI modalities: Over time shifted from spot transactions to use of a central bank security indexed to the exchange rate (CDR, since 2002) and currency swaps (since 2014). "The latter form the bulk of the interventions nowadays, with the important advantage that they do not affect liquidity in local currency, being settled at the end of the contract on a net basis, and thus no requiring sterilization by the central bank." ### Characteristics of the Peruvian Economy and Underlying Frictions - Market shallowness and premia: - Presence of uncovered interest parity (UIP) premia ex-ante and ex-post at short (3 months) and long (1 year) horizons, widening during capital outflows. - Persistent covered interest parity (CIP) premium over short horizons closely tracks the UIP premium; CIP premium disappears over longer horizons. - "Premia have been more volatile since the COVID-19 pandemic, reflecting both the increased volatility in capital flows, as well as the persistent increase in political uncertainty." - "FXIs display high negative correlation with UIP premia (around 48 percent)," indicating correlation between premia spikes/troughs and FX sales/purchases. - Stagnant FX turnover suggests intervention has likely crowded out private sector FX operations. - Dollarization and currency mismatches: - Deposit and credit dollarization: "currently, deposit and credit dollarization stand at 23 and 37 percent from over 50 percent a decade ago." - "High share of foreign investors in the local currency sovereign bond market—holding 41 percent of outstanding bonds—presents a further risk." - Total FX credit to FX deposits: "17 and 142 percent for households and corporates." - Sectoral dollarization (gross): mining 98 percent; agriculture and fishing 72 percent; manufacturing 60 percent. - Sectoral exposures and hedging: "High rates of dollarization in mining (98 percent), agriculture and fishing (72 percent), and manufacturing (60 percent) are partially offset through foreign currency invoicing and access to hedging instruments such as FX swaps; once accounting for these, the exposure to foreign currency risk declines significantly for these sectors." - Vulnerable sectors: "Other sectors with a lower overall share in FX debt have a higher exposure to FX risks, in particular electricity and water and services. Sectors with greater exposure to exchange rate risk also have high leverage ratios and low coverage ratios." - Policy implications: - FXI can be justified to mitigate volatility and smooth large exchange rate movements to help exposed corporates adjust mismatches without triggering a macro-financial spiral. - Continued use of FXIs should follow IPF principles: target identified frictions, be part of an integrated policy response, and not substitute warranted fiscal or monetary adjustments. *Source: 1perea2023001 - Annex V. Risk Assessment Matrix* ### 8. Inflation expectations in Peru are well-anchored and FXI has not been used to address ### 1perea2023001 - 8. Inflation expectations in Peru are well-anchored and FXI has not been used to address ### Inflation expectations and FXI usage - The BCRP has implemented a successful inflation-targeting regime over the past two decades. - Exchange-rate pass-through is limited, as is co-movement of the exchange rate with inflation and inflation expectations. - FXI has not been used to address the BCRP’s price stability mandate. ### A rules-based case for FXIs - Targeted FXIs can address issues with market depth and currency mismatch while permitting the development of the private foreign exchange market. - The IPF calls for intervention in response to large, temporary, destabilizing shocks that are not a result of other domestic policies. - A risk-based intervention region can be defined to indicate appreciation or depreciation ranges that may warrant (but do not require) intervention. - Lafarguette and Veyrune (2021) provide a risk-based framework that can address excess volatility while circumventing excessive interventions. ### Value-at-risk intervention framework (modeling and example) - Method: - Model conditional volatility of FX returns along with market fundamentals to capture premia, mismatch, and commodity prices. - Construct an asymmetric, time-varying distribution for FX returns by parametrizing a skew t-distribution. - Set an intervention region depending on the central bank’s risk tolerance using a value-at-risk approach. - Central bank choices: - A central bank that wants to tightly control FX volatility would choose a value-at-risk with a higher probability value. - A central bank preferring more flexible control would choose a value-at-risk with a lower probability value. - Example (Figure 5): - The 5 percent level is chosen. - With information as of January 31, 2023, the intervention region is set at: - appreciation beyond 78 bps, and - depreciation beyond 64 bps in the exchange rate. - If this tolerance were applied over the entire sample, the number of FXIs would be much more limited than historical experience in Peru. - Policy use: - The framework can guide a transition from a more interventionist regime to a more flexible regime, allowing private markets to develop more gradually. ### Conclusions and policy implications - The IPF framework offers insights to address shocks interacting with underlying frictions that generate disorderly market conditions. - Given the extent of shallow FX markets in Peru: - FXIs and macroprudential policies may be used to smooth large changes in hedging and financing premia when capital flow shocks generate sharp destabilizing changes in premia with implications for macroeconomic and financial stability. - FXIs should aim to ensure that markets function appropriately, primarily targeting the premia rather than the exchange rate per se. - In episodes of large depreciation increasing financial stability risks from FX mismatches, FXIs can help prevent adverse macro-financial amplification, irrespective of whether the initial shock is real or financial. - If FX mismatches continue to decline, financial stability risks should be mitigated, reducing the need for FXIs for this motive; however, the case for smoothing large destabilizing changes in premia arising from market shallowness would continue to exist. - A risk-based approach to interventions would allow for more flexibility and a gradual deepening of FX markets over time. *Source: IMF staff analysis in 1perea2023001 — “Inflation expectations in Peru are well-anchored and FXI has not been used to address.”* ### 5. Debt consolidation across sectors: ### 5. Debt consolidation across sectors: ### Public-sector intra-government debt holdings (stock and consolidation) - Holders and reported nominal values (Millions of PEN): - Extra-budget. funds: 2,681 - Social security funds: 406 - State govt.: 1,267 - Nonfin pub. corp.: 1,509 - Central bank: 7,442 - Oth. pub. fin. corp: 7,142 - Total: 20,447 - Consolidation and coverage notes: - Commentary: Millions of PEN. Only includes debt securities and loans from the BCG to subnational governments and the rest of the public sector. - Reporting on intra-government debt holdings: Not applicable / CG / CPS annotations present in table. - Valuation and basis of recording definitions provided: - Nominal value 5/: defined as the amount the debtor owes reflecting value at creation and subsequent economic flows. - Face value 6/: undiscounted amount of principal to be paid at (or before) maturity. - Market value 7/: value as if acquired in market transactions on the balance sheet reporting date. Only traded debt securities have observed market values. - Notes: - 1/ CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector. - 2/ Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable. - 3/ IPSGSs = Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities. - 4/ Includes accrual recording, commitment basis, due for payment, etc. ### Public Debt Sustainability Analysis — Baseline realism and key indicators - Commentary summary: - The realism analysis does not point to major concerns. - The forecast track record for the main drivers does not reveal any systematic bias. - The projected fiscal consolidation is well within norms. - Real GDP growth forecast in the baseline is consistent with reasonable estimates of the fiscal multiplier and converges to potential GDP growth over the forecast horizon. - Comparative elements and distributions included in figures (textual indicators preserved): - Comparator group: Emerging Markets, Commodity Exporter, Program. - Forecast vintages referenced: Projections made in the October and April WEO vintage. - Historical data coverage: annual observations from 1990 to 2019 for MAC advanced and emerging economies. - Realism diagnostics reference percentiles (color code): > 75th percentile; 50-75th percentile; 25-50th percentile; < 25th percentile. - Noted metrics and indicators depicted (percent of GDP unless otherwise indicated): - Public debt to GDP, Primary deficit, r - g, Public Debt Creating Flows, Bond Issuances, avg marginal interest rates, 3-Year Debt Reduction, 3-Year Adjustment in Cyclically-Adjusted Primary Balance, Real GDP Growth under different multipliers (Multiplier=0.5, Multiplier=1, Multiplier=1.5). - Term structure notes: 5+ yr term, 1-5 yr term, <1 yr term. - Spread metrics: Spread vs 10-yr US Treas., Implied spread (Laubach rule). ### Medium-term risk analysis (Debt Fanchart and GFN financeability) - Key indices and values (percent of GDP unless otherwise indicated): - Fanchart width: 43.8 - Probability of debt not stabilizing (pct): 21.9 - Terminal debt level x institutions index: 19.7 - Average GFN in baseline: 3.5 - Bank claims on government (pct bank assets): 7.3 - Chg. in claims on govt. in stress (pct bank assets): 2.7 - GFN financeability index: 4.5 - Probability/error metrics for stress prediction (2023-2028): - Prob. of missed crisis, 2023-2028 (if stress not predicted): 9.1 pct. - Prob. of false alarm, 2023-2028 (if stress predicted): 58.0 pct. - Overall module signals: - Debt Fanchart Module: Moderate risk (index ~1.1). - GFN Financeability Module: Low risk. - Commentary: Of the two medium-term tools, the Debt Fanchart Module is pointing to a moderate level of risk, while the GFN Financeability Module suggests a low risk level, supported by low gross financing needs. ### Long-term risk analysis - Focused indicators and presentation: - GFN-to-GDP ratio and Amortization-to-GDP ratio are central to long-term projections. - Scenarios compared: Medium-term extrapolation; Medium-term extrapolation with debt stabilizing primary balance; Historical average assumptions. - Long-run projection alternatives: Baseline with t+5; Baseline with t+5 and DSPB; Historical 10-year average. - Overall Risk Indication: Presented visually across projections; indicators show scenario comparisons for GFN-to-GDP and Total public debt-to-GDP. ### Annex IX — Implementation of FSAP Recommendations: findings and status - Overall findings: - The financial system has improved and gained strength since the 2018 FSAP; banking system resilient due to strong capital buffers and profitability. - Main vulnerabilities in 2018 were external (reliance on commodity exports) and exchange rate depreciation risk due to dollarization. - The 2018 FSAP recommended improvements across macroprudential framework, supervision, crisis preparedness, deepening money markets, and pension system reforms. - Significant progress and implemented measures (selected highlights with dates and parameters preserved): - Countercyclical provisions and capital surcharges fully aligned with the Basel III framework since January 2023. - New methodology established for determining additional capital buffers. - Deposit insurance system for cooperatives implemented from March 2022; collection began in March 2022. - An 8 percent capital surcharge to exposures subject to exchange rate risk implemented. - Amendments to SBS authority to exercise consolidated supervision progressed. - Requirements for recovery plans for D-SIBs requested with deadline: no later than June 30, 2023. - Risk-based supervision for insurance companies implemented in 2019-2020; model for brokers under development. - New regulations were issued aligning composition of regulatory capital to Basel III in December 2022 and active as of January 2023. Systemic risk buffers to be phased in 2023 and conservation buffers in 2026. - Notable areas of non-implementation or partial implementation: - Reforms to improve the private pension system: Not implemented. - Strengthen legal protection of SBS staff in line with international best practice: Not implemented. - Increase foreign currency lending risk weights: Partially implemented (an 8-percent increase in capital surcharges applied to exposures subject to credit exchange rate risk). - ELA framework enhancements: Partially implemented (BCRP can grant loans of last resort; coordination and specific eligibility/collateral requirements not fully specified). - Crisis preparedness and management arrangements: Partially implemented; authorities view pandemic measures as effective demonstration. - Enhance information-sharing between SBS and FSD and a comprehensive bank resolution framework: In progress. - Require payout of most insured deposits within seven working days and legal protection to FSD staff/agents: Partially implemented; in practice payouts are usually carried out within 48 hours. - Deepen repo markets and improve clearing and settlement infrastructure: In progress; regulations for repurchase operations approved, framework contract and collateral management system under development. - Strategy for Global Asset and Liability Management (EGIAP) aims to strengthen public debt market, interconnection with Euroclear, and phase 2 “Secondary Market Link” to allow euro-clearable bonds and settlement improvements. - Design reforms to improve the private pension system: Not implemented; a Multisectoral Commission was created in July 2022 to prepare technical reports and regulatory proposal for a new pension system. - Selected FSAP recommendations and status labels (time frame annotations preserved: IT = less than 1 year; ST = 1-3 years; MT = 3-5 years): - Increase capital surcharges for systemic banks; increase countercyclical provisioning. (SBS) (ST) — Implemented. - Enhance monitoring of off-balance-sheet exposures. (SBS) (IT) — Implemented. - Increase foreign currency lending risk weights. (SBS) (ST) — Partially implemented. - Introduce growth-at-risk, systemic risk analysis, corporate stress testing; enhance macroprudential mandate and coordination (BCRP/SBS) (ST/MT) — Implemented. - Amend legal framework to grant SBS full consolidated supervision. (SBS) (MT) — In progress (draft law for holding companies to be sent to Congress). - Implement recovery and resolution planning for D-SIBs. (SBS) (MT) — In progress (recovery plans requested by SBS). - Strengthen SBS internal governance and internal audit functions. (SBS) (ST/MT) — Implemented (Internal Risk Management Department created; Ethics Tribunal formed). - Strengthen risk-based AML/CFT supervision and sanctioning powers. (MEF/SBS) (ST/MT) — Partially implemented (new Company Authorization Regulation in January 2021; modifications to governance and risk management regulations; work to increase fines). - Design deposit-insurance system for cooperatives and bring cooperatives under SBS supervision. (BCRP, MEF, SBS) (MT) — Implemented; collection began March 2022. - Strengthen crisis preparedness and management arrangements (MEF, BCRP, SBS, FSD) (MT) — Partially implemented. - Deepen repo markets and improve settlement; prioritize medium- and long-term issuance around benchmark tenors (BCRP/MEF) (ST/MT) — In progress. - Design reforms to improve the private pension system. (MEF) (ST/MT) — Not implemented; Multisectoral Commission created in July 2022 to evaluate and propose. *Source: 1perea2023001 - 5. Debt consolidation across sectors* ### Annex X. Progress on Governance Issues ### Annex X. Progress on Governance Issues ### Overview - The Fund supports efforts to address weaknesses in governance. The IMF adopted a policy for economic governance in 1997, elaborated a Guidance Note (The Role of the IMF in Governance Issues), and adopted the Framework for Enhanced Engagement on Governance in 2018. - Governance assessments cover: (i) governance of fiscal issues; (ii) financial sector oversight; (iii) central bank governance and operations; (iv) market regulation; (v) rule of law; and (vi) anti-money laundering and combatting the financing of terrorism. The assessment also examines the severity of corruption. - Authorities have made considerable progress implementing the governance agenda, though some weaknesses remain and additional efforts are needed to maintain reform momentum. ### Progress and anti-corruption measures - A new Anti-Corruption Plan (based on a broad consultative process) is being implemented. - New legislation has been passed to strengthen fiscal governance. - The National Board of Justice (an independent organ to appoint judges and prosecutors) is operational. - Offices of Institutional Integrity have been opened in more than 200 public sector entities. - A whistleblower complaint platform has been launched. - An integrity index by the Integrity Secretariat has been created to focus on areas with higher corruption risks. - The Comptroller’s Office monitors emergency-related spending, identifies abuses, and regularly publishes its reports. ### Fiscal governance — summary of recommendations and status - General: Progress on business procedure streamlining, economic and regulatory impact analysis, consideration of a unified civil servant human resource system, reduction in redundant workers and related savings, stricter controls and more secure payment orders, and strengthening of public procurement. Some fiscal governance measures remain in process. - Key implemented items: - Administrative simplification and regulatory quality: The Secretariat of Public Management (SGP) and the Multisectoral Commission for Regulatory Quality standardized 100 administrative procedures. - A decree mandating Regulatory Impact Analysis was introduced in 2022; all regulations include compliance mechanisms and indicators (including on timing). - As of 2022, 100 percent of executive branch entities with regulatory functions approve their work program early and make it available to the public. - Legislative Decree No. 1436 (2018) establishes the Financial Management System Committee (SAFI) and added Investment, Human Resources, and Procurement System elements to the PFM system. - Multiple directives introduced on: strengthening authorizations for accrued expenses; programming and budgeting of the Multiyear Budget; budget execution; acquisition and disposal of fixed assets; wage bill management and multiyear programming; recording information in the Centralized Registry of Public Sector Payrolls and Human Resource Data; disbursements within the National Debt System; management of public entity assets; presentation of financial information of public enterprises and other funds; procedures to close out financial statements; and milestones to implement the SIAF-RP. - MEF will set up a department under the Directorate General of Public Budgeting in 2023 to carry out economic impact assessments of regulatory measures. - Drafts and pre-publications of major laws: draft General Law of the Public Supply Chain (pre-published October 2020); draft bill of the new State Procurement Law (Ministerial Decision No. 318-2022-EF/54) pre-published December 2022 and under review. - Action plan to address OECD Recommendations for the Public Sector’s Financial Management Systems will be included in reform planning. - Civil service modernization: - A "Directive on Hiring and Dismissing" staff at government entities was drafted and expected to be approved by April 2023. - Law No. 31657 includes provisions for staff transfers from the Service Administration Contracts (CAS) to the Civil Service. - Draft bill No. 03078/2022-CR to create the Integrated Electronic System for Human Resource Management (run by SERVIR) is under consideration by Congress. - A pilot for the Payroll Validation Module in the Computer Software for the Centralized Registry of Public Sector Payrolls and Human Resources Data (AIRHSP) is ongoing. - Measures implemented in 2019 forced a nationwide reconciliation of payrolls; associated unidentified spending fell 93 percent between 2020 and 2022. - Digitalization: - Digitization of the registry for staff covered under Service Administration Contracts at the AIRHSP was completed in 2022. - Centralized authorization using electronic ID and dynamic code completed for national government and ongoing for local governments. - SIAF-SP module for electronic payment of customs tax by executing units implemented in June 2021. - Digitization of offers in SEACE completed in 2019; supplier inquiries and comments submitted through SEACE. - Digital Work Notebook and "Works Valuation Management" module implemented in 2020; "Electronic Quoting System" implemented in 2020. - Mandatory use of token-like codes associated with electronic ID for payment operations fully implemented in February 2022. - Updating of the SIAF-SP technological platform is ongoing with modules: (i) certification and filing (accounts for 80 percent of transactions); (ii) accounting and debt (20 percent of transactions); and (iii) back-office. - Pilot of the certification module deployed across 46 executing units, with full deployment expected by October 2023. - Roll-out of the accounting and debt module is set for March 2023. - Progressive deployment of the back-office module set to start in February 2023. - Further interoperability improvements anticipated under new procurement and investment bank systems. ### Enhancing institutions and public procurement - Actions taken: - Inclusion on multilateral organizations’ lists of persons and companies ineligible to be hired now impedes doing business with the government. - OSCE strengthened for oversight across procurement phases; Peru Compras strengthened to standardize government requirements. - Legislative Decree 1444 incorporated the possibility of using trusts for project advances for better tracking of advances. - INDECOPI issued “Guidelines to Combat Bidding Fraud in Public Procurement” in 2018. - Public Procurement Surveillance Program implemented in 2021; OSCE issued a Risk Management directive for planning execution of works in 2018. - Executive Decree No. 168-2020-EF established provisions for ministries to prioritize approval of requirements driven by Peru Compras. - A "Samaritan Alert" in framework agreements was implemented in 2022, activated when only one brand is selected in a catalogue. - A draft bill to reform public procurement regulations with a focus on integrity (addressing OECD recommendations, open data, citizen participation, accountability, risk management) was tabled before Congress. - Legislative Decree No. 1439 develops the National Procurement System (SNA), delimiting competencies of DGA, OSCE and Peru Compras. - DGA issued 6 directives and completed 56 webinars, 173 virtual trainings, and 40 in-person trainings as of 2022. - All bidders' offers required to be submitted through SEACE since 2019. - Public Procurement Center implemented an "Electronic Quoting System" in 2020. - OSCE implemented the Public Procurement Surveillance Program with 6 citizen surveillance operations each in 2021 and 2022. - Regulations issued in 2018 and 2020 promote use of the Dispute Resolution Board (DS 344-2018-EF and DS 250-2020-EF). - The draft public procurement bill expands OSCE’s supervisory powers, delimits jurisdiction for injunctions, and broadens the scope of Dispute Resolution Boards. ### Control system reform - Recommendations and partial implementation: - Create a culture of risk management and internal control across all government levels, with PCM and MEF playing leadership roles. - Improve risk-assessment capacity centrally and at SNGs, starting with high-priority sectors as models. - Strengthen MEF regional offices to help implement internal control systems at SNGs. - Establish independent internal audit units at each entity as internal controls are strengthened. - Actions taken: - Supreme Decree 103-2022-PCM approved the PNMGP (national policy on modernization of public administration) for 2023, empowering SGP to approve administrative services including “timely technical assistance in risk management for public entities of the 3 levels of government,” pending regulation of risk management. - Resolution No. 006-2022-PCM/SGP approved the strategy called “implementation of pilot modernization actions in Peru.” A pilot project in the Regional Government of Lambayeque is slated for 2023. - PCM through the SGP verifies compliance with Resolution No. 392-2020-CG of the Office of the Comptroller. - Directive No. 020-2020-CG/NORM (Directive on the Institutional Control Bodies) defines functions of institutional control bodies (OCIs) in public sector entities. *Source: Annex X. Progress on Governance Issues* ### Annex XI. A Primer on Climate Mitigation Policy in Peru ### Annex XI. A Primer on Climate Mitigation Policy in Peru ### Overview - Purpose: Preliminary analysis of mitigation policies to bring Peru in line with its Nationally Determined Contribution (NDC) by 2030 and net-zero pledge for 2050. - Key conclusion: The greater the reduction in emissions from deforestation and land-use, the lower the carbon tax required to achieve climate goals. - Major emissions sources: Land Use, Land Use Change and Forestry (LULUCF) is the largest source; energy-related sectors and agriculture follow. - Tools used: Climate Policy Assessment Tool (CPAT) developed jointly by IMF and World Bank staff. ### National commitments and institutional context - Published policies and laws: - National Strategy on Climate Change (2015) - Forest and Wildlife Law (2015) - Framework Law on Climate Change (2018) - High-Level Commission on Climate Change (established 2020) - Updated NDC presented to the UNFCCC (2020) - National Adaptation Plan (2021) - National climate emergency declared (2022) - Updated NDC targets for 2030: - Absolute unconditional target: 208.8 million tons of CO2 equivalent (MtCO2eq) - Absolute conditional target: 179 MtCO2eq - These correspond to a 30 and 40 percent reduction from the business-as-usual baseline. - Power matrix target: increase share of variable renewable energy in the power matrix from less than 5 percent to 20 percent in 2030. ### A. A Global Perspective — Context for Peru - Required global emission reductions to contain warming: - CO2 and other GHG emissions must be cut by 25 to 50 percent respectively below 2019 levels by 2030, followed by rapid transition to zero or negative net emissions to keep 1.5°C target viable. - Baseline projections: - Global CO2 emissions excluding LULUCF: from 30 billion tons in 2020 to over 35 billion by 2030. - 1.5–2.0°C-compatible CO2 emissions: about 15 to 25 billion tons in 2030. - IMF assessment: - Measures equivalent to a global carbon price at $75 per ton by 2030 are needed to limit warming below 2°C. - G20 countries should adopt measures equivalent to a carbon price of over $75 per ton by 2030 to cut emissions at least 30 percent below BAU. ### B. Land Use, Land-Use Change and Forestry (LULUCF) and Agriculture in Peru - Emissions shares and trends: - LULUCF and energy combined represent more than 70 percent of total emissions in Peru. - Peru territory: 57 percent forestland; 95 percent of this is Amazon rainforest. - LULUCF emissions in 2016: 109 million tons of CO2eq, about 53 percent of total emissions. - Over the past two decades, Peru has lost about 2.6 million hectares of forest cover (about 3.6 percent of the total). - 2020 annual deforestation: 203,272 hectares (highest on record); above the annual average of 150,000 hectares since 2012. - Drivers of deforestation (2011–2016): agricultural and livestock use responsible for more than three quarters of annual deforestation; followed by mining operations and settlement expansion (roads, infrastructure, migration). - Agriculture emissions (2016): - Total: 25.9 million tons of CO2eq or 12.6 percent of total emissions. - Breakdown by source in agriculture: - Enteric fermentation: 44 percent of sector emissions. - Direct N2O from managed soils: almost 30 percent. - Indirect N2O from managed soils: 10 percent. - Biomass burning: 7 percent. - Rice cultivation: 4 percent. - Manure management: 2,4 percent. - Urea application: 1 percent. - Indirect N2O emissions from manure management: 0.8 percent. - Recommended forestry channels to increase carbon storage: - Reduce deforestation. - Afforestation. - Enhance forest management (planting larger trees, fertilizing, tree thinning, increasing rotation lengths). - Sectoral policy options to stop/reduce deforestation: - Assignment of forest rights and concessions. - Investments in conservation, reforestation, and afforestation. - Introduction of agroforestry systems, nature-based tourism, and silvopastoral systems. - Governance and anti-corruption measures to stop illegal activities. - Monitoring and transparency improvements. - Feebate program concept for forestry: - Fee formula: [CO2 rental price] × [carbon storage on their land in a baseline period ─ stored carbon in the current period] - Outcomes: - Landowners cutting trees pay fees. - Landowners allowing regeneration or replanting receive negative fees (subsidies) drawn from fee payments. - Advantages: - Rewards reduced deforestation, afforestation, and enhanced forest management. - Can be designed to be revenue-neutral through appropriate scaling of the baseline over time. - Comparatively simple to administer if landowners are registered for business tax collection. - Political appeal to responsible landowners expecting rebates. - Implementation supports: - Advances in monitoring technologies (satellite monitoring, aerial photography, LIDAR, on-the-ground sampling) make feebates more practical. - Measuring above ground carbon (about three quarters of the total) can keep costs down. - REDD+ capacity development is underway with other developing countries. - Agricultural mitigation options: - Incorporate agroforestry systems. - Change irrigation practices and substitute fertilizers to allow higher crop yields. - Implement silvopastoral systems and rotating feed in the Amazon to increase carbon sequestration and cattle weight by up to 20 percent, reducing methane emissions per kilogram of meat produced. ### C. Emissions in Energy-Related Sectors - Energy and industry-related CO2 emissions in 2020: - Accounted for 19 percent of Peru’s 257 MtCO2 GHG emissions. - Transportation: 7 percent of GHGs. - Power generation: 6 percent. - Industrial process emissions: 5 percent. - Agriculture: 8 percent. - Waste: 4 percent. - Fuel contributions to energy-related CO2 emissions (2020): - Oil products: 47 percent. - Natural gas: 36 percent. - Liquified natural gas (LNG): 12 percent. - Electricity generation (2020): - Fossil fuels: 36 percent of electricity generation (down from 42 percent in 2010). - Generation shares in 2020: gas 34 percent, coal 1 percent, oil 1 percent. - Hydropower: 58 percent of electricity output. - Fossil fuel share has increased above the 29 percent observed in 1980 due to fast electricity demand growth outstripping hydro growth. - NDC ambition: - 2030 pledge: reduce GHG emissions to 208.8 MtCO2eq (updated NDC), a significant increase in ambition from 2015 NDC target of 298.3 MtCO2eq. - The updated NDC requires a 24 percent reduction in GHG emissions in 2030 relative to the baseline. ### D. Quantitative Evaluation of Emissions Mitigation Options (CPAT analysis) - Role of carbon pricing: - Carbon pricing is the centerpiece for addressing energy- and combustion-related emissions. - Benefits: promotes reduced energy use and shift to cleaner energy across sectors; mobilizes revenue; generates domestic environmental co-benefits. - Central constraint for Peru: - Large land-use change emissions make meeting NDC goals almost impossible without significant reductions in land-use change emissions. - Three CPAT-modeled scenarios that achieve the 2030 NDC target: - Just Land-Use: - Cut land-use change emissions by 41 percent by 2030. - No other changes required to meet Peru’s 2030 carbon emissions target. - Proportionate: - All emissions (including land-use change emissions) cut about 25 percent from BAU scenarios. - Requires an economy-wide carbon tax starting at $25 per ton of CO2 in 2023 and rising to $155 per ton of CO2 by 2030. - Hybrid: - Land-use change emissions cut by 35 percent by 2030 from BAU scenarios. - Requires a less-stringent carbon tax starting at $20 per ton of CO2 in 2023 and rising to $50 per ton of CO2 by 2030. - Notes on carbon price comparisons: - A carbon price of $155 per ton of CO2 is characterized as relatively high globally. - For context provided in the analysis: a permit to emit one ton of carbon traded at a price of about $90 per ton at the end of 2022 on the European Union’s Emissions Trading System. - CPAT outputs analyzed: - Impacts on emissions by scenario (total and land-use change). - CO2 emissions reductions from the baseline by sector and by fuel type. - Fiscal impacts: new government revenues under scenarios. - Macroeconomic impacts: impact on GDP growth in 2030 under scenarios. - Distributional impacts and comparisons of efficiency costs with domestic environmental co-benefits. ### Key policy implications and recommendations (from analysis) - Prioritize rapid and large reductions in deforestation and land-use change emissions to lower the carbon price burden on the rest of the economy. - Implement a mix of sectoral interventions in forestry and agriculture: - Assignment of forest rights and concessions. - Investments in conservation, reforestation, afforestation, agroforestry, silvopastoral systems, and nature-based tourism. - Governance and anti-corruption measures to curb illegal activities in the Amazon basin. - Monitoring and transparency improvements leveraging satellite, aerial, and on-the-ground technologies. - Consider designing a national feebate program for forestry to incentivize carbon storage while allowing revenue-neutral designs. - For energy-related emissions, adopt carbon pricing as a key instrument, calibrated to the level of achievable land-use emissions reductions: - If land-use emissions reductions are limited, higher carbon prices (up to $155 per ton of CO2 by 2030 in the Proportionate scenario) will be required. - If substantial land-use reductions are achieved, lower carbon prices suffice (e.g., $50 per ton of CO2 by 2030 in the Hybrid scenario). - Use CPAT and similar tools to quantify trade-offs across emissions, fiscal revenues, GDP impacts, and distributional effects when designing policies. *Prepared by Diego Mesa Puyo and Antung Anthony Liu (both from FAD’s Climate Policy Division).* ### 26. Higher carbon pricing would have a negative on GDP growth, but this could be entirely ### 26. Higher carbon pricing would have a negative on GDP growth, but this could be entirely ### Impact on GDP and revenue recycling - Potential negative impact on GDP growth in 2030: - 0.9 percentage points in the proportionate scenario. - 0.3 percentage points in the hybrid scenario. - If 50 percent of revenues collected from the carbon tax are recycled effectively through productive public investment, the negative impact would be completely offset. - Economic costs (pure mitigation costs) in 2030: - Proportionate scenario: -1.0 percent of GDP. - Hybrid scenario: -0.3 percent of GDP. - Domestic environmental co-benefits in 2030: - Proportionate scenario: 0.9 percent of GDP. - Hybrid scenario: 0.4 percent of GDP. - Adding global climate benefits increases environmental benefits from 0.4 to 0.9 percent of GDP, almost exactly equal to the economic efficiency cost. ### Price impacts by fuel (2030 comparisons and 2022 baselines) - General findings: - Carbon pricing puts upward pressure on energy prices, highest impact on coal, followed by oil and road fuels. - Since natural gas is the largest fossil fuel source for the electricity sector, rises in prices of electricity are relatively restrained. - Percentage increases (Proportionate vs. Hybrid scenarios compared to the reform just focused on land-use change): - Weighted average coal prices increase by 158 percent (Proportionate) and 51 percent (Hybrid). - Natural gas prices increase by 44 percent (Proportionate) and 14 percent (Hybrid). - Electricity prices rise by 23 percent (Proportionate) and 5 percent (Hybrid). - Diesel prices increase by 48 percent (Proportionate) and 16 percent (Hybrid) compared to the reform just focused on land-use change. - Gasoline prices increase by 82 percent (Proportionate) and 27 percent (Hybrid) compared to the reform just focused on land-use change. - Table 1. Peru: Energy Prices by Scenario (exact values) - 2022 Price; 2030 Price; Fuel Unit; Just Land-Use; Proportionate; Hybrid - Gasoline $/L: 0.71; 0.50; 0.92; 0.64 - Diesel $/L: 1.26; 0.98; 1.45; 1.13 - LPG $/L: 0.78; 0.62; 0.94; 0.72 - Kerosene $/L: 0.81; 0.59; 1.04; 0.74 - Oil $/bbl: 87.62; 56.59; 129.35; 80.06 - Coal $/GJ: 13.33; 9.25; 23.89; 13.97 - Natural gas $/GJ: 22.66; 19.79; 28.47; 22.59 - Electricity $/kWh: 0.11; 0.10; 0.12; 0.10 ### Distributional impacts and policy design - Regressivity without revenue recycling: - Carbon pricing is regressive in both Proportionate and Hybrid scenarios if revenue is wasted. - Carbon pricing imposes a burden on an average household of 1-2.5 percent of consumption, driven largely by direct increases in the price of fossil fuels. - Revenue recycling effects: - Revenue recycling would offset negative impacts on households; targeted recycling could make reforms pro-poor. - Scenario with 50 percent of revenues used for a targeted, unconditional cash transfer to the bottom four consumption deciles: - Makes reform pro-poor and equity enhancing. - In the Proportionate scenario, the bottom four deciles are better off with net benefits of about 2-16 percent of consumption. - The next five deciles are approximately no better or worse off. - The richest households are worse off on net by only 1.2 percent of consumption. - Distributional analysis method: - Two-step approach: (1) use input-output tables to calculate effect of carbon pricing on categories of consumer goods; (2) map price increases to household expenditure surveys using budget shares for different goods by household income group. ### Summary of scenario outcomes (Table 2 key figures) - CO2 emissions reduction in 2030, % from BAU: - Just Land-Use: 26% - Proportionate: 26% - Hybrid: 26% - Land-Use Emissions Reduction by 2030, % from BAU: - Just Land-Use: 41% - Proportionate: 26% - Hybrid: 34% - Carbon tax required: - Just Land-Use: $0 per MtCO2 - Proportionate: $25 in 2023 rising to $155 by 2030 - Hybrid: $20 in 2023 rising to $50 by 2030 - Cumulative CO2 emissions reductions in 2024-2030, MtCO2: - Just Land-Use: 321 - Proportionate: 357 - Hybrid: 350 - Additional fiscal revenues raised in 2030, % of GDP: - Just Land-Use: 0.00 - Proportionate: 1.88 - Hybrid: 0.70 - Cumulative additional fiscal revenues raised in 2024-2030, bn USD: - Just Land-Use: 0.0 - Proportionate: 28.3 - Hybrid: 11.6 - Impact on GDP growth in 2030, percentage points deviation from the BAU growth: - Just Land-Use: 0.0% - Proportionate: 0.0% - Hybrid: 0.0% - Electricity price increase in 2030, percent from the BAU price: - Just Land-Use: 0% - Proportionate: 23% - Hybrid: 5% - Diesel price increase in 2030, percent from the current price: - Just Land-Use: 0% - Proportionate: 48% - Hybrid: 16% - Relative mean consumption effect on the poorest after revenue recycling, % of BAU consumption: - Just Land-Use: 0.0% - Proportionate: 16.0% - Hybrid: 5.9% - Pure abatement costs, % of GDP: - Just Land-Use: 0.0% - Proportionate: -1.0% - Hybrid: -0.3% - Domestic co-benefits (transport, air pollution, climate), % of GDP: - Just Land-Use: 0.0% - Proportionate: 0.9% - Hybrid: 0.4% *Source: IMF Staff Using CPAT* ### References ### References and Informational Annex (Content unit: 1perea2023001) ### Key references cited - Black, Simon; Ian Parry; James Roaf; and Karlygash Zhunussova. 2021. “Not Yet on Track to Net Zero: The Urgent Need for Greater Ambition and Policy Action to Achieve Paris Temperature Goals.” IMF Staff Climate Note 2021/005. - Crippa, Monica; Diego Guizzardi; Marilena Muntean; Edwin Schaaf; Frank Dentener; John A. van Aardenne; Suvi Monni; et al. 2018. “Gridded Emissions of Air Pollutants for the Period 1970–2012 within EDGAR v4.3.2.” Earth System Science Data 10 (4): 1987–2013. - De La Torre Ugarte, Daniel; Néstor Collado Duran; Fernando Requejo; Ximena Gomez; and Carlos Heros. 2021. “A Deep Decarbonization Pathway for Peru’s Rainforest.” Energy Strategy Reviews. - Friedlingstein, Pierre; Matthew W. Jones; Michael O’Sullivan; Robbie M. Andrew; Dorothee C. E. Bakker; Judith Hauck; Corinne Le Quéré; et al. 2021. “Global Carbon Budget 2021.” Earth System Science Data Discussions, November, 1–191. - IPCC, 2021. AR6 Climate Change 2021: The Physical Science Basis. - Parry, Ian. 2020. “Rationale for, and design of, a feebate for forest carbon sequestration.” in “Designing Fiscal Instruments for Sustainable Forests” World Bank Group. - Parry, Ian (eds), 2021, “No Brainers and Low-Hanging Fruit in National Climate Policy”, CEPR Press, London. - Parry, Ian; Simon Black; and James Roaf. 2021. “Proposal for an International Carbon Price Floor among Large Emitters.” IMF Staff Climate Note 2021/001. - Sedjo, R., and G. Marland. 2003. “Inter-Trading Permanent Emissions Credits and Rented Temporary Carbon Emissions Offsets: Some Issues and Alternatives,” Climate Policy, Vol. 3, No. 4, pp. 435–444. - Vernon, Nate; Ian Parry; and Simon Black. "Still not getting energy prices right: A global and country update of fossil fuel subsidies." (2021). - World Bank Group. 2022. “Country Climate and Development Report: Peru.” ### IMF Fund relations and financial arrangements - Membership Status: Joined 12/31/1945; accepted the obligations of Article VIII, Sections 2(a), 3, and 4 on 2/15/1961. - Quota (General Resources Account): 1334.50 SDR Million (100.00 percent of Quota). - Fund holdings of currency: 949.12 SDR Million (71.12 percent). - Reserve Tranche Position: 385.43 SDR Million (28.88 percent). - SDR Department net cumulative allocation: 1888.95 SDR Million (100.00 percent of Allocation). - SDR Department holdings: 1775.06 SDR Million (93.97 percent). - Outstanding Purchases and Loans: None. - Latest financial arrangements (type, date of expiration, amount approved, amount drawn): - FCL, May 27, 2022 — May 26, 2024 — 4,003.50 (SDR Million) — 0.00 (SDR Million). - FCL, May 28, 2020 — May 27, 2022 — 8,007.00 (SDR Million) — 0.00 (SDR Million). - Stand-By, Jan. 26, 2007 — Feb. 28, 2009 — 172.37 (SDR Million) — 0.00 (SDR Million). - Stand-By, Jun. 09, 2004 — Aug. 16, 2006 — 287.28 (SDR Million) — 0.00 (SDR Million). - Projected Payments to the Fund: - Principal: 2023 0.00; 2024 0.00; 2025 0.00; 2026 0.00; 2027 0.00. - Charges/Interest: 2023 3.60; 2024 3.71; 2025 3.70; 2026 3.71; 2027 3.71. - Total: 2023 3.60; 2024 3.71; 2025 3.70; 2026 3.71; 2027 3.71. ### Exchange arrangement and external position - Exchange arrangement: Peru has a floating exchange rate arrangement. - On January 31, 2023 the average of interbank buying and selling rates was 3.846 soles per U.S. dollar. - Peru accepted the obligations of Article VIII, Sections 2, 3, and 4 on February 15, 1961. - International reserves amount to 30 percent of GDP (noted as part of external position assessment). ### Technical assistance and capacity building (by department and year) - FAD (selected entries): 2014 Follow-up Macro-fiscal 7/30/2014; 2014 Treasury Management 11/23/2014; 2015 Follow-up on Tax and Customs Administration 1/19/2015; 2015 Local Government Revenues and BEPS in Natural Resource Sector 12/1/2015; 2016 Budget Management 2/15/2016; 2017 Fiscal Reporting and Budgeting 1/16/2017; 2017 Tax Administration 6/7/2017; 2019 Revenue Administration 11/13/2019; 2020 Large Taxpayer Units 1/20/2020; 2022 Debt Management – Debt Servicing Payment Process 2/15/2022. - MCM: 2021 CBDC Feasibility 08/27/2021; 2022 Back Office Processes 02/15/2022; 2022 CBDC Design Phase 1/3 08/01/2022; 2022 CBDC Design Phase 2/3 12/20/2022. - LEG: 2017 Strengthening AML/CFT Supervision of the SMV 2/7/2017. - STA (selected entries): 2018 Monetary and Financial Sector Statistics 10/22/2018; 2019 Sectoral Accounts 7/15/2019; 2020 National accounts (sectoral balance sheets, GDP statistics) 1/16/2020; 2020 CPI Weights 10/19/2020; 2021 Sectoral Accounts 06/21/2021. ### Relations with other international financial institutions - World Bank Group: country page and overview of lending cited. - Inter-American Development Bank: country page and lending portfolio cited. ### Statistical issues, data adequacy, and recommended improvements - General assessment: Data provision and macroeconomic statistics have some shortcomings but are broadly adequate for policy formulation, surveillance, and monitoring. - Areas for improvement identified: - (i) coordination among agencies compiling official statistics to avoid duplication of efforts; - (ii) publishing a single official measure of inflation for Peru with component regional indexes; - (iii) redeveloping the wholesale price index as a producer price index; - (iv) finalizing migration to standardized report forms for monetary data related to other financial corporations; - (v) expanding scope of data sources for compiling financial flows of individual residents. - National accounts: INEI released a new national accounts series implementing the 2008 SNA with base year 2007; INEI is preparing historical quarterly GDP series for 1980–2007. - Price statistics: Official measures include CPI for Metropolitan Lima and CPI National; index uses weights based on the 2019/2020 ENAPREF (data collection stopped in May 2020 due to the pandemic). - Labor market statistics: Four indicators tracked—open unemployment, underemployment, employment, and remunerations; nationwide unemployment and underemployment surveyed quarterly. - Government Financial Statistics: Central Bank (BCRP) compiles monthly GFS for the general government; financing info available at nonfinancial public sector level; data reported on cash basis for revenues and on accrual basis for expenditures. - Monetary and financial statistics: Reported monthly using SRFs; data on other financial corporations (OFCs) recently reported and under review. - External sector statistics: Balance of payments and IIP reported quarterly following BPM6 starting with Q1 2018 data; participation in Coordinated Direct Investment Survey (inward latest 2013, outward 2010) and Coordinated Portfolio Investment Survey (latest data Dec 2017). - Specific recommendations for external statistics: - strengthen data coverage (manufacturing services on physical inputs owned by others, compensation of employees, money market funds, insurance corporations, households); - improve valuation (loans and debt securities reported at face value rather than nominal and market value); - improve instrument classification and level of detail (particularly for other investment); - delineate reserves in IIP consistent with international standards (participations in FLAR and BIS should be excluded). - BCRP reporting: since August 2001 weekly data on international reserves; since August 2006 includes full amount of liquidity requirements in the reserve template. ### Table of Common Indicators (as of February 1, 2023) — sample entries and periodicity - Exchange Rates: Latest Observation 2023M1; Date Received 01/31/23; Frequency of data M; Frequency of reporting M; Frequency of publication M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest Observation 01/31/23; Date Received 02/02/23; Frequency M. - Reserve/Base Money: Latest Observation 01/31/23; Date Received 02/07/23; Frequency M. - Broad Money: Latest Observation 12/31/23; Date Received 01/27/23; Frequency M. - Consumer Price Index: Latest Observation January 2023; Date Received 01/31/23; Frequency M. - Revenue, Expenditure, Balance and Composition of Financing—Central Government: Latest Observation December 2022; Date Received 01/27/23; Frequency M. - GDP/GNP: Latest Observation Q4/2022; Date Received 02/16/23; Frequency Q. - International Investment Position: Latest Observation Q3/2022; Date Received [12/18/22]; Frequency Q. ### Statement by Mr. Herrera and Mr. Hendrick (March 22, 2023) — Key points - The Peruvian economy grew 2.7 percent in 2022 and is expected to grow at a similar rate in 2023. - Inflation in Peru increased in 2022, but less than in its LAC peers; inflation peaked in June 2022 and is forecast to follow a downward trend since March 2023. - By end-2022, the fiscal deficit declined to 1.6 percent of GDP; public debt fell to 34 percent of GDP. - International reserves amount to 30 percent of GDP; access to a precautionary FCL arrangement provides additional insurance against tail risks. - The financial sector remains solid, well capitalized, and with excellent financial soundness indicators; stress testing suggests resilience even under severely adverse scenarios. - Authorities continue structural reform work under the OECD accession process; recent political tensions underscore the need to muster social consensus to consolidate macroeconomic stability, inclusive growth, and poverty reduction. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1perea2023001.pdf* ### INTRODUCTION ### INTRODUCTION ### Summary assessment and context - The Peruvian authorities broadly agree with the staff report (SM/23/61) and value the constructive policy dialogue with Mr. Santos and his team. - Key downside risks highlighted: economic slowdown in trading partners (China, the U.S., and the euro area), tighter-than-anticipated global financial conditions, high inflation, increased uncertainty associated with the Russia-Ukraine war, flooding and heavy rainfall caused by cyclone Yaku (affecting agricultural activities and coastal infrastructure), and road blockades during the first 45 days of 2023 that hampered mining, tourism, and agribusiness and stoked inflation. - Peru can build on strong fundamentals to recover high potential growth once social and political stability is restored. ### Recent developments - Long-run performance and policy framework: - Economy grew at an annual rate of almost 5 percent over the last two decades prior to the pandemic. - Under the inflation-targeting framework by the Central Reserve Bank of Peru (BCRP), inflation averaged 2½ percent over the same period. - Public assets stood at 12¾ percent of GDP in 2022. - Growth and labor market: - Peruvian economy grew 2.7 percent in 2022, supported by strong domestic demand, recovery in employment, and lifting of pandemic-related restrictions. - National unemployment rate fell to 4.3 percent in 2022. - Formal employment surpassed pre-pandemic levels in early 2022. - Real GDP growth was -1.1 percent (yoy) in January 2023, reflecting the impact of road blockades. - Inflation: - Headline inflation was 8½ percent at end-2022. - In February 2023, headline inflation declined slightly to 8.65 percent from January 2023 (8.75 percent). - BCRP expects inflation to return within the 1-3 percent target band by end-2023. - Monetary policy: - BCRP raised the policy rate by 725 bps in 17 consecutive steps to 7¾ percent in January 2023, after an initial 25-bp hike in July 2021. - The BCRP paused the tightening cycle to assess effects and signaled a data-dependent stance. - BCRP estimations show that current economic activity is close to potential. - Fiscal accounts: - NFPS deficit was 1.6 percent of GDP in 2022, down from 8.9 percent of GDP in 2020. - Fiscal rule limit: 3.7 percent of GDP. - Fiscal consolidation aims for a medium-term target deficit of 1.0 percent of GDP by 2026. - The lower 2022 deficit reflected a 12.7 percent (nominal) increase in tax revenues (real terms 4.5 percent) and a 6 percent (nominal) expenditure increase (real term -1.7 percent, mainly in capital spending). - Public debt fell to 34 percent of GDP in 2022. - External position and reserves: - International reserves were US$72.2 billion as of end-December 2022. - FX coverage metrics: 30 percent of GDP, 524 percent of short-term debt at remaining maturity, 207 percent of FX bank deposits, and 250 percent of the Fund ARA metric. - Current account deficit increased to 4.3 percent of GDP in 2022 and is forecast to decline to 2.1 percent in 2023. - Financial sector resilience: - ROE at 16½ percent and ROA at 2.0 percent as of December 2022. - NPLs stabilized around 4 percent with high provision coverage. - Credit growth decelerated rapidly after withdrawal of support measures. - Top-down stress test confirms resilience under severely adverse scenarios. - Supervisory and regulatory authorities continue monitoring and will act as needed. ### Outlook and risks - Growth outlook and initiatives: - Authorities are more optimistic than staff for 2023 growth and expect structural reforms to enhance medium-term potential output. - The new Quellaveco mine may provide additional growth over ½ percent. - Short-term fiscal impulse “Con Punche Peru” may provide an additional ½ percent growth. - Policy buffers and readiness: - Key buffers: high international reserves, declining fiscal deficit, low public debt, investment-grade sovereign rating, ample access to international markets with low spreads, strong domestic financial sector, and the FCL arrangement. - Consensus expectation that BCRP credibility will help bring inflation back within the target band by end-2023 or early 2024. - Authorities stand ready to take additional actions if global market conditions warrant. ### Looking forward — policies for inclusive growth and poverty reduction - Short-term fiscal stance: - Authorities agree a small short-term fiscal impulse is appropriate while maintaining planned fiscal consolidation beyond 2024. - “Con Punche Peru” aims to inject 0.6 percent of GDP, supporting vulnerable households and firms in agriculture and tourism, and assisting subnational governments to execute capital expenditure programs. - Fiscal framework and targets: - Original NFPS deficit target of 1 percent by 2025 delayed by one year. - Temporary public debt-to-GDP limit set at 38 percent, with a return to the 30 percent debt ceiling by 2032. - Fiscal strategy anchored in the Medium-Term Budgeting Framework and guided by the Fiscal Council; recent legislation strengthened the Fiscal Council’s credibility. - Structural reforms and public services: - Authorities committed to OECD accession-related structural reforms; raising productivity and reducing informality are priorities. - Emphasis on enhancing public provision of health, education, and social protection, and improving budget implementation capacities and quality of public spending at local and regional levels. - Ongoing assessment of pension system redesign options to build consensus among stakeholders and civil society. - Inflation and poverty: - Maintaining stable and low inflation is central to growth and poverty reduction. - Inflation averaged 2.7 percent in 2001-2021. - BCRP continues data-driven policy to return inflation to the 1–3 percent target band. - Financial regulatory progress: - January 2023: new capital framework aligned with Basel III introduced. - Most FSAP recommendations implemented: expanded oversight of financial cooperatives, monitoring of banks’ balance sheet exposures, deposit insurance for credit unions, and enhancements to emergency liquidity assistance. ### Climate change and environmental context - Legislative and institutional measures: - Framework Law on Climate Change enacted in 2018. - High-Level Commission on Climate Change established in 2020. - National Adaptation Plan published in 2021; national climate emergency declared in 2022. - Emissions profile and challenge: - Peru is not a large carbon emitter; energy matrix is intensive in natural gas and hydroelectric power. - Main emissions source: land use change and forestry (LULUCF). - Forestry context: 57 percent of Peru’s territory is forestland and 95 percent is Amazon rainforest; deforestation is a considerable challenge. ### Final remarks - Peru’s economic transformation over the last three decades followed a deep recession and hyperinflation in the late 1980s, resulting in sustained growth, low inflation, and substantial poverty reduction. - Fiscal discipline, openness, and an investment-friendly framework helped build strong fiscal and international reserve buffers and strengthened resilience to shocks, including political instability. - Authorities remain vigilant and committed to adjustments needed to ensure sustained and inclusive growth and to complying with Peru’s burden-sharing for a better and sustainable world. *Peruvian authorities’ introduction to the Article IV Consultation staff report.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1perea2023001.pdf_