## 1. The Impact of El Niño Costero and Global

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### Context and recent developments
- The 2023 El Niño Costero began in March 2023, became strong in April 2023, weakened in early 2024, and persisted until early April 2024 (ENFEN assessment).
- El Niño Global began in June 2023, became strong in September 2023, weakened to moderate strength in February 2024, and is expected to dissipate by May 2024.
- Political context:
  - Former Vice President Dina Boluarte became President in December 2022.
  - Cabinet changes occurred in February 2024 and April 2024.
  - A two-year Flexible Credit Line arrangement (300 percent of quota) was approved in May 2022 and expires on May 26, 2024; the authorities expect to treat it as precautionary and to exit upon expiration, conditional on external risks.

### Aggregate economic impact and recent outcomes
- Growth and shocks:
  - Economy contracted slightly in 2023: growth recorded a contraction of -0.4 percent y/y in Q1 2023, followed by three consecutive quarters of slightly negative growth (y/y).
  - BCRP estimates combined shocks (social unrest, El Niño, droughts, avian flu) contributed an estimated -2.1 percentage points to GDP growth.
- External position and reserves:
  - Current account balance: surplus of 0.6 percent of GDP in 2023.
  - International reserves: US$71.3 billion (233 percent of the ARA metric) at end-2023; compared to US$72.2 billion (240 percent of the ARA metric) at end-2022.
- Fiscal position:
  - Nonfinancial public sector fiscal deficit: 2.8 percent of GDP in 2023 (above fiscal rule target of 2.4 percent of GDP).
  - Public debt: 32.1 percent of GDP in 2023 (from 33.9 percent of GDP in 2022).
  - Public assets: 10.5 percent of GDP.
- Monetary policy and market rates:
  - Headline inflation: 3.0 percent y/y in March 2024.
  - Core inflation: 3.1 percent y/y in March 2024.
  - Inflation expectations: 2.6 percent (12 months ahead) in March 2024.
  - BCRP policy rate: lowered from 7.75 percent to 6.00 percent between September 2023 and April 2024.
  - Reserve requirement ratio in domestic currency: lowered to 5.5 percent (from 6.0 percent) effective in April (March 2024 decision).
  - Long-term sovereign yield: 7.2 percent in Q4 2023 versus 8.1 percent in Q4 2022.

### Sectoral impacts (empirical and observed)
- Historical empirical estimates for strong/very strong El Niño Costero events (average effects within one year of onset):
  - Fisheries: 70 percent lower production (historical average).
  - Agriculture: 11 percent lower production (historical average).
  - Fiscal reaction historically: deterioration of the primary balance of about 2 percent of GDP during the same period.
- Observed impacts for the 2023 event (March–December 2023):
  - Fishing output: 27.3 percent below trend.
  - Agriculture output: 4.9 percent below trend.
  - Construction output: 9.2 percent lower.
  - Manufacturing output: 6.6 percent lower.
- Price impacts (staff estimates and observed CPI spikes):
  - Non-core food inflation: peaked at an increase of 8.1 percentage points after eleven months following past strong events.
  - Core food inflation: increases by 2.3 percentage points in the second year after the shock (historical estimate).
  - Observed temporary CPI spikes during the ongoing El Niño Costero:
    - Fish and Seafood component: 11 percentage points increase between February and June.
    - Fruits component: 22.6 percentage points increase between February and September.
  - By end-2023, inflation rates for these categories fell.

### Labor market and financial sector effects
- Labor market:
  - Unemployment rate: fell from 7.1 percent at end-2022 to 6.4 percent at end-2023; increased to 7.7 percent in March 2024.
  - Real wage growth: averaged -3.4 percent y/y and was negative until October 2023.
  - Informality: declined in 2023; adequate employment remains below pre-pandemic levels.
- Financial sector soundness:
  - NPL ratio: 4.5 percent in 2023, driven by loans to small- and medium-sized businesses.
  - Deposit institutions’ provisions: cover more than 100 percent of NPLs.
  - Regulatory capital ratios (end-2023): total regulatory capital ratio 16.3 percent; common equity Tier1 capital ratio 13.1 percent.
  - Liquidity coverage ratio (LCR): 167 percent in local currency and 140 percent in foreign currency.
  - Return on equity: 13 percent (end-2023).
  - Real credit from deposit corporations: contracted by 2.0 percent in 2023.
  - Banks: adequate capital, liquidity, and profitability despite headwinds.

### Macroeconomic outlook and projections
- Near-term constraints:
  - A moderate El Niño Global and a weak El Niño Costero expected to continue until early April 2024, constraining recovery in H1 2024.
- Staff projections:
  - Real GDP: projected to grow at 2.5 percent in 2024.
  - Output gap: a negative output gap is expected to continue until 2026.
  - Current account: expected to return to a deficit of 1.1 percent of GDP in 2024 and to stabilize at 1.5 percent of GDP in the medium term.
  - Credit growth: expected to rebound modestly with a timid positive feedback effect on the real sector.
  - Inflation outlook: as El Niño effects dissipate, inflation expected to rapidly decline towards the midpoint of the target band, aided by a negative output gap and normalization of supply shocks; BCRP continuing a cautious easing cycle.

### Policy and institutional responses described
- Macroeconomic framework and actions:
  - Strong fiscal policies and institutional frameworks helped maintain the lowest debt ratio in the region.
  - BCRP applied decisive monetary policy tightening earlier and initiated an easing cycle starting September 2023.
  - Strong supervision and macroprudential policies preserved financial stability.
  - Two-year Flexible Credit Line arrangement (300 percent of quota), approved in May 2022, provided signaling and insurance against tail scenarios; authorities expect to treat it as precautionary and to exit upon expiration on May 26, 2024, conditional on external risks.
  - Fiscal measures in 2023 included new stimulus programs (Con Punche 1 and 2) and climate-related spending for reconstruction and preparation related to Cyclone Yaku and El Niño.

*Source: IMF staff analysis as presented in the provided chapter on Peru: "1. The Impact of El Niño Costero and Global" from the supplied PDF content.*

### 1. The Impact of El Niño Costero and Global ______________________________________________________ 6

### 1. The Impact of El Niño Costero and Global

### Context and recent developments
- The 2023 El Niño Costero began in March 2023 and, according to Estudio Nacional del Fenómeno El Niño (ENFEN), became strong in April 2023, weakened in early 2024, but persisted until early April 2024.
- El Niño Global began in June 2023, became strong in September 2023, weakened to moderate strength in February 2024, and is expected to dissipate by May 2024.
- Political context: former Vice President Dina Boluarte became President in December 2022; cabinet changes occurred in February 2024 and April 2024. A two-year Flexible Credit Line arrangement (300 percent of quota) was approved in May 2022 and expires on May 26, 2024; the authorities expect to treat it as precautionary and to exit upon expiration, conditional on external risks.

### Aggregate economic impact and recent outcomes
- The economy contracted slightly in 2023: growth recorded a contraction of -0.4 percent y/y in Q1 2023, followed by three consecutive quarters of slightly negative growth (y/y).
- The BCRP estimates the combined shocks (social unrest, El Niño, droughts, avian flu) contributed an estimated -2.1 percentage points to GDP growth.
- External position and reserves:
  - Current account balance: surplus of 0.6 percent of GDP in 2023.
  - International reserves: US$71.3 billion (233 percent of the ARA metric) at end-2023; compared to US$72.2 billion (240 percent of the ARA metric) at end-2022.
- Fiscal position:
  - Nonfinancial public sector fiscal deficit: 2.8 percent of GDP in 2023 (above fiscal rule target of 2.4 percent of GDP).
  - Public debt: 32.1 percent of GDP in 2023 (from 33.9 percent of GDP in 2022).
  - Public assets: 10.5 percent of GDP.
- Monetary policy and market rates:
  - Headline inflation: 3.0 percent y/y in March 2024.
  - Core inflation: 3.1 percent y/y in March 2024.
  - Inflation expectations: 2.6 percent (12 months ahead) in March 2024.
  - BCRP policy rate: lowered from 7.75 percent to 6.00 percent between September 2023 and April 2024.
  - Reserve requirement ratio in domestic currency: lowered to 5.5 percent (from 6.0 percent) effective in April (March 2024 decision).
  - Long-term sovereign yield: 7.2 percent in Q4 2023 versus 8.1 percent in Q4 2022.

### Sectoral impacts (empirical and observed)
- Historical staff empirical estimates for strong/very strong El Niño Costero events (average effects within one year of onset):
  - Fisheries: 70 percent lower production (historical average).
  - Agriculture: 11 percent lower production (historical average).
  - Fiscal reaction historically: deterioration of the primary balance of about 2 percent of GDP during the same period.
- Observed impacts for the 2023 event (March–December 2023):
  - Fishing output: 27.3 percent below trend.
  - Agriculture output: 4.9 percent below trend.
  - Construction output: 9.2 percent lower.
  - Manufacturing output: 6.6 percent lower.
- Price impacts (staff estimates and observed CPI spikes):
  - Non-core food inflation: peaked at an increase of 8.1 percentage points after eleven months following past strong events.
  - Core food inflation: increases by 2.3 percentage points in the second year after the shock (historical estimate).
  - Observed temporary CPI spikes during the ongoing El Niño Costero:
    - Fish and Seafood component: 11 percentage points increase between February and June.
    - Fruits component: 22.6 percentage points increase between February and September.
  - By end-2023, inflation rates for these categories fell.

### Labor market and financial sector effects
- Labor market:
  - Unemployment rate: fell from 7.1 percent at end-2022 to 6.4 percent at end-2023; increased to 7.7 percent in March 2024.
  - Real wage growth: averaged -3.4 percent y/y and was negative until October 2023.
  - Informality: declined in 2023; adequate employment remains below pre-pandemic levels.
- Financial sector soundness:
  - NPL ratio: 4.5 percent in 2023, driven by loans to small- and medium-sized businesses.
  - Deposit institutions’ provisions: cover more than 100 percent of NPLs.
  - Regulatory capital ratios (end-2023): total regulatory capital ratio 16.3 percent; common equity Tier1 capital ratio 13.1 percent.
  - Liquidity coverage ratio (LCR): 167 percent in local currency and 140 percent in foreign currency.
  - Return on equity: 13 percent (end-2023).
  - Real credit from deposit corporations: contracted by 2.0 percent in 2023.
  - Banks: adequate capital, liquidity, and profitability despite headwinds.

### Macroeconomic outlook and projections
- Short- and medium-term outlook (staff projections and expectations):
  - A moderate El Niño Global and a weak El Niño Costero expected to continue until early April 2024, constraining recovery in H1 2024.
  - Real GDP: projected to grow at 2.5 percent in 2024.
  - Output gap: a negative output gap is expected to continue until 2026.
  - Current account: expected to return to a deficit of 1.1 percent of GDP in 2024 and to stabilize at 1.5 percent of GDP in the medium term.
  - Credit growth: expected to rebound modestly with a timid positive feedback effect on the real sector.
  - Inflation outlook: as El Niño effects dissipate, inflation expected to rapidly decline towards the midpoint of the target band, aided by a negative output gap and normalization of supply shocks; BCRP continuing a cautious easing cycle.

### Policy and institutional responses described
- Macroeconomic policy framework and actions:
  - Strong fiscal policies and institutional frameworks helped maintain the lowest debt ratio in the region.
  - BCRP applied decisive monetary policy tightening earlier and initiated an easing cycle starting September 2023.
  - Strong supervision and macroprudential policies preserved financial stability.
  - Two-year Flexible Credit Line arrangement (300 percent of quota), approved in May 2022, provided signaling and insurance against tail scenarios; authorities expect to treat it as precautionary and to exit upon expiration on May 26, 2024, conditional on external risks.
  - Fiscal measures in 2023 included new stimulus programs (Con Punche 1 and 2) and climate-related spending for reconstruction and preparation related to Cyclone Yaku and El Niño.

*Source: IMF staff analysis as presented in the provided chapter on Peru: "1. The Impact of El Niño Costero and Global" from the supplied PDF content.*

### 11.      Evolving risks are broadly balanced, and Peru has ample buffers to cope with adverse

### 11.      Evolving risks are broadly balanced, and Peru has ample buffers to cope with adverse shocks, although the outlook remains uncertain.

### Risks and buffers
- Short-term domestic risks: intensification of political uncertainty, social unrest, and climate-related shocks (El Niño) that could derail the recovery and necessitate fiscal support.
- Key external risks: weak trading-partner growth, commodity price volatility, and a sharp tightening of global financial conditions that could create inflationary pressures and weigh on growth.
- Upside scenario: stronger recovery in confidence could support stronger private consumption and investment growth.
- Macroeconomic buffers:
  - Relatively low public debt.
  - Abundant international reserves.
  - Access to international capital markets on favorable terms.

### Monetary policy: managing the easing cycle
- The BCRP’s data-driven monetary policy easing is judged appropriate given recent disinflation and anchored inflation expectations.
- Exact policy metrics:
  - Real ex-ante policy rate stood at 3.4 percent in April 2024.
  - Estimated real neutral rate: 2 percent.
- Policy trade-offs:
  - As upside inflation risks from El Niño dissipate, additional data-dependent easing could resume to support weak economic growth.
  - The pace of easing might be constrained by the U.S. policy rate (which could remain higher for longer), as a smaller policy rate gap could pressure the ER.

### Exchange rate flexibility, FX intervention, and derivatives market
- Financial stability risks from FX mismatches have diminished due to the decline in dollarization and limited unhedged FX positions.
- BCRP FX operations in 2022-23 were mostly to maintain its stock of derivative positions; an intervention occurred in February 2024 (spot and forward) responding to expectations of a rapidly narrowing interest rate differential vis-à-vis the U.S.
- Model-based staff estimates (QIPF) under a higher foreign monetary policy shock find that allowing ER depreciation could deliver the fastest economic recovery compared to using FX interventions to contain ER fluctuations.
- FX derivatives market and hedging:
  - Peru’s FX derivative market had an average daily turnover of less than 1 billion USD (about 0.3 percent of GDP) in 2022.
  - Turnover appears lower when FX volatility is lower.
  - Recommendation: allow greater ER flexibility and remove tax hurdles to foster greater private sector participation and additional hedging opportunities.

### De-dollarization and macroprudential measures
- Credit dollarization trends:
  - Around 50 percent in mid-2013.
  - 24 percent in 2022.
- De-dollarization momentum has recently stalled, with dollarization concentrated in unhedged FX credit by medium-sized firms and largely hedged large-sized firms.
- Policy options to support de-dollarization:
  - Introduce FX-targeted macroprudential measures (e.g., additional capital buffers or higher risk weights for borrowers’ unhedged FX exposures).
  - Maintain sufficiently higher reserve requirements for foreign currency relative to domestic currency.
  - Note: SBS introduced an 8 percent capital surcharge for FX-denominated loans when calculating Basel III capital ratios (in line with 2018 FSAP recommendation). Recent SBS regulatory proposal contemplates higher risk weights for unhedged FX loans.

### Fiscal sustainability and policy guidance
- 2024 Budget:
  - Envisages a deficit of the non-financial public sector of 2 percent of GDP, consistent with the fiscal rule.
  - The required adjustment relies on unidentified measures to reduce current spending beyond recently announced measures and a potentially optimistic growth projection.
- Staff recommendation in case of lower-than-expected revenues:
  - Delay consolidation by one year by setting a fiscal target for 2024 of 2.5 percent of GDP instead of 2.0 percent to support growth and lessen the risk of missing the target again.
- Risks to meeting the target: new tax benefits and unfunded spending initiatives by Congress.
- Public financial management reforms could improve spending efficiency and support consolidation.
- Fiscal metrics and targets:
  - Fiscal deficit projected to decline by 0.5 percent of GDP per year to reach a deficit of 1 percent of GDP by 2026.
  - This path allows gradual reduction in the debt ratio to comply with the debt ceiling of 30 percent of GDP, which becomes binding in 2032.
  - Gross financing needs would average 4.0 percent of GDP over the forecast horizon.

### Public debt profile and liquidity
- Debt structure and risks:
  - Around 84 percent of public debt has fixed interest rates with an average duration of about 14 years.
  - Approximately 50 percent of public debt is denominated in local currency.
  - Roll-over risks are low.
  - Highly liquid assets of about 9 percent of GDP indicate a considerable cash buffer.
- Staff assessment: public debt is sustainable with a high probability.

### Revenue mobilization and tax policy options
- Peru’s relatively low tax burden suggests a more balanced composition of consolidation is preferable.
- Revenue policy options include:
  - Environmental taxes.
  - Expanding taxes to the digital economy.
  - Homogenizing the rates of capital and labor income.
  - Curtailing sectoral tax benefits, special regimes, and other tax expenditures.
- Personal income tax observations:
  - Personal income tax revenues are about 1.7 percent of GDP.
  - Modest revenues reflect low tax rates and high income thresholds that effectively exempt the majority of formal workers.
- Tax administration:
  - Plans to improve tax administration and compliance are important but will likely require additional resources for the tax authority (noting loss of about 1/3 of its staff over the past decade).

### Pension reform: coverage, adequacy, and withdrawal risks
- Need for reform: urgent to address low coverage and adequacy and to prevent new rounds of early withdrawals from the private pension scheme.
- Coverage metrics:
  - Coverage as share of working age population contributing is less than 20 percent compared to a LAC average of 45 percent.
- Congressional developments:
  - Reform proposals include expanding the minimum and social pension, automatic enrollment, limiting early withdrawals from private pension accounts, and periodic assessment of parameters.
  - In April 2024, Congress approved a seventh withdrawal from private pension funds (to be paid in four installments starting in June), of up to 4 UIT (about 5,700 USD).
- Staff refinements to proposals to maximize impact:
  - Clarify language limiting early withdrawals from private pension savings accounts.
  - Align eligibility criteria for the minimum pension to avoid shrinking the pool of potential beneficiaries.
  - Improve targeting mechanism of the non-contributory pension.
- Welfare and costing (Box 2):
  - Staff compares three scenarios for Pensión 65: (i) improved targeting; (ii) authorities’ proposal of broadening coverage of poor elderly while excluding poor pensioners affiliated with other earnings-related schemes; and (iii) staff recommendation of broader coverage of poor elderly (without excluding poor pensioners affiliated with other earnings-related schemes) with a higher benefit amount.
  - Improving targeting could increase coverage of poor elderly by 7 percentage points without additional cost.
  - Authorities’ proposal expands social pension coverage of the poor by 2.5 percentage points, leaving about 88 percent of poor elderly uncovered.
  - Spending 0.24 percent of GDP could increase both coverage and benefit amounts and yield a greater poverty impact.

*Source: IMF Staff Report chapter "11. Evolving risks are broadly balanced, and Peru has ample buffers to cope with adverse shocks, although the outlook remains uncertain."*

### 21.      Although systemic risk remains limited, the authorities should continue to closely

### 1perea2024001 - 21.      Although systemic risk remains limited, the authorities should continue to closely

### Financial stability and banking-sector resilience
- Banks remain profitable, with ample liquidity and capital buffers.
- The financial system is highly concentrated: 17 banks dominate the financial system with almost 87 percent of total financial sector assets.
- Nonperforming loans (NPLs) are expected to gradually decline as the economy starts to rebound.
- The regulator’s latest top-down stress tests suggest the banking system would remain sound even under adverse scenarios.
- The severest liquidity stress scenario replicates a shock observed in Argentina in early 2000 (that has never been observed in Peru), which imposes substantial stress on sovereign bonds.
- The deposits withdrawn from pension funds could revert to banks as retail deposits, with little impact on system-wide liquidity. The authorities’ liquidity stress test scenario is more conservative as it does not include this positive reintermediation effect.

### Pension withdrawals, AFPs, and liquidity cushions
- Between 2020-24, Congress approved seven rounds of withdrawals from private pension funds (AFPs).
- Cumulative withdrawals until 2022 reached 9.4 percent of GDP, reducing accumulated savings to only 11.2 percent of GDP in December 2022.
- The recently approved seventh withdrawal could result in outflows of up to 3 percent of GDP (about ¼ of assets under management).
- To insure against recurrent withdrawals, AFPs have increased portfolio allocation towards more liquid assets and with shorter maturity, which affects their profitability.
- The BCRP has installed a facility to provide emergency liquidity to AFPs to help them cope with the withdrawals.
- The recent liquidity stress test conducted by the financial authority shows that deposit corporations can cope with a substantial withdrawal of deposits from AFPs.
- Recommendation: Maintain liquidity cushions in case of further pension withdrawals.

### Regulatory implementation, macroprudential tools, and FinTech
- Most institutions already comply with Basel III capital requirements, ahead of the deadline.
- The new resolution on counter-cyclical policies, including counter-cyclical capital buffers (CCyB) and counter-cyclical provisioning, becomes effective in June 2024, but is unlikely to be activated soon.
- Current activation rule: policies are activated when the 30-month historical average GDP growth exceeds a 4 percent threshold, which is substantially higher than current potential growth estimates of only 2.3 percent.
- Recommendation: Revise the CCyB activation threshold and consider adopting a rule based on an indicator that better reflects the financial cycle, such as the credit-to-GDP gap.
- Recovery plans for domestic systemically important banks have been submitted for review and should be later extended to the financial group level.
- Policy priorities: build on progress in enhancing financial inclusion, continue lowering barriers to entry for Fintech providers while maintaining appropriate risk-based regulation, continue enforcing interoperability regulations, and introduce frameworks for Open Banking and Finance.
- The BCRP is exploring digital money and released CIRCULAR NO 0011-2024-BCRP on April 16, 2024 to specify activities for Digital Money Innovation Pilots (one-year Pilot).

### Growth, productivity, and structural reforms
- Growth has disappointed since 2014 with average and potential growth falling to about 2.3 percent (from a 6 percent average in the previous decade).
- The decline in potential growth has been driven by a slower pace of investment and human capital accumulation, and most notably by a decline in total factor productivity growth.
- Staff findings: firm-level productivity has worsened since 2014, broad based across firm size, region, and industry; productivity growth stagnant to negative in large firms, coastal region firms, and in services and construction.
- Policy recommendations to boost productivity:
  - Reform special corporate tax regimes and labor legislations and regulations to remove barriers to formalization and growth.
  - Reduce regulatory uncertainty to promote investment.
  - Introduce greater labor market flexibility to help workers transition to more productive sectors and reduce labor informality.
- Box 3 findings on legislative distortions:
  - Employee profit-sharing law: regression discontinuity analysis shows a large mass of firms with just less than 20 employees (who are not subject to the profit-sharing law) and these firms are about 40 percent less productive than firms with just above 20 employees.
  - Moving between special corporate tax regimes can increase business tax liability by 30 to 50 percent and increases compliance costs and opportunities for tax arbitrage.
  - Staff analysis of the Regimen Especial del Impuesto de la Renta (RER) shows firms just within the Regimen General (RG) are about 40 percent less productive than firms just within the RER.

### Climate change vulnerability and resilience investments
- Peru is highly vulnerable to climate change; climate change will likely increase damages from natural disasters and undermine potential growth.
- The prevailing natural disaster profile reduces potential output by about 4.1 percent in 2023, relative to a counterfactual without natural disasters.
- Under the intermediate GHG emission scenario (SSP2-4.5):
  - Potential output losses may be as high as 19.4 percent of GDP by 2050 and 55.2 percent of GDP by 2100.
- Current implementation of adaptation and resilience is limited; Peru has one of the lowest adaptive capacities in the region and climate expenditure on disaster risk management and adaptation is well below levels implied by national strategies.
- Policy and investment scenario:
  - Investing 0.8 percent of GDP in public adaptation per year until 2030, climate proofing 80 percent of Peru’s transport infrastructure, and increasing public investment efficiency by 5 percentage points could produce 9.3-12.3 percent gains in the potential output level by 2050 and 12.4-31 percent gains by 2100 (depending on global warming scenario).
  - These gains imply a 0.1-0.3 percentage point increase in the average annual potential growth rate.
  - Fiscal savings from these climate measures: average annual fiscal savings of 1.2-1.6 percent of GDP by 2050 and 2.3-4.6 percent of GDP by 2100.
- Recommendation: Scale up investments in climate adaptation and resilience, strengthen budget planning and costing of adaptation measures, and enforce stricter territorial planning.

### Digital technologies, AI, and productivity opportunities
- Over 50 percent of the workforce is significantly exposed to AI in trade, financial, government, education, health, IT, and real estate sectors.
- Staff simulations (based on Comin and Mestieri (2018)) show halving the technology gap with the U.S. could increase Peru’s long-term growth by up to 0.2 percentage points annually between 2030-2050.
- Automation risks: about 17 percent of the workforce falls into a category with high exposure to AI and low complementarity, indicating risks of job substitution.
- Digital and financial inclusion statistics:
  - Only 53 percent of adults have a traditional financial account; rapid expansion of digital wallets has increased financial inclusion to 65 percent.
- Policy priorities: encourage skills development for AI integration, leverage FinTech and GovTech expansion, continue digitalization of PFM (covering budget preparation, accounting, procurement, public investment, debt management, and payroll), and expand internet connectivity in health facilities (only a third of hospitals have internet connectivity).

*Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1perea2024001.pdf*

### 28.      Effective governance institutions would also reinforce inclusive growth. Peru faces

### 28.      Effective governance institutions would also reinforce inclusive growth. Peru faces

### Governance, corruption, and institutional capacity
- Severe governance weaknesses and a high level of corruption undermine management of public funds, trust in institutions, and hamper investments.
- The Contraloría General de la República estimates that around 3 percent of GDP was lost to corruption in 2023.
- Existing anti-corruption frameworks include:
  - asset declaration of public officials;
  - integrity officers in public agencies;
  - a beneficial ownership registry.
- Implementation gaps and resource constraints limit effectiveness; prioritized implementation and adequate resourcing are needed.
- Specific institutional strengthening priorities:
  - full, timely and public access to asset declarations of high-level public officials to support verification and investigation efforts;
  - enhance independence and effectiveness of judicial bodies (Junta Nacional de Justicia and Ministerio Público) through robust judicial vetting of regular judges and reduction of reliance on temporary judges;
  - effective use of AML tools, including enhanced due diligence for politically exposed persons and freezing of illicit assets;
  - improved coordination among relevant agencies to support effective prosecution and end corruption impunity.

### Medium-term structural reform agenda to raise potential growth
- Government plans noted as positive steps:
  - cutting red tape (particularly for the mining sector);
  - unblocking large infrastructure projects;
  - streamlining the tax system;
  - reforming the procurement framework;
  - recently approved political reform (return to bicameralism and allow re-election of congressmen).
- The OECD accession process provides a roadmap for further reforms to:
  - improve local government capacity;
  - boost the business climate;
  - reduce informality;
  - reform the civil service;
  - further boost productivity and support green and inclusive growth.

### Authorities’ views (summary)
- Growth and inflation:
  - Authorities agreed with the medium-term growth path but envisaged a stronger recovery in 2024, expecting growth close to 3 percent in 2024 as transitory shocks normalize and domestic demand recovers.
  - They expect inflation to continue to converge towards the middle of the target band but see upside risks to inflation.
- Monetary policy and exchange rate:
  - Authorities will pursue cautious, data-dependent monetary policy normalization and signaled continued easing consistent with inflation evolution.
  - They noted core inflation remains close to the upper limit of the target range and uncertainty from climatic and external risks persists.
  - Exchange rate pressures could constrain monetary policy; market expectations of rapidly narrowing interest rate differentials led to speculation-induced excessive exchange rate volatility in February 2024, prompting BCRP intervention in spot and forward markets.
  - FX interventions are used to mitigate excessive volatility and preserve transmission of monetary policy; further de-dollarization progress could be challenging due to FX credit held by large corporates.
  - Prefer targeted macroprudential measures and removing hurdles to develop the local capital market.
- Fiscal policy:
  - Authorities committed to gradual fiscal consolidation consistent with the fiscal rule and announced austerity measures to improve spending efficiency.
  - Given political constraints, they will focus on improving tax administration rather than introducing new revenue measures.
  - Modernizing the Fiscal Tribunal is deemed essential to speed dispute resolution and deter litigation to defer tax obligations.
  - They plan to pursue reforms to pensions, tax simplification, and public procurement but expect refinements as congressional discussions proceed.
- Financial sector and pension policy:
  - Authorities view the financial system as sound and profitable with capital comfortably above minimums; loan deterioration driven by SMEs; NPLs covered by voluntary provisioning.
  - Most financial institutions prepared for Basel III; recalibrating activation criteria of counter-cyclical policies is not short-term agenda.
  - Authorities strongly oppose early pension withdrawals, warning of detrimental impacts on future pensions and the local capital market; vigilant regarding congressional modifications with potential high fiscal cost.
- Structural reforms, climate, digitalization, and anti-corruption:
  - Authorities acknowledge need for structural reforms to reverse decline in potential growth, emphasizing labor and tax regulation reform and easing barriers for firm growth.
  - Climate-related shocks are seen as a significant threat; authorities stress ex-ante resilience building and increased spending on disaster risk management and climate adaptation.
  - Committed to promoting digitalization to boost financial inclusion, taxation, public finance, telemedicine, and studying AI impacts on labor markets and productivity.
  - Authorities committed to enhancing anti-corruption effectiveness; note low perception scores partly reflect increased public awareness from investigations; concerned about chilling effects on public decision-making and recruitment.

### Staff appraisal — macroeconomic outlook and policy advice
- Growth and inflation outlook:
  - Economy slowly recovering after multiple shocks; strong recovery in agriculture and fishing, momentum in mining, and looser monetary policy support growth revival amid political uncertainty.
  - Inflation expected to converge to the target band (of 1-3 percent).
  - External position in 2023 moderately stronger than medium-term fundamentals due to sizable import compression amid subdued growth.
- Buffers and risks:
  - Evolving risks broadly balanced; Peru has ample buffers including low public debt, abundant international reserves, and favorable access to international capital markets.
- Monetary policy recommendation:
  - Conditions allow for further monetary policy easing; additional easing appropriate to bring the monetary policy rate to a neutral level as inflation converges and expectations remain anchored.
  - With expected narrowing of the interest rate differential against the U.S., BCRP should allow greater exchange rate flexibility.
- Macroprudential and de-dollarization measures:
  - Decline in credit dollarization has stalled; dollarization concentrated in unhedged FX credit by medium-sized firms and largely hedged large firms.
  - Consider introducing additional capital buffers or higher risk weights for borrowers’ unhedged FX exposures to reduce unhedged positions.
  - Allowing greater exchange rate flexibility and removing tax hurdles could foster development of derivative markets.
- Fiscal policy and consolidation:
  - Given available fiscal space, fiscal consolidation could be delayed; 2024 budget envisages a deficit of 2 percent of GDP, consistent with the fiscal rule target.
  - If revenues disappoint, delaying consolidation by one year (setting a fiscal target for 2024 of 2.5 percent) could support growth recovery and lessen risk of missing the target again.
  - Recently announced measures to improve spending efficiency and strengthen expenditure control and public procurement are welcome; new tax benefits and unfunded spending initiatives by Congress would jeopardize the target.
  - Restructuring Petroperu governance is positive; further financial support should be conditional on firm viability.
- Revenue mobilization and fiscal sustainability:
  - Fiscal deficit set to gradually decline by 0.5 percent of GDP per year to reach a deficit of 1 percent of GDP by 2026 to preserve medium-term sustainability.
  - Given Peru’s relatively low tax burden, a more balanced composition of consolidation is preferable.
  - Plans to reduce tax evasion and avoidance should be reinforced with additional independence and resources for the tax administration.
  - Analyze optimality of medium-term fiscal target, debt ceiling, and liquidity buffers carefully.
- Pensions:
  - Long-awaited pension reform urgently needed to address low coverage and adequacy and to prevent new rounds of early withdrawals; current reform proposals include expanding the minimum and social pension, automatic enrollment, and limiting early withdrawals.
  - Some fine-tuning would maximize impact; comprehensive medium-term reform required; early withdrawals are ill advised.
- Financial sector resilience:
  - Systemic risks limited; banks profitable with ample liquidity and capital buffers; monitor vulnerabilities in small financial institutions.
  - Private pension funds should maintain appropriate liquidity cushions against withdrawals.
  - Operationalizing new regulations and closing gaps will enhance resilience: most institutions prepared for Basel III; revise countercyclical activation criteria; extend recovery plans to financial group level; lower barriers for Fintech while maintaining risk-based regulation; enforce interoperability and introduce frameworks for Open Banking and Finance.
- Structural reforms to raise potential growth:
  - Focus reforms on labor and tax regulations that impose excessive costs for formalizing or growing a business.
  - Increase investment in resilient infrastructure and climate adaptation given high climate vulnerability and low adaptive capacity.
  - Embrace digital and artificial intelligence while facilitating labor force transition.
  - Strengthen governance institutions to attract investment, augment public trust, and mitigate impunity for corruption by adequately resourcing anti-corruption and judicial bodies and improving inter-agency coordination.
  - OECD accession process provides a clear roadmap for ambitious reforms to improve local government capacity, boost the business climate, reduce informality, and reform the civil service.
  - Government efforts in cutting red tape, unblocking large infrastructure projects, streamlining the tax system, reforming the procurement framework, and the recently approved political reform are welcome.

*Source: PERU — INTERNATIONAL MONETARY FUND (staff report excerpts).*

### 50.      Staff recommends that the next Article IV consultation take place on the standard 12-

### 1perea2024001 - 50. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

### Real sector developments
- Growth:
  - Real GDP: "Growth in 2023 was slightly negative, amid weak domestic demand."
  - Real GDP annual series and contributions highlight: private investment and inventories declined in 2023 (figures and charts in source).
- Labor market:
  - Unemployment rate (Metropolitan Lima): chart shows decline toward pre-pandemic levels; specific table value for 2023: 13.0 (Est. 2023, Table 1).
  - Unemployment rate projections: 10.7 (2024), 7.8 (2025), 6.8 (2026) (Table 1).
- Inflation:
  - Headline inflation and core inflation converging to middle of target band (figure caption).
  - Consumer prices (end of period): 2.0 (2019), 6.4 (2021), 8.5 (2022), 3.2 (2023), 2.4 (2024), 2.0 (2025–2029) (Table 1).
  - Consumer prices (period average): 1.8 (2019), 4.0 (2021), 7.9 (2022), 6.3 (2023), 2.3 (2024), 2.0 (2025–2029) (Table 1).

### Corporate sector indicators
- Profitability and leverage:
  - Corporate profitability (Return on Assets, Return on Equity) trending down but remains above LA5 peers (figure caption).
  - Corporate leverage (Debt to Assets) remains below peers over the last decade (figure caption).
- Liquidity and risk:
  - Cash ratio returned to pre-pandemic levels.
  - Interest coverage: Peru outperforms peers for much of last two decades.
  - Share of debt at risk (Share of Debt with ICR<1) has fallen to pre-pandemic levels (figure caption).

### Fiscal policy developments and outlook
- Fiscal trajectory:
  - "A gradual fiscal consolidation... will guide the fiscal deficit to the 1% of GDP target and stabilize the debt ratio" (figure captions).
  - NFPS primary balance (Table 1): -7.3 (2020), -1.0 (2023), -0.1 (2025), -1.1 (2026), 0.2 (2029).
  - NFPS overall balance (Table 1): -8.9 (2020), -2.5 (2023), -1.7 (2025), -2.8 (2026), -1.0 (2029).
  - NFPS structural balance (Table 1): -7.0 (2020), -4.0 (2023), -2.2 (2025), -2.5 (2026), -1.1 (2029).
- Revenues and expenditures:
  - NFPS revenue: 21.8 (2020), 25.5 (2023), 26.9 (2024), 23.9 (2026) (Table 1).
  - NFPS primary expenditure: 29.1 (2020), 26.5 (2023), 27.0 (2024), 25.0 (2026) (Table 1).
  - Public debt: Gross non-financial public sector debt: 34.9 (2020), 36.1 (2023), 33.9 (2024), 32.1 (2026), 31.6 (2029) (Table 1).
- Fiscal composition and medium-term:
  - Fiscal consolidation described as gradual; mining revenues noted as "lackluster" (figure caption).
  - Table 2 and Table 3 provide detailed fiscal aggregates and projections (revenues, expenditures, primary/overall balances, public gross debt in percent of GDP).

### Macrofinancial conditions
- Credit and financial flows:
  - Credit-to-GDP ratio and gap: credit contracting; decline visible for all sectors, especially corporates (figure caption).
  - Real growth of credit: Table 5 shows real growth of credit to private sector (Est. series): -2.0 (2023) and projections in Monetary Survey.
  - Net debt securities flows: flows negative across sectors (figure caption).
- Spreads and volatility:
  - Loan effective credit spread against deposit rate: loan-deposit spread for loans in LC around pre-pandemic level; spread with USD widening (figure caption).
  - Market realized volatility declining — capital market stabilizing (figure caption).
- Real estate:
  - Real residential property prices indexed to 2010=100 show underpricing and trends in price-to-income ratio (figure caption).

### External sector developments
- Trade and current account:
  - Trade balance: "The trade balance has been growing through 2023" (figure caption).
  - Current account (Table 6 / Table 7): Current account balance (percent of GDP) series: -0.6 (2019), 1.1 (2020), -2.2 (2021), -4.0 (2022), 0.6 (2023), -1.1 (2024), -1.4 (2025), -1.4 (2026), -1.5 (2027–2029) (Tables 6, 7).
- Capital flows:
  - Net portfolio outflows resumed as pension funds increased portfolio investment abroad (figure caption).
  - FDI inflows moderated reflecting political uncertainty and low business confidence (figure caption).
- Exports and imports:
  - Exports (U.S. dollars percent change, Table 7): -2.2 (2019), -10.7 (2020), 47.0 (2021), 5.2 (2022), 1.5 (2023), -0.8 (2024), 3.1 (2025).
  - Imports (U.S. dollars percent change, Table 7): -1.8 (2019), -15.5 (2020), 38.2 (2021), 16.5 (2022), -10.8 (2023), 5.3 (2024), 4.3 (2025).
- Reserves and external buffers:
  - Gross international reserves (Table 1 / Table 7): 74.9 (2020), 78.5 (2021), 72.2 (2022), 73.8 (2024), 84.4 (2029) (in billions of U.S. dollars—Table 1 lists 74.9, 78.5, 72.2, etc.; Table 6/7 provide series).
  - Gross official reserves (Table 7 memorandum items in millions of U.S. dollars): 68,370 (2019), 74,909 (2020), 78,539 (2021), 72,246 (2022), 71,319 (2023), 73,819 (2024), 76,319 (2025), 78,419 (2026), 80,819 (2027), 82,719 (2028), 84,411 (2029).
  - Reserves in percent of short-term external debt: 473 (2019), 495 (2020), 583 (2021), 530 (2022), 409 (2023), 459 (2024) (Table 1 / Table 7).

### Exchange rate and foreign exchange conditions
- Interest differentials and FX intervention:
  - Interest differential between the Sol and USD has narrowed substantially (figure caption).
  - BCRP's FXI operations passive since 2022 with very little spot market operations (figure caption).
  - Cumulative net purchase of Sol by BCRP shown in chart; spot and non-spot purchases series present.
- Dollarization and FX positions:
  - Dollarization rate of credit declined overall but has picked up for corporates since 2022 (figure caption).
  - Deposit institutions' open FX positions are small (figure caption).
  - The spread between BCRP's required reserve ratio for foreign currency and domestic currency has narrowed since late 2021 (figure caption).
- FX derivative market:
  - FX derivative turnover of Peru is lowest among LA5 countries (figure caption).

### Financial sector health and supervisory framework
- Capital and liquidity:
  - Regulatory capital ratio and Tier1 capital ratio increased and are well above Basel III minimum required levels (figure caption and Table 5).
  - Under full Basel III, minimum required Tier1 ratio (8.5%) and total capital ratio (12.5%) by September 2024 noted in source.
  - Liquid asset ratio: most excess pandemic liquidity unwound but relatively high liquidity maintained (figure caption).
- Profitability and asset quality:
  - ROA decomposition shows positive contribution from higher interest margin offset by increasing costs and provisions (figure caption).
  - NPL ratio is high and increasing (figure caption); Table 5: NPLs to gross loans: 4.5 (2023).
  - Return on assets (ROA, Table 5): 2.7 (2019), 0.4 (2020), 2.5 (2022), 2.2 (2023).
- Counter-cyclical policy:
  - Counter-cyclical policy rule becomes effective in June 2024 but unlikely to be activated (figure caption detailing activation criteria and SBS resolution).

### Financial market indicators and investor sentiment
- Equity and spreads:
  - Peruvian equities trended upward after monetary tightening domestically and abroad (figure caption).
  - PEN remains stable relative to USD with low volatility compared to peers (figure caption).
  - EMBIG and CDS spreads widened in recent years due to political uncertainty and external shocks, but have begun to stabilize (figure caption).
- Distressed market conditions:
  - Distressed Market Conditions Index for Peru shows stabilization similar to regional peers (figure caption).
- Market indices:
  - IGBVL index values (Table 5): 17,733.8 (2020), 20,097.5 (2021), 21,361.7 (2022), 22,440.5 (2023).

### Key projections and medium-term macro framework (selected quantitative highlights)
- Output and demand (Table 8 / Table 1):
  - Real GDP growth: -10.9 (2020), 13.4 (2021), 2.7 (2022), -0.6 (2023), 2.5 (2024), 2.7 (2025), 2.3 (2026–2029) (Table 8 / Table 1).
  - Output gap (percent of potential GDP): -5.5 (2020), 0.9 (2021), 0.6 (2022), -1.3 (2023), -0.7 (2024), -0.2 (2025), 0.0 (2026–2029) (Table 1 / Table 8).
- External:
  - Current account (percent of GDP): series as noted above (Table 7).
  - Total external debt (percent of GDP): 43.7 (2020), 46.3 (2021), 43.0 (2022), 40.6 (2023), 38.2 (2024), 31.8 (2029) (Table 1 / Table 7).
- Public finances (Table 2 / Table 8):
  - NFPS gross debt: 34.9 (2020), 36.1 (2023), 33.9 (2024), 32.1 (2026), 31.6 (2029) (Tables 1,2,8).
  - NFPS primary and overall balances: see Fiscal policy section above (Tables 1–3).

### Policy implications and recommendations (implicit in source)
- Maintain fiscal consolidation to guide fiscal deficit toward the 1% of GDP target and stabilize debt ratio (figure captions and fiscal projections).
- Monitor credit contraction and corporate sector indicators, given declines in private investment, inventories, and corporate profitability (real sector and corporate sector figures).
- Continue monetary and FX policy vigilance given narrowing interest differential, passive FX intervention since 2022, and evolving dollarization dynamics (exchange rate and monetary figures).
- Strengthen financial sector oversight given rising NPLs, high provisioning needs, and activation rules for counter-cyclical buffers (financial sector figures and notes on Basel III implementation and counter-cyclical policy).

*Source: IMF staff report content as provided in the supplied PDF extracts.*

### Annex I. Recommendations of the 2023 Article IV Consultation

### Annex I. Recommendations of the 2023 Article IV Consultation and Authorities’ Actions

### Fiscal Policy
- Recommendation: Fiscal stance
  - A slightly expansionary fiscal stance in the short term is appropriate. The fiscal adjustment path over the medium term to achieve the fiscal target of a deficit of 1 percent of GDP should be gradual.
- Authorities’ action:
  - Implemented. The fiscal impulse was slightly positive in 2023.
  - The authorities remain committed to a gradual fiscal consolidation consistent with the fiscal rule, with the NFPS deficit reduced by about 0.5 percent of GDP per year during 2024-26.
- Recommendation: Fiscal Council (FC)
  - Augment the Fiscal Council’s (FC) operational independence and enhance transparency and accountability in the dialogue with the government to support confidence in the fiscal framework.
- Authorities’ action:
  - Partially implemented. The opinion of the FC and the response from the Ministry of Finance are included in the Budget but not in the Mid-term Budget Update. Both institutions would benefit from a more regular and transparent dialogue.
- Recommendation: Fiscal consolidation
  - Improve tax administration, streamline tax expenditures, and simplify the tax system.
  - Enhance targeting of social benefits, implement comprehensive civil service reform, and improve governance at SOEs to address rising spending needs, strengthen government effectiveness, and contain fiscal risks.
- Authorities’ action:
  - Partially implemented. The government presented in January 2024 a proposal to reduce the number of corporate tax regimes from four to just two.
  - Tax administration and compliance have significantly improved in recent years, but further improvements would require additional resources and independence.
- Recommendation: Pension Reform
  - Pension reform is urgent following large withdrawals from private pension funds. Additional withdrawals will exacerbate existing problems.
- Authorities’ action:
  - In progress. The government presented a reform proposal in October 2023, which contains measures to limit early withdrawals.
  - Congress approved in April 2024 a seventh round of pension withdrawals.

### Monetary and Exchange Rate Policy
- Recommendation: Monetary stance
  - Monetary policy tightening should continue to remain data dependent. Decisions to pause are warranted, but a premature end to the tightening cycle should be avoided.
- Authorities’ action:
  - Implemented. Monetary policy remained tight, leading to a rapid decline in inflation and inflation expectations throughout the year and reaching the inflation target in January 2024.
  - An easing cycle began in September, after 8 months of declining inflation.
- Recommendation: Foreign exchange interventions (FXI)
  - Consider the tradeoffs of frequent FXI. Fewer and more targeted interventions can address risks while permitting the FX market to develop.
- Authorities’ action:
  - Partially implemented. The authorities have maintained a discretionary approach since the 1990s and provide ample information on FXI.
  - Market participants understand that FXI is limited to moderate FX volatility and to mitigate financial risks.
  - There has been a development in the FX market in the last years, both in the spot and derivatives markets.

### Financial Policies
- Recommendation: Macroprudential
  - Closely monitor bank portfolios and lending standards, should vulnerabilities emerge in an environment of tightening financial conditions.
- Authorities’ action:
  - Implemented. Enhanced vigilance is in place given emerging pockets of vulnerability amid the slowing growth.
- Recommendation: Regulation
  - Close key regulatory and supervisory gaps in line with the recommendations of the 2018 FSAP.
- Authorities’ action:
  - In progress. See Annex VI. The full implementation of Basel III capital requirements was delayed due to El Niño and political instability.

### Structural Policies
- Recommendation: Productivity
  - Boost productivity by improving education, enhancing infrastructure, facilitating labor reallocation, and improving the business climate.
- Authorities’ action:
  - Partially implemented. The government has taken measures to improve the business climate, reduce red tape and unblock large infrastructure projects.
- Recommendation: Informality
  - Reduce informality.
- Authorities’ action:
  - Partially implemented. Informality has been reduced from the high levels observed in 2020 but remains elevated.
- Recommendation: Governance
  - Improve the effectiveness of public services and enhance transparency, including by strengthening anti-corruption enforcement and institutions.
- Authorities’ action:
  - In progress. The National Board of Justice, which appoints judges and prosecutors, is fully operational, but civil service reform is pending.
- Recommendation: Infrastructure
  - Strengthen the capacity to execute public investment to reduce the large infrastructure gap.
- Authorities’ action:
  - Partially implemented. Public investment was low in 2023 following local elections in 2022.
  - The government has implemented initiatives to improve local government capacity and has taken measures to unblock large infrastructure projects.

*Source: Annex I. Recommendations of the 2023 Article IV Consultation and Authorities’ Actions*

### Annex II. External Sector Assessment

### Overall Assessment and Policy Responses
- Overall assessment:
  - Peru’s external position in 2023 was moderately stronger than the level implied by medium-term fundamentals and desirable policies.
  - Assessment informed by the current account model, based on actual 2023 current account.
  - Reserve coverage remains strong and adequate even after considering dependence on commodity prices and substantial domestic FX liabilities.
  - These estimates are subject to uncertainty related to multiple shocks affecting the economy in 2023.
- Potential policy responses:
  - Cautious and prudent monetary policy stance.
  - Continued exchange rate flexibility amid limited FX interventions.
  - Medium-term fiscal consolidation to return to the fiscal rule.
  - Given available substantial fiscal space, delaying the fiscal consolidation by one year in the short run would support the growth recovery and rebalancing of the current account closer to the norm.
  - Accelerate structural reforms, including growth-enhancing public and private investment and measures to improve productivity and reduce informality.

### Foreign Assets and Liabilities: Position and Trajectory
- Background:
  - Peru’s IIP characterized by large foreign reserves, moderate external debt, and large FDI liabilities.
  - Net IIP rose slightly to -40 percent of GDP in 2023 compared to 2022 (-43 percent of GDP).
  - External assets about 59 percent of GDP, including central bank holdings 27 percent of GDP and financial system about 10 percent of GDP.
  - Liabilities: large FDI liabilities 52 percent of GDP, public and private external debt about 40 percent of GDP, equity securities 6.6 percent of GDP.
  - Net IIP projected to increase slightly and stay at about -38 percent of GDP over the medium term.
- Assessment:
  - Gross external financing needs declined to an estimated 5 percent of GDP in 2023.
  - Risks from pension withdrawals led to increased portfolio investments abroad by pension funds and to lower NIIP.
  - The external stability (ES) approach does not suggest a need for an external adjustment.
  - Estimated medium-term current account balance (CAB) required to stabilize the NIIP at its end-2023 level is -2.3 percent of GDP, which is below the medium-term CAB projections in the baseline.

### Key 2023 External Statistics (as reported)
- NIIP: -40.1 (% GDP)
- Gross Assets: 59 (% GDP)
- Reserve Assets: 27 (% GDP)
- Gross Liab.: 99.2 (% GDP)
- Debt Liab.: 40.6 (% GDP)

### Current Account: Background and Assessment
- Background:
  - Current account deficit narrowed by about 4.6 pp of GDP to a surplus of 0.6 percent of GDP in 2023.
  - Trade balance increased from 4.2 percent of GDP in 2022 to 6.5 percent of GDP in 2023.
  - Terms of trade and import volume: import prices down about 6.8 percent (Jan-Dec 2023), import volume down about 4.2 percent (Jan-Dec 2023).
  - Exports of goods increased by about 1.5 percent (reflecting modest volume growth and lower export prices).
  - Imports of goods contracted by about 11 percent (contraction in volumes due to negative domestic demand about 4 percent, and in import prices about 6.8 percent).
  - Investment income outflows declined by about 1.6 pp of GDP but remained high at 5.5 percent of GDP.
  - Services trade deficit narrowed by 0.6 pp of GDP.
  - Over the medium term, the current account deficit is expected to stabilize at about 1.5 percent of GDP.
- Assessment:
  - EBA CA model estimates a current account norm of -1.4 percent of GDP.
  - Cyclically adjusted current account (staff estimate) is -0.2 percent of GDP, based on actual 2023 CA of 0.6 percent of GDP.
  - Overall CA gap is about 1.3 percent of GDP, indicating Peru’s external position in 2023 was moderately stronger than implied by fundamentals and desirable policies.
  - Positive policy gap of 0.5 percent of GDP mainly explained by stronger fiscal balances relative to the rest of the world (relative fiscal policy gap contribution estimated at 0.8 percent of GDP) and a larger credit gap (contribution estimated at -0.2 percent of GDP).

### Real Exchange Rate (REER)
- Background:
  - REER appreciated in 2023: average about 5.8 percent stronger than in 2022, and end-of-period (eop) about 1.9 percent stronger than in 2022.
  - Nominal ER against trading partners appreciated 5 percent (avg) and 3.5 percent (eop).
  - Nominal ER against the US dollar appreciated about 2.7 percent and fluctuated during the year.
- Assessment:
  - EBA REER approaches estimate overvaluation of 9.7 percent (index method) and 28.5 percent (level method) in 2023.
  - REER gap from IMF staff CA gap assessment, with elasticity of 0.19, implies REER undervaluation of about 7 percent.
  - Staff assesses the REER gap in 2023 to be in the range of -4.5 and -8.7 percent, with a midpoint of -7 percent.
  - The estimated REER undervaluation is subject to elevated model uncertainty due to multiple shocks in 2023.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Net inflows into the capital and financial account declined to -0.4 percent of GDP in 2023 after highs of 3.8 percent of GDP in the prior year.
  - Inflows dominated by FDI liabilities (increased by about US$4.2 billion), resilient in recent years but declined in 2023 and reflected primarily reinvested earnings.
  - Inflows offset by increased portfolio investments abroad by pension funds (reflecting uncertainty with potential early pension withdrawal), public sector debt amortization (including global bonds held by non-residents), and purchases of short-term foreign assets.
- Assessment:
  - Strong economic fundamentals and creditor diversification have underpinned capital inflows, including during stress.
  - FDI inflows benefited from capital contributions and profits in major sectors: mining and infrastructure.
  - Key risks: lower commodity prices (primary risk to FDI) and political uncertainty (secondary).
  - Peru’s attractiveness and expected economic recovery should allow investments to pick up in the medium term.

### FX Intervention and Reserves Level
- Background:
  - BCRP active in FX market to smooth ER volatility without targeting a specific rate.
  - 2021: BCRP sold US$17.5 billion (8.1 percent of GDP), including US$11.6 billion on the spot market (5.1 percent of GDP).
  - 2022: central bank sold US$1.2 billion on the spot market.
  - 2023: spot sales only US$81 million; non-spot market interventions about $2.4 billion primarily through FX swap transactions.
  - Peru’s gross international reserves decreased by about US$0.9 billion in 2023.
  - In Q1 2024, FX sales picked up as BCRP intervened in spot and non-spot FX markets to ease depreciation pressures related to expected narrowing of interest rate differential vis-à-vis the U.S.
- Assessment:
  - Flexible ER serves as primary adjustment mechanism to external shocks.
  - Gross international reserves were US$71.3 billion (26.7 percent of GDP) at end-2023, or about 233 percent of the ARA metric (above 100–150 percent adequacy range).
  - Reserves exceed an augmented ARA metric that incorporates volatility of copper and gold prices and Peru’s heavy reliance on commodity exports.
  - By early March 2024, GIR rose to US$75.6 billion or about 242 percent of 2024 ARA metric.

*Source: Annex II. External Sector Assessment*

### Annex III. Risk Assessment Matrix

### Global Risks (Likelihood / Impact / Policy Response)
- Commodity price volatility
  - Likelihood: High
  - Impact: Medium
  - Key effects: Volatile import prices increase inflation and weaken private consumption; excessive volatility reduces confidence and affects growth.
  - Policy response: Adjust pace of monetary easing according to impact on inflation and expectations; allow ER to play shock-absorber role; provide targeted fiscal support to the most vulnerable.
- Abrupt global slowdown or recession
  - Likelihood: Medium
  - Impact: High
  - Key effects: Weak trading partners’ growth adversely affects exports; falling terms of trade weighs on domestic activity and exerts downward pressure on the ER.
  - Policy response: Stand ready to use existing policy space to provide temporary support to growth and vulnerable households.
- Monetary policy miscalibration
  - Likelihood: Medium
  - Impact: High
  - Key effects: Premature loosening or overly prolonged tightening by major central banks can hinder disinflation, cause abrupt financial adjustments, and weaken central bank credibility; high US rates exert downward pressure on ER and tightening abroad leads to large capital outflows.
  - Policy response: Adjust pace of monetary easing while allowing ER to act as shock absorber; ER interventions can prevent excessive volatility; accelerate de-dollarization efforts.
- Systemic financial instability
  - Likelihood: Medium
  - Impact: Medium
  - Key effects: High interest rates, risk premia, and asset repricing amid slowdowns and political uncertainty may trigger market dislocations and cross-border spillovers affecting weak banks and NBFIs.
  - Policy response: Use policy space for temporary support; recalibrate FX targeted reserve requirement to accumulate liquidity buffer and promote de-dollarization; maintain enhanced financial system monitoring.
- Deepening geoeconomic fragmentation
  - Likelihood: High
  - Impact: High
  - Key effects: Trade and FDI fragmentation, supply disruptions, protectionism, payments systems fragmentation, higher costs, financial instability, lower growth; while demand for minerals may increase, investment distortions lower potential growth and diversify risks.
  - Policy response: Advance structural reforms to boost investment and growth; work with international community for cooperation on global issues; engage major trading partners to maintain open trade policies.

### Domestic Risks (Likelihood / Impact / Policy Response)
- Social unrest
  - Likelihood: High
  - Impact: High
  - Key effects: Real income loss and slowing growth amplify social unrest; political polarization and instability weaken policymaking, erode confidence, stifle investment, and generate capital outflows.
  - Policy response: Advance structural reform agenda to boost investment and growth; continue political reform to reduce polarization and increase stability; strengthen governance and anti-corruption enforcement.
- Extreme climate events
  - Likelihood: Medium
  - Impact: High
  - Key effects: Peru highly vulnerable to natural disasters related to climate change; damage to infrastructure, agriculture, and producing sectors causes economic, social, and fiscal costs.
  - Policy response: Promptly deploy resources for timely reconstruction and employ countercyclical policies as needed; invest in resilient infrastructure and implement effective adaptation measures.

- Note on RAM:
  - The Risk Assessment Matrix shows events that could materially alter the baseline path.
  - Relative likelihood: “low” <10 percent; “medium” 10–30 percent; “high” 30–50 percent.
  - RAM reflects staff views at time of discussions with the authorities; risks may interact and materialize jointly.

*Source: Annex III. Risk Assessment Matrix*

### Annex IV. Sovereign Risk and Debt Sustainability Analysis

### Annex IV. Sovereign Risk and Debt Sustainability Analysis

### Overall assessment
- The overall risk of sovereign stress in Peru is assessed as "Low".
- Public debt is assessed as "sustainable with high probability".
- Commentary: Peru's overall risk of sovereign stress is low and public debt is sustainable with a high probability. The public debt ratio and other indicators have stabilized as the recovery from the COVID-19 pandemic has advanced. The public debt ratio is expected to stabilize over the medium term as the authorities proceed with a planned fiscal consolidation. Medium-term liquidity risks are low, as signaled by GFN Financeability Module and supported by the strength of the macroeconomic policy frameworks and institutions. Long term risks appear manageable.

### Debt dynamics and baseline projections
- Public debt path (Percent of GDP):
  - Actual 2023: 32.1
  - 2024: 33.0
  - 2025: 33.3
  - 2026: 33.2
  - 2027: 32.6
  - 2028: 32.1
  - 2029: 31.6
  - 2030: 31.2
  - 2031: 30.7
  - 2032: 30.2
  - 2033: 29.8
- Change in public debt (Percent of GDP):
  - 2023: -1.8
  - 2024: 0.9
  - 2025: 0.3
  - 2026: -0.1
  - 2027: -0.6
  - 2028: -0.5
  - 2029: -0.5
  - 2030: -0.5
  - 2031: -0.5
  - 2032: -0.5
  - 2033: -0.5
- Contribution of identified flows (Percent of GDP): mirrors the "Change in public debt" series (e.g., -2.7 in 2023; 0.8 in 2024; 0.3 in 2025; then series of -0.1 to -0.5 thereafter).
- Primary deficit (Percent of GDP):
  - 2023: 1.2
  - 2024: 0.9
  - 2025: 0.3
  - 2026: -0.2
  - 2027: -0.7
  - 2028: -0.6
  - 2029: -0.6
  - 2030: -0.6
  - 2031: -0.6
  - 2032: -0.6
  - 2033: -0.6
- Noninterest revenues (Percent of GDP): 2023: 23.9; 2024: 23.8; 2025: 23.8; 2026: 23.7; 2027: 23.6; 2028: 23.6; 2029: 23.7; 2030: 23.8; 2031: 23.8; 2032: 23.9; 2033: 23.9
- Noninterest expenditures (Percent of GDP): 2023: 25.1; 2024: 24.7; 2025: 24.1; 2026: 23.5; 2027: 22.9; 2028: 23.0; 2029: 23.1; 2030: 23.2; 2031: 23.2; 2032: 23.3; 2033: 23.4
- Automatic debt dynamics / Real interest rate and relative inflation (Percent):
  - Automatic debt dynamics: -2.2 in 2023; then 0.2–0.4 across 2024–2032 (e.g., 0.2 in 2024, 0.2 in 2025, 0.4 in 2026, 0.4 in 2027, 0.3 thereafter).
  - Real interest rate and relative inflation: -1.6 in 2023; 1.0 in 2024; 1.1 in 2025–2029; 1.0 in 2030–2032.
- Real growth rate (Percent): 2023: 0.2; 2024: -0.8; 2025: -0.9; 2026–2032: -0.7 each year (extended projection shows continuation with "..." beyond 2032).
- Other identified flows (Percent of GDP): -1.6 in 2023; -0.3 in 2024; -0.2 in 2025 onward (consistent -0.2).
- Contingent liabilities: 0.0 across projection years shown.
- Gross financing needs (GFN, Percent of GDP):
  - 2023: 3.6
  - 2024: 3.6
  - 2025: 3.1
  - 2026: 3.7
  - 2027: 3.0
  - 2028: 3.5
  - 2029: 4.2
  - 2030: 3.4
  - 2031: 5.1
  - 2032: 5.0
  - 2033: 5.2
- Of which: debt service (Percent of GDP):
  - 2023: 2.6
  - 2024: 2.8
  - 2025: 2.9
  - 2026: 3.9
  - 2027: 3.7
  - 2028: 4.2
  - 2029: 4.8
  - 2030: 4.0
  - 2031: 5.8
  - 2032: 5.6
  - 2033: 5.8
- Local vs foreign currency shares of GFN (Percent of GDP): local currency and foreign currency splits reported for each year (e.g., local currency: 1.5 in 2023, 1.6 in 2024, 1.3 in 2025, 2.2 in 2026, etc.; foreign currency: 1.0 in 2023, 1.3 in 2024, 1.6 in 2025, 1.7 in 2026, etc.).
- Memo points:
  - Real GDP growth (percent): -0.6 in 2023; 2.5 in 2024; 2.7 in 2025; 2.3 in 2026–2032.
  - Inflation (GDP deflator; percent): 6.3 in 2023; 2.3 in 2024; 2.0 in 2025–2032.
  - Nominal GDP growth (percent): 6.6 in 2023; 4.9 in 2024; 4.8 in 2025; 4.5 in 2026; 4.4 in 2027–2029; 4.3 in 2030–2032.
  - Effective interest rate (percent): 0.0 in 2023; 5.5 in 2024; 5.4 in 2025; 5.4 in 2026–2032 (with minor year-to-year variation reported).

- Commentary: Public debt is expected to stabilize over the medium term and fall toward the long-run debt target reflecting the planned fiscal consolidation envisioned in the fiscal rules.

### Debt coverage and public sector structure
- Statistical coverage: Non-Financial Public Sector (NFPS) is the statistical coverage of Peru’s public debt statistics.
- Subsector inclusions (captured in the baseline): Budgetary central government (Yes); Extra budgetary funds (EBFs) (Yes); Social security funds (SSFs) (Yes); State governments (Yes); Local governments (Yes); Public nonfinancial corporations (Yes); Central bank (No); Other public financial corporations (No).
- Commentary: The investor base is well diversified, the law of the debt is equally distributed between local and foreign. Most of the public debt is marketable, with over ten years of residual maturity.
- Reported consolidated debt holdings (Millions of PEN):
  - Extra-budgetary funds (holder/issuer): 2,680.827
  - Social security funds: 405.793
  - State government: 1,266.6905
  - Nonfinancial public corporations: 1,508.9526
  - Central bank: 7,441.907
  - Other public financial corporations: 7,142.4429
  - Total reported: 20,446.613
- Residual maturity: 13.6 years (stated).

### Realism of baseline assumptions and forecast track record
- The realism analysis does not point to major concerns.
- The forecast track record for main drivers does not reveal any systematic bias.
- Projected fiscal consolidation is stated to be "well within norms".
- The real GDP growth forecast in the baseline is described as consistent with reasonable estimates of the fiscal multiplier and converges to potential GDP growth over the forecast horizon.

### Medium-term risk assessment (modules and indexes)
- Debt fanchart module:
  - Debt fanchart index (DFI): 1.3
  - Terminal debt-to-GDP x institutions index: 19.6 (percent of GDP)
  - Debt fanchart module risk signal: Moderate
- Gross financing needs (GFN) financeability module:
  - Average baseline GFN: 3.5 (percent of GDP)
  - Initial banks' claims on the general government (pct bank assets): 5.0
  - Change in banks' claims in stress (pct bank assets): 2.1
  - GFN financeability index (GFI): 3.5
  - GFN module risk signal: Low
- Medium-term index (combined): Risk signal: 5/ (final assessment)
  - Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct.
  - Prob. of false alarms, 2024-2029, if stress predicted: 58.0 pct.
- 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 assessment and stress tests
- Long-term risks are assessed as low.
- Stress tests indicate debt should be manageable under risk scenarios, including large amortization, climate change adaptation, and natural resource scenarios.
- Large amortization and custom scenarios: reported projections and indicators (GFN-to-GDP ratio, Amortization-to-GDP ratio) point to a favorable outlook and low long-term risk, supported by the commentary that Peru has a favorable gross financing needs to GDP ratio.
- Long-term scenario assumptions (selected):
  - Real GDP growth: 2.3%
  - Primary Balance-to-GDP ratio: 0.6%
  - Real depreciation: -1.8%
  - Inflation (GDP deflator): 2.0%
- Commentary: Debt in the long run should be sustainable in light of risks with regards to climate adaptation.

### Climate change and natural resource scenarios
- Climate change: Adaptation—Long-run projections show that GFN-to-GDP and total public debt-to-GDP remain manageable under both standardized and customized climate adaptation scenarios.
- Natural resources scenario—presented as a separate long-term risk assessment with corresponding long-run projections; overall assessment remains that long-term risks are low and debt manageable under scenario variants.

### Supplemental: Foreign exchange interventions (Annex V excerpt)
- Highlighted external risk: Further tightening of global financial conditions, notably "tighter for longer" U.S. monetary policy, could affect Peru via risk premia and capital flows given FX market shallowness and elevated dollarization.
- IMF staff guidance summary:
  - FX interventions (FXIs) can be beneficial for alleviating macroeconomic volatility from non-fundamental shocks in the short term.
  - In the presence of a foreign interest rate shock, less flexible exchange rates may lead to a slower economic recovery.
  - FXIs could disincentivize development of the FX market.
  - The central bank should carefully choose policy tools based on their effectiveness and costs in the short and long term.

*Source: IMF staff estimates and projections as presented in Annex IV. Sovereign Risk and Debt Sustainability Analysis.*

### 1.      The narrowing interest rate differential against U.S could impact the ER dynamics. The

### 1perea2024001 - 1.      The narrowing interest rate differential against U.S could impact the ER dynamics. The

### Interest rate differential and exchange rate (ER) dynamics
- BCRP started monetary policy tightening in mid-2021, and interest rate differential against U.S. had widened until mid-2022; during this period ER dynamics was on a moderate appreciation trend.
- With inflation lowered substantially, BCRP started reducing policy rate since October 2023, while U.S. Federal Reserve has paused their monetary policy, and the interest rate differential vis-à-vis against U.S. is narrowing.
- The FX and rate differential vis-à-vis USD charts cover 2010–2023 for policy rates and Sol/USD relationships; figures and series referenced include Policy Rates (LC), Policy Rates (USD), Differential (LC-USD), and Sol/USD.

### Dollarization and FX market structure
- Financial system credit dollarization rate declined from about 45 percent at the end of 2013 to 24 percent at the end of 2023.
- Some corporate sectors (electricity and water, services) still exhibit elevated unhedged foreign currency positions; other sectors (large corporates) have much of their dollar-credit exposure hedged.
- Peru’s average FX turnover is the lowest among LA5 countries, particularly in FX derivatives markets, mainly due to lower participation of foreign financial institutions.
- Low turnover combined with high dollarization could raise risk premia, increase depreciation pressure, and undermine financial stability by affecting dollar-denominated liabilities and domestic financial conditions.

### Effectiveness of foreign exchange intervention (FXI) — model evidence
- Staff uses the IMF’s estimated quantitative integrated policy framework (IPF) model, a small-open economy DSGE estimated with Peruvian data from 2003Q1 to 2022Q1, incorporating shallow FX markets and nominal rigidities.
- Impulse responses: one standard deviation shock in risk premium (an increase in UIP premium) results in:
  - about 1-2.5 percent depreciation in real effective exchange rate (REER),
  - an increase of price by about 0.04-0.14 percent point.
- The model shows FXI is effective in containing effects arising from UIP premium shocks; the impulse response to an FXI shock mirrors that of the UIP premium shock.
- Caveats: model assumes all prices set in local currency (exports/imports may be USD-priced), excludes banking sector, and does not consider zero lower bound or unconventional policy in large economy.

### Medium-term trade-offs and simulation scenarios
- Simulations compare three FX regimes: Flexible FX, FXI with MP (Monetary Policy), and Fixed FX, under two shock types: UIP premium shock and foreign monetary policy shock.
- Simulation calibration: size of the shock was calibrated so that it depreciates the ER by 5 percent under Flex FX regime.
- Scenario findings:
  - If depreciation originates from a UIP premium shock, FXI with MP and Fixed FX deliver the smallest output gap fluctuations and inflation.
  - If depreciation originates from a foreign interest rate shock, inflation is affected short-term via higher import prices but impact is short lived; after 3 years the Flexible regime yields the smallest output gap effects, though domestic policy rate must be tightened given higher inflation risk.
- Overall trade-off: FXI can mitigate FX volatility short-term but can slow economic recovery in the medium term under higher foreign monetary policy shock.

### Long-term costs: development of FX derivatives and FX rigidity
- High FX rigidity can reduce incentives for firms and financial institutions to hedge, thereby slowing development of the FX derivatives market.
- Staff estimates indicate that a combination of greater FX rigidity (inverse of volatility) and FXI could significantly reduce turnover in FX derivatives.
- Regression evidence: annual average daily turnover in FX derivatives per GDP regressed on FX rigidity, FXI per GDP, and their interaction, controlling for dollarization, FX open positions, financial market development, individual and time fixed effects, using data for 14 emerging market and developing economies during 2007–22. The FXI x FX Rigidity interaction is significant at the 5 percent level.

### Policy implications and recommendations
- Use FXI targeted to excessive volatility arising from market frictions (e.g., UIP risk premium shocks) rather than broad or frequent intervention.
- Employ FXI sparingly for significant nonfundamental shocks to:
  - mitigate short-term effects on the economy and inflation,
  - allow greater FX flexibility to foster faster medium-term economic recovery,
  - help foster development of the FX derivatives market, which would mitigate market frictions.
- Recognize intertemporal cost/benefit trade-offs: FXI moderates short-term volatility but can delay current account adjustment and economic recovery in the medium term and may discourage FX derivative market development.

*Source: 1perea2024001 (IMF staff).*

### 3.      The authorities have made significant progress on the recommendations from the 2018

### 3.      The authorities have made significant progress on the recommendations from the 2018

### Systemic Risk and Macroprudential Policy
- Countercyclical provisions and capital surcharges fully aligned with the Basel III framework will be in effect starting in June 2024.
- New regulation issued with a new methodology for determining systemic risk capital requirement, which includes size, interconnectedness, substitutability and complexity. Banking Law modified to require minimum common equity Tier 1 and Tier 1 ratios.
- New regulation changing the provisioning scheme to be more sensitive to risk, requiring higher countercyclical provisions for SME portfolio.
- Off-balance-sheet bank exposures are being closely monitored; a new regulation for a standardized report of credit commitments was published.
- Current regulation requires an additional 8% in capital surcharges applied to foreign currency exposures subject to foreign exchange credit risk.
- Growth-at-risk methodology and a granular risk model for corporate debtors have been incorporated in the stress test model.
- Regulatory changes completed: (i) regulatory capital requirement for systemic risk, (ii) reduction of the trigger that activates the rule for countercyclical provisioning and capital requirement, and (iii) capital requirements for additional risks.

### Financial Sector Oversight — Banks
- Draft law for holding companies prepared to grant SBS powers to exercise full consolidated supervision; it needs to be approved by Congress.
- Liquidity contingency plans at a consolidated level are required and assessed by the SBS; current regulation of consolidated supervision defines a responsible supervisor.
- Recovery plans for domestic systemically important banks (D-SIBs) have been received by the SBS (approved by the Board of Directors); the SBS is evaluating the plans to give them feedback.
- Strengthening SBS internal governance and control framework: functions of the Internal Control Committee expanded; Ethics Tribunal formed; a good governance model with appropriate levels of authority, responsibility, accountability, and control mechanisms established.
- Strengthening legal protection of all SBS staff in line with international best practice: Not implemented.

### Insurance
- Risk-based supervision model for insurance companies is applied since 2019-2020.
- A trial of a risk-based supervision model for brokers was run in 2022; the final model was approved in February 2024 and is applied since then.

### Cooperatives and Deposit Insurance
- Regulation for a deposit-insurance system has been approved and the premiums began to be collected.
- The deposit insurance system for cooperatives was implemented in March 2022, and will start providing coverage from 2025 (insurance begins to provide coverage in January 2025 to those cooperatives that have complied with 24 contributions (2 years of premiums)).

### Crisis Management and Emergency Liquidity Assistance (ELA)
- BCRP and SBS participated in a cross border crisis simulation exercise for 7 countries of the Americas, led by the FSI BIS, to test the effectiveness of the existing resolution framework.
- Work is underway to develop a proposal for a comprehensive bank resolution framework.
- FSD payouts are usually carried out within 48 hours; recommendation to require payout of most insured deposits within seven working days and provide legal protection to FSD staff/agents.
- ELA framework: Previously, the BCRP could grant loans of last resort via créditos de regulación monetaria/ CRM and repos; coordination between BCRP and the supervisory authority is not required to provide liquidity through the discount window, but the BCRP shares information with the supervisory authority. SBS should consider accessibility of financial companies to the ELA and repo facility of BCRP in their liquidity stress test.

### Financial Integrity
- New regulation issued containing stricter clauses on moral suitability of shareholders, ultimate beneficial owners, directors, managers, and principal officers of companies.
- A draft law for increasing the cap on fines has been prepared; it needs to be approved by Congress.
- Strengthen risk-based AML/CFT supervision (including sanctioning powers) for banks and other high-risk reporting entities remains an ongoing recommendation.

### Financial Deepening
- Work ongoing to improve Repurchase Agreements and clearing/settlement to give greater dynamism to the public debt market; regulations for these operations have been approved while a framework contract is being prepared.
- A collateral management system is being developed to facilitate securities loans.
- Strategy for Global Asset and Liability Management (EGIAP) aims to strengthen the market for public debt securities in national currency with medium and long-term maturities and achieve interconnection with Euroclear. Implementation of phase 2 “Secondary Market Link” would allow all bonds to be euro-clearable and can be registered and settled in the local ICLV.

### Pension System: Welfare Impact and Costing (Annex VII)
- Social welfare impact of Peru’s pension system is limited due to both low coverage and benefits for the bottom of the income distribution.
- Poor targeting of the social pension contributes to less than 10 percent of poor elderly being covered.
- The envisioned reform expands the social pension coverage of the poor elderly by 2.5 percentage points, though an estimated 88 percent of this group would remain uncovered.
- If targeting were improved, the share of poor elderly covered would increase by 7 percentage points with negligible fiscal cost.
- Alternatively, with no targeting improvement but a small fiscal cost of 0.13 percent of GDP, more poor elderly could be covered.
- A greater poverty impact would be achieved by spending 0.24 percent of GDP to also increase the benefit amount.

### Pension System — Structure and Key Statistics
- Peru’s pension system consists of: non-contributory pension (Pensión 65), PAYGO SNP (ONP), and funded DC scheme SPP.
- Retirement age is 65 for both men and women.
- Public spending on pensions in Peru in 2022: 0.1 percent of GDP on social pensions and 0.4 percent of GDP on old-age and survivor pension under SNP.
- Employment rate over age 15: 63 percent for women and 76 percent for men.
- Active coverage rates (over age 15, 2022): SNP — 7 percent for women and 10 percent for men; SPP — 14 percent for women and 22 percent for men.
- SNP requires a minimum of 20 years of contributions to receive a pension; only 17 percent of current SNP contributors between ages 60-64 reach this minimum.
- Share of older population receiving a pension from the SNP: around 16 percent for both men and women in 2022.
- Private pension scheme assets declined from 22 percent of GDP in 2020 to around 12 percent in 2022.
- Only 30 percent of SPP members did not withdraw anything during the period of increased lump-sum withdrawals.
- Pensión 65 recipients receive S/250 every two months (about 30 percent of the poverty line and 55 percent of the extreme poverty line).
- Poverty statistics (2022): elderly poverty rate 22 percent; general poverty rate 27 percent; extreme poverty among elderly 4 percent.
- In 2022, about 625,000 people benefited from Pensión 65, about 16.2 percent of the elderly.
- Among Pensión 65 recipients, extreme poverty rate falls from 27.8 percent to 9.3 percent.
- Pensión 65 reduces prevalence of extreme poverty among the elderly by 3 percentage points (from 7.2 to 4.2 percent).
- Pensión 65 benefit amount is 55 percent of the extreme poverty line; current benefit amounts represent on average 14.6 percent of per-capita beneficiaries’ consumption.

### Pension System — Design and Proposals
- Pension reform proposal presented to Congress in October 2023 includes: expanding minimum and social pension, automatic enrollment, limiting early withdrawals from the private pension accounts, and periodic assessment of parameters.
- A social pension proposal under discussion in Parliament would increase coverage by lowering the eligibility requirement from living in extreme poverty (under S/226 per month) to living in poverty (under S/415 per month), while maintaining multidimensional poverty considerations.
- Potential extension under consideration: people aged 65 years and over affiliated with SNP or SPP with income below the extreme poverty line; under this extension, members of the SPP system should transfer their private pension account balance to the ONP reserve fund.
- Further extension explored for workers 75 years and older who have income below the poverty line.

*Prepared by Boele Bonthuis, Delphine Prady, and Julieth Pico (all FAD).*

### 10.      Given the high informality and limited coverage and adequacy of the contributory

### 10.      Given the high informality and limited coverage and adequacy of the contributory

### Role of the non-contributory (social) pension
- The social pension is identified as the most important tool for elderly economic security because contributory schemes "do not provide meaningful long-term benefits to a large share of their membership."
- The non-contributory pension is described as "the single most important type of pension benefit to provide economic security in old age."
- Extending access to the non-contributory pension is important to prevent old-age poverty, but "the proposed design reform could be adjusted to improve its effectiveness."

### Indexation
- Indexation criteria should be rules-based.
- The most straightforward rule recommended: index non-contributory pension benefits to inflation.
- Alternative indexation: link to a specific minimum consumption basket for the elderly.
- Rationale: "Since poverty lines often follow inflation closely, the most straightforward rule would be to index non-contributory pension benefits to inflation."

### Reform scenarios and estimated impacts for Pensión 65
- Three scenarios presented to strengthen coverage and adequacy; Table 1 summarizes features and estimated fiscal impact (Table content not reproduced here).
- Counterfactual baseline with improved targeting:
  - Fiscal cost: 0.10 percent of GDP (same as current baseline).
  - Fiscal envelope: "about S/1 billion."
  - Reduces extreme poverty rate among elderly from 4.2 percent (baseline) to 3.3 percent.
  - Baseline leakage: "43 percent of all Pensión 65 beneficiaries are non-poor."
- Scenario 1 (authorities’ proposal):
  - Expands Pensión 65 to about 170,000 elderly who do not currently receive a pension.
  - Selection mimics SISFOH targeting; leakage: "43 percent of beneficiaries are non-poor as in the baseline scenario."
  - Benefit amount remains S/125 per month.
  - Extra fiscal cost: S/200 million; total spending on the social pension becomes 0.13 percent of GDP.
  - Outcome: achieves similar (extreme) poverty reduction to the counterfactual baseline but at the extra fiscal cost noted.
- Scenario 2:
  - Extends benefits to about 30,000 poor pensioners affiliated with earning-related schemes.
  - Pensión 65 coverage increases to about 825,000 elderly, or 21.3 percent of all people aged 65 and above.
  - Selection mimics SISFOH targeting; leakage: "43 percent of beneficiaries are non-poor as in the baseline scenario."
  - Benefit amount remains S/125 per month.
  - Reduces old age extreme poverty to 3 percent.
  - Extra fiscal cost: S/50 million; total spending of 0.13 percent of GDP.
  - Note: "This fiscal cost could increase in the future because of the extraordinary withdrawals, if the amount withdrawn is spent and not recovered enough through future contributions to finance at least a pension high enough to be excluded by SISFOH."
- Scenario 3 (staff recommendation):
  - Coverage same as Scenario 2 (about 825,000 beneficiaries).
  - Individual benefit increased to the extreme poverty line of S/226 per month.
  - Current Pensión 65 benefit represents 55 percent of the extreme poverty line and 30 percent of the poverty line.
  - Raising benefit to S/226 per month can reduce old age extreme poverty to 1.8 percent.
  - Old age poverty would be reduced by almost 4 percentage points to 18.2 percent.
  - Extra fiscal cost: S/1 billion after accounting for the coverage broadening of Scenario 2; total spending of 0.24 percent of GDP.
  - Footnote: "Extreme poverty is not entirely eliminated because poverty is determined on the household level while pension benefits are granted only to elderly household members."
  - Cost containment note: "pension testing of the level of the social pension benefits can be considered (this is for instance done in Chile)."

### Targeting and administrative improvements for Pensión 65
- Priority: improve SISFOH targeting to reduce inclusion and exclusion errors.
- Current problem: "Almost half Pensión 65 beneficiaries are not poor, and therefore are incorrectly included in the program."
- Actions recommended to increase efficiency:
  - Broaden coverage to all households/individuals of the SISFOH data collection system.
  - Regularly update collected data and build interoperability across socioeconomic databases (possibly at different government levels) to reduce validation costs.
  - Update the algorithm that grants socioeconomic scores.
- Example cited: Costa Rica’s SINIRUBE as a relevant example:
  - SINIRUBE integrates 34 public institutions and covers approximately 80 percent of households.
  - SINIRUBE inclusion and exclusion errors estimated at 23 percent.

### Governance, anti-corruption, and rule-of-law context affecting social programs
- Corruption scale and impact:
  - In 2023, "more than 24 billion soles (around 3 percent of GDP) were estimated to have been lost to corruption" (Contraloría General de la República).
  - Public perception: negative perception about progress to reduce corruption reached 52.8 percent in 2023 (Latinobarometro).
  - Impunity aggravates corruption; criminal proceedings for corruption officials average 4.5 years (Defensoría del Pueblo reference).
- Progress in anti-corruption infrastructure:
  - CGR expanded public audit coverage from 27 percent of the government in 2017 to 95 percent by end of 2024.
  - UIF has built partnerships to enable identification, freezing and confiscation of proceeds of crime.
  - Junta Nacional de Justicia (JNJ) established in 2020 for vetting and discipline of judges and prosecutors.
  - Peru became a party to the OECD Anti-Bribery Convention in 2018.
- Recommendations to enhance effectiveness and coordination of anti-corruption institutions:
  - Enhance compliance with asset declarations and conflict of interest statements by politically exposed persons and robust verification by the CGR.
  - Ensure full and timely access to agencies (e.g., banks) to support verification and identification of discrepancies.
  - Better resource institutional integrity offices to manage and process complaints and protect whistleblowers.
  - Strengthen transparency of the Single Digital Platform for Citizen Complaints.
  - Strengthen mechanisms for coordination and cooperation among anti-corruption institutions.
- Rule-of-law and judicial recommendations:
  - Reduce reliance on temporary judges; prioritize regular judges to improve judicial independence and efficiency.
  - Ensure effectiveness and independence of the Junta Nacional de Justicia.
  - Modernize the organic law of the Ministerio Publico – Fiscalía de la Nación to strengthen institutional independence and organize resources to prosecute high-level crimes.
  - Adequately resource the judiciary, JNJ and Ministerio Publico and support digitalization for case management.
- AML/CFT recommendations:
  - Continue supervisory efforts to implement enhanced due diligence measures against politically exposed persons (including family members and close associates).
  - Enhance UIF financial intelligence capacities by ensuring timely and effective access to bank secrecy, tax, beneficial ownership, and asset declarations.
  - SUNAT to populate and verify the registry of beneficial ownership information.
  - Create a centralized register for all notarized documents.

*PERU INTERNATIONAL MONETARY FUND*

### Annex IX. Data Issues

### Annex IX. Data Issues (As of April 11, 2024)

### Data Adequacy Assessment for Surveillance
- Peru: Data Adequacy Assessment Rating — B
- Median Rating across sectors: A B B B B B B
- Rationale for the assessment:
  - Data provided to the Fund for surveillance are timely, comprehensive, and adequate for macroeconomic and financial analysis.
  - Data coverage, frequency, and timeliness are generally in line with expectations and requirements set in the IMF Data Standards Initiatives.
  - Improving granularity and coverage of:
    - government finance statistics,
    - public debt statistics, and
    - financial soundness indicators
    would further strengthen adequacy for surveillance.
  - Coordination among agencies that compile official statistics would avoid duplication and enhance consistency across sectors.

### Changes since last Article IV Consultations
- In 2023, the EPEN replaced the ENAHO as the source for the INEI's official labor force statistics at the national level.

### Corrective actions and capacity development priorities
- Government finance statistics:
  - Migrate to the GFSM 2014 Manual to improve data quality, coverage, and granularity and to support cross-sector consistency.
- Public debt statistics:
  - Improve granularity, ensure consistency between stocks and flows, and harmonize data between the Ministry of Finance and BCRP.
- Financial sector surveillance:
  - Include additional core indicators and expand coverage to nonbank financials and nonfinancial sectors such as real estate markets.

### Use of data different from official statistics
- Staff do not use data and/or estimates different from official statistics.

### Other data gaps
- Labor market:
  - Core labor market statistics are timely (unemployment, underemployment, remuneration of formal employment), but timeliness of statistics of the informal sector could be improved.
- Foreign exchange intervention (FXI) data:
  - Published daily but could include average maturity of derivative positions.
- Climate-related data:
  - Data related to climate change, particularly related to natural disasters, could be provided.

---

### Data Standards Initiative
- Peru subscribes to the Special Data Dissemination Standard (SDDS) since August 1996 and publishes data on its National Summary Data Page.
- The latest SDDS Annual Observance Report is available on the Dissemination Standards Bulletin Board.

### Table 1 — Selected Common Indicators Required for Surveillance (As of April 11, 2024)
- Exchange Rates
  - Date of Latest Observation: 2/2024
  - Date Received: 3/2024
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency Timeliness Expectation: D
  - Current Practice: 1D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of Latest Observation: 3/2024
  - Date Received: 4/2024
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency Timeliness Expectation: W
  - Current Practice: 1W
  - Note: Every Friday the central bank disseminates daily net international reserves, and weekly International Reserve Assets and Reserve Liabilities.
- Reserve/Base Money
  - Date of Latest Observation: 3/2024
  - Date Received: 4/2024
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency Timeliness Expectation: W
  - Current Practice: 1W
- Broad Money
  - Date of Latest Observation: 11/2023
  - Date Received: 12/2023
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency Timeliness Expectation: M
  - Current Practice: 1M
- Central Bank Balance Sheet
  - Date of Latest Observation: 3/2024
  - Date Received: 4/2024
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency Timeliness Expectation: W
  - Current Practice: 1W
- Consolidated Balance Sheet of the Banking System
  - Date of Latest Observation: 2/2024
  - Date Received: 3/2024
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency Timeliness Expectation: M
  - Current Practice: 1M
- Interest Rates
  - Date of Latest Observation: 2/2024
  - Date Received: 3/2024
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency Timeliness Expectation: D
  - Current Practice: 1D
- Consumer Price Index
  - Date of Latest Observation: 3/2024
  - Date Received: 4/2024
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency Timeliness Expectation: M
  - Current Practice: 1D
- Revenue, Expenditure, Balance and Composition of Financing — General Government
  - Date of Latest Observation: Q4/2023
  - Date Received: 1/2024
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency Timeliness Expectation: A
  - Current Practice: Q
  - Expected Current Practice Timeliness: 2Q
  - Current Practice Timeliness: 2M
- Revenue, Expenditure, Balance and Composition of Financing — Central Government
  - Date of Latest Observation: 2/2024
  - Date Received: 3/2024
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency Timeliness Expectation: M
  - Current Practice: 1M
- Stocks of Central Government and Central Government-Guaranteed Debt
  - Date of Latest Observation: Q4/2023
  - Date Received: 2/2024
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency Timeliness Expectation: Q
  - Current Practice: 1Q
  - Current Practice Timeliness: 2M
- External Current Account Balance
  - Date of Latest Observation: Q4/2023
  - Date Received: 2/2024
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency Timeliness Expectation: Q
  - Current Practice: 1Q
  - Current Practice Timeliness: 2M
- Exports and Imports of Goods and Services
  - Date of Latest Observation: Q4/2023
  - Date Received: 2/2024
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency Timeliness Expectation: M
  - Current Practice: 8W
  - Current Practice Timeliness: 6W
- GDP/GNP
  - Date of Latest Observation: Q4/2023
  - Date Received: 2/2024
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency Timeliness Expectation: Q
  - Current Practice: 1Q
  - Current Practice Timeliness: 2M
- Gross External Debt
  - Date of Latest Observation: Q4/2023
  - Date Received: 2/2024
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency Timeliness Expectation: Q
  - Current Practice: 1Q
  - Current Practice Timeliness: 2M
- International Investment Position
  - Date of Latest Observation: Q4/2023
  - Date Received: 2/2024
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency Timeliness Expectation: Q
  - Current Practice: 1Q
  - Current Practice Timeliness: 2M

---

### Supplementary Information (May 2024 updates)

### Ministry of Finance updated macroeconomic and fiscal projections
- Authorities' new projections for the non-financial public sector fiscal deficit (Percent of GDP) — Table values:
  - 2024: Budget Projections 2.0; Authorities' New Projections 2.5; Staff Baseline Projections 2.5
  - 2025: Budget Projections 1.5; Authorities' New Projections 2.2; Staff Baseline Projections 2.0
  - 2026: Budget Projections 1.0; Authorities' New Projections 1.8; Staff Baseline Projections 1.5
  - 2027: Budget Projections 1.0; Authorities' New Projections 1.4; Staff Baseline Projections 1.0
  - 2028: Budget Projections 1.0; Authorities' New Projections 1.0; Staff Baseline Projections 1.0
- Key messages:
  - Authorities now envisage economic growth at 3.1 percent for 2024, compared to 3.0 percent in the 2024 Budget.
  - The authorities increased their projection for the 2024 non-financial public sector fiscal deficit from 2 percent of GDP to 2.5 percent of GDP, now aligned with staff’s baseline projection.
  - The new medium-term fiscal projections postpone fiscal consolidation: the 1 percent-of-GDP fiscal target would now be reached in 2028 instead of 2026.
  - The executive requested special legislative powers for 90 days to introduce measures to foster economic recovery; one envisaged measure includes changes to fiscal rule targets. The IMF stands ready to provide technical assistance on assessing the optimality of current medium-term fiscal rule targets.

### Key Points from the Statement by Mr. Alfaro and Mr. Hendrick (May 20, 2024)
- Growth and comparative performance:
  - Peruvian economy expected to grow 3.0 percent in 2024 and a similar growth rate is expected in 2025.
  - Peru’s growth remains one of the highest among LAC-5 as reported in the April World Economic Outlook (WEO).
- Inflation and monetary policy:
  - April 2024 year-on-year headline inflation: 2.4 percent.
  - April 2024 core inflation: 3.0 percent.
  - Inflation expectations anchored within the 1 to 3 percent range.
  - On May 9, the BCRP reduced the policy rate by 25 bps to 5.75 percent.
- Fiscal and debt indicators:
  - Fiscal deficit was 2.8 percent in 2023.
  - Public debt decreased from 33.9 to 32.9 percent of GDP between 2022 and 2023.
  - Fiscal buffers are around 9 percent of GDP.
- External sector and reserves:
  - At end-April 2024, international reserves amounted to US$ 74.5 billion, equivalent to 28.6 percent of GDP.
  - Reserves are well above the Fund’s ARA metric.
- Financial sector:
  - Banks are profitable and well-capitalized with ample liquidity and capital buffers.
  - Most financial entities comply with Basel III capital requirements ahead of deadline.
  - Stress tests suggest the financial system is resilient under severely adverse scenarios.
- Structural reforms and policy priorities:
  - Authorities working on structural reforms in the context of OECD accession to boost growth and address social needs.
  - Plans to follow up on staff recommendations to address climate-related shocks and promote digitalization and artificial intelligence to boost productivity and inclusive growth.
- Flexible Credit Line (FCL):
  - Authorities decided not to renew the FCL after its expiration at the end of May 2024.
  - Recent FCL arrangement details in the Fund relations section:
    - FCL May 27, 2022 — May 26, 2024 — Amount Approved 4,003.50 (SDR Million) — Amount Drawn 0.00
    - FCL May 28, 2020 — May 26, 2022 — Amount Approved 8,007.00 (SDR Million) — Amount Drawn 0.00

*Source: Annex IX. Data Issues (As of April 11, 2024) and Supplementary Information (May 2024) from the IMF staff report material provided.*

### 4. The Peruvian economy is expected to rebound in 2024, with a projected real GDP

### 4. The Peruvian economy is expected to rebound in 2024, with a projected real GDP growth of 3.0 percent

### Economic outlook and drivers of growth
- Projected real GDP growth in 2024: 3.0 percent.
- Main drivers of growth in 2024: exports, investment, and private consumption.
- 2023 shocks: multiple consecutive shocks beginning with social unrest in early 2023 affecting the mining and services sectors, and the negative impact of El Niño Costero, and El Niño Global affecting the agriculture and fishing sector.
- Estimated contribution of combined shocks to GDP growth in 2023: -2.1 percentage points.
- Labor market:
  - Unemployment rate fell at end-2023.
  - Informality declined, though adequate employment remains below pre-pandemic levels.
- Sector prospects for 2024:
  - Strong recovery expected in agriculture and fishing.
  - Moderate boost expected in the mining sector.
- High-frequency indicators of economic activity in March 2024 point towards a healthy and sustained recovery.
- Investment project: US$ 3.5 billion deep-water mega port in Chancay (built by Cosco Shipping Ports Chancay Peru (CSPCP)) set to start operations late this year, saving around 12 days in relation to current routes and expected to generate thousands of jobs and many business opportunities in the region.

### Inflation and monetary policy
- BCRP easing cycle began in September 2023.
- Cumulative policy rate reduction: 200 bps, with eight 25 bps reductions from 7.75 percent in September 2023 to 5.75 percent last May 9, 2024.
- April 2024 monthly inflation: -0.05 percent.
- April 2024 core inflation: 0.11 percent.
- Annual inflation decreased to 2.4 percent.
- Core inflation decreased to 3.0 percent.
- One-year inflation expectations: 2.6 percent (fifth consecutive month within central bank target).
- Central bank inflation target range: 1 to 3 percent.
- BCRP stance: data-dependent and may be adjusted if warranted by market conditions.
- Monetary authority expects inflation to continue decreasing and to stay around the center of the target range in the coming months.

### Fiscal position and public debt
- Non-financial public sector (NFPS) deficit in 2023: 2.8 percent of GDP.
- General Government revenues fell by 2.3 percentage points of GDP in 2023.
- Public debt:
  - Declined from 33.9 percent of GDP in 2022 to 32.9 percent of GDP in 2023.
  - 87 percent of public debt has fixed interest rates (average duration about 14 years).
  - About 51 percent of public debt is denominated in local currency.
- Public savings by end-2023: 10.5 percent of GDP.
- Sovereign credit rating: remains at investment grade by the three major rating agencies.
- Sovereign spreads: among the lowest in the region.
- Medium-term fiscal target: NFPS deficit of 1 percent of GDP in 2028.
- 2024 Budget envisages NFPS deficit of 2 percent of GDP, consistent with the current fiscal rule.
- Revised fiscal target for 2024 aligned with staff’s estimate: 2.5 percent of GDP.
- Ministry of Finance has announced a review of fiscal targets for 2024-2026 with a view to reaching the 1 percent of GDP target by 2028.
- Authorities requested Fund technical assistance to review the current fiscal rule and consolidation path.

### External position and reserves
- Net international reserves at end-April 2024: US$ 74.5 billion.
- Net international reserves equivalent to 28.6 percent of GDP.
- Current account 2023: temporary surplus of 0.8 percent of GDP (explained by sizable import compression despite a 4.8 percent improvement in the terms of trade).
- Current account medium-term expectation: converge to a deficit of around 1.5 percent.
- Exchange rate: appreciated moderately in 2023 and remains stable in 2024.
- Assessment: external position remains strong and international reserve coverage remains adequate under all Fund metrics.

### Financial sector resilience
- Banking system:
  - Banks are profitable and well-capitalized, with ample liquidity and capital buffers.
- Updated top-down stress test (SBS, April 2024):
  - Financial system’s average capital ratio would fall from 16.3 percent in December 2023 to 12.2 percent in December 2025 under a severely adverse scenario.
- Most institutions already comply with Basel III capital requirements ahead of the deadline.
- SBS measures: will continue to monitor market conditions and take measures as needed.
- Liquidity and pension withdrawals:
  - SBS liquidity stress test indicates banks can cope with substantial withdrawal of deposits from private pension funds.
  - Explanation: abundant liquidity and significant portion of capital cycles back to banks as deposits; high-income segments hold most private pension balances with relatively low marginal propensity to consume.
  - Effect: change in composition of bank deposits from long-term to short-term instruments.
- Macroprudential measure noted: SBS introduced an 8 percent capital surcharge for FX-denominated loans when calculating Basel III capital ratios.

### Structural reforms, productivity, and climate resilience
- Authorities concur that additional structural reforms are needed to boost potential growth.
- OECD accession process underway; authorities focusing on a broad range of structural reforms since 2021.
- Political constraints: reforms requiring Congressional approval may take longer under current political circumstances.
- Productivity and firm-level recommendations from staff will be carefully considered.
- Informality and micro/SME development: barriers to firms and productivity growth also helped reduce informality and support micro businesses and SMEs; a review of this framework may be warranted.
- Digitalization and AI: government making efforts to promote digitalization and exploring use of artificial intelligence to boost productivity.
- Climate and emissions:
  - Peru is not a large carbon emitter; energy matrix is intensive in natural gas and hydroelectric power.
  - Most emissions from land use and deforestation.
  - Peru is highly vulnerable to extreme weather events (e.g., El Niño and El Niño Costero); need for prevention policies in addition to post-disaster response.
  - Ongoing work to incorporate climate risks in macroeconomic forecasts and expand the toolkit for qualifying disaster risks.
- Staff’s assessment of growth and fiscal benefits of climate adaptation and resilience policies is appreciated.

### Fiscal consolidation, tax administration, and institutions
- Revenue mobilization and strengthening SUNAT (tax administration) are important components of fiscal consolidation.
- Recent tax administration improvements: electronic invoicing, a digital tax registry, notices of tax due, leveraging big data tools, enhanced use of treaties to exchange taxpayer information.
- Fund technical assistance provided to help SUNAT revamp capabilities.
- Fiscal Council: has guided Ministry of Finance’s budget execution and ensured compliance with the fiscal rule; supports fiscal framework with transparency and independence.
- Authorities will consider staff’s recommendations to improve the role of the Fiscal Council in ongoing reviews of the medium-term fiscal target, the debt ceiling, the expenditure growth limit, and liquidity buffers.

### Final remarks and precautionary arrangements
- Authorities remain committed to very strong macroeconomic policies and timely responses to emerging shocks.
- Over the last three decades: sustained growth, low inflation, and substantial reduction in poverty since the turn of the century attributed to sound economic policies.
- Authorities continuously review growth strategy and adjust policies as needed to improve living standards.
- On the FCL arrangement:
  - Authorities do not intend to renew the two-year FCL arrangement following its expiration on May 27th.
  - Rationale: FCL served its precautionary role; emerging signs of improving global conditions and expected strengthening of Peru’s external position amid moderate current account deficits and a rise in long-term private capital inflows justify exiting the arrangement.

*IMF staff report excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1perea2024001.pdf_