## _cr07241 ## Source details **Canonical URL:** [_cr07241](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07241.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07241.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07241.pdf.json) --- ### Executive summary - Economy performing remarkably well: record-high real GDP growth, contained inflation, continued fiscal prudence, improved external creditworthiness, and a strengthened financial system. - Program objective: consolidate macroeconomic stability; improve quality of spending and tax efficiency; reduce poverty; strengthen financial sector and business environment to achieve sustainable growth and position Peru for exit from Fund-supported programs and attainment of investment grade. - Principal risks: external conditions—commodity prices and global financial conditions—drive the outlook and downside vulnerabilities. ### Outlook and short-term risks - Real GDP growth: - 2006: 8 percent. - 2007 Q1: 7½ percent (y/y). - Staff view: Real GDP growth could reach 7 percent in 2007, above the program projection of 5½ percent. - Inflation and monetary policy: - April 2007: inflation slightly negative. - May 2007: 12-month inflation 0.9 percent. - Core inflation: stable at 1½ percent. - Inflation target reduced in early February 2007 from 2.5 percent to 2 percent, tolerance range +/- 1 percent. - May consensus forecasts: growth 7 percent and end-year inflation 1.8 percent. - External position: - Expected current account surplus in 2007 with continued reserve accumulation. - Official reserves: about 175 percent of FX deposits as of end-May 2007. - Downside scenario: - A sharp decline in commodity prices combined with increased risk aversion and a severe equity correction could significantly pressure the exchange rate and balance sheets, particularly given still-high dollarization. ### Fiscal performance and policy - Fiscal outcomes: - Consolidated public sector overall surplus in 2006: 2.2 percent of GDP. - Preliminary consolidated government surplus in 2007 Q1: 4.9 percent of GDP. - Two supplementary budgets (February and May 2007) amounting to about 1 percent of GDP. - Revenue outlook and targets: - Staff estimate revenue could exceed program projections by 1¼ percentage points of GDP in 2007. - Authorities expect the adjusted deficit target of ½ percent of GDP to be met comfortably; scope for consolidated public sector to achieve balance in 2007. - Recent fiscal measures and risks: - Two mid-May decrees to accelerate approval of public investment and concessions until end-2007 by simplifying SNIP procedures; one decree exempts Alto Piura hydropower project (about $700 million) from SNIP. - SNGs allowed to use canon minero resources for temporarily hiring teachers in regions. - Staff view: these measures may entail risks to the level and quality of public spending. - Fiscal reforms and safeguards under implementation: - Restructuring SNIP: high-level commission to prepare comprehensive reform proposal before end-June; plan to expand regional SNIP offices from six to an additional nine by year-end. - Use of canon minero: authorities stress temporary use for education staffing with central government support expected in 2008. - Review of the Fiscal Responsibility and Transparency Law (FRTL): May supplementary budget modified the 3-percent real expenditure limit (now applies to central government current spending) and removed transfers; staff cautioned against margins that could undermine credibility and urged establishment of a Fiscal Coordination Committee. - Decentralization safeguards: Ministry of Finance unit established to monitor SNGs; staff urged an adequate accreditation system for devolved functions (185 functions by end-2007). - Public financial management: five pilot performance-budgeting projects initiated; Integrated Financial Management System (SIAF) audit results expected by September; FAD resident advisor to assist in establishing a Treasury Single Account at the central government level by end-2007. - PPP legal framework: authorities intend to finalize draft and submit to congress by end-September; staff stressed PPP projects must be subject to SNIP evaluation; limited use of CRPAOs to existing contracts. ### Program implementation and structural progress - Status: - All end-March 2007 performance criteria and structural benchmarks broadly observed. - Tax regime simplified and base broadened; tax treatment of financial derivatives clarified except for securitized transactions. - Unit to monitor fiscal performance by sub-national governments (SNGs) established at the Ministry of Finance. - Strategy to strengthen effectiveness of social assistance programs published by Inter-ministerial Committee for Social Affairs (CIAS). - Progress on PPP legal framework slower than planned, partly due to personnel reshuffling. - Structural risks and mitigation: - Authorities committed to preserving program targets while addressing social and infrastructure needs. - Emphasis on preserving high quality of public spending even if spending acceleration is pursued. ### Financial system and external creditworthiness - Financial intermediation and resilience: - Credit to the private sector increased by around 25 percent over the past 18 months. - Sol-denominated credit (consumer and mortgage loans) increasing at annual rates of around 30 percent. - Dollarization is declining steadily but remains high. - Equity prices have tripled since early 2006; price-earnings ratios are at high levels. - Financial soundness indicators (selected, end-of-year data for 2005–2007 with 2007 end-March data): - Regulatory Capital to Risk Weighted Assets: 12.0, 12.5, 12.5 - Nonperforming Loans to Total Loans: 2.1, 1.6, 1.6 - Provisions to Nonperforming loans: 235.3, 251.4, 246.5 - Provisions to Nonperforming, restructured, and refinanced loans: 80.3, 100.3, 104.1 - Return on Assets: 2.2, 2.2, 2.4 - Return on Equity: 22.2, 23.9, 25.8 - Liquid Assets to Total Short Term Liabilities: 45.5, 44.2, 44.8 - Net Open Position in Foreign Exchange to Capital: 23.1, 17.1, 30.2 ### Policy priorities and government commitments - Authorities committed to: - Consolidate macroeconomic stability through fiscal discipline and vulnerability reduction; enhance the inflation-targeting framework while maintaining an appropriate monetary stance. - Preserve and improve quality of public spending via sound decentralization of SNIP; strengthen the FRTL; maintain proper accreditation for decentralized spending functions; enhance public financial management systems; establish adequate PPP framework. - Enhance tax regime effectiveness by streamlining and broadening the tax base, including a new framework for tax incentives and exemptions. - Tackle high poverty levels by implementing CIAS action plan to enhance social assistance programs and reform universal programs. - Strengthen the financial system by reducing dollarization (particularly of mortgage loans); improving regulatory and supervisory framework for public banks; advancing reforms to deepen domestic capital markets. - Advance growth-enhancing reforms by further opening the economy, increasing labor formality, and improving the business environment. ### Fiscal reforms and tax administration (section 9) - Recent tax reform objectives: Reducing distortionary taxes and increasing tax compliance; broadening the tax base. - Key tax-policy changes and parameters: - ITAN rate reduced from 0.6 percent to 0.5 and threshold revised downward from S/. 5 million to S/. 1 million. - Exemption of credit services from VAT is now permanent. - Capitalization of interest on outstanding tax debt eliminated. - Participation in the simplified regime extended. - Timetable for the financial transactions tax: 0.08 percent (present) → 0.07 percent in 2008 → 0.05 percent by 2010. - ITAN further reduction to 0.4 percent by 2009. - Capital gains from stock trading taxed at an effective rate of 5 percent from 2009 on. - Early refund of VAT payments extended to all sectors for firms making investments over $5 million. - New tax-incentive framework: time limits of 6 years for new exemptions; renewals conditioned (up to 3 years) on evaluation of goal achievement. - New exemptions for indirect taxes eliminated; congress must inform MEF before approving any new tax exemptions. - Ministries have 2 years to present an assessment of existing tax exemptions to congress. - Tax exemptions in the Selva region (except Loreto) replaced with direct transfers for investment, maintenance of infrastructure and social expenditure; elimination of certain VAT exemptions will be gradual. - Tax-administration actions and recommendations: - SUNAT efforts focused on upgrading information systems, implementing well-targeted audits, and strengthening cross-checks between domestic taxes and customs. - Staff commended rationalizing tax incentives and replacing Selva exemptions with earmarked transfers. - Staff encouraged authorities to resist pressures to grant new exemptions. - Policy recommendation: Adopt performance indicators and more focused audits to sustain tax administration gains. ### Strengthening social assistance programs and poverty strategy - Reform goals: Rationalize and strengthen SAPs; improve targeting, monitoring, and cost-effectiveness. - Institutional and operational measures: - Merger of 82 SAPs into 26 enhanced programs in 13 programmatic areas. - Finalize updating the single registry of beneficiaries and the household targeting system. - Provide the CIAS with a permanent head and technical staff; agreed as an end-September structural benchmark. - Launch a pilot program aimed at reducing child malnutrition in three provinces, using new comprehensive CIAS criteria. - Increase Juntos program focus on malnutrition and enhance its conditionality. - Voluntary contributions from mining companies beginning to finance regional projects. - Diagnosed weaknesses of existing SAPs: - Weak articulation and links to goal-achievement, leading to undercoverage and important leakages. - Deficiencies in monitoring and assessing social impact; lack of adequate beneficiary-identification systems and clear exit strategies. - High administrative costs: About 80 percent of SAPs have administrative costs that exceed 10 percent of the total spending under the program. - Proposed reform pillars: - i) human development, ii) promoting economic opportunities, iii) establishing a social safety net. - Institutional strengthening via a Single Beneficiary Registry and Household Focalization System, building on Juntos. - Drive for Performance: performance budgeting using indicators; Ministry of Finance to provide training on performance budgeting; priority to poorest municipalities to reduce undercoverage and leakages. - Action-plan timing: - Phase I: Legal decrees to merge SAPs to be completed by end-June. - Phase II: Reform of universal programs to begin in the second half of 2007. - Poverty statistics (2005, in percent of total population): - Lima: 36.1 - Coast: 39.9 - Highlands: 65.3 - Selva: 58.4 ### Inflation targeting, monetary policy, and reserves - Inflation and policy stance: - 12-month inflation declined below the 0.5 percent inner band in March, triggering a consultation under the program. - Authorities and staff agreed current monetary stance remains appropriate given the temporary decline. - New inflation target expected to help entrench price stability and declining dollarization. - Inflation consultation mechanism under the program remains unchanged for the rest of 2007. - Inflation drivers and outlook: - Headline inflation decelerated due to reductions in prices of public utilities, fuel, and selected food items. - Formal sector wages and capacity utilization rose, but strong productivity gains reduced unit labor costs. - Declining inflation expectations and gradual exchange rate appreciation also contained pressures. - Authorities project 12-month inflation to return to the mid-point of the target range by end-2007 given a positive output gap of about 1 percent at end-2006; structural model suggests a more gradual return. - Risk factors: uncertainty on the output gap and a potentially large fiscal impulse could intensify inflation pressures earlier than expected. - Reserves and exchange rate flexibility: - Agreement to continue building up reserves to levels broadly consistent with risks of high dollarization. - Staff encouraged greater exchange rate flexibility to avoid one-way bets and promote financial hedges, given limitations to sterilization despite strong fiscal position. ### Financial system resilience and capital-market deepening - Financial stability and supervision: - New regulations require banks to constitute special provisions for credits to overexposed customers. - Banks completed self-assessment of foreign currency portfolios; required provisioning constituted and integrated into supervision. - Large banks began extending mortgage loans in domestic currency with similar terms to foreign-currency loans. - Authorities exchanging part of MiVivienda’s foreign currency portfolio into Nuevo Soles; new domestic-currency lending programs launched. - Publicly-owned financial institutions (COFIDE, Banco de la Nación, Agrobanco) improving coordination of credit risk assessments. - Staff encouraged close monitoring of Banco de la Nación’s rapid consumer lending growth to ensure it remains within the 25 percent annual limit. - Uncertainty remains over timing of congressional approval of draft legislation to bring public financial institutions and MiVivienda under Superintendency of Banks supervision. - Capital-market reforms and targets: - Limit on pension funds’ investments abroad raised to 15 percent. - CONASEV established a “fast-track” registration process for public offerings by accredited investors. - Authorities assessing issuance of a 30-year sol-denominated bond to extend the domestic yield curve. - Expectation: share of local-currency denominated debt to reach 30 percent by end-2007. ### Public investment policy, decentralization, and PPPs (section 27) - Public investment policy points: - Well-designed public investment policies help minimize fiscal risks and support sustainable growth and poverty alleviation. - Temporary measures to expedite public investment must be balanced by sound procedures to ensure high quality. - Essential to improve decentralization process of the SNIP to retain an effective framework to assess project viability. - Increased capacity-building at SNG level, project monitoring and ex-post evaluation are essential. - Redouble efforts to establish a comprehensive legal framework for PPPs and explore alternative financing instruments to ensure balanced risk-sharing. ### Program conditionality, SBA disbursements, and staff recommendation - Stand-By Arrangement and disbursement schedule highlights: - Total access under the Stand-By Arrangement: SDR 172.4 million (27 percent of quota). - Disbursements schedule includes SDR 159.6 million on January 26, 2007 (Board approval of SBA) and subsequent purchases of SDR 1.596 million tied to reviews and observance of quarterly performance criteria through November 15, 2008, with a later SDR 1.596 million on February 15, 2009 for observance of end-December 2008 performance criteria. - Purchases by year memorandum: 2007: 164.4; 2008: 6.4; 2009: 1.6; total purchases: 172.4. - Staff recommendation: - "The staff supports the completion of the first review under the SBA." Rationale: "In light of the authorities’ strong commitment to the program, and good performance, the staff supports the completion of the first SBA review." ### Debt sustainability and medium-term projections - Baseline macro assumptions: - Economic growth: average about 5½ percent a year. - Overall deficit of the combined public sector: averaging ½ percent of GDP. - Public sector revenue: increase by 1 percent of GDP during 2007-2012. - Public sector debt projections: - Public sector debt stock: decline from 33 percent of GDP at end-2006 to about 22 percent of GDP by 2012. - Public external debt: decline from 24 percent of GDP at end-2006 to 17 percent by 2012. - Total external debt: decline from 30 percent of GDP at end-2006 to 20 percent by 2012. - Sensitivity and shock analysis: - One-off 30 percent depreciation would raise external debt-to-GDP by about 11 percentage points above baseline in the medium term. - A 10 percent of GDP shock to public sector contingent liabilities would raise the public debt-to-GDP ratio sharply in the short run and keep it 9 percentage points above baseline over the medium term. - Selected projected indicators (external debt-to-GDP): - 2006: 30.3 - 2007: 28.2 - 2008: 26.5 - 2009: 25.4 - 2010: 23.9 - 2011: 22.0 - 2012: 19.8 - Gross external financing need (selected years): - 2006: $2.5 (2.7 percent of GDP) - 2007: $6.0 (5.8 percent of GDP) - 2008: $4.6 (4.2 percent) - 2009: $4.6 (4.0 percent) - 2010: $5.3 (4.3 percent) - 2011: $5.7 (4.3 percent) - 2012: $7.5 (5.2 percent) - Public sector debt-to-GDP (gross debt projections): - 2006: 32.7 - 2007: 30.0 - 2008: 28.8 - 2009: 27.4 - 2010: 25.7 - 2011: 23.7 - 2012: 21.8 ### Statistical issues and data shortcomings (ANNEX 4) - General assessment: - Macroeconomic statistics broadly adequate for policy formulation, surveillance, and program monitoring. - Peru in observance of SDDS since August 1996. - Data ROSC prepared and published in 2003. - Main areas for improvement: - (i) coordination among agencies compiling official statistics; - (ii) implementing a new benchmark and base year for GDP (INEI working on 2001 base year); - (iii) expanding WPI coverage to include mining, oil and gas extraction, electricity and water, public transportation, and communication; - (iv) finalizing migration to standardized report forms for monetary data; - (v) expanding scope of data sources for compiling financial flows of individual residents. - Selected operational data publication frequencies and latest observations (as of dates in source): - Exchange Rates: Latest observation Apr. 2007; Date received 5/17/2007; Frequency D. - International Reserve Assets and Reserve Liabilities: Latest observation May 2007; Date received 5/29/2007; Frequency D/W. - Consumer Price Index: Latest observation Apr. 2007; Date received 5/21/2007; Frequency M. - GDP/GNP: Latest observation Q1 2007; Date received 5/21/07; Frequency M. - Gross External Debt: Latest observation Dec. 2006; Date received 5/21/07; Frequency Q. ### Staff appraisal and recommendations - Overall assessment: - Peru enjoys broad-based and record-high growth, low inflation, and rising formal employment—favorable conditions to entrench prudent policies and advance equity and poverty alleviation. - Preserving sound macroeconomic policies and advancing reforms would reduce vulnerabilities, entrench sustainable growth, and reduce high poverty levels; progress toward investment grade expected to aid exit from Fund-supported programs. - Key recommendations: - Continue fiscal prudence and save part of any revenue overperformance to keep public debt on a downward trend. - Implement FRTL amendments with consistent enforcement and resist margins on deficit limits and growth on real current spending that could undermine credibility. - Prompt implementation of the new budget classification and improvements in public procurement to minimize misclassification risks. - Devolution of spending to subnational governments by year-end should follow sound accreditation criteria to preserve fiscal soundness. - Preserve high quality of public spending when accelerating spending. - Prompt implementation of SAP reform and bolstering CIAS capacity are critical to reducing poverty. - Continue efforts to reduce dollarization, deepen domestic capital markets, and strengthen regulatory oversight of public financial institutions. - Resist pressures for new tax exemptions; continue tax-administration modernization and performance-based audits. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07241.pdf* ### Executive Summary ...................................................................................................... ### _cr07241 - Executive Summary ### Background and Key Issues - The economy is performing remarkably well: record-high real GDP growth, contained inflation, continued fiscal prudence, improved external creditworthiness, and a strengthened financial system. - Program objective: consolidate macroeconomic stability; improve quality of spending and tax efficiency; reduce poverty; strengthen financial sector and business environment to achieve sustainable growth and position Peru for exit from Fund-supported programs and attainment of investment grade. - Principal risks: external conditions—commodity prices and global financial conditions—drive the outlook and downside vulnerabilities. ### Outlook and Short-Term Risks - Real GDP growth: - 2006: 8 percent (an eleven-year high). - 2007 Q1: 7½ percent (y/y). - Staff view: Real GDP growth could reach 7 percent in 2007, above the program projection of 5½ percent, mainly reflecting higher-than-expected commodity prices. - Inflation and monetary policy: - April 2007: inflation became slightly negative. - May 2007: 12-month inflation turned positive, at 0.9 percent. - Core inflation: stable at 1½ percent. - In early February 2007 the central bank reduced its inflation target from 2.5 percent to 2 percent, tolerance range +/- 1 percent. - May consensus forecasts: growth 7 percent and end-year inflation 1.8 percent. - External position: - Expected current account surplus in 2007 with continued reserve accumulation. - Official reserves: about 175 percent of FX deposits as of end-May 2007. - Downside scenario: a sharp decline in commodity prices combined with increased risk aversion and a severe equity correction could significantly pressure the exchange rate and balance sheets, particularly given still-high dollarization. ### Fiscal Performance and Policy - Fiscal outcomes: - Consolidated public sector overall surplus in 2006: 2.2 percent of GDP. - Preliminary consolidated government surplus in 2007 Q1: 4.9 percent of GDP. - Two supplementary budgets (February and May 2007) amounting to about 1 percent of GDP to allow social and infrastructure spending not executed in 2006. - Revenue outlook and targets: - Staff estimate revenue could exceed program projections by 1¼ percentage points of GDP in 2007. - Authorities expect the adjusted deficit target of ½ percent of GDP to be met comfortably; scope for consolidated public sector to achieve balance in 2007. - Recent fiscal measures and risks: - Two mid-May decrees aimed to accelerate approval of public investment projects and concessions until end-2007 by simplifying SNIP procedures; one decree exempts Alto Piura hydropower project (about $700 million) from SNIP. - SNGs allowed to use canon minero resources for temporarily hiring teachers in regions. - Staff view: these measures may entail risks to the level and quality of public spending. - Fiscal reforms and safeguards under implementation: - Restructuring SNIP: high-level commission to prepare comprehensive reform proposal before end-June; plan to expand regional SNIP offices from six to an additional nine by year-end. - Use of canon minero: authorities stress temporary use for education staffing with central government support expected in 2008. - Review of the Fiscal Responsibility and Transparency Law (FRTL): May supplementary budget modified the 3-percent real expenditure limit (now applies to central government current spending) and removed transfers; staff cautioned against margins that could undermine credibility and urged establishment of a Fiscal Coordination Committee. - Decentralization safeguards: Ministry of Finance unit established to monitor SNGs; staff urged an adequate accreditation system for devolved functions (185 functions by end-2007). - Public financial management: five pilot performance-budgeting projects initiated; Integrated Financial Management System (SIAF) audit results expected by September; FAD resident advisor to assist in establishing a Treasury Single Account at the central government level by end-2007. - PPP legal framework: authorities intend to finalize draft and submit to congress by end-September; staff stressed PPP projects must be subject to SNIP evaluation; limited use of CRPAOs to existing contracts. ### Program Implementation and Structural Progress - Program status: - All end-March 2007 performance criteria and structural benchmarks broadly observed. - Tax regime simplified and base broadened; tax treatment of financial derivatives clarified except for securitized transactions. - Unit to monitor fiscal performance by sub-national governments (SNGs) established at the Ministry of Finance. - Strategy to strengthen effectiveness of social assistance programs published by Inter-ministerial Committee for Social Affairs (CIAS). - Progress on PPP legal framework slower than planned, partly due to personnel reshuffling. - Structural risks and mitigation: - Authorities committed to preserving program targets while addressing social and infrastructure needs. - Emphasis on preserving high quality of public spending even if spending acceleration is pursued. ### Financial System and External Creditworthiness - Financial intermediation and resilience: - Credit to the private sector increased by around 25 percent over the past 18 months. - Sol-denominated credit (consumer and mortgage loans) increasing at annual rates of around 30 percent. - Dollarization is declining steadily but remains high. - Equity prices have tripled since early 2006; price-earnings ratios are at high levels. - Financial soundness indicators (selected): - Regulatory Capital to Risk Weighted Assets: 12.0, 12.5, 12.5 - Nonperforming Loans to Total Loans: 2.1, 1.6, 1.6 - Provisions to Nonperforming loans: 235.3, 251.4, 246.5 - Provisions to Nonperforming, restructured, and refinanced loans: 80.3, 100.3, 104.1 - Return on Assets: 2.2, 2.2, 2.4 - Return on Equity: 22.2, 23.9, 25.8 - Liquid Assets to Total Short Term Liabilities: 45.5, 44.2, 44.8 - Net Open Position in Foreign Exchange to Capital: 23.1, 17.1, 30.2 - (Source in text: SBS; end-of-year data for 2005–2007 with 2007 end-March data) ### Policy Priorities and Government Commitments - Authorities remain committed to: - Consolidate macroeconomic stability through fiscal discipline and vulnerability reduction; enhance the inflation-targeting framework while maintaining an appropriate monetary stance. - Preserve and improve quality of public spending via sound decentralization of SNIP; strengthen the FRTL; maintain proper accreditation for decentralized spending functions; enhance public financial management systems; establish adequate PPP framework. - Enhance tax regime effectiveness by streamlining and broadening the tax base, including a new framework for tax incentives and exemptions. - Tackle high poverty levels by implementing CIAS action plan to enhance social assistance programs and reform universal programs. - Strengthen the financial system by reducing dollarization (particularly of mortgage loans); improving regulatory and supervisory framework for public banks; advancing reforms to deepen domestic capital markets. - Advance growth-enhancing reforms by further opening the economy, increasing labor formality, and improving the business environment. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07241.pdf* ### 9. The authorities and staff agreed that the recent tax reforms will enhance the ### _cr07241 - 9. The authorities and staff agreed that the recent tax reforms will enhance the ### Fiscal reforms and tax administration - Recent tax reform objectives: Reducing distortionary taxes and increasing tax compliance; broadening the tax base. - Key tax-policy changes and parameters: - ITAN rate reduced from 0.6 percent to 0.5 and threshold revised downward from S/. 5 million to S/. 1 million. - Exemption of credit services from VAT is now permanent. - Capitalization of interest on outstanding tax debt eliminated. - Participation in the simplified regime extended. - Timetable for the financial transactions tax: 0.08 percent (present) → 0.07 percent in 2008 → 0.05 percent by 2010. - ITAN further reduction to 0.4 percent by 2009. - Capital gains from stock trading taxed at an effective rate of 5 percent from 2009 on. - Early refund of VAT payments extended to all sectors for firms making investments over $5 million. - New tax-incentive framework: time limits of 6 years for new exemptions; renewals conditioned (up to 3 years) on evaluation of goal achievement. - New exemptions for indirect taxes eliminated; congress must inform MEF before approving any new tax exemptions. - Ministries have 2 years to present an assessment of existing tax exemptions to congress. - Tax exemptions in the Selva region (except Loreto) replaced with direct transfers for investment, maintenance of infrastructure and social expenditure; elimination of certain VAT exemptions will be gradual. - Tax-administration actions and recommendations: - SUNAT efforts focused on upgrading information systems, implementing well-targeted audits, and strengthening cross-checks between domestic taxes and customs. - Staff commended rationalizing tax incentives and replacing Selva exemptions with earmarked transfers. - Staff encouraged authorities to resist pressures to grant new exemptions. - Policy recommendation: Adopt performance indicators and more focused audits to sustain tax administration gains. ### Strengthening social assistance programs (SAPs) and poverty-alleviation strategy - Reform goals: Rationalize and strengthen SAPs; improve targeting, monitoring, and cost-effectiveness. - Institutional and operational measures: - Merger of 82 SAPs into 26 enhanced programs in 13 programmatic areas. - Finalize updating the single registry of beneficiaries and the household targeting system. - Provide the CIAS with a permanent head and technical staff; agreed as an end-September structural benchmark. - Launch a pilot program aimed at reducing child malnutrition in three provinces, using new comprehensive CIAS criteria. - Increase Juntos program focus on malnutrition and enhance its conditionality. - Voluntary contributions from mining companies beginning to finance regional projects. - Diagnosed weaknesses of existing SAPs: - Weak articulation and links to goal-achievement, leading to undercoverage and important leakages. - Deficiencies in monitoring and assessing social impact; lack of adequate beneficiary-identification systems and clear exit strategies. - High administrative costs: About 80 percent of SAPs have administrative costs that exceed 10 percent of the total spending under the program. - Proposed reform pillars: - i) human development, ii) promoting economic opportunities, iii) establishing a social safety net. - Institutional strengthening via a Single Beneficiary Registry and Household Focalization System, building on Juntos. - Drive for Performance: performance budgeting using indicators; Ministry of Finance to provide training on performance budgeting; priority to poorest municipalities to reduce undercoverage and leakages. - Action-plan timing: - Phase I: Legal decrees to merge SAPs to be completed by end-June. - Phase II: Reform of universal programs to begin in the second half of 2007. - Poverty statistics (2005, in percent of total population): - Lima: 36.1 - Coast: 39.9 - Highlands: 65.3 - Selva: 58.4 ### Inflation targeting, monetary policy stance, and reserves - Inflation and policy stance: - 12-month inflation declined below the 0.5 percent inner band in March, triggering a consultation under the program. - Authorities and staff agreed current monetary stance remains appropriate given the temporary decline. - New inflation target expected to help entrench price stability and declining dollarization. - Inflation consultation mechanism under the program remains unchanged for the rest of 2007. - Inflation drivers and outlook (Box 3): - Headline inflation decelerated due to reductions in prices of public utilities, fuel, and selected food items. - Formal sector wages and capacity utilization rose, but strong productivity gains reduced unit labor costs. - Declining inflation expectations and gradual exchange rate appreciation also contained pressures. - Uncertainty on the output gap: with a positive output gap of about 1 percent at end-2006, authorities project 12-month inflation to return to the mid-point of the target range by end-2007. - Alternative measures find less evidence of a positive output gap; structural model suggests inflation could return more gradually toward the target. - Risk factors: uncertainty on the output gap and a potentially large fiscal impulse could intensify inflation pressures earlier than expected. - Reserves and exchange rate flexibility: - Agreement to continue building up reserves to levels broadly consistent with risks of high dollarization. - Staff encouraged greater exchange rate flexibility to avoid one-way bets and promote financial hedges, given limitations to sterilization despite strong fiscal position. - Graphical and projection references in the source: reserves-to-output ratios and BCRP interventions (figures not reproduced here). ### Financial system resilience and capital-market deepening - Financial stability and supervision: - Progress noted in addressing risks from rapid credit growth and rising equity prices. - New regulations require banks to constitute special provisions for credits to overexposed customers. - Banks completed self-assessment of foreign currency portfolios; required provisioning constituted and integrated into supervision. - Large banks began extending mortgage loans in domestic currency with similar terms to foreign-currency loans. - Authorities exchanging part of MiVivienda’s foreign currency portfolio into Nuevo Soles; new domestic-currency lending programs launched. - Publicly-owned financial institutions (COFIDE, Banco de la Nación, Agrobanco) improving coordination of credit risk assessments. - Staff encouraged close monitoring of Banco de la Nación’s rapid consumer lending growth to ensure it remains within the 25 percent annual limit. - Uncertainty remains over timing of congressional approval of draft legislation to bring public financial institutions and MiVivienda under Superintendency of Banks supervision. - Capital-market reforms and targets: - Limit on pension funds’ investments abroad raised to 15 percent. - CONASEV established a “fast-track” registration process for public offerings by accredited investors. - Authorities assessing issuance of a 30-year sol-denominated bond to extend the domestic yield curve. - Expectation: share of local-currency denominated debt to reach 30 percent by end-2007. ### Other growth-enhancing reforms and program issues - Trade and labor: - Authorities confident about prompt ratification of the Peru-U.S. FTA by the U.S. Congress; expect needed changes on labor and environmental issues and possible amendment and new ratification by Peru’s Congress. - Assessing options to address labor market informality; discussions on comprehensive labor legislation reform balanced with increased access to social benefits. - Plans to establish two additional commercial courts in Lima and two more in the regions. - Program conditionality and benchmarks: - Letter of intent reaffirms commitment to program and targets. - Indicative targets for September and December converted into performance criteria. - New end-September 2007 benchmark: appointment of a new permanent head and technical staff of the CIAS. - End-December 2007 benchmark: full clarification of the tax treatment of financial securitization transactions. - End-September 2007 benchmark: submission of a legal framework for PPP operations. - Safeguards and debt issues: - Off-site safeguards assessment: no significant weaknesses in the Central Bank’s safeguards framework; proposed minor measures related to external auditor appointment duration and terms of the Organic Law on recording unrealized revaluation gains. - Paris Club debt: Secretariat meeting indicated about $7.5 million in claims to be reconciled; creditors did not foresee this preventing the proposed debt repayment operation. ### Staff appraisal and policy recommendations - Overall assessment: - Peru enjoys broad-based and record-high growth, low inflation, and rising formal employment—favorable conditions to entrench prudent policies and advance equity and poverty alleviation. - Preserving sound macroeconomic policies and advancing reforms would reduce vulnerabilities, entrench sustainable growth, and reduce high poverty levels; progress toward investment grade expected to aid exit from Fund-supported programs. - Commendations and priorities: - Authorities commended for strong implementation of policies and reforms and focus on the program’s goals. - Timely implementation of SAP reform and bolstering CIAS capacity are critical to reducing poverty. - Continued fiscal prudence recommended, including saving part of any revenue overperformance to keep public debt on a downward trend. - Proposed FRTL amendments introducing strict sanctions for non-compliance are welcome but must be implemented consistently. - Recommendation to resist inclusion of margins on deficit limits and growth on real current spending, as this could undermine fiscal credibility. - Prompt implementation of the new budget classification and improvements in public procurement to minimize risks of misclassification of maintenance and infrastructure outlays. - Devolution of spending to subnational governments by year-end should follow sound accreditation criteria to preserve fiscal soundness. - Staff commends recent tax-system reforms and reiterates encouragement to resist pressures for new exemptions. *Source: _cr07241 - 9. The authorities and staff agreed that the recent tax reforms will enhance the* ### 27. Well-designed public investment policies would help minimize fiscal risks and ### 27. Well-designed public investment policies would help minimize fiscal risks and support sustainable economic growth and poverty alleviation. ### Public investment policy design and decentralization - Well-designed public investment policies would help minimize fiscal risks and support sustainable economic growth and poverty alleviation. - The recently announced temporary measures to expedite needed public investment must be balanced by sound procedures to ensure their high quality. - It is essential that the decentralization process of the SNIP is improved, to retain a hard-won but more effective framework to assess the viability of public investment projects. - For this, increased capacity-building efforts at the SNG level, project monitoring and ex-post evaluation are essential. - It is also essential to redouble efforts to establish a comprehensive legal framework for PPPs and to continue exploring alternative financing instruments for PPP projects to ensure a balanced risk-sharing between the public and private sectors. ### Exchange rate flexibility and monetary policy - Greater exchange rate flexibility would help solidify the new inflation target and help entrench declining dollarization. - To help internalize risks and further anchor expectations, the staff sees scope for greater exchange rate two-way flexibility, given the improved resilience of the banking system to exchange rate shocks, official reserves approaching more desirable levels, and the new inflation target. - These efforts should be complemented by measures to reduce the dollarization of mortgage loans. - Staff also supports the current stance of monetary policy and encourages continued close monitoring of underlying inflation pressures. ### Regulatory oversight of public financial institutions and capital markets - Staff encourages the authorities to sustain efforts in enacting legislation that would effectively strengthen the regulatory oversight of public financial institutions. - The authorities should ensure the effective operation of the newly established committee of representatives of COFIDE, BN and Agrobanco to coordinate their overall credit assessment and lending to private financial institutions. - It will also be important to continue monitoring Banco Nacion’s recent expansion of consumer lending. - Staff also welcomes the reforms to deepen domestic capital markets and encourages the authorities to further streamline the process of registration of securities by CONASEV. *IMF staff assessment excerpt.* ### 30. The staff supports the completion of the first review under the SBA. In light of ### _cr07241 - 30. The staff supports the completion of the first review under the SBA. In light of ### Staff recommendation - "The staff supports the completion of the first review under the SBA." - Rationale: "In light of the authorities’ strong commitment to the program, and good performance, the staff supports the completion of the first SBA review." ### Real sector developments - Investment and consumption accelerated; economic growth broadened. - Consumer and business confidence rose. - Formal employment expanded. - Price pressures remained subdued (CPI and core inflation within target bands shown). - Key indicators (selected series and observations from figures): - Real GDP growth rates by quarter series shown for 2006Q1–2007Q1 (figure panels). - INDICCA, Index of Consumer Confidence: index points plotted Jan 01–Jan 07. - Capital goods imports (right scale, US$ millions) and manufacturing capacity utilization (left scale) plotted Jan 01–Jan 07. - Unemployment (Lima, right scale) and Employment in firms with 10 or more employees (index, October 1997=100) tracked Jan-01–Jan-07. ### Fiscal sector developments - "There has been a sharp improvement in the fiscal balance...supported by increased revenue collection." - Improvement drivers: "better tax administration and higher commodity prices." - Expenditure share to GDP declined, partly reflecting low budget execution by sub-national governments. - Strong fiscal performance allowed public debt to decline markedly. - Key series and levels (from figures and tables): - Combined public sector debt (In percent of GDP): panel shown 2000–2007 with levels spanning 25–60 percent range. - General Government Revenue and Tax Revenue as percent of GDP increased across 2000–2007. - VAT Efficiency (left scale) and Mining-Related Revenue (right scale) tracked 2000–2007. - Budget Execution of SNGs (In percent of total) tracked 2000–2006. ### External sector developments - Balance of payments strengthened, boosted by improved terms of trade and rising financial market confidence. - Non-traditional exports increased; reserves were built. - External debt declined while the domestic-currency share in public debt rose. - Key quantified developments: - Current account (in percent of GDP) and Terms of Trade (1994=100) series 2004Q1–2006Q3. - Copper prices (US cents per pound) series 2004Q1–2006Q3. - Total Exports (US$ millions) and component series (Other Non-traditional, Textiles) 2004Q1–2006Q3. - Direct Investment (US$ billions) and EMBI indices series 2004Q1–2006Q3. - Net international reserves (US$ billions) and GIR ratios tracked 2002–2006. ### Banking and financial system - System remains sound: strong capitalization ratios, declining non-performing loans, increasing profitability, comfortable liquidity and FX positions. - System remains highly dollarized (notably mortgage loans). - Financial deepening remains quite low despite high credit growth. - Equity prices rose sharply; P/E ratios increased moderately but capital markets remain relatively small. - Banking indicators (selected exact values where shown): - CAR and NPL series 2002–2006. - ROE, forex position, liquid assets/ST liabilities series 2002–2006. - Forex Loans / Total Loans and Forex Deposits / Total Deposits (percent) 2002–2006. - Credit/GDP and Flow of credit/GDP (t-1) series 2002–2007 May. - Market Capitalization as Percent of GDP compared: Peru, Mexico, Chile, Brazil. ### Selected macroeconomic projections and indicators (Table 1 and related tables) - Real GDP (annual percent change) projections and historical: examples include 3.9, 5.2, 6.4, 8.0, 5.5, 7.0, 6.0 (series shown across years/prel./prog.). - Consumer Prices (end of period) sample values: 2.5, 3.5, 1.5, 1.1, 2.5, 2.0, 2.0 (series). - Exports and Imports percent changes (selected): Exports series includes 17.8, 38.8, 36.7, 37.7, 6.2, 9.4, -1.0; Imports series includes 11.2, 19.0, 23.0, 23.3, 16.1, 20.2, 12.7. - Gross reserves (millions of U.S. dollars): 10,206; 12,649; 14,120; 17,329; 16,765; 21,329; 21,829 (selected years). - Combined public sector overall balance (percent of GDP) series include -1.7, -1.1, -0.3, 2.2, -0.8, 0.0, -0.5. - External current account balance (percent of GDP) series include -1.5, 0.0, 1.3, 2.6, 0.2, 0.9, 0.5. ### Quantitative performance criteria and program targets (Table 2 highlights) - Borrowing requirement of the combined public sector (cumulative from Dec 31, 2006, millions of U.S. dollars / New Soles): - Unadjusted limits and adjusted limits values presented for Mar. 31, Jun. 30, Sept. 30, Dec. 31 with example unadjusted limits -1,396; -4,190; -2,761; 2,418. - Actual and margins shown for selected dates: Adjusted limits -1,646; Actual -4,252; Margin 2,606 (example). - Net international reserves of the Central Reserve Bank (excluding foreign-currency deposits of financial institutions): Unadjusted targets -260; 443; 363; 50; Adjusted targets -635; Actual 948; Margin 1,583 (examples). - Outstanding short-term external debt of the nonfinancial public sector: Limits 50 (each quarter), Actual 0, Margin 50. - Contracting or guaranteeing of nonconcessional public debt with maturity ≥ one year: Unadjusted limits 7/ 8/ 9/ 751; 1,237; 1,608; 2,636 (table entries); Adjusted limits 3,146; Actual 2,742; Margin 404. - Inflation consultation bands (12-month rate): Outer band upper 5.5; Inner band upper 4.5; Central point 2.5; Inner band lower 0.5; Outer band lower -0.5; Actual 0.3 (example entry). ### Structural benchmarks for 2007 (Table 3) - Publication of main recommendations of CIAS on anti-poverty strategy: March 31, 2007 — Observed. - Establishment of a unit at the Ministry of Finance to monitor subnational governments: March 31, 2007 — Observed. - Clarify tax treatment of financial derivatives and securitized transactions: March 31, 2007 — Substantially observed; "Tax treatment of securitized transactions is expected to be clarified by December 31, 2007." - Submit to congress a legal framework for PPP operations: June 30, 2007 — Reprogrammed for September 30, 2007. - Ensure most new mortgage loans under MiVivienda are denominated in nuevo soles: June 30, 2007 — N/A. - Full implementation of the Treasury Single Account (TSA) for central government: December 31, 2007 — N/A. - 2008 Budget prepared according to modernized classification and charts of accounts: December 31, 2007 — N/A. - Financial transactions tax rate reduced effective January 1, 2008: December 31, 2007 — Observed. "A decree was issued in March 2007." - Issue new regulations regarding new risk categories and provisions to address foreign currency risk: December 31, 2007 — N/A. ### Fiscal operations and financing (Tables 4–6 highlights) - Combined public sector primary balance and overall balance series shown across years; examples: - Combined public sector primary balance (percent of GDP) series include 0.5; 1.0; 1.6; 4.1; 1.3; 1.9; 1.2 (table entries). - Combined public sector overall balance (percent of GDP) series include -1.7; -1.1; -0.3; 2.2; -0.8; 0.0; -0.5. - Fiscal operations (in percent of GDP and in billions of Soles) include detailed revenue, expenditure, interest, financing, disbursements, amortization and privatization items (tables provide year-by-year numbers and projections). - Financing of combined public sector (Table 6, in millions of U.S. dollars) examples: - Net external financing series: 843; 1,078; -1,067; -560; -174; -9; -533 (years shown). - Disbursements (millions US$): 2,101; 2,474; 2,728; 609; 1,000; 3,294; 1,020. - Amortization (millions US$): -1,187; -1,348; -3,678; -1,195; -1,174; -3,392; -1,592. ### Public sector social expenditure (Table 7) - Total social expenditure and pensions (in millions of New Soles): 20,698; 21,613; 23,578; 25,764; 27,736; 29,379 (series). - Universal coverage (Education and Health) (millions of New Soles): 8,197; 8,916; 10,396; 10,954; 12,689; 13,822. - Education and Health components (millions of New Soles): Education 5,759; 6,366; 7,289; 7,718; 8,341; 9,048. Health 2,438; 2,550; 3,107; 3,235; 4,348; 4,774. - Social expenditure shares (percent of GDP and percent of general government expenditure) and annual percentage changes are provided in the table (examples: Total social expenditure and pensions 53.5; 52.6; 53.0; 52.0; 50.5; 45.5 in percent of general government expenditure; and 10.3; 10.1; 9.9; 9.8; 9.1; 8.9 in percent of GDP). ### Monetary survey (Table 8) - Net international reserves (millions of U.S. dollars): 36,393; 43,111; 46,594; 56,566; 54,260; 68,930; 69,536 (central bank series). - Liabilities to the private sector and broad money (12-month percent change) examples: Liabilities to the private sector 2.5; 8.5; 13.5; 12.3; 9.3; 13.8; 9.6. - Net credit to private sector (levels and currency breakdowns) and currency/deposit compositions are detailed across panels. - Program exchange rate (S/. per US$) memorandum: 3.48; 3.41; 3.31; 3.27; 3.24; 3.24; 3.19 (series). ### Financial soundness indicators (Table 9) - Capital Adequacy (Equity capital to risk-weighted assets): 12.8; 12.5; 13.3; 14.0; 12.0; 12.5; 12.5 (Dec-01 to Dec-06). - Nonperforming loans to total gross loans (3/): 9.0; 7.6; 5.8; 3.7; 2.1; 1.6; 1.6. - Provisions to nonperforming loans (3/): 118.9; 133.2; 141.1; 176.5; 235.3; 251.4; 246.5. - ROA and ROE series: ROA 0.4; 0.8; 1.1; 1.2; 2.2; 2.2; 2.4. ROE 4.3; 8.3; 10.7; 11.6; 22.2; 23.9; 25.8. - Dollarization indicators: Share of foreign currency deposits in total deposits 71.9; 71.6; 69.7; 67.1; 67.2; 62.7; 60.7. Share of foreign currency loans in total credit 80.5; 79.7; 77.9; 77.9; 75.7; 71.5; 64.7. - Other operational metrics (liquidity ratios, sectoral loan shares, stock market index, foreign currency debt rating) provided in table. ### Balance of payments and external financing (Tables 10–11) - Balance of Payments summary (Table 10, in millions of U.S. dollars): - Current account and merchandise trade series examples: Current account -935; -111; 1,033; 2,456; 151; 877; 551 (years shown). - Exports levels (millions US$): 9,091; 12,617; 17,247; 23,750; 24,705; 25,974; 25,705. - Imports and services/income transfers nets reported (series). - External financing requirements and sources (Table 11, in millions of U.S. dollars): - Gross financing requirements: 6,008; 7,125; 8,440; 5,265; 5,459; 9,855; 5,076 (years). - Debt amortization totals and medium- and long-term components reported (series). - Available financing components include FDI, privatization receipts, portfolio, short-term flows, and debt financing from private creditors with detailed yearly numbers and projections. ### Medium-term macroeconomic framework and vulnerabilities (Tables 12–13) - Staff projection highlights (selected): - GDP at constant prices (annual percent change) series include 6.4; 8.0; 7.0; 6.0; 5.5; 5.5; 5.5 (2005–2011 projections in table). - Consumer prices (end of period) projection 1.5; 1.1; 2.0; 2.0; 2.0; 2.0; 2.0. - Terms of trade (deterioration -) series: 5.9; 26.1; -0.6; -10.5; -7.6; -4.7; -1.1; -0.9. - External current account balance (percent of GDP) staff projection series include 1.3; 2.6; 0.9; 0.5; 0.1; -0.2; -0.3; -0.5. - Financial and external vulnerability indicators (Table 13, selected): - Public sector debt/GDP series: 47.0; 44.4; 37.7; 32.8; 31.2; 30.0; 28.8 (years). - Total external debt (percent of GDP): 48.1; 44.9; 36.1; 30.3; 28.4; 28.1; 26.5. - Gross official reserves (millions of U.S. dollars): 10,206; 12,649; 14,120; 17,329; 16,765; 21,329; 21,829. - GIR as percent of short-term external debt series include 211.9; 166.3; 311.4; 356.6; 336.9; 412.6; 458.3 (table entries). ### Social and development indicators (Table 14) - Millennium Development Goals indicators and selected outcomes (series and targets shown): - Population below $1 a day (percent): 18.1; 12.8; 10.5; ...; 9.1 (target entries). - Net primary enrollment ratio: 90.8; 97.9; 97.9; 97.3; 97.1; ...; 100.0. - Under 5 mortality rate (per 1,000): 60.0; 42.0; 39.0; 34.0; 29.2; 22.8; ...; 53.3 (table entries). - Access to improved water source and sanitation series: Access to water ~80–83 percent; sanitation series ~62–63 percent (table entries). - Sources cited for MDG table: United Nations, Report 2006 and World Development Indicators, 2007. *Source: Central Reserve Bank of Peru; Ministry of Economy and Finance; Superintendency of Banks and Insurance of Peru; ECLAC 2002-03; National Statistical Institute (INEI); UN Report 2006; World Development Indicators 2007; and IMF staff estimates/projections (content as provided).* ### 1. SDR 159.6 million 2/January 26, 2007Board approval of SBA. ### _cr07241 - 1. SDR 159.6 million 2/January 26, 2007Board approval of SBA. ### Disbursement schedule and associated conditions - 1. SDR 159.6 million 2/January 26, 2007Board approval of SBA. - 2. SDR 1.596 million June 27, 2007Completion of the First Review and observance of end-March 2007 performance criteria. - 3. SDR 1.596 millionAugust 15, 2007Observance of end-June 2007 performance criteria. - 4. SDR 1.596 millionNovember 15, 2007Completion of the Second Review and observance of end-September 2007 performance criteria. - 5. SDR 1.596 millionFebruary 15, 2008Observance of end-December 2007 performance criteria. - 6. SDR 1.596 million May 15, 2008Completion of the Third Review and observance of end-March 2008 performance criteria. - 7. SDR 1.596 million August 15, 2008Observance of end-June 2008 performance criteria. - 8. SDR 1.596 millionNovember 15, 2008Completion of the Fourth Review and observance end-September 2008 performance criteria. *Source: _cr07241 - 1. SDR 159.6 million 2/January 26, 2007Board approval of SBA.* ### 9. SDR 1.596 millionFebruary 15, 2009Observance of end-December 2008 performance criteria. ### _cr07241 - 9. SDR 1.596 millionFebruary 15, 2009Observance of end-December 2008 performance criteria. ### Stand-By Arrangement: Schedule of Purchases and Obligations (Table 15) - Total access under the Stand-By Arrangement: SDR 172.4 million (27 percent of quota). 1/ - Amount required to exhaust the first credit tranche (not subject to phasing): specified as required (no separate numeric). - Proposed principal (repurchases) from prospective drawings by year (2007–2014): - 2007: 0.0 - 2008: 0.0 - 2009: 0.0 - 2010: 20.4 - 2011: 83.4 - 2012: 65.6 - 2013: 2.8 - 2014: 0.2 - Total prospective principal repurchases: 172.4 - Charges and interest (prospective drawings) — GRA charges by year: - 2007: 2.5 - 2008: 9.1 - 2009: 9.4 - 2010: 9.4 - 2011: 6.5 - 2012: 1.9 - 2013: 0.1 - 2014: 0.0 - Total GRA charges: 38.8 - Service and commitment charges (prospective drawings): 0.8 in 2007, remainder 0.0, total 0.9. - Credit outstanding (prospective drawings) by year: - 2007: 164.4 - 2008: 170.8 - 2009: 172.4 - 2010: 152.0 - 2011: 68.6 - 2012: 3.0 - 2013: 0.2 - 2014: 0.0 - Credit outstanding (percent of quota) by year: - 2007: 25.8 - 2008: 26.8 - 2009: 27.0 - 2010: 23.8 - 2011: 10.8 - 2012: 0.5 - 2013: 0.0 - 2014: 0.0 - Memorandum: Purchases by year: - 2007: 164.4 - 2008: 6.4 - 2009: 1.6 - 2010–2014: 0.0 - Total purchases: 172.4 - Notes: - 1/ Assuming all purchases are made. Repurchases assumed to be made under obligations schedule. - 2/ Projections based on current rates of charge, including burden-sharing charges where applicable; current SDR interest rate assumed for net use of SDRs. ### Debt Sustainability Analysis — Baseline Findings (Appendix 1) - Baseline macro assumptions: - Economic growth: average about 5½ percent a year (stated as "about 5½ percent a year"). - Overall deficit of the combined public sector: averaging ½ percent of GDP. - Public sector revenue: increase by 1 percent of GDP during 2007-2012. - Public sector debt projections: - Public sector debt stock: decline from 33 percent of GDP at end-2006 to about 22 percent of GDP by 2012. - Public external debt: decline from 24 percent of GDP at end-2006 to 17 percent by 2012. - Total external debt: decline from 30 percent of GDP at end-2006 to 20 percent by 2012. - Private sector external debt: projected to decline slightly over the medium term from already low levels. - Sensitivity and shock analysis: - Interest rate and real GDP growth shocks (10-year historical standard deviations) show only moderate vulnerability. - Exchange rate sensitivity: a one-off 30 percent depreciation would raise external debt-to-GDP by about 11 percentage points above baseline in the medium term (scenario assumes permanent depreciation). - Non-interest current account shocks (e.g., terms-of-trade) would have a moderate adverse impact on external indebtedness. - A 10 percent of GDP shock to public sector contingent liabilities would raise the public debt-to-GDP ratio sharply in the short run and keep it 9 percentage points above baseline over the medium term. ### External Debt Sustainability: Key Indicators and Projections (Table 1) - External debt-to-GDP (actual and projected): - 2002: 48.9 - 2003: 48.1 - 2004: 44.9 - 2005: 36.1 - 2006: 30.3 - 2007: 28.2 - 2008: 26.5 - 2009: 25.4 - 2010: 23.9 - 2011: 22.0 - 2012: 19.8 - Change in external debt (yearly): - 2002: -1.6 - 2003: -0.7 - 2004: -3.3 - 2005: -8.8 - 2006: -5.8 - 2007: -2.2 - 2008: -1.7 - 2009: -1.1 - 2010: -1.5 - 2011: -1.9 - 2012: -2.2 - Identified external debt-creating flows (4+8+9) by year: - 2002: -3.5 - 2003: -2.0 - 2004: -7.5 - 2005: -8.8 - 2006: -9.7 - 2007: -4.1 - 2008: -2.0 - 2009: -1.2 - 2010: -1.4 - 2011: -1.7 - 2012: -1.7 - Current account deficit excluding interest (percent of GDP): 2002–2012 shows movement from -0.5 (2002) to -0.7 (2012) with peaks (e.g., -4.6 in 2006). - Exports (percent of GDP) by year: - 2002: 16.2 - 2003: 17.5 - 2004: 20.9 - 2005: 24.5 - 2006: 28.1 - 2007: 27.7 - 2008: 25.9 - 2009: 24.3 - 2010: 23.4 - 2011: 22.8 - 2012: 22.1 - Imports (percent of GDP) series includes values such as 17.3, 17.6, 16.8, 19.1, 19.6, 21.2, 22.2, 22.4, 22.2, 22.3, 22.1 (2002–2012). - Automatic debt dynamics contributions (selected): - Contribution from nominal interest rate: ranges from 2.4 (2002) declining to 1.2 (2012). - Contribution from real GDP growth: negative contributions e.g., -2.5 (2002) to -1.1 (2012). - Contribution from price and exchange rate changes: negative in earlier years (e.g., -0.3 in 2002; -3.4 in 2004) and then data truncated with ellipses. - Residual, including change in gross foreign assets (2-3): examples: 2.0 (2002), 1.3 (2003), 4.2 (2004), 0.0 (2005), 4.0 (2006), 1.9 (2007), 0.4 (2008), 0.1 (2009), -0.1 (2010), -0.2 (2011), -0.4 (2012). - External debt-to-exports ratio (in percent): 301.5 (2002), 274.3 (2003), 215.0 (2004), 147.5 (2005), 107.9 (2006), 101.6 (2007), 102.5 (2008), 104.5 (2009), 102.5 (2010), 96.3 (2011), 89.6 (2012). - Gross external financing need (in billions of US dollars) and percent of GDP (selected years): - 2002: $7.1 (12.5 percent of GDP) - 2003: $5.5 (9.0 percent) - 2004: $4.8 (6.9 percent) - 2005: $6.8 (8.6 percent) - 2006: $2.5 (2.7 percent) - 2007: $6.0 (5.8 percent) - 2008: $4.6 (4.2 percent) - 2009: $4.6 (4.0 percent) - 2010: $5.3 (4.3 percent) - 2011: $5.7 (4.3 percent) - 2012: $7.5 (5.2 percent) - Key macro assumptions underlying baseline: - Real GDP growth (percent): 2002–2012: 5.2, 3.9, 5.2, 6.4, 8.0, 7.0, 6.0, 5.5, 5.5, 5.5, 5.5. - GDP deflator in US dollars (change in percent): 0.6, 3.8, 7.7, 7.1, 8.7, 3.1, 0.1, 0.9, 1.5, 1.8, 2.0. - Nominal external interest rate (percent): 5.0, 4.9, 4.9, 5.3, 6.5, 6.9, 6.5, 6.7, 6.5, 6.2, 6.0. - Growth of exports (US$ terms, percent): 8.1, 16.7, 34.7, 33.7, 34.9, 8.9, -0.9, 0.1, 2.8, 5.0, 4.2. - Growth of imports (US$ terms, percent): 3.4, 9.2, 8.5, 29.5, 20.5, 19.1, 11.4, 7.2, 6.1, 7.9, 6.5. - Current account balance excluding interest (percent of GDP): 0.5, 0.7, 2.1, 3.4, 4.6, 2.8, 2.2, 1.8, 1.4, 1.1, 0.7. - Net non-debt creating capital inflows: 2.7, 0.0, 1.9, 2.0, 1.7, 1.3, -0.1, -0.3, 0.3, 0.8, 1.1. ### Public Sector Debt Sustainability: Key Indicators and Projections (Table 2) - Public sector debt-to-GDP (gross debt) projections: - 2002: 46.5 - 2003: 47.0 - 2004: 44.4 - 2005: 37.7 - 2006: 32.7 - 2007: 30.0 - 2008: 28.8 - 2009: 27.4 - 2010: 25.7 - 2011: 23.7 - 2012: 21.8 - Foreign-currency denominated share of public sector debt (percent of GDP): - 2002: 42.7 - 2003: 43.2 - 2004: 37.5 - 2005: 29.6 - 2006: 24.8 - 2007: 22.3 - 2008: 21.2 - 2009: 19.8 - 2010: 18.4 - 2011: 16.7 - 2012: 15.2 - Change in public sector debt (yearly): examples: - 2002: 0.6 - 2003: 0.5 - 2004: -2.6 - 2005: -6.6 - 2006: -5.0 - 2007: -2.8 - 2008: -1.2 - 2009: -1.4 - 2010: -1.6 - 2011: -2.0 - 2012: -1.9 - Identified debt-creating flows (4+7+12): - 2002: -1.1 - 2003: -1.0 - 2004: -4.5 - 2005: -5.0 - 2006: -7.8 - 2007: -2.0 - 2008: -0.8 - 2009: -1.1 - 2010: -1.3 - 2011: -1.7 - 2012: -1.6 - Primary deficit (percent of GDP): examples: 0.0 (2002), -0.4 (2003), -1.0 (2004), -1.6 (2005), -4.0 (2006), -1.5 (2007), -0.8 (2008), -1.0 (2009), -1.1 (2010), -1.4 (2011), -1.3 (2012). - Revenue and grants (percent of GDP): 17.5 (2002) rising to 20.5 (2012) with intermediate values such as 20.4 (2006). - Primary (noninterest) expenditure (percent of GDP): e.g., 17.5 (2002), 17.6 (2003), 17.0 (2004), 17.3 (2005), 16.5 (2006), 18.6 (2007), 18.7 (2008–2009), 18.9 (2010), 18.8 (2011), 19.2 (2012). - Automatic debt dynamics (percent of GDP): examples: -0.3 (2002), -0.5 (2003), -3.4 (2004), -3.3 (2005), -3.8 (2006), -0.5 (2007). - Contribution from real interest rate and real GDP growth (selected): - Contribution from real interest rate: 1.8 (2002), 0.9 (2003), -0.5 (2004), 0.5 (2005), -1.0 (2006), 1.7 (2007), 1.7 (2008), 1.4 (2009), 1.2 (2010), 1.0 (2011), 0.9 (2012). - Contribution from real GDP growth: -2.2 (2002), -1.7 (2003), -2.2 (2004), -2.6 (2005), -2.6 (2006), -2.1 (2007), -1.7 (2008), -1.5 (2009), -1.4 (2010), -1.3 (2011), -1.2 (2012). - Other identified debt-creating flows and privatization receipts (negative): -0.7 (2002), -0.1 (2003), -0.2 (2004), -0.1 (2005,2006), and 0.0 thereafter. - Residual, including asset changes (2-3): 1.6 (2002), 1.5 (2003), 1.9 (2004), -1.6 (2005), 2.8 (2006), -0.7 (2007), -0.4 (2008), -0.3 (2009–2012). - Public sector debt-to-revenue ratio (percent): 265.3 (2002), 261.7 (2003), 247.0 (2004), 199.2 (2005), 160.3 (2006), 149.3 (2007), 148.0 (2008), 138.9 (2009), 128.9 (2010), 117.0 (2011), 106.5 (2012). - Gross financing need (percent of GDP and in billions of US$): - Percent of GDP: 6.5 (2002), 5.4 (2003), 4.9 (2004), 6.8 (2005), 1.5 (2006), 5.7 (2007), 3.8 (2008), 2.7 (2009), 2.7 (2010), 1.4 (2011), 1.9 (2012). - In billions of US$: 3.7 (2002), 3.3 (2003), 3.4 (2004), 5.4 (2005), 1.4 (2006), 5.9 (2007), 4.1 (2008), 3.2 (2009), 3.4 (2010), 1.8 (2011), 2.8 (2012). - Scenario illustrations: - Scenario with key variables at historical averages and scenario with no policy change (constant primary balance) presented, with public sector debt outcomes such as 30.0, 28.1, 26.1, 24.1, 22.0, 19.9 (selected years). ### Fund Relations (Annex 1) - Membership status: Joined 12/31/1945; accepted Article VIII obligations on February 15, 1961. - Quota and holdings: - Quota: 638.40 (SDR million), 100.00 percent. - Fund holdings of currency: 638.43 (SDR million), 100.01 percent. - SDR Department: - Net cumulative allocation: 91.32 (SDR million), 100.00 percent. - Holdings: 2.58 (SDR million), 2.82 percent. - Outstanding purchases and loans: None. - Financial arrangements (selected approvals and amounts): - Stand-By arrangements listed with approvals and amounts approved (e.g., 172.37 and 287.28 SDR million entries shown), amount drawn columns 0.00. - Projected Obligations to the Fund (SDR million; based on existing use and SDR holdings): - Charges/interest by year: 2.85 (2007), 3.76 (2008), 3.76 (2009), 3.76 (2010), 3.76 (2011). - Total by year mirrors charges/interest numbers. - Safeguards assessment: Off-site safeguards assessment of the central bank finalized; safeguards at Banco Central de Reserva del Perú (BCRP) meet the requirements of the safeguards policy. - Exchange arrangements: Unified, managed floating exchange rate. April 30, 2007 interbank average: 3.17 Nuevo Sol per U.S. dollar. System free of restrictions except those notified under Executive Board Decision No. 144-(52/51) related to UN Security Council Resolutions 1267 and 1373. Central government maintains external payments arrears to unguaranteed suppliers; clearing arrangement with Malaysia since 1991. - Last Article IV consultation: Concluded January 26, 2007 (Country Report No. 07/54). - FSAP and ROSCs: FSAP and follow-ups noted (FSAP May 2001, update June 2005); Fiscal ROSC October 2002; Data ROSC February 2003. - Technical assistance: Multiple TA missions listed across departments (FAD, MFD, STA) and years (examples include FAD: June 2005, March 2006, November 2006; tax policy and administration missions in 2006–2007; MFD April 2006). - Resident Representative: Ms. Nicoletta Batini since January 2006. ### World Bank Relations (Annex 2) — Summary of Engagement and Portfolio - World Bank Group Country Partnership Strategy approved December 19, 2006; projects financial assistance of up to US$3.5 billion between July 2007 and June 2011. - Ongoing investment portfolio: 17 operations for net commitment of $536 million and one Guarantee Facility for US$200 million. - Two DPLs approved in FY07: Fiscal Management and Competitiveness DPL ($200 million) and Results and Accountability DPL (US$150 million). - Two investment loans in FY07: Sierra Rural Development ($20 million) and Decentralized Rural Transport ($50 million). - FY08 pipeline: 7 operations for approximately $400 million. - Focus areas: (i) strengthening public sector management and decentralization; (ii) maintaining macro stability and accelerating growth; (iii) fostering equity and quality of social services, particularly in rural areas. - Bank-Fund collaboration areas: - Tax Reform and Fiscal Decentralization (Fund led on tax reform; joint work with World Bank and IDB on laws/regulations). - Financial Sector (joint FSAP completed May 2001; FSAP update June 2005). - Fiscal Management (joint IMF-World Bank-IDB mission September 2004 on Public Investment and Fiscal Policy; collaboration on results budgeting and Treasury Single Account). - Statement of World Bank Loans (as of May 2007) — selected undisbursed/partially disbursed loans and amounts (in US$ millions): Second Rural Roads Project 50.0 (undisbursed 1.9); Rural Education Project 52.5 (30.1); Lima Urban Transport Project 45.0 (39.6); National Rural Water Supply and Sanitation Project 50.0 (39.9); others listed. Total disbursed: 5,181.8; amount repaid: 2,568.7; total outstanding: 12,534.2; total undisbursed: 309.0. ### Inter-American Development Bank (IDB) Relations (Annex 3) - IDB 2002–2006 strategy objectives: poverty reduction and equity promotion within high economic growth context. - As of June 6, 2007: active portfolio of 26 loans totaling US$1,230.5 million (25 investment loans US$930.5 million; one policy-based loan US$300.0 million). - 2007 lending program: seven investment loans for US$124.5 million and three programmatic loans for US$600.0 million. - High-case 2007 disbursement forecast: US$874.9 million (US$750.0 for policy-based lending). - Negotiations to convert US$200.0 million of previously disbursed loan into local currency to assist de-dollarization of public sector debt. - IDB pipeline: Peru – Liquefied Natural Gas project under due diligence for US$400.0 million expected approval Q2 2008. - Non-reimbursable technical cooperation in portfolio: US$28.3 million. - IDB loan portfolio by sector (commitments / disbursements / percent disbursed): - Agriculture: 30.0 / 8.6 / 28.5% - Education: 87.0 / 86.2 / 99.1% - Environment: 5.0 / 3.8 / 76.9% - Public Sector Management: 59.4 / 12.1 / 20.3% - Social Investment: 403.3 / 219.0 / 54.3% - Transportation: 510.0 / 203.0 / 39.8% - Urban Development: 60.0 / 18.6 / 31.1% - Grand Total: 1,230.5 / 551.3 / 44.8% *Sources: Fund staff estimates/projections, annexes and tables contained in the content unit.* ### ANNEX 4. PERU: STATISTICAL ISSUES ### ANNEX 4. PERU: STATISTICAL ISSUES ### General assessment - Macroeconomic statistics are broadly adequate for policy formulation, surveillance, and program monitoring. - Peru has been in observance of the Special Data Dissemination Standard (SDDS) since August 1996 and meets the specifications for coverage, periodicity, and timeliness of the data categories. - An advance release calendar and the metadata for Peru are posted on the Fund’s Dissemination Standards Bulletin Board. - A data ROSC was prepared and published in 2003. - Main areas for improvement (as identified in the source): - (i) coordination among the agencies that compile official statistics to avoid duplication of efforts and confusion among users; - (ii) implementing a new benchmark and base year for GDP; - (iii) expanding the coverage of the wholesale price index to include mining, oil and gas extraction, electricity and water, public transportation, and communication; - (iv) finalizing the migration to the standardized report forms for monetary data, with the introduction of report forms for other depository corporations and other financial corporations; - (v) expanding the scope of data sources for compiling financial flows of individual residents. ### I. Real Sector and Prices - National accounts and GDP: - Authorities published a revised GDP series in 2000 using the 1994 benchmark estimates as the base year and including input-output tables. - Estimates after 1994 are largely based on extrapolation techniques due to limited availability of periodic source data. - The lack of current detailed tables for supply and use hampers reconciliation of discrepancies; changes in inventories are mainly determined as a residual. - Quarterly accounts have benefited from improvements in the timeliness of monthly production indices, but coverage is still very limited. - INEI is working on a new national account series using 2001 as the base year. - Consumer Price Index (CPI) and Wholesale Price Index (WPI): - CPI weights are derived from a 1993–94 household expenditure survey; except for weights, source data are timely and consistent with technical requirements. - Owner-occupied housing (imputed rent) was eliminated from the Metropolitan Lima index; imputed rent is included in indices of the other 24 cities. Consequently, the national CPI is a weighted average of indices with different coverage. - WPI weights are outdated; INEI derived weights from the 1994 input-output table and other ministry reports. Statistical techniques for the WPI follow generally accepted international standards. - Recommended expansion of WPI coverage to include: mining, oil and gas extraction, electricity and water, public transportation, and communication. - Labor market statistics: - Authorities monitor open unemployment, underemployment, employment, and remunerations. - Indicator quality has improved, but: - wage data have a relatively long delay; - nationwide unemployment and underemployment are surveyed only once a year; - labor productivity data are published only at the time of adjustments to electricity and telecommunications tariffs. ### II. Fiscal Sector - Government finance statistics (GFS): - GFS for the general government are compiled using the analytical framework of the GFS Manual 1986. - For the consolidated central government, revenues are compiled on a cash basis, while expenditures are compiled on an accrual basis. - Authorities have sent Fund information on components of consolidated central government expenditures by function. - Coverage of published national budget data is narrower than fiscal statistics prepared for program purposes. - Authorities have prepared a plan to migrate to the GFS Manual 2001; the schedule for migration has yet to be defined. - Authorities report annual GFS data using the GFSM 2001 analytical framework for publication in the Government Finance Statistics Yearbook (GFSY) and monthly data for the International Financial Statistics (IFS). ### III. Monetary Sector - BCRP publications and methodology: - The BCRP prepares and publishes analytical accounts of the banking system and of the central bank broadly in line with the Monetary and Financial Statistics Manual methodology. - Main discrepancy: valuation of some financial instruments at cost rather than at market prices. - Coverage and reporting: - Until early-2003, nonbank deposit-taking institutions were excluded from the depository corporations survey; following the 2003 data ROSC recommendations, BCRP began incorporating them. - Monetary statistics are disseminated only in summary form. - Migration to standardized report forms: - In January 2007 a mission assisted with migration to new standardized report forms and finalized the report form for the central bank, recommending improvements in classification and sectorization of some accounts. - A follow-up mission, planned for FY 2008, is expected to complete standardized data for other depository corporations and other financial corporations. ### IV. External Sector - Balance of payments and IIP: - BCRP prepares quarterly balance of payments and international investment position data largely in line with BPM5 recommendations. - Data are reported to the Fund for publication in the IFS and the Balance of Payments Statistics Yearbook. - Departures from BPM5 include: - lack of coverage of assets held abroad and land acquisition abroad by residents; - lack of separate identification of liabilities to affiliated enterprises; - recording of some external debt transactions not on an accrual basis. - International reserves and external debt: - Since August 2001 BCRP has reported weekly data on international reserves in accordance with the Operational Guidelines for Data Template on International Reserves and Foreign Currency Liquidity. - Since August 2006 BCRP is including the full amount of the liquidity requirements in the reserve template both under official reserve assets and as a contingent net drain (as specified in Section III of the Data Template). - Peru disseminates quarterly external debt data with a one-quarter lag on the BCRP website with a hyperlink to the Fund’s website. - External debt data are not fully compiled on an accrual basis, in contrast to BPM5 and the External Debt Statistics: Guide for Compilers and Users. ### Table of Common Indicators (selected operational points as of May 30, 2007) - Exchange Rates: Latest observation Apr. 2007; Date received 5/17/2007; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest observation May 2007; Date received 5/29/2007; Frequency of Data D; Frequency of Reporting W; Frequency of Publication W. - Reserve/Base Money: Latest observation Feb. 2007; Date received 4/18/2007; Frequency of Data W; Frequency of Reporting W; Frequency of Publication W. - Broad Money: Latest observation Feb. 2007; Date received 4/18/2007; Frequency of Data W; Frequency of Reporting W; Frequency of Publication W. - Central Bank Balance Sheet: Latest observation Feb. 2007; Date received 4/18/2007; Frequency of Data W; Frequency of Reporting W; Frequency of Publication W. - Consolidated Balance Sheet of the Banking System: Latest observation Feb. 2007; Date received 4/18/2007; Frequency of Data W; Frequency of Reporting W; Frequency of Publication W. - Interest Rates: Latest observation Mar. 2007; Date received 4/18/2007; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - Consumer Price Index: Latest observation Apr. 2007; Date received 5/21/2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Latest observation Mar. 2007; Date received 5/21/2007; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Latest observation Mar. 2007; Date received 5/21/2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - External Current Account Balance: Latest observation Q4. 2006; Date received 4/13/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Exports and Imports of Goods and Services: Latest observation Q4. 2006; Date received 4/13/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - GDP/GNP: Latest observation Q1 2007; Date received 5/21/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Gross External Debt: Latest observation Dec. 2006; Date received 5/21/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Data quality assessments (footnotes retained from source): - Footnote 7: Assessment in the data ROSC published on October 4, 2003 and based on mission during February 12–26, 2003. Assessment categories: O, LO, LNO, NO, NA. - Footnote 8: Same as footnote 7, except referring to source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies. ### Policy-relevant statistical needs (implied by program monitoring and recent mission activity) - Finalize migration to standardized report forms for monetary statistics, including report forms for other depository corporations and other financial corporations (follow-up mission planned for FY 2008). - Update GDP benchmark and base year (INEI working on series with 2001 base year). - Update CPI and WPI weight structures (CPI currently uses 1993–94 weights; WPI weights derived from 1994 input-output table). - Improve coverage and timeliness of source data for quarterly national accounts and monthly production indices. - Expand external sector coverage to fully record assets held abroad, land acquisition abroad by residents, liabilities to affiliated enterprises, and ensure accrual recording of external debt transactions. *Source: _cr07241 - ANNEX 4. PERU: STATISTICAL ISSUES (IMF document).* ### 12. To strengthen the coordination of lending practices by public financial institutions, ### 12. To strengthen the coordination of lending practices by public financial institutions, ### Coordination and oversight of public financial institutions - Representatives of COFIDE, Banco de la Nacion and Agrobanco have held meetings to determine which financial institutions qualify, according to strict financial criteria, to enter into lending and infrastructure-support agreements with Banco de la Nacion. - Banco de la Nacion, Agrobanco, and MiVivienda will be fully incorporated under the regulatory and supervisory framework of the Superintendency of Banks; expectation that congress will approve such amendment in the next few months. - Technical work on the legal and regulatory framework for empowering the central bank to oversee and regulate the entire payments system continues. - Concern noted: increased presence in the financial system by public banks could crowd-out private institutions and potentially entail fiscal costs over the medium term. ### Dedollarization and housing finance measures - Guarantees and the provision of the “good payer bonus” on mortgages in foreign currency are being discontinued to ensure that by end-June most new mortgage loans guaranteed by MiVivienda are denominated in Nuevo Soles (end-June structural benchmark). - MiVivienda has established a timetable for fully discontinuing the issuance of guarantees for foreign currency mortgage loans by January 1, 2008. - New lending programs in domestic currency, such as Mi Hogar and Techo Propio, have been initiated to assist lower income groups. - Technical discussions with private banks to exchange part of MiVivienda’s foreign currency portfolio into Nuevo Soles are being finalized. - Intend to securitize the rest of MiVivienda’s foreign currency portfolio before end-2007. ### Tax treatment, pension fund limits, and financial instruments - The tax treatment of certificates of deposit, repurchase agreements, financial derivatives, and other financial instruments has been clarified (end-March structural benchmark). - Clarification of the tax treatment of securitized transactions proved more complex than foreseen and is intended to be completed, with technical assistance from the Fund, before end-December 2007. - The limit on pension funds’ investments abroad has been raised to 15 percent, and cross-limits have been eased. ### Debt management and external operations - Debt management operations continue to improve the debt profile and extend the yield curve to provide a deep and liquid benchmark. - Agreement reached toward a prepayment of part of nonconcessional obligations with the Paris Club due in 2007–2015. - Remain engaged in resolving the issue of some disputed claims that have arisen in this context. - Public debt burden expected to diminish from 32.6 percent of GDP in 2006 to around 24 percent of GDP by 2010. ### Other growth-enhancing reforms and trade measures - Average tariff level recently reduced from 10 percent to 8.3 percent; additional measures to foster competitiveness are being evaluated. - One-stop windows for importers and exporters and microenterprises expected to be fully operational by year-end. - Extending capacity of commercial courts in Lima and committed to establishing commercial courts in Trujillo and Arequipa by end-2007. ### Macroeconomic performance, inflation, and reserves - Real GDP is estimated to have grown by about 7½ percent on average during the first four months of 2007. - External current account posted a surplus of 2.8 percent of GDP as of end-2006, some 0.2 percent of GDP larger than previously estimated. - Net international reserves reached US$21.7 billion as of mid-June (close to 180 percent of foreign currency deposits). - Peru’s sovereign bond spread declining to a record-low of around 100 basis points. - Inflation target reduced from 2.5 per cent to 2 percent in February, with tolerance band at ±1 percent. - Twelve-month inflation expected to converge towards the 2 percent target over the remainder of the year. ### Fiscal stance, public investment, and social programs - Consolidated public sector posted a surplus of 2.1 percent of GDP in 2006. - Authorities expect to meet the adjusted fiscal deficit of 0.5 percent of GDP for 2007, although it could be close to balance given potentially higher revenues. - Amendment proposed to Fiscal Responsibility and Transparency Law: current 3-percent limit on the real growth of general government’s expenditure to be applicable only to central government consumption expenditure. - Measures to improve quality of public spending and expedite public investment: restructuring National System of Public Investment, decentralization support, legal framework for PPPs (submission to Congress expected end-September), and methodology to estimate contingent obligations associated with PPP projects published. - Interministerial Committee for Social Affairs (CIAS) consolidated 82 SAPs into 26 and will adopt institutional and operational arrangements to increase effectiveness. - Conditional cash transfer program Juntos to focus conditionality on prevention of children malnutrition; World Bank assistance to improve focus and coverage. ### Financial sector developments and supervisory actions - Financial intermediation expanding; regulation and supervision being reinforced, including provisioning against currency risks. - Work proceeding to shift MiVivienda's portfolio to domestic currency and ensure new mortgage loans are denominated in domestic currency. - New lending programs in domestic currency launched. - Expect congressional approval in the next months to bring Banco de la Nación, Agrobanco, and MiVivienda under supervision by the Superintendency of Banks. - Work on the legal and regulatory and supervisory framework for enabling the central bank to oversee the payments system continues. - Due to technical complexities, clarification of the tax treatment of securitized transactions now expected before end-December. - Limit on pension funds’ investments abroad raised to 15 percent. ### Program review, IMF arrangement, and official statements - Request for completion of the First Review under the Stand-By Arrangement. - IMF Executive Board completed the first review of Peru’s Stand-By Arrangement in the amount equivalent to SDR 172.4 million (about US$261 million). - The arrangement was approved on January 26, 2007. - Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, highlighted the need for continued commitment to sound policies and structural reforms to entrench growth, strengthen resilience, and alleviate poverty. - Statement by Javier Silva-Ruete: GDP growth reached 8 percent in 2006 and is forecasted at around 7 percent in 2007; international reserves equal to 3.7 times short-term debt (residual basis) and 77 percent of total liquidity as of the end of the first quarter. ### Selected exact numerical items and deadlines from the source - End-June structural benchmark: ensure that most new mortgage loans guaranteed by MiVivienda are denominated in Nuevo Soles. - MiVivienda full discontinuation of foreign-currency guarantees by January 1, 2008. - Securitize the rest of MiVivienda’s foreign currency portfolio before end-2007. - Clarify tax treatment of securitized transactions before end-December 2007. - Pension funds’ investment abroad limit raised to 15 percent. - Tariff reduction from 10 percent to 8.3 percent. - Real GDP growth about 7½ percent (first four months of 2007). - External current account surplus of 2.8 percent of GDP as of end-2006 (0.2 percent of GDP larger than previously estimated). - Net international reserves US$21.7 billion (mid-June). - Sovereign bond spread around 100 basis points. - Consumer loans by Banco de la Nación rose by about 40 percent (y/y) in May. - Stand-By Arrangement amount: SDR 172.4 million (about US$261 million). - Arrangement approval date: January 26, 2007. - Public debt: 32.6 percent of GDP in 2006; expected around 24 percent of GDP by 2010. - Consolidated public sector surplus 2.1 percent of GDP in 2006. - Adjusted fiscal deficit target for 2007: 0.5 percent of GDP. - Inflation target reduced from 2.5 per cent to 2 percent; tolerance band ±1 percent. - Structural benchmarks listed for 2007: - June 30: Ensure that most of new mortgage loans extended by banks with the guarantee of MiVivienda are denominated in nuevo soles - September 30: Submit to congress a legal framework for PPP operations; Appoint a new head of CIAS and technical staff - December 31: Clarify the tax treatment of securitized transactions; Full implementation of the Treasury Single Account (TSA) for the central government - 2008 Budget prepared according to the modernized budget classification system and incorporated into the charts of accounts; Issue new regulations regarding new risk categories and provisions to address foreign currency risk. *IMF staff report and associated statements (content unit).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07241.pdf_