## _cr0754

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### Executive summary
- Peru experiencing its longest expansion on record with low inflation, a solid external position, and declining indebtedness and dollarization ratios.
- Half of the population still below the poverty line.
- Persistent structural weaknesses: narrow tax base with broad exemptions and weak tax compliance; limited technical capabilities of subnational governments delaying infrastructure execution; high labor market informality; regulatory requirements for closing businesses above the Latin American average; exposure to exchange rate risks despite reductions in financial dollarization.
- Program aims: entrench macroeconomic stability; enhance anti-poverty strategy; strengthen financial system resilience and depth; press ahead with growth-enhancing reforms.
- Authorities requested a low-access 25–month Stand-By Arrangement (SBA), intended as precautionary, to anchor policies for 2007–08.

### Outlook and macroeconomic projections
- Short-term growth projection:
  - Growth expected to decelerate from 6½–7 percent in 2006 to 5–5½ percent in 2007–08.
  - Conservative projection: abate from 6½–7 percent in 2006 to 5–5½ percent in 2007–08, partly reflecting slowdown in world demand and declining terms of trade.
- Medium-term growth projection:
  - Economy should expand at around 5 percent a year.
  - Staff baseline: Real GDP growth series (annual percentage change) — 2005: 6.4; 2006: 6.5; 2007: 5.5; 2008: 5.0.
  - Alternative macro assumptions: Real GDP growth (in percent) 2005: 6.4; 2006: 6.5; 2007–2011: 5.5, 5.0, 5.0, 5.0, 5.0.
- Risks: balanced and largely dependent on global conditions; downside risks include a less benign El Niño, disorderly unwinding of global imbalances, and commodity price shocks.
- Inflation:
  - 12–month inflation peaked at 2.9 percent in April and abated to around 1½ percent in November 2006; inflation target range is 1.5–3.5 percent.
  - Inflation expected to return closer to the middle of the official target range (2.5 percent).
  - Inflation projections (end-year): 2005: 1.6; 2006: 1.6; 2007: 2.5; 2008: 2.5.
- External position:
  - External current account balance (percent of GDP): 2005: 1.3; 2006: 1.3; 2007: 0.2; 2008: 0.1.
  - Net international reserves at end-November 2006: US$16.2 billion; end-2006: US$17.3 billion (alternate reporting: US$17.4 billion at end-2006 in staff statement).
  - Gross international reserves (millions of U.S. dollars): 2005: 14,115; 2006: 15,615 (table); alternative: 2006: 17,329 (statement); 2007 (projection): 16,765 / 18,479 (alternate).
- Key short-run sensitivity:
  - A 10 percent decline in mining export prices would reduce central government revenue by around 0.4 percentage points of GDP.

### Key recent performance indicators
- Real GDP growth: 7½ percent year-on-year during January-September 2006; preliminary GDP growth in 2006: 7.5 percent.
- Inflation: 12–month inflation 1.1 percent in December 2006 (statement); core inflation at lower end of target range (1.4 percent core in December).
- Combined public sector:
  - Deficit reduced from 2½ percent of GDP in 2001 to ⅓ percent of GDP in 2005.
  - Combined public sector registered a surplus equivalent to about 3 percent of GDP during the first three quarters of 2006.
  - For 2006 as a whole combined public sector would register a surplus of 1 percent of GDP (Executive Summary) / 1½ percent of GDP (statement).
- Public sector debt:
  - Expected to decline to 32 percent of GDP by end–2006 (Executive Summary) / estimated 31½ percent at end-2006 (statement); projected to decline to around 27½ percent in 2011 (medium-term projection).
  - Local currency–denominated debt equivalent to one-fifth of total.
- Sovereign ratings and spreads:
  - Fitch and S&P upgraded to BB+; Moody’s changed outlook from neutral to positive; Moody’s rates Peru three notches below investment grade with a positive outlook.
  - Sovereign bond spreads around 135 basis points.
- Foreign direct investment around 4 percent of GDP in 2006.
- Central bank net purchases of foreign exchange during first eleven months of 2006: US$2¼ billion.
- Imports estimated to have risen by 26 percent in 2006, driven particularly by capital goods.

### Fiscal policy, targets, and stance
- Fiscal rule and targets:
  - Authorities reaffirm commitment to comply with the 1 percent limit on the overall deficit of the Fiscal Responsibility and Transparency Law (FRTL).
  - Overall public sector deficit set at 0.8 percent of GDP in 2007 and 0.7 percent in 2008.
  - Staff recommended sustaining fiscal overperformance relative to the 1 percent deficit limit; staff estimates structural fiscal deficit would increase by about 1½ percentage points of GDP in 2007.
  - Quarterly adjusters: central government revenue outperformance to reduce PSBR subject to ceilings (end-March up to S/. 250 million; end-June up to S/. 500 million; end-September up to S/. 750 million; end-December total up to S/. 1,000 million).
  - If central government revenues net of mandatory transfers exceed programmed amounts, the government would save them to reduce the overall deficit to 0.5 percent of GDP or less.
- Infrastructure spending:
  - Key priority to increase spending in infrastructure and maintenance; amend FRTL to remove capital expenditure and maintenance outlays from the 3 percent limit on expenditure growth in real terms.
  - Government aims to increase public investment to 4.5 percent of GDP over the next five years.
  - 2007 capital expenditure increase focused on roads, education, basic health, and rural electrification.
- Tax policy and administration:
  - Draft law to rationalize fiscal exemptions to be submitted to congress by March 2007; introduce time limits and condition renewals on evaluations.
  - Staff recommended transforming ITAN into a minimum corporate income tax when it expires end–2006; Congress approved gradual decreases in ITAN and reinstatement of stock market capital gains tax in 2009.
  - Strengthen tax administration: intensified audits, stepped-up collection of arrears, introduction of performance indicators, particularly for customs and VAT; provide adequate resources to SUNAT.
- Spending quality and public financial management:
  - Move gradually toward performance budgeting by 2010; performance budgeting for public investment to be introduced in the 2008 budget with World Bank assistance.
  - Independent audit of SIAF funded by IDB with results expected by September 2007.
  - Treasury Single Account (TSA) planned for central government by end-December 2007; TSA for subnational governments by end-December 2008.
  - SNIP decentralization and limit on projects not subject to SNIP approval raised from S/. 4 million to S/. 10 million.
- Civil servant wages: 2007 budget includes low ceilings consistent with austerity; staff concerned about potential loss of qualified personnel.
- Program adjustors: ceilings for contracting/guaranteeing of nonconcessional public debt adjusted by US$300 million and overall deficit adjusted up to US$100 million for additional capital expenditure undertaken by PetroPeru to comply with environmental requirements.

### Public-private partnerships (PPPs) and contingent liabilities
- PPP pipeline: government plans to initiate PPP operations for a total amount of US$3 billion in 2007 (ports, highways, sanitation).
- CRPAOs and PPP commitments:
  - At end–2006, government commitments related to PPP projects estimated at close to 2 percent of GDP in NPV terms.
  - Program includes performance criteria on commitments associated with new PPPs signed in 2007 and will monitor issuance of PAO Entitlement Recognition Certificates (CRPAOs) and adjust overall deficit and public debt accordingly.
  - Government expects to issue US$2 billion of such certificates during 2006–10, including US$0.1 billion in 2006 and US$0.4 billion in 2007.
- Debt treatment:
  - Staff considered CRPAO instruments should be treated as debt under the Fund’s definition; issuance agreed to be included in measurement of Peru's debt stock for the Fund’s debt sustainability analysis and performance criteria.

### Monetary policy, exchange rate, and inflation targeting
- Exchange rate regime: unified, managed floating exchange rate with free purchases of goods and services and capital account transactions.
- Central bank interventions: net central bank purchases in foreign exchange market amounted to US$5.7 billion since end-2002; program contemplates further modest reserves buildup of US$350 million (net of banks’ deposits at the central bank) in 2007.
- Exchange rate flexibility:
  - Staff recommended greater exchange rate flexibility to solidify inflation targeting; authorities agreed gradual implementation while leaning against temporary appreciation pressures.
  - Over the past three years, the Nuevo Sol fluctuated within a narrow margin (less than 5 percent) against the U.S. dollar.
- Remuneration on banks’ legal reserves on foreign currency liabilities:
  - Rate increased from 2.5 percent to 2.75 percent in early December; previously raised from 2.25 percent to 2.5 percent in July 2006.
- Inflation consultation bands (12-month IPC, Metropolitan Lima, INEI):
  - Outer band (upper limit): 5.5
  - Inner band (upper limit): 4.5
  - Central point: 2.5
  - Inner band (lower limit): 0.5
  - Outer band (lower limit): -0.5
  - Actual (Sep. 06): 1.8

### Financial system resilience, dollarization, and supervision
- Financial intermediation low: net credit to the private sector equivalent to 27 percent of GDP.
- Credit growth (12-month through September 2006):
  - General bank credit to private sector: around 12.5 percent
  - Consumer credit: expanding by 28 percent
- Dollarization:
  - Share of foreign currency deposits in total deposits (Dec-05): 67.2 percent; foreign currency deposits at commercial banks (Dec-05): 10,913 (millions of U.S. dollars).
  - Measures to reduce dollarization, particularly of mortgage loans, and dedollarize MiVivienda operations.
- Prudential measures:
  - New regulations require banks to constitute provisions equivalent to 20 percent of credit lines for overexposed customers.
  - Plan to adopt capital requirements for foreign currency related credit risk for all financial institutions, in line with Basel II (within two years).
  - Plan to introduce lower loan-to-value ratios for mortgage loans in foreign currency to unhedged borrowers.
  - Explore securitization of MiVivienda’s portfolio to induce voluntary swaps from dollar to soles loans; obstacle: lack of standardization of mortgage contracts.
- Public banks:
  - Banco de la Nación, COFIDE, and Agrobanco increasing lending to SMEs and microfinance channels.
  - Microfinance institutions account for about 15 percent of total credit, or about 4 percent of GDP.
  - Minimum capital requirement for microfinance institutions is $250,000; plan to raise minimum capital requirements and strengthen governance.
  - Banco de la Nación to comply with a 25 percent annual growth limit on consumer lending operations in 2007 and 2008.
- Financial soundness indicators (selected end-year series, 2002–2006 end-September for 2006):
  - Regulatory capital to risk weighted assets: 12.5, 13.3, 14.0, 12.0, 12.4
  - Non-performing loans to total loans: 7.6, 5.8, 3.7, 2.1, 1.9
  - Provisions to nonperforming loans: 133.2, 141.1, 176.5, 235.3, 223.3
  - Provisions to nonperforming, restructured, and refinanced loans: 69.1, 67.1, 68.7, 80.3, 89.6
  - Return on assets: 0.8, 1.1, 1.2, 2.2, 2.2
  - Return on equity: 8.3, 10.7, 11.6, 22.2, 23.5
  - Liquid assets to total short term liabilities: 41.9, 40.4, 44.5, 45.5, 43.0
  - Net foreign exchange open position to capital: 37.0, 31.8, 24.2, 23.1, 22.4
- Corporate sector vulnerability indicators (as of December, selected):
  - Debt Service to Sales, Total: 4.0, 3.4
  - Fisheries: 8.0, 5.1
  - Tourism: 7.5, 5.9
  - Mining: 2.3, 1.7
  - Debt to Net Worth, Total: 1.7, 1.5
  - Fisheries: 2.1, 1.8
  - Commerce: 2.0, 1.9
  - Textiles: 1.8, 1.8
  - Mining: 1.2, 1.0

### Poverty reduction, social programs, and regional disparities
- Poverty and social spending:
  - Half of population below poverty line; poverty rate (Total) — 2002: 53.8; 2003: 52.2; 2004: 51.6; 2005: 50.6.
  - Total social expenditure and pensions (millions of New Soles): 2002: 19,032; 2003: 20,249; 2004: 22,516; 2005: 24,888.
  - Universal coverage (Education and Health) (millions of New Soles): 2002: 8,491; 2003: 9,016; 2004: 10,541; 2005: 10,994.
  - Education (percent of general government expenditure): 2002: 14.6; 2003: 15.2; 2004: 16.1; 2005: 15.4.
  - Selected MDG indicator — Infant mortality (per 1,000 live births): 1995: 46.0; 2000: 40.0; 2002: 30.0; 2003: 26.0; 2004: 24.0.
- Social programs and targeting:
  - 122 social programs exist; evidence that large share of resources does not reach targeted population (example: Vaso de Leche program).
  - Conditional cash transfer program Juntos expanded: increase families under Juntos from 180,000 in 2006 to 300,000 by end-2007.
  - CIAS (Interministerial Committee for Social Assistance) to prepare anti-poverty strategy and action plan by March 2007 (structural benchmark).
  - Authorities plan to establish a registry of beneficiaries for all programs.
- Regional disparities and mining transfers:
  - Regional poverty: Sierra: 68 percent; Selva: 60 percent; Coast: 41 percent.
  - Department extremes: Huancavelica 88 percent; Madre de Dios 20 percent.
  - Canon minero estimated at US$1 billion in 2006 (around 1 percent of GDP), up from US$150 million in 2002; seven departments account for close to 80 percent of canon minero total.
  - Mining royalty collections expected to amount to US$0.1 billion in 2006.
  - At end-September 2006, subnational governments accumulated US$0.5 billion in bank deposits.
  - Voluntary private mining company contributions agreement expected to disburse some US$0.8 billion over the next five years.

### Structural reforms to boost growth and competitiveness
- Business environment:
  - Draft law to simplify business licensing to shorten approval processes from near 100 days to 15 days; establish a one-stop window for exporters and importers.
  - Establishment of commercial courts with plans to extend nationwide.
- Labor market reforms:
  - Three fourths of active workers employed in informality; staff recommend making permanent labor regime for micro-enterprises (expires end–2008).
  - Recommendations: lower high severance payments, align non-wage benefits with job tenure, remove legal impediments to dismissals for economic/technological/structural reasons, invest in human capital and training.
- Trade and FTAs:
  - Trade openness near 50 percent of GDP; average tariff rates lowered from 10.1 percent to 8.3 percent effective January 1, 2007.
  - Uncertainty on U.S. FTA ratification poses risks to textile and agricultural sectors; ATPDEA preferences extended through end-June 2007 with option for another six-month extension.
  - Negotiations planned with Singapore and Mexico.

### Debt sustainability, stress tests, and vulnerabilities
- Baseline debt projections:
  - Public sector debt projected to decline from 38 percent of GDP at end-2005 to about 27½ percent of GDP by 2011.
  - External debt baseline (percent of GDP): 2005: 36.1; 2006: 30.7; 2007: 28.4; 2008: 26.7; 2009: 25.4; 2010: 24.0; 2011: 22.5.
  - Public sector debt (percent of GDP): 2005: 37.7; 2006: 32.0; 2007: 31.2; 2008: 30.5; 2009: 29.7; 2010: 28.7; 2011: 27.4.
- Sensitivity and stress tests:
  - Debt dynamics moderately vulnerable to changes in real GDP growth and interest rates.
  - One-off 30 percent depreciation of the sol would shift external debt-to-GDP ratio by 14 percentage points above baseline in medium term (assumes permanent depreciation).
  - A 10 percent of GDP shock to contingent liabilities would raise public debt-to-GDP sharply in short run and keep it 10 percentage points above baseline over medium term.
- Gross external financing need (billions of US dollars): 2005: 6.8; 2006: 4.0; 2007: 4.3; 2008: 4.9; 2009: 4.7; 2010: 5.1; 2011: 5.5.
- Public sector gross financing need (in percent of GDP): 2005: 6.8; 2006: 2.8; 2007: 3.3; 2008: 3.8; 2009: 3.0; 2010: 3.1; 2011: 2.9.

### Stand-By Arrangement (SBA) modalities, program monitoring, and safeguards
- SBA details:
  - Low-access 25-month SBA covering period through end-February 2009.
  - Total access under SBA: SDR 172.4 million (27 percent of quota).
  - Proposed schedule of purchases (SDR):
    - SDR 159.6 million — 2/January, 2007 — Board approval of SBA.
    - SDR 1.596 million — May 15, 2007 — Completion of the First Review and observance of end-March 2007 performance criteria.
    - SDR 1.596 million — August 15, 2007 — Observance of end-June 2007 performance criteria.
    - SDR 1.596 million — November 15, 2007 — Completion of the Second Review and observance of end-September 2007 performance criteria.
    - SDR 1.596 million — February 15, 2008 — Observance of end-December 2007 performance criteria.
    - SDR 1.596 million — May 15, 2008 — Completion of the Third Review and observance of end-March 2008 performance criteria.
    - SDR 1.596 million — August 15, 2008 — Observance of end-June 2008 performance criteria.
    - SDR 1.596 million — November 15, 2008 — Completion of the Fourth Review and observance end-September 2008 performance criteria.
    - SDR 1.596 million — February 15, 2009 — Observance of end-December 2008 performance criteria.
  - Note: SDR 159.6 million required to exhaust the first credit tranche which is not subject to phasing.
- Monitoring and reviews:
  - Semi-annual reviews; first review associated with performance at end-March 2007.
  - Monitoring based on quantitative performance criteria, an inflation consultation mechanism, and structural benchmarks.
- Safeguards and statistics:
  - Off-site safeguards assessment of the Central Reserve Bank of Peru expected to be completed by end-January 2007; all recommendations of 2004 safeguards assessment implemented.
  - Statistics adequate but need improvements: new GDP base year; better labor cost indices and household indebtedness indicators; improved agency coordination.
  - Technical assistance mission scheduled to enhance reporting of monetary data in January 2007.
- Periodic reporting requirements detailed (monthly and quarterly fiscal, financial, and external data; Nota Semanal; BCRP daily operations; etc.).

### Structural benchmarks and deadlines (selected)
- March 31, 2007:
  - Publication of main CIAS recommendations on anti-poverty strategy.
  - Establish a unit at the Ministry of Finance to monitor subnational governments and assess performance relative to fiscal rules.
  - Clarify tax treatment of financial derivatives and securitized transactions.
- June 30, 2007:
  - Submit to congress legal framework for PPP operations.
  - Ensure most new mortgage loans guaranteed by MiVivienda are denominated in nuevo soles.
- December 31, 2007:
  - Full implementation of the Treasury Single Account (TSA) for central government.
  - 2008 Budget prepared according to modernized budget classification.
  - Financial transactions tax rate reduced, effective January 1, 2008.
  - Issue new regulations regarding new risk categories and provisions to address foreign currency risk.

### Staff appraisal and recommendations
- Staff supports authorities’ request for a new Stand-By Arrangement given program coherence and policy commitments for 2007–08.
- Policy priorities highlighted by staff:
  - Consolidate macroeconomic stability while addressing social and infrastructure needs.
  - Sustain fiscal prudence: save windfall revenue, contain inflationary impact of fiscal expansion, broaden tax base, avoid new tax exemptions.
  - Improve quality of spending and entrench FRTL amendments to limit spending growth.
  - Reduce dollarization and strengthen financial regulation and supervision; deepen domestic capital markets.
  - Implement decentralization cautiously; transfer tasks only to subnational governments meeting accreditation criteria.
  - Establish legal framework for PPPs, minimize future fiscal commitments, and monitor issuance of associated securities.
  - Undertake labor market reforms to reduce informality and improve human capital.
  - Pursue trade liberalization, including ratification of FTA with the United States.
- Directors commended authorities’ commitment to sound policies and structural reforms; noted remaining challenges: high poverty, regional disparities, high dollarization.

*Source: Executive Summary and selected sections of _cr0754 (IMF staff report and related tables).*

### Executive Summary ......................................................................................................

### _cr0754 - Executive Summary

### Background
- Peru is experiencing its longest expansion on record, with low inflation, a solid external position, and declining indebtedness and dollarization ratios.
- Half of the population is still below the poverty line.
- Persistent structural weaknesses include: narrow tax base with broad exemptions and weak tax compliance; limited technical capabilities of subnational governments delaying infrastructure execution; high labor market informality; regulatory requirements for closing businesses above the Latin American average; exposure to exchange rate risks despite reductions in financial dollarization.

### Outlook
- Short-term growth projection: growth is expected to decelerate from 6½–7 percent in 2006 to 5–5½ percent in 2007–08.
- Medium-term growth projection: the economy should expand at around 5 percent a year.
- Risks: balanced and largely dependent on global conditions.

### Current Setting — Key Indicators and Recent Performance
- Real GDP grew by 7½ percent year-on-year during January-September 2006.
- 12–month inflation peaked at 2.9 percent in April and abated to around 1½ percent in November 2006; inflation target range is 1.5–3.5 percent.
- Core inflation remains at the lower end of the inflation target range.
- Combined public sector deficit reduced from 2½ percent of GDP in 2001 to ⅓ percent of GDP in 2005.
- Combined public sector registered a surplus equivalent to about 3 percent of GDP during the first three quarters of 2006; for 2006 as a whole the combined public sector would register a surplus of 1 percent of GDP (compared with a deficit of ½ percent of GDP initially envisaged).
- Imports estimated to have risen by 26 percent in 2006, driven particularly by capital goods.
- Foreign direct investment around 4 percent of GDP in 2006.
- Net international reserves at end-November 2006: US$16.2 billion, equivalent to over 325 percent of short-term debt and 135 percent of foreign currency deposits with the banking system.
- Public sector debt expected to decline to 32 percent of GDP by end–2006, 14 percentage points below its 2002 level; local currency–denominated debt equivalent to one-fifth of total.
- Sovereign ratings: Fitch and S&P upgraded to BB+; Moody’s changed outlook from neutral to positive; Moody’s rates Peru three notches below investment grade with a positive outlook.
- Sovereign bond spreads around 135 basis points.
- Central bank net purchases of foreign exchange during first eleven months of 2006: US$2¼ billion.

### Medium-Term Challenges (from policy discussions)
- Need for sustained and stronger growth to boost employment and lower poverty.
- Promote nontraditional labor intensive sectors through a prudent policy framework toward foreign investment and more flexible labor regulations to reduce informality.
- Improve access to public services by the poor to enhance policy effectiveness and sustainability.

### The 2007–08 Program — Objectives and Major Components
- Program aims: entrench macroeconomic stability; enhance anti-poverty strategy; strengthen financial system resilience and depth; press ahead with growth-enhancing reforms.
- Consolidating macroeconomic stability:
  - Fiscal targets for 2007–08 to remain below the 1 percent deficit ceiling in the Fiscal Responsibility and Transparency Law (FRTL).
  - Measures to lower distortionary taxes and exemptions and to improve the quality of public spending will be adopted (paragraph 14–19).
  - Greater exchange rate flexibility would help solidify the inflation targeting framework.
- Tackling high poverty:
  - An action plan to restructure and enhance the effectiveness of social assistance programs is a key component of the program (paragraph 21–23).
- Strengthening the financial system:
  - Reducing dollarization, particularly of mortgage loans, is a critical objective to fortify banking system resilience (Paragraph 30).
  - Measures to allow for better internalization of risks and to deepen domestic capital markets will assist these efforts (paragraph 32–33).
- Growth-enhancing reforms:
  - Continue reforms to simplify regulatory requirements, enhance labor market flexibility, and further open the economy (paragraph 34–37).

### Policy Priorities and Structural Reforms
- Fiscal: maintain deficit below 1 percent of GDP per FRTL; eliminate regional and sectoral exemptions; bolster tax revenue effort; improve quality of public spending; enhance budget flexibility; limit growth in public sector wages to provide scope for increased public investment and assistance to the poor.
- Monetary/exchange rate policy: support inflation targeting; limit intervention to events of excessive exchange rate volatility; consider greater exchange rate flexibility.
- Financial sector: strengthen prudential framework to internalize foreign currency risks; develop capital markets; consolidate supervision; reduce dollarization of credit and deposits.
- Institutional/legal: expedite dispute resolution through commercial courts; continue concessions and infrastructure privatizations (e.g., Callao port and regional airports).
- Trade/market access: advance trade liberalization including implementation of the Free Trade Agreement with the United States (ratified by Peruvian congress and pending U.S. ratification).

### Program Modalities and Fund Engagement
- Authorities requested a low-access 25–month Stand-By Arrangement (SBA), intended as precautionary, to anchor policies for 2007–08.
- Fund engagement: Directors previously supported deficits below the 1 percent FRTL ceiling, fiscal consolidation, and measures that pave the way for an exit from Fund support; mixed views on longer-term engagement with low-access precautionary arrangements (Box 1).

*Source: Executive Summary of _cr0754 - Executive Summary*

### 10.      The short-term outlook remains strong, with relatively balanced risks. Growth is

### 10.      The short-term outlook remains strong, with relatively balanced risks. Growth is

### Short-term outlook and risks
- Growth is conservatively projected to abate from 6½–7 percent in 2006 to 5–5½ percent in 2007–08, partly reflecting a slowdown in world demand and declining terms of trade.
- The external position would remain robust.
- Inflation is expected to return closer to the middle of the official target range (2.5 percent), in line with consensus forecasts, driven in part by fiscal expansion.
- While commodity prices are expected to ease from recent record-highs, large ongoing investment projects in extractive industries, together with an expected pickup in government capital expenditure, suggest some upside risks to growth.
- A less benign El Niño phenomenon than currently envisaged could have a negative impact on output.
- A disorderly unwinding of global imbalances could exert sharp downward pressures on commodity prices and heighten global risk aversion, with potentially adverse consequences for exports and public finances.
- A 10 percent decline in mining export prices would reduce central government revenue by around 0.4 percentage points of GDP.

### Medium-term outlook and public debt dynamics
- Over the medium term, the economy is expected to expand by around 5 percent a year.
- The projection takes into account a gradual decline in commodity prices, which would bring the external current account balance back into small deficits.
- Public indebtedness is projected to decline steadily, from an estimated 32 percent of GDP in 2006 to around 27½ percent in 2011.
- Staff and authorities agreed debt dynamics remain fragile; stress tests indicate that a sharp depreciation of the currency could potentially reverse most of the envisaged decline.
- Staff view underscores the importance of further dedollarization and fiscal overperformance over the medium term compared to the overall deficit ceiling under the FRTL.
- An illustrative scenario shows that balance in the accounts of the consolidated public sector would help public debt converge to the debt ratios of investment grade emerging market economies by 2009.

### Macroeconomic projections (Staff Projection; Annual percentage change / In percent of GDP)
- Real GDP growth6.55.55.05.0
- Inflation (end-year)1.62.52.52.5
- External current account balance1.30.20.1-0.1
- Public sector primary balance3.01.31.21.0
- Public sector balance 1.0-0.8-0.7-0.7
- Public sector balance (including CRPAOs)0.9-1.2-1.2-1.1
- Total public debt32.031.230.529.7
- Gross official reserve coverage of:
  - Short-term debt (residual maturity)350337385370

### Policy discussions and the 2007–08 program: objectives
- Program focuses on maintaining macroeconomic stability and reducing poverty, while consolidating medium-term growth prospects.
- Program aims to entrench macroeconomic stability through fiscal consolidation, while providing scope for addressing pressing social and infrastructure needs.
- A strategy is being prepared to strengthen poverty alleviation, including by stepping up the effectiveness of social assistance programs combined with institutional strengthening.
- Emphasis on lessening vulnerabilities—particularly dollarization—and deepening domestic capital markets to achieve investment grade status.
- Expected virtuous cycle: sound policies → more equitable economic growth.

### A. Entrenching fiscal consolidation — fiscal targets and stance
- Authorities reaffirmed commitment to comply with the 1 percent limit on the overall deficit of the FRTL.
- Staff recommended sustaining fiscal overperformance relative to the 1 percent deficit limit to help public debt decline faster.
- Overall balance:
  - The overall public sector deficit has been set at 0.8 percent of GDP in 2007 and 0.7 percent in 2008.
  - Should central government revenues net of mandatory transfers exceed programmed amounts, the government would save them to reduce the overall deficit to 0.5 percent of GDP or less.
  - Staff estimates that the structural fiscal deficit of the consolidated public sector would increase by about 1½ percentage points of GDP in 2007.
  - Revenue overperformance above 0.3 percent of GDP would likely result in additional savings.
- Infrastructure spending:
  - Key priority is to increase spending in infrastructure and maintenance to stimulate job creation and address social needs, particularly in poor regions.
  - Authorities will amend the FRTL to remove capital expenditure and maintenance outlays from the 3 percent limit on expenditure growth in real terms.
  - Under the 2007 budget, growth in total expenditure excluding maintenance and investment will be submitted to the 3 percent limit in real terms, while capital expenditure would register a sizeable increase.
  - Increased capital expenditure for 2007 focuses mainly on projects relating to roads, education, basic health, and rural electrification.
- Civil servant wages:
  - Wage outlays included in the 2007 budget reflect the austerity policy of the new administration with relatively low ceilings on civil servant wages and salaries.
  - Staff expressed concern that such low ceilings could lead the most qualified personnel to leave the civil service.
- Staff supported the fiscal stance but emphasized the need to improve the quality of spending and to save unanticipated additional revenue to help contain inflationary pressures.

### Strengthening the effectiveness of the tax regime
- Comprehensive reassessment of tax incentives considered essential due to complexity of existing tax exemptions.
- Authorities will submit a draft law to congress aimed at rationalizing fiscal exemptions by March 2007; expected to introduce time limits to exemptions and condition renewals on evaluations of goal achievement.
- Authorities intend to continue promoting replacement of existing regional tax exemptions with direct central government transfers earmarked for investment and social spending.
- Staff recommendations and recent congressional actions:
  - Staff recommended transforming the temporary tax on assets (ITAN) into a minimum corporate income tax when it expires at end–2006, while allowing the exemption on capital gains in the stock market to lapse.
  - Congress approved gradually decreasing rates of ITAN and reinstating the tax on capital gains in the stock market in 2009.
  - Congress approved a gradual decrease in the rate of the financial transactions tax (FTT).
- Staff emphasized strengthening tax administration through intensified audits, stepped-up collection of arrears, and introduction of performance indicators, particularly for customs and the value-added tax.
- Importance of providing adequate resources to the tax administration agency SUNAT emphasized.

### Improving the quality of public spending
- Authorities intend to modernize the budgetary process, including introducing performance budgeting; performance indicators expected to pave way for gradual move toward performance budgeting by 2010.
- Performance budgeting for public investment to be introduced in the 2008 budget with World Bank assistance.
- Critical steps:
  - Fiscal framework:
    - New legislation freed PetroPeru from budgetary oversight and the annual limits on non-publicly guaranteed borrowing; authorities introduced a law to create a Committee for Fiscal Policy Coordination under the Minister of Economy and Finance.
    - Congress approved a law subjecting non-publicly guaranteed borrowing by PetroPeru to the General Indebtedness Law requirements.
    - Authorities intend to gradually strengthen the commercial orientation of PetroPeru.
  - Public Financial Management:
    - Strengthening SIAF and rolling it out to sub-national governments; independent audit of SIAF funded by Inter-American Development Bank with results expected by September 2007.
    - Efforts underway to adopt a Treasury Single Account in 2007 and to align budget classification with GFSM 2001.
  - National System of Public Investment (SNIP):
    - SNIP critical in strengthening project assessment but can delay approvals; government beginning to decentralize SNIP with regional offices to assess and approve public investment projects per Ministry guidelines.
    - Staff encouraged reassessment of SNIP's purview to expedite small maintenance projects.
  - Public-Private Partnership (PPP) framework:
    - Authorities intend to submit to congress a draft PPP framework law by June 2007.
    - At end–2006, government commitments related to PPP projects were estimated at close to 2 percent of GDP in NPV terms.
    - Program includes performance criteria on all commitments associated with new PPPs signed in 2007 and will monitor issuance of PAO Entitlement Recognition Certificates (CRPAOs) and adjust overall deficit and public debt accordingly.
    - Government expects to issue US$2 billion of such certificates during 2006–10, including US$0.1 billion in 2006 and US$0.4 billion in 2007.

### Decentralization and subnational fiscal management
- Decentralization process accelerated by a 2006 urgency decree bringing forward the devolution of 185 functions to regional governments to end–2007.
- Staff emphasized transfers should occur only once subnational capacities are in place; pilot projects recommended.
- Importance of preserving/strengthening accreditation system for subnational governments stressed.
- Ministry of Finance conducting workshops to train subnational governments on financial reporting and fiscal rule compliance; a unit will be established at the Ministry to monitor sub-national financial developments.
- Staff cautioned that management of regional public companies should be transferred only to subnational governments demonstrating capacity to administer them soundly.

### Further improving the structure of public debt
- Debt management focuses on increasing share of local-currency denominated and fixed-rate debt in total debt and smoothing amortization profile.
- About one-fourth of the sovereign domestic bond debt is held by non-residents; authorities do not consider placement of sol-denominated bonds abroad a priority.
- Staff considered CRPAO instruments issued to facilitate financing of PPP projects signed in 2005 should be treated as debt under the Fund’s definition; issuance of such papers agreed to be included in measurement of Peru's debt stock for the Fund’s debt sustainability analysis and performance criteria for contracting and guaranteeing public debt.
- Authorities plan to explore alternative financial mechanisms for PPP projects to minimize government risks from such operations.

*Source: IMF staff*

### 21.      A major challenge is how best to reduce poverty and ensure that all segments of the

### 21.      A major challenge is how best to reduce poverty and ensure that all segments of the

### Poverty reduction, social programs, and targeting
- Lack of significant progress in alleviating poverty in recent years highlights the need to improve the quality of public spending and the effectiveness of social assistance programs.
- Social programs are numerous: 122 in total.
- A large share of resources available does not reach the targeted population (example cited: a 2004 CGN report noted that only about half of resources allocated under the Vaso de Leche program reached the targeted population).
- The conditional cash transfer program Juntos has been highlighted for effectiveness by civil society; it conditions cash transfers on compliance with administrative, health, and educational requirements and has helped restore a sense of inclusion among beneficiaries.
- Authorities plan to establish a registry of beneficiaries for all programs (MEFP, paragraph 14).
- Authorities requested the Interministerial Committee for Social Assistance (CIAS), under the Prime Minister, to prepare a strategy and corresponding action plan by March 2007; the CIAS’s action plan will be a key component of the economic program and specific actions will be made explicit at the time of the first review.
- If CIAS recommendations involve expanding social expenditure programs, there may be a need to rebalance the government’s poverty strategy from capital to current spending.

### Regional disparities, resource allocation, and the canon minero (Box 2)
- Regional poverty differences:
  - Sierra: 68 percent
  - Selva: 60 percent
  - Coast: 41 percent
  - Department extremes: Huancavelica 88 percent; Madre de Dios 20 percent
- A 2005 World Bank poverty assessment links regional poverty variation to access to basic services and road infrastructure.
- Resources for subnational governments:
  - The canon minero is estimated at US$1 billion (around 1 percent of GDP) in 2006 (up from US$150 million in 2002).
  - Seven departments account for close to 80 percent of the canon minero total.
  - Mining royalty collections are expected to amount to US$0.1 billion in 2006.
  - At end-September 2006, subnational governments had accumulated US$0.5 billion in bank deposits.
- Constraints: limited capacity of subnational governments to identify and execute productive investment projects; creation of SNIP offices at the regional level is expected to assist approvals and accelerate implementation.
- Staff encouraged revenue-sharing mechanisms to direct part of the mining-related corporate tax/canon minero to the poorest regions without mining activity; a recent initiative to allocate 20 percent of the canon minero to such regions was unsuccessful in congress.
- Voluntary private mining company contributions:
  - Agreement finalized in December (year implied by context) expected to lead to disbursements of some US$0.8 billion over the next five years.
  - Contributions are a function of commodity prices and computed as a proportion of companies’ after-tax profits; they will remain outside the budget framework and be managed by companies with project selection by committees of corporations and subnational governments.
  - Staff emphasized attention to project nature and spending to minimize disruption risks if mineral prices decline.

### Strengthening the inflation targeting framework and exchange rate policy
- Inflationary pressures described as quiescent despite strong economic momentum; increase in policy rates and upward currency pressure helped keep underlying pressures in check.
- Risk: increased public spending could put additional pressure on resources and monetary conditions.
- Staff recommendations and observations:
  - Inflation targeting framework has helped anchor expectations around the official target.
  - Continuation of intervention policy that limits exchange rate flexibility could undermine inflation target achievement.
  - To raise effectiveness and credibility, staff suggested increasing exchange rate flexibility.
  - Institutional recommendation: de-linking future appointments of the central bank president and board members from the political cycle to enhance monetary policy independence (would require a constitutional amendment).
- Authorities’ stance:
  - Agreed on need for greater exchange rate flexibility but emphasized gradual implementation; importance of leaning against temporary appreciation pressures to avoid large corrections in an adverse global environment.
  - Concern: in a highly dollarized economy, a significant and sudden depreciation could lead to sharp changes in banks’ balance sheets.
  - Expected intervention policy to become less frequent and primarily aim at limiting excessive volatility; preferred discretionary intervention over rules-based intervention given limited foreign exchange market size.
- Reserve buildup in program:
  - Program contemplates a further, modest reserves buildup of US$350 million (net of banks’ deposits at the central bank) in 2007.
- Central bank remuneration on banks’ legal reserves on foreign currency liabilities:
  - Staff noted the rate had been artificially low; encouraged raising it to reduce distortions.
  - In early December, the rate was increased from 2.5 percent to 2.75 percent.
  - Prior changes: raised from 2.25 percent to 2.5 percent in July 2006; previously had remained unchanged since June 2005; prior to that it floated at the equivalent of Libor minus 0.75 percentage points.
- Competitiveness:
  - Since 2000, Peruvian exports have more than tripled in U.S. dollar terms; volume growth averaged 10 percent a year.
  - Volume growth of nontraditional exports averaged 12 percent a year.
  - Authorities and staff agreed the currency may be slightly undervalued in real effective terms, though assessment is difficult and uncertain.
  - Infrastructure development and reductions in customs procedures recommended to further improve competitiveness.
- Exchange rate regime summary (Box 3):
  - Peru maintains a unified, managed floating exchange rate with free purchases of goods and services and capital account transactions.
  - Net central bank purchases in the foreign exchange market have amounted to US$5.7 billion since end-2002.
  - Over the past three years, the Nuevo Sol fluctuated within a narrow margin (less than 5 percent) against the U.S. dollar.
  - Foreign exchange market daily turnover of US$40–100 million.
  - Peru’s REER stands slightly below its 10-year average; a model suggests the REER is slightly undervalued.

### Strengthening resilience and depth of the financial system
- Banking system generally sound; authorities addressing balance sheet vulnerabilities related to high dollarization.
- Financial intermediation remains low: net credit to the private sector equivalent to 27 percent of GDP.
- Access to banking services increased by an additional 1½ million new borrowers over the past five years.
- Credit growth (12-month period through September 2006):
  - General bank credit to the private sector: around 12.5 percent
  - Consumer credit: expanding by 28 percent
- Authorities concerned strong consumer credit growth may reflect weakened lending standards.
- Measures and plans:
  - New regulations require banks to constitute provisions equivalent to 20 percent of credit lines for overexposed customers.
  - Plan to move within the next two years toward adoption of capital requirements for foreign currency related credit risk for all financial institutions, in line with Basel II (MEFP, paragraph 22).
  - Plan to introduce lower loan-to-value ratios for mortgage loans in foreign currency to unhedged borrowers.
  - Efforts to dedollarize mortgage loan operations with the guarantee of MiVivienda (MEFP, paragraph 23).
  - Exploring options to securitize MiVivienda’s portfolio to induce voluntary swaps of dollar loans into domestic currency loans; obstacle: lack of standardization of mortgage contracts.
- Role of public banks:
  - Three major public financial institutions—Banco de la Nación, COFIDE, and Agrobanco—are increasing lending to small and medium-sized firms, partly through microfinance institutions.
  - Microfinance institutions account for about 15 percent of total credit, or about 4 percent of GDP.
  - Current minimum capital requirement for microfinance institutions is $250,000; directors have tended to be appointed based on political affiliation, particularly in municipal credit unions.
  - Authorities plan to raise minimum capital requirements and strengthen management selection (MEFP, paragraph 26), and to enhance coordination among public banks and with the Superintendency of Banks (SBS) to ensure lending is based on sound risk practices (MEFP, paragraph 25).
  - Staff urged ensuring adequate governance and full-fledged supervision of public financial institutions; supervision of public banks is complicated by the subsidiary role of the General Banking Law.

### Financial soundness and vulnerability indicators (selected exact figures cited)
- Peru. Financial Soundness Indicators of the Banking System, 2002–2006 (end-year; for 2006, end-September data)
  - Regulatory capital to risk weighted assets: 12.5, 13.3, 14.0, 12.0, 12.4
  - Non-performing loans to total loans: 7.6, 5.8, 3.7, 2.1, 1.9
  - Provisions to nonperforming loans: 133.2, 141.1, 176.5, 235.3, 223.3
  - Provisions to nonperforming, restructured, and refinanced loans: 69.1, 67.1, 68.7, 80.3, 89.6
  - Return on assets: 0.8, 1.1, 1.2, 2.2, 2.2
  - Return on equity: 8.3, 10.7, 11.6, 22.2, 23.5
  - Liquid assets to total short term liabilities: 41.9, 40.4, 44.5, 45.5, 43.0
  - Net foreign exchange open position to capital: 37.0, 31.8, 24.2, 23.1, 22.4
- Indicators of corporate sector vulnerability (as of December):
  - Debt Service to Sales, Total: 4.0, 3.4
  - Fisheries: 8.0, 5.1
  - Tourism: 7.5, 5.9
  - Mining: 2.3, 1.7
  - Debt to Net Worth, Total: 1.7, 1.5
  - Fisheries: 2.1, 1.8
  - Commerce: 2.0, 1.9
  - Textiles: 1.8, 1.8
  - Mining: 1.2, 1.0

*Italicized source attribution line.*

### 33.      As a follow-up to the 2005 FSAP update, the authorities and staff discussed how to

### _cr0754 - 33.      As a follow-up to the 2005 FSAP update, the authorities and staff discussed how to

### Financial sector: systemic risk, lender-of-last-resort, and dollarization
- Agreement to strengthen the lender of last resort framework, particularly to establish the seniority status of the central bank as a creditor (currently left to the SBS to decide) (MEFP, paragraph 24).
- Staff suggestion: narrow the net open foreign exchange position of banks and set limits on the levels of the foreign exchange position of private pension funds.
- Authorities’ view: current bank regulations were appropriate; no immediate need for minimum hedging requirements for private pension funds. Authorities noted private pension funds adjust profitability for risks, limiting incentives for large open positions, but agreed this may not work well during times of stress and undertook to explore the merits of minimum hedging requirements (MEFP, paragraph 27).
- For banks, the limits of the short and long net open foreign position are equivalent to 10 percent and 100 percent of capital, respectively. Staff suggested that the limit on the long position be reduced to around the level of dollarization of assets, so that the capital of banks remain protected.

### Capital markets deepening and related reforms
- Recent developments:
  - Domestic capital markets expanded markedly in recent years, particularly with respect to long-term bond issues and the market capitalization of listed shares.
  - Improvements supported by active government debt management and increased global investor interest, helping extend the domestic yield curve for public securities.
- Authorities’ planned steps to deepen capital markets:
  - Remove regulatory impediments to issuing securities.
  - Publish a yield curve for private securities.
  - Unify the tax treatment of securitized transactions.
  - Clarify the tax treatment of financial derivatives and align it with that for securitization transactions to encourage bank participation and expand the set of instruments used by the central bank for monetary policy (MEFP, paragraph 24).
- Payments system reforms and these capital market reforms expected to promote secondary market trading.
- Authorities planned to request technical assistance from the Fund in the capital market area.
- Private pension funds:
  - Assets held by private pension funds: US$12.7 billion at end-September.
  - Authorities raised the limit on pension fund investments abroad from 10.5 percent to 12 percent.
  - Staff encouraged continued gradual increases in these limits to help diversify risks.

### Other growth-enhancing reforms: business environment, labor, and trade
- Business environment:
  - Progress in investor protection and contract enforcement.
  - Establishment of two commercial courts, with plans to extend nationwide.
  - Draft law to simplify business licensing aiming to shorten approval processes from an average of close to 100 days to 15 days; establish a "one-stop window" for exporters and importers.
- Labor market and informality:
  - Three fourths of active workers are employed in the informal sector.
  - Contributing factors include high severance payments and legal impediments to dismissals in the formal sector.
  - Authorities see some room for increasing flexibility and reducing severance payments while providing a safety net to dismissed workers.
  - Staff recommendation: make permanent the labor regime governing micro-enterprises (due to expire by end–2008).
  - Evidence that non-wage costs are significantly higher in Peru than in other countries in the region and employers report a deficit of skills; investment in human capital and worker training programs recommended.
- Trade openness and FTA risks:
  - Trade openness remains relatively low at close to 50 percent of GDP.
  - Authorities lowered average tariff rates from 10.1 percent to 8.3 percent, effective January 1, 2007.
  - Uncertainty regarding ratification of the U.S. FTA may pose risks to certain sectors: nearly 60 percent of Peru’s total textile exports and one quarter of agricultural exports enjoy duty-free access to the U.S. market under ATPDEA preferences; in the absence of timely FTA ratification, investment in these sectors might be curtailed.
  - ATPDEA preferences extended through end-June 2007, with option for another six-month extension.
  - Negotiations for new bilateral trade agreements expected to be initiated with Singapore and Mexico.

### Program modalities, safeguards, and statistics
- Proposed low-access SBA:
  - Covers the period through end-February 2009.
  - Total access equivalent to SDR172.37 million (27 percent of quota or close to 13 percent on an annual basis).
  - Authorities plan to treat the arrangement as precautionary.
  - Given the low access, staff views risks to the Fund as small even if Peru were to draw the full amount available.
- Program reviews and monitoring:
  - Semi-annual reviews; first review associated with performance at end-March 2007.
  - First review focus: reforms to enhance the fiscal policy framework, including effectiveness of the tax system (notably exemptions) and proposals to strengthen effectiveness of social assistance programs.
  - Monitoring based on quantitative performance criteria, an inflation consultation mechanism, and structural benchmarks (Table 1 of the MEFP).
- Safeguards:
  - An off-site safeguards assessment of the Central Reserve Bank of Peru expected to be completed by end-January 2007.
  - All recommendations of the last safeguards assessment (completed in October 2004) have been implemented.
- Statistics:
  - Statistics adequate for policy formulation, surveillance, and program monitoring.
  - Updated business register established; need to implement a new base year for the GDP.
  - Need for better labor cost indices and indicators of household indebtedness.
  - Need to improve coordination among agencies compiling official statistics.
  - A technical assistance mission to enhance reporting of monetary data scheduled for January 2007.

### Staff appraisal: macroeconomic outlook, priorities, and risks
- Macroeconomic context and achievements:
  - Supported by a favorable external environment, Peru is experiencing its longest expansion on record, with strong broad-based growth, rising employment, and well-contained inflation.
  - Vulnerabilities reduced: strong foreign reserves position, declining public debt-to-GDP ratio, improved debt maturity structure, and sovereign bond spreads close to record lows.
- Policy priorities and recommendations:
  - Consolidate macroeconomic stability and address structural and social weaknesses.
  - Strengthen macroeconomic framework while addressing social and infrastructure needs, fostering long-term growth, and strengthening financial system resilience.
  - Maintain a stable and predictable policy framework to support investment and growth; respect for contracts emphasized.
  - Continue measures to reduce red tape, simplify business procedures, and extend commercial courts beyond Lima.
  - Government anti-poverty strategy: Interministerial Committee under the Prime Minister to define strategy and action plan to combat poverty, rationalize programs, improve targeting, and identify immediate assistance.
  - Fiscal prudence: combined public sector projected to register a modest deficit in 2007 due to lower projected revenue and increased infrastructure spending; authorities intend to lower the deficit if revenue collections exceed program projections.
  - Staff encourages containing possible inflationary impact of fiscal expansion, entrenching limits on spending growth through approval of amended FRTL, broadening tax base, and avoiding new tax exemptions.
  - Committee for Fiscal Policy Coordination should ensure operations of all public sector entities, including PetroPeru, comply with program objectives.
  - Decentralization: implement with caution; transfer tasks only to subnational governments meeting accreditation criteria and coordinate National System of Public Investment decentralization.
  - Public-private partnerships: establish legal framework, minimize future fiscal commitments under PPP program, include a ceiling on new commitments, monitor issuance of securities associated with PPP projects, and explore instruments to minimize financial risks to the government.
  - Exchange rate policy: move to greater exchange rate flexibility; limit interventions to avoid excessive volatility to help internalize currency risks and encourage hedging, aiding dedollarization.
  - Dedollarization: continue steps to reduce financial dollarization; proposed changes to the MiVivienda mortgage lending program and measures to discourage mortgage bank lending in foreign currency to unhedged borrowers are important.
  - Financial system: continue strengthening payments system, reform frameworks for repurchase operations and derivatives, strengthen bank resolution and lender-of-last-resort frameworks, and continue gradually raising limits on private pension fund investments abroad.
  - Labor market reform: comprehensive reform to lower high severance payments, better align non-wage benefits with job tenure, and remove legal restrictions on dismissals for economic, technological, and structural reasons to reduce informality.
  - Trade liberalization: continue efforts toward Doha Round and ratification of the FTA with the United States to bolster private investment and employment; scope to reduce maximum tariff rates and tariff dispersion.
- Risks to the program:
  - Include adverse terms-of-trade shocks and possible policy slippages, particularly if the global environment turns less favorable.
  - Lower commodity prices and higher global risk aversion could pressure the exchange rate and public finances, with potentially disruptive balance-sheet effects.
  - Authorities’ commitment to maintaining macroeconomic stability and reducing poverty mitigates concerns.
- Staff recommendation:
  - Support for the authorities’ request for a new Stand-By Arrangement, given program coherence and policy commitments for 2007–08.

*Source: _cr0754 - 33.      As a follow-up to the 2005 FSAP update, the authorities and staff discussed how to (IMF staff report content).*

### 56.      It is recommended that the next Article IV consultation with Peru be held on the

### It is recommended that the next Article IV consultation with Peru be held on the 24-month consultation cycle

### Recommendation
- It is recommended that the next Article IV consultation with Peru be held on the 24-month consultation cycle, in accordance with the provisions of the July 15, 2002 decision on consultation cycles for countries with Fund arrangements.

### Macroeconomic outlook and projections
- Real GDP (annual percentage change)
  - 2005: 6.4
  - 2006: 6.5
  - 2007 (projection): 5.5
  - 2008 (projection): 5.0
- Real domestic demand (annual percentage change)
  - 2005: 5.5
  - 2006: 5.8
  - 2007 (projection): 6.2
  - 2008 (projection): 6.7
- Consumer Prices (end of period)
  - 2005: 1.5
  - 2006: 1.6
  - 2007 (projection): 2.5
  - 2008 (projection): 2.5
- Consumer Prices (period average)
  - 2005: 1.6
  - 2006: 2.0
  - 2007 (projection): 2.0
  - 2008 (projection): 2.5
- Nominal GDP (S/. billions)
  - 2005: 261.6
  - 2006: 298.9
  - 2007 (projection): 317.9
  - 2008 (projection): 337.2
- GDP per capita (in US$)
  - 2005: 2,917
  - 2006: 3,297
  - 2007 (projection): 3,496
  - 2008 (projection): 3,685

### Fiscal position and projections
- Combined public sector primary balance (percent of GDP)
  - 2005: 3.0
  - 2006: 1.3
  - 2007 (projection): 1.2
  - 2008 (projection): 1.2
- Combined public sector overall balance (percent of GDP)
  - 2005: 1.0
  - 2006: -0.8
  - 2007 (projection): -0.7
- Central government primary balance (percent of GDP)
  - 2005: 2.5
  - 2006: 1.1
  - 2007 (projection): 1.1
  - 2008 (projection): 1.1
- General government current revenue (percent of GDP)
  - 2005: 19.6
  - 2006: 18.5
  - 2007 (projection): 18.5
  - 2008 (projection): 18.6
- General government noninterest expenditure (percent of GDP)
  - 2005: 16.9
  - 2006: 17.4
  - 2007 (projection): 17.4
- Interest due (percent of GDP)
  - 2005: 2.0
  - 2006: 2.0
  - 2007 (projection): 2.0
  - 2008 (projection): 1.9
- Public sector debt (including CRPAOs) (percent of GDP)
  - 2005: 37.7
  - 2006: 32.0
  - 2007 (projection): 31.2
  - 2008 (projection): 30.5

### External sector and balance of payments
- External current account balance (percent of GDP)
  - 2005: 1.3
  - 2006: 1.3
  - 2007 (projection): 0.2
  - 2008 (projection): 0.1
- Gross international reserves (in millions of U.S. dollars)
  - 2005: 14,115
  - 2006: 15,615
  - 2007 (projection): 16,765
  - 2008 (projection): 17,465
- Gross reserves as percent of short-term external debt
  - 2005: 288.5
  - 2006: 350.1
  - 2007 (projection): 336.9
  - 2008 (projection): 385.5
- Exports (US$ percent change)
  - 2005: 36.7
  - 2006: 34.9
  - 2007 (projection): 6.2
  - 2008 (projection): -3.7
- Imports (US$ percent change)
  - 2005: 23.0
  - 2006: 25.6
  - 2007 (projection): 16.1
  - 2008 (projection): 11.2
- Total external debt (percent of GDP)
  - 2005: 30.7
  - 2006: 28.4
  - 2007 (projection): 26.7

### Monetary and financial indicators
- Liabilities to the private sector (12-month percent change, banking system)
  - 2005: 9.5
  - 2006: 9.3
  - 2007 (projection): 9.2
- Net credit to the private sector (12-month percent change, financial system)
  - 2005: 12.0
  - 2006: 12.1
  - 2007 (projection): 8.0
  - 2008 (projection): 6.3
- Currency (in millions of New Soles)
  - 2005: 11,390
  - 2006: 12,571
  - 2007 (projection): 13,831
- Net international reserves (in millions of U.S. dollars)
  - 2005: 15,308
  - 2006: 16,458.3
  - 2007 (projection): 17,158.3
- Financial soundness indicators (selected, private commercial banks)
  - Nonperforming loans to total gross loans (Dec-05): 2.1
  - Provisions to nonperforming loans (Dec-05): 235.3
  - ROA (Dec-05): 2.2
  - ROE (Dec-05): 24.6
  - Share of foreign currency deposits in total deposits (Dec-05): 67.2
  - Foreign currency deposits at commercial banks (in millions of U.S. dollars, Dec-05): 10,913

### Social spending and Millennium Development Goals (selected)
- Total social expenditure and pensions (in millions of New Soles)
  - 2002: 19,032
  - 2003: 20,249
  - 2004: 22,516
  - 2005: 24,888
- Total social expenditure and pensions (percent of GDP)
  - 2002: 49.2
  - 2003: 49.3
  - 2004: 50.6
  - 2005: 50.4
- Universal coverage (Education and Health) (in millions of New Soles)
  - 2002: 8,491
  - 2003: 9,016
  - 2004: 10,541
  - 2005: 10,994
- Education (percent of general government expenditure)
  - 2002: 14.6
  - 2003: 15.2
  - 2004: 16.1
  - 2005: 15.4
- Selected MDG indicators (reported)
  - Infant mortality (per 1,000 live births) trend in table 12:
    - 1995: 46.0
    - 2000: 40.0
    - 2002: 30.0
    - 2003: 26.0
    - 2004: 24.0

### Program targets, quantitative performance criteria, and liquidity indicators
- Borrowing requirement of the combined public sector (cumulative amounts from December 31, 2004, millions of U.S. dollars)
  - Adjusted limits (Dec. 31): 2,605
  - Actual (Dec. 31): 339
  - Margin (Dec. 31): 2,266
- Net international reserves of the Central Reserve Bank, excluding foreign-currency deposits of financial institutions (cumulative amounts from December 31, 2005, millions of New Soles)
  - Adjusted targets (Mar. 31): -654
  - Actual (Mar. 31): -732
  - Margin (Mar. 31): -78
- Inflation consultation mechanism (consultation bands for the 12-month rate of inflation, in percent)
  - Outer band (upper limit): 5.5
  - Inner band (upper limit): 4.5
  - Central point: 2.5
  - Inner band (lower limit): 0.5
  - Outer band (lower limit): -0.5
  - Actual (Sep. 06): 1.8

*Source: IMF staff tables and text as provided in the content unit.*

### 1.  SDR 159.6 million 2/January, 2007Board approval of SBA.

### _cr0754 - 1.  SDR 159.6 million 2/January, 2007Board approval of SBA.

### Proposed Schedule of Purchases Under the Stand-By Arrangement, 2007–09
- Proposed purchases (SDR):
  - SDR 159.6 million — 2/January, 2007 — Board approval of SBA.
  - SDR 1.596 million — May 15, 2007 — Completion of the First Review and observance of end-March 2007 performance criteria.
  - SDR 1.596 million — August 15, 2007 — Observance of end-June 2007 performance criteria.
  - SDR 1.596 million — November 15, 2007 — Completion of the Second Review and observance of end-September 2007 performance criteria.
  - SDR 1.596 million — February 15, 2008 — Observance of end-December 2007 performance criteria.
  - SDR 1.596 million — May 15, 2008 — Completion of the Third Review and observance of end-March 2008 performance criteria.
  - SDR 1.596 million — August 15, 2008 — Observance of end-June 2008 performance criteria.
  - SDR 1.596 million — November 15, 2008 — Completion of the Fourth Review and observance end-September 2008 performance criteria.
  - SDR 1.596 million — February 15, 2009 — Observance of end-December 2008 performance criteria.
- Notes:
  - 1/ Total access under the Stand-By Arrangement is SDR 172.4 million (27 percent of quota).
  - 2/ This amount is required to exhaust the first credit tranche which is not subject to phasing.

### Obligations, Charges, and Credit Outstanding (Selected figures and structure)
- Existing drawings (selected lines):
  - Principal (repurchases) — total shown: 0.0 13.4 (2006/2014 entries).
  - GRA charges — 0.0 0.2 (2006 entries).
  - SDR charges — 0.0 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 — total 29.4.
  - Credit outstanding (selected) — 13.4 (2006).
  - Percent of quota (selected) — 2.1 0.0...
- Prospective drawings (selected lines):
  - Principal (repurchases) row: 0.0 0.0 0.0 0.0 60.5 83.4 25.5 2.8 0.2 172.4.
  - GRA charges (projections) row: 0.0 0.6 9.1 9.1 9.4 8.5 4.3 0.6 0.1 0.0 38.7.
  - Service and commitment charges row: 0.0 0.0 2.4 1.1 0.2 0.0 0.0 0.0 0.0 3.7.
  - Credit outstanding (selected) row: 0.0 164.4 170.8 172.4 111.9 28.5 3.0 0.2 0.0...
  - Percent of quota (selected) row: 0.0 25.8 26.8 27.0 17.5 4.5 0.5 0.0 0.0...
- Cumulative (existing and prospective) highlights:
  - Principal (repurchases) cumulative: 0.0 13.4 0.0 0.0 60.5 83.4 25.5 2.8 0.2 185.8.
  - GRA charges cumulative: 0.0 0.0 7.1 9.1 9.1 9.4 8.5 4.3 0.6 0.1 0.0 38.9.
  - SDR and Service charges cumulative: 0.0 0.0 6.1 4.8 3.9 3.7 3.7 3.7 3.7 3.7 3.7 33.1.
  - Credit outstanding cumulative: 13.4 164.4 170.8 172.4 111.9 28.5 3.0 0.2 0.0...
  - Percent of quota cumulative: 2.1 25.8 26.8 27.0 17.5 4.5 0.5 0.0 0.0...
- Memorandum item:
  - Purchases: 0.0 164.4 6.4 1.6 0.0 0.0 0.0 0.0 0.0 172.4.

### Debt Sustainability Analysis — Baseline and Projections (Summary)
- Baseline scenario outcomes:
  - Economic growth would average close to 5 percent a year.
  - Overall deficit of the combined public sector averaging 0.9 percent of GDP.
  - Public sector revenue would remain broadly unchanged as a percent of GDP.
  - Public sector debt stock projected to decline from 38 percent of GDP at end-2005 to about 27½ percent of GDP by 2011.
  - Total external debt projected to decline from 36 percent of GDP at end-2005 to 22 percent by 2011.
  - Public external debt projected to decline from 28 percent to 19 percent of GDP over the same period.
- Role of private external debt:
  - 80 percent of total external debt is public.
  - Private sector external debt had declined during 2004–05 and is projected to decline slightly over the medium term from already low levels.
- Sensitivity and stress tests:
  - Debt dynamics are moderately vulnerable to changes in real GDP growth and interest rates (sensitivity tests based on 10-year historical standard deviations).
  - External and public debt ratios are sensitive to exchange rate changes due to high foreign currency share of debt.
    - A one-off 30 percent depreciation of the sol would shift the external debt-to-GDP ratio by 14 percentage points above the baseline projections in the medium term (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 contingent liabilities of the public sector:
    - Public debt-to-GDP ratio would rise sharply in the short run and remain 10 percentage points above baseline over the medium term.
- Graphical tests reported (bound tests):
  - External Debt Sustainability: bound tests include interest rate shock, current account shock, combined shock, real depreciation shock (one-time 30 percent in 2006), growth shock, gross financing need under baseline (right scale).
  - Public Debt Sustainability: bound tests include interest rate shock, combined shock, 30 percent depreciation, contingent liabilities shock (10 percent of GDP), real depreciation and contingent liabilities combined, primary balance shock and no policy change scenario.
- Selected projection table values (external DSA, percent of GDP unless indicated):
  - Baseline: External debt — 2005: 36.1; 2006: 30.7; 2007: 28.4; 2008: 26.7; 2009: 25.4; 2010: 24.0; 2011: 22.5.
  - Change in external debt (selected): 2005: -8.8; 2006: -5.4; 2007: -2.2; 2008: -1.7; 2009: -1.3; 2010: -1.4; 2011: -1.6.
  - External debt-to-exports ratio (in percent): 2005: 147.5; 2006: 109.0; 2007: 103.0; 2008: 107.2; 2009: 107.9; 2010: 105.7; 2011: 100.7.
  - Gross external financing need (in billions of US dollars): 2005: 6.8; 2006: 4.0; 2007: 4.3; 2008: 4.9; 2009: 4.7; 2010: 5.1; 2011: 5.5.
  - Gross external financing need (in percent of GDP): 2005: 8.6; 2006: 4.4; 2007: 4.4; 2008: 4.7; 2009: 4.2; 2010: 4.3; 2011: 4.3.
- Key macroeconomic assumptions underlying the external baseline (selected):
  - Real GDP growth (in percent): 2005: 6.4; 2006: 6.5; 2007–2011: 5.5, 5.0, 5.0, 5.0, 5.0.
  - GDP deflator in US dollars (change in percent): 2005: 7.1; 2006: 7.8; 2007–2011: 2.1, 1.9, 2.0, 2.0, 2.1.
  - Nominal external interest rate (in percent): 2005: 5.3; 2006: 6.6; 2007–2011: 6.9, 6.8, 6.6, 6.4, 6.0.
  - Growth of exports (US dollar terms, in percent): 2005: 33.7; 2006: 32.1; 2007: 5.6; 2008: -3.4; 2009: 1.1; 2010: 3.5; 2011: 5.2.
  - Growth of imports (US dollar terms, in percent): 2005: 29.5; 2006: 22.6; 2007: 14.6; 2008: 10.4; 2009: 7.2; 2010: 5.8; 2011: 6.7.
  - Current account balance, excluding interest payments (in percent of GDP): 2005: 3.4; 2006: 3.4; 2007–2011: 2.1, 1.9, 1.5, 1.3, 0.9.
  - Net non-debt creating capital inflows (in percent of GDP): 2005: 2.0; 2006: 1.0; 2007–2011: 0.9, 0.4, 0.2, 0.2, 0.5.

### Public Sector Debt Sustainability (Selected projections and assumptions)
- Baseline: Public sector debt (percent of GDP):
  - 2005: 37.7; 2006: 32.0; 2007: 31.2; 2008: 30.5; 2009: 29.7; 2010: 28.7; 2011: 27.4.
  - Change in public sector debt (selected): 2005: -6.6; 2006: -5.7; 2007: -0.8; 2008: -0.7; 2009: -0.8; 2010: -1.0; 2011: -1.3.
  - Identified debt-creating flows (4+7+12) (selected): 2005: -5.0; 2006: -5.7; 2007–2011: -0.8, -0.7, -0.8, -1.0, -1.3.
- Primary deficit and fiscal structure (percent of GDP):
  - Primary deficit (selected): 2005: -1.6; 2006: -2.9; 2007: -0.9; 2008: -0.7; 2009: -0.6; 2010: -0.6; 2011: -0.8.
  - Revenue and grants: 2005: 18.9; 2006: 20.2; 2007–2011: 19.0, 19.0, 19.0, 19.0, 18.9.
  - Primary (noninterest) expenditure: 2005: 17.3; 2006: 17.4; 2007–2011: 18.1, 18.2, 18.4, 18.4, 18.1.
- Automatic debt dynamics and contributions (selected):
  - Automatic debt dynamics (selected): 2005: -3.3; 2006: -2.7; 2007: 0.1; 2008: 0.1; 2009: -0.1; 2010: -0.3; 2011: -0.4.
  - Contribution from interest rate/growth differential (selected): 2005: -2.1; 2006: -2.7; 2007: 0.1; 2008: 0.1; 2009: -0.1; 2010: -0.3; 2011: -0.4.
  - Of which contribution from real interest rate (selected): 2005: 0.5; 2006: -0.6; 2007: 1.8; 2008: 1.6; 2009: 1.3; 2010: 1.0; 2011: 0.9.
  - Of which contribution from real GDP growth (selected): 2005: -2.6; 2006: -2.1; 2007: -1.7; 2008: -1.5; 2009: -1.4; 2010: -1.4; 2011: -1.3.
- Public sector debt composition:
  - o/w foreign-currency denominated (percent of GDP): 2005: 29.6; 2006: 25.0; 2007: 24.0; 2008: 23.5; 2009: 22.8; 2010: 22.1; 2011: 21.1.
- Gross financing need (selected):
  - In percent of GDP: 2005: 6.8; 2006: 2.8; 2007: 3.3; 2008: 3.8; 2009: 3.0; 2010: 3.1; 2011: 2.9.
  - In billions of U.S. dollars: 2005: 5.4; 2006: 2.5; 2007: 3.2; 2008: 4.0; 2009: 3.4; 2010: 3.7; 2011: 3.8.
- Key macroeconomic and fiscal assumptions underlying public baseline (selected):
  - Real GDP growth (in percent): 2005: 6.4; 2006: 6.5; 2007–2011: 5.5, 5.0, 5.0, 5.0, 5.0.
  - Average nominal interest rate on public debt (in percent): 2005: 4.8; 2006: 6.0; 2007–2011: 6.7, 6.5, 6.1, 5.7, 5.3.
  - Average real interest rate (nominal rate minus change in GDP deflator, in percent): 2005: 1.4; 2006: -1.3; 2007–2011: 5.9, 5.5, 4.6, 3.8, 3.4.
  - Inflation rate (GDP deflator, in percent): 2005: 3.4; 2006: 7.3; 2007–2011: 0.8, 1.0, 1.5, 1.9, 1.9.
- Alternative scenarios reported:
  - Scenario with key variables at their historical averages: public sector debt levels shown in table (selected): 2005: 32.0; 2006: 30.4; 2007: 28.8; 2008: 27.3; 2009: 25.8; 2010: 24.4.
  - Scenario with no policy change (constant primary balance) in 2005–2010: public sector debt path (selected): 2005: 32.0; 2006: 29.3; 2007: 26.6; 2008: 23.8; 2009: 20.9; 2010: 18.0.

### Fund Relations and Projected Obligations (As of November 30, 2006)
- Membership status:
  - Joined 12/31/1945; accepted Article VIII obligations on February 15, 1961.
- Quota and holdings (SDR Million / Percent Quota):
  - Quota: 638.40 — 100.00.
  - Fund holdings of currency: 651.81 — 102.1.
- SDR Department:
  - Net cumulative allocation: 91.32 — 100.00.
  - Holdings: 0.6 — 0.66.
- Outstanding purchases and loans:
  - Extended arrangements: 13.38 — 2.1 percent of quota.
- Financial arrangements (selected approvals and amounts):
  - Stand-By — Approval Date 6/09/04 — Expiration Date 8/16/06 — Amount Approved (SDR Million) 287.28 — Amount Drawn (SDR Million) 0.00.
  - Stand-By — Approval Date 2/01/02 — Expiration Date 2/29/04 — Amount Approved 255.00 — Amount Drawn 0.00.
  - Stand-By — Approval Date 3/12/01 — Expiration Date 1/31/02 — Amount Approved 128.00 — Amount Drawn 0.00.
- Projected obligations to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs) — selected:
  - Principal (2006–2010): 0.0 0.0 13.38 0.0 0.0 0.0.
  - Charges/interest (2006–2010): 0.0 3.88 3.68 3.67 3.67.
  - Total (2006–2010): 0.0 17.26 3.68 3.67 3.67.
- Safeguards assessments:
  - Central Reserve Bank of Peru subject to an update of the 2004 assessment; previous assessment concluded some risks existed and recommendations have since been implemented.
- Exchange arrangements:
  - Peru maintains a unified, managed floating exchange rate.
  - On November 30, 2006, the average interbank buying and selling rates was 3.22 Nuevo Soles per U.S. dollar.
  - Exchange system free of restrictions except those maintained solely for preservation of national or international security (notified under Executive Board Decision No. 144-(52/51)); restrictions maintained pursuant to UN Security Council Resolutions 1267 (October 15, 1999) and 1373 (September 28, 2001).
  - Central government maintains external payments arrears to unguaranteed suppliers; some in discussions with the government, others not located.
  - Peru has maintained a clearing arrangement with Malaysia since 1991.
- Last Article IV Consultation:
  - The 2003 Article IV consultation was concluded on February 23, 2004 (Country Report No. 04/155).
- FSAP and ROSCs:
  - FSAP missions in Lima September 2000–January 2001; Financial System Stability Assessment Report dated February 28, 2001; follow-up FSAP concluded June 2005.
  - Fiscal ROSC (FAD mission) October 2002; Data ROSC (STA mission) February 2003.
- Technical assistance (selected departments and purposes, dates as listed):
  - FAD: June 2005, March 2006, November 2006 — Public Financial Management.
  - Tax policy and administration: May 2005, February 2006, September and November 2006.
  - Public investment and fiscal policy, including issues related to PPPs: August 2004.
  - Fiscal rules: November 1999.
  - MFD, STA and other missions listed with specific dates and purposes in the source.
- Resident Representative:
  - Ms. Nicoletta Batini has been Resident Representative in Peru since January 2006.

*Source: IMF staff estimates/projections and country documents as presented in the provided content.*

### APPENDIX 2. PERU: WORLD BANK RELATIONS

### APPENDIX 2. PERU: WORLD BANK RELATIONS

### Bank Group strategy
- A new World Bank Group Country Partnership Strategy (CPS) is under preparation and will cover the five year period of the new administration, corresponding to the Bank’s fiscal years 2007 to 2011.
- The CPS will provide the Bank’s framework to support the implementation of the government’s poverty reduction strategy with programs addressing fiscal, national competitiveness, and social-sector needs.
- The program supported by the Bank under the new CPS emphasizes partnerships, flexibility and results orientation.
- The CPS under preparation envisages a lending program that will include a combination of two fast disbursing loans and three investment projects per year.
- The new CPS will explore development policy lending possibilities in the fiscal and social sectors, including the first one to support policy reforms in the environmental sector.
- The previous Country Assistance Strategy discussed by the IBRD Board on September 17, 2002 came to an end in July 2006.
- FY06 approvals (to date): Regional Transport Decentralization project for $50 million; Decentralization and Competitiveness Development Policy Loan for $150 million; Real Property Rights Consolidation Project for $25 million; Rural Electrification Project for $50 million.
- Peru’s current portfolio (as reported): 15 loans for US$431 million and one Guarantee Facility for US$200 million.
- A development policy loan supporting fiscal management and competitiveness for US$200 million will be discussed at the Board on December 19th, 2006.
- By end-FY06 the disbursement level should hover around US$200 million.

### Bank-Fund collaboration in specific areas
- Tax Reform and Fiscal Decentralization:
  - Fund staff has taken the lead in assisting in the design of tax reform.
  - Jointly with the World Bank and IDB, staff has worked on drafting laws and regulations for fiscal decentralization.
  - The World Bank has also focused on the design and implementation of decentralization of the social sectors and pro-poor spending policies.
- Financial Sector:
  - A joint FSAP was completed in May 2001.
  - Follow up technical assistance to implement FSAP recommendations has been given by both institutions.
  - A joint FSAP update was completed in June 2005.
- Public expenditure review (PER):
  - In a joint effort with the IDB, and close collaboration with the IMF, the Bank completed in June 2002 a comprehensive diagnosis of, and made policy recommendations for, Peru’s public expenditure management.
  - A social sector expenditure review, with support of the Fund, is being prepared to assess fiscal trends in the social sector under decentralization, review the quality of social spending, and fine-tune the on-going budgetary protection policy of priority social programs.
- Fiscal reforms:
  - In March 2002, the Bank and the Fund supported an international seminar on proposals for revising the law on fiscal prudence and transparency.
  - A joint IMF-World Bank-IaDB mission took place in September 2004 for a pilot study on Public Investment and Fiscal Policy.
- CAS follow-up and preparation of the Programmatic Loans (Social Reform Loans I, II, III, and IV, and Decentralization and Competitiveness Loan I, II, and III):
  - The World Bank and the government have engaged in an interactive and continuous dialogue on CAS implementation and preparation of the subsequent programmatic loans.
  - Dialogue has concentrated on the macroeconomic background, setting of triggers, overall loan conditionality, and risks and estimation of the fiscal implications of Bank operations.

### Statement of World Bank Loans (As of October 2006) — selected portfolio details
- Total (Net of Cancellation): 5,692.4
- Total disbursed: 5,157.8
- Of which: amount repaid: 2,421.4
- Total outstanding: 12,718.1
- Total undisbursed: 333.7
- Ninety-four loans fully disbursed
- Partially disbursed or undisbursed loans (Loan Number — Year approved — Borrower — Purpose — Total (Net of Cancellation) — Undisbursed):
  - 46140 2001 Republic of Peru Second Rural Roads Project 50.0 2.5
  - 71760 2003 Republic of Peru Rural Education Project 52.5 35.1
  - 71770 2003 Republic of Peru Trade Facilitation and Productivity Improvement Technical Assistance Project 20.0 14.3
  - 72090 2003 Republic of Peru Lima Urban Transport Project 45.0 42.6
  - 71600 2003 Republic of Peru Additional Financing Lima Water Rehabilitation and Management Project 20.0 16.5
  - 71420 2003 Republic of Peru National Rural Water Supply and Sanitation Project 50.0 41.7
  - 72190 2004 Republic of Peru Justice Services Improvement 12.0 10.9
  - 72570 2004 Republic of Peru Vilcanota Valley Rehabilitation Program 5.0 4.8
  - 72550 2004 Republic of Peru Institutional Capacity for Sustainable Fiscal Decentralization 8.8 7.8
  - 73080 2005 Republic of Peru Irrigation Subsector Project 10.3 6.2
  - 72540 2005 Republic of Peru Accountability for Decentralization in the Social Sectors 7.8 5.6
  - 72850 2005 Republic of Peru Agricultural Research and Extension 25.0 21.1
  - 73220 2005 Republic of Peru Regional Transport Infrastructure Decentralization 50.0 49.9
  - 73680 2006 Republic of Peru Real Property Rights 25.0 25.0
  - 73660 2006 Republic of Peru Rural Electrification 50.0 49.9

### IFC investments (As of October 2006) — summary aggregates
- Loans Equity Quasi Participation Loans Total: 178.2 17.2 30.5 13.6 225.9
- Total disbursed: 148.1 16.6 30.5 13.6 208.8
- Total commitments held: (table header present; detailed values above)

*Source: World Bank.*

### 5.      To provide room for needed infrastructure spending while preserving fiscal

### _cr0754 - 5.      To provide room for needed infrastructure spending while preserving fiscal

### Fiscal framework and room for infrastructure spending
- The Fiscal Responsibility and Transparency Law (FRTL) is expected to be amended to provide room for needed infrastructure spending while preserving fiscal discipline.
- A mechanism of sanctions is to be introduced in case of noncompliance with this law.
- The 3-percent annual limit on the real growth in government spending was redefined to exclude maintenance and investment spending.
- These changes would allow the government to increase public investment to 4.5 percent of GDP over the next five years.
- A Committee for Fiscal Policy Coordination will be created to ensure that all nonfinancial public sector entities continue to abide by the guidelines and goals established in the FRTL.
- Program adjustors: ceilings for contracting and guaranteeing of nonconcessional public debt adjusted by US$300 million and overall deficit of the public sector adjusted up to US$100 million for additional capital expenditure undertaken by PetroPeru to comply with environmental requirements.

### Tax policy, tax base broadening, and administration
- The government is committed to broadening the tax base by reducing tax exemptions; following a study on regional and sectoral tax exemptions, by March 2007 it will submit to congress a draft law to rationalize fiscal exemptions.
- Steps will be taken to limit adverse tax-collection impact from creation of the tax free zone in Puno.
- Tax exemptions for companies effectively operating in high altitude regions will apply only to a limited number of taxes.
- During 2007, the government will seek to finalize arrangements to replace regional tax exemptions with government transfers earmarked for infrastructure for other regions.
- Tax policy measures:
  - Financial Transactions Tax rate will be gradually reduced beginning in January 2008.
  - Prior to end-March 2007, MEF will specify tax treatment of financial derivative instruments and financial securitization transactions.
  - Harmonize tax treatment of repurchase agreements and certificates of deposits by end-2007.
  - Legislation to reinstate tax on casinos and slot machines to be introduced in congress by end-December 2006.
  - No new measures that would result in unilateral cancellation of tax stability contracts for mining and hydrocarbon sectors.
- Tax administration measures:
  - Establish performance indicators at SUNAT, particularly at customs.
  - Administrative measures to avoid misuse of duty drawback for exports, improve advanced VAT refunds efficiency, and simplify system for small taxpayers (RUS).

### Budgetary modernization and public financial management
- 2008 budget to be prepared following a budget classification aligned with international standards and incorporated into the charts of accounts.
- Comprehensive reform underway to move gradually to performance budgeting in public sector accounts, aiming for completion by 2010.
- With World Bank assistance, performance indicators for public investment to be identified with a view to introducing performance budgeting by 2008.
- Treasury Single Accounts (TSA):
  - Fully functioning TSA for the central government by end-December 2007.
  - TSA for subnational governments by end-December 2008.
- Independent assessment of the Financial Management Information System (SIAF) to be completed by September 2007 and recommendations implemented thereafter.

### Decentralization, subnational fiscal monitoring, and public investment approval
- Decentralization to proceed in a fiscally sound manner; administrative capacity strengthening of subnational governments during 2007-08.
- Functions devolved to subnational governments upon meeting Accreditation System criteria.
- Ministry of Finance to establish a unit by March 2007 to monitor subnational governments and assess performance relative to fiscal rules; request reporting compliance from all regional governments and large municipalities by end-2007.
- National System of Public Investment (SNIP) reform:
  - Operations decentralized in coordination between Ministry of Finance and regions to preserve quality of project assessments.
  - Limit on projects not subject to SNIP approval revised upward from S/. 4 million to S/. 10 million.
  - Strengthen project assessment capacity of regional and local governments.

### Debt management, PPPs, and contingent liabilities
- Active debt management to deepen domestic capital market:
  - Increase share and duration of local currency instruments, reduce exchange rate risks, extend yield curve.
  - Lengthen maturity of new placements abroad to smooth external public debt amortization profile.
- Ministry of Finance to finalize methodology for valuing contingent liabilities of the public sector related to PPP projects and enhance design of financing instruments used in PPPs.
- PPP framework law to be submitted to congress by June 2007 covering project selection, approval, reporting, conflict resolution, and adherence to international accounting standards.
- 2007 PPP pipeline: government plans to initiate PPP operations for a total amount of US$3 billion (ports, highways, sanitation).
- Limit established on the net present value (NPV) of future government payments, firm and contingent, associated with new PPP operations.

### Poverty reduction and social programs
- Goal: prompt and significant reduction in poverty levels; target to reduce malnutrition among children less than five years old by five percentage points by 2011.
- Social program measures:
  - Consolidation and strengthening of child nutrition programs.
  - Facilitate access to health insurance for those in extreme poverty.
  - Creation of Fondo para la Igualdad, funded with savings from austerity measures and transfers authorized by the Ministry of Finance.
  - Establish a registry of beneficiaries from all social programs.
  - Agua para Todos program aims to reduce by half the share of the population without access to potable water over the next five years.
  - Expand housing efforts through Techo Propio and strengthen Cofopri’s property titling.
  - Increase families under Juntos from 180,000 in 2006 to 300,000 by end-2007.
  - Strengthen teacher accreditation and continuous training.
- CIAS to prepare reforms: by March 2007 complete comprehensive stocktaking of all social programs and prepare an action plan; completion by March 2007 is a structural benchmark under the program.
- Agreement with mining sector companies for voluntary contributions to a privately managed fund for poverty alleviation and infrastructure; a committee of subnational governments and mining companies will select financed projects.

### Labor market, private sector growth, and trade openness
- Promote sustained formal employment and gradual reduction in labor market informality; develop a more comprehensive social protection net and progressive access to benefits for informal workers.
- Renew current labor regime for micro-enterprises before its expiration by end-2008.
- Administrative simplification: implement one-step window for new businesses and exporters.
- Expand commercial courts beyond Lima by end-2008.
- Trade policy: ratification of FTA with the United States expected to prompt temporary compensation to affected producers without compromising fiscal targets; continue reducing MFN tariff protection and pursue new bilateral FTAs.

### Financial sector resilience and supervision
- Strengthen financial sector regulation and supervision; recent regulations to prevent household over-indebtedness and reduce foreign-currency-induced credit risks.
- Focus areas: sustain de-dollarization, improve payments system reliability, expand role of public banks in promoting financial access, develop capital market.
- Superintendency of Banks (SBS) actions:
  - Ensure banks complete assessment of unhedged borrowers by end-2006 and reclassify loans and provision as required.
  - By December 2007 strengthen regulations on loan classification and provisioning to fully account for foreign-currency induced credit risks.
  - Issue norms to introduce lower loan-to-value ratios for mortgage loans in foreign currency to unhedged borrowers.
  - Seek modification of the General Banking Law to introduce specific capital requirements for exposure to foreign currency credit risks (in line with Basel II).
- MiVivienda program:
  - By end-June 2007 ensure most new mortgage loans guaranteed by MiVivienda are denominated in nuevo soles.
  - Discontinue MiVivienda guarantee and “good payer bond” on mortgages in foreign currency for any new loan signed after that date.
  - MiVivienda to gradually increase resources through issuance of long-term bonds in soles.
- Payments system reforms:
  - Complete DVP for fixed-income and establish oversight of over-the-counter trading platforms.
  - Legal framework for central bank oversight of entire payment system to be defined by June 2007.
  - Modify banking law to ensure seniority of central bank as lender of last resort among creditors.
- Public banks as second-tier institutions:
  - Agrobanco recapitalized.
  - Banco de la Nación to assist small and medium regional businesses, channel new lending to micro enterprises via nonbank financial institutions, and comply with a 25 percent annual growth limit on consumer lending operations in 2007 and 2008.
  - Coordinating committee of COFIDE, Banco de la Nación, and Agrobanco to be established by March 2007 to determine which financial institutions may enter infrastructure agreements with Banco de la Nación.
  - Strengthen SBS oversight over Banco de la Nación.
- Microfinance and pension reforms:
  - Raise minimum capital requirements for microfinance institutions.
  - SBS to ensure transparent presentation of interest rates to enforce consumer protection.
  - Raise limits on private pension funds abroad gradually and ease other cross-limits; assess minimum hedging requirements for AFP foreign exchange investments.
  - Develop calendar for issuance of infrastructure bonds in domestic currency by June 2007.
  - Strengthen CONASEV’s role and administrative capacity.

### Quantitative performance criteria, inflation consultation bands, and key program numbers
- Selected quantitative indicators and limits (as presented):
  - Borrowing requirement of the combined public sector — Unadjusted limits: 1/ 2/ 3/ 4/ -1,396 -4,190 -2,761 2,418
  - Net international reserves of the Central Reserve Bank, excluding foreign-currency deposits of financial institutions — Unadjusted limits 5/ 6/ -260 443 363 350
  - Outstanding short-term external debt of the nonfinancial public sector — Limits 50 50 50 50
  - Contracting or guaranteeing of nonconcessional public debt with maturity of at least one year — Unadjusted limits 7/ 8/ 9/ 75 11,237 1,608 2,636
  - Of which: external debt of 1-5 year maturity — Limits 100 100 100 100
  - External payments arrears of the public sector (on a continuous basis) — Limits 0 0 0 0
  - NPV of future government payments associated with PPP operations (on a continuous basis) — Unadjusted Limits 10/ 1,500 1,500 1,500 1,500
- Consultation bands for the 12-month rate of inflation (in percent) 11/:
  - Outer band (upper limit) 5.5 5.5 5.5 5.5
  - Inner band (upper limit) 4.5 4.5 4.5 4.5
  - Central point 2.5 2.5 2.5 2.5
  - Inner band (lower limit) 0.5 0.5 0.5 0.5
  - Outer band (lower limit) -0.5 -0.5 -0.5 -0.5
- Notes and adjustments included in TMU:
  - PIPP proceeds included below the line.
  - The limit on the borrowing requirement of the combined public sector will be adjusted downwards by the amount central government revenues net of mandatory transfers exceed program estimates.
  - The limit on the borrowing requirement of the combined public sector will be adjusted for the operating balance of the BCRP.
  - The limit on contracting and guaranteeing of nonconcessional public debt will be adjusted upwards for guarantees contracted or extended by the government in relation to concessions, up to a ceiling of US$430 million for the year as a whole.
  - Discount rates to calculate the NPV of future stream of payments will be the currency-specific commercial interest reference rates (CIRRs) published by the OECD and specified in the TMU.
  - The target for net international reserves will be adjusted downward for withdrawals for portfolio management purposes of deposits held at the Central Reserve Bank by the Consolidated Pension Reserve Fund (FCR) and any other funds managed by the ONP; this downward adjustment will not exceed US$300 million at any time in 2007.
  - The limit will be adjusted upward by any amount of debt issued, and used in, debt-exchange operations, or for prefinancing of government operations.
  - The current debt limits do not include contracting of non-guaranteed debt by PetroPeru and will be adjusted upward by up to US$300 million for debt contracted by PetroPeru during 2007.
  - Specific downward adjustments for shortfalls from programmed net foreign borrowing and specified S/. ceilings for deposits at the BCRP are detailed in the TMU.

### Structural benchmarks for 2007
- March 31
  - Publication of the main recommendations of the CIAS on an anti-poverty strategy
  - Establishment of a unit at the Ministry of Finance to monitor the operations of subnational governments and assess their performance with respect to fiscal rules
  - Clarify the tax treatment of financial derivatives and securitized transactions
- June 30
  - Submit to congress a legal framework for PPP operations
  - Ensure that most of new mortgage loans extended by banks with the guarantee of MiVivienda are denominated in nuevo soles
- December 31
  - 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
  - Financial transactions tax rate reduced, effective January 1, 2008
  - Issue new regulations regarding new risk categories and provisions to address foreign currency risk

*Sources: Staff estimations.*

### 1.      The nonfinancial public sector (NFPS) includes the central government, the

### _cr0754 - 1.      The nonfinancial public sector (NFPS) includes the central government, the

### Scope and institutional coverage
- The nonfinancial public sector (NFPS) includes the central government, the autonomous agencies, the local and regional governments, and the nonfinancial public enterprises.

### Definition and measurement of the public sector borrowing requirement (PSBR)
- The PSBR (borrowing requirement of the combined public sector) will be measured as:
  - (a) net domestic financing of the NFPS; plus
  - (b) net external financing of the NFPS; plus
  - (c) proceeds from the Private Investment Promotion Program (PIPP); and
  - less (d) the operating balance of the Central Reserve Bank of Peru (BCRP).
- The PSBR will be adjusted to exclude the impact of data revisions that do not represent a change of its flows during 2007.

### Components of net domestic financing of the NFPS (component a)
- Net domestic financing of the NFPS is defined as the sum of:
  - (i) the increase in net claims of the domestic financial system on the nonfinancial public sector, excluding Peruvian Brady bonds and other government bonds initially sold abroad;
  - (ii) the net increase in the amount of public sector bonds held outside the domestic financial system and the nonfinancial public sector, excluding Peruvian Brady bonds and other bonds initially sold abroad;
  - (iii) the increase in the floating debt of the nonfinancial public sector due to expenditure operations and tax refund arrears;
  - less (iv) the accumulation of stocks, bonds, or other domestic financial assets by the nonfinancial public sector; and
  - (v) the amortization of pension related bonds.
- In the case of enterprises divested after December 31, 2006, the net credit of the financial system to these enterprises will be recorded, for the remainder of the program period, as unchanged from their level at the time of the PIPP.

- Footnotes within the definition:
  - The financial system comprises the banking system, the Corporación Financiera de Desarrollo (COFIDE), MiVivienda and all other nonbank financial intermediaries. The banking system includes the BCRP, the commercial banks, Banco de la Nación (BN), and AgroBanco.
  - Excluding the new issuances of pension related bonds.

### Components of net external financing of the NFPS (component b)
- Net external financing of the NFPS comprises:
  - (i) disbursements of loans; plus
  - (ii) receipts from the issuance of government bonds abroad; minus
  - (iii) cash payments of principal (current maturities of both loans and bonds); minus
  - (iv) cash payments of arrears (principal and interest); plus/minus
  - (v) the net increase/decrease in short-term external debt; minus
  - (vi) debt buy-backs or other prepayments of debt (at market value) not included in the following item (including repayments of short-term external debt assumed by the government at the time of the divestiture of public enterprises, net of the proceeds from the sale of inventories of such enterprises); minus
  - (vii) debt-equity swaps used in the PIPP accounted at the market value of these papers as defined by ProInversion; minus/plus
  - (viii) the net increase/decrease in foreign assets of the nonfinancial public sector (including those held abroad by the Fondo Consolidado de Reservas (FCR), and any other fund managed by the Oficina de Normalización Previsional (ONP)).

### PIPP proceeds (component c)
- PIPP proceeds are defined as:
  - (i) the cash payments received by the Treasury from the sale of state-owned assets (including proceeds transferred to the FCR, and any other specialized funds) valued at the program exchange rate; plus
  - (ii) debt equity swaps used in the PIPP, accounted at market values as defined by ProInversion.
- PIPP proceeds also include up-front payments received by the Treasury for the granting of concessions for public services but exclude the annual payments under the concession program, which are part of nontax revenue.

### Operating balance of the BCRP (component d)
- The operating balance of the BCRP includes:
  - (i) cash interest earnings of the BCRP minus cash interest payments by the BCRP, in both domestic and foreign currency;
  - (ii) the administrative expenses of the BCRP; and
  - (iii) any realized cash losses or gains from activities in currencies, financial instruments, and derivatives.
- BCRP’s silver holdings will be included as net domestic assets and excluded from the net international reserves.

### Quarterly adjusters on PSBR for 2007 (limits reduction from central government revenue outperformance)
- Quarterly limits on PSBR for 2007 will be reduced by the amount to which revenues of the central government net of mandatory transfers exceed program estimates at each date, subject to ceilings:
  - At end-March: program estimate S/.10,489 million; ceiling reduction up to S/. 250 million.
  - At end-June: program estimate S/. 23,359 million; ceiling reduction up to S/. 500 million.
  - At end-September: program estimate S/. 32,807 million; ceiling reduction up to S/. 750 million.
  - At end-December: program estimate S/. 44,821 million; total ceiling reduction up to S/. 1,000 million.
- Mandatory transfers: canon and sobrecanon, fondo de Camisea, regalía minera, renta de aduanas, and Impuesto de Promoción Municipal (IPM).

### Inflation consultation bands and procedural triggers
- Inflation measure: 12-month rate of change in consumer prices as measured by the Indice de Precios al Consumidor (IPC) at the level of Metropolitan Lima by the Instituto Nacional de Estadística e Informática (INEI).
- Consultation bands around central point of 2.5 percent:
  - Inner band: 2 percentage points around 2.5 percent. If inflation falls outside this inner band, the authorities will discuss with Fund staff on an appropriate policy response.
  - Outer band: 3 percentage points around 2.5 percent. If inflation falls outside this outer band, the authorities will discuss with Fund staff on a policy response and complete a consultation with the Executive Board of the Fund on the proposed policy response before requesting further purchases under the program.

### Banco de la Nación consumer lending definition
- Net consumer lending of the Banco de la Nación is defined as disbursements of all consumer loans (including “Multired Program” and “Prestamos a 60 Quotas”) less cash amortizations under the loan programs.
- Interest payments on these loans are excluded from the definition of net lending.

### Net international reserves (NIR) of the BCRP — program definition
- Net international reserves of the BCRP, excluding foreign-currency deposits of financial institutions, are defined as:
  - (a) foreign assets of the BCRP (excluding subscriptions to the IMF and the Latin American Reserve Fund (FLAR), Pesos Andinos, credit lines to other central banks, Corporación Andina de Fomento (CAF) bonds, and foreign assets temporarily held by the BCRP as part of swap operations);
  - less (b) reserve liabilities: (i) BCRP’s external liabilities with original maturity less than one year, and (ii) its liabilities to the IMF, to the Inter-American Development Bank (IADB) and to the FLAR;
  - less (c) deposits in foreign currency by the banking system, other financial intermediaries and the private sector, net of repos of Treasury bonds with the financial system.
- BCRP’s gold holdings will be accounted at US$516.53 per troy ounce (the average book value as of June 30, 2006).
- SDRs at US$1.429 per SDR.
- Foreign currency assets and liabilities of the BCRP in other currencies than US$ will be valued at the exchange rate of June 30, 2006.
- Net international reserves will be adjusted to exclude any valuation gains or losses resulting from net sales or deliveries of gold by the BCRP.
- The end-September 2006 level of net international reserves is shown in Table 3 (table not reproduced here).

### Short-term external debt flows and stock
- Flows of short-term external debt of the NFPS are defined as the net change in outstanding external indebtedness with maturity less than one year (including instruments with put options that would be triggered within one year of the contracting date).
- Measured in part on the basis of operations of a selected sample of public enterprises comprising Petroperú and Electroperú.
- These limits exclude normal import financing but include forward commodity sales.
- For companies sold to the private sector under the PIPP, short-term debt will be recorded as unchanged from their level at the time of PIPP for the remainder of the program period.
- The end-September 2006 stock of short-term external debt of the NFPS is shown in Table 4 (table not reproduced here).

### Contracting or guaranteeing of nonconcessional public debt (performance criterion)
- Applies to all domestic and external obligations of the NFPS contracted or guaranteed by the government, COFIDE, the BCRP, the BN, and any other public financial entity, except loans classified as reserve liabilities of the BCRP.
- Exclusions from program limits on nonconcessional debt:
  - (i) any new loans extended in the context of a debt rescheduling or debt reduction operation;
  - (ii) any lending at concessional terms;
  - (iii) certificates (BCRPCD) issued by the BCRP for conducting monetary policy.
- Program limits will be adjusted upward by up to US$300 million for debt contracted by Petroperu during 2007 that is not guaranteed by the central government.

### Definition of "debt" for the performance criterion
- External public debt also applies to commitments contracted or guaranteed for which value has not been received.
- The term “debt” follows point No.9 of the Guidelines on Performance Criteria with respect to Foreign Debt (Board Decision No. 12274-(00/85)), meaning a current, not contingent, liability created under a contractual arrangement through the provision of value in the form of assets or services, and requiring the obligor to make one or more payments in the form of assets or services at future dates.
- Primary forms include:
  - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, and official swap arrangements);
  - (ii) suppliers’ credits;
  - (iii) leases (debt equals the present value at the inception of the lease of all lease payments expected to be made during the agreement, excluding operation, repair or maintenance payments);
  - (iv) PAO Entitlement Recognition Certificates (CRPAOs) used to facilitate financing of PPP projects by concessionaires.
- Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
- Foreign currency public debt to be contracted or guaranteed will be converted based on the program exchange rate, with cross rates for non-dollar currencies set based upon the rate on the day of the transaction, published by REUTERS.
- Footnote: Under Peruvian law, the CRPAOs are not treated as sovereign debt.

### Concessionality definition and calculation
- A debt is concessional if it includes a grant element of at least 35 percent.
- Grant element calculation:
  - Grant element = (nominal value minus NPV) divided by nominal value.
  - NPV of debt at disbursement is calculated by discounting the future stream of payments of debt service due on the debt.
- Discount rates:
  - Use currency specific commercial interest reference rates (CIRRs) published by the OECD.
  - For debt with maturity of at least 15 years: use the ten-year average CIRR.
  - For debt with maturity of less than 15 years: use the six-month average CIRR.
- For program purposes through end-June 2007, the CIRRs published by the OECD in October 2006 will be used (see Table 5).

### Concessionality for currency-basket loans and creditor-internal rates
- Loans in currency baskets: concessionality assessed on the basis of U.S. dollar interest rate tables.
- For loans with interest rates based on creditor internal policy, the relevant interest rate is the interest rate for each creditor at the time of commitment.
- Loans or portions extended in the context of debt rescheduling or a debt reduction operation are excluded from the ceiling.

### PPP (Public-Private Partnership) NPV treatment
- NPV of future government payments associated with PPP operations will include all payments, firm and contingent, committed by the government in relation to new PPP projects signed during the program period.
- Payments to be included:
  - Pagos anuales por Obra (PAOs);
  - Pagos Anuales por Mantenimiento y Operación (PAMOs);
  - Ingresos Minimos Anuales Garantizados (IMAGs).
- For projects without defined PAOs and PAMOs, the target includes estimated aggregate annual payments for the project (Pagos Anuales por Servicio, PAS).
- Discount factor: 10-year commercial interest reference rate (CIRR).
- For program purposes through end-June 2007, the CIRRs published by the OECD in October 2006 will be used (Table 5).

### External payments arrears
- External payments arrears of the public sector include arrears to multilateral financial institutions, Paris Club creditors, and other foreign creditors with whom debt restructuring agreements have been concluded.
- They exclude arrears outstanding at end-2005 that were not covered under restructuring agreements.
- Public sector for arrears purposes includes NFPS, COFIDE, the BCRP, the BN, and any other state development bank.

### Periodic reporting requirements
- Periodic reporting includes:
  - (a) The latest Nota Semanal published by the BCRP;
  - (b) Report of BCRP daily operations;
  - (c) Daily exchange rate statistics.
- Monthly reports to include:
  - (i) Performance criteria: Data on program’s quarterly quantitative performance criteria.
  - (ii) Financial sector: detailed balance sheets and disaggregations for consolidated financial system, banking system, BCRP, BN, commercial banks, AgroBanco, MiVivienda, development banks in liquidation; COFIDE balance sheet and guarantees; private pension system balance sheet; evolution of gross disbursements and cash amortizations of consumer loans under the “Multired Program” of Banco de la Nación; stock of government guarantees for housing support programs.
  - (iii) Fiscal sector:
    - PSBR as defined in Table 1.
    - List of domestic and external debt instruments contracted or guaranteed by the public sector, including amount, lender, grace period, maturity, interest rate, collateral guarantees, instrument enhancements, and labeling of refinancing credits.
    - Summary of disbursements and interest and amortization due and paid (identifying payments of arrears) of loans in the records of the General Directorate of Public Credit by creditor and debtor, indicating foreign origin (distinguishing financial and nonfinancial public sector debt) and domestic origin (Table 6).
    - Cash operations of the treasury (including floating debt, with memorandum item on tax refund arrears).
    - Data on PIPP revenue: gross receipts, costs of the PIPP, use of debt-for-equity swaps, commissions received by ProInversion, resulting cash receipts to the Treasury and the FCR, and debts assumed by the government in connection with the PIPP.
    - Central Government operations: Central Government Current Revenue (SUNAT Format); Central Government Noninterest Expenditure; Transfers from the Central Government to the Rest of the General Government.
    - Fuel prices of Petroperu and Relapasa, and international prices of products commercialized by Petroperu including tariffs, indirect taxes and distribution margins (prices listed for all grades of gasoline, diesel fuel, kerosene and fuel oils).
    - Stocks of the central government PIPP accounts in the BCRP and the BN.
  - (iv) External sector:
    - Summary of imports by products (volume and prices);
    - Summary of exports by products (volume and price).
  - (d) Quarterly data of fiscal and external accounts, and public sector debt, distinguishing between external and domestic total public sector debt and total NFPS.
  - (f) Other:
    - Summary of legislative changes pertaining to economic matters;
    - BCRP circulars;
    - BCRP inflation report.

### Key data excerpt from Table 1 — Public Sector Borrowing Requirement 2006 (selected lines)
- Table title: Peru: Public Sector Borrowing Requirement 2006 (In millions of nuevos soles)
- Headings shown: Stock as of Dec. 31 2005 1/ ; Stock as of Sep. 30 2006 1/ ; Flow Jan-Sep
- a. Net domestic financing of the nonfinancial public sector4 : 470-1 143-5 612
- i. Net claims of the financial system (1+2+3): -6 440-10 513-4 073
- 1. Net credit of the banking system on the NFPS, COFIDE and MiVivienda: -14 559-20 817-6 258
  - Credits: 6 8115 150-1 661
  - Liabilities: 21 37025 9684 597
- 2. Net credit of COFIDE and MiVivienda on the banking system: 2 8543 056 201
  - Credits: 3 0843 117 33
  - Liabilities: 230 62- 168

*Italic: Source document _cr0754 - 1.      The nonfinancial public sector (NFPS) includes the central government, the (PDF).*

### 3.  Net credit of nonbanking financial institutions on the NFPS5 2657 2481 984

### 3.  Net credit of nonbanking financial institutions on the NFPS5 2657 2481 984

### Net credit and related items
- Credits5: 9547 7871 833
- Liabilities: 689 538- 151

### Stock of NFPS bonds in circulation11 (excluding bonds held by NFPS and of the financial system)
- ii. Stock of NFPS bonds in circulation11: 49610 760- 736
- 1. Total: 20 66521 354 689
- 2. Less: holdings of the financial system (including COFIDE and MiVivienda)8: 66210 2711 609
- 3. Less: holdings of nonfinancial public sector entities: 507 323- 184

### Floating debt and adjustments
- iii. Floating debt: 2 8102 173- 637
- iv. Less: Accumulation of stocks, bonds, or other domestic financial assets by the NFPS: 2 4442 513 70
- v. Less: Issuance of pension recognition bonds in program period: 9521 049 96

### Net external financing and privatization
- b. Net external financing -2 454 (Millions of US dollars)-$ 757
- c. Privatization 240 (Millions of US dollars)$ 74
- d. Operating balance of the BCRP402
- PSBR  (a+b+c-d): -8 228
- 1/ Foreign currency valued at US$ 1 = S/. 3,24

### Programmed external borrowing and payments (Jan - Mar / Jan - Jun / Jan - Sep / Jan - Dec)
- i. Loan Disbursements: 2944405921000
  - -Projects: 144290442600
  - -Non Projects: 150150150400
- ii. Bonds: 0000
- iii. Cash payments on amortization: 3095788661148
  - - Loans: 2525217531035
  - - Bonds: 5656113113
  - - Prepayments: 0000
- iv. Cash payments to settle arrears: 0000
- v. Change in short term debt (increase+): 0000
- A. NET FOREIGN BORROWING (i+ii-iii-iv+v): -14-138-274-148
- vi. Debt equity swaps: 0000
- vii. Change in foreign assets held by the NFPS: 36811
- viii. Investment project under the PIPP: 0000
- B. NET EXTERNAL FINANCING (A-vi-vii+viii): -17-143-282-159
- 1/ Excludes balance of payments support loans to the Central Reserve Bank of Peru.
- Source: Central Reserve Bank of Peru

### Table 2. Peru: Public External Debt — Net External Financing N.F.P.S. 2007 (In millions of dollars)
- Stocks as of September 30, 2006
  - a. Assets: 14,755
    - Deposits abroad: 5,926
    - Securities: 8,225
    - Gold   1/: 576
    - Holdings of SDR   2/: 9
    - Reciprocal credit agreement: 9
    - Cash: 10
    - Others: 0
  - b. Liabilities: 26
    - Reciprocal credit agreement: 2
    - Liabilities with international organizations: 23
      - IMF: 2/0
      - IADB: 23
      - FLAR: 0
  - c. Foreign currency deposits of financial institutions at the Central Bank: 3,693
    - Banking enterprises: 3,522
    - Banco de la Nación: 75
    - COFIDE: 18
    - Financial enterprises: 78
  - d. Treasury bond repos: 0
  - e. Swaps: 0
  - f. Valuation US$/other currencies: 179
  - g. Net international Reserves - Program definition (a-b-c+d-e-f): 10,858

- Memorandum items:
  - 1. Subscription to the IMF and FLAR: 331
  - 2. Pesos andinos: 20
  - 3. CAF bonds: 0
  - 4. Valuation change by BCRP's gold holdings: 91
  - 5. Valuation change by BCRP's SDR holdings: 0
  - 6. Net international reserves, official definition (g+c-d+e+f+1+2+3+4+5): 15,172
- Source: Central Reserve Bank of Peru.
- 1/ Gold valued at  US$ 516,53330
- 2/ Valued at US$ 1,42927  per SDR.

### Table 3. Peru: Net International Reserves of the Central Reserve Bank of Peru excluding foreign currency deposits of financial institutions as defined in the Technical Memorandum of Understanding (TMU) (In millions of US dollars)
- (Content reflected in Table 2 figures above)

### Table 4. Peru: Short-Term External Debt Owed by the Nonfinancial Public Sector (In millions of US$) — as of September 30, 2006
- Export Financing / Working Capital / Import Financing / Total
- Total: 007373
- Petroperu: 007373
- Electroperu: 0000
- General government: 0000
- Memorandum item:
  - Total of export financing plus working capital loans: 0
- Source: Central Reserve Bank of Peru and state companies.

### Table 5. Peru: Commercial Interest Reference Rates (CIRRs)
- Six-month and Ten-year previous-period and multi-year average CIRR series listed for multiple currencies (selected entries shown exactly as provided):
  - Australian Dollar: 6.51% / 6.85% / 12.15% / 10.15% / 9.28% / 8.55% / 7.98% / 7.68% / 7.48% / 7.24%
  - Japanese Yen: 2.49% / 2.08% / 5.53% / 4.65% / 4.30% / 3.75% / 3.17% / 2.77% / 2.45% / 2.24%
  - U.S. Dollar > 8.5 years: 5.78% / 6.09% / 8.62% / 7.93% / 7.59% / 7.35% / 7.06% / 6.85% / 6.63% / 6.36%
  - Euro (ECU for ten-year avg): 4.62% / 5.39% / 8.56% / 7.99% / 7.82% / 7.13% / 6.79% / 6.40% / 6.07% / 5.80%
  - Memorandum: SDR 3/: 4.97% / 5.46% / 8.22% / 7.51% / 7.21% / 6.85% / 6.49% / 6.17% / 5.90% / 0.00%
- Notes:
  - 1/ Estimates based on actual CIRRs for 1/95 to 12/04.
  - 2/ For the current 10-year averages, rates for Euro are used from 1/99.
  - 3/ The 10-year SDR denominated CIRR rate was constructed based on the weighted average of the five previous six-month rates.

### Table 6. Peru: Stock of Domestic Debt of the NFPS (September-30-2006)
- Legal Norm Gross placements Stock (estimated) Currency Amount (Millions of Nuevos Soles)
- Credits from BN: 2,584
- Credit to central government US$ / S/. / Y: 2,554
- Credit to local governments US$ / S/.: 29
- Net public treasury overdraft S/.: 0
- Bonds: 12,075
  - Capitalización BCRP D.S. 066-94-EF S/. 6140
  - Serie A: 2390
  - Serie B: 3750
  - Bonos TP - Financial system strengthening D.U. 041-99 US$: 175171
  - Bonos TP - Temporal suscription of stocks D.U. 034-99 US$: 52169
  - Bonos TP - Temporal portfolio exchange D.S. 114-98-EF US$: 1360
  - Bonos TP - Debt exchange bonds D.S. 068-99-EF US$: 259347
  - Bonos TP - RFA and FOPE programs D.S. 059-2000-EF / D.U. 050-2002 US$: 109383
  - Bonos TP - Financial system consolidation D.U. 108-2000 / D.U. 099-2001 US$: 3920
  - Bonos TP - Sovereign bonds 1/ S/.11 48111,005
  - Bonos TP - Caja de Pensiones Militar Policial Bonds D.U. 030-2001 US$: 340
- Total: 14,659
- Memorandum item:
  - Pension Reform Bonds D.S. 096-95-EF and DS 097-54-EF: S/.9,002
  - Floating debt: S/.1,402
- 1/ Include public debt operations to exchange Bonds Financial system consolidation for Sovereign Bonds (S/. 851 millions in May and S/. 393 millions in September of 2005), and the Bonds to prepay external public debt with Paris Club (S/. 2 619 millions in July and August of 2005) and Japeco ( S/. 811 millions in November of 2005)
- Source: Central Reserve Bank of Peru

### Statement by the IMF Staff Representative — January 26, 2007
- Purpose:
  - Provides additional information available since the circulation of the staff report; does not alter the thrust of the staff appraisal.
- Macroeconomic developments:
  - Real GDP is estimated to have grown by about 7½ percent (year-on-year) during January-November 2006, underpinned by strong private consumption and investment.
  - In December, 12-month inflation fell to 1.1 percent, below the 1.5–3.5 percent target range.
  - Core inflation remained stable, at 1.4 percent.
  - The external current account surplus is estimated to reach close to 2 percent of GDP in 2006, about ¾ percentage point of GDP above staff projections.
  - Net international reserves stood at US$17.4 billion at end-2006.
  - The exchange rate appreciated moderately against the U.S. dollar, by 1½ percent since November.
- Policy developments:
  - Preliminary data suggest the consolidated public sector balance would record a surplus of 1½ percent of GDP in 2006, exceeding staff projections by about ½ percentage points of GDP.
  - Authorities' actions in line with Letter of Intent and MEFP:
    - Draft law amending the Fiscal Responsibility and Transparency Law presented to congress and approved on first reading (MEFP, ¶5).
    - Legislation to reinstate the tax on casinos and slot machines passed on December 21, 2006 (MEFP, ¶7).
    - Regulations for voluntary mining sector contributions issued on December 21, 2006 (¶ 24).
    - Regulatory framework for a one-step window for exporters and importers approved by Congress in early January (MEFP, ¶19).
    - Banks completed assessment to identify unhedged borrowers; preliminary information: about 18 percent of banks’ foreign currency denominated loans have been extended to unhedged borrowers (MEFP, ¶22).
    - Superintendency of Banks liberalized regulations for private pension funds’ investments abroad (MEFP, ¶27):
      - Private pension funds allowed to invest in non-investment grade instruments and mutual funds investing in private equity, venture capital, real estate, and hedge funds.
      - Limit for investing in a single mutual fund eased from 1 percent to 2 percent.
      - Eliminated the maximum limit (3 percent) on investments in a mutual fund management company.

### Public Information Notice (PIN) No. 07/12 — FOR IMMEDIATE RELEASE January 29, 2007
- IMF Executive Board concluded the 2006 Article IV consultation with Peru on January 26, 2007.
- Background summary:
  - Peruvian economy enjoying longest expansion on record, with low inflation, solid external position, and declining indebtedness ratios.
  - During the first 11 months of 2006, real GDP grew by about 7½ percent year-on-year, driven by strong exports and domestic demand.
  - After peaking at 2.9 percent in April, 12-month inflation abated to [text truncated in source].

*Source: _cr0754 - 3.  Net credit of nonbanking financial institutions on the NFPS5 2657 2481 984*

### 1.1 percent in December, reflecting tightening monetary conditions, a favorable food supply

### 1.1 percent in December, reflecting tightening monetary conditions, a favorable food supply shock, and a decline in domestic fuel prices

### Inflation and monetary conditions
- 12–month inflation abated to around 1.1 percent in December 2006.
- Core inflation has remained at the lower end of the inflation target range.
- Inflation expectations are well anchored.
- Monetary policy guided by the inflation targeting framework, aimed at keeping inflation within the 1½-3½ percent official range.
- Authorities intend to gradually introduce more flexibility in exchange rate management to enhance credibility of the inflation targeting framework and provide incentives for hedging.

### External position and financial conditions
- Current account surplus is estimated to have risen to 2 percent of GDP in 2006.
- Foreign direct investment remained strong in 2006.
- Net international reserves at end-2006: US$17.3 billion.
- Net international reserves equivalent to:
  - 390 percent of short-term debt.
  - 150 percent of foreign currency deposits with the banking system.
- Gross international reserves (millions of U.S. dollars):
  - 2002: 9,690
  - 2003: 10,206
  - 2004: 12,649
  - 2005: 14,115
  - 2006: 17,329
  - 2007 (projection): 18,479
- Percent of short-term external debt:
  - 2002: 214.2
  - 2003: 214.4
  - 2004: 161.2
  - 2005: 288.5
  - 2006: 388.6
  - 2007 (projection): 371.4
- Percent of foreign currency deposits at banks:
  - 2002: 100.6
  - 2003: 107.3
  - 2004: 128.3
  - 2005: 129.4
  - 2006: 150.5
  - 2007 (projection): 153.9
- Sovereign credit developments:
  - Two credit ratings agencies upgraded Peru’s sovereign rating to BB+ (one notch below investment grade).
  - Moody’s changed its outlook from neutral to positive.
- Exchange rate and asset markets:
  - Nuevo Sol fluctuating within a narrow margin against the U.S. dollar.
  - Real effective exchange rate broadly stable, close to the average of the past five years.
  - Sovereign bonds near all-time low levels; stock market prices have increased sharply.

### Fiscal performance and public debt
- Combined public sector deficit reduced from 2½ percent of GDP in 2001 to ⅓ percent of GDP in 2005.
- During January–September 2006, combined public sector balance achieved a surplus equivalent to about 3 percent of GDP.
- Expenditure grew by 11 percent in real terms during the first three quarters of 2006 compared with the same period in 2005.
- Expenditure expected to pick up in the last quarter of 2006 due to a supplementary budget focusing on capital outlays and advancing outlays planned for 2007.
- For 2006 as a whole, combined public sector expected to register a surplus of 1½ percent of GDP (compared with a deficit of ½ percent of GDP initially envisaged under the 2004-06 program).
- Public sector debt estimated to have declined to 31½ percent of GDP by end-2006, or 15 percentage points below its end–2002 level.
- Structure of public debt improvement: share of local currency-denominated debt now equivalent to one-fifth of total.
- Fiscal policy stance:
  - Authorities committed to sustaining fiscal consolidation while boosting infrastructure and social spending.
  - Authorities requested a new 25-month Stand-By Arrangement, intended to be treated as precautionary.
- Key fiscal ratios (in percent of GDP):
  - General government current revenue:
    - 2002: 17.0
    - 2003: 17.4
    - 2004: 17.5
    - 2005: 18.3
    - 2006: 19.6
    - 2007 (projection): 18.5
  - General government noninterest expenditure:
    - 2002: 17.2
    - 2003: 17.1
    - 2004: 16.7
    - 2005: 17.0
    - 2006: 16.4
    - 2007 (projection): 17.4
  - Combined public sector primary balance:
    - 2002: 0.0
    - 2003: 0.5
    - 2004: 1.0
    - 2005: 1.6
    - 2006: 3.5
    - 2007 (projection): 1.3
  - Combined public sector overall balance:
    - 2002: -2.2
    - 2003: -1.7
    - 2004: -1.1
    - 2005: -0.3
    - 2006: 1.5
    - 2007 (projection): -0.8
  - Combined public sector debt:
    - 2002: 46.6
    - 2003: 47.0
    - 2004: 44.4
    - 2005: 37.7
    - 2006: 31.5
    - 2007 (projection): 30.7

### Growth, investment, and labor market
- Real GDP growth:
  - 2002: 5.2
  - 2003: 3.9
  - 2004: 5.2
  - 2005: 6.4
  - 2006: 6.5
  - 2007 (projection): 5.5
- Real domestic demand:
  - 2002: 4.4
  - 2003: 3.4
  - 2004: 4.4
  - 2005: 5.5
  - 2006: 8.8
  - 2007 (projection): 6.2
- Exports and imports (annual percentage change):
  - Exports:
    - 2002: 9.8
    - 2003: 17.8
    - 2004: 38.8
    - 2005: 36.7
    - 2006: 37.2
    - 2007 (projection): 4.4
  - Imports:
    - 2002: 2.8
    - 2003: 11.2
    - 2004: 19.0
    - 2005: 23.0
    - 2006: 23.9
    - 2007 (projection): 17.7
- Terms of trade (deterioration -):
  - 2002: 3.1
  - 2003: 1.3
  - 2004: 9.2
  - 2005: 6.9
  - 2006: 26.1
  - 2007 (projection): -5.3
- Labor market and structural issues:
  - Unemployment rate:
    - 2002: 9.4
    - 2003: 9.4
    - 2004: 9.4
    - 2005: 9.6
  - High informality in the labor market highlighted as a major concern.
  - Directors recommended measures to reduce informality, including reduction of high severance payments, better alignment of non-wage benefits with job tenure, and removal of legal restrictions that prevent dismissals.

### Poverty and social indicators
- Poverty rate (Total) 1/:
  - 2002: 53.8
  - 2003: 52.2
  - 2004: 51.6
  - 2005: 50.6
- Life expectancy at birth (years):
  - 2002: 69.8
  - 2003: 70.0
- Infant mortality (per thousand live births):
  - 2002: 30.0
  - 2003: 26.0
- Adult literacy rate:
  - 2002: 87.3
  - 2003: 87.7
  - 2004: 87.8
- Directors emphasized decisively tackling high poverty levels and welcomed creation of a high-level committee to develop a strategy to combat poverty.
- Program objective: an action plan to strengthen poverty alleviation and enhance effectiveness and scope of social assistance programs.

### Financial sector reforms and dollarization
- High dollarization of the economy identified as a remaining vulnerability.
- Directors commended progress in identifying foreign exchange–related credit risks in the banking system.
- Policy measures and reforms:
  - Reduce dollarization, particularly of mortgage loans.
  - Proposed changes to the MiVivienda mortgage lending program to discourage mortgage lending in foreign currency to unhedged borrowers.
  - Strengthen payments system and regulatory framework.
  - Reforms to deepen domestic capital markets.
- Directors recommended managing exchange rate more flexibly (gradually) to encourage hedging and reduce dollarization, while noting risks for sectoral balance sheets in a highly dollarized economy.

### Stand-By Arrangement and program priorities (2007–08)
- IMF Executive Board approved a 25-month SDR 172.4 million (about US$257.7 million) Stand-By Arrangement for Peru on January 26, 2007; authorities intend to treat the arrangement as precautionary.
- Program main objectives:
  - Consolidate macroeconomic stability.
  - Tackle high poverty levels.
  - Strengthen resilience and depth of the financial system.
  - Press ahead with growth-enhancing reforms.
- Program elements and commitments:
  - Fiscal targets for 2007–08 within the 1 percent of GDP deficit ceiling in the Fiscal Responsibility and Transparency Law.
  - Measures to lower distortionary taxes and exemptions and improve quality of public spending.
  - Greater exchange rate flexibility to solidify credibility of the inflation targeting framework.
  - Enhance effectiveness of social assistance programs in a comprehensive anti-poverty strategy.
  - Decentralization to proceed consistent with high-quality investment under the National System of Public Investment.
  - Reforms to reduce dollarization, strengthen financial regulation, improve business environment, reduce informality, and sustain trade liberalization.
  - Late December: authorities lowered average import tariff rates from 10.1 percent to 8.3 percent, effective January 1, 2007.

### Executive Board assessment and recommendations
- Directors commended Peruvian authorities’ commitment to sound economic policies and structural reforms, attributing these to high growth, low inflation, and declining external vulnerabilities.
- Directors noted remaining challenges: high poverty, regional income disparities, and still-high dollarization.
- Fiscal policy recommendations:
  - Continue saving part of central government revenue that exceeds the budgeted amount to contain demand pressures, accelerate public debt reduction, and achieve investment grade status.
  - Improve tax policy and administration, reduce tax exemptions, and simplify the tax regime to broaden the tax base.
  - Introduce performance-based budgeting and improve public financial management.
  - Spend more on infrastructure and social assistance without compromising fiscal consolidation goals.
  - Implement fiscal decentralization cautiously; strengthen administrative and technical capacity of subnational governments and clearly specify shared expenditure responsibilities.
  - Establish a legal framework for public-private partnerships (PPPs); monitor issuance of securities associated with PPPs and clearly record public sector obligations.
- Structural and labor market recommendations:
  - Reduce informality via labor market reforms (severance, non-wage benefits alignment, removal of dismissal restrictions).
  - Improve business environment and extend commercial courts nationwide.
  - Maintain an environment favorable to foreign direct investment and trade openness, critical for mining and diversification toward nontraditional labor-intensive sectors.
- Directors welcomed the Stand-By Arrangement as a policy anchor and noted that continued strong implementation of policies should lay the basis for eventual exit from use of Fund resources.

*Source: IMF staff report and Press Release, January 26, 2007.*

### 1. Over the last years Peru has posted solid growth, responsible fiscal and monetary

### _cr0754 - 1. Over the last years Peru has posted solid growth, responsible fiscal and monetary

### Overview and objectives
- Peru has posted solid growth; responsible fiscal and monetary policies have been implemented; external and financial vulnerabilities have diminished considerably; progress has been made in structural reform.
- Authorities (in office July 2006) aim to: lay firmer foundations for sustained medium-term growth, reduce high poverty by ensuring a more equitable distribution of growth benefits, enhance physical and human capital, promote employment, improve the business climate, and further limit financial vulnerabilities.
- The authorities request a Stand-By Arrangement (SBA) covering the period through end-February 2009; the government intends to treat the arrangement as precautionary, keeping the Fund’s financial exposure in Peru at a minimum —currently only 2.1 percent of quota.

### Growth and external position
- Preliminary GDP growth in 2006: 7.5 percent.
- The expansion is Peru’s longest on record; four years of annual expansion of more than 5 percent preceded 2006.
- Export growth in 2006: roughly 35 percent in dollar terms, driven by favorable commodity prices and expansion in industrial exports (mainly textiles and agricultural goods).
- At end-2006:
  - Reserves reached 3.8 times short-term debt (residual basis).
  - Reserves reached around 100 percent of foreign currency-denominated deposits in the banking system.
  - Sovereign spreads hit historic lows.
- Outlook for 2007: soft deceleration in line with a cooling global economy; macroeconomic policies and structural reforms will aim at sustaining growth and stability.

### Fiscal policy and public debt
- Public debt trajectory:
  - Around 37½ percent of GDP at end-2005.
  - Around 32 percent at end-2006.
  - Falling to almost 30 percent of GDP by end-2008 (authorities’ objective).
- Overall public sector balance:
  - Surplus in 2006: 1.6 percent of GDP (highest in decades).
  - Projected deficits: not to exceed 0.8 percent in 2007 and 0.7 percent in 2008, driven significantly by urgent increases in social and infrastructure spending.
- Public investment plan:
  - Current public investment: around 3 percent of GDP.
  - Target public investment: rise to 4.5 percent of GDP over the next five years.
  - National System of Public Investment (SNIP) will be decentralized.
- Fiscal discipline measures:
  - Create fiscal space by improving tax collections and enhancing expenditure restraint, quality, and focus.
  - Authorities granted temporary fiscal powers to enhance efficiency and transparency of the tax structure and end several tax exemptions.
  - Phased-in performance budgeting.
  - At least half of any excess central government revenue over programmed amounts will be saved.
  - Sanctions for noncompliance enforced under the Fiscal Responsibility and Transparency Law (FRTL).
  - Operations of subnational governments will be closely monitored.

### Monetary policy and inflation targeting
- Inflation-targeting scheme (adopted 2002):
  - Medium-term inflation target: 2.5 percent within a ±1 percent range.
  - Regime: floating exchange rate.
- Foreign exchange policy: interventions limited to confronting excessive exchange rate volatility or abrupt fluctuations; no commitment to any given exchange rate level.
- Recent exchange rate movement: the domestic currency has appreciated around 1.5 percent in the last three months.
- Inflation performance:
  - Central bank moved from a year-end basis to a rolling twelve-month inflation target in 2006; target met until November.
  - Twelve-month inflation fell to 1.14 percent toward year-end due to one-off supply shocks.
  - Expectation: inflation to start converging towards the target range by mid-2007; no reason to loosen monetary stance as of the report.
  - Core inflation was heading towards the lower limit of the target range as of year-end, though gradually increasing since December 2005.

### Poverty reduction and social policies
- Authorities aim to promote rapid poverty alleviation and structural transformation for high, sustainable, and balanced growth.
- Social program consolidation and targeting:
  - Interministerial Committee for Social Affairs (CIAS) to present in March 2007 a plan for consolidating existing social programs and optimizing functioning.
  - Resources from austerity measures and voluntary private sector contributions to be applied to child malnutrition, access to clean water, and housing programs.
  - Cash transfer program launched in 2005 will be expanded.
- Education initiatives:
  - National Accord supports government initiative to evaluate teachers and improve skills through continuous training.

### Infrastructure, PPPs, and business climate
- Infrastructure deficit identified as a major bottleneck for industrial and rural growth.
- Public-Private Partnerships (PPPs):
  - Government envisages initiating PPPs totaling US$3 billion during 2007, especially in ports, highways, and sanitation.
  - A framework law to be submitted to Congress by June 2007 proposing guidelines for project selection and approval, reporting requirements, conflict resolution, and adherence to accounting standards.
  - A limit has been established on the net present value of future payments, firm and contingent, associated with PPPs to ensure fiscal sustainability.
- Business environment measures:
  - Administrative simplification for new businesses and exporters.
  - Establish commercial courts in several cities after successful pilot in the capital to expedite business dispute resolution.
  - Fiscal regime to remain consistent with attracting investment in mining and hydrocarbon sectors; authorities will not introduce measures resulting in unilateral cancellation or modification of tax stability contracts.
  - Aim to reduce informal jobs and develop a more comprehensive social protection net.
- Trade policy:
  - Pursue regional and bilateral FTAs.
  - FTA with the U.S. (pending U.S. Congress ratification) would make permanent special access currently under ATPDEA and is expected to encourage export growth, diversification, and investment-attracting reforms.

### Financial sector policies and stability measures
- Financial system indicators are sound due to strengthened supervision and regulation.
- De-dollarization and banking measures:
  - Accelerate de-dollarization, including mortgage lending in domestic currency under the state-sponsored housing program.
  - Strengthen norms on loan classification, provisioning, and capital requirements to face foreign currency credit risks.
- Payments system reforms:
  - Modified legislation to entrust surveillance and regulation of the payments system to the central bank and to ensure the central bank’s seniority as lender of last resort among creditors.
- Public banks and financial access:
  - Public banks to operate as second tier institutions as part of strategy to promote small and medium-size enterprises.
  - Banco de la Nación to enter infrastructure agreements with selected financial institutions to facilitate access in remote areas.
  - Banco de la Nación to continue complying with a 25 percent annual growth limit on consumer lending operations.
- Microfinance and pension funds:
  - Implement additional measures to improve the financial soundness and corporate governance of microfinance institutions.
  - Seek to enhance the operating environment of private pension funds, including by gradually raising limits on their investments abroad.

### Policy stance and IMF engagement
- Authorities consider the policies in their Memorandum of Economic and Financial Policies (MEFP) adequate to meet program objectives but stand ready to take additional measures if needed.
- Authorities commit to maintaining close and proactive dialogue with the Fund.

*Source: _cr0754 - 1. Over the last years Peru has posted solid growth, responsible fiscal and monetary*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0754.pdf_