## PERU — First Review Under the Stand-By Arrangement and Requests for Modification of Performance Criterion and Waiver for Nonobservance of Performance Criterion ## Source details **Canonical URL:** [PERU — First Review Under the Stand-By Arrangement and Requests for Modification of Performance Criterion and Waiver for Nonobservance of Performance Criterion](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0799.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0799.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0799.pdf.json) --- ### Executive summary - Stand-By Arrangement: 26-month Stand-By Arrangement in the amount of SDR 287.279 million (21 percent of quota on an annual basis) approved by the Executive Board on June 9, 2004; authorities are treating the arrangement as precautionary. - Availability under arrangement: With completion of this review, a total of SDR 126.06 million will be available for drawing. - Program purpose (Directors’ view): Reinforce confidence, boost economic growth and employment, further reduce vulnerabilities associated with high dollarization and public debt, and strengthen the basis for defining Peru’s exit from Fund-supported programs. - Staff position on waiver and modifications: - Support for waiver of nonobservance of the end-September structural performance criterion on the establishment of a commercial court in Lima and resetting this criterion for end-December 2004. - Support for modification of the end-December structural performance criterion on awarding in concession the construction and maintenance of two major roads to end-April 2005. - Medium-term baseline: Growth projected at 4½ percent a year in 2004–06 under assumptions of sound macro policies and progress on structural reforms. ### Recent macroeconomic developments (2004) - Growth and labor: - Real GDP growth: 4⅓ percent during the first eight months of 2004. - Unemployment: about 8 percent in July. - Agriculture: decline in output due to a severe drought. - Inflation and monetary policy: - CPI 12–month increase: 4 percent at end-October 2004 (authorities’ year-end inflation target band: 1.5–3.5 percent). - Central bank policy rate: raised by 25 basis points on two occasions (August and October) to 3 percent. - Cumulative inflation first ten months of 2004: 3.2 percent; food prices contributed 1.8 percentage points and oil derivatives 0.7 percentage points. - Core inflation: remains close to the mid-range of the inflation target band but is increasing. - Exchange rate and reserves: - Nuevo Sol appreciated by 4 percent against the U.S. dollar during January–October 2004. - Central bank net foreign exchange purchases: US$1.7 billion during January–October 2004. - Net official international reserves: US$12.2 billion by end-October 2004, up from US$10.2 billion at end-2003; reserves covering more than 200 percent of short-term external debt. - External sector: - Current account deficit: narrowed to 1.3 percent of GDP during the first half of 2004, ½ percentage points below its level in the same period of 2003. - Export growth: 30 percent increase in U.S. dollar terms. - Remittances: grew to 1.7 percent of GDP. - Energy (Camisea): net energy imports in second semester of 2004 projected to be some US$260 million (0.4 percent of annual GDP) higher compared with original program due to a projected 50 percent increase in average price of petroleum products and lower fuel export volumes. - Fiscal developments: - Combined public sector primary operations: surplus equivalent to ½ percent of yearly GDP during January–June. - Central government tax revenue: projected to rise from 13 percent of GDP in 2003 to 13.4 percent in 2004. - Mining royalty approved: rate set at 1–3 percent, with annual proceeds estimated at US$35–40 million in 2005 (about 0.06 percent of GDP). - Temporary government guarantee for fuel stabilization fund up to US$17 million (computed against the 2006 budget). - Program performance: - All quantitative performance criteria for end-September 2004 under the program were observed. ### Structural reforms and implementation issues - Main priorities: awarding in concession of transportation infrastructure and reform of the public pension regime (Cédula Viva). - Missed/delayed actions: - End-September structural performance criterion on creation of a commercial court missed due to administrative bottlenecks and a strike; expected to be established by end-December 2004. - Two structural benchmarks (collateral registries and pension reform of the military and police) were missed. - End-September benchmark on elimination of the special wage tax was met with a slight delay; Congress approved elimination by December 1, 2004. - Authorities’ specific requests: - Waiver for nonobservance of end-September commercial court criterion; reset to end-December 2004. - Modify timing of awarding in concession the construction and maintenance of two major roads from end-December 2004 to end-April 2005 (to allow completion of environmental impact assessment for IDB loan guarantee). ### Banking and financial sector developments (2004) - Monetary aggregates and credit: - 12-month increase in broad money at end-September: 10⅔ percent; base money increase: 20 percent. - Credit to private sector rose 1½ percent in September (12-month change). - Credit composition: - Credit for housing, consumption, and SMEs rose; commercial bank lending fell further as corporate borrowing shifted to domestic bond market. - Asset quality and capitalization: - Banks’ nonperforming loan ratios: about 5½ percent of portfolio in September. - Banks’ risk-based capital-to-assets ratios: continued to strengthen; regulatory Tier I and equity ratios improved (selected series show Regulatory Tier I 12.9 percent Jun-04; Equity capital to risk-weighted assets 14.1 percent Jun-04). - De-dollarization: modest improvements in de-dollarization of bank activities. - Other financial indicators: - Lima stock exchange index rose by 28 percent during January–September 2004 (after 75 percent surge in 2003). - Sovereign credit rating upgraded by Standard and Poor’s (to BB) and Fitch in June. - Sovereign spread: about 320 basis points at end-October. ### Fiscal policy: recent performance and 2005 budget outlook - Combined public sector overall deficit: projected to decline to 1.4 percent of GDP in 2004 (as programmed). - Central government revenue and expenditures: - Central government tax revenue: 13.4 percent of GDP in 2004 (projected). - Targeted spending on extreme poverty: 1½ percent of GDP. - Draft 2005 budget aims to reduce combined public sector deficit to 1 percent of GDP. - Key revenue measures and estimates: - Petroleum tax adjustments: specific excise tax rates on petroleum products lowered in mid–2004; full-year effect estimated at 0.1 percent of GDP. - Mining royalty estimated proceeds US$35–40 million in 2005 (about 0.06 percent of GDP). - Financing and debt management: - Eighty percent of 2005 gross financing needs expected to be met through official financing and external bond placements; remainder through domestic market. - October placement: US$800 million 10–year Eurobond covering about 70 percent of Peru’s external market financing needs for 2005. - Authorities intend to include collective action clauses in foreign sovereign debt placements and increase local currency composition of new debt issuance. - Staff recommendations for fiscal framework: - Prepare well-quantified contingency measures to ensure meeting the 2005 deficit target. - Amend the Fiscal Responsibility and Transparency Law (FRTL) to establish sanctions for noncompliance and issue supporting regulations for quarterly fiscal performance reports. - Issue a law on public indebtedness to ensure transparent reporting of public contingent liabilities and quasi-fiscal operations of trusts. ### Monetary, exchange rate, and financial policy recommendations - Monetary policy: - Managed prudently under inflation-targeting; risk that inflation could be slightly above upper limit by end–2004. - Central bank said ready to tighten further if needed to return inflation to mid-point in 2005. - Exchange rate and intervention: - Staff encouraged flexibility, transparency, and limiting intervention to smoothing excessive volatility. - Sterilized intervention could become costly; reduction in intervention likely to lead to sol appreciation and lessen pressure to raise interest rates. - Pension funds and de-dollarization: - Staff argued for further raising limits on private pension fund investments abroad to diversify risks and reduce appreciation pressures; central bank opposed prioritizing domestic capital market development. - Limits were raised from 9 percent of total assets to 10.5 percent in May 2004. - Monitoring system for foreign currency loan risks expected operational by end-December (end-December benchmark). - Staff supported differentiated generic loan provision requirements to disincentivize foreign-currency lending to agents without foreign-currency income. - Public banks: - Banco de la Nación’s consumer-lending program expanded faster than programmed: credit expanded by the equivalent of US$120 million in first eight months of 2004 versus yearly increase of US$65 million in the program. - Authorities taking steps to limit credit growth under this program for remainder of 2004 and in 2005. ### Public investment, PPPs, and structural reform effort - Public investment: - Public investment fell to about 3 percent of GDP in 2003 from an average of 5 percent in the mid–1990s. - SNIP (National Public Investment System) improved project selection, but weaknesses remain in maintenance prioritization, project preparation, appraisal, and transparency. - PPPs and concessions: - Government called for bids to award construction and maintenance of seven regional airports (early October). - Road concessions delayed due to complex technical PPP design and environmental impact assessments; two major road concessions delayed to April 2005. - Authorities advised to enter PPPs only where benefits clearly outweigh budgetary costs and contingent liabilities; transparency in reporting PPP costs and liabilities required. - Cédula Viva pension regime: - Characteristics: - CV outlays in 2003: 2.4 percent of GDP — twice as much as general public pension regime. - Authorities estimated pension liabilities at US$24 billion (40 percent of GDP) at end-2003 in NPV terms. - Current CV pensioners eligible for pensions up to about US$9,000 a month versus about US$350 maximum in general regime. - Until 2003 contribution rate in CV was 6 percent vs. 13 percent in general regime. - Reform progress and effects: - Constitutional amendment required; first vote approved May 26, 2004; second vote scheduled before year-end (Congress approved constitutional amendment on November 11, 2004 per later sections). - Authorities estimate fiscal savings of ½ percent of GDP a year over 2005-09, with minimal savings in 2005-06. - Reform would reduce CV pension liabilities by 24 percent in NPV terms under authorities’ estimates. - Main reform elements: eliminate automatic link of pensions with public sector wages; close CV to new entrants; limit benefits; impose ceiling and adjust pensions annually by inflation and cash availability. - Draft law envisages pensions above US$1,035 a month (3½ percent of beneficiaries) would be reduced gradually while pensions below US$200 a month would be immediately raised by US$30. ### Trade policy, external integration, and risks - Trade negotiations and integration: - Authorities aim to complete FTA discussions with the United States by early 2005. - Party to an economic cooperation agreement between the Andean Community and Mercosur; progress in discussions with Thailand; exploring negotiations with Chile and the European Union. - Protectionist measures and risks: - Temporary safeguards on imports of textile products reduced items from 100 to 20 and expanded to all countries (renewed in October 2004). - Mission stressed cautious and temporary application of such measures due to negative impacts on low-income consumers and exporter concerns. - Main risks to program: - Political uncertainty and social tensions, with high poverty and underemployment and proximity of elections in early 2006. - Downside risks from external environment: sensitivity to commodity price developments and effects from removal of world textile and clothing quotas (January 2005). - Buffers: comfortable international reserves and a well-capitalized banking system mitigate vulnerabilities. ### Debt, financing, and debt sustainability analysis (selected projections and indicators) - Stand-By Arrangement total access: SDR 287.279 million (21 percent of quota on an annual basis). - Disbursement schedule highlights: - Initial disbursement: SDR 80.00 million — 2/June 9, 2004 Board approval of SBA. - Subsequent scheduled disbursements of SDR 23.031 million on multiple review/completion dates through May 15, 2006 (detailed schedule in source). - Composition of public external debt (June 2004): - Total public external debt: US$22.8 billion; International organizations 32 percent; Paris Club 36 percent; International bonds 27 percent; Other 5 percent. - Total public debt: US$26.8 billion; currency composition: US$ 57 percent; Yen 14 percent; Euro 11 percent; Other foreign currency 10 percent; Soles 8 percent. - Interest-rate composition: Fixed 47 percent; Variable 53 percent. - Debt sustainability findings: - Public sector debt projected to decline to about 43½ percent of GDP at end-2004 and about 35 percent of GDP by 2009. - Standard sensitivity and stress tests indicate robustness to alternative shocks, though depreciation and growth shocks raise ratios temporarily (selected stress-test scenarios presented). - External debt (percent of GDP) selected projections: - 2001: 50.7; 2002: 49.3; 2003: 49.1; 2004: 46.2; 2005: 43.5; 2006: 41.4; 2007: 39.4; 2008: 37.5; 2009: 35.8 - Public sector debt (percent of GDP) selected projections: - 2001: 46.6; 2002: 47.1; 2003: 47.7; 2004: 44.7; 2005: 41.7; 2006: 39.9; 2007: 38.3; 2008: 36.6; 2009: 35.1 ### Key selected statistics (as presented) - Real GDP: 0.2; 4.9; 3.8; 4.0; 4.3; 4.5; 4.5 - Real domestic demand: -0.6; 4.0; 3.3; 3.5; 4.6; 4.4; 4.5 - Consumer Prices (end of period): -0.1; 1.5; 2.5; 2.5; 3.5; 2.5; 2.5 - Consumer Prices (period average): 2.0; 0.2; 2.3; 3.2; 3.7; 2.4; 2.5 - Exports (U.S. dollars): 1.0; 9.9; 16.4; 22.9; 29.4; 3.9; 2.2 - Imports (U.S. dollars): -2.0; 2.7; 11.3; 8.0; 17.7; 4.1; 4.0 - General government current revenue: 17.2; 17.2; 17.7; 17.4; 17.8; 17.9; 17.8 - Central government tax revenue: 12.2; 11.9; 13.0; 13.3; 13.4; 13.5; 13.4 - Combined public sector primary balance: 0.0; 0.0; 0.5; 0.8; 0.8; 1.2; 1.3 - Combined public sector overall balance: -2.3; -2.2; -1.7; -1.4; -1.4; -1.0; -1.0 - Gross reserves (millions of U.S. dollars): 8,838; 9,690; 10,206; 10,306; 11,947; 11,447; 11,547 - Total external debt: 50.7; 49.3; 49.1; 45.9; 46.2; 43.5; 41.4 - Combined public sector debt: 46.6; 47.1; 47.7; 44.6; 44.7; 41.7; 39.9 - Nominal GDP (S/. billions): 188.3; 198.7; 210.7; 231.6; 231.8; 246.9; 265.1 ### Staff appraisal, recommendations, and program review outcome - Staff appraisal highlights: - Preserving macroeconomic stability remains core policy objective. - Authorities reaffirmed commitment to accelerate structural reforms and provided a new timetable for key measures. - Given authorities’ commitments and the new timetable, staff supports the waiver and timing modifications requested. - Staff recommendations and policy guidance (selected): - Prepare contingency measures to meet 2005 fiscal target; refrain from granting new wage increases until identified savings materialize. - Amend FRTL to establish sanctions and issue supporting regulations for quarterly fiscal performance reports. - Issue law on public indebtedness for transparent reporting of contingent liabilities. - Encourage flexibility of the exchange rate and limit intervention to smoothing excessive volatility; consider raising pension funds’ investment limits abroad to diversify risks. - Strengthen supervision, continue de-dollarization efforts, implement monitoring system for foreign-currency loan risks, and centralize collateral registries by end-December. - Pursue PPPs only when benefits clearly outweigh fiscal costs and ensure transparency in PPP liabilities. - Review outcome: - Executive Board completed the first review; completion makes available SDR 126.06 million for drawing and the arrangement is being treated as precautionary. - Staff recommends completion of the first review and supports waiver and modifications on the specified structural performance criteria. *International Monetary Fund. Staff report prepared by the Western Hemisphere Department, approved by José Fajgenbaum and Juha Kähkönen, November 5, 2004.* ### 2004. The views expressed in the staff report are those of the staff team and do not ### PERU — First Review Under the Stand-By Arrangement and Requests for Modification of Performance Criterion and Waiver for Nonobservance of Performance Criterion ### Executive summary - Stand-By Arrangement: 26-month Stand-By Arrangement in the amount of SDR 287.279 million (21 percent of quota on an annual basis) approved by the Executive Board on June 9, 2004; authorities are treating the arrangement as precautionary. - Availability under arrangement: With completion of this review, a total of SDR 126.06 million will be available for drawing. - Program purpose (Directors’ view): Reinforce confidence, boost economic growth and employment, further reduce vulnerabilities associated with high dollarization and public debt, and strengthen the basis for defining Peru’s exit from Fund-supported programs. - 2004 macro performance: Real GDP projected to grow by 4⅓ percent in 2004; inflation remained relatively low though increased recently; achievement of 2004 fiscal targets is within reach; gross official reserves are well above program targets. - Structural reform: Progress made but short of program objectives. Main focus: awarding in concession transportation infrastructure to the private sector and reform of the public pension regime. The establishment of a commercial court (end-September structural performance criterion) has been delayed; concession of two major roads (end-December structural performance criterion) now expected in April 2005. Several other structural measures are lagging. - Political environment: Domestic political situation remains difficult; popular support for the administration remains low; government lacks a stable voting majority in congress. - Staff position on waiver and modifications: In view of authorities’ commitments and new timetable, staff supports the authorities’ request for a waiver of the end-September criterion on the commercial court, resetting this criterion for end-December, and modifying the end-December criterion on road concessions to end-April 2005. - Medium-term outlook: Assuming sound macro policies and progress on structural reforms, growth is projected at 4½ percent a year in 2004–06. Possible free trade arrangement with the United States and a second large natural gas project are positive factors. - Main risk: The political situation remains the main risk to the program, though the government has so far preserved a consensus for prudent policies and reform. ### Program and review process - Review discussions: Held in Lima during September 20–29, 2004. Staff team included G. Terrier (Head), A. López-Mejía, M. Perez dos Santos (all WHD), M. García-Escribano (FAD), and M. Shannon (PDR); J. Guzmán (Senior Resident Representative) assisted; Mr. Pereyra, Advisor to the Executive Director, participated in policy discussions. - Letter to Managing Director: In his letter dated November --, 2004, Minister Kuczynski describes progress and specifies policy actions in structural reform (Attachment I). The Minister requests a waiver for nonobservance of the end-September structural performance criterion on the establishment of a commercial court in Lima, resetting this criterion for end-December, and modifying from end-December 2004 to end-April 2005 the date of implementation of the structural performance criterion on awarding in concession the construction and maintenance of two major roads. - Relations with the Fund: Peru’s outstanding Fund credit is SDR 66.9 million (10.5 percent of quota). The last Article IV consultation concluded on February 23, 2004. Peru has accepted the obligations of Article VIII, Sections 2, 3, and 4 and maintains an exchange system free of restrictions on payments and transfers for current international transactions. Peru’s economic statistics are adequate for surveillance and policy formulation. ### Recent macroeconomic developments (2004) - Growth and labor: - Real GDP growth: 4⅓ percent during the first eight months of 2004. - Unemployment: about 8 percent in July (lowest level in several years). - Agriculture: decline in output due to a severe drought. - Drivers of momentum: strong export growth and recovery in private investment in manufacturing and construction; improvements in urban employment. - Inflation and monetary policy: - CPI 12–month increase: 4 percent at end-October 2004 (above the authorities’ year-end inflation target band of 1.5–3.5 percent). - Central bank policy rate: raised by 25 basis points on two occasions (August and October) to 3 percent. - CPI developments: cumulative inflation first ten months of 2004 was 3.2 percent; increases in food prices and oil derivatives contributed 1.8 percentage points and 0.7 percentage points, respectively. - Core inflation: remains close to the mid-range of the inflation target band but is increasing. - Exchange rate and reserves: - Currency appreciation: Nuevo Sol appreciated by 4 percent against the U.S. dollar during January–October 2004. - Central bank intervention: net foreign exchange purchases of US$1.7 billion during January–October 2004. - Net official international reserves: US$12.2 billion by end-October 2004, up from US$10.2 billion at end-2003; reserves covering more than 200 percent of short-term external debt. - External sector: - Current account deficit: narrowed to 1.3 percent of GDP during the first half of 2004, ½ percentage points below its level in the same period of 2003. - Export growth: 30 percent increase in U.S. dollar terms, led by mineral products prices and volumes, revival of fishing exports, and strong growth in non-traditional sectors partly spurred by temporary preferential access to U.S. markets. - Remittances: grew to 1.7 percent of GDP. - Energy and Camisea: completion of first phase of Camisea gas project expected to reduce demand for energy imports; compared with original program, net energy imports in second semester of 2004 projected to be some US$260 million (0.4 percent of annual GDP) higher due to a projected 50 percent increase in average price of petroleum products and lower fuel export volumes. - Fiscal developments: - Combined public sector primary operations: During January–June, combined public sector registered a surplus equivalent to ½ percent of yearly GDP, compared with a slight deficit in the program. - Reasons: higher-than-projected revenue (income tax and VAT) and delays in spending execution (heavy rains and low implementation capacity at sub-national governments). - Capital spending: picking up in the second semester as programs administered by the central government increase and capacity-building efforts at sub-national levels proceed. - Program performance: - All quantitative performance criteria for end-September 2004 under the program were observed (Table 2). ### Structural reforms and implementation issues - Main structural priorities: awarding in concession of transportation infrastructure and reform of the public pension regime (including Cédula Viva public pension regime reform). - Specific implementation timing adjustments requested by authorities: - Waiver requested for nonobservance of the end-September structural performance criterion on establishment of a commercial court in Lima; reset this criterion to end-December 2004. - Modify timing of the structural performance criterion on awarding in concession the construction and maintenance of two major roads from end-December 2004 to end-April 2005. - Assessment: Progress has been made in structural areas but remains short of program objectives; several structural measures are lagging. ### Outlook, risks, and staff appraisal - Growth projections: 4½ percent a year in 2004–06 under assumptions of sound macro policies and progress on structural reforms. - Positive factors for medium term: potential free trade arrangement with the United States; a possible second large natural gas project. - Main risks: Domestic political and social tensions, with high poverty and underemployment and the proximity of presidential and congressional elections in early 2006; political fragmentation in Congress. - Staff appraisal highlights: - Preserving macroeconomic stability remains core policy objective. - Authorities reaffirmed commitment to accelerate structural reforms and provided a new timetable for key measures. - Given authorities’ commitments and the new timetable, staff supports the waiver and timing modifications requested. *International Monetary Fund. Staff report prepared by the Western Hemisphere Department, approved by José Fajgenbaum and Juha Kähkönen, November 5, 2004.* ### 8. Banking and financial ### 8. Banking and financial ### Banking and financial indicators - At end-September, the 12-month increase in broad money was 10⅔ percent and that of base money 20 percent, reflecting in part an increase in preference for the domestic currency. - Over the past 12 months, credit to the private sector rose 1½ percent in September. - Credit for housing, consumption, and small- and medium-scale enterprises rose, while commercial bank lending fell further, reflecting a shift in corporate borrowing from banks to the domestic bond market. - Banks’ nonperforming loan ratios declined to about 5½ percent of their portfolio in September. - Banks’ risk-based capital-to-assets ratios have continued to strengthen. - Modest improvements have taken place in the de-dollarization of bank activities. - Lima stock exchange index rose by 28 percent during January-September 2004, on top of the 75 percent surge registered in 2003. - Peru’s sovereign credit rating was upgraded in June by Standard and Poor’s (to BB) and Fitch. - Peru’s sovereign spread was about 320 basis points at end-October. ### Structural reform progress (program implementation) - Authorities concentrated efforts on awarding concessions to the private sector (including Las Bambas mining project) and reform of the Cédula Viva public pension regime. - Missed and delayed benchmarks: - End-September structural performance criterion on the creation of a commercial court was missed because of administrative bottlenecks and a strike in the judiciary; court now expected to be established by end-December 2004. - Two structural benchmarks (on collateral registries and the pension reform of the military and police) were missed. - End-September benchmark on the elimination of the special wage tax was met with a slight delay; in October, congress approved elimination of this tax by December 1, 2004. - Met and completed actions: - Structural benchmark on a census of government employees and pensioners was completed as scheduled in September. - Progress made in computerizing the payroll and improving procurement procedures. - Legislation enacted on certification of administrative capacity of subnational governments for fiscal decentralization. ### Political and social context - The government lacks a majority in congress; a moderate opposition member was elected President of Congress in July. - Congressional agenda moving slowly; opposition controls important congressional commissions. - Growing infighting within the government coalition contributed to a slowdown in implementation of the economic agenda. - Social manifestations of discontent persist in several sectors, including the civil service. - Pressure on the government to increase spending expected to build further in the period up to the elections. ### Outlook and risks - Under the assumption that world growth remains strong, real GDP growth would average 4½ percent during 2004–05. - Downside risks: - Slowdown in the world economy could adversely affect exports and growth (Peru’s large reliance on mineral exports). - Removal of world textile and clothing quotas in January 2005 (Box 2) poses risks to the textile sector. - Deterioration in investor sentiment if political uncertainties and election-related expenditure pressures lead to relaxation of the fiscal stance. - Buffers and resilience: - Level of official reserves is comfortable. - Banking system well capitalized. - Debt sustainability analysis indicates public and external debt dynamics are relatively robust to possible shocks. ### Fiscal policy: recent performance and 2005 budget outlook - Combined public sector overall deficit projected to decline to 1.4 percent of GDP in 2004, as programmed. - Central government revenue expected somewhat higher than program; non-interest expenditure broadly the same; interest payments slightly lower. - Offsetting factors: small operational loss of the central bank due to sterilization of foreign exchange intervention; lower primary balance of public enterprises reflecting higher electricity production costs associated with the drought. - Central government tax revenue projected to rise from 13 percent of GDP in 2003 to 13.4 percent in 2004. - Significant gains in corporate income tax collections due to high mineral prices. - Improvements in tax administration and extension of VAT withholding schemes contributed. - In June, congress approved a royalty on sales of mining companies; rate set at 1–3 percent, with annual proceeds estimated at US$35–40 million in 2005 (about 0.06 percent of GDP). - Petroleum tax adjustments: - Specific excise tax rates on petroleum products were lowered in mid–2004; full-year effect estimated at 0.1 percent of GDP. - A small temporary fund was created to avoid excessive volatility in domestic petroleum prices; government guarantee up to US$17 million computed against the 2006 budget. - Current expenditure slightly above program due mostly to higher-than-expected increases in teachers’ salaries; offset by lower capital outlays. - Targeted spending on extreme poverty remained broadly constant at 1½ percent of GDP. - Authorities plan to create a US$40 million Defense Fund, financed in part with gas royalties; mission expressed reservations about this fund. - Draft 2005 budget aims to reduce the combined public sector deficit to 1 percent of GDP. Key measures: - Elimination of the special payroll tax (IES). - Reduction in the Financial Transactions Tax rate. - Further extension of the temporary increase in the VAT rate to 19 percent (introduced in 2003). - Revenue projected to rise slightly as a percent of GDP due to stronger VAT and income tax collections and higher royalties. - Wage bill includes only full-year impact of 2004 wage increases; new increases would be considered later only if savings from procurement improvements and elimination of payroll irregularities materialize by mid-year. - Staff recommendations: - Prepare well-quantified contingency measures to ensure meeting the 2005 deficit target. - Amend the Fiscal Responsibility and Transparency Law (FRTL) to establish sanctions for noncompliance and issue supporting regulations for quarterly fiscal performance reports. - Issue a law on public indebtedness to ensure transparent reporting of public contingent liabilities and quasi-fiscal operations of trusts. - Public debt and financing: - Eighty percent of the public sector’s 2005 gross financing needs expected to be met through official financing and external bond placements; remainder through domestic market borrowing. - In October, authorities placed a US$800 million 10–year Eurobond, covering about 70 percent of Peru’s external market financing needs for 2005. - Authorities intend to include collective action clauses in foreign sovereign debt placements and increase local currency composition of new debt issuance. - Discussions initiated with Paris Club creditors on possible prepayments financed through longer-term operations; a formal proposal may be presented to the Paris Club before year-end. ### Monetary, exchange rate, and financial policies - Monetary policy managed prudently under inflation-targeting. - Risk that inflation could be slightly above the upper limit of the central bank’s band by end–2004. - Central bank confident recent tightening will help inflation converge to the target band by end–2004 and is ready to tighten further if needed to return inflation to the mid-point of the target band in 2005. - Exchange rate policy and central bank intervention: - Large central bank intervention contained sol appreciation during the first semester; somewhat higher flexibility observed in recent months. - Staff encouraged flexibility, transparency, and limiting intervention to smoothing excessive volatility. - Sterilized intervention could become costly; reduction in intervention would likely lead to sol appreciation and lessen pressure to raise interest rates. - Pension fund investment limits: - Staff argued for further raising limits on private pension fund investments abroad to diversify risks and reduce appreciation pressures. - Central bank opposed, prioritizing development of the domestic capital market and availability of pension resources for long-term private sector financing. - Note: limits were raised from 9 percent of total assets to 10.5 percent in May 2004. - De-dollarization and supervision: - Authorities committed to reducing financial dollarization and strengthening bank supervision. - Central bank expects dollarization to gradually decline due to sound policies and strong supervision. - Monitoring system to measure risks associated with foreign currency denominated loans expected to be operational by year-end (end-December benchmark). - Staff supported differentiated generic loan provision requirements to disincentivize foreign-currency lending to agents without foreign-currency income. - Plan to centralize collateral registries by end-December (end-June benchmark). - Follow-up FSAP scheduled for early 2005 to assess compliance with Basle core principles, prepare technical notes on securities/public debt/pensions, and assess anti-money laundering and combating financing of terrorism progress. - Public banks and sectoral support programs: - Banco de la Nación’s consumer-lending program expanded faster than programmed: credit expanded by the equivalent of US$120 million in first eight months of 2004 versus yearly increase of US$65 million in the program. - Authorities taking steps to limit credit growth under this program for remainder of 2004 and in 2005. - Agricultural Bank will limit lending to channeling credit lines from abroad to agricultural producers; quasi-fiscal operations with small-scale farmers will continue to be recorded in the budget. *Source: _cr0799 - 8. Banking and financial* ### 24. Peru’s structural reform effort aims at fostering private investment and improving ### 24. Peru’s structural reform effort aims at fostering private investment and improving ### Progress in fostering private investment and infrastructure concessions - Government called for bids to award the construction and maintenance of seven regional airports in concession to the private sector (early October). - Road infrastructure concessions experienced delays partly due to complex technical design issues for Public-Private Partnerships (PPPs). - Completion of the end-December performance criterion on awarding two major roads in concession was delayed to April 2005 to allow completion of an environmental impact assessment necessary to secure a loan guarantee from the IDB. - Authorities generally concurred with recommendations of a recent IMF-World Bank-IDB mission focused on options for fiscally responsible public investment, issues related to PPPs, and treatment of commercially-run enterprises. ### Judicial and dispute-resolution reforms - Establishment of the first specialized commercial court in Lima (end-September structural performance criterion) delayed by a few months due to administrative bottlenecks and a strike in the judiciary; expected to begin operations in December. - Steps already taken: - Supreme Court issued required resolution for establishing the court. - Budgetary resources assigned. - Building facilities selected. - Selection of judges and administrative personnel under way. - IDB supporting implementation and parallel improvements in non-judicial dispute resolution mechanisms, including enhancing arbitrator and mediator accreditation and training. ### Public investment — preliminary findings (Box 3) - Public investment fell to about 3 percent of GDP in 2003 from an average of 5 percent of GDP in the mid–1990s. - Decline partly reflects narrower public sector coverage due to privatization of large state-owned telecommunications and electricity companies during the 1990s, and also a reduction in the overall fiscal deficit in the context of policies that have weakened public sector savings. - Infrastructure bottlenecks persist, hindering faster output and employment growth. - Institutional and procedural improvements since establishment of the National Public Investment System (SNIP) in 2001 increased productivity of public investment by improving ability to weed out unviable projects. - Remaining important weaknesses: - Difficulties in setting maintenance and investment priorities in the annual budget process, leading to inadequate maintenance and unduly long project execution rates. - Weak project preparation and appraisal and implementation units in government ministries and in subnational governments. - Inadequate transparency in approval of unviable and politically-motivated projects. ### Public enterprises and PPPs (Box 3) - No public enterprise currently meets the criteria for recommending their exclusion from the fiscal accounts. - Authorities may consider granting certain public enterprises in concession. - PPP guidance: - Authorities should enter into PPPs only where benefits (increased future revenue streams or lower service costs) clearly outweigh budgetary costs or costs associated with government contingent liabilities. - Transparency in reporting costs and liabilities associated with PPPs is required in budget and other documents. - Legal and regulatory frameworks covering PPPs should be strengthened to ensure adequate enforcement of PPP contracts. ### South American Infrastructure Authority (ASI) — preliminary concerns (Box 3) - Proposed ASI aims to undertake public works financed by external borrowing to permit construction beyond national budget ceilings and protect investment from interruptions. - Mission noted risks in current ASI design: - Operations could generate contingent liabilities and risks not sufficiently well assigned among member governments. - Could undermine fiscal transparency and integrity of budgets in member countries. - Unrealistic to assume ASI could benefit from cross-default privileges from multilateral institutions or perform functions given very limited staff resources. ### Public sector resource management and pension reform - Authorities focusing on reform of the Cédula Viva preferential public pension regime; draft law introduced in congress but progress slow. - Plan to reform the pension regime of the police and the military to make it financially viable (end-September benchmark) — now expected to be announced by end-December. - Work under way with congress on legislation to implement framework law on public sector human resource management. - Intention to implement gradually a comprehensive reform of the public wage structure once Cédula Viva reform is completed. - Development of a Management Control and Evaluation System to improve quality of public expenditures; intend to build an initial database of program management indicators and include these indicators in the 2006 budget. ### Cédula Viva (CV) regime — characteristics and proposed reform (Box 4) - Main characteristics: - CV is a preferential, pay-as-you-go, highly subsidized public pension regime. - In 2003, outlays under the CV regime amounted to 2.4 percent of GDP— twice as much as the general public pension regime, which has 35 percent more pensioners. - Authorities estimated pension liabilities at US$24 billion (40 percent of GDP) at end-2003 in NPV terms. - Current CV pensioners are eligible for pensions of up to about US$9,000 a month, compared with a maximum of about US$350 for those in the general pension regime. - Until 2003 the pension contribution rate in the CV regime was 6 percent of salaries compared with 13 percent in the general regime. - Reform requirements and expected effects: - Reforming CV requires a constitutional amendment approved by two-thirds of congress in two consecutive legislatures; congress approved first vote on May 26, 2004, second vote scheduled before year-end. - Draft law submitted to congress to reform the system. - Authorities estimate fiscal savings of ½ percent of GDP a year over 2005-09, with only minimal savings in 2005-06. - Reform would reduce CV pension liabilities by 24 percent in NPV terms under authorities’ estimates. - Main reform elements: - Eliminating automatic link of pensions with public sector wages; estimated savings from elimination of indexation of CV pensions and wages at about 0.4 percent of GDP a year. - Closing the CV system to new entrants. - Limiting benefits: impose ceiling on pension payments, adjust pensions annually based on inflation and cash availability, and limit survivors’ benefits. - Draft law envisages that pensions above a monthly ceiling of US$1,035 a month (3½ percent of the beneficiaries) would be reduced gradually while pensions below US$200 a month would be immediately raised by US$30. ### Tax base broadening and labor market measures - Mission reaffirmed need to broaden tax base by eliminating sectoral and regional tax exemptions; draft laws introduced in 2003 with little or no progress recently. - Authorities remain committed to pressing congress for early approval of these reforms. - Labor reform: - Elimination of the payroll tax welcomed. - Consensus still needed for deeper labor reform to promote formal employment and lower regulatory charges in formal regular employment contracts (which exceed 50 percent of wages). - Some proposals envisage extending flexible labor regulations on micro-enterprises introduced in late 2003 to medium-size firms (so far, some 1,200 micro-enterprises requested placement under the new regime). - In September, authorities reinstated the unemployment protection system in place until 2001. - Authorities concurred with the mission on refraining from any new increases in the minimum wage (it was last increased by 12 percent in September 2003). ### Fiscal decentralization and subnational financial management - Progress mixed; government proceeding cautiously and in a fiscally-sound manner. - Working toward prompt issuance of regulations necessary to implement law certifying administrative capacity of regional governments (end-December benchmark) — key to eliminating problems in execution of capital spending by subnational governments. - Lack of consensus on law clarifying shared functional responsibilities among government levels (end-December benchmark); authorities plan to clarify responsibilities through annual devolution plans and budgets, sectoral legislation, and safeguards. - Integrated Financial Management System (SIAF) being extended to local governments with World Bank support: - By year end, SIAF expected to cover about 800 of the 1829 municipalities. - Authorities plan SIAF payroll and debt modules and capacity building in public investment planning and public assets management at subnational level. ### Trade policy and external integration - Authorities aim to complete Free Trade Agreement (FTA) discussions with the United States by early 2005. - Party to an economic cooperation agreement between the Andean Community and Mercosur (signed in October). - Progress in discussions with Thailand; exploring negotiations with Chile and the European Union. - Despite reduced external tariff rates, tariff dispersion increased; import surcharges up to 60 percent remain for some agricultural products, including rice, milk products, and sugar. - Imposed phyto-sanitary restrictions on rice imports (March). - Temporary safeguards on imports of over 100 Chinese textile products were imposed late last year; renewed in October 2004 with number of textile items reduced from 100 to 20, and expanded to all countries. - Mission stressed cautious and temporary application of such measures due to negative impacts on low-income consumers, exporter concerns about retaliatory actions, and encouragement of broader protectionist pressures. ### Safeguards, statistics, and anti-corruption initiatives - Safeguards assessment of the central bank completed on October 26, 2004; assessment confirmed adequate mechanisms to safeguard Fund resources and minimize misreporting. - Authorities working to implement main recommendation encouraging central bank and Comptroller General’s Office to clarify responsibilities in internal and external audits. - Peru’s statistics adequate for policy formulation, surveillance, and program monitoring; progress being made addressing shortcomings mainly in national accounts and price statistics. - Peru participating in G-8 Anti-corruption and Transparency Initiative; pledged cooperation including support for regional and local government resource management (with emphasis on extractive industries), expanding State Procurement and Contracting Electronic System, and strengthening connectivity for state institutions. - Authorities working on technical action plan to reinforce initiatives, expected to finalize by year-end. - Discussions held with World Bank and DFID regarding Extractive Industry Transparency Initiative; authorities expressed support. ### Program modalities, risks, and projections - Specific quantitative targets for 2005 to be discussed during mission scheduled for early next year and brought to the Board for the second review. - Next mission will discuss quarterly quantitative performance criteria, inflation consultation mechanism, and structural criteria and benchmarks through end-2005. - Broad lines of structural reform program for 2005 discussed; key steps include: - Granting in concession the construction, operation and maintenance of several roads, regional airports and, possibly, a port terminal. - Continuing to clarify gradually the functional responsibilities among levels of governments, extending SIAF coverage at sub-national level, and strengthening capacity of key sub-national governments while ensuring satisfactory functioning of accreditation system. - Putting in place a SIAF budget module at the national level to improve fiscal budgeting and transparency. - Strengthening prudential regulations for dollarized credit risks. - Enhancing regulation of private pensions funds to help reduce their administration costs and fees. - Minimal risk of failure to repay the Fund: - Even if Peru drew the full amount available under the program, Fund credit outstanding would peak in 2006 at 47.1 percent of quota, representing 0.6 percent of GDP and 3.8 percent of gross foreign reserves. - Key risks: - Political uncertainty is the main risk to program implementation, particularly as the presidential election approaches and ambitious fiscal objectives for 2005 and structural reforms become more challenging. - Downside risks from external environment due to sensitivity to commodity price developments and uncertain effects from removal of world textile and clothing quotas early next year. - Ongoing investment in energy sectors is reducing sensitivity of external position to oil price changes. - Comfortable international reserves and a well capitalized banking system help mitigate vulnerabilities associated with high financial dollarization and relatively high public debt. ### Staff appraisal and fiscal stance - Peruvian economy performed well in 2004: strong growth, moderately low inflation, and further strengthening of external position despite difficult political situation. - Progress on structural reforms has fallen short of program objectives; several structural measures lagging and two structural performance criteria delayed. - Authorities committed to rekindling reform effort. - Fiscal consolidation remains core of macroeconomic strategy. - 2005 budget aims at reducing the deficit to 1 percent of GDP to support reduction in public debt-to-GDP ratio without undermining growth. - Staff supports tax policy steps including a reduction in rate of the tax on financial transactions and elimination of the special payroll tax. *Source: _cr0799 - 24. Peru’s structural reform effort aims at fostering private investment and improving* ### 40. In the months ahead, wage pressures are expected to remain strong, and vigilance ### _cr0799 - 40. In the months ahead, wage pressures are expected to remain strong, and vigilance ### Fiscal pressures, wage policy, and contingency measures - Wage pressures are expected to remain strong in the months ahead; vigilance will be needed to meet the 2005 fiscal target. - Staff recommendations and findings: - Prepare contingency measures. - Refrain from granting any new wage increases until savings from improvements in procurement and the elimination of payroll irregularities have materialized. - Minimize government guarantee claims on the fuel stabilization fund while ensuring domestic petroleum prices fully reflect international developments. - Avoid earmarking revenues, including for the creation of a Defense Fund. - Continue working with congress to improve the design of the mining royalty. - Risks highlighted: - Continued high oil prices could adversely affect the fiscal accounts. - Quasi-fiscal losses of the central bank would rise if domestic interest rates move up. ### Fiscal framework, decentralization, and public financial management - Authorities’ efforts to improve the framework for prudent fiscal management and decentralization are commended. - Institutional measures and recommendations: - Introduction of sanctions should help institutionalize the Fiscal Responsibility and Transparency Law. - Careful approach to decentralization is crucial for fiscal sustainability. - Implementation progress welcomed on the law certifying subnational governments’ administrative capacity. - Stress on effective procedures to clarify shared functional responsibilities among levels of government. - Note of a strategic shift to rely on congressional approval of annual devolution plans and budgets, with safeguards to avoid reversals. ### Infrastructure, investment, and Public-Private Partnerships (PPPs) - Staff concurs on improving infrastructure in a fiscally-sound manner, consistent with debt sustainability. - Policy recommendations: - Broaden the tax base, including stepping up efforts to eliminate tax exemptions. - Improve expenditure allocation to bolster public savings and make room for additional investment. - Provide adequate maintenance of existing infrastructure. - Implement only projects with high economic and social returns. - When pursuing PPPs, ensure appropriate risk transfer and transparency and strengthen the legal and regulatory framework. ### Debt management and exchange rate policy - Reducing currency and rollover risk of public debt is a key element of the debt management strategy. - Support for gradually shifting composition of new public debt toward local-currency instruments and seeking opportunities to reprofile existing debt. - Exchange rate policy recommendations: - Allow the exchange rate to move more freely. - Importance of flexibility and a clear communication strategy under the inflation targeting regime. - Limit intervention to minimizing short-run volatility to avoid one-way bets for capital inflows and contain central bank losses. - Consider raising the limit on private pension funds’ investments abroad to diversify risks and reduce appreciation pressures. ### Financial sector regulation and supervision - Authorities have continued strengthening and modernizing regulation and supervision of financial intermediaries. - Staff welcomes intentions to raise generic loan provisioning requirements according to risks. - Concerns and recommendations: - Regrets significant increase in Banco de la Nación’s consumer-lending program during 2005; welcomes commitment to limit its expansion going forward. ### Trade policy and external integration - Authorities’ efforts to further integrate Peru in the global economy are commendable. - Staff encourages continued pursuit of multilateral trade discussions and free-trade agreements. - Caution against protectionist measures, including temporary restrictions on textile products. ### Structural reforms, labor costs, and program support - Adherence to envisaged structural reforms is key to boosting sustained growth and employment over the medium-term. - Authorities’ focus: - Promoting concessions to foster private sector investment. - Reforming the Cédula Viva public pension regime. - Staff welcomes commitment to address delays in structural reform and the forthcoming establishment of a commercial court to enhance private sector conditions. - Welcomes elimination of the special payroll tax by year-end and urges determined action to further reduce labor costs. ### Medium-term outlook, risks, and program review recommendation - Baseline medium-term outlook is favorable. - Successful implementation of the program reinforces confidence in continuity of prudent macroeconomic policies and aids Peru’s exit strategy from Fund-supported programs. - Risks to the program: - Adverse terms-of-trade shocks. - Policy slippages associated with possible political instability. - Buffers in place: - Comfortable level of international reserves. - Well-capitalized banking system. - Staff recommendation: - Peru has performed well under the Stand-By Arrangement; staff recommends completion of the first review. - Support for waiver of nonobservance of the end-September 2004 structural performance criterion on establishment of a commercial court in Lima and resetting this criterion to end-December 2004. - Support for modification in timing of the end-December structural performance criterion on granting of concessions for construction and maintenance of two major roads, expected to be observed with a few months’ delay, in April 2005. ### Key selected statistics (as presented) - Real GDP: 0.2; 4.9; 3.8; 4.0; 4.3; 4.5; 4.5 - Real domestic demand: -0.6; 4.0; 3.3; 3.5; 4.6; 4.4; 4.5 - Consumer Prices (end of period): -0.1; 1.5; 2.5; 2.5; 3.5; 2.5; 2.5 - Consumer Prices (period average): 2.0; 0.2; 2.3; 3.2; 3.7; 2.4; 2.5 - Exports (U.S. dollars): 1.0; 9.9; 16.4; 22.9; 29.4; 3.9; 2.2 - Imports (U.S. dollars): -2.0; 2.7; 11.3; 8.0; 17.7; 4.1; 4.0 - General government current revenue: 17.2; 17.2; 17.7; 17.4; 17.8; 17.9; 17.8 - Central government tax revenue: 12.2; 11.9; 13.0; 13.3; 13.4; 13.5; 13.4 - General government noninterest expenditure: 17.8; 17.3; 17.3; 16.7; 17.1; 16.8; 16.7 - Combined public sector primary balance: 0.0; 0.0; 0.5; 0.8; 0.8; 1.2; 1.3 - Interest due: 2.2; 2.2; 2.2; 2.2; 2.1; 2.2; 2.3 - Combined public sector overall balance: -2.3; -2.2; -1.7; -1.4; -1.4; -1.0; -1.0 - External current account balance: -2.2; -2.0; -1.8; -0.7; -0.8; -0.8; -0.8 - Gross reserves (millions of U.S. dollars): 8,838; 9,690; 10,206; 10,306; 11,947; 11,447; 11,547 - Total external debt: 50.7; 49.3; 49.1; 45.9; 46.2; 43.5; 41.4 - Combined public sector debt: 46.6; 47.1; 47.7; 44.6; 44.7; 41.7; 39.9 - Gross domestic investment: 18.8; 18.8; 18.8; 18.2; 19.0; 19.3; 19.8 - National savings: 16.6; 16.8; 17.0; 17.5; 18.2; 18.5; 18.9 - Nominal GDP (S/. billions): 188.3; 198.7; 210.7; 231.6; 231.8; 246.9; 265.1 *Source: IMF staff report as presented in the content unit.* ### 4. Put in full operation a system within the SBS to measure currency ### 4. Put in full operation a system within the SBS to measure currency risks ### Fiscal operations: combined public sector (key balances and flows) - Combined public sector primary balance (percent of GDP): - 2001: -0.0 - 2002: 0.0 - 2003: 0.5 - 2004 (Prog./Proj.): 1.0/1.4 - 2005 1/: 0.8 - 2006: 0.8 - Combined public sector overall balance (percent of GDP): - 2001: -2.3 - 2002: -2.2 - 2003: -1.7 - 2004 (Prog./Proj.): -1.4/-1.4 - 2005 1/: -1.0 - 2006: -1.0 - Interest payments (percent of GDP): 2.2 (2001), 2.2 (2002), 2.2 (2003), 1.1 (2004 H1), 1.1 (2004 H2), 2.2 (2004 year), 1.1 (2005), 1.2 (2006), 2.1 (2005 program) - Central government primary balance (percent of GDP): - 2001: -0.7 - 2002: -0.2 - 2003: 0.2 - 2004 (H1/H2/year): 0.9/-0.3/0.6 - 2005 1/: 1.2 - 2006: -0.6/0.6/1.0 (program/proj. breakdown shown in source) ### Revenue and expenditure (central government and general government) - Central government revenue (percent of GDP): 14.4 (2001), 14.4 (2002), 15.0 (2003), 7.3 (2004 H1), 7.7 (2004 H2), 15.0 (2004 year), 15.5 (2005 prog.), 15.4 (2006 proj.) - Of which: tax revenue (percent of GDP): 12.2 (2001), 11.9 (2002), 13.0 (2003), 6.6 (2004 H1), 6.7 (2004 H2), 13.3 (2004 year), 6.7/6.7 (2005/2006 H1/H2 splits) - Financial transaction tax: 0.1 (2003 H2), 0.2 (2004 H1), 0.3 (2004 H2), 0.1 (2004 year), 0.2 (2005), 0.3 (2006) - Central government noninterest expenditure (percent of GDP): 15.1 (2001), 14.6 (2002), 14.8 (2003), 6.4 (2004 H1), 8.0 (2004 H2), 14.5 (2004 year), 14.5 (2005 prog.), 14.3 (2006 proj.) - General government current revenue (percent of GDP, memorandum): 17.2 (2001), 17.2 (2002), 17.7 (2003), 8.5 (2004 H1), 8.9 (2004 H2), 17.4 (2004 year), 8.8/9.0 (2005/2006 H1/H2) ### Financing of the combined public sector (levels and composition) - Combined balance and financing (millions of U.S. dollars): - Combined balance (millions US$): -1,212 (2001), -1,230 (2002), -1,027 (2003), -927 (2004 Prog.), -925 (2004 Proj.), -727 (2005 Prog.), -746 (2006 Proj.) - Financing (millions US$): 1,212 (2001), 1,230 (2002), 1,027 (2003), 927 (2004 prog.), 925 (2004 proj.), 727 (2005 prog.), 746 (2006 proj.) - Net external (millions US$): 479 (2001), 1,169 (2002), 977 (2003), 657 (2004 prog.), 1,392 (2005 prog.), 113 (2006 proj.), 234 (2007 proj.) - Disbursements (millions US$): 1,319 (2001), 2,863 (2002), 2,100 (2003), 1,961 (2004 prog.), 2,689 (2005 prog.), 1,484 (2006 proj.), 1,700 (2007 proj.) - Includes a Brady bond swap of US$923 million in early 2002 (noted in source) - Amortization (millions US$): -768 (2001), -1,837 (2002), -1,187 (2003), -642 (2004 H1), -693 (2004 H2), -1,335 (2004 year), -626 (2005), -729 (2006), -1,355 (2005 total) - Net domestic financing (millions US$): 406 (2001), -360 (2002), -215 (2003), 9 (2004 prog.), -610 (2004 proj.), 519 (2005 prog.), 488 (2006 proj.) - Bond placements (millions US$): 348 (2001), 267 (2002), 508 (2003), 552 (2004 prog.), 502 (2004 proj.), 600 (2005), 650 (2006) - Net deposits (millions US$): 255 (2001), -433 (2002), 461 (2003), 93 (2004 prog.), -468 (2004 proj.), 832 (2005), 269 (2006) - Privatization receipts (millions US$): 327 (2001), 421 (2002), 52 (2003), 68 (2004 prog.), 43 (2004 proj.), 111 (2005 prog.), 75 (2006 proj.) ### Monetary survey and reserves - Net international reserves (millions of soles / millions of U.S. dollars): - (S/. millions) 29,800 (2001), 32,954 (2002), 35,361 (2003), 34,968 (2004 prog.), 40,062 (2005 prog.), 38,123 (2006 proj.), 38,635 (2007 proj.) - (US$ millions) 8,324 (2001), 9,309 (2002), 9,905 (2003), 10,005 (2004 prog.), 11,646 (2005 prog.), 11,147 (2006 proj.), 11,247 (2007 proj.) - Currency in circulation (millions of soles): 4,945 (2001), 5,615 (2002), 6,370 (2003), 6,848 (2004 prog.), 7,150 (2005 prog.), 7,750 (2006 proj.), 8,316 (2007 proj.) - Net foreign assets and net domestic assets series provided in source tables (see original for full detail). ### Balance of payments and current account - Current account (millions US$): -1,157 (2001), -1,127 (2002), -1,062 (2003), -453 (2004 prog.), -521 (2005 prog.), -597 (2006 proj.), -643 (2007 proj.) - Merchandise trade (millions US$): -194 (2001), 306 (2002), 731 (2003), 2,103 (2004 prog.), 1,907 (2005 prog.), 1,964 (2006 proj.), 1,831 (2007 proj.) - Exports (millions US$): 7,026 (2001), 7,723 (2002), 8,986 (2003), 11,009 (2004 prog.), 11,625 (2005 prog.), 12,084 (2006 proj.), 12,353 (2007 proj.) - Traditional: 4,730 (2001), 5,369 (2002), 6,267 (2003), 7,982 (2004 prog.), 8,309 (2005 prog.), 8,391 (2006 proj.), 8,408 (2007 proj.) - Nontraditional and others: 2,296 (2001), 2,354 (2002), 2,719 (2003), 3,027 (2004 prog.), 3,315 (2005 prog.), 3,693 (2006 proj.), 3,946 (2007 proj.) - Imports (millions US$): -7,220 (2001), -7,417 (2002), -8,255 (2003), -8,906 (2004 prog.), -9,717 (2005 prog.), -10,120 (2006 proj.), -10,522 (2007 proj.) - Financial and capital account (millions US$): 1,606 (2001), 1,945 (2002), 1,476 (2003), 521 (2004 prog.), 2,192 (2005 prog.), 587 (2006 proj.), 16 (2007 proj.) - Public sector disbursements (millions US$): 1,343 (2001), 2,902 (2002), 2,161 (2003), 2,037 (2004 prog.), 2,688 (2005 prog.), 1,532 (2006 proj.), 1,725 (2007 proj.) - Public sector amortization (millions US$): -886 (2001), -1,843 (2002), -1,229 (2003), -1,375 (2004 prog.), -1,391 (2005 prog.), -1,452 (2006 proj.), -1,531 (2007 proj.) ### External financing requirements and sources - Gross financing requirements (millions US$): 7,061 (2001), 7,855 (2002), 6,002 (2003), 5,155 (2004 prog.), 6,866 (2005 prog.), 4,954 (2006 proj.), 5,781 (2007 proj.) - External current account deficit (excluding official transfers, millions US$): 1,157 (2001), 1,127 (2002), 1,062 (2003), 453 (2004 prog.), 521 (2005 prog.), 597 (2006 proj.), 643 (2007 proj.) - Debt amortization (millions US$): 5,454 (2001), 5,896 (2002), 4,462 (2003), 4,602 (2004 prog.), 4,615 (2005 prog.), 4,857 (2006 proj.), 5,038 (2007 proj.) - Medium- and long-term debt (millions US$): 1,714 (2001), 2,664 (2002), 1,873 (2003), 2,075 (2004 prog.), 2,089 (2005 prog.), 2,089 (2006 proj.), 2,220 (2007 proj.) - Short-term debt (millions US$): 3,740 (2001), 3,232 (2002), 2,589 (2003), 2,527 (2004 prog.), 2,526 (2005 prog.), 2,768 (2006 proj.), 2,818 (2007 proj.) ### Medium-term macroeconomic framework (selected projections) - GDP at constant prices (annual percent change): 0.2 (2001), 4.9 (2002), 3.8 (2003), 4.3 (2004), 4.5 (2005), 4.5 (2006), 4.5 (2007) - Consumer prices (end of period): -0.1 (2001), 1.5 (2002), 2.5 (2003), 3.5 (2004), 2.5 (2005), 2.5 (2006), 2.5 (2007) - External current account balance (percent of GDP): -2.2 (2001), -2.0 (2002), -1.8 (2003), -0.8 (2004), -0.8 (2005), -0.8 (2006), -0.8 (2007) - Public sector debt-to-GDP (percent): 46.6 (2001), 47.1 (2002), 47.7 (2003), 44.7 (2004), 41.7 (2005), 39.9 (2006) - Combined public sector primary balance (percent of GDP): 0.0 (2001), 0.0 (2002), 0.5 (2003), 0.8 (2004), 1.2 (2005), 1.3 (2006), 1.4 (2007) ### Financial soundness and banking system indicators - Capital adequacy: - Equity capital to risk-weighted assets: 12.8 (Dec-00), 12.8 (Dec-01), 12.5 (Dec-02), 13.3 (Dec-03), 14.1 (Jun-04) - Regulatory Tier I capital to risk-weighted assets: 12.7 (Dec-00), 12.4 (Dec-01), 12.4 (Dec-02), 12.1 (Dec-03), 12.9 (Jun-04) - Asset quality and provisioning: - Nonperforming loans to total gross loans: 9.7 (Dec-00), 9.0 (Dec-01), 7.6 (Dec-02), 5.8 (Dec-03), 5.1 (Jun-04) - Provisions to nonperforming loans: 107.4 (Dec-00), 118.9 (Dec-01), 133.2 (Dec-02), 141.1 (Dec-03), 146.9 (Jun-04) - Dollarization and foreign currency exposure: - Share of foreign currency deposits in total deposits: 73.5 (Dec-00), 71.9 (Dec-01), 71.6 (Dec-02), 69.7 (Dec-03), 69.9 (Jun-04) - Share of foreign currency loans in total credit: 81.9 (Dec-00), 80.5 (Dec-01), 79.7 (Dec-02), 77.9 (Dec-03), 78.1 (Jun-04) - Commercial banks' foreign assets (US$ millions): 824 (Dec-00), 748 (Dec-01), 779 (Dec-02), 601 (Dec-03), 508 (Jun-04) - Commercial banks' short-term foreign liabilities (US$ millions): 1,519 (Dec-00), 1,161 (Dec-01), 763 (Dec-02), 702 (Dec-03), 873 (Jun-04) - Profitability and liquidity: - ROA: 0.3 (Dec-00), 0.4 (Dec-01), 0.8 (Dec-02), 1.1 (Dec-03), 1.1 (Jun-04) - ROE: 3.0 (Dec-00), 4.5 (Dec-01), 8.4 (Dec-02), 10.9 (Dec-03), 11.3 (Jun-04) *Sources: Central Reserve Bank of Peru; Ministry of Economy and Finance; and Fund staff estimates/projections.* ### 1. SDR 80.00 million 2/June 9, 2004Board approval of SBA. ### _cr0799 - 1. SDR 80.00 million 2/June 9, 2004Board approval of SBA. ### Disbursement schedule and conditionality - Initial disbursement - SDR 80.00 million — 2/June 9, 2004 Board approval of SBA. - Subsequent disbursements and performance conditions - SDR 23.031 million — August 31, 2004 Observance of end-June 2004 performance criteria. - SDR 23.031 million — October 31, 2004 Completion of the First Review and observance of end-September 2004 performance criteria. - SDR 23.031 million — February 28, 2005 Completion of the second review and observance of end-December 2004 performance criteria. - SDR 23.031 million — May 15, 2005 Observance of end-March 2005 performance criteria. - SDR 23.031 million — August 31, 2005 Completion of the third review and observance of end-June 2005 performance criteria. - SDR 23.031 million — November 15, 2005 Observance of end-September 2005 performance criteria. - SDR 23.031 million — February 28, 2006 Completion of the fourth review and observance of end-December 2005 performance criteria. - SDR 23.031 million — May 15, 2006 Observance of end-March 2006 performance criteria. *Source: _cr0799 - 1. SDR 80.00 million 2/June 9, 2004Board approval of SBA.* ### 10. SDR 23.031 millionJuly 31, 2006Completion of the fifth review and observance of ### _cr0799 - 10. SDR 23.031 millionJuly 31, 2006Completion of the fifth review and observance of ### Stand-By Arrangement: Schedule of Purchases and Obligations - Total access under the Stand-By Arrangement is SDR 287.279 million (21 percent of quota on an annual basis). 1/ - Amount required to bring total disbursements outstanding to above 25 percent of quota. 2/ - Obligations from existing drawings (selected items, in SDR million as presented): - Principal (repurchases): 26.8, 26.8, 26.8, 13.4, 0.0, 0.0, 0.0, 0.0 = 93.6 (total shown) - GRA charges: 2.1, 1.6, 0.8, 0.1, 0.0, 0.0, 0.0, 0.0 = 4.6 (total shown) - SDR charges: 1.5, 1.7, 1.7, 1.7, 1.7, 1.7, 1.7, 1.7 = 13.5 (total shown) - Credit outstanding (selected years): 66.9, 40.1, 13.4, 0.0, 0.0, 0.0, 0.0, 0.0 - (percent of quota) 10.5, 6.3, 2.1, 0.0, 0.0, 0.0, 0.0, 0.0 - Obligations from prospective drawings (selected items): - Principal (repurchases) prospective sequence: 0,0,0,0,80.3,126.4,63.3,17.3 = 287.3 (total shown) - GRA charges prospective: 0.6,5.3,8.1,8.9,8.1,5.1,1.8,0.3 = 38.1 (total shown) - Credit outstanding (prospective years): 126.1,218.2,287.3,287.3,207.0,80.6,17.3,0.0 - (percent of quota) 19.7,34.2,45.0,45.0,32.4,12.6,2.7,0.0 - Cumulative (existing and prospective) highlights: - Credit outstanding cumulative: 192.9,258.3,300.7,287.3,207.0,80.6,17.3,0.0 - (percent of quota) 30.2,40.5,47.1,45.0,32.4,12.6,2.7,0.0 - (percent of GDP) 0.40,0.50,0.60,0.50,0.30,0.10,0.00,0.0 - (percent of exports of goods and services) 2.1,2.7,3.1,2.8,1.9,0.7,0.1,0.0 - (percent of public sector debt service) 8.3,9.6,12.0,10.5,6.3,2.7,0.6,0.0 - Memorandum: Purchases: 126.0,92.1,69.1,0.0,0.0,0.0,0.0,0.0 (as presented) - Sources: Fund staff estimates/projections. - Notes: - 1/ Assuming all scheduled purchases are made. Repurchases assumed to be made under obligations schedule. - 2/ Projections are based on current rates of charge, including burden-sharing charges where applicable, for purchases in the GRA, and on current interest rates for PRGF and Trust Fund. The current SDR interest rate is assumed for net use of SDRs. ### Main Economic Indicators and Trends (2001–2004) - Key qualitative findings: - "Domestic demand has been driving growth." - "The current account deficit has remained relatively stable, with a growing trade surplus offsetting higher investment-income payments." - "Monetary policy has been supportive of domestic demand." - "Reserves have grown rapidly and the banks have strengthened their long FX position." - Charted indicators noted (2001–2004): - GDP Growth (left scale) and contributions from Domestic Demand, Exports, Imports (right scale). - Trade and Current Account Deficit in Billions of US$; Exports and Imports series. - Monetary aggregates: Broad Money and Base Money 12-month percentage change. - International reserves: Net and Gross International Reserves and Bank's FX Position. ### Selected Financial Indicators (2000–2004) - Banking sector trends: - "Non-performing loan ratios continue to decline, provisioning ratios remain strong, and bank profitability is improving." - "Capital adequacy and liquidity ratios remain high." - External spreads: "…external spreads have been declining." - Stock prices: "Stock prices in U.S. dollar terms have recovered strongly since 2003 reflecting higher commodity prices..." - Indicators shown include: - Non-performing loans (NPL), Return on equity, Provisions/NPL ratio. - Liquidity Ratio in Foreign Currency, Liquidity Ratio in Domestic Currency, Risk-weighted Capital-Asset ratio. - EMBI and regional comparisons. ### Composition of Public Debt (June 2004) - Total public external debt: US$22.8 billion (composition by creditor): - International organizations: 32% - Paris Club: 36% - International bonds: 27% - Other: 5% - Total public debt: US$26.8 billion; currency composition: - US$: 57% - Yen: 14% - Euro: 11% - Other foreign currency: 10% - Soles: 8% - Interest-rate composition: - Fixed: 47% - Variable: 53% - Key statements: - "Three-fourths of the US$22.8 billion public external debt is owed to official creditors." - "92 percent of the US$26.8 billion total public debt is denominated in foreign currency." - "Slightly more than half of the public debt bears a variable interest rate." - Note: External debt by creditor and total debt by currency/interest rate presented in charts and notes. ### Peru—Debt Sustainability Analysis (DSA) (summary) - Baseline trajectory and projections: - "Peru’s external and public sector debt ratios are robust to alternative assumptions about underlying macroeconomic variables." - "Peru’s public sector debt stock is projected to decline to about 43½ percent of GDP at end-2004, and further to about 35 percent of GDP by 2009." - Standard sensitivity tests using 10-year historical standard deviation shocks do not significantly alter the medium-term projection. - Even under two-standard-deviation shocks, debt ratios generally decline once conditions normalize. - Sensitivities: - External and public debt are sensitive to changes in growth and to exchange rate changes given high foreign currency composition. - A sustained 30–percent real depreciation would lead to a protracted period of higher ratios, albeit with a declining trend. - Country-specific scenario: a shock to terms of trade leading to a sustained 15 percent real depreciation and reduction in projected output by 4 percentage points during 2005 would result in a sharp increase in external and public debt ratios, but ratios would decline rapidly with subsequent recovery supported by a strong primary balance. - Chart notes: - 1/ Effect of a sustained 30 percent real depreciation of the Nuevo Sol. - 2/ Effect of a sustained 12 percent real depreciation of the Nuevo Sol, and endogenous current account adjustment. ### External Debt Sustainability Framework (Table 1, selected figures 2001–2009) - External debt (percent of GDP), actual and projections: - 2001: 50.7 - 2002: 49.3 - 2003: 49.1 - 2004: 46.2 - 2005: 43.5 - 2006: 41.4 - 2007: 39.4 - 2008: 37.5 - 2009: 35.8 - Change in external debt (2001–2009): -1.5, -1.4, -0.2, -2.9, -2.7, -2.0, -2.1, -1.8, -1.7 - Identified external debt-creating flows (4+8+9) (selected): 0.7, -3.6, -1.3, -5.1, -1.9, -2.9, -2.9, -2.3, -2.3 - Current account deficit, excluding interest payments (percent of GDP): -0.9, -0.4, -0.5, -1.4, -1.6, -1.7, -1.8, -1.6, -1.6 - Exports (percent of GDP): 16.1, 16.4, 17.6, 20.0, 19.3, 18.7, 18.4, 18.1, 17.8 - Imports (percent of GDP): 17.9, 17.6, 17.9, 18.6, 18.0, 17.6, 17.4, 17.3, 17.1 - Net non-debt creating capital inflows (negative): -1.4, -3.0, 0.2, -0.9, 0.4, -0.9, -1.3, -0.6, -0.6 - Automatic debt dynamics (selected): 3.0, -0.1, -1.1, -2.8, -0.7, -0.3, 0.1, -0.1, -0.1 - External debt-to-exports ratio (in percent): 315.1, 300.4, 278.8, 231.3, 224.8, 221.6, 214.0, 207.1, 201.1 - Gross external financing need (in billions of US dollars): 6.7, 7.2, 5.6, 5.2, 5.5, 5.6, 5.9, 6.4, 5.9 - Key macro assumptions (selected): - Real GDP growth (in percent) projections: 4.3, 4.1, 4.3, 4.5, 4.5, 4.5 (multiple entries provided) - Exchange rate appreciation (US dollar value of local currency, change in percent): -1.5, -0.3, 1.1, -5.3, 4.8, 1.1, 0.6, -0.4, -0.5, -0.5, -0.5, 0.0 - Growth of exports (US dollar terms, in percent) historical and projections: 0.9, 7.4, 15.1, 9.9, 11.0, 26.1, 3.8, 3.3, 4.4, 5.1, 4.8, 7.9 - Growth of imports (US dollar terms, in percent): -0.9, 3.5, 9.2, 7.8, 14.7, 15.3, 3.7, 4.3, 5.0, 6.3, 5.4, 6.7 ### Public Sector Debt Sustainability Framework (Table 2, selected figures 2001–2009) - Public sector debt (percent of GDP): - 2001: 46.6 - 2002: 47.1 - 2003: 47.7 - 2004: 44.7 - 2005: 41.7 - 2006: 39.9 - 2007: 38.3 - 2008: 36.6 - 2009: 35.1 - Foreign-currency denominated share (percent of GDP): 41.9, 41.5, 42.0, 37.6, 35.1, 33.5, 30.6, 29.3, 28.1 - Change in public sector debt (percent of GDP): 0.7, 0.6, 0.6, -3.0, -3.0, -1.9, -1.6, -1.7, -1.5 - Identified debt-creating flows (4+7+12): 0.3, -0.8, -0.9, -3.6, -2.1, -1.7, -1.4, -1.5, -1.4 - Primary deficit (percent of GDP): 0.0, 0.0, -0.4, -0.8, -1.2, -1.3, -1.4, -1.3, -1.2 - Revenue and grants (percent of GDP): 18.1, 17.7, 18.2, 18.1, 18.3, 18.2, 18.2, 18.1, 18.1 - Primary (noninterest) expenditure (percent of GDP): 18.2, 17.7, 17.8, 17.4, 17.1, 17.0, 16.8, 16.8, 16.8 - Automatic debt dynamics (selected): 0.9, -0.1, -0.4, -2.6, -0.7, -0.4, 0.0, -0.2, -0.1 - Public sector debt-to-revenue ratio (selected): 256.7, 267.0, 262.0, 246.6, 227.6, 218.8, 210.3, 202.0, 194.0 - Gross financing need (percent of GDP): 4.8, 6.2, 4.5, 4.4, 3.6, 3.6, 3.3, 4.2, 4.0 - Key assumptions (selected): - Real GDP growth (in percent) historical average and projections: 0.3, 4.9, 3.7, 4.3, 4.1, 4.3, 4.5, 4.5, 4.5 - Average nominal interest rate on public debt (in percent): 4.9, 4.9, 4.7, 5.6, 1.1, 4.9, 5.3, 5.8, 6.2, 6.3, 6.4 (table lists multiple entries) - Inflation rate (GDP deflator, in percent): 0.5, 0.6, 2.4, 7.5, 7.7, 5.4, 1.9, 2.7, 2.1, 2.6, 2.6 ### Stress Tests and Alternative Scenarios (selected results) - External debt stress tests (selected scenario outcomes, External Debt percent of GDP): - Baseline 2004: 46.2 (table shows baseline series) - A1 (historical averages in 2005-09): 46.2, 43.2, 41.9, 40.7, 39.0, 37.4 (sequence shown) - A2 (country-specific shock, real depreciation of 15 percent): 46.2, 55.0, 52.4, 49.8, 47.4, 45.2 - B6 (one time 30 percent nominal depreciation in 2005): 46.2, 63.2, 61.0, 58.8, 56.8, 55.0 - Public debt stress tests (selected scenario outcomes, Public Sector Debt percent of GDP): - Baseline 2004: 44.7 (table shows baseline series) - A1 (variables at historical averages): 44.7, 41.1, 38.8, 36.6, 34.5, 32.5 - A2 (country-specific shock, real depreciation of 15 percent): 44.7, 51.9, 50.1, 48.7, 47.3, 45.9 - B5 (one time 30 percent real depreciation in 2005): 44.7, 59.3, 57.3, 55.7, 54.0, 52.4 ### Peru—Fund Relations (as of September 30, 2004) - Membership: Joined 12/31/1945; accepted Article VIII obligations on February 15, 1961. - Quota and holdings (SDR Million / Percent): - Quota: 638.40 (100.00%) - Fund holdings of currency: 705.31 (110.48%) - SDR Department: - Net cumulative allocation: 91.32 (100.00) - Holdings: 0.03 (0.03) - Outstanding Purchases and Loans: - Extended arrangements outstanding: 66.88 (10.48 percent quota) - Financial Arrangements (selected): - Stand-by approved 6/09/04–8/16/06, Amount Approved (SDR Million): 287.28, Amount Drawn: 0.00 - Stand-by approved 2/01/02–2/29/04, Amount Approved: 255.00, Amount Drawn: 0.00 - Stand-by approved 3/12/01–1/31/02, Amount Approved: 128.00, Amount Drawn: 0.00 - Projected obligations to the Fund (SDR Million; selected years): - Principal forthcoming 2004: 0.0; 2005: 0.00; 2006: 26.75; 2007: 26.75; 2008: 13.38; 2009: 0.00 - Charges/interest (selected): Overdue 12/31/03: 0; 2004: 1.00; 2005: 3.60; 2006: 2.74; 2007: 1.98; 2008: 1.86 - Total (selected): 01.00, 30.35, 29.49, 15.35, 1.86 (sequence shown) - Safeguard assessment: - Completed October 26, 2004; "with few exceptions, safeguards at the Banco Central de Reserva del Peru (BCRP) meet the requirements of the safeguards policy." - Recommendation: by end-January 2005 the BCRP and the Comptroller General’s Office agree on a Memorandum of Understanding to harmonize oversight of external and internal audit mechanisms. - Exchange arrangements: - "Peru maintains a unified, managed floating exchange rate." - On October 15, 2004, the average interbank rate was 3.32 Nuevo Sol per U.S. dollar. - Central government maintains external payments arrears to unguaranteed suppliers; clearing arrangement with Malaysia since 1991. - Last Article IV Consultation: concluded February 23, 2004 (IMF Country Report No. 04/155). - Technical assistance (selected entries and dates): - FAD: August 2004 — Public investment and fiscal policy, including issues related to PPPs. - Multiple missions for tax policy and administration: June 2000, September 2002, September 2003, November 1999. - MFD and STA missions on central bank organization, inflation targeting, monetary operations in various months/years listed. - Resident Representative: Mr. Jorge Guzmán since August 2003. ### World Bank Relations (selected) - Country Assistance Strategy (CAS): - CAS discussed September 17, 2002; supports poverty reduction through fiscal, competitiveness, and social-sector programs. - Bank moved Peru to a CAS high-case lending scenario with a total envelope around US$300–400 million a year over FY04–06. - New lending includes quick-disbursing programmatic loans and investment projects for an additional US$200 million a year. - FY 2004 operations approved: US$357 million. - Bank-Fund collaboration areas: - Tax Reform and Fiscal Decentralization (Fund staff lead on tax reform design; joint work on laws/regulations). - Financial Sector: joint FSAP completed May 2001; follow-up assistance provided. - Public expenditure review (PER) and social sector expenditure review in preparation. - Fiscal reforms and joint missions on public investment and fiscal policy. - Statement of World Bank Loans (as of September 30, 2004) (selected): - One hundred ten (115) loans fully disbursed: 4,723.2 (millions US$) - Partially disbursed loans listed with amounts and undisbursed figures (multiple entries, e.g., 40760 1996 Irrigation Rehabilitation Total 85.0 Undisbursed 2.7, etc.) - Total disbursed: 4,723.8; amount repaid: 1,902.5; Total outstanding: 2,803.0; Total undisbursed: 265.4 - IFC investments (as of July, 2004): - Total commitments held by IFC: 386.5 (millions US$) - Total disbursed: 286.4 ### Inter-American Development Bank (IDB) Relations (selected) - Country Strategy 2002–2006 objectives: poverty reduction and equity promotion within high economic growth. - Lending portfolio (as of October 1, 2004): 23 loans total US$1,490.5 million (21 investment loans US$890.5 million; two policy-based loans US$600 million). - FY 2004 lending foreseen: approval of eight investment loans for US$137.2 million and one policy-based loan for US$300 million plus reimbursable technical cooperation US$10 million. - IDB portfolio data by sector (In millions of US$; Commitments / Disbursements / Percent Disbursed): - Agriculture: 68.9 / 46.5 / 67.4 - Education: 87.0 / 19.7 / 22.6 - Social investment: 327.6 / 194.7 / 59.4 - Public sector management: 669.0 / 415.3 / 62.1 - Transportation: 245.0 / 124.5 / 50.8 - Total: 1,490.5 / 809.5 / 54.3 ### Statistical Issues and Observance - Peru is in observance of the Special Data Dissemination Standard (SDDS) and meets coverage, periodicity, and timeliness specifications. - Key statistical sector findings and outstanding issues: - Real sector: - Revised GDP series using 1994 base year (published June 2000); INEI working on new national account series using 2001 base year. - Lack of detailed supply and use tables; changes in inventories mainly determined as a residual. - CPI weights derived from 1993–94 household survey; imputed rent excluded from Metropolitan Lima index but included in other 24 cities, leading to national index as a weighted average with differing coverage. - WPI weights outdated; WPI techniques follow international standards. - Labor market indicators improved but with limitations: wage data delays; nationwide unemployment/underemployment surveyed once a year; labor productivity published only at tariff adjustments. - Fiscal sector: - General government GFS compiled using GFS Manual 1986; consolidated central government revenues on cash basis, expenditures on accrual basis. - Authorities have not prepared a plan to migrate to GFS Manual 2001. - Coverage of national budget accounting narrower than program fiscal accounting. - Monetary sector: - BCRP analytical accounts broadly in line with Monetary and Financial Statistics Manual; discrepancy: valuation of some instruments at cost rather than market prices. - Nonbank deposit-taking institutions incorporated into depository corporations’ survey since early 2003. - Monetary statistics disseminated in summary form. - External sector: - BCRP prepares quarterly balance of payments and IIP largely in line with BPM5; departures include lack of coverage of assets held abroad and land acquisition abroad by residents; some external debt transactions not on accrual basis. - BCRP reports weekly reserve template data since August 2001; includes full amount of liquidity requirements in official reserve assets but does not register contingent net drain. - Quarterly external debt data disseminated since end-September 2003 with one-quarter lag; external debt not compiled on an accrual basis. - ROSC mission findings (Feb 12–26, 2003): macroeconomic statistics largely adequate but important shortcomings mainly in national accounts and price statistics; most recommendations implemented but areas to improve listed (coordination, business register, new GDP benchmark/base year, WPI coverage expansion, sectoral breakdowns per MFSM, expand data sources for financial flows). ### Core Statistical Indicators (as of October 27, 2004) - Date of latest observation and reporting details (selected): - Exchange Rate: Date of latest observation 10/26/2004; Date received 10/27/2004; Frequency D (Daily); Source B (Central bank); Mode E (Electronic); Confidentiality C (For unrestricted use). - International Reserves (net): Date 10/26/2004; Frequency W (Weekly); Source B; Mode E; Confidentiality C. - Central Bank Balance Sheet: Date 10/22/2004; Frequency D; Source B; Mode E; Confidentiality C. - Reserve/Base Money and Broad Money: Dates 10/22/2004 and 09/30/2004 respectively; reporting frequencies and sources listed. - CPI: Date of latest observation 10/26/2004; Date received 10/27/2004; Frequency M; Source O/B as indicated; Confidentiality C. - Notes: - 1/ Data refer to net international reserves. Reserve template data are reported weekly, with a lag of 1 week. - 2/ Overall government balance refers to combined public sector deficit, including general government, public enterprises, and the operating balance of the central bank. - 3/ External debt data are reported quarterly with a lag of 2 months, and cover private and public sector debt and debt-service. ### Letter from Peruvian Authorities to Managing Director (Lima, November 4, 2004) — Policy Update and Intentions - Macroeconomic performance and near-term expectations: - "We now expect the economy to grow by about 4⅓ percent during 2004, above program projections." - "Twelve-month inflation has recently picked up reflecting in part supply shocks, including fuel prices, but we anticipate that it will settle at about 3.5 percent by year-end—the upper end of the inflation target range of the Central Bank." - "Fiscal policy is on track to meet the deficit target of 1.4 percent of GDP in 2004, and the draft 2005 budget is consistent with reducing the deficit further to 1 percent of GDP." - "All quantitative performance criteria of the program for end-September were observed." - Structural and policy actions (progress and requests): - Concessions for public asset management: - Preparatory work for concessioning construction and maintenance of two major roads progressed; four main roads work ongoing. - Request: modification of structural performance criterion implementation date from December 31, 2004 to April 30, 2005 to allow completion of environmental impact assessments and administrative work. - Bids called for concessioning operation and maintenance of several airports; legal/regulatory process for new port terminal concession completed for awarding during 2005. - Public pension reform: - Constitutional amendment for comprehensive reform of the Cédula Viva regime approved by Congress in the first of two required legislative sessions in June. - Government working to secure constitutional amendment approval before year-end; draft law submitted to Congress (end-December benchmark). - Census of civil servants and pensioners completed. - Draft plan for reforming police and military pension regimes completed; inter-ministerial discussions expected completed by end-December. - Decentralization: - Progress toward implementation of law on certification of subnational governments’ administrative capacity by year-end (end-December benchmark). - Acknowledgement that law clarifying shared responsibilities among national, regional, and local governments may not be possible to secure by year-end; commitment to gradual, fiscally neutral decentralization, sectoral legislation, annual devolution plans and budgets, safeguards, and regulations in 2005 to penalize or intervene non-compliant subnational governments. - Judiciary / commercial court: - Program to strengthen property rights, establish commercial court module in Lima; delays due to administrative bottlenecks and prolonged strike. - Supreme Court approved creation of the commercial court; expected to begin operations by December. - Request: waiver of non-observance of the structural performance criterion for end-September and reset date from September 30, 2004 to December 31, 2004. - Plan to centralize collateral registry information delayed; committed to complete by end-December. - Public bank lending: - Net lending under Banco de la Nación consumer-lending program has grown faster than anticipated. - Government will limit the stock of outstanding loans to S/. 1,000 million through the end of 2004 and avoid excessive growth in public bank lending. *Source: IMF staff report content as provided in the supplied PDF content unit.* ### 2005. Progress is under way to ensure compliance by the Superintendency of Banks and ### _cr0799 - 2005. Progress is under way to ensure compliance by the Superintendency of Banks and ### Review outcome and access to resources - The Executive Board completed the first review of Peru’s performance under a 26-month Stand-By Arrangement originally approved on June 9, 2004. - The completion of the review makes available for drawing a total equivalent to SDR 126.06 million (about US$191.2 million), with the Peruvian authorities intending to treat the arrangement as precautionary. ### Macroeconomic performance and outlook - Growth and activity - GDP growth has exceeded program projections and is expected to be at least 4.5 percent for the year. - Private investment and exports drove the pickup: estimated growth rates of 6.5 percent and 17.8 percent, respectively, in the third quarter. - Textile exports expanded 35.7 percent year-on-year in the third quarter, in dollar terms. - Inflation and monetary policy - The inflation-targeting framework (adopted in 2002) aims at a 2.5 percent medium-term target within a ±1 percent range, under a floating exchange rate regime. - Supply shocks (world oil prices and weak agricultural crops) pushed inflation up; central bank reference rates were increased in August and October to reduce monetary stimulus. - Inflation decreased to rates close to zero in the last three months (relative to the document), and twelve-month inflation is expected to converge to the upper bound of the target range (3.5 percent) at end-2004. - Authorities are confident to bring inflation back to the mid-point (2.5 percent) in 2005. - Balance of payments and exchange rate - Nominal exchange rate appreciated by 5 percent year-to-date (relative to the document), consistent with favorable external accounts. - International reserves are well above program projections—2.5 times short-term debt. - Central bank interventions were limited to confronting excessive exchange rate volatility; interventions contributed to increasing international reserves. - External financing and debt policy - Peru maintained access to international capital markets; sovereign spreads among the lowest in the Latin American region. - In October, Peru issued a ten-year bond for 650 million euros (first in the euro-denominated market). - Authorities are expanding placements in longer-term local currency instruments (primary dealer system initiated in March 2003) and are considering a plan to pre-pay Paris Club creditors. ### Fiscal performance and projections - Fiscal balances and measures - Balanced fiscal result as of September: -0.2 percent of GDP. - Fiscal target for 2004 is well within reach; draft 2005 budget aims at further fiscal consolidation. - Fiscal responsibility: the 3 percent limit for real expenditure growth established in the Fiscal Responsibility and Transparency Law (FRTL) will be respected. - Medium-term fiscal framework and public debt - Medium-term projections envisage fiscal deficit declining to 1 percent in 2005, 0.9 percent in 2006 and 0.7 percent in 2007. - Public debt projected to decrease from 45 percent of GDP in 2004 to around 39 percent in 2007. - Revenue and expenditure details - Improved tax collections due to buoyant activity, administrative improvements (extension of withholding tax), and tax measures since mid-2003 (tax reform completed in early 2004). - Wage increases in education and higher social expenditures were partly offset by delays in devolution to sub-national governments. - Authorities plan contingency measures to ensure compliance with 2005 fiscal targets given expected strong wage pressures. ### Structural reforms and growth-enhancing measures - Infrastructure and public investment - Concession of a major copper project completed in August. - Authorities pressing to bridge infrastructure deficit and to explore innovative financing consistent with fiscal targets and debt sustainability. - Final report of mission on public investment and fiscal policy expected to assess long-term impacts of infrastructure investment on fiscal accounts and output. - Concessions, PPPs, and transport projects - Bids called to award in concession the operation and maintenance of several airports; legal/regulatory process for a new port terminal concession completed for 2005. - Award of concession contracts or PPPs for two main roads—originally an end-December performance criterion—delayed by technical factors (including mandatory environmental impact assessments); authorities request moving the date to April 30, 2005. - Concessions or PPPs for a total of four major roads expected to be completed over the next year. - Pension and labor reforms - Congress approved the constitutional amendment to phase out the preferential public pension regime (Cédula Viva) on November 11, 2004: establishment of a maximum pension, closure to new entrants, and elimination of the link between wage increases and pensions. - Draft plan for reforming police and military pension regimes completed; inter-ministerial discussions underway and expected to be completed by end-December. - October: Congress approved legislation to eliminate the special wage tax (IES); authorities intend to offset fiscal effects through improved VAT and income tax collections. - Governance, public sector management, and decentralization - Census of civil servants (end-September benchmark) completed. - Authorities intend to include sanctions in the FRTL for officials responsible for meeting fiscal targets. - Plans to implement a system of performance indicators initially covering education, health and transport; working towards quarterly reporting of fiscal performance in 2005. - Progress on legal framework for decentralization: implementation of law on certification of subnational governments’ administrative capacity by year-end; approach to clarify shared responsibilities gradually through sectoral legislation or annual devolution plans and budgets. - Business climate and legal system - A commercial court module to defend property rights, settle commercial disputes, and speed contract enforcement will begin operating in December (originally an end-September performance criterion); authorities request a waiver of non-observance and resetting to end-December. - Creation of a commercial court expected to enhance the business climate and property rights enforcement. ### Financial sector measures and supervision - Collateral registry and information systems - Preparation and announcement of a plan to centralize collateral registries delayed; government committed to do so by end-December. - Currency risk measurement - Progress is underway to ensure compliance by the Superintendence of Banks and Insurance Companies with the implementation by year-end of a system to measure currency risks (end-December benchmark). - Private pension funds and capital markets - Private pension funds play a significant role in domestic capital market development. - Investment limits for private pension funds were raised from 7.5 to 9 percent last year and to 10.5 percent this year; authorities have reservations about further increases for the moment. - A follow-up FSAP mission will further analyze the private pension system. ### Trade policy and FTAs - Active pursuit of regional and bilateral free-trade agreements (FTAs). - Steps taken to further an FTA with Thailand; Peru is part of the recent agreement between Mercosur and the Andean Community. - Ongoing negotiations for an FTA with the U.S., with aim to complete discussions by early 2005; expected to make permanent benefits from ATPDEA and to encourage export diversification. ### Political economy and program commitment - Authorities affirm strong commitment to program goals despite political debate; delays in reforms attributed to unexpected or technical factors. - Recent congressional approval of pension amendment cited as evidence of ability to muster consensus. - Authorities believe political risks do not pose clear significant threats to program implementation and request such risks be placed in proper perspective. *IMF Press Release No. 04/245 and accompanying statements (November 19, 2004) — completion of First Review under Peru’s Stand-By Arrangement* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0799.pdf_