## _cr08258 ## Source details **Canonical URL:** [_cr08258](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08258.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08258.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08258.pdf.json) --- ### Stand-By Arrangement and Review - 25-month SBA for SDR 172.37 million (27 percent of quota) approved on January 26, 2007; treated as precautionary. - Executive Board approved second review on December 19, 2007; staff recommends completion of the third review and inflation consultation. - Schedule of purchases (selected): SDR 159.6 million — January 26, 2007; SDR 1.596 million — June 27, 2007; SDR 1.596 million — August 15, 2007; SDR 1.596 million — December 19, 2007; SDR 1.596 million — February 15, 2008; SDR 1.596 million — July 7, 2008; total access SDR 172.368 million (27 percent of quota). ### Recent Macroeconomic Performance (2007–mid‑2008) - Growth and demand: - Real GDP growth: 2007: 9 percent; Q1 2008: 9.2 percent; staff projections: 2008: 6.5 (alternate 8.2); 2009: 6.5. - Real domestic demand growth (staff series): 11.5 ... 11.0 7.1. - Private investment: 23.2 ... 19.2 12.3. - Inflation and monetary tightening: - 12-month inflation around 5½ percent since March; inflation peaked at 5.55 percent in March 2008; eased to 5.39 percent in May; 5.7 percent (y/y) in June 2008. - Inflation excluding food: around 2 percent; core inflation and expectations about 4 percent. - Central bank reference rate raised by 125 basis point in four steps since mid-2007 to 5¾ percent; later raised to 6 percent (July 10, 2008 action noted). - Reserve requirements increased: minimum nonremunerated RR (both currencies) from 6 to 8½ percent (and later to 9 percent), Marginal RR for FX deposits from 30 to 45 percent (later 49 percent), Marginal RR for NS deposits from 15 to 25 percent (effective in steps Feb, Apr, May 2008). - Selected operational measures with effective dates: CD transfer registration and nonresident confirmations — Effective February, 2008; Sales of CDs by resident FIs to natural persons subject to 4 percent commission — Effective April 11, 2008; New CD-NR limited to financial institutions — Effective February, 2008; eased for primary dealers — Effective May, 2008. - Exchange rate and reserves: - Nuevo Sol appreciation: 15½ percent against the U.S. dollar between early 2007 and mid-April 2008; subsequent depreciation about 8 percent after mid-April. - Central bank purchased some US$15 billion in foreign exchange market (about half in first four months of 2008). - Net international reserves (BCRP program definition examples): 17,612; 22,229; 28,270 (stock dates shown); gross international reserves: 12,649; 14,120; 17,329; 21,329; 25,429; 27,743 (selected table entries). - Official reserves reached some 230 percent of foreign-currency deposits in April; at end-March BCRP reserves $27.7 billion. - Fiscal outcomes: - Consolidated public sector surplus of 3.2 percent of GDP in 2007 (above program target deficit of 0.5 percent of GDP). - Authorities raised 2008 operational and program fiscal target to an overall surplus of 2 percent of GDP (above approved balanced budget). - Fiscal table excerpts (percent of GDP): Total revenue of general government: 19.8 20.6 20.5; Total primary expenditure: 17.9 16.7 15.7; Current expenditure: 13.2 13.4 12.7; Capital expenditure: 4.7 3.3 3.0; Overall balance of CPS: 0.0 2.3 3.2; Overall balance (including CRPAOs): -0.3 1.3 2.2. - Financial and credit indicators: - Total credit growth to private sector: ~30 percent by end-2007; decelerated to about 14 percent by mid-April 2008. - Share of domestic-currency public debt ~34¾ percent end-2007. - On April 2, Fitch upgraded Peru to investment grade. - Poverty: - Poverty declined from 44½ percent in 2006 to 39⅓ percent in 2007. - Urban poverty fell by 5½ percentage points. - Extreme poverty declined by 2.4 percentage points to 13.7 percent. ### Performance Criteria, Structural Benchmarks, and Program Monitoring - All quantitative performance criteria and structural benchmarks for end-December 2007 and end-March 2008 were observed; inflation exceeded upper limit of program’s consultation band. - Consultation bands for 12-month inflation rate (percent): central point: 2.0; inner band upper: 4.0; inner band lower: 0.0; outer band upper: 5.0; outer band lower: -0.5. Actual observations shown: 0.3, 1.6, 2.8, 3.9, 5.6 (reporting columns). - Structural benchmarks (selected): - Ensure most new mortgage loans with MiVivienda guarantee denominated in Nuevos Soles — Dec 31, 2007 — Observed (slight delay). - Submit legal framework for PPP operations to Congress — Dec 31, 2007 — Observed (draft submitted Jan 10, 2008). - Clarify tax treatment of securitized transactions — redefined to end-June 2008 — In progress. - Implement Treasury Single Account (TSA) — redefined to Sept 30, 2008 — In progress. - Amend General Banking Law to introduce capital requirements for exchange-related risk in line with Basel II — June 30, 2008 — Observed. - Amend Law of Pension Funds to raise foreign investment limit — June 30, 2008 — Observed. ### Inflation Outlook, Risks, and Policy Responses - Staff projection: inflation 4.3 percent by end-2008; return to 1-3 percent target range by mid-2009. - Upside risks identified: - Imported food and fuel price shocks; weather-related shocks; strong domestic demand. - First-round impact of a 10 percent increase in retail fuel prices on CPI: 0.4 percent. - Policy responses discussed: - Further interest rate adjustments and greater exchange rate flexibility, combined with neutral fiscal stance. - Use of higher reserve requirements to tighten conditions, with scope to dismantle higher RRs once inflation returns to target. - Authorities intend to pursue constitutional amendment to delink central bank appointments from political cycle; staff encourages strengthening central bank independence. - Consultation procedure: if inflation outside inner band (2 percentage points around central point of 2 percent) authorities discuss policy with Fund staff; if outside outer band (3 percentage points above and 2.5 below central point) complete Executive Board consultation before further purchases. ### Exchange Rate Policy and Dedollarization - Authorities seek to gradually increase role of exchange rate as shock-absorber while limiting excessive volatility; intervention geared toward protecting economy from terms-of-trade reversal and global recession impact. - Dedollarization progress: driven by appreciation of Nuevo Sol and growth of Nuevos Soles lending; authorities pursuing orderly dedollarization. ### Fiscal Framework Reforms and Risks - Tax and expenditure measures: - New regime for limiting tax exemptions; methodological guidelines for assessing tax exemptions to be issued by end-June (structural benchmark). - Gradual replacement of domestic VAT and fuel VAT/excise exemptions with direct transfers postponed from 2009 to 2013 for two regions. - Congress extended VAT credit use to 12 months (potential administrative complication). - Congress approved exemption of Ministry of Health from current expenditure limits for 2008; could undermine FRTL; amendment introducing sanctions for noncompliance approved in first instance. - Fuel Price Stabilization Fund (FEPC): - High octane gasoline removed from FEPC in late May. - Accrued cost of implicit fuel subsidies projected about 1 percent of GDP in 2008. - Authorities expect to pay about 0.3 percent of GDP of this cost in 2008 (about half already in current expenditure projections). - Cost of lower fuel excises estimated at 0.4 percent of GDP. ### Financial Sector Resilience and Capital Markets - Bank soundness and supervision: - Capital adequacy (Equity capital to risk-weighted assets): 14.0 (Dec-04), 12.0 (Dec-05), 12.5 (Dec-06), 12.5 (Mar-07), 11.7 (Dec-07), 12.9 (Mar-08). - Nonperforming loans to total gross loans: 3.7 (Dec-04), 2.1 (Dec-05), 1.6 (Dec-06), 1.6 (Mar-07), 1.3 (Dec-07), 1.4 (Mar-08). - Provisions to NPLs: 176.5 (Dec-04), 235.3 (Dec-05), 251.4 (Dec-06), 246.5 (Mar-07), 278.4 (Dec-07), 257.7 (Mar-08). - Liquidity: Total liquid assets to total short-term liabilities: 44.5 (Dec-04), 45.5 (Dec-05), 44.2 (Dec-06), 44.9 (Mar-07), 45.3 (Dec-07), 49.4 (Mar-08). - Regulatory reforms: - Amendment to GBL to introduce capital requirements for foreign-currency-induced credit risk in line with Pillar II of Basel II. - Draft amendment to GBL to raise minimum capital for microfinance institutions — structural benchmark end-June (in progress/draft prepared). - Minimum capital requirements increased for new cajas rurales to $1,000,000 and new cajas municipales to $1,600,000; existing MFIs given 2 years to comply. - May amendment to Law of Pension Funds increased private pension funds’ investment abroad limit from 20 to 30 percent. - Market and credit risks: - Dollarization remains high; consumer credit growing fast. - Banco de la Nación credit growth contained in Q1 2008 after 68 percent rise in 2007. ### Poverty Reduction, Social Programs, and Infrastructure - Social programs: - CIAS prepared Multi-Annual Social Framework. - Crecer and Juntos implemented in most poorest rural districts; Juntos to be evaluated with IDB support. - Temporary pilot food basket program to 100 thousand households; consideration of targeted cash-transfer to 200 thousand households for up to 6 months. - Public investment and SNIP: - Changes to SNIP increased number of approved projects. - Fund for Regional and Local Investment started February; first-round results expected by end-May. - Outsourcing of SNIP studies to be allowed by amendment submitted to Congress (March 31, 2008 structural benchmark — Observed). ### Debt Sustainability and Medium-Term Outlook - Public sector debt (including CRPAOs) projected decline: 30.4 (end-2007) → 22.0 (2008 proj) → 19.0 (2009 proj) → 12.1 (2013). - External debt (percent of GDP) projections: 2007: 29.9; 2008: 25.1; 2009: 22.4; 2013: 17.2. - Baseline macro assumptions: real GDP growth averaging close to 6 percent a year in 2008–13; public sector revenue broadly stable. - Sensitivity analyses: - One-off 30 percent real depreciation raises external debt-to-GDP by about 10 percentage points above baseline in medium term. - 10 percent of GDP shock to contingent liabilities raises public debt-to-GDP ~10.4 percentage points above baseline over medium term. ### Technical and Program Definitions (TMU) — selected - Program exchange rate for 2008 operations: S/. 2.90 per U.S. dollar. - NFPS includes central government, autonomous agencies, local and regional governments, and nonfinancial public enterprises. - PSBR measurement: net domestic financing of NFPS + net external financing of NFPS + PIPP proceeds − operating balance of BCRP; adjustments exclude non-flow data revisions. - Net international reserves (BCRP, program definition) exclude foreign-currency deposits of financial institutions; BCRP gold valued at US$646.89 per troy ounce; SDRs valued at US$1.514 per SDR (valuation conventions preserved as in source). - Concessionality threshold: grant element ≥ 35 percent; CIRRs (OECD) used for NPV discounting (CIRRs published August 2007 used through end-2008). ### Staff Appraisal and Recommendations - Staff view: Peru's strong performance owed to sound policies and structural reforms; investment grade achieved despite global uncertainty. - Key policy recommendations: - Preserve macroeconomic stability: tight fiscal and monetary policies; save revenue overperformance; maintain fiscal surplus target of 2 percent of GDP for 2008; limit general government spending growth to <4 percent in real terms. - Monetary policy: rely on reference rate as key instrument; use reserve requirements and other instruments as needed; phase out elevated reserve requirements as conditions permit. - Exchange rate and financial deepening: allow greater exchange rate flexibility to absorb shocks; deepen capital markets and de-dollarize credit. - Fiscal framework: press to amend Fiscal Responsibility and Transparency Law to introduce sanctions; limit exemptions that undermine spending limits; ensure Build and Transfer programs’ risks contained; implement PPP framework law. - Financial sector: press amendments to GBL to align capital requirements with Basel II and raise minimum capital for MFIs; improve CONASEV–SBS coordination. - Poverty reduction: preserve consolidated social strategy; support CIAS role; use SNIP reforms and Fund for Regional and Local Investment to address infrastructure needs. ### Supplementary Information (July 21, 2008) - Personnel: Luis Valdivieso sworn in as new Finance Minister on July 14, 2008. - Macroeconomic updates: - Real GDP growth nearly 10 percent in first five months of 2008 (y/y); domestic demand ~11½ percent; exports +33 percent; imports +53 percent; nationwide employment +10 percent in May (y/y). - Nuevo Sol appreciated ~4 percent since early July; Standard & Poor’s upgraded Peru to investment grade on July 14; sovereign spread declined 15 basis points. - BCRP raised policy rate to 6 percent on July 10, 2008; minimum reserve requirements to rise to 9 percent effective in August; marginal RR for FX deposits to 49 percent. *Source: Executive Summary and excerpts from IMF staff report and annexes — _cr08258.* ### Executive Summary ### Executive Summary ### Stand-By Arrangement (SBA) and Mission - A 25-month SBA for SDR 172.37 million (27 percent of quota) was approved on January 26, 2007. The SBA is treated as precautionary. The Executive Board approved the second review of the SBA on December 19, 2007. - Mission: A staff team comprising M. Cerisola (head), M. Gonzalez, C. Paiva (all WHD), Messrs. D. Leigh (FAD), P. Breuer (PDR), G. Gasha (MCM) visited Lima from April 28-May 13. Mr. L. Breuer (resident representative) and Mr. Silva Ruete (OED) also participated in the meetings with BCRP President Velarde and Finance Minister Carranza. ### 2008 Program — Economic Performance - Broad-based real GDP growth and fiscal surpluses at record-high levels; declining vulnerabilities. - Inflation has risen to 5½ percent in recent months, largely owing to increasing imported food prices. - All performance criteria for end-December 2007 and end-March 2008 were observed, but inflation in March exceeded the upper limit of the program’s consultation band around the official inflation target range. - The authorities discontinued the provision of guarantees for foreign currency loans by MiVivienda and submitted a draft legal framework for Public-Private Partnerships (both end-December benchmarks) in early January. - The end-March structural benchmark was observed and progress has been made on end-June benchmarks. ### Key Findings and Developments under the Program - Economic growth: - Real GDP grew 9 percent in 2007. - Real GDP growth at 9.2 percent in the first quarter of 2008. - Inflation and monetary measures: - 12-month inflation around 5½ percent since March, above the 1-3 percent target range. - Core inflation and expectations about 4 percent; inflation excluding food around 2 percent. - The central bank raised its reference rate by 125 basis point in four steps since mid-2007, to 5¾ percent, and increased reserve requirements. - The authorities reduced fuel excises and food import tariffs in March and June. - Recent monetary policy measures (selected, with effective dates as reported by the authorities): - CDs transfer registration and nonresident confirmations: Effective February, 2008. - Sales of CDs by resident financial institutions to natural persons or other financial institutions subject to a commission of 4 percent: Effective April 11, 2008. - New CD-NR limited to financial institutions that participate in the local financial system: Effective February, 2008; eased for primary dealers: Effective May, 2008. - Increase in Reserve Requirements: Minimum nonremunerated RR (both currencies): 6 to 8½ percent; Marginal RR for FX deposits from 30 to 45 percent; Marginal RR for NS deposits: from 15 to 25 percent — Effective in 3 steps and 2 steps as indicated (February, April and May, 2008; February and May, 2008). - Short-term foreign currency borrowing subject to RR: Since January 1, 2008. - Exchange rate and capital flows: - Between early 2007 and mid-April 2008, the Nuevo Sol appreciated 15½ percent against the U.S. dollar. - The central bank purchased some US$15 billion in the foreign exchange market, with about half of such purchases in the first four months of 2008. - Since mid-April the central bank ceased intervention; following measures in May, the Nuevo Sol depreciated by about 8 percent against the U.S. dollar. - Fiscal outcomes: - Consolidated public sector surplus of 3.2 percent of GDP in 2007—above the 0.5 percent of GDP deficit target under the program. - Authorities raised their 2008 operational and program fiscal target to an overall surplus of 2 percent of GDP (above the approved balanced budget) to help contain inflation pressures. - Fiscal table excerpts (as reported): - Total revenue of general government: 19.8 20.6 20.5 - Total primary expenditure of general government: 17.9 16.7 15.7 - Current expenditure: 13.2 13.4 12.7 - Capital expenditure: 4.7 3.3 3.0 - Public enterprises primary balance: 0.0 0.1 0.1 - Interest payments: 1.8 1.8 1.8 - Central bank operating balance: 0.1 0.2 0.2 - Overall balance of CPS: 0.0 2.3 3.2 - Overall balance (including CRPAOs): -0.3 1.3 2.2 - Financial and external indicators: - Official reserves reached some 230 percent of foreign-currency deposits in April. - Share of domestic-currency public debt about 34¾ percent by end-2007. - On April 2, Fitch upgraded Peru to investment grade status. - Total credit growth to the private sector around 30 percent by end-2007, decelerated to about 14 percent by mid-April 2008. - Rapid dedollarization driven by appreciation of the Nuevo Sol and growth in Nuevos Soles lending. - Poverty and social outcomes: - Poverty declined from 44½ percent in 2006 to 39⅓ percent in 2007. - Urban poverty fell by 5½ percentage points. - Extreme poverty declined by 2.4 percentage points to 13.7 percent. ### Performance under the SBA and Structural Reform Progress - All quantitative performance criteria and structural benchmarks for end-December 2007 and end-March 2008 were observed. - Inflation exceeded the upper bound in the program’s inflation consultation mechanism with the Executive Board. - Data to assess quantitative performance criteria as of end-June will not be available before the Executive Board meeting but are expected to be observed; a waiver of applicability is being requested. - Authorities have made significant progress toward completing the structural reform agenda envisaged for end-June 2008 ahead of schedule. ### Macroeconomic Framework and Outlook (2007–09) - Growth and inflation projections (Staff Projection): - Real GDP growth: 2007: 9.0; 2008: 6.5; 2008 (alternate): 8.2; 2009: 6.5 - Real domestic demand growth: 11.5 ... 11.0 7.1 - Private investment: 23.2 ... 19.2 12.3 - Government consumption: 4.8 ... 1.5 4.5 - Inflation (end-year): 3.9 2.5 4.3 2.8 - External current account balance: 1.4 -0.5 -0.6 -0.7 - Public sector balance (excluding CRPAOs): 3.2 0.0 3.0 1.6 - Public sector balance (including CRPAOs): 2.2 -0.7 2.4 1.2 - Total public debt (including CRPAOs): 30.4 26.2 22.0 19.0 - Gross official reserve coverage of short-term debt (residual maturity): 374 489 582 504 - Outlook narrative: - Real GDP growth projected to slow from about 9.2 percent in Q1 2008 to 7¼ percent by Q4 2008 due to monetary tightening, global slowdown, and deterioration in terms of trade. - Inflation projected at 4.3 percent by end-2008 and to move back into the 1-3 percent target range by mid-2009 as imported food inflation and demand pressures wane. - Downside risks for 2009 have increased given weaker global conditions, despite favorable fundamentals and prudent policies in 2008. ### Policy Discussions — Strategic Priorities - Three broad reform priorities agreed: - Preserve macroeconomic stability: tight fiscal and monetary policies to contain inflation pressures. - Enhance resilience to shocks: gradually increase the role of the exchange rate as a shock-absorber, increase budget flexibility, minimize fiscal risks, and raise the depth and strength of the financial system and capital markets. - Boost sustainable and equitable growth: improve infrastructure and social services, enhance the business environment, and raise competitiveness to entrench long-term growth and secure further poverty reduction. A. Preserving Macroeconomic Stability — Policy Commitments and Instruments - Fiscal policy: - Authorities committed to a fiscal surplus target of 2 percent of GDP and to save revenue overperformance. - Limit general government spending growth to less than 4 percent in real terms by reining in current spending while ensuring public investment increases as budgeted. - Revenue overperformance to be saved; could result in an overall consolidated surplus of up to 3 percent of GDP in 2008 to lock-in a neutral fiscal stance. - Monetary and financial policy: - Adjust monetary policy using all instruments to ensure price and financial stability. - Authorities judged increasing reserve requirements effective to tighten monetary conditions without exacerbating short-term capital inflows. - Authorities expect full impact of measures (reserve requirement increases and reference rate lifts) to be gradually reflected in market interest rates and will monitor inflation pressures and expectations closely and respond promptly as needed. - Reliance on the reference interest rate as the key policy instrument is preferred while short-term capital inflows remain contained; further reserve requirement increases possible if inflows resume and cause sharp appreciation pressures. - Planned SBS changes to provisioning requirements on consumer loans expected to assist in moderating credit and domestic demand growth. *Source: Executive Summary — _cr08258.* ### 5. The authorities and the staff agreed that there were upside risks to the inflation ### 5. The authorities and the staff agreed that there were upside risks to the inflation ### Inflation outlook and policy responses - The strong pace of domestic demand, considerable uncertainty about the future path of international fuel prices, and uncertain eventual pass thru to domestic fuel prices (that were still below import parity levels) could bring inflation above the current forecast of 4.3 percent for 2008. - The first-round impact of a 10 percent increase in retail fuel prices on the consumer price index would be 0.4 percent. - Staff noted that further interest rate adjustment and greater exchange rate flexibility, along with a neutral fiscal stance, could help contain inflation pressures and keep inflation close to the inner consultation band under the program of 4 percent. - Authorities and staff agreed that policies should remain geared to mitigating second round effects from external shocks. - Authorities viewed recent measures as protecting the inflation targeting framework; market perceptions continue to attach high credibility to the authorities’ commitment to the inflation target notwithstanding increased dispersion of inflation expectations. - Authorities intend to press for prompt congressional approval of the draft constitutional amendment to delink appointments of board members and the President of the central bank from the political cycle. - Authorities stressed that complementing monetary policy tightening with higher reserve requirements would be more effective in addressing ongoing policy challenges and reinforcing credibility; they also saw scope to dismantle higher reserve requirements once inflation returned to the target range and global conditions became more supportive. - Staff noted the importance of considering how to eventually dismantle the high level of reserve requirements to simplify and bring more certainty to the inflation-targeting framework. ### Enhancing the economy’s resilience to shocks - With increased monetary independence, authorities saw more scope for the exchange rate to be driven by fundamentals; foreign exchange intervention continued to be geared toward protecting the economy from an expected reversal of the terms of trade and the impact of a potential global recession. - Intervention would continue to limit excessive exchange rate volatility and preserve an orderly dedollarization process; authorities expressed concern that in a dollarized economy swings in the exchange rate tend to be magnified and could be destabilizing, especially when driven by short-term speculative motives. - Staff agreed on risks posed by short-term inflows, noting improved banking-system resilience to exchange rate shocks and Peru’s currency appreciation relative to improved fundamentals provided some scope for greater exchange rate flexibility and to reduce one-way bets on the currency. ### Fiscal framework reforms and emerging risks - Tax exemptions: - Authorities working to implement new regime for limiting tax exemptions, with new methodological guidelines for assessing tax exemptions to be issued by end-June (structural benchmark). - Gradual replacement of two key tax exemptions—on domestic VAT, and fuel VAT and excises—with direct budgetary transfers was postponed from 2009 to 2013 for two out of six regions previously benefiting from such exemptions. - Tax administration: - Proposals to separate customs from tax administration have been brought forward to expedite customs procedures in light of new trade agreements. - Authorities and staff agreed customs procedures could be simplified under the current institutional framework, which has been successful in maximizing informational synergies and enhancing tax compliance. - Recent amendments by Congress introduced an extension to 12 months on the use of the VAT credit that could complicate tax administration and reduce compliance. - Fiscal rules: - In late May, Congress approved legislation exempting the Ministry of Health from current expenditure limits for 2008, which could undermine the Fiscal Responsibility and Transparency Law (FRTL); authorities intended to accommodate these changes within revised expenditure plans. - An amendment to the FRTL introducing sanctions for noncompliance with targets has been approved in first instance by Congress; authorities intend to redouble efforts to obtain final approval in the coming months. - Initiatives involving the private sector: - Approval of framework law for Public-Private Partnerships and the Build and Transfer Program (B&T) would facilitate private sector collaboration, including with subnational governments (SNGs). - Authorities explained B&T projects will be fully reflected in fiscal accounts and would not entail significant expenditure risks nor to the tax administration. - Higher international oil prices and FEPC: - Authorities removed high octane gasoline from the FEPC in late May. - The accrued cost of implicit fuel subsidies was projected to reach about 1 percent of GDP in 2008. - Authorities expect to pay about 0.3 percent of GDP of this cost in 2008, of which about half is already included in current expenditure projections. The cost of lower fuel excises is estimated at 0.4 percent of GDP. - Broader reforms to the FEPC contemplated, including new import parity reference prices that better reflect import costs and more timely payments of liabilities to importers and refineries. ### Financial sector resilience and capital markets deepening - Market and global risks: - Liquidity ratios are well above regulatory levels; quarterly stress tests required by the SBS confirm banks’ resilience to liquidity shocks. - Authorities amended the General Banking Law (GBL) to introduce capital requirements for financial risks, including foreign-currency-induced credit risk, in line with Pillar II of Basel II. - Authorities will submit to Congress a draft amendment for the GBL to increase the minimum capital for microfinance institutions (structural benchmarks, end-June). - Discussions indicate vulnerability of foreign-owned banks to global shocks is well-contained; Peruvian banking system is not directly exposed to U.S. securitized instruments. - Credit risks: - Provisioning requirements for unused credit card lines would be extended to other types of consumer credit. - Credit growth of Banco de la Nación (BN) contained during first three months of 2008—following a 68 percent rise in 2007. - Supervisory framework: - Draft law to bring all public financial institutions under the supervisory umbrella of the SBS remains stalled in Congress. - New organic law for Agrobanco approved, broadening Agrobanco’s scope for first-tier operations; authorities intend to eliminate the 49 percent limit to private sector shareholding. - Capital markets measures and status: - SBS and CONASEV signed a Memorandum of Understanding in January 2008 to enhance supervisory coordination and regulatory consistency; an inter-institutional committee established to implement the memorandum. - In May, authorities amended the Law of Pension Funds to increase the limit for private pension funds’ investments abroad from 20 to 30 percent. - Capital markets reform key measures include various regulatory actions with deadlines (some done, some in progress, some to be approved by June 2008 or September 2008); minimum capital requirements will be increased from $200,000 to $1 million for new cajas rurales and $1.6 million for new cajas municipales. Existing microfinance institutions will be given 2 years to comply with new requirements. ### Reforms to reduce poverty and enhance growth - Social programs and targeting: - Interministerial Committee for Social Affairs (CIAS) prepared a Multi-Annual Social Framework to enhance assessment and articulation of social assistance programs and spending. - Crecer and Juntos implemented in most poorest rural districts; authorities recognized need to further alleviate high rural poverty. - With IDB support, authorities undertook to evaluate Juntos and are exploring options to stimulate “productive chains” in rural areas, including for 3 million youth with limited access to education and jobs. - To address inflation impact on vulnerable urban groups, authorities implemented a temporary pilot program to distribute food baskets to 100 thousand households and were considering a targeted cash-transfer program to 200 thousand households for a period of up to 6 months. - Investment and infrastructure: - Changes to the SNIP resulted in a significant rise in number of projects approved. - Fund for Regional and Local Investment started operating in February, allowing SNGs in poorest regions to bid for resources; first-round results expected by end-May. - Outsourcing of studies required for formulation and approval of investment projects under SNIP expected to be approved soon, providing regions with a “certified market” for evaluators. - Projects under voluntary contributions by mining companies are being implemented. - Business environment: - Initiatives include a one-stop window for exporters and implementation of Positive Administrative Silence law. - Efficiency of ports being enhanced by allowing private sector investment and expanding critical infrastructure. - Discussions continue on simplifying labor regime for small- and medium-sized firms to reduce informality and provide access to health and pension benefits. - Trade and tariffs: - Authorities pressing to implement all legislation and regulations required to support the Peru-US FTA by November. - Recently signed agreements with Canada and Singapore; negotiations continue with China, the EU, and Mexico. - Recent reductions brought the average effective tariff from 3.2 percent at end-2007 to 1.9 percent as of end-March. ### Staff appraisal: main conclusions and recommendations - Peru’s impressive economic performance continues; strong performance and prospects owe much to authorities’ sound policies and progress in addressing structural vulnerabilities, which helped achieve investment grade status despite heightened global uncertainty. - Dealing with policy challenges requires a delicate balancing act, with price stability at the forefront: - Inflation remains one of the lowest in the region; pressures have been largely imported, but measures of core inflation have accelerated, expectations have risen, and fuel prices lag international prices. - Risks to the inflation outlook may require further policy adjustments to prevent inflation expectations deviating further from the target and to ensure steady convergence to the official target. - Staff welcomes authorities’ commitment to preserving macroeconomic stability: - Decision to tighten monetary policy, raise the fiscal target, and continue saving revenue overperformance is appropriate. - Authorities stand ready to tighten policies further if needed. - Staff sees scope for continued tight current public expenditure management, greater exchange rate flexibility and interest rate adjustment to support disinflation. - On the inflation-targeting framework: - Staff welcomes authorities’ intention to phase out recent increases in reserve requirements as soon as conditions permit because their effectiveness is likely to diminish over time. - Phasing out reserve requirements will also help simplify and bring more certainty to the framework supporting inflation targeting. - Staff encourages authorities to solidify the inflation target by pressing ahead with reform to strengthen central bank independence. - On fiscal framework: - Staff welcomes new framework for Public-Private Partnerships, new methodological guidelines for assessing tax exemptions, and intention to reform the Fuel Price Stabilization Fund to more expeditiously reflect international prices and the cost of subsidies in the budget. - The current institutional framework supporting tax and customs administration has worked well and needs to be preserved. - Priority should be given to amending the Fiscal Responsibility and Transparency Law to introduce sanctions for noncompliance and to ensure expenditure limits remain effectively enforced at all government levels, avoiding further exemptions to specific government entities. - Important to ensure potential risks associated with the Build and Transfer program remain effectively contained. - On financial sector reforms: - Amendment to the General Banking Law to align capital requirements for financial risks with Pilar II of Basel II and proposal to raise minimum capital for microfinance institutions are important. - Improve coordination between CONASEV and the SBS; press with reform to align regulatory framework for public banks with private banks and ensure scope of public banks’ first-tier operations remains limited. - Increase in foreign investment limits for private pension funds is a key step for greater diversification and to reduce systemic risks. - On poverty reduction: - Significant decline in poverty rates during 2007 is encouraging. - Preserving a consolidated strategy, including supporting the role of the Interministerial Committee for Social Affairs in coordinating efforts, is essential to sustaining progress. - Changes to the National System of Public Investment and launching of the Fund for Regional and Local Investment bode well for alleviating social and infrastructure needs. *Source: IMF staff report excerpt.* ### 21. Staff recommends completion of the third review and inflation consultation ### 21. Staff recommends completion of the third review and inflation consultation ### Staff recommendation and rationale - Staff recommends completion of the third review and inflation consultation under the SBA. - Rationale: program’s good performance and the authorities’ commitment to the program, and the authorities’ request for a waiver of applicability of end-June performance criteria. ### Real sector developments - Investment and consumption remain strong. - Economic growth is broad-based with contributions (in percent, y/y) from: - Imports, Consumption, Private investment, Exports, GDP Growth (see figure series for period 2002Q1–2008Q1). - Formal employment expanding; unemployment (Lima, right scale) and employment in firms with 10 or more employees (all urban areas, left scale) shown. - Business and consumer confidence indicators softening somewhat. - High capital investment contains a steady but gradual rise in capacity utilization. - Inflation dynamics: - CPI, CPI core (official), CPI excl. food and energy plotted with target band. - Inflation has surpassed the upper limit of the target range mainly due to imported inflation and weather shocks. ### Fiscal sector developments and performance - Sharp improvement in fiscal balance supported by increased revenue collection. - Improvement reflects better tax administration and higher commodity prices. - Current expenditure share to GDP has declined; capital spending share has increased recently, partly reflecting increase in public investment projects authorized by the National System of Public Investment. - Strong fiscal performance has allowed public debt to decline markedly. - Key historical and projected fiscal numbers (In percent of GDP; selected rows, Table 4 and Table 5): - Combined public sector primary balance: 1.0 (2004), 1.6 (2005), 4.1 (2006), 1.9 (2007), 4.1 (2008 proj), 5.0 (2008 revised prog), 1.6 (2009 proj), 4.5 (2008 prelim prog), 2.9 (2009) - Combined public sector overall balance: -1.1 (2004), -0.3 (2005), 2.2 (2006), 0.0 (2007), 2.3 (2008 proj), 3.2 (2008 revised prog), 0.0 (2009 proj), 3.0 (2008 prelim prog), 1.6 (2009) - General government revenue: 17.0 (2004), 18.0 (2005), 19.7 (2006), 19.6 (2007), 20.5 (2008 proj), 20.4 (2008 revised prog), 19.9 (2009 proj), 20.3 (2008 prelim prog), 19.2 (2009) - Combined public sector debt (incl. CRPAOs) (percent of GDP): 44.3 (2004), 37.7 (2005), 32.8 (2006), 30.0 (2007), 29.2 (2008 proj), 30.4 (2008 revised prog), 26.2 (2009 proj), 22.0 (2008 prelim prog), 19.0 (2009) - Fiscal operations in nominal Nuevos Soles (selected, Table 5): - Central government revenue (2007): 35,570; 2008 proj: 41,372; 2009 proj: 53,076 (and further series across columns as shown). - Combined public sector overall balance (millions of Nuevos Soles): -2,554 (2004), -865 (2005), 6,738 (2006), -101 (2007), 7,782 (2008 prog), 11,077 (2008 revised prog), -100 (2009), 7,669 (2008 prelim prog), 11,486 (2009) ### External sector developments - Strong balance of payments boosted by improved terms of trade, rising non-traditional exports, and strong foreign direct investment; impact of global market turmoil limited. - Reserves have been built while external debt has declined markedly; domestic currency share in public debt is rising. - Key external figures (Table 9, Table 10): - Current account (in percent of GDP): 0.0 (2004), 1.4 (2005), 3.0 (2006), 0.9 (2007), 1.3 (2008 proj), 1.4 (2008 revised prog), -0.5 (2009 proj), -0.6 (2008 prelim prog), -0.7 (2009) - Net international reserves (in millions of U.S. dollars): 12,649 (2004), 14,120 (2005), 17,329 (2006), 21,329 (2007), 25,429 (2008 prog), 27,743 (2008 revised prog), 28,679 (2009 proj), 37,243 (2008 prelim prog), 41,243 (2009) - Gross international reserves (millions of U.S. dollars): 12,649, 14,120, 17,329, 21,329, 25,429, 27,743, 28,679, 37,243, 41,243 (Table 12) - Exports (US$ percent change): 40.9 (2004), 35.6 (2005), 37.0 (2006), 9.4 (2007), 17.6 (2008 proj), 17.5 (2008 revised proj), 7.9 (2009 proj), 18.5 (2008 prelim prog), 3.5 (2009) - Imports (US$ percent change): 19.5 (2004), 23.3 (2005), 23.0 (2006), 20.2 (2007), 28.9 (2008 proj), 31.8 (2008 revised prog), 21.1 (2009 proj), 35.0 (2008 prelim prog), 11.7 (2009) ### Banking and financial system soundness - Banking system indicators (Table 8 and Figure 4): - Strong capitalization ratios and declining non-performing loans; adequate provisioning. - Capital Adequacy: Equity capital to risk-weighted assets: 14.0 (Dec-04), 12.0 (Dec-05), 12.5 (Dec-06), 12.5 (Mar-07), 11.7 (Dec-07), 12.9 (Mar-08). - Nonperforming loans to total gross loans (3/): 3.7 (Dec-04), 2.1 (Dec-05), 1.6 (Dec-06), 1.6 (Mar-07), 1.3 (Dec-07), 1.4 (Mar-08). - Provisions to nonperforming loans (3/): 176.5 (Dec-04), 235.3 (Dec-05), 251.4 (Dec-06), 246.5 (Mar-07), 278.4 (Dec-07), 257.7 (Mar-08). - Profitability: ROA 1.2 (Dec-04), 2.2 (Dec-05), 2.2 (Dec-06), 2.4 (Mar-07), 2.5 (Dec-07), 2.5 (Mar-08). ROE 11.6, 22.2, 23.9, 25.8, 27.9, 28.2 (same dates). - Liquidity: Total liquid assets to total short-term liabilities: 44.5 (Dec-04), 45.5 (Dec-05), 44.2 (Dec-06), 44.9 (Mar-07), 45.3 (Dec-07), 49.4 (Mar-08). - Concerns: dollarization remains high and consumer credit is growing fast. - Financial depth and credit: - Credit continues to grow steadily: Credit/GDP and Flow of credit/GDP series shown. - Net credit to private sector (12-month percent change): -0.3 (2004), 16.3 (2005), 6.2 (2006), 12.5 (2007), 18.4 (2008 proj), 30.8 (2008 revised), 14.5 (2009 proj), 13.4 (2008 prelim), 10.3 (2009) - Market indicators: - Market capitalization and stock market index upward trend, but price/earning ratios have declined. ### Quantitative performance criteria and inflation consultation mechanism (Table 2) - Quantitative performance criteria and targets (cumulative amounts from December 31; millions of U.S. dollars and millions of Nuevos Soles) and consultation bands for 12-month inflation rate. - Consultation bands for 12-month rate of inflation (in percent): - Outer band (upper limit): 5.5, 5.5, 5.5, 5.5, 5.0 (across reporting dates) - Inner band (upper limit): 4.5, 4.5, 4.5, 4.5, 4.0 - Central point: 2.5, 2.5, 2.5, 2.5, 2.0 - Inner band (lower limit): 0.5, 0.5, 0.5, 0.5, 0.0 - Outer band (lower limit): -0.5, -0.5, -0.5, -0.5, -0.5 - Actual inflation observations shown: 0.3, 1.6, 2.8, 3.9, 5.6 (dates correspond to reporting columns). - Tables list program limits and actuals for: - Borrowing requirement of the combined public sector (unadjusted and adjusted limits), with actuals and margins (in millions of Nuevos Soles). - Net international reserves of the Central Reserve Bank, excluding foreign-currency deposits of financial institutions: unadjusted and adjusted targets, actuals, and margins (in millions of U.S. dollars). - Outstanding short-term external debt of the nonfinancial public sector: limits and actuals. - Contracting or guaranteeing of nonconcessional public debt with maturity of at least one year: unadjusted and adjusted limits, actuals, and margins (in millions of U.S. dollars). - NPV of future government payments associated with PPP operations (continuous basis): unadjusted limits, actuals, and margins (in millions of U.S. dollars). ### Structural benchmarks for 2007–08 (Table 3) - Observed, not observed, or in progress status for benchmarks and revised timing: - Ensure most new mortgage loans extended by banks with MiVivienda guarantee are denominated in Nuevos Soles. Implementation date Dec 31, 2007 — Observed with a slight delay (two guarantees issued in early 2008 for loans granted in late Dec 2007). - Submit legal framework for PPP operations to Congress. Dec 31, 2007 — Observed with a slight delay (draft submitted Jan 10, 2008). - Clarify tax treatment of securitized transactions. Dec 31, 2007 — Not observed; benchmark reset to end-June 2008 at time of second review; June 30, 2008 — In progress (Draft legislation under preparation). - Full implementation of the Treasury Single Account (TSA) for central government. Dec 31, 2007 — Not observed; redefined and reset to end-September 2008. Implement TSA by Sept 30, 2008 — In progress. - 2008 Budget prepared according to modernized budget classification system and incorporated into charts of accounts. Dec 31, 2007 — Not observed; redefined and reset to end-September 2008. 2009 Budget to be prepared per system by Sept 30, 2008 — In progress. - Issue regulations for new risk categories and provisions to address foreign currency risk. Dec 31, 2007 — Not observed; redefined and reset to end-June 2008 at second review. - Submit to Congress amendment to SNIP Law to allow outsourcing of studies required for formulation and approval of investment projects. March 31, 2008 — Observed. - Submit to Congress amendment to General Banking Law to allow SBS introduction of capital requirements for exchange-related risk in line with Basel II. June 30, 2008 — Observed. - Submit to Congress amendment to General Banking Law to raise minimum capital requirement for microfinance institutions. June 30, 2008 — In progress (draft law prepared). - Submit to Congress amendment to Law of Pension Funds to significantly raise limit for foreign investment by private pension funds. June 30, 2008 — Observed. - Expand number of Technical Assistance Regional Offices from 16 to 28. Dec 31, 2008 — Observed. ### Monetary and credit developments (Table 7) - Central bank and monetary aggregates (selected): - Net international reserves (millions of Nuevos Soles): 41,430 (Dec-04), 48,353 (Dec-05), 55,279 (Dec-06), 68,079 (Dec-07), 74,856 (Mar-08), 83,017 (proj), 81,581 (proj), 96,691 (proj), 107,091 (proj). - Net domestic assets and net credit to nonfinancial public sector series displayed (Nuevos Soles). - Liabilities to the private sector: 57,094 (2004), 67,599 (2005), 73,562 (2006), 84,182 (2007), 86,977 (2008 proj), 90,228 (2008 revised), 98,227 (2009 proj), 103,648, 116,548. - Broad money (12-month percent change): 8.3 (2004), 18.4 (2005), 8.8 (2006), 14.5 (2007), 18.2 (2008 proj), 22.7 (2008 revised), 12.9 (2009 proj), 14.9, 12.4. ### Balance of payments and external financing (Tables 9 and 10) - Balance of payments summary (selected, in millions of U.S. dollars): - Current account: 191 (2004), 149 (2005), 2,757 (2006), 877 (2007), 1,378 (2008 proj), 1,516 (2008 revised), -618 (2009 proj), -821 (2008 prelim), -1,181 (2009) - Merchandise trade and services, income, transfers detailed across years. - Financial and capital account: 2,155 (2004), 141 (2005), 847 (2006), 2,969 (2007), 6,583 (2008 proj), 8,623 (2008 revised), 3,829 (2009 proj), 10,282 (2008 prelim), 5,154 (2009) - External financing requirements and sources (Table 10): - Gross financing requirements: 7,247 (2004), 8,434 (2005), 4,965 (2006), 9,855 (2007), 15,173 (2008 proj), 17,415 (2008 revised), 10,111 (2009 proj), 19,569 (2008 prelim), 12,744 (2009) - Accumulation of NIR (flow): 2,353 (2004), 1,628 (2005), 2,753 (2006), 3,925 (2007), 7,733 (2008 proj), 9,654 (2008 revised), 3,250 (2009 proj), 9,500 (2008 prelim), 4,000 (2009) - Foreign direct investment (net): 1,599 (2004), 2,579 (2005), 3,467 (2006), 2,893 (2007), 6,175 (2008 proj), 5,343 (2008 revised), 4,771 (2009 proj), 6,791 (2008 prelim), 6,244 (2009) ### Medium-term macroeconomic framework (Table 11) - Growth, inflation, external and fiscal projections (annual percentage change and percent of GDP): - GDP at constant prices (selected): 7.6 (2004), 9.0 (2005), 8.2 (2006), 6.5 (2007), 5.5 (2008 proj), 5.5 (2009 proj), 5.5 (2010), 5.5 (2011), 5.5 (2012–2013). - Consumer prices (end of period): 1.1 (2004), 3.9 (2007), 4.3 (2008 proj), 2.8 (2009 proj), 2.8, 1.8, 2.0, 2.0, 2.0 (multi-year series). - External current account balance (percent of GDP): 3.0 (2004), 1.4 (2005), -0.6 (2008 proj), -0.7 (2009 proj), -0.7, -0.9, -1.1, -1.3 (multi-year). - Public sector debt (percent of GDP): 32.8 (2004), 30.4 (2005), 22.0 (2008 proj), 19.0 (2009 proj), 17.4, 15.6, 13.9, 12.1 (multi-year). - Gross international reserves (billions of U.S. dollars): 17,329 (2006), 27,743 (2008 proj), 37,243 (2008 prelim), 41,243 (2009) ### Financial and external vulnerability indicators (Table 12) - Key vulnerability indicators (selected): - Public sector debt/GDP: 44.3 (2004), 37.7 (2005), 32.8 (2006), 30.0 (2007), 29.2 (2008 proj), 30.4 (2008 revised), 26.2 (2009 proj), 22.0 (2008 prelim), 19.0 (2009) - Net international reserves (in millions of U.S. dollars): 12,631 (2004), 14,097 (2005), 17,275 (2006), 21,275 (2007), 25,375 (2008 proj), 27,689 (2008 revised), 28,625 (2009 proj), 37,189 (2008 prelim), 41,189 (2009) - Gross official reserves in percent of short-term external debt: 163.9 (2004), 311.4 (2005), 182.4 (2006), 336.9 (2007), 500.1 (2008 proj), 373.9 (2008 revised), 489.1 (2009 proj), 582.4 (2008 prelim), 503.9 (2009) *Source: _cr08258 - 21. Staff recommends completion of the third review and inflation consultation* ### 1. SDR 159.6 million 2/January 26, 2007Board approval of SBA. ### _cr08258 - 1. SDR 159.6 million 2/January 26, 2007Board approval of SBA. ### Schedule of Purchases under the Stand-By Arrangement (selected entries) - 1. SDR 159.6 million — January 26, 2007 — Board approval of SBA. - 2. SDR 1.596 million — June 27, 2007 — Completion of the First Review and observance of end-March 2007 performance criteria. - 3. SDR 1.596 million — August 15, 2007 — Observance of end-June 2007 performance criteria. - 4. SDR 1.596 million — December 19, 2007 — Completion of the Second Review and observance of end-September 2007 performance criteria. - 5. SDR 1.596 million — February 15, 2008 — Observance of end-December 2007 performance criteria. - 6. SDR 1.596 million — July 7, 2008 — Completion of the Third Review and observance of end-June 2008 performance criteria. - 7. SDR 1.596 million — August 15, 2008 — Observance of end-June 2008 performance criteria. - 8. SDR 1.596 million — November 15, 2008 — Completion of the Fourth Review and observance end-September 2008 performance criteria. - 9. SDR 1.596 million — February 15, 2009 — Observance of end-December 2008 performance criteria. - Note: 1/ Total access under the Stand-By Arrangement is SDR 172.368 million (27 percent of quota). - Note: 2/ This amount is required to exhaust the first credit tranche which is not subject to phasing. ### Proposed schedule and cumulative obligations (selected numeric highlights) - Purchases (memorandum item): 170.8, 1.6, 0.0, 0.0, 0.0, 0.0, 0.0 = 172.4 (sources: Fund staff estimates/projections). - Obligations from prospective drawings — Principal (repurchases): 0.00, 0.06, 0.58, 3.22, 5.5, 3.0, 0.2 = 172.4. - Charges and interest (GRA charges) projected: 6.8, 7.0, 6.4, 3.3, 0.5, 0.1, 0.0 = 24.0. - SDR charges projected: 1.3, 2.5, 2.5, 2.5, 2.5, 2.5, 2.5 = 16.3 (cumulative SDR charges and service: 1.3, 2.5, 2.5, 2.5, 2.5, 2.5, 2.5 = 16.4 in cumulative table). - Credit outstanding (selected years): 170.8, 172.4, 111.9, 28.7, 3.2, 0.2, 0.0. - Percent of quota (credit outstanding, selected years): 26.8, 27.0, 17.5, 4.5, 0.5, 0.0, 0.0. - Cumulative percent of quota (selected): 3.2, 27.0, 3.2, 3.2, 0.5, 0.0, 0.0. - Other ratios (selected cumulative values): Percent of GDP 0.00, 0.20, 0.00, 0.00, 0.00, 0.00, 0.0; Percent of exports of goods and services 0.1, 0.7, 0.1, 0.1, 0.0, 0.0, 0.0; Percent of public sector debt service 0.5, 7.8, 0.9, 0.8, 0.1, 0.0, 0.0. ### Letter of Intent — Macroeconomic outcomes and program adjustments (June 23, 2008) - 2007 macro outcomes: - Real GDP growth: 9 percent (a 13-year-high). - Formal employment rise: 8 percent. - Poverty rate: declined to 39 percent. - Nonfinancial public sector surplus: 3.1 percent of GDP. - Public debt: 29.1 percent of GDP. - Central Reserve Bank of Peru net international reserves: $27.7 billion (sovereign shifted to a net creditor position). - Inflation and monetary policy: - Inflation rose to 5½ percent in March, eased to 5.39 percent in May. - Underlying inflation (excluding food): 2 percent over the past twelve months. - Central Reserve Bank of Peru tightened monetary conditions by raising interest rates by 125 basis points and raising reserve requirements. - Expectation: inflation to return gradually to the official target range of 1-3 percent by mid-2009. - Reserves and precautionary measures: - Central Reserve Bank accumulated $6.4 billion of international reserves during the first quarter of 2008, above program target. - Fiscal policy: - Fiscal target for the nonfinancial public sector raised to a surplus of 2 percent of GDP (from balance envisaged in the 2008 Budget) and incorporated into the Fund-supported program. - Social policy and structural reforms: - CIAS expanding coverage of Crecer and Juntos; Juntos assessment review to be undertaken with technical collaboration from the Interamerican Development Bank. - Structural measures: Public-Private Partnership framework law issued; MiVivienda no longer issues guarantees for foreign-currency mortgage loans; reform of SNIP submitted to Congress (end-March structural benchmark); capital market reforms including increase in limit for foreign investment abroad by pension funds and amendment to General Banking Law to allow SBS introduction of Basel II market-risk requirements (both end-June 2008 structural benchmarks). - Request: - Government requests completion of the Third Review under the Stand-By Arrangement. ### Quantitative performance criteria and consultation bands (selected numeric limits and rules) - Borrowing requirement of the combined public sector — Unadjusted limits (cumulative amounts from December 31, 2007): - Mar. 31: -2,036 - Jun. 30: -5,555 - Sept. 30: -6,302 - Dec. 31: -7,350 - Net international reserves of the Central Reserve Bank, excluding foreign-currency deposits of financial institutions — Unadjusted targets: - Mar. 31: -645 - Jun. 30: -404 - Sept. 30: -437 - Dec. 31: 0 - Outstanding short-term external debt of the nonfinancial public sector — Limits: 50, 50, 50, 50 (for Mar., Jun., Sept., Dec.). - Contracting or guaranteeing of nonconcessional public debt with maturity of at least one year — Unadjusted limits: - Mar. 31: 1,568 - Jun. 30: 1,673 - Sept. 30: 2,354 - Dec. 31: 2,680 - External debt of 1-5 year maturity — Limits: 100, 100, 100, 100. - External payments arrears of the public sector — Limits (on a continuous basis): 0, 0, 0, 0. - NPV of future government payments associated with PPP operations (on a continuous basis) — Unadjusted limits: 1,860, 1,860, 1,860, 1,860. - Consultation bands for the 12-month rate of inflation (percent): - Central point: 2.0 - Inner band (upper limit): 4.0 - Inner band (lower limit): 0.0 - Outer band (upper limit): 5.0 - Outer band (lower limit): -0.5 - Adjustment and operational rules (selected): - PSBR will be adjusted downward by revenue overperformance: S/.12,767 at end-March up to S/.450 ceiling; S/.26,493 at end-June up to S/.900 ceiling. No adjustor for end-September or end-December. - Target for net international reserves adjusted upward by net foreign borrowing of the nonfinancial public sector exceeding -US$600 million at end-March, -US$394 million at end-June, -US$497 million at end-September, and -US$41 million at end-December 2008; adjusted downward for shortfalls from programmed net foreign borrowing. Downward adjustment for withdrawals of FCR/ONP-managed deposits will not exceed US$300 million at any time in 2008. - Limit on contracting and guaranteeing nonconcessional public debt will be adjusted upward for guarantees related to concessions up to a ceiling of US$293 million for the year. - Adjustments for Petroperu: PSBR limit may be adjusted upward by up to US$100 million for Petroperu capital spending (over the $30 million already included); current debt limits do not include non-guaranteed debt by Petroperu and will be adjusted upward by up to US$300 million for debt contracted by Petroperu during 2008. ### Technical Memorandum of Understanding (TMU) — Definitions and data conversion - Program exchange rate for 2008 operations in foreign currency: S/. 2.90 per U.S. dollar. - Nonfinancial public sector (NFPS) includes: central government, autonomous agencies, local and regional governments, and nonfinancial public enterprises. - PSBR measurement: (a) net domestic financing of NFPS; plus (b) net external financing of NFPS; plus (c) PIPP proceeds; less (d) operating balance of BCRP. PSBR adjusted to exclude impact of data revisions not representing flow changes during 2008. - Net domestic financing of NFPS defined as sum of: - (i) increase in net claims of domestic financial system on NFPS (excluding Peruvian Brady bonds and other government bonds initially sold abroad); - (ii) net increase in amount of public sector bonds held outside domestic financial system and NFPS (excluding Peruvian Brady bonds and other bonds initially sold abroad); - (iii) increase in floating debt due to expenditure operations and tax refund arrears; - less (iv) accumulation of stocks, bonds, or other domestic financial assets by NFPS; - less (v) amortization of pension related bonds. - Net external financing of NFPS comprises: - (i) disbursements of loans; plus (ii) receipts from issuance of government bonds abroad; minus (iii) cash payments of principal (current maturities of loans and bonds); minus (iv) cash payments of arrears (principal and interest); plus/minus (v) net increase/decrease in short-term external debt; minus (vi) debt buy-backs or prepayments (at market value); minus (vii) debt-equity swaps used in PIPP accounted at market value defined by ProInversion; minus/plus (viii) net increase/decrease in foreign assets of NFPS (including those held by Fondo Consolidado de Reservas (FCR) and funds managed by ONP). - PIPP proceeds defined as: - (i) cash payments received by the Treasury from sale of state-owned assets (including proceeds transferred to the FCR and other specialized funds) valued at the program exchange rate; plus - (ii) debt-equity swaps used in PIPP accounted at market values defined by ProInversion; - plus up-front payments for concessions; excludes annual concession payments (part of nontax revenue). - Operating balance of BCRP includes: - (i) cash interest earnings minus cash interest payments (domestic and foreign currency); - (ii) administrative expenses of BCRP; - (iii) any realized cash losses or gains from activities in currencies, financial instruments, and derivatives. - Net consumer lending of Banco de la Nación: disbursements of all consumer loans (including Multired and “Prestamos a 60 Quotas”) less cash amortizations; interest payments excluded from net lending definition. - Net international reserves of BCRP (excluding foreign-currency deposits of financial institutions) defined as: - (a) foreign assets of BCRP (excluding subscriptions to IMF and FLAR, Pesos Andinos, credit lines to other central banks, CAF bonds, and foreign assets temporarily held as part of swap operations); - less (b) reserve liabilities: (i) BCRP external liabilities with original maturity < one year; and (ii) BCRP liabilities to IMF, IADB, and FLAR; - less (c) deposits in foreign currency by banking system, other financial intermediaries and private sector, net of repos of Treasury bonds with the financial system. - BCRP silver holdings: included as net domestic assets and excluded from net international reserves. - Valuation conventions: - BCRP gold holdings accounted at US$646.89 per troy ounce (average book value as of June 30, 2007). - SDRs valued at US$1.514 per SDR. - Foreign currency assets and liabilities in currencies other than US$ valued at exchange rate of June 30, 2007. - Net international reserves adjusted to exclude valuation gains or losses from net sales or deliveries of gold by the BCRP. - Consultation procedure on inflation: - If inflation falls outside inner band (2 percentage points around central point of 2 percent), authorities will discuss with Fund staff appropriate policy response. - If inflation falls outside outer band (3 percentage points above and 2.5 percentage points below central point of 2 percent), authorities will discuss with Fund staff and complete a consultation with the Executive Board of the Fund on the proposed policy response before requesting further purchases. *Source: IMF staff estimates, Letter of Intent and Technical Memorandum of Understanding as presented in the provided content.* ### 10. The flows of the short-term external debt of the NFPS are defined as the net ### _cr08258 - 10. The flows of the short-term external debt of the NFPS are defined as the net ### Definition and treatment of short-term external debt of the NFPS - Flows are defined as the net change in the NFPS’s outstanding external indebtedness with a maturity of less than one year (including instruments with put options that would be triggered within one year of the contracting date). - Measurement is, in part, on the basis of the operations of a selected sample of public enterprises comprising Petroperú and Electroperú. - These limits exclude normal import financing but include forward commodity sales. - For companies sold to the private sector under the PIPP, the short-term debt of these entities will be recorded, for the remainder of the program period, as unchanged from their level at the time of the PIPP. - The end-June 2007 stock of short-term external debt of the NFPS is shown in Table 4. ### Contracting or guaranteeing of nonconcessional public debt (scope and exclusions) - Applies to all domestic and external obligations of the NFPS contracted or guaranteed by the government, COFIDE, the BCRP, the BN, and any other public financial entity, except for loans classified as reserve liabilities of the BCRP. - Program limits exclude: - (i) any new loans extended in the context of a debt rescheduling or debt reduction operation; - (ii) any loans on concessional terms; and - (iii) certificates (CDBCRPs and CDBCRP-NRs) issued by the BCRP for conducting monetary policy. - Program limits will be adjusted upward by up to US$300 million for debt contracted by Petroperu during 2008 that is not guaranteed by the central government. ### Definition of "debt" for performance criteria - External public debt for the performance criterion includes commitments contracted or guaranteed for which value has not been received. - The term “debt” follows the meaning set forth in point No.9 of the Guidelines on Performance Criteria with respect to Foreign Debt adopted on August 24, 2000 (Board Decision No. 12274-(00/85)). - Debt defined as a current (not contingent) liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more future payments in assets (including currency) or services to discharge principal and/or interest. - Primary forms of debt include: - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements); - (ii) suppliers’ credits (deferred payment contracts for goods or services); - (iii) leases (debt equals present value at inception of all lease payments expected to be made during the agreement period, excluding payments covering operation, repair or maintenance); - (iv) PAO Entitlement Recognition Certificates (CRPAOs) used to facilitate financing of Public-Private Partnership (PPP) projects by concessionaires. - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. - Foreign currency public debt to be contracted or guaranteed will be converted based on the program exchange rate, with cross rates for non-dollar foreign currencies set based upon the rate on the day of the transaction, published by REUTERS. - Under Peruvian law, the CRPAOs are not treated as sovereign debt. ### Concessionality and grant element calculations - For program purposes, a debt is concessional if it includes a grant element of at least 35 percent. - Grant element calculation: grant element = (nominal value minus NPV) divided by nominal value (expressed as a percentage of nominal value). - NPV of debt at disbursement is calculated by discounting the future stream of payments of debt service due on this debt. - Discount rates used are the currency specific commercial interest reference rates (CIRRs), published by the OECD. - For debt with a maturity of at least 15 years, the ten-year average CIRR will be used to calculate the NPV and the grant element. - For debt with a maturity of less than 15 years, the six-month average CIRR will be used. - For the purposes of the program through end-December 2008, the CIRRs published by the OECD in August 2007 will be used (Table 5). ### Concessionality for currency-basket loans and creditor-policy-based rates - Concessionality of loans in currency baskets will be assessed on the basis of U.S. dollar interest rate tables. - For loans with interest rates based on the internal policy of the creditors, the relevant interest rate to define concessionality will be the interest rate for each creditor at the time of the commitment. - Loans or portions of loans extended in the context of a debt rescheduling or a debt reduction operation will be excluded from the ceiling. ### NPV treatment of PPP-related government payment commitments - NPV of future government payments associated with PPP operations will include all payments, firm and contingent, committed by the government in relation to new PPP projects signed during the program period. - Included payments: annual payments for coverage of investment by the concessionaire (Pagos Anuales por Obra, PAOs); annual payments for maintenance and operation (Pagos Anuales por Mantenimiento y Operación, PAMOs); minimum annual revenues guaranteed to a concessionaire (Ingresos Minimos Anuales Garantizados, IMAGs). - For projects where PAOs and PAMOs are not yet defined, the target includes the estimated aggregate annual payments (Pagos Anuales por Servicio, PAS). - Discount factor for NPV of payments: the 10-year commercial interest reference rate (CIRR). - For the program through end-December 2008, the CIRRs published by the OECD in August 2007 will be used (Table 5). ### External payments arrears and public sector definition - External payments arrears of the public sector include arrears to multilateral financial institutions, to Paris Club creditors, and to other foreign creditors with whom debt restructuring agreements have been concluded. - They exclude arrears outstanding at end-2007 that were not covered under restructuring agreements. - Public sector defined to include the NFPS, COFIDE, the BCRP, the BN, and any other state development bank. ### Net foreign borrowing definition (used in Table 1 of the letter of intent dated [June x, 2008]) - Net foreign borrowing (Table 2) is defined as: - the sum of disbursements of loans (I.2.b.i); - plus receipts from the issuance of government bonds abroad (I.2.b.ii); - minus cash payments of principal (I.2.b.iii); - minus cash payments of arrears (principal and interest) (I.2.b.iv); - plus/minus the net increase/decrease in short-term external debt (I.2.b.v). - Withdrawals for portfolio management purposes of deposits held at the BCRP by the FCR and any other fund managed by the ONP (footnote 6 of Table 1 attached to the letter of intent dated June 23, 2008) refer to placements of funds in accord with an investment plan approved by the Board of the FCR, excluding deposits in public financial institutions and government securities. ### Periodic reporting requirements - Periodic reporting includes: - (a) The latest Nota Semanal published by the BCRP; - (b) Report of BCRP daily operations; - (c) Daily exchange rate statistics; - (d) Monthly Report of: - (i) Performance criteria: Data on the program’s quarterly quantitative performance criteria. - (ii) Financial sector: - (a) Disaggregation of the net domestic assets of the BCRP and BN with details of the other net accounts. - (b) Evolution of gross disbursements and cash amortizations of consumer loans under the “Multired Program” of Banco de la Nación. - (iii) Fiscal sector: - (a) PSBR as defined in Table 1. - (b) List of domestic and external debt instruments contracted or guaranteed by the public sector, including data on the amount, lender, grace period, maturity, and interest rate (refinancing credits should be labeled as such), collateral guarantees, any instrument enhancements (such as but not limited to put or call options) that affect the price or maturity of the debt instrument. - (c) Summary of disbursements and interest and amortization due and paid (identifying the payments of arrears) of loans included in the records of the General Directorate of Public Credit by creditor and debtor, indicating foreign origin (distinguishing between financial and nonfinancial public sector debt) and domestic origin (Table 6). - (d) Cash operations of the treasury (which includes floating debt, with a memorandum item on tax refund arrears). - (e) Data on PIPP revenue, which will include gross receipts, costs of the PIPP, use of debt-for-equity swaps, commissions received by ProInversion and the resulting cash receipts received by the Treasury and the FCR. In addition, the report will include debts assumed by the government in connection with the PIPP. - (f) Stocks of the central government PIPP accounts in the BCRP and the BN. - (iv) External sector: - (a) Summary of imports by products (volume and prices); - (b) Summary of exports by products (volume and price). - (d) Quarterly data on the breakdown of public sector debt, distinguishing between external and domestic total public sector debt by currency composition and instruments, according to the debt definition of the Marco Macroeconomico Multianual (MMM), and including CRPAOs. - (f) Other: - (a) Summary of legislative changes pertaining to economic matters. - (b) BCRP circulars. - (c) BCRP inflation report. ### Selected quantitative figures from Tables (as presented) - Table 1 Peru: Public Sector Borrowing Requirement 2007-08 (In million of Nuevos Soles) - a. Net domestic financing of the nonfinancial public sector: 21; -6 019; -6 040; -4 427; -3 466; 961. - i. Net claims of the financial system (1+2+3): -10 843; -18 764; -7 921; -17 366; -17 451; - 84. - 1. Net credit of the banking system on the NFPS, COFIDE and MiVivienda: -21 587; -35 745; -14 158; -34 117; -32 907; 1 210. - Credits: 5 281; 5 321; 40; 5 314; 4 609; - 705. - Liabilities: 26 868; 41 066; 14 198; 39 431; 37 516; -1 915. - 2. Net credit of COFIDE and MiVivienda on the banking system: 3 145; 3 660; 515; 3 433; 3 626; 193. - Credits: 3 293; 3 906; 613; 3 679; 3 945; 266. - Liabilities: 148; 246; 98; 246; 319; 72. - 3. Net credit of nonbanking financial institutions on the NFPS: 7 599; 13 322; 5 723; 13 318; 11 831; -1 487. - Credits: 8 194; 13 909; 5 715; 13 893; 12 422; -1 471. - Liabilities: 595; 588; - 8; 575; 592; 17. - ii. Stock of NFPS bonds in circulation: 10 766; 11 725; 958; 11 725; 14 389; 2 664. - 1. Total: 21 945; 31 296; 9 351; 31 230; 31 640; 410. - 2. Less: holdings of the financial system (including COFIDE and MiVivienda): 10 816; 19 031; 8 215; 18 976; 16 634; -2 342. - 3. Less: holdings of nonfinancial public sector entities: 363; 540; 178; 529; 618; 88. - iii. Floating debt: 3 695; 4 813; 1 118; 4 813; 3 124; -1 689. - iv. Less: Accumulation of stocks, bonds, or other domestic financial assets by the NFPS: 2 517; 2 606; 89; 2 412; 2 342; - 71. - v. Less: Issuance of pension recognition bonds in program period: 1 080; 1 187; 107; 1 187; 1 187; 0. - Table 2 Peru: Public External Debt 1/ Net External Financing N.F.P.S. 2007-08 (In millions of dollars) - b. Net external financing: -6 966; -4 119 (Millons of US dollars) -$ 2,150; -$ 1,420. - c. Privatization: 462; 22 (Millions of US dollars) $ 143; $ 8. - d. Operating balance of the BCRP: 632; -86. - PSBR (a+b+c-d): -13 176; -3 050. - Row A. NET FOREIGN BORROWING (i+ii-iii-iv+v): -14; -385; -138; -654; -274; -601; -148; -2,184; -600; -394; -497; -41. - Row B. NET EXTERNAL FINANCING (A-vi-vii+viii): -17; -391; -143; -664; -282; 580; -159; -2,150; -607; -404; -514; -61. - Memo notes: - 1/ Excludes balance of payments support loans to the Central Reserve Bank of Peru. - 2/ Includes disbursements for the project "Yuncan" since April 2004. - Balance and reserve statistics (selected) - Net international Reserves - Program definition (a-b-c+d-e-f): 17,612; 22,229; 28,270 (for 30-Jun-07; 31-Dec-07; 31-Mar-08 respectively). - Assets: 21,186; 27,165; 32,959. - Deposits abroad: 8,060; 9,568; 11,115. - Securities: 12,378; 16,834; 21,085. - Gold: 721; 721; 721. - Holdings of SDR: 12; 13; 11. - Liabilities: 27; 31; 31. - Liabilities with international organizations: 26; 28; 28. - IADB: 26; 27; 28. - Foreign currency deposits of financial institutions at the Central Bank: 3,547; 4,655; 4,111. - Banking enterprises: 3,395; 4,396; 3,669. - Banco de la Nación: 581; 743; 15. - COFIDE: 242; 80; 0. - Exchange rate notation in Table 1 footnote: Foreign currency valued at US$ 1 = S/. 3,242/ Foreign currency valued at US$ 1 = S/. 2,90. *Italic: Source: _cr08258 (extracted text provided).* ### 6. Net international reserves, official definition (g+c-d+e+f+1+2+3+4+5)21,52827,68933,576 ### _cr08258 - 6. Net international reserves, official definition (g+c-d+e+f+1+2+3+4+5)21,52827,68933,576 ### Net international reserves and related statistics - Headline string as in source: 21,52827,68933,576 - Source: Central Reserve Bank of Peru. - Notes from source: - 1/ As defined in the Technical Memorandum of Understanding - 2/ Gold valued at US$ 646,88755 - 3/ Valued at US$ 1,51434 per SDR. - Table 3: Peru. Net International Reserves of the Central Reserve Bank of Peru excluding foreign currency deposits of financial institutions 1/ (In millions of US dollars) — stock dates shown in source pages (see tables for "As of end-June 2007", "As of end-March 2008", "As of end-December 2007"). ### Short-term external debt and public sector external obligations - Table 4. Peru: Short term external debt owed by the Non-Financial Public Sector (In millions of US$) - Export Financing, Working Capital, Import Financing, Total — entries in source (see table rows including Petroperu, Electroperu, General government). - Source: Central Reserve Bank of Peru and state companies. - Reference stock dates: As of end-June 2007; As of end-March 2008; As of end-December 2007. ### Commercial Interest Reference Rates (CIRRs) — Table 5 - Average CIRRs and previous six-month rates are reported by currency and by historical averaging windows as in source. - Example reported values (preserved exactly): - Australian Dollar: 7.10%, 6.61%, 12.15%, 10.15%, 9.28%, 8.55%, 7.98%, 7.68%, 7.48%, 7.24%, 6.85% - Japanese Yen: 2.46%, 2.03%, 5.53%, 4.65%, 4.30%, 3.75%, 3.17%, 2.77%, 2.45%, 2.24%, 2.08% - U.S. Dollar > 8.5 years: 5.72%, 5.93%, 8.62%, 7.93%, 7.59%, 7.35%, 7.06%, 6.85%, 6.63%, 6.36%, 6.09% - Euro (ECU for ten-year avg): 5.17%, 5.19%, 8.56%, 7.99%, 7.82%, 7.13%, 6.79%, 6.40%, 6.07%, 5.80%, 5.39% - Memorandum: SDR 3/ series preserved as in source: 5.22%, 5.11%, 8.22%, 7.51%, 7.21%, 6.85%, 6.49%, 6.17%, 5.90%, 5.64%, 5.33% - Note in source on construction: The 10-year SDR denominated CIRR rate was constructed based on the weighted average of the five 10-year CIRR averages for the underlying currencies. ### Stock of Domestic Debt of the Non-Financial Public Sector (Table 6) - Headline aggregates and selected items (currency, legal norm, gross placements, stock) are presented in Nuevos Soles and US$, exact figures in source include: - Bonds: 16,509; Total: 16,624; Of which Pension Reform Bonds (Bonos de Reconocimiento) D.S. 096-95-EF S/.8,896; Floating debt S/.1,565 (first column) - Later columns/periods report Bonds 22,178; Total 22,334; Of which Pension Reform Bonds S/.8,945; Floating debt S/.4,041 - Another period: Bonds 22,246 and Bonds 22,397 with respective totals and Of which Pension Reform Bonds S/.9,076; Floating debt S/.2,351 - Source: Central Reserve Bank of Peru - Reference stock dates: As of end-June 2007; As of end-March 2008; As of end-December 2007 ### Inflation consultation letter — key findings and projections (ANNEX 3) - Context and recent inflation outcomes: - Inflation rose up to 5.5 percent in March, declining to 5.39 percent in May. - CPI increase during first five months: from 3.9 percent as of end-December 2007 to 5.4 percent in May. - Food prices increased by 11.2 percent; remainder of goods and services rose by 1.9 percent on average. - Cumulative CPI between January and May 2008: 2.7 percent, of which the specified food products explained some 32 percent. - Weather shocks explain about 40 percent of the cumulative inflation to May. - Inflation expectations: - Economic analysts’ inflation expectations: from 3.0 to 4.5 percent for the present year; from 2.5 to 3.5 percent for the year 2009; from 2.1 to 2.5 percent for the year 2010. - BCRP’s survey: 35 percent of enterprises project to increase prices within the next three months (compared with 33 percent in January). - Output, demand, and growth projections: - GDP and domestic demand growth in Q1: 9.3 and 10.8 percent, respectively. - Current Inflation Report projections (revisions): - GDP 2008: increased from 7 to 8 percent. - Domestic demand 2008: increased from 8.2 to 9.8 percent. - GDP 2009: adjusted from 6.3 to 6.5 percent. - Domestic demand 2009: adjusted from 7.2 to 8.0 percent. - Private consumption 2008: from 5.8 to 6.6 percent. - Public investment spending 2008: from 33.0 to 41.5 percent. - Private investment 2008: projected to grow at an annual rate of 20.4 percent. - Projected output gap: would reach 2 percent in 2008 (difference between GDP and potential). - BCRP estimate of potential output growth: 7.2 percent. - Monetary policy actions and financial conditions: - Interest reference rate increased by 125 basis points, from 4.5 percent in June 2007 to 5.75 percent in June 2008. - Reserve requirements increased on obligations in domestic and foreign currency. - Preferential interest rates for credits between December 2007 and May 2008: - Domestic currency: from 5.6 to 6.2 percent. - Foreign currency loans: from 6.4 to 10.1 percent. - Inflation projection and outlook: - Inflation projection extends to 2010; inflation expected to return gradually to the target range of 1-3 percent by mid-2009. - Projected inflation will still exceed the upper limit of the target range by end-2008, following a peak in inflation of 5.55 pecent in March 2008. - Note on probabilistic bands: darkest band shows a 10 percent probability; all bands together represent a 90 percent probability (figure referenced in source). - Risks to the baseline inflation projection (mostly on the upside) and policy responses: - Higher fuel prices: - Baseline assumes partial reversal of recent oil price increase and maintenance of the Fuel Price Stabilization Fund. - If sustained oil price increases cannot be compensated fiscally, domestic fuel prices could exceed expected levels. - Policy response: monetary policy would not be altered as long as inflation expectations remain well anchored and the effect on inflation appears temporary. - Higher food prices: - Baseline assumes current imbalances between supply and demand in food commodities markets diminish; assumes agricultural output decelerates this year due to adverse weather and rising fertilizer costs but that these problems should be overcome within two years. - Risk of more persistent or rising food prices (including from biofuels demand or worsening supply) could put upward pressure on domestic food prices. - Policy response: monetary policy would not be altered as long as inflation expectations remain stable and the effect is temporary. - Stronger pressures from domestic demand: - Baseline assumes aggregate demand growth will converge toward potential growth (around 7-7.5 percent). - If demand is higher-than-expected and not accompanied by higher potential growth, domestic demand pressures on inflation would arise. - Policy response: monetary policy would need to be tightened to achieve sustainable growth and return inflation to the target range. - Further deceleration in the global economy: - International context: gradually worsening terms of trade, temporary deceleration in 2008, slight recovery from 2009 for main trading partners. - If the U.S. economy entered a severe recession, a drastic correction in export prices could generate capital outflows and contractionary impulse on domestic demand. - Policy response: Central Bank could intervene to limit exchange rate volatility, and if necessary could ease its monetary stance to mitigate falling demand pressures on inflation. *Source: Central Reserve Bank of Peru; ANNEX 3. PERU: INFLATION CONSULTATION LETTER (June 25, 2008) as reproduced in the provided content.* ### 10. The Central Reserve Bank reiterates its commitment to act proactively to assure the ### 10. The Central Reserve Bank reiterates its commitment to act proactively to assure the convergence of inflation rates to the 2 percent target ### Monetary policy commitment - The Central Reserve Bank reiterates its commitment to act proactively to assure the convergence of inflation rates to the 2 percent target, taking due consideration of the existence of temporary factors that could cause transitory deviations of inflation from the target range. - Signatory: Julio Velarde, President, Central Reserve Bank of Peru. ### Debt sustainability: baseline overview - Peru’s debt-to-GDP ratio is projected to decline considerably under the baseline debt sustainability scenario. - Economic growth would average close to 6 percent a year in 2008-13. - Public sector revenue would remain broadly stable. - Public sector debt stock (including CRPAOs) projected to decline from 30.4 percent of GDP at end-2007 to 12.1 percent of GDP by 2013. - Nearly two thirds of total external debt is public; decline in public debt largely determines the path of total external debt. - Total external debt projected to decline from 30 percent of GDP at end-2007 to 17 percent by 2013. - Public external debt projected to decline from 15 percent to 10 percent of GDP over 2007–2013. ### External debt projections and key figures (Table 1 highlights) - External debt (in percent of GDP): 2007: 29.9; 2008: 25.1; 2009: 22.4; 2010: 21.2; 2011: 19.8; 2012: 18.5; 2013: 17.2. - Change in external debt (annual): 2003: -0.9; 2004: -3.4; 2005: -8.8; 2006: -5.5; 2007: -0.6; 2008: -4.8; 2009: -2.8; 2010: -1.1; 2011: -1.4; 2012: -1.3; 2013: -1.3. - Identified external debt-creating flows (4+8+9) (percent of GDP): 2003: -2.1; 2004: -7.4; 2005: -9.0; 2006: -9.7; 2007: -10.3; 2008: -7.5; 2009: -3.4; 2010: -3.4; 2011: -3.1; 2012: -3.1; 2013: -2.7. - Current account deficit, excluding interest payments (percent of GDP): 2003: -0.7; 2004: -2.1; 2005: -3.5; 2006: -5.0; 2007: -3.3; 2008: -0.8; 2009: -0.5; 2010: -0.7; 2011: -0.4; 2012: 0.0; 2013: 0.3. - Exports (percent of GDP): 2003: 17.6; 2004: 21.1; 2005: 24.7; 2006: 28.4; 2007: 28.7; 2008: 26.6; 2009: 24.0; 2010: 23.3; 2011: 23.4; 2012: 23.1; 2013: 22.5. - Imports (percent of GDP): 2003: 17.5; 2004: 18.0; 2005: 19.1; 2006: 19.7; 2007: 21.9; 2008: 22.9; 2009: 22.4; 2010: 22.7; 2011: 22.9; 2012: 23.0; 2013: 22.8. - Net non-debt creating capital inflows (negative) (percent of GDP): 2003: 0.0; 2004: -1.5; 2005: -2.0; 2006: -1.5; 2007: -4.4; 2008: -6.2; 2009: -2.7; 2010: -3.0; 2011: -2.9; 2012: -3.2; 2013: -3.1. - Automatic debt dynamics contribution (percent of GDP): 2003: -1.5; 2004: -3.7; 2005: -3.4; 2006: -3.2; 2007: -2.6; 2008: -0.5; 2009: -0.2; 2010: 0.2; 2011: 0.2; 2012: 0.1; 2013: 0.0. - Contribution from nominal interest rate: 2003: 2.2; 2004: 2.1; 2005: 2.1; 2006: 2.0; 2007: 1.9; 2008: 1.4; 2009: 1.3; 2010: 1.4; 2011: 1.3; 2012: 1.1; 2013: 1.0. - Contribution from real GDP growth: 2003: -1.8; 2004: -2.2; 2005: -2.7; 2006: -2.3; 2007: -2.3; 2008: -1.9; 2009: -1.4; 2010: -1.2; 2011: -1.1; 2012: -1.0; 2013: -1.0. - Contribution from price and exchange rate changes (percent of GDP): 2003: -1.8; 2004: -3.6; 2005: -2.8; 2006: -2.9; 2007: -2.2; 2008: ... (table continues). - Residual, incl. change in gross foreign assets (2-3) (percent of GDP): 2003: 1.2; 2004: 3.9; 2005: 0.2; 2006: 4.2; 2007: 9.6; 2008: 2.8; 2009: 0.6; 2010: 2.3; 2011: 1.7; 2012: 1.8; 2013: 1.4. - External debt-to-exports ratio (in percent): 2003: 274.3; 2004: 212.2; 2005: 145.8; 2006: 107.4; 2007: 104.3; 2008: 94.5; 2009: 93.2; 2010: 91.2; 2011: 84.7; 2012: 80.3; 2013: 76.4. - Gross external financing need (in billions of US dollars): 2003: 5.5; 2004: 4.9; 2005: 6.8; 2006: 2.2; 2007: 7.8; 2008: 10.1; 2009: 8.8; 2010: 9.4; 2011: 9.9; 2012: 11.9; 2013: 11.2. - Gross external financing need (in percent of GDP): 2003: 9.0; 2004: 7.0; 2005: 8.6; 2006: 2.4; 2007: 7.1; 2008: 7.3; 2009: 5.5; 2010: 5.6; 2011: 5.5; 2012: 6.2; 2013: 5.5. - Scenario with key variables at their historical averages: sample values shown include 25.1; 23.8; 22.4; 20.5; 18.8; 16.7; -2.5 (table continues). ### Public sector debt projections and key figures (Table 2 highlights) - Public sector debt (percent of GDP): 2003: 47.1; 2004: 44.3; 2005: 37.7; 2006: 32.9; 2007: 30.4; 2008: 22.0; 2009: 19.0; 2010: 17.3; 2011: 15.5; 2012: 13.8; 2013: 12.1. - Share foreign-currency denominated (percent of GDP): 2003: 43.3; 2004: 37.5; 2005: 29.5; 2006: 25.0; 2007: 21.9; 2008: 15.6; 2009: 12.9; 2010: 11.4; 2011: 9.9; 2012: 8.5; 2013: 7.2. - Change in public sector debt (percent of GDP): 2003: 0.4; 2004: -2.8; 2005: -6.6; 2006: -4.8; 2007: -2.5; 2008: -8.4; 2009: -3.0; 2010: -1.7; 2011: -1.8; 2012: -1.7; 2013: -1.7. - Identified debt-creating flows (4+7+12) (percent of GDP): 2003: -1.1; 2004: -4.7; 2005: -5.0; 2006: -7.6; 2007: -7.8; 2008: -5.7; 2009: -3.0; 2010: -1.7; 2011: -1.8; 2012: -1.7; 2013: -1.7. - Primary deficit (percent of GDP): 2003: -0.4; 2004: -1.0; 2005: -1.6; 2006: -3.9; 2007: -4.0; 2008: -3.9; 2009: -2.6; 2010: -1.9; 2011: -2.0; 2012: -1.9; 2013: -1.9. - Revenue and grants (percent of GDP): 2003: 18.0; 2004: 17.9; 2005: 18.9; 2006: 20.5; 2007: 20.5; 2008: 20.4; 2009: 19.2; 2010: 20.3; 2011: 20.5; 2012: 20.7; 2013: 20.9. - Primary (noninterest) expenditure (percent of GDP): 2003: 17.6; 2004: 17.0; 2005: 17.3; 2006: 16.5; 2007: 16.5; 2008: 16.5; 2009: 16.7; 2010: 18.4; 2011: 18.5; 2012: 18.7; 2013: 18.9. - Automatic debt dynamics (percent of GDP): 2003: -0.7; 2004: -3.6; 2005: -3.3; 2006: -3.6; 2007: -3.7; 2008: -1.8; 2009: -0.4; 2010: 0.2; 2011: 0.2; 2012: 0.2; 2013: 0.2. - Contribution from interest rate/growth differential (percent of GDP): 2003: -0.9; 2004: -2.8; 2005: -2.1; 2006: -3.4; 2007: -1.7; 2008: -1.8; 2009: -0.4; 2010: 0.2; 2011: 0.2; 2012: 0.2; 2013: 0.2. - Contribution from real interest rate (percent of GDP): 2003: 0.8; 2004: -0.7; 2005: 0.6; 2006: -1.0; 2007: 0.9; 2008: 0.4; 2009: 0.9; 2010: 1.2; 2011: 1.1; 2012: 1.0; 2013: 0.9. - Contribution from real GDP growth (percent of GDP): 2003: -1.8; 2004: -2.2; 2005: -2.7; 2006: -2.4; 2007: -2.6; 2008: -2.2; 2009: -1.3; 2010: -1.0; 2011: -0.9; 2012: -0.8; 2013: -0.7. - Other identified debt-creating flows (percent of GDP): 2003: -0.1; 2004: -0.2; 2005: -0.1; 2006: -0.1; 2007: -0.1; 2008: 0.0; 2009: 0.0; 2010: 0.0; 2011: 0.0; 2012: 0.0; 2013: 0.0. - Privatization receipts (negative) (percent of GDP): 2003: -0.1; 2004: -0.2; 2005: -0.1; 2006: -0.1; 2007: -0.1; 2008: 0.0; 2009: 0.0; 2010: 0.0; 2011: 0.0; 2012: 0.0; 2013: 0.0. - Residual, including asset changes (2-3) (percent of GDP): 2003: 1.5; 2004: 1.9; 2005: -1.6; 2006: 2.8; 2007: 5.3; 2008: -2.7; 2009: 0.0; 2010: 0.0; 2011: 0.0; 2012: 0.0; 2013: 0.0. - Public sector debt-to-revenue ratio (percent): 2003: 261.7; 2004: 247.0; 2005: 199.2; 2006: 160.7; 2007: 148.6; 2008: 107.6; 2009: 98.9; 2010: 85.3; 2011: 75.7; 2012: 66.6; 2013: 57.8. - Gross financing need (percent of GDP): 2003: 5.4; 2004: 4.9; 2005: 6.8; 2006: 1.5; 2007: 4.7; 2008: -0.3; 2009: 0.2; 2010: 1.0; 2011: 1.2; 2012: 1.0; 2013: 0.9. - Gross financing need (in billions of U.S. dollars): 2003: 3.3; 2004: 3.4; 2005: 5.4; 2006: 1.4; 2007: 5.1; 2008: -0.5; 2009: 0.4; 2010: 1.7; 2011: 2.2; 2012: 2.0; 2013: 1.8. - Scenario with key variables at their historical averages (public debt percent of GDP): 22.0; 20.3; 18.7; 17.1; 15.6; 14.2; -0.4 (table continues). - Scenario with no policy change (constant primary balance) in 2008-2013: 22.0; 17.1; 13.4; 9.6; 5.9; 2.1; 0.0 (table continues). ### Sensitivity tests and shocks - Debt ratios are robust to alternative macroeconomic assumptions; sensitivity tests use 10-year historical standard deviations for real GDP growth and interest rates. - A one-off 30 percent real depreciation of the exchange rate (assumed permanent) would raise the external debt-to-GDP ratio by about 10 percentage points above baseline projections in the medium term. - A 10 percent of GDP shock to contingent liabilities of the public sector would: - Raise the public debt-to-GDP ratio sharply in the short run. - Leave the public debt-to-GDP ratio 10.4 percentage points above baseline projections over the medium term. - Non-interest current account shocks (such as terms-of-trade) would have a moderate adverse impact on external indebtedness. - Combined and individual shocks presented include: - Individual shocks: permanent one-half standard deviation shocks to real interest rate, growth rate, and current account balance. - Combined shock: permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance. - One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009 in public debt tests (real depreciation defined as nominal depreciation minus domestic inflation based on GDP deflator). ### Key macroeconomic assumptions underlying baseline - Real GDP growth (in percent): 2003: 4.0; 2004: 5.1; 2005: 6.7; 2006: 7.6; 2007: 9.0; 2008: 8.2; 2009: 6.5; 2010–2013: 5.5 each year. - GDP deflator in US dollars (change in percent): 2003: 3.9; 2004: 8.2; 2005: 6.8; 2006: 8.8; 2007: 7.7; 2008: 17.5; 2009: 7.8; 2010: 0.3; 2011: 1.0; 2012: 1.0; 2013: 1.6. - Nominal external interest rate (in percent): 2003: 4.9; 2004: 4.9; 2005: 5.3; 2006: 6.5; 2007: 7.4; 2008: 6.1; 2009: 5.7; 2010: 6.5; 2011: 6.3; 2012: 6.0; 2013: 5.8. - Growth of exports and services (US dollar terms, in percent): 2003: 16.7; 2004: 36.5; 2005: 33.5; 2006: 34.5; 2007: 18.3; 2008: 17.9; 2009: 3.5; 2010: 2.7; 2011: 7.1; 2012: 5.1; 2013: 4.6. - Growth of imports and services (US dollar terms, in percent): 2003: 8.7; 2004: 16.8; 2005: 21.0; 2006: 20.3; 2007: 30.5; 2008: 33.1; 2009: 12.1; 2010: 7.5; 2011: 7.7; 2012: 6.7; 2013: 6.4. - Current account balance, excluding interest payments (percent of GDP): 2003: 0.7; 2004: 2.1; 2005: 3.5; 2006: 5.0; 2007: 3.3; 2008: 0.8; 2009: 0.5; 2010: 0.7; 2011: 0.4; 2012: 0.0; 2013: -0.3. - Net non-debt creating capital inflows (percent of GDP): 2003: 0.0; 2004: 1.5; 2005: 2.0; 2006: 1.5; 2007: 4.4; 2008: 6.2; 2009: 2.7; 2010: 3.0; 2011: 2.9; 2012: 3.2; 2013: 3.1. ### Policy implications and risks (as presented) - Under baseline assumptions of robust growth and moderate fiscal surplus, Peru’s public and external debt ratios decline significantly through 2013. - Key risks include exchange rate shocks (notably a 30 percent real depreciation scenario), contingent liability shocks (10 percent of GDP), and adverse shifts in the current account; these can materially raise debt ratios relative to baseline. - Despite an increasing share of domestic-currency debt, high foreign-currency share in Peru’s debt implies continued sensitivity to exchange rate movements. - Available data at the time do not point to a significant overvaluation of the exchange rate. *International Monetary Fund. PERU — Third Review and Inflation Consultation Under the Stand-By Arrangement and Request for Waiver of Applicability of Performance Criteria—Informational Annex. June 30, 2008.* ### APPENDIX 2. PERU: WORLD BANK RELATIONS ### APPENDIX 2. PERU: WORLD BANK RELATIONS ### Bank Group strategy - Country Partnership Strategy (CPS) approved by the Board on December 19, 2006, emphasizes inclusive growth and poverty reduction. - CPS projects financial assistance of up to US$3.5 billion between July 2007 and June 2011. - Envisaged lending program: combination of two fast disbursing loans and three investment projects per fiscal year. - Strategy includes development policy lending operations in the fiscal and social sectors, and possibly one to support policy reforms in the environmental sector. - FY08-09 pipeline: 11 operations for the amount of 550-700 million in commitments. - New series of programmatic operations (up to $500 million) planned for the next three years in fiscal, social, and environment sectors. - Recent DPL approvals: $200 million Fiscal and Competitiveness DPL and $150 million Results and Accountability II (REACT II) DPL. ### Bank-Fund collaboration in specific areas - Tax Reform and Fiscal Decentralization: - Fund staff led assistance in design of tax reform. - Joint work with the World Bank and IDB on drafting laws and regulations for fiscal decentralization. - World Bank focused on design and implementation of decentralization of social sectors and pro-poor spending policies. - Financial Sector: - Joint FSAP completed in May 2001. - Follow-up technical assistance by both institutions to implement FSAP recommendations. - Joint FSAP update completed in June 2005. - Public Sector Management: - Collaboration on results based budgeting, implementation of a Treasury Single Account, and modernization of budget processes, institutions and information systems. - Reform of the National Public Investment System (SNIP): - Bank working with authorities to reduce institutional bottlenecks of public investment system. - Joint WB-IADB mission in March 2007 to revise government procurement regulations. - Bank providing technical assistance for framework law for Public-Private Partnerships and implementation of FONIPREL. ### Statement of World Bank Loans (As of May 2008) — selected entries and totals - Loan details (Loan Number / Year Approved / Borrower / Purpose / Total (Net of Cancellation) / Undisbursed): - 72090 / 2004 / Republic of Peru / Lima Transport Project / 45.0 / 31.3 - 72850 / 2005 / Republic of Peru / Agricultural Research and Extension - APL II / 25.0 / 14.6 - 74230 / 2007 / Republic of Peru / Decentralized Rural Transport Project / 50.0 / 49.5 - 73080/40760 / 1997 / Republic of Peru / Irrigation Subsector Project / 95.3 / 2.2 - 72550 / 2005 / Republic of Peru / Institutional Capacity for Sustainable Fiscal Decentral / 8.8 / 7.0 - 72190 / 2004 / Republic of Peru / Justice Services Improvement / 12.0 / 5.8 - 52856 / 2004 / Republic of Peru / Lima Transport / 7.9 / 4.1 - 71600 / 2003 / Republic of Peru / Additional Financing Lima Water Rehabilitation and M / 20.0 / 5.5 - 38111 / 1995 / Republic of Peru / PE LIMA WATER Rehabilit & Mgt. Proj. / 150.0 / 0.3 - 71420 / 2003 / Republic of Peru / National Rural Water Supply and Sanitation Project / 50.0 / 32.2 - 73680 / 2006 / Republic of Peru / Real Property Rights II Project / 25.0 / 21.6 - 73220 / 2006 / Republic of Peru / Regional Transport Infrastructure Decentralization / 50.0 / 47.4 - 73660 / 2006 / Republic of Peru / Rural Electrification / 50.0 / 43.3 - 74430 / 2007 / Republic of Peru / Sierra Rural Development Project / 20.0 / 20.0 - 71770 / 2003 / Republic of Peru / Trade Facilitation and Productivity Improvement Tech / 20.0 / 5.1 - 72570 / 2005 / Republic of Peru / Vilcanota Valley Rehabilitation and Management Proj / 5.0 / 3.8 - 71760 / 2003 / Republic of Peru / Rural Education / 52.5 / 23.5 - 72540 / 2005 / Republic of Peru / Accountability for Decentralization in the Social Secto / 7.8 / 3.1 - 74550 / 2007 / Republic of Peru / Results and Accountability (REACT) DPL / 150.0 / 150.0 - Totals: - Total disbursed: 5,439.9 - Of which: amount repaid 2,782.3 - Total Outstanding: 2,585.6 - Total Undisbursed 470.4 ### Statement of IFC Operations in Peru (As of end May 2008) - Commitments held / Disbursed: - Loans 324.0 / 249.4 - Equity 125.9 / 118.4 - Quasi 54.0 / 54.0 - Particip Loans 230.0 / 230.0 - Total 503.9 / 421.4 *Source: APPENDIX 2. PERU: WORLD BANK RELATIONS (as provided)* --- ### APPENDIX 3. PERU: RELATIONS WITH THE INTER-AMERICAN DEVELOPMENT BANK ### Country Strategy - Country Strategy for 2007-2011: focus on competitiveness, social development, and modernization of the State. - Three strategic pillars: - (i) strengthening Peru’s participation in the global economy and enhancing competitiveness; - (ii) promoting social development and economic inclusion; - (iii) deepening the reform of the State and improving public sector management. ### Lending and portfolio (as of May 31, 2008) - Active public sector operations: 25 loans for a total amount of US$859.3 million, of which US$164.1 million (19.1%) had been disbursed. - Public sector lending program for 2008: seven investment loans for US$150.0 million and two programmatic loans for US$125.0 million. - Structured Corporate Finance department: portfolio in execution of 5 loans for a total amount of US$550.0 million (focus: financial and natural gas sectors). - Private sector lending for 2008: one project for US$15.0 million. - To assist de-dollarization of public sector debt: Bank converted US$50.0 million of a previously disbursed loan into local currency; further local currency transactions under consideration. ### PERU—IDB Loan Portfolio by Sector (As of May 31st, 2008) — US$ million - Agriculture: Commitments 30.0 / Disbursements 15.0 / % Disbursed 49.9% - Environmental: Commitments 5.0 / Disbursements 0.0 / % Disbursed 0.0% - Science and Technology: Commitments 25.0 / Disbursements 1.7 / % Disbursed 6.8% - Urban Development: Commitments 60.0 / Disbursements 32.0 / % Disbursed 53.3% - Social Investment: Commitments 103.3 / Disbursements 86.6 / % Disbursed 83.8% - Modernization of the State: Commitments 126.5 / Disbursements 13.6 / % Disbursed 10.8% - Water and Sanitation: Commitments 200.5 / Disbursements 0.1 / % Disbursed 0.1% - Transportation: Commitments 308.9 / Disbursements 15.1 / % Disbursed 4.9% - Total: Commitments 859.3 / Disbursements 164.1 / % Disbursed 19.1% *Source: APPENDIX 3. PERU: RELATIONS WITH THE INTER-AMERICAN DEVELOPMENT BANK (as provided)* --- ### APPENDIX 4. PERU: STATISTICAL ISSUES ### Overview - Macroeconomic statistics broadly adequate for policy formulation, surveillance, and program monitoring. - Peru subscribes to the Special Data Dissemination Standard (SDDS). - Data ROSC prepared and published in 2003. - Identified areas for improvement: - (i) coordination among agencies compiling official statistics to avoid duplication and user confusion; - (ii) implementing a new benchmark and base year for GDP; - (iii) expanding coverage of the wholesale price index to include mining, oil and gas extraction, electricity and water, public transportation, and communication; - (iv) finalizing migration to standardized report forms for monetary data, introducing report forms for other depository corporations and financial corporations; - (v) expanding scope of data sources for compiling financial flows of individual residents. ### I. Real Sector and Prices - Revised GDP series published in 2000 used 1994 benchmark as base year; included input-output tables. - Post-1994 estimates largely based on extrapolation techniques due to limited periodic source data. - Lack of current detailed supply and use tables hampers reconciliation; changes in inventories mainly determined as a residual. - Quarterly accounts improved timeliness of monthly production indices, but coverage remains limited. - INEI working on new national account series using 2007 as the base year. - A national accounts statistics mission tentatively scheduled for fiscal year starting in May 2008. - CPI expenditure weights derived from 1993–94 household expenditure survey; owner-occupied housing excluded from Metropolitan Lima index through exclusion of imputed rent; imputed rent included in indices of other 24 cities; national index is weighted average of indices with different coverage. - WPI weights derived from 1994 input-output table and other reports are outdated. ### Labor Market Statistics - Authorities monitor labor using four indicators: open unemployment, underemployment, employment, and remunerations. - Improvements noted, but issues: - Wage data have relatively long delay; - Nationwide unemployment and underemployment surveyed only once a year; - Labor productivity data published only at time of adjustments of electricity and telecommunications tariffs. ### II. Fiscal Sector - Government finance statistics (GFS) for general government compiled using GFS Manual 1986 analytical framework. - For consolidated central government: revenues compiled on a cash basis; expenditures compiled on an accrual basis. - Authorities sent Fund information on components of consolidated central government expenditures by function. - Coverage of published national budget data narrower than fiscal statistics prepared for program purposes. - Authorities prepared plan to migrate to GFS Manual 2001; schedule for migration not yet defined. - Authorities report annual GFS data using GFSM 2001 presentational framework for publication in the Government Finance Statistics Yearbook (GFSY) and monthly data for the International Financial Statistics (IFS). ### III. Monetary Sector - BCRP compiles and publishes analytical accounts of central bank, depository corporations, and financial corporations broadly in line with Monetary and Financial Statistics Manual methodology. - Main discrepancies: - Exclusion of deposits of other financial corporations, state and local governments, and public nonfinancial corporations from broad money definition; - Use of cash accounting; - Valuation of some financial instruments at cost rather than market prices. - Mission visited in January 2007 to assist migration to new standardized report forms (SRFs) for reporting monetary data to the IMF; finalized SRF for central bank with recommendations to improve classification and sectorization. - Follow-up mission during 2008 expected to complete SRF work for other depository corporations and other financial corporations. ### IV. External Sector - BCRP prepares quarterly balance of payments and international investment position largely in line with BPM5 recommendations. - Data reported to Fund for IFS and Balance of Payments Statistics Yearbook. - Departures from BPM5: - Lack of coverage of assets held abroad and land acquisition abroad by residents; - Lack of separate identification of liabilities to affiliated enterprises; - Not recording on an accrual basis some external debt transactions. - BCRP has reported weekly international reserves since August 2001 in accordance with the Operational Guidelines for Data Template on International Reserves and Foreign Currency Liquidity. - Since August 2006, BCRP includes full amount of liquidity requirements in reserve template both under official reserve assets and as a contingent net drain (as specified in Section III of the Data Template). - Peru disseminates quarterly data on external debt with an eight week lag on the National Summary Data Page with a hyperlink to the Fund’s website. ### Peru: Table of Common Indicators Required for Surveillance (As of June 10, 2008) — selected entries - Exchange Rates: Date of latest observation Mar. 2008 / Date received 4/3/08 / Frequency of Data D / Frequency of Reporting M / Frequency of Publication D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: Date of latest observation May 2008 / Date received 6/9/08 / Frequency of Data D / Frequency of Reporting M / Frequency of Publication W - Reserve/Base Money: Date of latest observation Feb. 2008 / Date received 4/8/08 / Frequency of Data W / Frequency of Reporting M / Frequency of Publication W - Broad Money: Date of latest observation Feb. 2008 / Date received 4/8/08 / Frequency of Data W / Frequency of Reporting M / Frequency of Publication W - Central Bank Balance Sheet: Date of latest observation Feb. 2008 / Date received 4/8/08 / Frequency of Data W / Frequency of Reporting M / Frequency of Publication W - Consolidated Balance Sheet of the Banking System: Date of latest observation Feb. 2008 / Date received 4/8/08 / Frequency of Data W / Frequency of Reporting M / Frequency of Publication W - Interest Rates2: Date of latest observation Mar. 2008 / Date received 4/8/08 / Frequency of Data D / Frequency of Reporting M / Frequency of Publication D - Consumer Price Index: Date of latest observation Apr. 2008 / Date received 5/19/08 / Frequency of Data M / Frequency of Reporting M / Frequency of Publication M - Revenue, Expenditure, Balance and Composition of Financing3 – General Government4: Date of latest observation 2004 / Date received 9/21/2005 / Frequency of Data Q / Frequency of Reporting Q / Frequency of Publication Q - GDP/GNP: Date of latest observation Q4 2007 / Date received 3/27/08 / Frequency of Data Q / Frequency of Reporting Q / Frequency of Publication Q - International investment Position: Date of latest observation Q1 2007 / Date received 8/16/07 / Frequency of Data Q / Frequency of Reporting Q / Frequency of Publication Q - Footnotes included in table: - 1 Every Friday the Central Bank disseminates daily net international reserves, and weekly International Reserve Assets and Reserve Liabilities. - 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. - 3 Foreign, domestic bank, and domestic nonbank financing. - 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. - 5 Including type of instrument, maturity and type of creditor. - 6 Includes external gross financial asset and liability positions vis-à-vis nonresidents. - 7 Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA). - 8 Reflects assessment in data ROSC published in October 2003 based on findings of mission during February 12–26, 2003; assessment indicates whether international standards concerning (respectively) concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), not observed (NO), or not available (NA). - 9 Same as footnote 7, except referring to international standards concerning (respectively) source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies. *Source: APPENDIX 4. PERU: STATISTICAL ISSUES (as provided)* --- ### Supplementary Information (IMF staff supplement, July 21, 2008) ### Key points - This supplement provides additional information available since circulation of the staff report; it does not alter the thrust of staff appraisal. - On July 14, Mr. Luis Valdivieso was sworn in as new Finance Minister, replacing Mr. Carranza. Mr. Valdivieso is a former Fund-staff member, supports the letter of intent, and has provided assurances of strong commitment to the program. - Macroeconomic performance: - Real GDP growth at nearly 10 percent during the first five months of 2008, over the same period in 2007. - Domestic demand estimated to have expanded at around 11½ percent. - Exports risen by 33 percent in the same period. - Imports, particularly capital goods and intermediate goods, risen by 53 percent. - Nationwide employment rose by 10 percent (year-on-year) in May, led by commerce and services. - Financial market sentiment: - Since early July, the Nuevo Sol appreciated by about 4 percent against the U.S. dollar; the central bank has not intervened. - On July 14, Standard & Poor’s upgraded Peru to investment grade. - Peru’s sovereign bond spread declined by 15 basis points since then. - Inflation and monetary policy: - Inflation was 5.7 percent (y/y) in June, exceeding the upper consultation band with the Executive Board under the program. - Monthly inflation in June reached 0.77 percent, reflecting higher food prices and a 1.6 percent average increase in domestic fuel-related retail prices. - Excluding food and fuel, consumer prices rose 2.2 percent over the past 12 months. - On July 10, the central bank increased its policy interest rate by 25 basis points, to 6 percent, and tightened reserve requirements. - Minimum reserve requirements will rise from 8½ percent to 9 percent effective in August and cover all obligations, notably banks’ long-term borrowing (2-7 years) in foreign currency. - Marginal reserve requirements for foreign currency deposits will rise from 45 percent to 49 percent. - Authorities see upside risks to inflation given sustained strong domestic demand growth and higher fuel prices. - Authorities reaffirm commitment to continue tightening monetary policy to bring inflation gradually toward the inflation target range by mid-2009. *Source: Supplementary Information prepared by the Western Hemisphere Department, Approved July 21, 2008 (as provided).* ### 7. The authorities have enacted wide-ranging legislation as part of the Peru-U.S. ### 7. The authorities have enacted wide-ranging legislation as part of the Peru-U.S. Free Trade Agreement (FTA) ### Legislative measures enacted since March 2008 - The government has approved 96 legislative decrees under the special powers granted by Congress. - Customs law - Adapts rules to expedite procedures and sets new rules for controls at customs. - Preserves the current joint structure for tax and customs administration under a single agency, consistent with staff recommendations. - Small Businesses - Establishes a new labor and tax regime, and broader definition for micro and small enterprises to encourage formalization. - Government shares the costs of providing workers with gradual access to social security and health benefits. - Small enterprise labor costs (such as severance payments) would be reduced from 72 percent of gross salaries to 41½ percent. - Authorities expect about two million enterprises would be formalized over the next three years, thereby improving health and social security coverage significantly. - Staff view: this law is an important step toward reducing labor market informality. - General Banking law and Supervision - Strengthening the bank surveillance and intervention regimes. - Introducing minimum capital requirements for credit, market, and operational risks in line with Basel II. - Modifying the definition and limits in minimum capitalization (raised from 9.1 percent to 10 percent), also in line with Basel II. - Allowing nonbank financial institutions to conduct similar operations as banks, such as syndicated loans, factoring, and external trade financing. ### End-June structural benchmarks: status and actions - Some end-June structural benchmarks were not met, although significant progress has been made toward their completion. - Guidelines for assessing tax exemptions - Authorities have finalized the draft guidelines and intend to issue them shortly. - Submission to Congress of law to raise minimum capital requirements for microfinance institutions - Draft law prepared by the Superintendency of Banks is under legal review at the Ministry of Finance. - Authorities intend to submit it to the Council of Ministers for discussion and approval within the next two weeks. - Staff expects prompt submission to Congress given the importance of this law in the context of the recent approved expansion of operations to nonbank financial institutions. - Clarification of tax treatment of securitization transactions - Authorities prefer to hold this reform, as it would entail amendments to the VAT law and a suspension of income tax withholding difficult to justify with Congress at this juncture. - Authorities have been resisting introducing other tax exemptions in the recent period. - Staff shares the authorities' assessment of the risks and notes several reforms implemented under the program still support the deepening of domestic capital markets. - Staff will continue to explore options with the authorities on how to facilitate securitization transactions, but supports the authorities’ view that the risks of proceeding would outweigh the benefits. ### IMF Executive Board: Third Review under the Stand-By Arrangement (Press Release No. 08/181, July 24, 2008) - Arrangement details - 25-month Stand-By Arrangement in the amount equivalent to SDR 172.4 million (about US$280.7 million). - Arrangement approved on January 26, 2007 (see Press Release No. 07/15). - Authorities reiterated intention to continue treating the arrangement as precautionary. - Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, summarized: - Peru achieved record-high economic growth, rising employment, and significant poverty reduction despite heightened global risks. - Authorities have tightened monetary policy to contain underlying pressures and help anchor inflation expectations. - Fiscal policy has been tightened, with a commitment to maintain a prudent strategy to help achieve a neutral fiscal stance. - Use all monetary policy instruments to bring inflation gradually toward its target range while ensuring an orderly dedollarization process. - Significant progress in enhancing fiscal structural framework: comprehensive law for Public-Private Partnerships; new Customs Law maintaining customs and domestic tax administration under a single agency. - Continued reforms recommended to minimize fiscal risks: preserve sound public investment policy; amend the Fiscal Responsibility Law to introduce sanctions for noncompliance and ensure spending limits are observed by all government levels; reform the Fuel Price Stabilization Fund to better align domestic and international prices and reduce fiscal burden. - Fund for Regional and Local Investment, SNIP reforms, and Interministerial Committee for Social Affairs leadership will help entrench poverty alleviation gains. - Amendment of the General Banking Law aligning minimum capital requirements and exchange-rate-related risks with Basel II; need to amend the General Banking Law to raise minimum capital requirements of microfinancial institutions and align regulatory framework for public banks with private banks. - Increase in legal limit for foreign investment by private pension funds will help deepen domestic capital markets. - New legal framework for micro and small businesses will help reduce informality and provide workers with better access to social security and health benefits. ### Economic performance, policies, and projections (Executive Director statement by Javier Silva-Ruete, July 23, 2008) - Growth and employment - Growth was 9 percent in 2007; poverty decreased markedly for the second year in a row; formal employment has risen. - Inflation exceeded the upper limit of the Central Bank’s (BCRP) official target range (between 1-3 percent) by around 2½ percent points. - GDP forecasts and investment - GDP growth reached 9 percent in 2007, a 13-year high. - GDP growth reached a solid 9.2 year-on-year in the first quarter of 2008. - Forecast is approximately 8 percent in 2008 and 6.5 percent in 2009. - Authorities expect private investment to expand 20 percent in 2008 and around 14 percent in 2009. - Inflation and monetary/fiscal responses - Annual inflation rose to 5.5 percent in March and 5.7 in June 2008 due to international food prices and weather-related shocks. - BCRP raised the reference rate by 150 points since 2007, to 6 percent. - Reserve requirements increased several times with an impact equivalent to 140 basic points in the interest rate. - Operational fiscal target for the year has been raised. - At end-March and end-June, annual non-food inflation was about 2 percent. - Authorities expect inflation to gradually return to the target range of 1-3 percent by mid-2009 and remain ready to take further action if required. - International reserves and exchange rate policy - During the first quarter of 2008, BCRP built up an additional $6.4 billion in international reserves. - At end-March, official reserves reached $27.7 billion—more that 200 percent of foreign-currency deposits. - BCRP interventions aimed at alleviating destabilizing effects of strong capital inflows and will continue to be limited to reducing exchange rate volatility. - Dedollarization - Financial dollarization is receding considerably, driven by stronger confidence in the currency, notably growing mortgage lending in domestic currency. - Authorities committed to pursuing an orderly dedollarization process. - Fiscal position and public investment - In 2007, the consolidated public sector posted a surplus of 3.2 percent of GDP. - Authorities raised their operational fiscal target to a surplus of 2 percent of GDP for 2008. - Public investment has accelerated considerably in response to improvements in SNIP procedures. - Public debt fell to 29.1 percent of GDP. - Social and regional investment - Fund for Regional and Local Investment launched in February to enhance infrastructure in poorer areas; first results of the call for projects to be announced soon. - Financial sector and capital markets actions - New capital requirements for financial risk, including foreign currency-induced credit risk, in line with Pillar II of Basel II, introduced through an amendment to the General Banking Law (GBL). - Amendment of the GBL passed to strengthen microfinance institutions and improve their competitive position. - Limit on foreign investment abroad by pension funds was raised. - MiVivienda stopped issuing guarantees for loans denominated in foreign currency. - Structural reform acceleration and fiscal tax measures - Framework law passed to improve risk allocation between private and public sectors in PPPs. - Draft law submitted to Congress to allow outsourcing of studies required for design and approval of investment projects under SNIP to expedite investment while preserving quality. - Authorities intend to delay some changes to the VAT law and the income tax treatment of securitization-related operations (end-June 2008 structural benchmark) because they would require tax exemptions. - Competitiveness and labor market reforms - Decrees launched to improve competitiveness: reform of ports, improvements in markets overseas, and labor market reform reducing labor cost for small enterprises to formalize the sector. - Authorities intend to complete similar arrangements with other important trade partners. - Poverty reduction and social programs - Poverty rate declined from 44 percent in 2006 to 39 percent in 2007. - Multi-Annual Social Framework prepared by the Interministerial Committee for Social Affairs. - Social program Crecer expanded and, together with Juntos, implemented in the poorest rural districts. - Temporary pilot program to distribute food among vulnerable urban groups implemented in response to higher food prices. - Authorities evaluating targeted cash-transfer program to mitigate impact of rising food prices on poorest segments. - Ratings - Fitch and Standard and Poor’s granted investment grade to Peruvian debt in recognition of declining vulnerabilities and strengthened fiscal position. ### Performance criteria and review request - All end-March 2008 performance criteria were met, except the inflation target. - Authorities request completion of the Third Review and stand ready to take necessary steps to meet commitments and maintain dialogue with the Fund; they consent to publication of the staff report. *International Monetary Fund, Press Release No. 08/181; Executive Board Meeting statements (July 23–24, 2008).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08258.pdf_