## 1.   Selected Economic Indicators

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### I. Background: Peru’s resilience and recent performance
- 10-year expansion with a cumulative growth of about 50 percent.
- Real per-capita income grew 40 percent over this period.
- Poverty declined to 36 percent in 2008 from 55 percent in 2000.
- Credit ratings: investment grade by Fitch and Standard & Poor’s in 2008 and by Moody’s in late 2009.
- Global crisis impact and 2009 activity:
  - Growth: 9.8 percent in 2008; about 1 percent for 2009.
  - Private investment (including inventories) fell by 30 percent in real terms in 2009.
  - Inflation: peaked at 6.7 percent in December 2008; fell to near zero in the second half of 2009.
  - Core inflation: declined to near 2 percent by end–2009.
  - Fourth quarter 2009: economy grew by over 15 percent (qoq, saar annualized).

### II. Policy response and financial stability
- Monetary and fiscal policy actions:
  - Policy interest rate reduced by 525 bps since early 2009 to a historic-low of 1¼ percent.
  - Substantial fiscal stimulus with a positive fiscal impulse of about 2½ percent of GDP in 2009.
  - Real general government primary spending increased by 14 percent in 2009.
  - Contingency measures (guarantees) were prepared but ultimately not needed.
- Central bank actions and FX operations:
  - Central bank injected substantial liquidity in Soles and U.S. dollars.
  - As of March 24, the central bank has bought US$2.3 billion so far this year to moderate volatility.
- Banking sector resilience:
  - Introduction of dynamic provisioning in 2008.
  - Non-performing loans increased to 2.8 percent in January 2010 from 2.2 percent in 2008.
  - Banks remained well-capitalized, liquid, and profitable during 2009.
- External flows and exchange rate:
  - Net FDI flows diminished slightly to a still-high 3 percent of GDP.
  - Public sector issued US$2 billion in 2009 for pre-financing and Paris Club repayment.
  - The Sol recovered pre-Lehman level by November 2009 and appreciated by 5 percent in nominal and real effective terms since then.

### III. Near-term outlook and staff projections
- Growth projections:
  - Staff projects growth at 6¼ percent this year and 6 percent in 2011.
- Fiscal and monetary stance:
  - The stimulus plan has a residual impulse in 2010; real government spending projected to grow at 7 percent in 2010.
  - Monetary conditions expected to remain accommodative; inflation expected to converge to the middle of the target range in the second half of the year.
- Risks:
  - Balance of risks to growth appears tilted to the upside (cyclical inventory rebuilding; acceleration of private investment projects).
  - Principal tail risk: relapse in global growth and return of global risk aversion.
  - Other risks: a strong El Niño weather effect; electoral cycle (municipal/regional elections October 2010; presidential elections April 2011) could dampen private investment temporarily.
- Policy considerations:
  - Graduate policy stance toward neutral as private-led recovery takes hold.
  - Sequence policy normalization with prudential tools (reserve requirements, policy rate adjustments, macroprudential measures).
  - Consider consolidating fiscal stance in advance of increasing policy interest rates to limit incentives for carry trade inflows.
  - Authorities retain room to provide additional stimulus if global conditions worsen, including liquidity injection in Soles and U.S. dollars and non-traditional/quantitative measures.

### IV. Medium-term outlook and structural challenges
- Medium-term projections and risks:
  - Potential growth expected to remain elevated at about 5¾ percent over the medium term.
  - Current account deficit projected to fluctuate between 2 and 3 percent of GDP as global conditions normalize.
  - Public debt ratios projected to decline to about 20 percent of GDP.
  - Large and sustained capital inflows could test absorption capacity and pose policy challenges; likely to result in stronger private investment and a widening of the current account over the medium term.
- Reform priorities:
  - Continue global integration; improve competitiveness and innovation; develop domestic capital markets.
  - Focus on education, labor markets, economic/judicial institutions, and civil service reform.
  - Review fiscal framework to reduce pro-cyclicality and further strengthen prudential framework guided by lessons from the global financial crisis.

### V. Policy discussions and specific recommendations
- Graduating macro policy stance:
  - Assess evidence of self-sustained private-led recovery and monitor potential buildup of domestic demand pressures.
  - Withdraw policy stimulus timely to avoid late-year inflationary pressures.
- Sequencing and complementary tools:
  - Combine fiscal consolidation with monetary normalization and quantitative/prudential measures (reserve requirements, macroprudential measures).
  - Use greater exchange rate flexibility to reduce incentives for one-side bets.
- Fiscal consolidation and fiscal framework:
  - Bring fiscal stance to neutral to regain fiscal cushions.
  - Authorities aim to return in 2011 to the 1 percent of GDP deficit limit established by the Fiscal Responsibility and Transparency Law.
  - Authorities’ projection of overall deficit: 1.6 and 1.0 percent of GDP for 2010 and 2011, respectively.
  - Address mounting liabilities of the Oil Price Stabilization Fund (FEPC) in the short run (potential liability of the FEPC would amount to ½ percent of GDP in 2010).
  - Safeguard quality of public investment projects and review unconventional crisis-response measures.
- Prudential framework strengthening:
  - Regulatory norms on capital, liquidity and dynamic provisioning are ahead of international standards.
  - Steps to broaden regulatory perimeter to bring cooperative banks and Banco de la Nacion fully under the Superintendence of Banks and Insurance (SBS).
  - Additional capital requirements linked to assessment (stress testing) and FX credit risk to become effective in July 2010.
  - Consider initiatives for capital requirements for systemic risk, crisis resolution frameworks, and improved liquidity provisioning under systemic stress.
  - Enhance cross-border supervisory collaboration and information sharing.

### VI. Key fiscal indicators (General Government, percent of GDP)
- Peru: Fiscal Performance 2007–10 1/
  - Revenues: 20.8 (2007), 21.0 (2008), 18.6 (2009), 19.3 (2010p)
  - Expenditures: 16.0 (2007), 17.3 (2008), 19.5 (2009), 19.6 (2010p)
  - of which Current: 12.9 (2007), 13.2 (2008), 13.8 (2009), 13.7 (2010p)
  - of which Capital: 3.1 (2007), 4.1 (2008), 5.7 (2009), 5.9 (2010p)
  - NFPS Overall Balance: 3.3 (2007), 2.0 (2008), -2.0 (2009), -1.5 (2010p)
  - Fiscal Impulse: -1.2 (2007), 1.1 (2008), 2.4 (2009), 0.1 (2010p)
  - 1/ General Government.

### De-dollarization and exchange rate flexibility
- Observations:
  - Substantial reduction in financial dollarization over the last decade; the Sol has shown greater currency volatility in recent years.
  - Drivers: Macroeconomic stability; solid prudential framework; developing capital market in Soles; successful crisis management boosting confidence in local currency and lending in Soles.
- Authorities' reforms:
  - Develop mortgages in local currency and other necessary financial instruments (creation of a covered bond instrument).
- Staff view:
  - A gradual increase in currency volatility will foster development of FX hedging instruments and markets.
  - Greater exchange rate flexibility would allow the exchange rate to play a larger role as a shock absorber, including to large and persistent capital inflows.
- Exchange rate assessments (Appendix 4):
  - Macroeconomic balance approach: overvaluation of 6 percent (REER).
  - External stability approach: overvaluation of 5 percent.
  - Equilibrium real exchange rate approach: undervaluation of 7 percent as of October 2009.
  - Stock approach for non-renewable resources: suggests an undervaluation of 2 percent (based on copper).
- Underlying current account estimation for 2010:
  - Projected current account for 2010: -1.3 percent of GDP.
  - Estimated underlying current account deficit: -1.1 percent of GDP.
  - Quantified effect of lower longer-term commodity prices: equivalent to 1¼ percent of GDP reduction in exports.

### Capital market development
- Rationale: deeper capital market to channel resources effectively.
- Observations:
  - Actual and potential demand for domestic assets increased substantially, but supply of assets has been limited.
  - Structural constraints: economic size and selective nature of issuers; regulations and taxation could be reviewed.
- Authorities’ initiatives:
  - Create a covered bond instrument to develop mortgage market in Soles.
  - Foster repo and interest rate swap markets.
  - Strengthen CONASEV to ease access to domestic capital markets.
  - Agreement to integrate Chilean, Colombian and Peruvian stock markets by 2011 could increase investible assets for AFPs and market liquidity.

### Poverty reduction and social policy
- Outcomes:
  - Poverty declined from 44½ percent in 2006 to 36 percent in 2008.
  - Despite deceleration in growth in 2009, poverty gains were preserved due to fiscal stimulus sustaining employment and protecting social spending.
- Authorities’ efforts:
  - Strengthen the Inter-ministerial Committee for Social Assistance (CIAS).
  - Consolidate and focus social programs; increase coverage and resources for some programs (notably Juntos).
  - Continue implementing poverty alleviation strategy Crecer (single registry of beneficiaries; performance indicators).

### Capital inflows and macroeconomic management
- Outlook and risks:
  - Likely persistent shift to large and sustained capital inflows, especially FDI.
  - Benefits: support productivity upgrade and potential growth.
  - Risks: composition of inflows, widening current account, currency appreciation, potential credit booms and asset bubbles, risk of reversal and volatility.
- Policy implications:
  - Prepare fiscal space for private investment; increase exchange rate flexibility; use macro-prudential instruments.
  - Sequence withdrawal of stimulus:
    - Start consolidating fiscal stance in advance of increasing policy interest rates to limit carry trade incentives.
    - Normalize monetary conditions possibly relying first on reserve requirements before increasing the policy interest rate.
    - Coordinate fiscal and monetary policy with macro-prudential measures.
- Contingency:
  - If global conditions relapse, Peru has space to provide additional policy stimulus and central bank room to inject liquidity.

### Medium-term fiscal stance and macro-prudential framework
- Recommendation:
  - Gradually return to a neutral fiscal stance to regain fiscal cushions.
  - Fiscal spending plans should aim for a declining fiscal deficit path and a return in 2011 to the limit of 1 percent of GDP established by the Fiscal Responsibility and Transparency Law.
  - Address mounting FEPC liabilities in the short run to avoid large debt obligations.
  - Timely consolidation would regain fiscal space in case of a relapse in global conditions and create space for private sector investment.

### Selected social, real, external, monetary and fiscal statistics (selected series from tables)
- Social indicators (selected):
  - Life expectancy at birth (years): 70.7, 72.8, 73.1, 73.3, .........
  - Infant mortality (per thousand live births): 22.8, 18.9, 17.2, 17.0, .........
  - Adult literacy rate: 87.9, 88.7, 89.6, ............
  - Poverty rate (Total) 1/: 48.7, 44.5, 39.3, 36.2, .........
  - Unemployment rate: 9.6, 8.5, 8.4, 8.4, 8.6, ......
- Production and prices:
  - Real GDP (annual percentage change): 6.8, 7.7, 8.9, 9.8, 0.9, 6.3, 6.0
  - Real domestic demand: 5.8, 10.3, 11.9, 12.1, -2.9, 7.4, 7.0
    - Private sector: 5.9, 9.0, 11.4, 12.6, -2.1, 4.9, 6.2
  - Consumer Prices (end of period): 1.2, 1.1, 3.9, 6.7, 0.2, 2.0, 2.0
  - Consumer Prices (period average): 1.6, 2.0, 1.8, 5.8, 2.9, 1.5, 1.8
- External sector (selected):
  - Exports (percent change, U.S. dollars): 35.6, 37.2, 17.0, 13.1, -14.7, 19.7, 10.0
  - Imports (percent change, U.S. dollars): 23.2, 22.9, 32.0, 45.1, -26.1, 21.4, 13.4
  - External current account balance (percent of GDP): 1.4, 3.1, 1.3, -3.7, 0.2, -0.7, -1.8
- Money and credit (12-month percent change):
  - Liabilities to the private sector: 18.4, 8.8, 22.7, 24.2, 6.2, 14.7, 14.0
  - Net credit to the private sector: 16.3, 6.3, 20.8, 31.5, 1.7, 14.4, 14.1
  - Broad money: 18.4, 8.8, 22.7, 24.2, 6.2, 14.7, 14.0
- Public sector (percent of GDP):
  - General government current revenue: 18.0, 19.9, 20.7, 20.9, 18.5, 19.2, 19.0
  - General government noninterest expenditure: 16.8, 16.3, 16.0, 17.3, 19.5, 19.6, 18.9
  - Combined public sector primary balance: 1.6, 4.1, 5.1, 3.7, -0.7, -0.2, 0.3
  - Combined public sector overall balance: -0.3, 2.2, 3.3, 2.2, -2.0, -1.5, -1.0
  - Public sector debt (including CRPAOs, percent of GDP): 37.7, 33.2, 30.9, 25.7, 27.4, 26.7, 25.6
- Reserves and external debt:
  - Gross reserves (millions of U.S. dollars): 14,120; 17,329; 27,743; 31,250; 33,190; 35,690; 37,190
  - Gross reserves: Percent of short-term external debt: 314.2, 174.9, 405.3, 421.1, 397.5, 473.7, 481.4
  - Total external debt (percent of GDP): 36.1, 30.8, 32.4, 28.9, 32.3, 28.6, 29.6
- Savings and investment (percent of GDP):
  - Gross domestic investment: 17.9, 20.0, 23.0, 26.7, 20.6, 23.3, 24.9
    - Public sector: 2.9, 2.8, 3.1, 4.2, 5.3, 6.0, 6.0
    - Private sector: 15.0, 17.2, 19.9, 22.5, 15.3, 17.3, 18.8
  - National savings: 19.3, 23.1, 24.2, 23.0, 20.8, 22.6, 23.1
- Fiscal accounts (levels; in millions of Nuevos Soles):
  - Nominal GDP (S/. billions): 261.7, 302.3, 335.2, 372.6, 381.7, 415.5, 449.3
  - Central government primary balance (S/. millions): 2,904; 9,816; 11,536; 13,372; -2,314; 2,466; 5,216
  - Revenue (S/. millions): 41,372; 53,076; 61,498; 68,354; 60,939; 67,758; 75,317
  - Noninterest expenditure (S/. millions): 38,468; 43,260; 49,962; 54,982; 63,253; 65,292; 70,102
  - Combined public sector overall balance (S/. millions): -865; 6,738; 11,077; 8,097; -7,553; -6,165; -4,552

### Monetary aggregates and financial soundness (selected)
- Net international reserves (in millions of U.S. dollars): 14,097; 17,275; 27,689; 31,196; 33,136; 35,636; 36,636
- Net domestic assets (central bank, in millions of New Soles): -38,237; -43,483; -68,159; -79,160; -76,124; -80,356; -82,713
- Net credit to private sector (financial system, in millions of Nuevos Soles): 74,945; 86,575; 111,218; 126,759; 139,747; 159,466; 181,697
- Liabilities to the private sector (financial system, in millions of Nuevos Soles): 101,825; 123,329; 158,138; 163,946; 195,715; 228,577; 265,221
- Base money (12-month percentage change): 25.7, 18.3, 28.2, 25.5, 5.5, 16.7, 15.5
- Financial soundness indicators (private commercial banks; selected):
  - Equity capital to risk-weighted assets (Dec): 14.0, 12.0, 12.5, 11.7, 11.9, 13.5, 13.5
  - Nonperforming loans to total gross loans (3/ basis): 3.7, 2.1, 1.6, 1.3, 1.3, 1.6, 1.7
  - Provisions to nonperforming loans (3/): 176.5, 235.3, 251.4, 278.4, 258.7, 242.2, 232.1
  - ROA: 1.2, 2.2, 2.2, 2.5, 2.6, 2.3, 2.2
  - ROE: 11.6, 22.2, 23.9, 27.9, 31.1, 24.5, 23.8
  - Share of foreign currency deposits in total deposits: 67.1, 67.2, 62.7, 59.3, 58.0, 55.8, 52.6
  - Foreign currency deposits at commercial banks (millions of U.S. dollars): 9,596; 10,913; 11,855; 14,857; 18,312; 19,600; 17,821

### Medium-term macro framework and debt sustainability (selected projections)
- GDP at constant prices (annual change): 8.9, 9.8, 0.9, 6.3, 6.0, 5.7, 5.7, 5.7, 5.8
- Consumer prices (end of period): 3.9, 6.7, 0.2, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0
- External current account balance (percent of GDP): 1.3, -3.7, 0.2, -0.7, -1.8, -2.8, -2.6, -2.2, -2.0
- Public sector debt (percent of GDP): 30.9, 25.7, 27.4, 26.7, 25.6, 24.3, 22.7, 21.1, 19.7
- External debt sustainability (selected series):
  - External debt (percent of GDP): 2005: 36.1; 2006: 30.8; 2007: 32.1; 2008: 28.7; 2009: 32.0; 2010: 28.4; 2011: 29.4; 2012: 28.8; 2013: 28.2; 2014: 27.0; 2015: 26.1.
  - Gross external financing need (percent of GDP): 2005: 8.4; 2006: 1.8; 2007: 8.1; 2008: 9.1; 2009: 6.2; 2010: 6.7; 2011: 6.5; 2012: 7.4; 2013: 6.6; 2014: 6.1; 2015: 5.4.

### Recent economic developments and appendix highlights
- Rapid growth deceleration occurred in the first half of 2009, followed by a strong recovery in the second half driven by construction and government spending.
- Employment remained resilient; Peru avoided opening a significant output gap.
- Inflation pressures abated in part due to food and fuel prices.
- Central bank liquidity and FX operations timeline (selected FX interventions sold/purchased):
  - Sold US$2 billion (Sep), Sold US$2.6 billion (Oct), Sold US$ 676 million (Jan), Sold US$ 810 million (Nov), Sold US$ 289 million (Dec), Sold US$ 473 million (Feb), Purchased US$77 million (May), Purchased US$269 million (Sep), Purchased US$910 million (Oct).
- Dynamic provisioning (DP) design and activation:
  - Generic and cyclical components; cyclical provisioning became effective in December 2008 and uses GDP-based triggers.
  - Charted provisioning levels (end-2006 through end-2009) show Generic Provision and Cyclical Provision increases (figure values noted in source).
- Reserve requirements and regulatory adjustments included multiple RR changes across Sep–Dec 2008, Jan–Mar 2009, Apr–Dec 2009, including reinstallation in Jan 2010 of a 35 percent RR on short-term (less than 2 years) foreign credit lines.

### Executive Board assessment (selected)
- Directors commended authorities for prudent macroeconomic policies and a vigorous rebound.
- Balance of risks to growth tilted to the upside; with limited slack this calls for early withdrawal of policy stimulus "to avoid a build-up in inflationary pressures."
- A renewed surge in capital inflows would require close monitoring and a strategy focusing on fiscal consolidation and greater exchange rate flexibility.
- Normalizing monetary conditions may rely on a combination of measures, including reserve requirements and macro–prudential measures "to prevent credit and asset booms."
- Directors supported strengthening FEPC and reducing pro-cyclicality of the fiscal framework.
- On de-dollarization and exchange rate policy: progress noted; "A gradual increase in currency flexibility could foster the development of foreign exchange hedging instruments and reduce dollarization."
- On supervision and regulation: continue to strengthen macro–prudential supervision; consider systemic risk in the regulatory framework and extend prudential perimeter.

*Source: Staff Report Article IV 2010 Consultation — Peru (Selected Economic Indicators).*

### 1.   Selected Economic Indicators

### _cr1098 - 1.   Selected Economic Indicators

### I. Background: Peru’s resilience and recent performance
- Peru experienced a 10-year expansion with a cumulative growth of about 50 percent.
- Real per-capita income grew 40 percent over this period.
- Poverty declined to 36 percent in 2008 from 55 percent in 2000.
- Credit ratings: investment grade by Fitch and Standard & Poor’s in 2008 and by Moody’s in late 2009.
- The global crisis impact and 2009 activity:
  - Growth: 9.8 percent in 2008; about 1 percent for 2009.
  - Private investment (including inventories) fell by 30 percent in real terms in 2009.
  - Inflation: peaked at 6.7 percent in December 2008; fell to near zero in the second half of 2009.
  - Core inflation: declined to near 2 percent (the mid-point of the target range) by end–2009.
  - Fourth quarter 2009: economy grew by over 15 percent (qoq, saar annualized).

### II. Policy response and financial stability
- Monetary and fiscal policy actions:
  - Policy interest rate reduced by 525 bps since early 2009 to a historic-low of 1¼ percent.
  - Substantial fiscal stimulus with a positive fiscal impulse of about 2½ percent of GDP in 2009.
  - Real general government primary spending increased by 14 percent in 2009.
  - Contingency measures (guarantees) were prepared but ultimately not needed.
- Central bank actions and FX operations:
  - Central bank injected substantial liquidity in Soles and U.S. dollars to prevent liquidity squeeze and credit crunch.
  - As of March 24, the central bank has bought US$2.3 billion so far this year to moderate volatility.
- Banking sector resilience:
  - Introduction of dynamic provisioning in 2008.
  - Non-performing loans increased to 2.8 percent in January 2010 from 2.2 percent in 2008.
  - Banks remained well-capitalized, liquid, and profitable during 2009.
- External flows and exchange rate:
  - Net FDI flows diminished slightly to a still-high 3 percent of GDP.
  - Public sector issued US$2 billion in 2009 for pre-financing and Paris Club repayment.
  - The Sol recovered pre-Lehman level by November 2009 and appreciated by 5 percent in nominal and real effective terms since then.

### III. Near-term outlook and staff projections
- Growth projections:
  - Staff projects growth at 6¼ percent this year and 6 percent in 2011.
- Fiscal and monetary stance:
  - The stimulus plan has a residual impulse in 2010; real government spending projected to grow at 7 percent in 2010.
  - Monetary conditions expected to remain accommodative; inflation expected to converge to the middle of the target range in the second half of the year.
- Risks:
  - Balance of risks to growth appears tilted to the upside, including cyclical inventory rebuilding and an acceleration of private investment projects put on hold.
  - Principal tail risk: relapse in global growth and return of global risk aversion.
  - Other risks: a strong El Niño weather effect; electoral cycle (municipal/regional elections October 2010; presidential elections April 2011) could dampen private investment temporarily.
- Policy considerations:
  - Need to graduate policy stance toward neutral as private-led recovery takes hold.
  - Sequence policy normalization with prudential tools to prevent credit and asset booms (reserve requirements, policy rate adjustments, macroprudential measures).
  - Consider consolidating fiscal stance in advance of increasing policy interest rates to limit incentives for carry trade inflows.
  - Authorities retain room to provide additional stimulus if global conditions worsen, including liquidity injection in Soles and U.S. dollars and non-traditional/quantitative measures.

### IV. Medium-term outlook and structural challenges
- Medium-term projections and risks:
  - Potential growth expected to remain elevated at about 5¾ percent over the medium term.
  - Current account deficit projected to fluctuate between 2 and 3 percent of GDP as global conditions normalize.
  - Public debt ratios projected to decline to about 20 percent of GDP.
  - Large and sustained capital inflows could test absorption capacity and pose policy challenges; likely to result in stronger private investment and a widening of the current account over the medium term.
- Reform priorities discussed:
  - Continue global integration; improve competitiveness and innovation; develop domestic capital markets.
  - Focus on education, labor markets, economic/judicial institutions, and civil service reform.
  - Review fiscal framework to reduce pro-cyclicality and further strengthen prudential framework guided by lessons from the global financial crisis.

### V. Policy discussions and specific recommendations
- Graduating macro policy stance:
  - Assess evidence of self-sustained private-led recovery and monitor potential buildup of domestic demand pressures.
  - Withdraw policy stimulus timely to avoid late-year inflationary pressures.
- Sequencing and complementary tools:
  - Combine fiscal consolidation with monetary normalization and quantitative/prudential measures (reserve requirements, macroprudential measures) to prevent credit and asset booms.
  - Use greater exchange rate flexibility to reduce incentives for one-side bets.
- Fiscal consolidation and fiscal framework:
  - Bring fiscal stance to neutral to regain fiscal cushions.
  - Authorities aim to return in 2011 to the 1 percent of GDP deficit limit established by the Fiscal Responsibility and Transparency Law.
  - Authorities’ projection of overall deficit: 1.6 and 1.0 percent of GDP for 2010 and 2011, respectively.
  - Address mounting liabilities of the Oil Price Stabilization Fund (FEPC) in the short run.
  - Importance of safeguarding quality of public investment projects and reviewing unconventional crisis-response measures.
- Prudential framework strengthening:
  - Regulatory norms on capital, liquidity and dynamic provisioning are ahead of international standards.
  - Steps to broaden regulatory perimeter to bring cooperative banks and Banco de la Nacion fully under the Superintendence of Banks and Insurance (SBS).
  - Additional capital requirements linked to assessment (stress testing) and FX credit risk to become effective in July 2010.
  - Consider initiatives for capital requirements for systemic risk, crisis resolution frameworks, and improved liquidity provisioning under systemic stress.
  - Enhance cross-border supervisory collaboration and information sharing.

### VI. Key fiscal indicators (General Government, percent of GDP)
- Peru: Fiscal Performance 2007–10 1/
  - Revenues: 20.8 (2007), 21.0 (2008), 18.6 (2009), 19.3 (2010p)
  - Expenditures: 16.0 (2007), 17.3 (2008), 19.5 (2009), 19.6 (2010p)
  - of which Current: 12.9 (2007), 13.2 (2008), 13.8 (2009), 13.7 (2010p)
  - of which Capital: 3.1 (2007), 4.1 (2008), 5.7 (2009), 5.9 (2010p)
  - NFPS Overall Balance: 3.3 (2007), 2.0 (2008), -2.0 (2009), -1.5 (2010p)
  - Fiscal Impulse: -1.2 (2007), 1.1 (2008), 2.4 (2009), 0.1 (2010p)
  - 1/ General Government.

*Source: Staff Report Article IV 2010 Consultation — Peru (Selected Economic Indicators).*

### 16.  Further de-dollarization will allow higher exchange rate flexibility. The authorities

### 16.  Further de-dollarization will allow higher exchange rate flexibility. The authorities

### De-dollarization and exchange rate flexibility
- Peru has experienced a substantial reduction in financial dollarization over the last decade; the Sol has shown greater currency volatility in recent years.
- Drivers of de-dollarization cited:
  - Macroeconomic stability.
  - A solid prudential framework.
  - A developing capital market in Soles.
  - Successful management of the global financial crisis boosting confidence in the local currency and lending in Soles.
- Authorities' reforms to further de-dollarize:
  - Develop mortgages in local currency and other necessary financial instruments.
- Staff view:
  - A gradual increase in currency volatility will foster development of FX hedging instruments and markets to manage currency risk in the corporate and financial sectors.
  - Greater exchange rate flexibility would allow the exchange rate to play a larger role as a shock absorber, including to large and persistent capital inflows.

### Reforms to maintain high growth and structural agenda
- Growth challenge:
  - Medium-term growth will need to be increasingly driven by higher productivity growth; current drivers are capital accumulation and employment of under-utilized resources (labor, land and natural resources).
- Key pillars of the authorities’ strategy:
  - (i) Global integration through free trade agreements with the United States, Europe and Asia.
  - (ii) Enhancing competitiveness by improving the business environment (lowering, inter alia, the cost of setting up and conducting business and fostering innovation).
  - (iii) Developing domestic capital markets.
- Areas requiring early attention: education, labor markets, economic/judicial institutions, and civil service reform.

### Capital market development
- Rationale: A deeper capital market is important to effectively channel resources in the economy.
- Observations:
  - Actual and potential demand for domestic assets has increased substantially, but supply of assets has been limited.
  - Structural constraints include economic size and selective nature of issuers; regulations and taxation could be reviewed to foster asset expansion.
- Authorities’ initiatives:
  - Steps to develop the mortgage market in Soles through the creation of a covered bond instrument.
  - Foster development of repo and interest rate swap markets to facilitate lending in Soles.
  - Strengthen the function of the Security and Exchange Commission (CONASEV) to ease access to domestic capital markets.
  - An agreement to integrate the Chilean, Colombian and Peruvian stock markets by 2011 could increase investible assets for AFPs and market liquidity.
- Additional concern: Limited market size and regulatory incentives of pension funds may contribute to market volatility and inefficient price discovery.

### Poverty reduction and social policy
- Outcomes and commitments:
  - Poverty declined from 44½ percent in 2006 to 36 percent in 2008, supported by strong growth and prioritized social spending.
  - Despite the sharp deceleration in growth in 2009, poverty gains were preserved due to the fiscal stimulus sustaining employment and protecting social spending.
- Authorities’ efforts to improve social spending quality:
  - Strengthening the Inter-ministerial Committee for Social Assistance (CIAS).
  - Consolidation and focusing of social programs.
  - Increased coverage and resources for some programs (notably Juntos).
  - Improvements in public health and education provision.
  - Continue implementing poverty alleviation strategy Crecer, focusing on targeting challenges, creating a single registry of beneficiaries, and improving program quality via performance indicators.
- Staff welcome the authorities’ strong commitment to continue fighting poverty.

### Fiscal framework, FEPC, and public spending quality
- Fiscal Responsibility and Transparency Law (FRTL):
  - FRTL instrumental for fiscal consolidation but controlling spending has been challenging; caps often difficult to enforce, particularly at sub-national level.
  - Staff recommendation: use of structural balance indicators could focus budget discussions on sustainable medium-term expenditure plans and reduce pro-cyclicality.
  - Authorities note structural balance approach is demanding; FRTL design (deficit and expenditure growth limits) has embedded flexibility.
  - Adjusting parameters—mainly through changes in expenditure caps—could shift fiscal focus closer to a structural balance approach while retaining debt limit objectives.
- Oil Price Stabilization Fund (FEPC):
  - At current prices, the potential liability of the FEPC would amount to ½ percent of GDP in 2010.
  - Authorities consider moving to a rule-based adjustment of price bands to ensure FEPC is self-financed and to an automatic settlement of liabilities.
  - Gradual but frequent adjustment of the reference price can minimize disruptive effects, avoid large price differentials and debt buildup.
  - Placing FEPC oversight under a technical regulatory agency could facilitate changes.
  - Staff suggested accompanying FEPC changes with a mechanism to minimize effects on vulnerable populations.
- Public spending quality initiatives:
  - Introduce performance indicators for some budgetary items and foster capacity building at sub-national level.
  - Assess medium-term implications of contingent fiscal liabilities (including PPP and remaining public sector pension schemes).
  - Maintain appropriate risk sharing in PPPs.
  - Strengthen the financial management information system (SIAF), broaden the tax base, and protect tax administration integrity.
  - Staff support reporting government certificates of future payments (CRPAOs) as part of fiscal balance and debt measures.

### Capital inflows and macroeconomic management
- Outlook and risks:
  - Peru likely to experience a persistent shift in investor preference with large and sustained capital inflows, especially FDI.
  - Benefits: support authorities' strategy to upgrade productivity and boost potential growth.
  - Risks: composition of inflows, widening current account, currency appreciation, potential credit booms and asset bubbles, and risk of reversal and volatility.
- Policy implications and recommendations:
  - Prepare in advance: fiscal policy creating space for private investment; exchange rate flexibility; and macro-prudential instruments to avoid credit and asset price booms.
  - Sequence withdrawal of policy stimulus if global conditions trigger renewed inflows:
    - Start consolidating the fiscal stance in advance of increasing policy interest rates to limit carry trade incentives.
    - Normalize monetary conditions possibly relying first on reserve requirements before increasing the policy interest rate.
    - Coordinate fiscal and monetary policy with macro-prudential measures to prevent credit and asset booms; use greater exchange rate flexibility to reduce one-sided bets.
- Contingency:
  - If global conditions relapse, Peru has space to provide additional policy stimulus (e.g., infrastructure and maintenance projects) and central bank room to inject liquidity.

### Medium-term fiscal stance and macro-prudential framework
- Recommendation: Gradually return to a neutral fiscal stance to regain fiscal cushions and manage prospective large and sustained capital inflows.
  - Fiscal spending plans should aim for a declining fiscal deficit path and a return in 2011 to the limit of 1 percent of GDP established by the Fiscal Responsibility and Transparency Law.
  - Address mounting FEPC liabilities in the short run to avoid large debt obligations.
  - Timely consolidation would regain fiscal space in case of a relapse in global conditions and create space for private sector investment, helping manage macroeconomic challenges from inflows.

*Staff Report Article IV 2010 Consultation-Peru*

### 34. It is expected that the next Article IV Consultation will take place on the standard 12-month

### _cr1098 - 34. It is expected that the next Article IV Consultation will take place on the standard 12-month

### Social indicators (selected)
- Life expectancy at birth (years): 70.7, 72.8, 73.1, 73.3, .........
- Infant mortality (per thousand live births): 22.8, 18.9, 17.2, 17.0, .........
- Adult literacy rate: 87.9, 88.7, 89.6, ............
- Poverty rate (Total) 1/: 48.7, 44.5, 39.3, 36.2, .........
- Unemployment rate: 9.6, 8.5, 8.4, 8.4, 8.6, ......

### Production and prices
- Real GDP (annual percentage change): 6.8, 7.7, 8.9, 9.8, 0.9, 6.3, 6.0
- Real domestic demand: 5.8, 10.3, 11.9, 12.1, -2.9, 7.4, 7.0
  - Of which: Private sector: 5.9, 9.0, 11.4, 12.6, -2.1, 4.9, 6.2
- Consumer Prices (end of period): 1.2, 1.1, 3.9, 6.7, 0.2, 2.0, 2.0
- Consumer Prices (period average): 1.6, 2.0, 1.8, 5.8, 2.9, 1.5, 1.8
- Table reference: Table 1. Peru: Selected Economic Indicators (Annual percentage change; unless otherwise indicated)

### External sector (selected)
- Exports (percent change, U.S. dollars): 35.6, 37.2, 17.0, 13.1, -14.7, 19.7, 10.0
- Imports (percent change, U.S. dollars): 23.2, 22.9, 32.0, 45.1, -26.1, 21.4, 13.4
- Terms of trade (deterioration -): 5.9, 28.3, 3.4, -13.7, -0.8, 3.7, 1.1
- Real effective exchange rate (depreciation -) 2/: -0.5, -1.3, -0.6, 4.9, 2.4, ......
- External current account balance (percent of GDP): 1.4, 3.1, 1.3, -3.7, 0.2, -0.7, -1.8

### Money and credit (banking system; 12-month percentage change)
- Liabilities to the private sector: 18.4, 8.8, 22.7, 24.2, 6.2, 14.7, 14.0
- Net credit to the private sector: 16.3, 6.3, 20.8, 31.5, 1.7, 14.4, 14.1
- Broad money: 18.4, 8.8, 22.7, 24.2, 6.2, 14.7, 14.0
- Table reference: Monetary Survey / Table 6.

### Public sector (combined; percent of GDP unless otherwise indicated)
- General government current revenue: 18.0, 19.9, 20.7, 20.9, 18.5, 19.2, 19.0
- General government noninterest expenditure: 16.8, 16.3, 16.0, 17.3, 19.5, 19.6, 18.9
- Combined public sector primary balance: 1.6, 4.1, 5.1, 3.7, -0.7, -0.2, 0.3
- Interest due: 1.9, 1.9, 1.8, 1.6, 1.3, 1.3, 1.3
- Combined public sector overall balance: -0.3, 2.2, 3.3, 2.2, -2.0, -1.5, -1.0
- Combined public sector overall balance (including CRPAOs): -0.3, 2.1, 2.2, 1.5, -2.4, -1.6, -1.0
- Public sector debt (including CRPAOs, percent of GDP): 37.7, 33.2, 30.9, 25.7, 27.4, 26.7, 25.6
- Table reference: Table 2. Peru: Fiscal Operations of the Combined Public Sector

### External sector — reserves and debt
- Gross reserves (in millions of U.S. dollars): 14,120; 17,329; 27,743; 31,250; 33,190; 35,690; 37,190
- Gross reserves: Percent of short-term external debt: 314.2, 174.9, 405.3, 421.1, 397.5, 473.7, 481.4
- Gross reserves: Percent of foreign currency deposits at banks: 131.0, 148.2, 208.7, 175.0, 190.3, 180.6, 182.3
- Total external debt (percent of GDP): 36.1, 30.8, 32.4, 28.9, 32.3, 28.6, 29.6
- External (of combined public sector debt): 28.1, 23.9, 19.9, 16.7, 17.4, 15.8, 15.1
- Table reference: Table 1; Table 9. Peru: Financial and External Vulnerability Indicators

### Savings and investment (percent of GDP)
- Gross domestic investment: 17.9, 20.0, 23.0, 26.7, 20.6, 23.3, 24.9
  - Public sector: 2.9, 2.8, 3.1, 4.2, 5.3, 6.0, 6.0
  - Private sector: 15.0, 17.2, 19.9, 22.5, 15.3, 17.3, 18.8
- National savings: 19.3, 23.1, 24.2, 23.0, 20.8, 22.6, 23.1
  - Public sector: 2.6, 5.1, 6.0, 6.1, 3.4, 4.2, 4.7
  - Private sector: 16.8, 18.0, 18.3, 16.9, 17.4, 18.4, 18.4
- External savings: -1.4, -3.1, -1.3, 3.7, -0.2, 0.7, 1.8

### Fiscal accounts (levels; in millions of Nuevos Soles)
- Nominal GDP (S/. billions): 261.7, 302.3, 335.2, 372.6, 381.7, 415.5, 449.3
- Central government primary balance (S/. millions): 2,904; 9,816; 11,536; 13,372; -2,314; 2,466; 5,216
- Revenue (S/. millions): 41,372; 53,076; 61,498; 68,354; 60,939; 67,758; 75,317
- Noninterest expenditure (S/. millions): 38,468; 43,260; 49,962; 54,982; 63,253; 65,292; 70,102
- Combined public sector overall balance (S/. millions): -865; 6,738; 11,077; 8,097; -7,553; -6,165; -4,552
- Public sector debt (incl. CRPAOs, S/. millions): 98,739; 100,245; 103,610; 95,706; 104,508; 111,092; 115,149
- Table reference: Table 3.

### Balance of payments (selected; in millions of U.S. dollars; projections)
- Current account (2007–2015 series): 1,363; -4,722; 248; -1,014; -2,734; -4,483; -4,494; -4,105; -3,988
- Exports (f.o.b., levels and composition): 27,882; 31,529; 26,886; 32,171; 35,389; 36,823; 38,215; 39,440; 40,755
  - Traditional: 21,464; 23,796; 20,572; 25,454; 28,135; 29,167; 30,162; 30,975; 31,789
  - Nontraditional and others: 6,418; 7,733; 6,314; 6,717; 7,254; 7,656; 8,053; 8,466; 8,966
- Imports: -19,595; -28,439; -21,011; -25,499; -28,916; -32,078; -34,488; -37,121; -40,032
- Financial and capital account (total): 8,400; 8,672; 1,399; 3,510; 4,231; 4,983; 4,994; 4,405; 4,288
- Net international reserves (NIR) flow (increase -): -9,654; -3,169; -1,045; -2,500; -1,500; -500; -500; -300; -300
- Table reference: Table 4. Peru: Balance of Payments

### Public sector social expenditure (selected)
- Total social expenditure and pensions (in millions of Nuevos Soles): 25,708; 27,626; 30,105; 33,517; 36,667; 37,856
- Universal coverage (Education and Health) 1/: 10,892; 11,888; 13,113; 15,302; 16,235; 15,725
  - Education: 7,682; 8,227; 8,970; 10,041; 10,272; 9,830
  - Health: 3,210; 3,661; 4,143; 5,260; 5,963; 5,896
- Targeted programs (Extreme Poverty): 3,453; 3,876; 4,648; 5,592; 6,307; 7,562
- Total social expenditure and pensions (percent of general government expenditure): 52.0, 50.3, 50.6, 47.7, 46.2, 43.6
- Table reference: Table 5. Peru: Public Sector Social Expenditure

### Monetary aggregates and central bank (selected)
- Net international reserves (in millions of U.S. dollars): 14,097; 17,275; 27,689; 31,196; 33,136; 35,636; 36,636
- Net domestic assets (central bank, in millions of New Soles): -38,237; -43,483; -68,159; -79,160; -76,124; -80,356; -82,713
- Net credit to private sector (financial system, in millions of Nuevos Soles): 74,945; 86,575; 111,218; 126,759; 139,747; 159,466; 181,697
- Liabilities to the private sector (financial system, in millions of Nuevos Soles): 101,825; 123,329; 158,138; 163,946; 195,715; 228,577; 265,221
- Base money (12-month percentage change): 25.7, 18.3, 28.2, 25.5, 5.5, 16.7, 15.5
- Table reference: Table 6. Peru: Monetary Survey

### Financial soundness indicators (private commercial banks; selected)
- Equity capital to risk-weighted assets (Dec): 14.0, 12.0, 12.5, 11.7, 11.9, 13.5, 13.5
- Nonperforming loans to total gross loans (3/ basis): 3.7, 2.1, 1.6, 1.3, 1.3, 1.6, 1.7
- Provisions to nonperforming loans (3/): 176.5, 235.3, 251.4, 278.4, 258.7, 242.2, 232.1
- ROA: 1.2, 2.2, 2.2, 2.5, 2.6, 2.3, 2.2
- ROE: 11.6, 22.2, 23.9, 27.9, 31.1, 24.5, 23.8
- Share of foreign currency deposits in total deposits: 67.1, 67.2, 62.7, 59.3, 58.0, 55.8, 52.6
- Foreign currency deposits at commercial banks (in millions of U.S. dollars): 9,596; 10,913; 11,855; 14,857; 18,312; 19,600; 17,821
- Table reference: Table 7. Peru: Financial Soundness Indicators

### Medium-term macroeconomic framework (selected projections)
- GDP at constant prices (annual change): 8.9, 9.8, 0.9, 6.3, 6.0, 5.7, 5.7, 5.7, 5.8
- Consumer prices (end of period): 3.9, 6.7, 0.2, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0
- Terms of trade (deterioration -): 3.4, -13.7, -0.8, 3.7, 1.1, -2.8, -3.4, -4.3, -5.0
- External current account balance (percent of GDP): 1.3, -3.7, 0.2, -0.7, -1.8, -2.8, -2.6, -2.2, -2.0
- Public sector debt (percent of GDP): 30.9, 25.7, 27.4, 26.7, 25.6, 24.3, 22.7, 21.1, 19.7
- Table reference: Table 8. Peru: Medium-Term Macroeconomic Framework

### Financial and external vulnerability indicators (selected)
- Public sector debt/GDP: 37.7, 33.2, 30.9, 25.7, 27.4
- Net credit to the private sector/GDP 2/: 28.6, 28.6, 33.7, 34.0, 36.6
- Gross official reserves (millions of U.S. dollars): 14,120; 17,329; 27,743; 31,250; 33,190
- Gross official reserves: In percent of short-term external debt: 314.2, 174.9, 405.3, 421.1, 397.5
- Gross international reserves to broad money: 92.2, 86.2, 80.2, 74.6, 69.5
- Months of next year's imports of goods and services: 9.3, 8.7, 9.8, 14.5, 12.8
- Net international reserves (in millions of U.S. dollars): 14,097; 17,275; 27,689; 31,196; 33,136
- Table reference: Table 9. Peru: Financial and External Vulnerability Indicators

### Recent economic developments (high-level observations from figures)
- Rapid growth deceleration occurred in the first half of 2009, followed by a strong recovery in the second half driven by construction and government spending.
- Employment remained resilient; Peru avoided opening a significant output gap.
- Inflation pressures abated in part due to food and fuel prices.
- Business and consumer confidence indicators recovered to pre-crisis levels.
- Core inflation and CPI inflation trends shown with official target band and employment indicators reflecting recovery momentum.
- Figure reference: "Peru: Real Sector Developments" (Appendix I and figures)

*Source: Staff Report Article IV 2010 Consultation-Peru (tables and figures as provided in the content unit).*

### Appendix 1: Recent Economic Developments

### Appendix 1: Recent Economic Developments

### Fiscal sector developments
- A significant fiscal stimulus was implemented, centered on infrastructure investment.
- Past strong fiscal performance, reduced debt and accumulated fiscal reserves enabled the stimulus.
- Revenues were affected by the negative terms of trade shock and the economic slowdown.
- Key fiscal indicators (as shown in figures):
  - Mining-Related Revenue (right) and Other General Government Revenues measured in percent of GDP for 2000–2010.
  - General Government Primary Expenditures split into Capital Expenditure and Current Expenditure (In percent of GDP).
  - Public debt measured in percent of GDP (right axis in one chart).
  - Fiscal Stance series include: Fiscal impulse; Overall NFPS balance; Structural NFPS balance (percent of GDP) for 2000–2010.

### External sector developments
- The current account improved due to:
  - A large decline in imports and profit remittances.
  - A recent recovery in terms of trade.
- The trade balance remained relatively stable amid a collapse in both exports and imports.
- The capital account remained resilient despite a reversal in FDI and portfolio flows at end-2008.
- Reserves continue to be adequate and external debt remains low.
- The Sol has returned near its pre-crisis level.
- Key external indicators and exact values shown in figures:
  - Trade balance (in per cent of GDP) and exports/imports (percent change) for 2005–2009.
  - Net international reserves (billions of US$, right).
  - Total external debt (in percent of exports of goods and services, left) and total external debt as a percent of GDP (right) for 2002–2009.
  - Financial Account components (percent of GDP, left) and flows in US$ millions (2006Q1–Q3 2009).
  - FX intervention (Compras Netas en Mesa de Negociación, mill. US$) and Exchange rate, NS/US$ (right) for Mar-04 to Mar-10.
  - Current account balance (in per cent of GDP) for 2005–2009.
  - Terms of Trade (1994=100, right).

### Banking and financial system
- Financial soundness indicators remained solid with comfortable liquidity and profitability ratios.
- The financial system is still highly dollarized.
- Credit decelerated but continued to expand, particularly in Soles.
- Equity prices and market capitalization recovered in line with global developments; financial conditions returned to pre-Lehman levels.
- Key banking indicators presented:
  - CAR; NPLs + REFI (in percent of total loans); Provisions/(NPL + REFi) (right) for 2002–2009.
  - ROE (right); FX exposure / capital (left); Liquid Assets/ST Liabilities (left).
  - Flow of credit/GDP (t-1) (right); Credit in US$/GDP; Credit in LC/GDP.
  - Market capitalization (percent of GDP) for Peru, Brazil, Chile and Lima Stock Market.
  - Dollarization in the banking system (percent, at Jan-05 exchange rate) for Credit and Liabilities (Feb-05 to Feb-10).
  - EMBI – Peru spreads and CDS (Mar-03 to Mar-10).

### Liquidity management and monetary response during the crisis
- Since September 2008, Peru’s proactive monetary response limited spillovers from the global financial crisis.
- The soundness of the financial system and central bank measures providing ample liquidity in soles and dollars helped maintain orderly financial conditions and prevented a liquidity squeeze.
- Unlike in other countries, credit to the private sector continued to grow, albeit at lower rates than in the previous year.
- The central bank modified the mix of monetary tools through the crisis, enabled by high credibility of the monetary regime and prudent pre-crisis policies.
- Early unconventional measures (first months after Lehmann’s collapse) included:
  - Reduction of reserve requirements.
  - Currency swaps and repo operations.
  - Announcing the possibility of intervening along the sovereign yield curve.
  - Repurchase of central bank’s certificates of deposits.
  - Central bank sold nearly US$7 billion (20 percent of international reserves at a noted point) to mitigate disruptive currency movements.
- Since February 2009, as inflation and currency pressures receded, the central bank cut the policy interest rate to a historic-low of 1¼ percent and relied less on unconventional measures.
- As conditions stabilized, the central bank began reversing unconventional measures from Q2 2009, reducing the stock of FX-swaps, repo operations and FX-indexed CDs. In January 2010, a reserve requirement of 35 percent on short-term (less than 2 years) foreign credit lines was reinstalled.

- Timeline of notable central bank operations and figures (2008–09):
  - FX interventions (selected): Sold US$2 billion (Sep), Sold US$2.6 billion (Oct), Sold US$ 676 million (Jan), Sold US$ 810 million (Nov), Sold US$ 289 million (Dec), Sold US$ 473 million (Feb), Purchased US$77 million (May), Purchased US$269 million (Sep), Purchased US$910 million (Oct).
  - Repos and swaps: Repo operations and volumes varied monthly (examples: Repos for S./ 73 million daily (Oct), Repos for S./2,075 million daily (Jan), Repos for S./3,176 million daily (Feb), Swap operations of soles in exchange of US$ with terms of 6 months and 1 year).
  - Repurchase and issuance actions: Repurchase of CDBCRP (S./ 14.8 million) and issuance of exchange-rate indexed securities (US$ 950 million).
  - Policy interest rate cuts: (Mar) Cut by 25bps to 6.25 percent; (Apr) Cut by 100bps to 5 percent; (May) Cut by 100bps to 4 percent; (Jun) Cut by 100bps to 3 percent; (Jul) Cut by 100bps to 2 percent; (Aug) Cut by 75bps to 1.25 percent. Additional earlier reductions include (Jan) Reduction of the minimum RR rate to 6.5 percent from 7.5 percent; (Mar) Reduction to 6 percent from 6.5 percent; (Dec.) Reduction of minimum reserve requirement rate to 7.5 percent from 9 percent.
- Peru: Credit growth to private sector (y-o-y, percent) series shown for 2008–2009, split by currency (total credit, in domestic currency, in foreign currency valued at exchange rate of 3 Sol/US$).

### Reserve requirements and regulatory adjustments (selected measures)
- Numerous reserve requirement (RR) changes implemented across three periods: September–December 2008; January–March 2009; April–December 2009. Selected measures include:
  - (Sep) Elimination of RR on funding from foreign investment funds specialized on microfinance with terms of at least 2 years.
  - (Oct) Reduction of the marginal RR in domestic currency from 25 percent to zero.
  - (Oct) Elimination of RR for increases in foreign credit lines in both currencies.
  - (Nov) In domestic currency, elimination of RR on 33 percent of deposits total liabilities subject to RR or up to a maximum of S/. 100 million; reduction of RR rate for nonresidents deposits to 35 percent from 120 percent; reduction of RR rate on foreign funding for microfinance loans to 9 percent from 120 percent.
  - (Jan) Reduction of the minimum balance of bank’s total liabilities subject to RR that have to be kept at the BCRP by 50 bps to 1.5 percent.
  - (Mar) The minimum balance requirement of bank's deposits at the BCRP was lowered by 50 bps to 1 percent.
  - (Jan 2010) Reinstallation of a 35 percent RR on short-term (less than 2 years) foreign credit lines.

### Dynamic provisioning (DP)
- Peru introduced dynamic provisioning (DP) at end-2008 to dampen lending pro-cyclicality after several years of double-digit credit growth.
- DP design:
  - Provisions composed of a fixed component (“generic rate”) and a variable dynamic element (“cyclical rate”) reflecting the state of the business cycle.
  - Generic provisioning defined across eight loan categories representing different credit risks.
  - Cyclical provisioning is activated/deactivated according to predetermined GDP-based growth thresholds and became effective in December 2008.
  - Cyclical provisions were calibrated on data from the crisis of the late 1990s and are higher for consumption credit.
- Activation rule summary:
  - Average of y-o-y GDP growth of last 30 months reaches a threshold of 5 percent or more, is already above 5 percent, and average of y-o-y growth of last 12 months is 2 percent higher than this indicator one year prior; deactivation requires the rule be deactivated by a “deactivation rule” for 18 months.
- De-activation rule summary:
  - Average of y-o-y GDP growth of last 30 months moves from a level above 5 percent to one below it, and 12 months is 4 percent lower than the value of this average one year before.
- Impact on provisioning levels (Figure A3.1, in million of soles):
  - end-2006: Generic Provision 1958; Cyclical Provision 454; "Voluntary" Provisions 486? (figures presented across end-2006, end-2007, end-2008, end-2009).
  - end-2007: Generic Provision 2118; Cyclical Provision 486; "Voluntary" Provisions 233?
  - end-2008: Generic Provision 2386; Cyclical Provision 233; "Voluntary" Provisions 375?
  - end-2009: Generic Provision 2712; Cyclical Provision 369; "Voluntary" Provisions 470?
  - (Note: exact charted values presented in figure; source: SBS)
- Distinctive features of Peru’s DP vs. other countries (Table A3.1):
  - Peru (2008): (i) generic provision depends on credit; and (ii) procyclical rate dependent on GDP growth. Trigger: GDP-based. Applicability: Systemic. Procyclical provisioning is discrete and only implemented once trigger set in place.
  - Spain (2005): Provisioning depends on individual NPLs; depends on individual banks portfolio; cumulative funds gradually build over time.
  - Colombia (2007): Individual provisioning depends on borrower characteristics; counter-cyclical provisioning reflects changes in borrower's credit risk due to economic cycle; generic provisioning of at least 1 percent of total loan portfolio. Regulator decides with some discretion; moving to more rule-based; systemic but moving to individual banks; cumulative funds gradually build over time.
  - Uruguay (2001): Individual provisioning and dynamic provisioning based on monthly statistical losses minus realized loan loss that month; depends on individual NPLs and banks’ portfolios; cumulative funds gradually build over time.

### Exchange rate and external price developments
- Amid the global financial crisis, the Nuevo Sol appreciated by about 5 percent in the last 2 years due to stronger fundamentals and a weaker U.S. dollar.
- The appreciation was gradual; the Sol was the most stable currency among major countries in the region and exchange rate volatility compared positively with other dollarized economies.
- Different exchange rate assessments suggest the exchange rate is in line with fundamentals, with estimates ranging from an undervaluation of 7 percent to an overvaluation of 6 percent.
- Real effective exchange rate (REER):
  - In November (year not specified in excerpts), REER was around its 1991–2008 average.
  - The Nuevo Sol appreciated cumulatively 5 percent during 2008–09 relative to the 2004–07 low levels.
  - The currency reached a peak in May 2009 with cumulative appreciation of 10 percent since September 2007; since then it depreciated by about 4 percent in real effective terms.
- Reserve accumulation: accumulation of reserves of about US$4 billion (15 percent of the 2007 NIR level) noted.
- Recent nominal appreciation pressures led the BCRP to purchase US$1.4 billion in the spot market in January (month/year as shown in figure).

*Source: _cr1098 - Appendix 1: Recent Economic Developments*

### Appendix 4: Exchange Rate Developments and Assessment

### Appendix 4: Exchange Rate Developments and Assessment

### Exchange rate stability and volatility
- Peru’s Sol has been the most stable currency among major countries in the region.
- 3-month rolling volatility for the nominal exchange rate (vis-à-vis the US$) has been below 2 percent during 2008-09.
- Volatility has been declining since June 2009 and remains below 1 percent.
- Historically, Peru’s exchange rate volatility is about middle ground between those of Uruguay and Costa Rica.
- Peru compares well with respect to other dollarized economies in the region.

### CGER and alternative assessments of misalignment
- Macroeconomic balance approach: suggests an overvaluation of 6 percent in the real effective exchange rate.
  - Method: compares underlying current account projected over the medium term at the current exchange rate with an estimated equilibrium current account (“CA norm”).
- External stability approach: suggests an overvaluation of 5 percent.
  - Method: calculates the current account adjustment needed to stabilize the net foreign asset (NFA) position at a benchmark level.
- Equilibrium real exchange rate approach: suggests an undervaluation of the Nuevo Sol of 7 percent as of October 2009.
  - Method: estimates long-run relationship between the real effective exchange rate and fundamentals via cross-country panel regression.
- Stock approach for non-renewable resources (Thomas, Kim, and Aslam (2008)):
  - Estimates the non-copper current account consistent with optimal consumption smoothing as a deficit of 2.1 percent of GDP.
  - Analysis based on copper suggests an undervaluation of 2 percent.
  - Key uncertainties: estimate of the stock of copper reserves, assumptions on the return on investment and the discount rate, and exclusion of other non-renewable resources.

### Underlying current account estimation for 2010
- Projected current account for 2010: -1.3 percent of GDP.
- Estimated underlying current account deficit: -1.1 percent of GDP.
- Comparison: projected deficit of -0.7 percent of GDP in 2010 (projection versus underlying estimate).
- Main temporary factors and adjustments affecting the projected current account:
  - Domestic output gap: Output is estimated to be below potential in 2010; bringing output to potential would increase imports and widen the current account deficit.
  - Output gap in trading partners: Foreign demand in Peru’s key trading partner is estimated to be below potential; closing that gap would improve exports and the trade/current account balances.
  - Commodity prices: 2010 prices are estimated above their long-term level (average of 2014-15); adjusting prices to long-term levels would deteriorate trade and current account balances and reduce profit remittances for foreign companies.
  - Hydrocarbon prices: Peru is a net importer of hydrocarbon products; recent price increases have worsened the trade balance. If hydrocarbon prices were reversed to a smoothed average, the current account would improve.
- Quantified effect of lower longer-term commodity prices: equivalent to 1¼ percent of GDP reduction in exports (only partially offset by lower profit remittances and output gap effects).
- Conclusion: The level of the underlying current account is consistent with external sustainability.
- Caveat: These adjustments and estimates are subject to medium-term dissipation as output gaps close and commodity/mineral prices approach long-term levels.

### Uncertainties and risks to assessments
- Exchange rate assessments are subject to considerable uncertainties from model assumptions and rapid changes due to global financial and economic turmoil.
- Potential complicating factors:
  - Further disruptions in currency markets.
  - Declines in commodity prices.
  - Changes in relative inflation and output gaps.

*Source: Fund staff estimates; Appendix 4: Exchange Rate Developments and Assessment.*

### Appendix 6: Fiscal and External Debt Sustainability

### Appendix 6: Fiscal and External Debt Sustainability Analysis

### External debt sustainability — key findings and projections
- External debt (in percent of GDP): 2005: 36.1; 2006: 30.8; 2007: 32.1; 2008: 28.7; 2009: 32.0; 2010: 28.4; 2011: 29.4; 2012: 28.8; 2013: 28.2; 2014: 27.0; 2015: 26.1.
- Change in external debt (percent of GDP): 2005: -8.8; 2006: -5.2; 2007: 1.3; 2008: -3.4; 2009: 3.4; 2010: -3.6; 2011: 1.0; 2012: -0.6; 2013: -0.6; 2014: -1.3; 2015: -0.9.
- Identified external debt-creating flows (sum of current account deficit excluding interest, net non-debt capital inflows, and automatic debt dynamics): 2005: -11.4; 2006: -10.1; 2007: -10.8; 2008: -6.8; 2009: -0.1; 2010: -2.2; 2011: -1.2; 2012: -0.1; 2013: -0.2; 2014: -0.6; 2015: -0.9.
- Current account deficit, excluding interest payments (percent of GDP): 2005: -3.5; 2006: -5.1; 2007: -3.1; 2008: 1.9; 2009: -1.7; 2010: -0.8; 2011: -0.1; 2012: 1.0; 2013: 1.0; 2014: 0.7; 2015: 0.7.
- Net non-debt creating capital inflows (negative indicates inflows; percent of GDP): 2005: -4.4; 2006: -2.0; 2007: -5.5; 2008: -5.4; 2009: 0.0; 2010: -1.2; 2011: -1.4; 2012: -1.3; 2013: -1.2; 2014: -1.3; 2015: -1.4.
- Automatic debt dynamics (percent of GDP): 2005: -3.4; 2006: -3.0; 2007: -2.2; 2008: -3.3; 2009: 1.6; 2010: -0.3; 2011: 0.2; 2012: 0.2; 2013: 0.1; 2014: 0.0; 2015: -0.1.
  - Contribution from nominal interest rate (percent of GDP): 2005: 2.1; 2006: 2.0; 2007: 2.0; 2008: 1.8; 2009: 1.5; 2010: 1.5; 2011: 1.8; 2012: 1.8; 2013: 1.6; 2014: 1.5; 2015: 1.4.
  - Contribution from real GDP growth (percent of GDP): 2005: -2.7; 2006: -2.4; 2007: -2.4; 2008: -2.6; 2009: -0.2; 2010: -1.8; 2011: -1.6; 2012: -1.6; 2013: -1.5; 2014: -1.5; 2015: -1.5.
- Residual, including change in gross foreign assets (percent of GDP): 2005: 2.6; 2006: 4.9; 2007: 12.1; 2008: 3.3; 2009: 3.5; 2010: -1.4; 2011: 2.2; 2012: -0.5; 2013: -0.4; 2014: -0.6; 2015: 0.0.
- External debt-to-exports ratio (in percent): 2005: 145.8; 2006: 107.6; 2007: 110.9; 2008: 103.8; 2009: 133.0; 2010: 115.2; 2011: 115.1; 2012: 113.2; 2013: 114.0; 2014: 112.2; 2015: 111.4.
- Gross external financing need (in billions of US dollars): 2005: 6.7; 2006: 1.7; 2007: 8.7; 2008: 11.6; 2009: 7.8; 2010: 9.8; 2011: 10.1; 2012: 12.0; 2013: 11.4; 2014: 11.3; 2015: 10.5.
  - Gross external financing need (percent of GDP): 2005: 8.4; 2006: 1.8; 2007: 8.1; 2008: 9.1; 2009: 6.2; 2010: 6.7; 2011: 6.5; 2012: 7.4; 2013: 6.6; 2014: 6.1; 2015: 5.4.
- Scenario with key variables at their historical averages produces external debt series (percent of GDP): 2005: 28.4; 2006: 25.3; 2007: 19.5; 2008: 14.6; 2009: 9.6; 2010: 5.2; 2011: -2.7 (debt-stabilizing non-interest current account indicated as -1.6).

### Public sector debt sustainability — key findings and projections
- Public sector debt (in percent of GDP): 2005: 37.7; 2006: 33.2; 2007: 30.9; 2008: 25.7; 2009: 27.4; 2010: 26.7; 2011: 25.6; 2012: 24.3; 2013: 22.7; 2014: 21.1; 2015: 19.7.
- Change in public sector debt (percent of GDP): 2005: -6.6; 2006: -4.6; 2007: -2.3; 2008: -5.2; 2009: 1.7; 2010: -0.6; 2011: -1.1; 2012: -1.3; 2013: -1.6; 2014: -1.5; 2015: -1.4.
- Identified debt-creating flows (percent of GDP): 2005: -5.0; 2006: -7.4; 2007: -7.7; 2008: -3.8; 2009: 0.7; 2010: -0.6; 2011: -1.0; 2012: -1.2; 2013: -1.5; 2014: -1.4; 2015: -1.3.
- Primary deficit (percent of GDP): 2005: -1.6; 2006: -4.0; 2007: -4.0; 2008: -2.9; 2009: 1.1; 2010: 0.3; 2011: -0.3; 2012: -0.7; 2013: -1.1; 2014: -1.1; 2015: -1.0.
- Revenue and grants (percent of GDP): 2005: 18.9; 2006: 20.6; 2007: 20.8; 2008: 21.0; 2009: 18.6; 2010: 19.3; 2011: 19.1; 2012: 19.5; 2013: 19.8; 2014: 19.6; 2015: 19.5.
- Primary (noninterest) expenditure (percent of GDP): 2005: 17.3; 2006: 16.7; 2007: 16.8; 2008: 18.1; 2009: 19.7; 2010: 19.5; 2011: 18.8; 2012: 18.8; 2013: 18.7; 2014: 18.6; 2015: 18.5.
- Automatic debt dynamics (percent of GDP): 2005: -3.3; 2006: -3.4; 2007: -3.5; 2008: -0.9; 2009: -0.4; 2010: -0.9; 2011: -0.7; 2012: -0.5; 2013: -0.4; 2014: -0.3; 2015: -0.3.
  - Contribution from interest rate/growth differential (percent of GDP): 2005: -2.1; 2006: -3.2; 2007: -1.5; 2008: -1.5; 2009: 0.7; 2010: -0.9; 2011: -0.7; 2012: -0.5; 2013: -0.4; 2014: -0.3; 2015: -0.3.
  - Contribution from real interest rate (percent of GDP): 2005: 0.6; 2006: -0.7; 2007: 1.1; 2008: 1.2; 2009: 0.9; 2010: 0.7; 2011: 0.8; 2012: 0.9; 2013: 0.9; 2014: 0.9; 2015: 0.8.
  - Contribution from real GDP growth (percent of GDP): 2005: -2.7; 2006: -2.5; 2007: -2.6; 2008: -2.7; 2009: -0.2; 2010: -1.6; 2011: -1.5; 2012: -1.4; 2013: -1.3; 2014: -1.2; 2015: -1.1.
- Contribution from exchange rate depreciation (percent of GDP): 2005: -1.2; 2006: -0.2; 2007: -2.0; 2008: 0.6; 2009: -1.2; (additional years elided in source).
- Other identified debt-creating flows (percent of GDP): effectively zero in projection years for privatization receipts, recognition of implicit or contingent liabilities, and other items.
- Residual, including asset changes (percent of GDP): 2005: -1.6; 2006: 2.9; 2007: 5.4; 2008: -1.4; 2009: 1.0; 2010–2015: 0.0 or -0.1 each year.
- Public sector debt-to-revenue ratio (percent): 2005: 199.2; 2006: 160.7; 2007: 148.5; 2008: 122.3; 2009: 147.2; 2010: 138.8; 2011: 134.0; 2012: 124.4; 2013: 114.5; 2014: 107.7; 2015: 101.4.
- Gross financing need (in percent of GDP): 2005: 6.8; 2006: 1.6; 2007: 4.8; 2008: 0.8; 2009: 4.6; 2010: 3.9; 2011: 2.9; 2012: 2.3; 2013: 1.8; 2014: 1.6; 2015: 1.5.
  - Gross financing need (in billions of U.S. dollars): 2005: 5.4; 2006: 1.4; 2007: 5.1; 2008: 1.0; 2009: 5.9; 2010: 5.7; 2011: 4.5; 2012: 3.8; 2013: 3.2; 2014: 3.0; 2015: 2.9.
- Scenario with key variables at their historical averages yields public sector debt (percent of GDP): 2005: 26.7; 2006: 24.7; 2007: 22.7; 2008: 20.8; 2009: 18.9; 2010: 17.1; 2011: -0.4 (debt-stabilizing primary balance indicated as -0.3).

### Key macroeconomic assumptions underlying the baseline
- Real GDP growth (percent): 2005: 6.7; 2006: 7.7; 2007: 8.9; 2008: 9.8; 2009: 0.9; 2010: 6.3; 2011: 6.0; 2012: 5.7; 2013: 5.7; 2014: 5.7; 2015: 5.8.
- GDP deflator in US dollars (change in percent): 2005: 6.8; 2006: 8.0; 2007: 6.4; 2008: 8.3; 2009: -1.4; 2010: 8.5; 2011: -0.4; 2012: -1.0; 2013: 1.0; 2014: 0.9; 2015: 0.5.
- Nominal external interest rate (percent): 2005: 5.3; 2006: 6.6; 2007: 7.6; 2008: 6.6; 2009: 5.2; 2010: 5.4; 2011: 6.8; 2012: 6.3; 2013: 6.1; 2014: 5.7; 2015: 5.4.
- Growth of exports (US dollar terms, percent): 2005: 32.8; 2006: 34.8; 2007: 17.2; 2008: 13.3; 2009: -13.2; 2010: 18.2; 2011: 9.4; 2012: 4.2; 2013: 4.0; 2014: 3.5; 2015: 3.6.
- Growth of imports (US dollar terms, percent): 2005: 21.4; 2006: 20.0; 2007: 31.2; 2008: 42.2; 2009: -24.3; 2010: 20.9; 2011: 11.3; 2012: 9.6; 2013: 6.9; 2014: 7.1; 2015: 7.4.
- Current account balance, excluding interest payments (percent of GDP): 2005: 3.5; 2006: 5.1; 2007: 3.1; 2008: -1.9; 2009: 1.7; 2010: 0.8; 2011: 0.1; 2012: -1.0; 2013: -1.0; 2014: -0.7; 2015: -0.7.
- Net non-debt creating capital inflows (percent of GDP): 2005: 4.4; 2006: 2.0; 2007: 5.5; 2008: 5.4; 2009: 0.0; 2010: 1.2; 2011: 1.4; 2012: 1.3; 2013: 1.2; 2014: 1.3; 2015: 1.4.

### Executive Board assessment and policy recommendations (selected)
- Executive Directors commended the Peruvian authorities for their impressive track-record of prudent macroeconomic policies which helped limit the impact of the global crisis and jump start a vigorous economic rebound.
- Directors noted that the balance of risks to Peru’s growth is tilted to the upside and that, with limited slack in resource utilization, these risks call for early withdrawal of policy stimulus "to avoid a build-up in inflationary pressures."
- A renewed surge in capital inflows would require close monitoring and would benefit from "a strategy that focuses on fiscal consolidation and greater exchange rate flexibility."
- Normalizing monetary conditions may rely on a combination of measures, including reserve requirements, along with macro–prudential measures "to prevent credit and asset booms."
- Directors welcomed authorities’ intention to manage spending plans carefully to achieve in 2011 the fiscal deficit limit established by the Fiscal Responsibility and Transparency Law.
- Directors supported plans to strengthen the Oil Price Stabilization Fund (FEPC) "for addressing the rising liabilities and reducing fiscal risks."
- Directors welcomed interest in exploring ways "to reduce pro-cyclicality of the fiscal framework."
- On de-dollarization and exchange rate policy: Directors noted progress made and agreed that improved fundamentals would continue to advance de-dollarization and allow the exchange rate to play a larger role as shock absorber; "A gradual increase in currency flexibility could foster the development of foreign exchange hedging instruments and reduce dollarization."
- On financial supervision and regulation: Directors commended efforts to solidify the prudential framework, recommended reassessing the framework in light of evolving international standards, and suggested continuing to strengthen macro–prudential supervision. Consideration could be given to: assessing scope for incorporating systemic risk into the regulatory framework; reviewing the crisis resolution framework; and extending the prudential perimeter to cooperatives and public financial institutions.
- Directors welcomed the authorities’ ambitious reform agenda to preserve high growth over the medium term and supported plans to further develop Peru’s capital market and continue poverty reduction efforts.

*Source: Appendix 6: Fiscal and External Debt Sustainability, Staff Report Article IV 2010 Consultation—Peru.*

### Annex I. Peru: Fund Relations

### Annex I. Peru: Fund Relations

### I. Membership
- Status: Joined 12/31/1945; accepted Article VIII obligations on February 15, 1961.

### II. General Resources Account
- Quota: 638.40 SDR Million — 100.00 percent quota
- Fund holdings of currency: 516.43 SDR Million — 80.89 percent

### III. SDR Department
- Net cumulative allocation: 609.89 SDR Million — 100.00 percent allocation
- Holdings: 524.09 SDR Million — 85.93 percent

### IV. Outstanding Purchases and Loans
- None

### V. Financial Arrangements
- Stand-By arrangements (listed with Approval Date / Expiration Date / Amount Approved (SDR Million) / Amount Drawn (SDR Million) / Type):
  - 1/26/07 — 2/28/09 — 172.37 — 0.00 — Stand-By
  - 6/09/04 — 8/16/06 — 287.28 — 0.00 — Stand-By
  - 2/01/02 — 2/29/04 — 255.00 — 0.00 — Stand-By

### VI. Projected Obligations to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Charges/interest:
  - 2010: 0.20
  - 2011: 0.25
  - 2012: 0.25
  - 2013: 0.25
  - 2014: 0.25
- Total:
  - 2010: 0.20
  - 2011: 0.25
  - 2012: 0.25
  - 2013: 0.25
  - 2014: 0.25
- Principal: (no amounts listed)

### VII. Safeguards Assessments
- An off-site safeguards assessment of the central bank has been finalized and has found that safeguards at the Banco Central de Reserva del Perú (BCRP) meet the requirements of the safeguards policy.

### VIII. Exchange Arrangements
- Exchange rate regime: Peru maintains a unified, floating exchange rate.
- Monetary framework: Inflation targeting framework in place.
- Inflation target: 2.0 percent, with a tolerance margin of ±1 percent.
- Market rate (on March 11, 2010): average of interbank buying and selling rates was 2.84 Nuevos Soles per U.S. dollar.
- Exchange restrictions: System free of restrictions except those maintained solely for the preservation of national or international security and notified pursuant to Executive Board Decision No. 144-(52/51); restrictions maintained pursuant to UN Security Council Resolutions 1267 (October 15, 1999) and 1373 (September 28, 2001).
- External payment arrears: central government maintains small external payment arrears to unguaranteed suppliers — US$11.7 million of principal and accrued interests as of December 31, 2009.
- Other: Peru has maintained a clearing arrangement with Malaysia since 1991.

### IX. Last Article IV Consultation
- The 2008 Article IV consultation was concluded on January 14, 2009 (EBS/09/10, IMF Country Report No. 09/40).

### X. FSAP, ROSCs, and AML/CFT
- FSAP:
  - Several joint Fund-Bank missions visited Lima in the period September 2000–January 2001 to conduct an FSAP for Peru.
  - The corresponding FSSA report (SM/01/75 dated February 28, 2001) was discussed by the Executive Board on March 12, 2001.
  - A follow-up FSAP mission was concluded in February 2005.
- ROSCs:
  - October 2002: FAD mission conducted a Fiscal ROSC for Peru.
  - February 2003: STA mission conducted a Data ROSC for Peru.
- AML/CFT technical assistance to SBS (Superintendency of Banks, Insurance and Pension Fund Companies):
  - (i) Developing and/or strengthening AML/CFT supervisory policies, practices, systems and tools to identify, measure, monitor, and control ML/FT risks for financial institutions under SBS responsibility.
  - (ii) Providing advice and assistance to SBS officials in addressing organizational and operational issues of the newly created AML/CFT Unit, including identification of human and technological resources to facilitate implementation of the risk-based approach to AML/CFT supervision.
  - (iii) Initiating the process for conducting a national risk assessment of ML/FT risks impacting Peru.
- TA status: So far, Peru has received three TA missions and the TA program is expected to continue for the next 18 months.

### XI. Technical Assistance
- Departmental TA missions and purposes (dates and topics as listed):
  - FAD: June 2005, March 2006, November 2006, May 2007–present — Public Financial Management
  - FAD: February and June 2009, April, June and October 2008, February, June and August 2007, February, September, and November 2006, and May 2005 — Tax policy and administration, customs administration
  - FAD: August 2004, September 2003, and September 2002 — Public investment and fiscal policy, including issues related to PPPs
  - FAD: November 1999 — Fiscal rules
  - MFD/MCM: May and August 2009 — Mortgage covered bonds
  - MFD/MCM: September 2008 — Supervision of Capital Markets
  - MFD/MCM: March 2008 — Implementation of Basel II
  - MFD/MCM: October 2007 — Strengthening the Capital Markets
  - MFD/MCM: July 2007 — Strengthening the Capital Markets
  - MFD/MCM: April 2007 — Strengthening the Capital Markets
  - MFD/MCM: April 2006 — Financial sector supervision
  - MFD/MCM: April 2005 — Consumer protection in the banking system
  - MFD/MCM: March 2005 — Central bank organization
  - MFD/MCM: April, December 2002, February 2003, March and September 2004 — Inflation targeting
  - MFD/MCM: October 2002 — Foreign exchange operations
  - MFD/MCM: August 2002 — Accounting and organizational issues
  - MFD/MCM: May 2002 — Inflation targeting
  - MFD/MCM: March 2002 — Monetary operations and government securities market
  - LEG: February 2010, May 2009, and September 2008 — AML/FT (see previous section)
  - STA: May and September 2009, March, September and November 2008, October 1999, and January 1998 — National account statistics, new base year for the national account series; and Government Finance Statistics 2001

### XII. Resident Representative
- Mr. Luis Breuer has been Resident Representative in Peru since January 2008.

*Annex I. Peru: Fund Relations (As of February 28, 2010)*

### Annex IV. Peru: Statistical Issues

### Annex IV. Peru: Statistical Issues

### Overview
- Macroeconomic statistics are broadly adequate for policy formulation and surveillance.
- Peru subscribes to the Special Data Dissemination Standard (SDDS).
- A data ROSC was prepared and published in 2003.
- Key areas for improvement:
  - coordination among agencies that compile official statistics to avoid duplication and confusion;
  - implementing a new benchmark and base year for GDP;
  - expanding WPI coverage to include mining, oil and gas extraction, electricity and water, public transportation, and communication;
  - finalizing migration to the standardized report forms (SRFs) for monetary data, including report forms for the central bank, other depository corporations, and other financial corporations;
  - expanding scope of data sources for compiling financial flows of individual residents.

### I. Real Sector and Prices
- Recent and historical actions:
  - Authorities published a revised GDP series in 2000 using the 1994 benchmark estimates as the base year and input-output tables.
  - INEI is working on a new national account series implementing the 1993 SNA and using 2007 as the base year.
  - Three national accounts statistics missions visited in November 2008, May 2009, and September 2009 to assist with compiling complete national accounts by institutional sectors and sequence of accounts of nonfinancial corporations.
  - More technical assistance will be needed in the coming years.
- Main limitations and methodological points:
  - Due to limited availability of periodic source data, estimates after 1994 are largely based on extrapolation techniques.
  - Lack of current detailed supply and use tables hampers reconciliation of discrepancies; changes in inventories are mainly determined as a residual.
  - Quarterly accounts have benefited from timelier monthly production indices, but coverage remains very limited.
- Price indices:
  - CPI (2009=100) expenditure weights for Metropolitan Lima derived from the 2008–2009 household budget survey; source data are timely and consistent with technical requirements.
  - Owner-occupied housing coverage was eliminated from Metropolitan Lima CPI through exclusion of imputed rent — a deviation from international practices.
  - WPI compilation techniques generally follow international standards, but WPI weights are outdated and derived from the 1994 input-output table and other reports and publications of relevant ministries.
- Labor market statistics:
  - Authorities monitor four indicators: open unemployment, underemployment, employment, and remunerations.
  - Quality has improved in recent years.
  - Monthly wage data for Metropolitan Lima is timely; other areas have relatively long delays.
  - Nationwide unemployment and underemployment are surveyed quarterly.
  - Monthly employment indices for the private sector and government are available and relatively timely.

### II. Fiscal Sector
- Methodology and reporting:
  - Institutional coverage and classification of GFS still follow GFS Manual 1986.
  - For consolidated central government, revenues compiled on a cash basis; expenditures compiled on an accrual basis.
  - Authorities have sent Fund information on components of consolidated central government expenditures by function.
  - Coverage of published national budget data is narrower than fiscal statistics prepared for the combined public sector.
  - Authorities prepared a plan to migrate to GFS Manual 2001, preparing a new budgetary classification and chart of accounts aligned to GFSM 2001 methodology.
  - The new budget aligned to GFSM 2001 was used for the 2009 budget processing.
- Outstanding issues:
  - Problems of coordination of GFS compiling units in the Ministry of Finance and in the central bank persist.
  - Although authorities report data for the Government Finance Statistics Yearbook (GFSY) using GFSM 2001, they do not report high frequency data for International Financial Statistics (IFS) using this methodology.

### III. Monetary Sector
- Coverage and methodology:
  - BCRP compiles and publishes analytical accounts of the central bank, depository corporations, and financial corporations broadly in line with the Monetary and Financial Statistics Manual.
- Main discrepancies and classification issues:
  - Exclusion of deposits of other financial corporations, state and local governments, and public nonfinancial corporations from the definition of broad money.
  - Valuation of some financial instruments at cost rather than market prices.
- SRF migration and technical assistance:
  - Mission in January 2007 assisted with migration to SRFs; finalized SRF for the central bank and recommended classification and sectorization improvements.
  - Follow-up mission in September 2008 completed SRF work for the central bank and developed a bridge table linking bank source data reported to BCRP to report form 2SR (other depository corporations).
  - Mission identified shortcomings in database management generating accounts of other depository corporations at BCRP.
  - BCRP is revising historical data for form 2SR and will report to the Fund using SRFs once revision is completed.

### IV. External Sector
- Balance of payments and IIP:
  - BCRP prepares quarterly balance of payments and international investment position largely in line with BPM5 recommendations.
  - Data are reported to the Fund for IFS and Balance of Payments Statistics Yearbook publication.
- Departures from BPM5:
  - Lack of coverage of assets held abroad and land acquisition abroad by residents.
  - Some external debt transactions are not recorded on an accrual basis.
- International reserves and external debt reporting:
  - Since August 2001, BCRP reports weekly data on international reserves per the Operational Guidelines for the Data Template on International Reserves and Foreign Currency Liquidity.
  - Since August 2006, BCRP includes full amount of liquidity requirements in the reserve template both under official reserve assets and as a contingent net drain (as specified in Section III of the Data Template).
  - Peru disseminates quarterly data on external debt with an eight week lag on the National Summary Data Page with a hyperlink to the Fund’s website.

### Table of Common Indicators Required for Surveillance (selected items, as of February 18, 2010)
- Exchange Rates
  - Date of latest observation: February 2010
  - Date received: 3/5/10
  - Frequency of Data: D
  - Frequency of Reporting: M
  - Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of latest observation: February 2010
  - Date received: 3/5/10
  - Frequency of Data: D
  - Frequency of Reporting: M
  - Frequency of Publication: W
- Reserve/Base Money
  - Date of latest observation: February 2010
  - Date received: 3/5/10
  - Frequency of Data: W
  - Frequency of Reporting: M
  - Frequency of Publication: W
  - Data Quality – Methodological soundness: O, LO, LO, LO
  - Data Quality – Accuracy and reliability: O, O, O, O, O
- Broad Money
  - Date of latest observation: January 2010
  - Date received: 2/26/10
  - Frequency of Data: W
  - Frequency of Reporting: M
  - Frequency of Publication: W
- Central Bank Balance Sheet
  - Date of latest observation: February 2010
  - Date received: 3/5/10
  - Frequency of Data: W
  - Frequency of Reporting: M
  - Frequency of Publication: W
- Consolidated Balance Sheet of the Banking System
  - Date of latest observation: January 2010
  - Date received: 2/26/10
  - Frequency of Data: W
  - Frequency of Reporting: M
  - Frequency of Publication: W
- Interest Rates
  - Date of latest observation: February 2010
  - Date received: 3/5/10
  - Frequency of Data: D
  - Frequency of Reporting: M
  - Frequency of Publication: D
- Consumer Price Index
  - Date of latest observation: February 2010
  - Date received: 3/5/10
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
  - Data Quality – Methodological soundness: O, LO, LO, LO
  - Data Quality – Accuracy and reliability: LO, LO, O, O, O
- Revenue, Expenditure, Balance and Composition of Financing – General Government
  - Date of latest observation: January 2010
  - Date received: 2/26/10
  - Data Quality – Methodological soundness: O, LO, O, O
  - Data Quality – Accuracy and reliability: O, O, O, LO, O
- Revenue, Expenditure, Balance and Composition of Financing – Central Government
  - Date of latest observation: January 2010
  - Date received: 2/26/10
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Stocks of Central Government Debt
  - Date of latest observation: January 2010
  - Date received: 2/26/10
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- International Investment Position
  - Date of latest observation: Q4 2009
  - Date received: 2/26/10
- External Current Account Balance
  - Date of latest observation: Q4 2009
  - Date received: 2/26/10
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
  - Data Quality – Methodological soundness: O, LO, LO, LO
  - Data Quality – Accuracy and reliability: LO, LO, O, O, O
- Exports and Imports of Goods and Services
  - Date of latest observation: January 2010
  - Date received: 3/12/10
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- GDP/GNP
  - Date of latest observation: Q4 2009
  - Date received: 2/26/10
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
  - Data Quality – Methodological soundness: LO, LO, LO, LO
  - Data Quality – Accuracy and reliability: LNO, LNO, LNO, LO, LO
- Gross External Debt
  - Date of latest observation: Q4 2010
  - Date received: 2/26/10
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q

Notes from the table (as presented):
- Every Friday the Central Bank disseminates daily net international reserves, and weekly International Reserve Assets and Reserve Liabilities.
- Interest rates include both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
- Revenue/financing rows include foreign, domestic bank, and domestic nonbank financing. General government includes central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- Stocks of central government debt include type of instrument, maturity and type of creditor.
- International investment position includes external gross financial asset and liability positions vis-à-vis nonresidents.
- Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).
- Data Quality footnotes reflect assessments from the 2003 data ROSC for methodological soundness and for accuracy and reliability.

*Source: Annex IV. Peru: Statistical Issues (staff report content).*

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