## _cr1226

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### Context and Recent Developments
- Per-capita income almost tripled in the decade 2001–11 to US$5,700.
- Public debt as a percent of GDP fell by more than one-half to about 20 percent.
- Real GDP growth accelerated to 5¾ percent on average per annum.
- Annual inflation fell to 2¼ percent on average.
- 2008–09 crisis response:
  - BCRP dropped its policy rate by 525 basis points to 1¼ percent in 2009.
  - MEF implemented a stimulus package generating a fiscal impulse of over 1½ percent of GDP in 2009.
  - Real GDP growth decelerated to 1 percent in 2009.
- Recovery and 2011 outlook:
  - Real GDP expanded 8¾ percent in 2010; grew 7½ percent in the first eight months of 2011.
  - Output gap closed to around zero after recovery.
  - Political uncertainties and global outlook expected to slow private demand by year-end 2011.

### Inflation and Overheating Indicators
- Recent inflation readings:
  - Inflation fell to ¼ of a percent in 2009, rebounded to 2 percent by end-2010.
  - Inflation increased to 4¼ percent in October 2011 (3½ percent for core inflation), above the target band of 1–3 percent.
  - Non-fuel non-food inflation was 2⅓ percent in October 2011 (yoy), within the target band.
  - Inflation expectations for 2012 remain well-anchored.
- Sources and outlook:
  - Supply shocks and some demand pressures; output gap hovering around zero.
  - As supply shocks are absorbed, inflation expected to return to the target.

### Fiscal Policy, Stimulus Exit, and Fiscal Buffers
- Fiscal outcomes:
  - Overall deficit fell from 1½ percent of GDP in 2009 to ½ percent in 2010.
  - Fiscal position switched to an annualized fiscal surplus of about 5½ percent of GDP in the first half of 2011 (2½ percent in the first half of 2010).
  - Fiscal Stabilization Fund increased to 3⅓ percent of GDP.
- Drivers:
  - Revenues remained buoyant despite tax cuts; under-execution of investment projects at sub-national level restrained expenditures.
  - Measures of over ½ percent of GDP were adopted in 2011 to foster capital execution.
- Tax and revenue specifics:
  - Tax collections improved by an average of 1 percent of GDP a year in 2010-11.
  - Several 2011 measures eroded the tax base, including reduction in the VAT rate (by 1 percentage point), the financial transaction tax and import duties.
- Medium-term fiscal stance (figures referenced):
  - Structural stance projected to return to a structural surplus of around 1 percent of GDP.
  - Net debt projected to decline significantly; gross debt declines and financial assets increase.

### Monetary Policy, Reserve Requirements, and Credit
- Policy rate and reserve actions:
  - After easing in 2009, tightening began mid-2010 with the policy rate increasing 300 basis points to 4¼ percent by May 2011.
  - Since May 2011, the central bank remained on hold.
  - Reserve requirement hikes complemented monetary tightening.
- Reserve requirement changes:
  - Second half 2010: marginal reserve requirements for domestic currency deposits raised to 25 percent for residents (from zero) and to 120 percent for nonresident financial entities (from 35 percent).
  - For foreign currency deposits, marginal reserve requirements increased to 55 percent (from 30 percent).
  - In 2011, BCRP increased average reserve requirements (cumulative hike of 100 basis points).
- Credit growth:
  - Credit growth around 20 percent in 2010–11.
  - Foreign currency credit growth surpassed domestic currency credit growth.

### Financial Sector Soundness and Macroprudential Measures
- Soundness indicators:
  - Non-performing loan ratio was 1½ percent by mid-2011 and well–provisioned.
  - Financial soundness indicators did not deteriorate significantly during 2008–09 crisis and continued improving.
  - Stress tests suggest system-wide resilience; some small banks might need capital under difficult scenarios.
- Dollarization and FX exposure:
  - Credit in foreign currency about 45 percent and increasing.
  - Financial dollarization remains high; declining trend has stalled.
- Liquidity and profitability:
  - Banking system characterized as sound, profitable and well-capitalized with comfortable liquidity and profitability ratios.
- Macroprudential framework (Box 1 highlights):
  - Basel III–spirit recommendations for capital and liquidity implemented.
  - Additional capital buffer components (implemented July 2010); SBS calculations show additional capital buffer ranges from 2.4 to 6.4 percent.
  - Phased implementation of buffers: starting with 40 percent of the capital buffer by July 2012 and then increments of 15 pp annually until July 2016.
  - FX-related measures:
    - July 2010: additional capital requirement on FX exposure of 2½ percent of foreign exchange credit exposure.
    - January 2011: limits on net derivative position of either 40 percent of assets or S/.400 million, tightened to 30 percent or S/.350 million in October 2011.
    - 2011: banks’ long net FX position reduced to 60 percent of net equity (from 75 percent).
  - Liquidity requirements and Basel III alignment:
    - Current minimum liquidity ratios in national and foreign currency (8 and 20 percent respectively) to increase to 10 and 25 percent when liability concentration exists.
    - LCR minimum 100 percent for domestic and foreign currencies, phased in with 80 percent for 2013, 90 percent for 2014, and 100 percent from 2015 onwards.
    - Most institutions already fulfill LCR; exceptions include finance companies and some municipal saving banks.
    - SBS does not impose a minimum NSFR but requests institutions have internal limit; regulation expected to be approved by end-2011.

### External Sector, Capital Flows, and Reserves
- Balance of payments and flows:
  - Current account switched to a deficit of 1½ percent of GDP in 2010.
  - Financial account registered private capital inflows about 9 percent of GDP in 2010 (including errors and omissions).
  - Overall balance reached a surplus of about 7½ percent of GDP in 2010.
  - Current account deficit expected to widen to 2½ percent of GDP in 2011 due to higher profit remittances and weakening private savings.
- Exports, imports, and reserves:
  - Strong export growth from high commodity prices; import growth remained strong.
  - International reserves continued to increase.
  - Nuevo Sol remained stable amid foreign exchange intervention; net FX purchases and CDLD BCRP interventions documented.
- External debt:
  - Total external debt low and declining in absolute terms and as percent of GDP.

### Exchange Rate Assessment and Intervention Policy
- REER and classification:
  - The Nuevo Sol has remained the most stable currency among the LA6 countries.
  - REER appreciated by about 1 percent since March 2010 (and strengthened by 4 percent in real effective terms from end-2009 to September 2011).
  - AREAER classifies Peru as having a de facto floating exchange rate regime.
- Staff assessment and recommendations:
  - CGER suggests exchange rate is in line with fundamentals on average.
  - Staff support gradual additional exchange rate flexibility to strengthen private sector FX risk assessment and foster de-dollarization.
  - Authorities prioritized mitigating excessive volatility to protect balance sheets in a dollarized economy.
  - Observed rapid expansion of mortgages denominated in U.S. dollars; market perceives dollar financing as cheaper.

### Mining Taxation Reform (Box 2)
- Mining sector significance:
  - Represents 11 percent of GDP; 70 percent of total exports (mineral accounted for 61 percent); and 20 percent of total fiscal revenues (3.5 percent of GDP) in 2010.
  - Fiscal revenue from mining exceeded that from crude oil in around 2004, accounting for slightly more than 60 percent of total revenue from mining.
- 2011 reforms approved September 2011:
  - New royalties based on operating profits of 1 to 12 percent to replace sales–based royalties, for companies with no stability contracts with the government.
  - New special mining tax (IEM)—levied on a sliding scale between 2 to 8.4 percent of operating margins applicable to companies with no tax stability contracts.
  - Special (voluntary) levy (GEM) of 4 to 13 percent of profits on the extraction of mineral resources targeting companies holding stability contracts.
  - Tax stability contracts: companies that signed stability contracts pay an additional 2 percent in income tax as an extra charge.
  - Under the voluntary contribution scheme (introduced in 2006), transfers could be up to 3.75 percent of profits after tax (2.75 percent for the local fund and 1 percent to the regional government fund). During 2007–10, resources transferred amounted to S/.2 billion.
  - New measures expected to raise additional US$1 billion annually (about 0.5 percent of GDP, at current commodity prices).

### Outlook and Risks (projections and scenarios)
- Near-term projections:
  - GDP growth expected to reach 6¾ percent in 2011.
  - Inflation projected at 3¾ percent in 2011 (eop).
  - Real GDP growth projected at 5¼ percent in 2012.
  - Inflation in 2012 would decline to 2½ percent.
  - External current account deficit expected around 2½ percent of GDP in 2012.
- Medium-term staff projections:
  - Economic growth around potential (6 percent).
  - Stable current account deficit (around 2½ percent of GDP).
  - Headline inflation at the target.
- Downside risks:
  - External: subpar global growth, lower terms of trade, adverse financial conditions; Spanish banks account for about ¼ of banking system assets.
  - Domestic: uncertainties on economic policy direction; possible new labor market law raising labor costs; an un-codified “consultation clause” in mining tax framework could create conflict and discourage investment.

### Near-term Macroeconomic Management (policy guidance)
- Fiscal:
  - Staff estimated fiscal position would switch to a surplus of 2¼ percent of GDP in 2011 (compared with a fiscal deficit of 1 percent in 2011 budget), with an estimated withdrawal of stimulus of about 2½ percent of GDP.
  - For 2012, policies would entail a fiscal impulse of ¾ percent of GDP in 2012; authorities’ budget aimed at reducing the surplus to about 1 percent of GDP.
  - Staff favored maintaining moderate structural surpluses of around 1 percent of GDP over the medium term to strengthen fiscal buffers.
  - Pre-Electoral report (January 2011) estimates public contingent liabilities around 8 percent of GDP.
- Monetary:
  - Given anticipated moderation in inflationary pressures and anchored inflation expectations, central bank could pause and continue assessing conditions.
  - If prospects of lower growth and inflation materialize, central bank has space to loosen policy rates and reserve requirements.
  - In event of strongly deteriorated global conditions, staff recommended active monetary policy (within inflation-targeting logic) and automatic stabilizers in the budget as first line of defense, ahead of discretionary fiscal stimulus.
  - If growth exceeds potential and inflationary pressures rise, staff would favor tightening.

### Policy Mix Assessment and Recommendations
- Overall assessment: policy mix "seems broadly adequate to maintain macro stability and foster growth."
- Key recommendations:
  - Monetary policy can remain on hold until a clearer global outlook emerges; continue monitoring private credit developments.
  - Policies should remain flexible: ease monetary policy as inflation prospects decline and output gap widens; activate fiscal automatic stabilizers; provide some foreign exchange support if global financial volatility occurs; loosen reserve requirements if liquidity conditions are stressed or credit decelerates too rapidly.
  - Use accumulated buffers gradually if tail risks materialize; central bank can inject considerable liquidity and cut rates more aggressively if needed, acknowledging potential FX market pressures.
  - Emphasize infrastructure and maintenance projects to sustain domestic demand and employment in adverse scenarios.
  - Give more weight to structural fiscal measures to reduce procyclicality; staff sees merits in targeting moderate structural overall balances of 1 percent of GDP in the medium term.
  - Increase the tax ratio to 18 percent of GDP by 2016 through stronger tax administration and reduced evasion; revised mining taxation framework is a welcome step.
  - Support gradual additional exchange rate flexibility to foster de-dollarization and private sector hedging development.
  - Formalize institutional setup for macroprudential policies to improve monitoring and coordination.

### Debt Sustainability Analysis — Baseline and Risks (ANNEX I)
- Recent dynamics and baseline:
  - Public sector gross debt declined from 47.1 percent of GDP in 2003 to 24.6 percent of GDP in 2010.
  - Foreign-currency share in total public debt declined from 80 percent in 2000 to 57 percent in 2010.
  - Overall fiscal surpluses averaged 1.7 percent of GDP (2000–10).
  - Baseline macro assumptions: Real GDP growth will average 6 percent a year in 2011–16; overall fiscal surpluses projected to average 1.4 percent of GDP.
  - Public sector debt (including CRPAOs) under baseline: 21.3 percent of GDP at end-2011; 17.3 percent of GDP by 2016.
  - External debt projected to decline from 26.1 percent at end-2011 to 20.8 percent by 2016; public external debt projected to decline from 11.7 percent of GDP to 7 percent by 2016.
- Sensitivity and stress tests:
  - Exchange rate shock: a one-off 30 percent real depreciation would increase external debt ratio by about 9 percentage points and public debt ratio by about 5 percentage points above baseline over the medium term.
  - Contingent liabilities shock: a 10 percent of GDP contingent liability would increase public debt by similar amount; by 2016 debt ratio would remain 9.2 percentage points above the baseline.
  - Other stress tests using historical standard deviations show moderate adverse impacts on indebtedness.
- Policy implications:
  - Under baseline, public and external debt ratios projected to decline reflecting strong growth, fiscal surpluses, and lower foreign-currency exposure.
  - Debt ratios are moderately vulnerable to macro volatility and particularly sensitive to large exchange rate depreciations and large contingent liabilities.
  - Maintaining prudent fiscal balances and reducing foreign-currency exposure of public debt would support debt consolidation; monitoring contingent liabilities is important.

### Key Quantitative Indicators (selected exact figures drawn from source)
- GDP and prices (selected):
  - Real GDP (annual percent change): 2006 7.7; 2007 8.9; 2008 9.8; 2009 0.9; 2010 8.8; 2011 6.7; 2012 5.2.
  - Consumer Prices (end of period): 2006 1.1; 2007 3.9; 2008 6.7; 2009 0.2; 2010 2.1; 2011 3.9; 2012 2.5.
  - GDP per capita (in US$): 2006 3,339; 2007 3,800; 2008 4,425; 2009 4,361; 2010 5,205; 2011 5,669; 2012 5,951.
- External and reserves:
  - Current Account (percent of GDP): 2008 -4.2; 2009 0.2; 2010 -1.5; 2011 -2.5; 2012 -2.6.
  - Gross reserves (millions of U.S. dollars): 2006 17,329; 2007 27,720; 2008 31,233; 2009 33,175; 2010 44,150; 2011 48,243; 2012 50,243.
  - Net international reserves: 17,275; 27,689; 31,196; 33,135; 44,105; 48,852; 50,852 (selected years).
- Fiscal and public debt:
  - NFPS Revenues (percent of GDP): 2006 25.4; 2007 25.8; 2008 26.6; 2009 24.0; 2010 25.0; 2011 26.3; 2012 25.9.
  - NFPS Overall Balance (percent of GDP): 2006 2.3; 2007 3.1; 2008 2.3; 2009 -1.6; 2010 -0.5; 2011 2.2; 2012 1.1.
  - Public Gross Debt (percent of GDP): 2006 33.0; 2007 29.8; 2008 24.0; 2009 27.3; 2010 23.5; 2011 20.4; 2012 19.9 (levels and projections appear in multiple tables).
- Financial sector indicators:
  - Nonperforming loans to total gross loans: 1.6; 1.3; 1.3; 1.6; 1.5; 1.5 (selected years).
  - Provisions to nonperforming loans: 251.4; 278.4; 258.7; 242.2; 245.6; 238.2.
  - Capital to risk-weighted assets: 12.5; 11.7; 11.9; 13.8; 13.6; 13.2.
  - Share of foreign currency deposits in total deposits: 62.7; 59.3; 58.0; 55.8; 47.8; 48.7.

*Source: PERU 2011 ARTICLE IV REPORT (Selected excerpts and figures).*

### 1. Selected Economic Indicators  _________________________________________________________________  27

### _cr1226 - 1. Selected Economic Indicators  _________________________________________________________________  27

### Context and Recent Developments
- Peru experienced strong macroeconomic performance over the decade 2001–11:
  - Per-capita income almost tripled in the decade 2001–11 to US$5,700.
  - Public debt as a percent of GDP fell by more than one-half to about 20 percent.
  - Real GDP growth accelerated to 5¾ percent on average per annum.
  - Annual inflation fell to 2¼ percent on average.
- 2008–09 global crisis response:
  - BCRP dropped its policy rate by 525 basis points to 1¼ percent in 2009.
  - MEF implemented a stimulus package generating a fiscal impulse of over 1½ percent of GDP in 2009.
  - Real GDP growth decelerated to 1 percent in 2009.
- Recovery and 2011 outlook:
  - Real GDP expanded 8¾ percent in 2010; grew 7½ percent in the first eight months of 2011.
  - Output gap closed to around zero after recovery.
  - Political uncertainties and global outlook expected to slow private demand by year-end 2011.

### Inflation and Overheating Indicators
- Recent inflation developments:
  - Inflation fell to ¼ of a percent in 2009, rebounded to 2 percent by end-2010.
  - Inflation increased to 4¼ percent in October 2011 (3½ percent for core inflation), above the target band of 1–3 percent.
  - Non-fuel non-food inflation was 2⅓ percent in October 2011 (yoy), within the target band.
  - Inflation expectations for 2012 remain well-anchored.
- Sources of inflationary pressure:
  - Supply shocks and some demand pressures.
  - Output gap hovering around zero; as supply shocks are absorbed, inflation expected to return to the target.

### Fiscal Policy, Stimulus Exit, and Fiscal Buffers
- Fiscal developments:
  - Overall deficit fell from 1½ percent of GDP in 2009 to ½ percent in 2010, despite real spending growing above potential.
  - Fiscal position switched to an annualized fiscal surplus of about 5½ percent of GDP in the first half of 2011 (2½ percent in the first half of 2010).
  - Fiscal Stabilization Fund increased to 3⅓ percent of GDP.
- Drivers of fiscal improvement:
  - Revenues remained buoyant despite tax cuts; under-execution of investment projects at sub-national level restrained expenditures.
  - Measures of over ½ percent of GDP were adopted in 2011 to foster capital execution (within 2011 budget limits).
- Tax and revenue notes:
  - Tax collections improved by an average of 1 percent of GDP a year in 2010-11.
  - Several 2011 measures eroded the tax base, including reduction in the VAT rate (by 1 percentage point), the financial transaction tax and import duties.
- Medium-term fiscal stance (as presented in figures):
  - Structural stance projected to return to a structural surplus of around 1 percent of GDP.
  - Net debt projected to decline significantly; gross debt declines and financial assets increase, reducing vulnerabilities.

### Monetary Policy and Credit
- Monetary policy actions:
  - After easing in 2009, a tightening cycle began mid-2010 with the policy rate increasing 300 basis points to 4¼ percent by May 2011.
  - Since May 2011, the central bank remained on hold given global uncertainty.
  - Reserve requirement hikes complemented monetary tightening.
- Reserve requirement changes (as described):
  - In second half 2010 marginal reserve requirements for domestic currency deposits raised to 25 percent for residents (from zero) and to 120 percent for nonresident financial entities (from 35 percent).
  - For foreign currency deposits, marginal reserve requirements increased to 55 percent (from 30 percent).
  - In 2011, BCRP increased average reserve requirements (cumulative hike of 100 basis points).
- Credit growth:
  - Credit growth around 20 percent in 2010–11.
  - Foreign currency credit growth surpassed domestic currency credit growth.

### Financial Sector Soundness and Vulnerabilities
- System-wide indicators:
  - Non-performing loan ratio was 1½ percent by mid-2011 and well–provisioned.
  - Financial soundness indicators did not deteriorate significantly during 2008–09 crisis and continued improving.
  - Stress tests suggest the system as a whole can withstand severe shocks, though some small banks might need capital under difficult scenarios.
- Dollarization and FX exposure:
  - Credit in foreign currency about 45 percent and increasing.
  - Financial dollarization remains high; deposits in US$/Total deposits and Credit in US$/Total credit show high dollarization and declining trend has stalled.
- Liquidity and profitability:
  - Banking system characterized as sound, profitable and well-capitalized with comfortable liquidity and profitability ratios.
- Market indicators:
  - International reserves (NIR) increased; reserve adequacy metric and NIR shown rising in figures.
  - External debt low and declining; external debt charts indicate reduction (percent of exports and percent of GDP).

### External Sector and Capital Flows
- Balance of payments and capital inflows:
  - Current account switched to a deficit of 1½ percent of GDP in 2010.
  - Financial account registered private capital inflows about 9 percent of GDP in 2010 (including errors and omissions).
  - Overall balance reached a surplus of about 7½ percent of GDP in 2010.
  - Current account deficit expected to widen to 2½ percent of GDP in 2011 due to higher profit remittances of foreign mining firms and weakening private savings.
- Exports and imports:
  - Strong export growth benefited from high commodity prices; import growth remained strong.
- Reserves and exchange rate:
  - International reserves continued to increase.
  - Nuevo Sol remained stable amid foreign exchange intervention; net FX purchases and CDLD BCRP interventions documented in figures.
- External debt:
  - Total external debt low and declining in both absolute terms and as percent of GDP.

### Macro-prudential Measures on Banks (Box 1)
- Implementation of Basel III–spirit recommendations for capital and liquidity.
- Additional capital buffer components (implemented July 2010):
  - Countercyclical capital requirement activated/deactivated according to dynamic provisioning activation rule (based on GDP growth) and accounting for default probabilities during recession and expected losses by loan type.
  - Capital requirement for concentration risks: individual exposures where major 20 debtors represent 5 percent of portfolio; sectoral and regional exposures.
  - Capital requirement for market concentration for institutions with assets-to-GDP ratio higher than 3 percent; add-on increases with lower credit rating; allows SBS to request additional capital for market risk from interconnectedness or substitutability.
  - Capital requirement for interest rate risks associated with banking book and proprietary portfolio: applies to banks dedicated to consumption lending (¼ percent on average) and finance companies (0.3 percent).
  - SBS calculations show additional capital buffer ranges from 2.4 to 6.4 percent.
  - Phased implementation: starting with 40 percent of the capital buffer by July 2012 and then increments of 15 pp annually until July 2016.
- FX-related prudential measures:
  - July 2010: additional capital requirement on FX exposure of 2½ percent of foreign exchange credit exposure.
  - January 2011: limits on net derivative position of either 40 percent of assets or S/.400 million, whichever highest; tightened to 30 percent or S/.350 million in October 2011.
  - 2011: banks’ long net FX position reduced to 60 percent of net equity (from 75 percent).
- Liquidity requirements (alignment with Basel III):
  - Current minimum liquidity ratios in national and foreign currency (8 and 20 percent respectively) to increase to 10 and 25 percent when liability concentration exists (debt from 20 major depositor accounts ≥ 25 percent of total liabilities).
  - Institutions must report liquidity ratios adjusted for borrowed funding and foreign exchange forward position.
  - Liquidity core ratio (LCR) and net stable funding ratio (NSFR) introduced:
    - LCR minimum 100 percent for domestic and foreign currencies, phased in with 80 percent for 2013, 90 percent for 2014, and 100 percent from 2015 onwards.
    - Most institutions already fulfill LCR; exceptions include finance companies and some municipal saving banks.
    - SBS does not impose a minimum NSFR but requests institutions have internal limit; regulation expected to be approved by end-2011.

*Source: PERU 2011 ARTICLE IV REPORT (Selected excerpts and figures).*

### 9. Foreign exchange intervention has

### 9. Foreign exchange intervention has

### Exchange rate, exchange arrangements, and intervention
- The Nuevo Sol has remained the most stable currency among the LA6 countries.
- The real effective exchange rate (REER) appreciated by about 1 percent since the issuance of the last Article IV consultation report (March 2010).
- The Fund’s latest report on exchange arrangements (AREAER) classifies Peru as currently having a de facto floating exchange rate regime.
- Staff supported the authorities’ intentions to use foreign exchange intervention if disruptions materialize in the foreign exchange market due to a worsening in external conditions, including the pullout of external credit lines in case of an extreme event.

### Political context and social policy objectives
- The Humala administration won the election in June 2011 with a clear mandate to attend social demands.
- Congress approved a revised framework for mining taxation in September 2011.
- The authorities started expanding some well targeted and successful social programs from a narrow base and at a low pace.
- By fulfilling some campaign promises, President Humala’s approval rating peaked at 65 percent in September 2011.
- The governing coalition holds a two-seat majority in Congress.
- The authorities developed targets to achieve more socially inclusive growth, including reducing the poverty ratio from 31 percent in 2010 to 20 percent in 2016.
- A new Ministry of Social Development and Inclusion would focus on better coordinating the delivery of social programs.

### Mining taxation reform (Box 2)
- The mining sector (mineral and hydrocarbon) represents 11 percent of GDP; 70 percent of total export (of which mineral accounted for 61 percent); and 20 percent of total fiscal revenues (3.5 percent of GDP) in 2010.
- Fiscal revenue from mining exceeded that from crude oil in around 2004, accounting for slightly more than 60 percent of the total revenue from mining.
- The new reforms approved in September, 2011, include:
  - new royalties based on operating profits of 1 to 12 percent to replace the sales–based royalties, for companies with no stability contracts with the government;
  - a new special mining tax (IEM)—levied on a sliding scale between 2 to 8.4 percent of operating margins applicable to companies with no tax stability contracts;
  - a special (voluntary) levy (GEM) of 4 to 13 percent of profits on the extraction of mineral resources targeting companies holding stability contracts.
- Tax stability contracts: companies that signed stability contracts pay an additional 2 percent in income tax as an extra charge.
- Under the voluntary contribution scheme (introduced in 2006), the amount transferred could be up to 3.75 percent of profits after tax (2.75 percent for the local fund and 1 percent to the regional government fund). During 2007–10, resources transfer from these companies amounted to S/.2 billion.
- The new measures are expected to raise additional US$1 billion annually (about 0.5 percent of GDP, at current commodity prices).

### Outlook and risks
- GDP growth is expected to reach 6¾ percent in 2011, driven by private consumption and inventory building.
- Inflation is projected at 3¾ percent in 2011 (eop).
- Real GDP growth is projected at 5¼ percent in 2012.
- Inflation in 2012 would decline to 2½ percent.
- The external current account deficit remains relatively stable at around 2½ percent of GDP next year.
- Over the medium term, staff projects:
  - economic growth at around potential (6 percent),
  - a stable current account deficit (around 2½ percent of GDP),
  - headline inflation at the target.
- Downside risks:
  - External risks: subpar global growth could lower terms of trade and generate adverse financial conditions; presence of Spanish banks accounts for about ¼ of the assets of the banking system.
  - Domestic risks: uncertainties on the overall direction of economic policy; possible new labor market law could raise labor costs and reduce competitiveness; a “consultation clause” in the revised mining taxation framework that has not been codified could create conflict with mining companies, discouraging investment.

### Near-term macroeconomic management: fiscal and monetary policy
- Fiscal performance and policy:
  - Persistent under-execution of capital spending due to the change of administration tightened the fiscal position.
  - Staff estimated the fiscal position would switch to a surplus of 2¼ percent of GDP in 2011 (compared with a fiscal deficit of 1 percent included in the 2011 budget), with an estimated withdrawal of stimulus of about 2½ percent of GDP.
  - For 2012, policies would entail a fiscal impulse of ¾ percent of GDP in 2012; authorities’ budget aimed at reducing the surplus to about 1 percent of GDP.
  - Staff favored maintaining moderate structural surpluses of around 1 percent of GDP over the medium term to strengthen fiscal buffers.
  - The Pre-Electoral report issued in January 2011 estimates public contingent liabilities for around 8 percent of GDP.
- Monetary policy:
  - Given expected moderation in inflationary pressures and firmly-anchored inflation expectations, the central bank could pause and continue assessing conditions before deciding the course of monetary policy in the short term.
  - If prospects of lower growth and inflation materialize, the central bank has space to loosen policy rates and reserve requirements.
  - In the event of strongly deteriorated global conditions, staff recommended active monetary policy (within the logic of inflation targeting) and automatic stabilizers in the budget as a first line of defense, ahead of meaningful discretionary fiscal stimulus.
  - If growth exceeds potential and inflationary pressures rise, staff would favor tightening the policy stance.

### External position
- The current account deficit is expected to remain at the same level of 2½ percent of GDP.
- Capital inflows are expected to ease, generating a moderate reserve accumulation.
- In the event of another global recession, the trade channel would be the main transmission (a sharp decline in commodity prices would lower Peru’s mineral exports); the financial channel is likely to be less significant as banks and the private sector are not dependent on short-term foreign financing.

*Source: 2011 ARTICLE IV REPORT PERU*

### 18. With the exchange rate in line with

### 18. With the exchange rate in line with fundamentals

### Exchange rate assessment and policy discussion
- Staff exchange rate assessment (CGER) suggests that on average, Peru’s exchange rate is in line with its fundamentals (Box 4).
- Authorities agreed with that assessment and reiterated readiness to accommodate changes in the exchange rate dictated by changes in fundamentals.
- Authorities’ stated objective of foreign exchange intervention policy: mitigate excessive exchange rate volatility and its potential destabilizing effects on balance sheets of banks and households in the context of a dollarized economy.
- Staff view: additional exchange rate flexibility, gradually introduced, could be useful to:
  - Strengthen private sector ability to assess foreign exchange risk.
  - Foster de-dollarization.
- Observed market behavior: the market for mortgages denominated in U.S. dollars seems to be expanding rapidly on the premise that dollar financing is cheaper than local currency financing.
- Authorities’ assessment: the current degree of flexibility has worked fine in confronting global uncertainties and variable capital flows and terms of trade.

### Peru: Balance of Payments (In percent of GDP) — key figures (2008–2012, projection)
- Current Account: -4.2 0.2 -1.5 -2.5 -2.6
- Exports: 24.5 21.2 23.1 25.1 25.3
- Imports: -22.4 -16.6 -18.7 -20.6 -21.0
- Other: -6.2 -4.5 -5.9 -7.0 -6.9
- Financial Account: 6.6 0.6 8.9 4.9 3.7
- Public sector (net): -1.1 0.8 -0.6 0.0 -0.3
- Private sector (net): 7.8 -0.2 9.5 4.9 4.0
  - Foreign direct investment: 4.9 4.1 4.6 4.3 4.5
  - Other private (net)1/: 2.9 -4.3 4.8 0.6 -0.5
- Overall Balance: 2.5 0.8 7.4 2.4 1.1
- Note: 1/ Includes errors and omissions.

(Sources: Peruvian authorities; and Fund staff estimates.)

### Peru: Central Bank Accounts — selected figures (In percent of currency the previous period)
- Currency: 16.7 11.0 25.5 23.3 21.1 (2008–2012, projection)
- Net domestic assets: -81.6 21.3    -124.3    -47.0 1.7
- Public sector (net): -44.7 -4.4 -24.2 8.6 6.8
- Banking system (net): 37.5 -24.2 -4.8 -22.0 -17.5
- Other (net): -74.3 49.9 -95.3 -33.5 12.4
- Net international reserves: 98.3    -10.3   149.8 70.2 19.4

(Sources: Central Reserve Bank of Peru; and Fund staff estimates.)

### Box 4 — Peru: Exchange Rate Assessment (findings)
- The Nuevo Sol has remained the most stable currency among the LA6 countries amid strong capital inflows.
- REER movements:
  - The Nuevo Sol appreciated in the first half of 2010; weakened subsequently up to April 2011 in part due to currency interventions.
  - Overall, the Nuevo Sol strengthened by 4 percent in real effective terms from end-2009 to September 2011.
- Staff CGER estimates: the Nuevo Sol is in line with fundamentals.
  - Panel data CGER estimates showed that, on average, the real exchange rate is not misaligned.
  - The macroeconomic balance approach indicates an overvaluation of 10 percent.
  - The external stability and the equilibrium exchange rate approaches indicate that the exchange rate is undervalued (by 1 and 16 percent respectively).
  - A Peru-specific behavioral estimate suggests a slight overvaluation of 1 percent.
- Underlying current account estimates and adjustments:
  - The underlying current account deficit is estimated at around 1 percent of GDP in 2012.
  - Adjustments to the projected current account (2½ percent of GDP in 2012) take into account:
    - Closing the domestic and trading partners’ output gaps over the medium term.
    - Mineral and hydrocarbon prices falling to their respective long-term levels.
    - Lower commodity prices translating into lower profit remittances.
  - Underlying current account estimated at 1½ percent of GDP in 2016.
  - Comparison with analytical norms:
    - Current account norm (MB approach): -¾ percent of GDP.
    - Net foreign assets (NFA) stabilizing current account: -2½ percent of GDP.

### Policy implications and staff recommendations (exchange rate and financial sector)
- Exchange rate:
  - Staff support gradual additional exchange rate flexibility to promote private sector risk assessment and de-dollarization.
  - Authorities prioritize mitigating excessive volatility to protect balance sheets in a dollarized economy.
- Financial sector and macroprudential policy (related considerations):
  - Staff welcomed authorities’ steps to incorporate FSAP recommendations and to implement new capital and liquidity requirements in line with international proposals (Basel III implementation planned starting July 2012).
  - Further coordination of macroprudential policy across agencies recommended to strengthen institutional mandates, accountability, and monitoring of systemic risks.
  - Enhanced information sharing suggested as a first step to improve understanding of systemic macro-financial linkages.

*Sources: Peruvian authorities; and Fund staff estimates.*

### 27. The policy mix seems broadly

### 27. The policy mix seems broadly

### Policy assessment and overarching recommendation
- The policy mix "seems broadly adequate to maintain macro stability and foster growth."
- Main challenge: "ensure a timely and flexible implementation of policies to confront changing domestic economic conditions in an external environment of heightened uncertainty."

### Fiscal policy: 2011 outcome and 2012 budget proposal
- 2011: "there will be a higher-than-expected surplus for 2011."
- 2012 budget aims at:
  - "a surplus of 1 percent of GDP"
  - "a structural expansion of ¾ percent of GDP"
- Assessment: the 2012 proposal "is broadly adequate as activity is expected to be softer."
- Short-term social spending: "Additional short-term social spending can be accommodated within the expenditure limits established by the 2012 budget."
- Past precedent: "As with the fiscal stimulus implemented in 2009, infrastructure and maintenance projects can prove effective to help sustain domestic demand and employment."

### Monetary policy stance and monitoring
- Recommendation: "monetary policy can remain on hold" given the uncertain external environment.
- Rationale:
  - Expected fall in inflationary pressures as "the impact of higher oil and food prices is absorbed."
  - Previous tightening in monetary policy.
- Specific endorsement: Staff "supports the central bank decision to keep policy rates unchanged, at least until a clearer picture on the global outlook emerges."
- Ongoing vigilance: "The authorities should continue monitoring private credit developments and ensuring risks remain contained."

### Flexibility under heightened global risks
- Policy flexibility advised: "policies should remain flexible."
- As first-line responses consistent with inflation targeting:
  - Monetary policy "could be eased as inflation prospects decline and the output gap widens."
  - Fiscal policy "activates automatic stabilizers."
- Additional measures if needed:
  - "Some foreign exchange support would be warranted."
  - "Reserve requirements may be loosen if liquidity conditions become stressed or if domestic credit decelerates too rapidly."

### Contingency and buffer use under tail risks
- If tail risks materialize: "additional policy stimulus could be deployed to limit the fallout."
- Buffer assessment: "The buildup of buffers in the last few years suggests there is space to implement a sizable policy response."
- Caution: "uncertainty about the nature and duration of the external shock makes advisable a gradual use of these buffers."
- Central bank capacity: "has the capacity to inject considerable liquidity and cut rates more aggressively if external financial conditions deteriorate (although potential pressures in the foreign exchange market could become a constraint)."
- Expected outcome of stimulus under severe shock: "the policy response would only help mitigate the shock, with economic activity likely being below potential in the short term."
- Governance recommendation: "it will be important to design and communicate clearly the authorities’ strategy and objectives, and ensure continuity in the policy framework."

### Structural fiscal anchors and medium-term targets
- Recommendation: "Giving more weight to structural measures to anchor fiscal policy would help cementing macroeconomic stability."
- Merits of approach: "reducing procyclicality risks, enhances predictability, and accumulates fiscal buffers."
- Medium-term target suggested by Staff: "targeting moderate structural overall balances of 1 percent of GDP in the medium-term" to cope with volatile global environment, contingent liabilities, and vulnerability to natural disasters.
- Short-term calibration: "current FRTL parameters could be calibrated to maintain a relatively stable structural result, with limits to expenditure growth, unless a discretionary fiscal reaction is called for."

### Tax mobilization and revenue strategy
- Goal: "increase the tax ratio to 18 percent of GDP by 2016" to provide additional resources for social programs and public investments.
- Measures welcomed:
  - "plans to strengthen tax administration"
  - "approval of the revised mining taxation framework, with due consideration for competitiveness in the sector"
  - "efforts to reduce tax evasion"
- Caution: "in the event these efforts did not yield the expected results, tax measures could be considered."

### Exchange rate, de-dollarization, and private sector risk management
- Outlook: "Peru’s improved fundamentals will foster further de-dollarization, allowing the exchange rate to play a larger role as shock absorber."
- Recommendation: "some additional exchange rate flexibility, gradually implemented, is important for the private sector to strengthen its ability to assess foreign exchange risk, and may contribute to de-dollarize."
- Current challenge: "Financial dollarization remains high and has actually increased in some segments given low international interest rates and appreciation expectations."
- Expected benefits of gradual flexibility: "foster the development of hedging instruments and private sector awareness about managing currency risk, thereby allowing the exchange rate to play a larger role as a shock absorber."

### Financial sector resilience and macroprudential setup
- Condition: "The financial sector is strong, and the prudential framework is ahead in the implementation of proposed international standards."
- Characteristics: "Peru’s financial sector remains sound, profitable and well-capitalized."
- Regulatory timing: "Most prudential regulations aligned with Basel III will be applied ahead of the internationally-agreed schedule, with banks well positioned to implement them."
- Monitoring priorities: "Monitoring corporate balance sheets, including foreign exchange and derivative positions, will be critical to assess vulnerabilities."
- Institutional recommendation: "Formalizing an institutional setup for macro-prudential policies would facilitate monitoring systemic risks more effectively, and enhance analysis and coordination across institutions."

### Medium-term growth and reform agenda
- Consensus: "growth will need to be increasingly driven by higher productivity over the medium term."
- Key pillars to ensure high potential growth:
  - "(i) enhancing competitiveness by boosting human capital and infrastructure and maintaining labor market flexibility;"
  - "(ii) improving the business climate to foster investment and innovation (including enhancing formality); and"
  - "(iii) further developing the local capital markets to facilitate investment and better allocate savings."

*Source: 2011 ARTICLE IV REPORT PERU — Selected excerpts.*

### 37. Staff proposes that Peru remains on

### 37. Staff proposes that Peru remains on the 12-month consultation cycle.

### Social indicators
- Life expectancy at birth (years): 72.8 73.0 73.2 73.5 73.5 73.7
- Infant mortality (per thousand live births): 23.8 22.2 20.7 19.4
- Adult literacy rate: 88.7 89.6 89.6 89.6 89.6
- Poverty rate (total) 1/: 44.5 39.3 36.2 34.8 31.1
- Unemployment rate: 8.5 8.4 8.4 8.4 7.9 7.5 7.5

### Production and prices
- Real GDP (annual percent change): 7.7 8.9 9.8 0.9 8.8 6.7 5.2
- Real domestic demand (annual percent change): 10.3 11.8 12.3 -2.8 12.8 8.1 5.5
  - Private sector demand: 10.3 12.2 12.4 -5.7 12.2 9.6 4.0
- Consumer Prices (end of period): 1.1 3.9 6.7 0.2 2.1 3.9 2.5
- Consumer Prices (period average): 2.0 1.8 5.8 2.9 1.5 3.2 2.8

### External sector (selected indicators)
- Exports (percent change): 37.2 17.9 10.4 -13.1 31.9 19.6 7.0
- Imports (percent change): 22.9 32.0 45.2 -26.1 37.1 21.2 8.1
- Terms of trade (deterioration -): 26.6 3.6 -14.5 -3.1 18.2 5.8 0.0
- Real effective exchange rate (depreciation -) 2/: -1.8 -1.7 4.4 3.5 2.4
- External current account balance (percent of GDP): 3.1 1.4 -4.2 0.2 -1.5 -2.5 -2.6

### Reserves and external debt
- Gross reserves (in millions of U.S. dollars): 17,329 27,720 31,233 33,175 44,150 48,243 50,243
- Gross reserves (percent of short-term external debt) 5/: 339.6 206.2 317.9 435.4 342.5 496.8 465.1
- Gross reserves (percent of foreign currency deposits at banks): 151.4 209.7 173.8 190.3 217.3 226.6 230.5
- Total external debt (percent of GDP): 31.4 31.3 28.4 29.3 27.4 26.1 25.4
- NFPS Gross debt (including CRPAOs): 33.1 30.4 24.9 28.4 24.6 21.3 20.7

### Monetary and credit
- Broad money (annual percent change): 9.0 22.2 24.9 5.9 23.8 15.4 12.4
- Net credit to the private sector (annual percent change): 6.4 30.2 32.4 1.3 14.6 20.5 14.4

### Public sector—levels (in millions of Nuevos Soles) and percent of GDP
- Nonfinancial Public Sector Revenues (millions): 76,640 86,455 99,305 91,581 108,606 127,635 135,866 145,657 157,577 169,503 182,859
  - Revenues (percent of GDP): 25.4 25.8 26.6 24.0 25.0 26.3 25.9 25.7 25.8 25.7 25.7
  - Taxes (millions): 46,285 53,435 59,672 53,842 65,951 77,603 82,287 89,658 97,720 105,270 113,672
  - Taxes (percent of GDP) 5/: 15.3 16.0 16.0 14.1 15.2 16.0 15.7 15.8 16.0 16.0 16.0
- Primary expenditures (millions): 63,970 70,224 84,788 92,751 105,902 111,147 124,071 132,547 142,773 154,108 166,382
  - Primary expenditures (percent of GDP) 2/: 21.2 21.0 22.7 24.3 24.4 22.9 23.7 23.4 23.3 23.4 23.4
- Primary balance (millions): 12,671 16,231 14,517 -1,170 2,704 16,487 11,795 13,110 14,805 15,395 16,477
  - Primary balance (percent of GDP): 4.2 4.8 3.9 -0.3 0.6 3.4 2.2 2.3 2.4 2.3 2.3
- Interest (millions): 5,660 6,008 5,884 5,011 5,057 5,686 6,183 6,458 6,647 6,606 6,874
  - Interest (percent of GDP): 1.9 1.8 1.6 1.3 1.2 1.2 1.2 1.1 1.1 1.0 1.0
- Overall balance (millions): 7,010 10,223 8,633 -6,181 -2,353 10,801 5,612 6,652 8,158 8,789 9,603
  - Overall balance (percent of GDP): 2.3 3.1 2.3 -1.6 -0.5 2.2 1.1 1.2 1.3 1.3 1.3
- Public Gross Debt (millions) 3/: 99,822 99,718 89,675 104,352 102,288 98,873 104,229 106,906 110,406 114,623 119,470
  - Public Gross Debt (percent of GDP) 3/: 33.0 29.8 24.0 27.3 23.5 20.4 19.9 18.9 18.9 17.4 16.8
  - Foreign-currency denominated debt (percent of GDP): 25.0 21.3 15.8 17.0 13.6 12.2 11.1 10.0 9.0 8.1 7.8

### Public sector—key percent-of-GDP ratios and projections
- General Government Primary Balance (percent of GDP): 3.7 4.9 3.7 -0.9 0.8 3.3 2.3 2.3 2.3 2.4 2.3
- General Government Overall Balance (percent of GDP): 1.9 3.2 2.2 -2.1 -0.3 2.2 1.2 1.3 1.3 1.3 1.3
- Public Gross Debt (including CRPAO) (percent of GDP): 33.1 30.4 24.9 28.4 24.6 21.3 20.7 19.6 18.7 18.0 17.3

### Social expenditure (selected)
- Total social expenditure and pensions (millions of Nuevos Soles): 30,928 33,814 37,099 43,341 46,367 46,590 50,310
  - As percent of general government expenditure: 57.0 56.4 53.2 54.7 52.3 51.7 49.2
  - As percent of GDP: 10.2 10.1 10.0 11.3 10.7 9.7 9.6
- Universal coverage (Education and Health) (millions): 11,800 12,852 14,955 18,220 18,979 18,514 20,667
  - Education (millions): 8,063 8,688 9,606 11,010 11,292 10,681 11,475
  - Health (millions): 3,737 4,164 5,350 7,210 7,687 7,832 9,192

### Balance of payments and capital flows (selected)
- Current account (millions of U.S. dollars): 2,872 1,460 -5,311 1,821 1 -2,315 -4,269 -4,729 -5,442 -5,523 -5,574 -5,288
- Merchandise trade (millions): 8,986 8,503 2,569 5,951 6,749 7,605 7,746 8,648 11,115 14,234 17,139
- Exports (millions of U.S. dollars): 23,830 28,094 31,019 26,962 35,565 42,522 45,491 49,294 54,530 60,434 66,375
  - Exports as percent of GDP: 25.8 26.2 24.5 21.2 23.1 25.1 25.3 25.4 25.9 26.7 27.2
- Imports (millions of U.S. dollars): -14,844 -19,591 -28,449 -21,011 -28,815 -34,918 -37,744 -40,646 -43,415 -46,200 -49,236
- Capital and financial account balance (millions of U.S. dollars): 348 8,400 8,674 1,499 13,149 8,818 6,699 7,412 7,523 7,574 7,288
  - Foreign direct investment (net) (millions): 3,388 5,380 6,188 5,178 7,113 7,341 8,075 8,882 9,771 10,748 11,554

### Monetary survey and central bank (selected)
- Net international reserves (in millions of U.S. dollars): 17,275 27,689 31,196 33,135 44,105 48,852 50,852
- Base money (12-month percent change): 18.3 28.2 25.5 5.5 45.3 16.9 12.8
- Broad money (12-month percent change): 9.0 22.2 24.9 5.9 23.8 15.4 12.4
- Net credit to private sector (12-month percent change): 6.4 30.2 32.4 1.3 14.6 20.5 14.4

### Financial system soundness (selected indicators)
- Capital to risk-weighted assets: 12.5 11.7 11.9 13.8 13.6 13.2
- Regulatory Tier I capital to risk-weighted assets: 10.6 8.8 7.7 10.5 10.8 10.8
- Nonperforming loans to total gross loans: 1.6 1.3 1.3 1.6 1.5 1.5
- Provisions to nonperforming loans: 251.4 278.4 258.7 242.2 245.6 238.2
- Return on assets (ROA): 2.2 2.5 2.6 2.3 2.4 2.3
- Return on equity (ROE): 23.9 27.9 31.1 24.5 24.2 24.3
- Share of foreign currency deposits in total deposits: 62.7 59.3 58.0 55.8 47.8 48.7
- Foreign currency deposits at commercial banks (millions of U.S. dollars): 11,855 14,857 18,312 19,600 19,857 21,624

### Medium-term macroeconomic framework (selected projections)
- GDP at constant prices (annual percent change): 0.9 8.8 6.7 5.2 6.0 6.0 6.0 6.0
- Consumer prices (end of period): 0.2 2.1 3.9 2.5 2.0 2.0 2.0 2.0
- External current account balance (percent of GDP): 0.2 -1.5 -2.5 -2.6 -2.8 -2.6 -2.5 -2.2
- Public sector combined primary balance (percent of GDP): -0.3 0.6 3.4 2.2 2.3 2.4 2.3 2.3
- Public sector debt (percent of GDP): 28.4 24.6 21.3 20.7 19.6 18.7 18.0 17.3
- Gross international reserves (billions of U.S. dollars): 33,175 44,150 48,243 50,243 52,243 54,243 56,243 58,243

*Source: IMF staff tables and projections contained in the Peru 2011 Article IV report.*

### ANNEX I. PERU: DEBT SUSTAINABILITY ANALYSIS

### ANNEX I. PERU: DEBT SUSTAINABILITY ANALYSIS

### Recent debt dynamics and baseline projections
- Public sector gross debt declined from 47.1 percent of GDP in 2003 to 24.6 percent of GDP in 2010.
- The foreign-currency share in total public debt declined from 80 percent in 2000 to 57 percent in 2010.
- Fiscal performance: overall fiscal surpluses averaged 1.7 percent of GDP (2000–10).
- Baseline macro assumptions:
  - Real GDP growth will average 6 percent a year in 2011–16.
  - Overall fiscal surpluses are projected to average 1.4 percent of GDP.
- Public sector debt (including CRPAOs) under the baseline:
  - 21.3 percent of GDP at end-2011
  - 17.3 percent of GDP by 2016
- External debt trajectory:
  - Declined from 52.7 percent of GDP in 2000 to 27.4 percent of GDP in 2010.
  - Baseline projects total external debt to decline from 26.1 percent at end-2011 to 20.8 percent by 2016.
  - Public external debt projected to decline from 11.7 percent of GDP to 7 percent of GDP over the same period.

### Identified debt-creating flows and dynamics (selected figures)
- Change in external debt (percent of GDP), 2006–2016 (selected): -4.7, -0.1, -3.0, 1.0, -1.9, -1.3, -0.8, -1.1, -1.3, -0.9, -1.3.
- Identified external debt-creating flows (4+8+9), 2006–2016 (selected): -10.3, -11.3, -6.1, -1.4, -9.8, -2.6, -2.0, -2.0, -2.3, -2.6, -2.7.
- Net non-debt creating capital inflows (negative), 2006–2016 (selected): -2.1, -5.6, -5.4, -1.2, -6.2, -3.4, -3.4, -3.3, -3.6, -3.8, -3.7.
- Automatic debt dynamics (external) 2006–2016 (selected): -3.0, -2.4, -3.1, 1.3, -4.0, -0.5, -0.1, -0.4, -0.3, -0.3, -0.3.
- External debt-to-exports ratio (in percent), 2006–2016 (selected): 109.4, 107.5, 103.7, 121.5, 106.7, 94.8, 91.6, 87.3, 81.0, 75.9, 70.4.
- Gross external financing need (in percent of GDP), 2006–2016 (selected): 2.3, 8.5, 11.8, 7.1, 8.8, 7.7, 8.1, 8.4, 8.3, 8.2, 8.1.

### Public debt dynamics table highlights
- Public sector debt-to-GDP (selected years):
  - 2006: 33.1
  - 2007: 30.4
  - 2008: 24.9
  - 2009: 28.4
  - 2010: 24.6
  - 2011: 21.3
  - 2016 (projection): 17.3
- Change in public sector debt (selected years): -4.6, -2.7, -5.5, 3.5, -3.9, -3.2, -0.6, -1.1, -0.9, -0.8, -0.7.
- Identified debt-creating flows (4+7+12), 2006–2016 (selected): -9.1, -7.5, -4.3, 0.1, -3.1, -4.8, -2.7, -2.7, -2.8, -2.7, -2.7.
- Primary deficit (percent of GDP), 2006–2016 (selected): -4.1, -4.4, -3.6, 0.6, -0.5, -3.4, -2.2, -2.3, -2.4, -2.3, -2.3.
- Revenue and grants (percent of GDP), 2006–2016 (selected): 25.5, 25.8, 26.6, 24.0, 25.0, 26.3, 25.9, 25.7, 25.8, 25.7, 25.7.
- Automatic debt dynamics (public) 2006–2016 (selected): -4.9, -3.1, -0.7, -0.5, -2.6, -1.4, -0.4, -0.4, -0.3, -0.4, -0.4.
- Public sector debt-to-revenue ratio (selected): 129.7, 117.9, 93.6, 118.8, 98.3, 81.1, 80.0, 76.3, 72.6, 69.9, 67.3.
- Gross financing need (in percent of GDP), 2006–2016 (selected): 1.4, 4.5, 1.0, 4.8, 6.5, -0.2, 1.0, 0.9, 0.6, 0.4, -0.1.

### Sensitivity and stress-test results
- Sensitivity tests use 10-year historical standard deviations for GDP growth, interest rates, and noninterest current account shocks; these show a moderate adverse impact on external and public indebtedness.
- Exchange rate shock:
  - A one-off 30 percent real depreciation of the exchange rate would increase the external debt ratio by about 9 percentage points above the baseline projections over the medium term.
  - The same shock would increase the public debt ratio by about 5 percentage points above the baseline projections over the medium term.
  - CGER estimates indicate that the Nuevo Sol is not misaligned.
- Contingent liabilities shock:
  - A contingent liabilities shock to the public sector of 10 percent of GDP would increase public debt by a similar amount over the medium term.
  - The public debt ratio would rise sharply in the short run and decline over the medium term; by 2016 the debt ratio would remain 9.2 percentage points above the baseline scenario.
- Combined shocks and other scenarios (as presented in bound-test figures) include permanent one-half standard deviation shocks to real interest rate, growth rate, and current account balance; and historical scenarios projecting five years ahead using ten-year historical averages.

### Key macroeconomic assumptions underlying baseline (selected)
- Nominal GDP (US dollars), 2006–2016 (selected): 92.3, 107.2, 126.8, 126.9, 153.8, 169.3, 180.1, 194.2, 210.2, 226.3, 244.2.
- Real GDP growth (in percent), 2006–2016 (selected): 7.7, 8.9, 9.8, 0.9, 8.8, 6.7, 5.2, 6.0, 6.0, 6.0, 6.0.
- GDP deflator (change in domestic currency), 2006–2016 (selected): 7.2, 1.9, 0.7, 2.2, 4.5, 4.2, 2.5, 2.0, 1.8, 1.6, 1.8.
- Nominal external interest rate (in percent), 2006–2016 (selected): 6.5, 7.4, 6.7, 4.8, 4.7, 4.7, 4.6, 4.5, 4.4, 4.4, 4.3.
- Growth of exports (US dollar terms, in percent), 2006–2016 (selected): 34.8, 18.0, 11.0, -11.7, 29.1, 18.0, 6.8, 8.2, 10.4, 10.5, 9.6.
- Growth of imports (US dollar terms, in percent), 2006–2016 (selected): 20.0, 31.2, 42.7, -24.5, 34.9, 19.3, 8.2, 7.5, 6.8, 6.4, 6.0.

### Policy-relevant implications (from the analysis)
- Under the baseline macrofiscal assumptions, Peru’s public sector debt and external debt ratios are projected to decline further over the medium term, reflecting strong growth, fiscal surpluses, and lower foreign currency exposure.
- Debt ratios are moderately vulnerable to macroeconomic volatility (growth, interest rate, current account shocks) but are particularly sensitive to large and permanent exchange rate depreciations and large contingent liabilities.
- Maintaining prudent fiscal balances and continued reduction in foreign-currency exposure of public debt would support the ongoing debt consolidation and reduce vulnerability to exchange rate shocks.
- Monitoring and managing contingent liabilities is important given that a 10 percent of GDP contingent liability shock would materially raise public debt ratios over the medium term.

*ANNEX I. PERU: DEBT SUSTAINABILITY ANALYSIS, 2011 Article IV Report*

### 2006. The strategy supports the government’s

### _cr1226 - 2006. The strategy supports the government’s

### Country Partnership Strategy (CPS) and Development Agenda
- The strategy supports the government’s developmental goals with emphasis on inclusive growth and poverty reduction.
- Agenda includes programs addressing fiscal, national competitiveness, infrastructure and social-sector needs.
- The country strategy underscores partnerships, flexibility and results orientation in public expenditure.
- The CPS projects financial assistance of up to US$3.5 billion between July 2007 and June 2011 and envisages a flexible lending program.
- The strategy includes development policy lending operations in the fiscal, social, and environmental sectors.
- The CPS Progress Report discussed by the Board on February 17, 2009 showed progress in the areas of fiscal management, sustained economic growth, and poverty reduction.
- The Bank provided US$1.36 billion in DPL-DDOs during FY 09 in response to contingent credit requests.
- Two investment lending operations in transport infrastructure and water and sanitation sector, and a CAT DDO were included in the program during the preparation of the CPS Progress Report.
- The overall medium term vision of the CPS continues to be relevant for Peru.

### Current Lending Portfolio and FY11 Approvals
- Peru’s current lending portfolio includes 19 active projects with a commitment of US$1.9 billion and an undisbursed balance of US$1.5 billion.
- Portfolio composition: thirteen investment loans, four DPL/DDOs and two GEF grants.
- Areas covered: economic policy, environment, social protection, transport infrastructure, water resources, among others.
- The Board approved ten new operations in FY 11 for a total commitment of US$524 million:
  - Third Environmental DPL (US$75 million)
  - Fourth Fiscal Management and Competitiveness DPL (US$100 million)
  - Third Results and Accountability in Social Sectors DPL (US$50 million)
  - first CAT DDO (US$100 million)
  - Irrigation in Sierra (US$20 million)
  - Second Justice Improvement (US$20 million)
  - Rural Water and Sanitation Program Additional Financing (US$30 million)
  - Results in Nutrition (US$25 million)
  - Lima Optimization of Water Systems (US$54.5 million)
  - Second Rural Electrification Project (US$50 million)
- The next CPS for the period FY2012−16 is expected to be presented to the Board in March 2012. Consultation processes started with civil society, private sector and academia; formal consultation with the new government administration expected in November–December 2011.

### Analytical and Trust Fund Activities
- The Bank has an extensive program of analytical and advisory activities for FY 12−14, including economic and sector work and non-lending technical assistance.
- Economic and sector work covers: public expenditure, infrastructure, gas development strategy, decentralization, labor markets, social sectors, climate change, and housing and municipal financing.
- The Bank’s TF portfolio is currently over US$27 million and has been expanding significantly.
- TFs complement other WB support by providing AAA and technical assistance and support harmonization and alignment of funding from various development partners behind core government programs.

### Bank-Fund Collaboration in Specific Areas
- Tax Reform and Fiscal Decentralization:
  - Fund staff led assistance in designing tax reform.
  - Joint work with the World Bank and IDB on drafting laws and regulations for fiscal decentralization.
  - World Bank focused on decentralization of the social sectors and pro-poor spending policies.
- Financial Sector:
  - A joint FSAP was completed in May 2001.
  - Follow up technical assistance provided by both institutions.
  - Joint FSAP updates completed in June 2005 and April 2011.
- Public Sector Management:
  - Collaboration on results based budgeting, implementation of a Treasury Single Account and modernization of budget processes, institutions and information systems.
- Customs Administration Modernization:
  - A needs assessment mission was undertaken together with the IMF to develop an action plan for modernizing customs administration.
  - The joint team presented a technical report to SUNAT.

### IBRD Portfolio Status (As of September 5, 2011) — Investment and Adjustment Loans (In millions of US$)
- Investment Projects (Net Commitment Amount / Undisbursed Balance at FY / Total Undisbursed Balance / Total Disbursement / Disbursement in FY):
  - National Rural Water Supply — Approval 8/29/2002 — SIL — 80.0 / 42.1 / 40.5 / 39.5 / 1.6
  - Regional Transport Decentralization — Approval 7/12/2005 — SIL — 50.0 / 31.9 / 29.5 / 20.5 / 2.4
  - Real Property Rights II — Approval 3/14/2006 — SIL — 25.0 / 8.0 / 7.4 / 17.6 / 0.6
  - Sierra Rural Development Project — Approval 4/24/2007 — SIL — 20.0 / 9.7 / 8.5 / 11.5 / 1.2
  - Rural Electrification — Approval 3/7/2006 — SIL — 50.0 / 5.2 / 3.7 / 46.3 / 1.5
  - (APL2) Health Reform Program — Approval 2/17/2009 — APL — 15.0 / 13.8 / 13.8 / 1.2 / 0.0
  - Decentralized Rural Transport Project — Approval 12/19/2006 — SIL — 50.0 / 12.2 / 10.2 / 39.8 / 2.0
  - Sierra Irrigation — Approval 7/27/2010 — SIL — 20.0 / 19.0 / 19.0 / 1.0 / 0.0
  - Water Resources Mgmt. — Approval 7/2/2009 — SIL — 10.0 / 9.5 / 9.5 / 0.5 / 0.0
  - Justice Services Improv. II — Approval 11/18/2010 — TAL — 20.0 / 20.0 / 19.5 / 0.5 / 0.5
  - Optimization of Lima Wat & Sewerage — Approval 4/7/2011 — SIL — 54.5 / 54.5 / 54.5 / 0.0 / 0.0
  - Results Nutrition for Juntos SWAp — Approval 3/8/2011 — SIL — 25.0 / 25.0 / 25.0 / 0.0 / 0.0
  - Second Rural Electrification — Approval 4/21/2011 — SIL — 50.0 / 50.0 / 50.0 / 0.0 / 0.0
  - Subtotals: 469.5 / 300.9 / 291.1 / 178.4 / 9.8
- Adjustment (DPL/DPL-DDO and CAT DDO) (Net Commitment Amount / Undisbursed Balance at FY / Total Undisbursed Balance / Total Disbursement / Disbursement in FY):
  - 2nd Results & Accnt.(REACT)DPL/DDO — Approval 4/9/2009 — DPL — 330.0 / 310.0 / 310.0 / 20.0 / 0.0
  - First Prog. Environ DPL/DDO — Approval 2/17/2009 — DPL — 330.0 / 310.0 / 310.0 / 20.0 / 0.0
  - 2nd Prg Fiscal Mgmt & Comp. DPL/DDO — Approval 8/5/2008 — DPL — 700.0 / 480.0 / 480.0 / 220.0 / 0.0
  - CAT DDO — Approval 12/9/2010 — DPL — 100.0 / 100.0 / 100.0 / 0.0 / 0.0
  - Subtotals: 1,460.0 / 1,200.0 / 1,200.0 / 260.0 / 0.0
- Total IBRD Portfolio: 1,929.5 / 1,500.9 / 1,491.1 / 438.4 / 9.8
- Notes: APL: Adaptable Program Loan; DPL: Development Policy Loan; SIL: Specific Investment Loan; and TAL: Technical Assistance Loan.
- Table caption: Peru: IBRD Portfolio Status — As of September 5, 2011

### Committed and Disbursed Outstanding Investment Portfolio (As of August 31, 2011) — Selected entries (In millions of US$)
- Total Portfolio summary line: Committed 594.7 / Disbursed 142.0 / **Quasi Equity 49.9 / *GT/RM Participant 2.4 / Loan 249.0 ; Disbursed Outstanding: Loan 490.0 / Equity 123.6 / **Quasi Equity 47.8 / *GT/RM Participant 1.9 / Loan Participant 69.0
- Selected committed/disbursed examples:
  - Agrokasa — FY Approval 2006 — Committed Loan 5.5 / Disbursed Loan 5.5
  - B.continental — FY Approval 2007/08 — Committed Loan 69.3 / Disbursed Loan 69.3 ; Disbursed Outstanding Participant 69.0
  - Peru lng — FY Approval 2008 — Committed Loan 293.4 / Disbursed Loan 293.4
  - Cheves — FY Approval 2011 — Committed Loan 70.0 / Disbursed Loan -
  - (Table lists multiple firms with exact committed and disbursed figures as of August 31, 2011)

### Relations with the Inter-American Development Bank (IDB)
- Country Strategy (2007−2011):
  - Continues focus on competitiveness, social development, and modernization of the State.
  - IDB supports Peru’s development agenda through 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.
  - Government demands increasingly linked to environmental sustainability; “green cluster” operations include water and sanitation, solid waste, energy, climate change, natural disasters and agriculture.
- New country strategy drafting for 2012−2016:
  - IDB projects flexibility in adapting the financial envelope to the financial needs of the country.
  - The new 2012−2016 Bank’s country strategy will probably agree on making sustainable growth and poverty-inequality reduction as main objectives and align actions with Peru’s National Plans and the incoming administration’s policy road map.
- Lending (As of September 9, 2011):
  - Bank’s portfolio of active, public sector operations: 28 loans for a total amount of US$681, 76 million, of which US$443.78 million (65 percent) had been disbursed.
  - Public sector lending program for 2011 comprises five policy-based loans for US$125 million and five investment loans for US$196 million, and one contingent loan for natural disaster emergencies for US$100 million, seven of them pending approval.
- Private sector operations:
  - SCF portfolio in execution: seven operations amounting to US$249 million and a guarantee mechanism for Continental Bank for US$100 million.
  - IIC 2011 portfolio: approved US$25.6 million.
  - OMJ portfolio: four operations amounting US$20 million; two regional operations for US$5 million that also benefit Peru.
  - Disbursement projections for SCF & OMJ total US$79 million as of September 2011.
  - Private sector lending for 2011 includes three SCF projects for US$174 million, two OMJ operations for US$13 million, MIF pipeline US$8.7 million, IIC five operations for US$31 million.

### IDB SG Loan Portfolio by Sector (As of September 9, 2011) (In millions of U.S. dollars)
- Agriculture — Commitments 50.0 / Disbursements 36.2 / % Disbursed 72.5
- Environmental — Commitments 63.4 / Disbursements 13.4 / % Disbursed 21.1
- Science and Technology — Commitments 25.0 / Disbursements 21.7 / % Disbursed 86.6
- Urban Development — Commitments 60.0 / Disbursements 55.9 / % Disbursed 93.1
- Social Investment — Commitments 26.2 / Disbursements 8.7 / % Disbursed 33.0
- Modernization of the State — Commitments 90.6 / Disbursements 39.3 / % Disbursed 43.3
- Water and Sanitation — Commitments 112.6 / Disbursements 101.3 / % Disbursed 89.9
- Transportation — Commitments 249.0 / Disbursements 166.9 / % Disbursed 67.0
- Capital Markets and Financial Institutions Division — Commitments 5.0 / Disbursements 0.6 / % Disbursed 11.8
- Total — Commitments 681.8 / Disbursements 443.8 / % Disbursed 65.1

### Statistical Issues and Recommendations
- Macroeconomic statistics broadly adequate; Peru subscribes to the Special Data Dissemination Standard (SDDS). A data ROSC was prepared and published in 2003.
- Scope for improvement identified:
  - (i) coordination among agencies compiling official statistics to avoid duplication and 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, including report forms for the central bank, other depository corporations, and other financial corporations;
  - (v) expanding scope of data sources for compiling financial flows of individual residents.
- Real Sector and Prices:
  - Revised GDP series published in 2000 used 1994 benchmark as base year; post-1994 estimates largely based on extrapolation due to limited periodic source data.
  - INEI is working on a new national account series implementing the 1993 SNA and using 2007 as the base year.
  - Four national accounts statistics missions visited in November 2008, May 2009, September 2009, and September 2010.
  - Official measure of inflation: CPI for Metropolitan Lima compiled by INEI. A 2009 law requires INEI to compile a new national level CPI as the future official CPI.
  - Since January 2010, Metropolitan Lima CPI uses updated weights from the 2008/09 ENAPREF. Since January 2011, city level indices compiled for 24 departmental capitals and another large urban area using 2008/09 ENAPREF weights.
  - A national level CPI was planned to be disseminated in February 2012 starting with the January 2012 index.
  - An STA mission on the CPI was conducted in May 2–13, 2011.
- Wholesale Price Index (WPI):
  - Statistical techniques generally follow international standards, but weights are outdated and derived from the 1994 input-output table and other reports.
- Labor Market Indicators:
  - Authorities monitor open unemployment, underemployment, employment, and remunerations.
  - Monthly wage data for Metropolitan Lima is timely; other areas have longer delays.
  - Nationwide unemployment and underemployment surveyed quarterly.
  - Monthly employment indices for private sector and government are available and relatively timely.
- Fiscal Sector:
  - The Central Bank compiles government finance statistics (GFS) following the GFSM2011 for general government and subsectors; data reported on a cash basis and financial assets and liabilities at face value.
  - Authorities have not yet sent information on components of expenditures by function to the Fund.
  - Coverage of published national budget data is narrower than the fiscal statistics prepared for the combined public sector.
  - New budget aligned to GFSM 2001 used for the 2009 budget processing.
  - Problems of coordination persist among GFS compiling units in the Ministry of Finance and in the central bank.
  - Authorities report data for publication in the Government Finance Statistics Yearbook (GFSY) using the GFSM.

*Source: PERU 2011 ARTICLE IV REPORT—INFORMATIONAL ANNEX (selected excerpts).*

### 2001. No high frequency data is reported for

### _cr1226 - 2001. No high frequency data is reported for

### Monetary Sector
- The central bank (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 methodology.
- Main discrepancies relative to the Manual:
  - 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 at market prices.
- Technical assistance and SRF migration:
  - Mission visited in January 2007 to assist migration to the new standardized report forms (SRFs) for reporting monetary data to the IMF; SRF for the central bank was finalized with recommended improvements in classification and sectorization.
  - Follow-up mission in September 2008 completed SRF work for the central bank and developed a bridge table linking source data reported by banks to the BCRP to the report form 2SR (other depository corporations).
  - Mission identified shortcomings in the database management that generates accounts for the other depository corporations sector at the BCRP.
  - Although groundwork for migration to the SRFs was finalized by technical assistance, the BCRP has not yet started reporting monetary data using the SRFs and no set date is foreseen for migration.
- Financial soundness indicators (FSIs):
  - Country started reporting data and metadata for FSIs with a quarterly frequency in June 2011.
  - Latest data received correspond to the second quarter of 2011.

### External Sector
- Balance of payments and IIP:
  - BCRP prepares quarterly balance of payments and international investment position data largely in line with BPM5 recommendations.
  - Departures from BPM5 include:
    - Lack of coverage of assets held abroad and land acquisition abroad by residents.
    - Not recording on an accrual basis some external debt transactions.
- International reserves reporting:
  - BCRP has reported weekly data on 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 the 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).
- External debt and dissemination:
  - 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.

### Data Reporting Frequency and Quality (as of September 30, 2011)
- Examples of latest observations, dates received, and reporting frequencies (selected series):
  - Exchange Rates: Date of latest observation August 2011; Date received 9/9/11; 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 August 2011; Date received 9/28/11; Frequency of Data D; Frequency of Reporting M; Frequency of Publication W.
  - Reserve/Base Money: Date of latest observation July 2011; Date received 9/9/11; 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 July 2011; Date received 9/9/11; Frequency of Data W; Frequency of Reporting M; Frequency of Publication W.
  - Interest Rates: Date of latest observation July 2011; Date received 9/9/11; Frequency of Data D; Frequency of Reporting M; Frequency of Publication D.
  - Consumer Price Index: Date of latest observation August 2011; Date received 9/29/11; 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.
  - External Current Account Balance: Date of latest observation Q4 2010; Date received 7/12/11; 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.
- Notes:
  - Every Friday the Central Bank disseminates daily net international reserves, and weekly International Reserve Assets and Reserve Liabilities.
  - Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).
  - Data quality assessments reflect findings from the data ROSC published in October 2003 and the mission that took place during February 12–26, 2003.

### Technical Assistance (selected entries)
- Department FAD:
  - Fiscal regimes for copper mining: an international comparison — September 2011.
  - Fiscal consideration in establishing a sovereign wealth fund — March 2011.
  - Modernizing treasury management and improving public accounting — November-December 2010.
  - Public financial management — June 2005, March 2006, November 2006, May 2007–present.
  - Tax policy and administration, customs administration — February and June 2009; April, June and October 2008; February, June and August 2007; February, September, and November 2006; and May 2005.
  - Public investment and fiscal policy, including issues related to PPPs — August 2004, September 2003, and September 2002.
  - Fiscal rules — November 1999.
- Department MCM:
  - Mortgage covered bonds — May and August 2009.
  - Supervision of capital markets — September 2008.
  - Implementation of Basel II — March 2008.
  - Strengthening the capital markets — October 2007, July 2007, April 2007.
  - Financial sector supervision — April 2006.
  - Consumer protection in the banking system — April 2005.
  - Central bank organization — March 2005.
  - Inflation targeting — April, December 2002; February 2003; March and September 2004; May 2002.
  - Foreign exchange operations — October 2002.
  - Accounting and organizational issues — August 2002.
  - Monetary operations and government securities market — March 2002.
- Department LEG:
  - AML/CFT national strategies and coordination — January 2011–Present.
  - ML/FT risk assessment — August 2009–July 2011.
  - Strengthening the AML/CFT financial supervisory framework — June 2008–July 2010.
- Department STA:
  - National account statistics, new base year for the national account series; and Government Finance Statistics 2001 — September 2010, May and September 2009; March, September and November 2008; October 1999; and January 1998.

### Executive Board Assessment (Public Information Notice No. 11/158, December, 14, 2011)
- Background and near-term developments:
  - Real GDP expanded 8.75 percent in 2010.
  - Real GDP growth expected to reach 6.75 percent in 2011.
  - Inflation fell to 0.25 percent in 2009 and rebounded to 2 percent by end-2010.
  - Credit growth stayed at about 20 percent in 2010–11.
  - Real GDP growth projected at 5.25 percent in 2012; inflation projected to decline to 2.5 percent in 2012.
  - External current account deficit projected to remain around 2.5 percent of GDP in 2012.
- Fiscal and monetary policy assessment:
  - Government unwound previous fiscal stimulus in 2011; fiscal position switched to an annualized fiscal surplus of about 5.5 percent of GDP in the first half of 2011.
  - Proposed 2012 budget aims at a surplus of 1 percent of GDP and entails a structural expansion of 0.75 percent of GDP.
  - Monetary policy was tightened with policy rate increased a total of 300 basis points to 4.25 percent between mid-2010 and May 2011; central bank remained on hold thereafter.
- Main conclusions and recommendations:
  - Policy mix broadly adequate to maintain macro stability and foster growth; main challenge is timely and flexible policy implementation amid heightened external uncertainty.
  - 2012 budget proposal is broadly appropriate; additional short-term social spending can be accommodated within 2012 expenditure limits.
  - Given uncertain external environment, monetary policy can remain on hold; staff supports central bank decision to keep policy rates unchanged until clearer global outlook emerges.
  - Policies should remain flexible: monetary easing as inflation prospects decline and output gap widens; fiscal policy to activate automatic stabilizers; some foreign exchange support warranted if global financial volatility occurs; reserve requirements may be loosened if liquidity conditions become stressed or domestic credit decelerates too rapidly.
  - If tail risks materialize, additional policy stimulus can be deployed gradually using accumulated buffers; central bank can inject considerable liquidity and cut rates more aggressively if external financial conditions deteriorate (acknowledging potential foreign exchange market pressures).
  - Emphasize infrastructure and maintenance projects to sustain domestic demand and employment under adverse global scenarios.
  - Fiscal framework recommendations:
    - Give more weight to structural measures to anchor fiscal policy to reduce procyclicality, enhance predictability, and accumulate buffers.
    - Staff sees merits of targeting moderate structural overall balances of 1 percent of GDP in the medium-term.
    - Calibrate Fiscal Responsibility and Transparency Law parameters to maintain a relatively stable structural result with limits to expenditure growth unless discretionary reaction is warranted.
  - Tax policy recommendations:
    - Tax mobilization important to sustain social agenda; authorities plan to strengthen tax administration to increase the tax ratio to 18 percent of GDP by 2016.
    - Approval of revised mining taxation framework is a welcome first step; further efforts to reduce tax evasion are needed and tax measures could be considered if evasion-reduction efforts fall short.
  - Exchange rate and de-dollarization:
    - Improved fundamentals will foster further de-dollarization, allowing the exchange rate to play a larger role as shock absorber.
    - Staff supports some additional exchange rate flexibility, gradually implemented, to encourage hedging instrument development and private sector foreign exchange risk management.
  - Financial sector and macroprudential framework:
    - Financial sector remains sound, profitable and well-capitalized.
    - Most prudential regulations aligned with Basel III will be applied ahead of internationally-agreed schedule.
    - Monitoring corporate balance sheets, including foreign exchange and derivative positions, is critical.
    - Formalizing an institutional setup for macro-prudential policies would facilitate monitoring systemic risks and enhance coordination across institutions.
  - Structural reform agenda to sustain high potential growth:
    - Key pillars: (i) enhancing competitiveness by boosting human capital and infrastructure and maintaining labor market flexibility; (ii) improving business climate to foster investment and innovation (including enhancing formality); (iii) further developing local capital markets to facilitate investment and better allocate savings.

### Selected Economic Indicators (selected rows and projections)
- Real GDP (annual percent change): 2006 7.7; 2007 8.9; 2008 9.8; 2009 0.9; 2010 8.8; 2011 6.7; 2012 5.2.
- Real domestic demand (annual percent change): 2006 10.3; 2007 11.8; 2008 12.3; 2009 -2.8; 2010 12.8; 2011 8.1; 2012 5.5.
- Private sector real domestic demand (annual percent change): 2006 10.3; 2007 12.2; 2008 12.4; 2009 -5.7; 2010 12.2; 2011 9.6; 2012 4.0.
- Consumer Prices (end of period): 2006 1.1; 2007 3.9; 2008 6.7; 2009 0.2; 2010 2.1; 2011 3.9; 2012 2.5.
- Consumer Prices (period average): 2006 2.0; 2007 1.8; 2008 5.8; 2009 2.9; 2010 1.5; 2011 3.2; 2012 2.8.
- Exports (annual percent change): 2006 37.2; 2007 17.9; 2008 10.4; 2009 -13.1; 2010 31.9; 2011 19.6; 2012 7.0.
- Imports (annual percent change): 2006 22.9; 2007 32.0; 2008 45.2; 2009 -26.1; 2010 37.1; 2011 21.2; 2012 8.1.
- Terms of trade (deterioration -) (annual percent change): 2006 26.6; 2007 3.6; 2008 -14.5; 2009 -3.1; 2010 18.2; 2011 5.8; 2012 0.0.
- Broad money (annual percent change): 2006 9.0; 2007 22.2; 2008 24.9; 2009 5.9; 2010 23.8; 2011 15.4; 2012 12.4.
- Net credit to the private sector (annual percent change): 2006 6.4; 2007 30.2; 2008 32.4; 2009 1.3; 2010 14.6; 2011 20.5; 2012 14.4.
- NFPS Revenue (percent of GDP): 2006 25.4; 2007 25.8; 2008 26.6; 2009 24.0; 2010 25.0; 2011 26.3; 2012 25.9.
- NFPS Overall Balance (percent of GDP): 2006 2.3; 2007 3.1; 2008 2.3; 2009 -1.6; 2010 -0.5; 2011 2.2; 2012 1.1.
- External current account balance (percent of GDP): 2006 3.1; 2007 1.4; 2008 -4.2; 2009 0.2; 2010 -1.5; 2011 -2.5; 2012 -2.6.
- Gross reserves (millions of U.S. dollars): 2006 17,329; 2007 27,720; 2008 31,233; 2009 33,175; 2010 44,150; 2011 48,243; 2012 50,243.
- Gross domestic investment (percent of GDP): 2006 20.0; 2007 22.8; 2008 26.9; 2009 20.7; 2010 25.0; 2011 24.6; 2012 24.6.
- National savings (percent of GDP): 2006 23.2; 2007 24.2; 2008 22.7; 2009 20.9; 2010 23.5; 2011 22.1; 2012 22.0.
- Nominal GDP (S/. billions): 2006 302.3; 2007 335.5; 2008 371.1; 2009 382.3; 2010 434.6; 2011 485.3; 2012 524.1.
- GDP per capita (in US$): 2006 3,339; 2007 3,800; 2008 4,425; 2009 4,361; 2010 5,205; 2011 5,669; 2012 5,951.

*International Monetary Fund — 2011 ARTICLE IV REPORT — INFORMATIONAL ANNEX (Peru).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1226.pdf_