Press Release No. 07/145

Press Release: IMF Executive Board Completes First Review under Peru's Stand-By Arrangement

June 27, 2007

The Executive Board of the International Monetary Fund (IMF) today completed the first review of Peru's economic performance under a 25-month Stand-By Arrangement in the amount equivalent to SDR 172.4 million (about US$261 million).

The authorities have indicated that they are treating the arrangement as precautionary. The arrangement was approved on January 26, 2007 (see Press Release No. 07/15).

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:

"Over the past several years, Peru has benefited from record high and broad-based economic growth, a strong external position, low inflation, and declining vulnerabilities, owing to the implementation of sound macroeconomic policies and a favorable external environment. Continued commitment to sound policies and structural reforms will be crucial to entrench economic growth, strengthen the economy's resilience to shocks, and alleviate poverty.

"The authorities' strategy to improve the targeting and effectiveness of social assistance programs will help intensify their poverty alleviation efforts, which should be based on a broad consensus. The authorities intend to buttress the capacity of the Interministerial Committee for Social Assistance to ensure that the strategy is well coordinated and implemented in a timely manner.

"Sound fiscal policies to underpin stability remain the backbone of the program, which aims to address critical social and infrastructure needs by ensuring high-quality public spending. The restructuring of the National System of Public Investment will expedite approval of public investment projects while protecting their quality. Measures are being taken to bolster the capacity of subnational governments to evaluate and execute projects, including with private sector support. Prompt establishment of a comprehensive legal framework for public-private partnerships will help ensure that public investment remains of high quality, and that there is an equitable sharing of risks between the public and private sectors.

"In amending the Fiscal Responsibility and Transparency Law, the authorities' intention to introduce strict sanctions for noncompliance with the Law's fiscal goals is welcome. To support fiscal prudence, a unit has been established in the Ministry of Finance to monitor subnational governments' compliance with the Law, and efforts will be made to ensure that the devolution of fiscal functions to subnational governments preserves effective accreditation mechanisms and fiscal prudence.

"Tax incentives have been rationalized, certain regional exemptions have been replaced with budgetary transfers, and a timetable has been set to reduce distortionary taxes. It is important to resist pressures to grant new exemptions. Tax administration will be strengthened, building on recent gains.

"Monetary policy has been prudent. The new inflation target should further entrench price stability and help reduce dollarization. In light of the comfortable level of official reserves and the increased resilience of the banking system to exchange rate shocks, some greater exchange rate flexibility should be possible, to promote awareness of currency risks and further develop the domestic financial markets.

"Financial sector reforms have helped reduce the risks associated with financial system dollarization, but further measures are needed to reduce the dollarization of mortgage loans. Envisaged legislation to strengthen regulatory oversight of public financial institutions is welcome, and there is a need to ensure that public banks do not undermine financial sector competition," Mr. Portugal said.