Public Information Notice: IMF Concludes 2002 Article IV Consultation with Peru

December 23, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On December 13, 2002, the Executive Board concluded the 2002 Article IV consultation with Peru and completed the First Program Review Under the Stand-By Arrangement for Peru approved on February 1, 2002.1


After several years of strong performance, Peru's economy weakened in the late 1990s, mainly as a result of adverse external shocks, a weakening structural reform effort, and domestic political turmoil. Real GDP growth averaged 7 percent during 1993-97, but only 1 percent over 1998-2001. Inflation declined progressively since the early 1990s and was slightly negative by end-2001.

In 2002, economic activity is recovering and real GDP is expected to grow by 3.7 percent, and annual inflation is projected at 2 percent. Employment during the first nine months of the year rose 2.3 percent with respect to its level in the same period a year earlier. After a sizeable fiscal stimulus in the second half of last year, fiscal policy was tightened in early 2002, and the combined public sector deficit is projected at 2.3 percent of GDP for the entire year. The external position is robust, with an expected accumulation of official international reserves of over US$1 billion. During 2002, progress was made in introducing structural reforms in the fiscal area, including on tax and pension system reform, fiscal transparency, and fiscal rules. The authorities also introduced an inflation targeting framework for monetary policy, with the medium-term inflation-target centered at a midpoint of 2.5 percent plus/minus 1 percentage point. Moreover, continued efforts have been made to strengthen the banking system, along the lines of suggestions from the 2000 Financial Sector Assessment Program. Bank portfolios and profitability improved, loan provisioning was high, and risk-adjusted capital-asset ratios increased for the system as a whole. Credit to the private sector has been basically flat, but there are signs that it is picking up.

The program for 2003 is based on continued economic recovery, with GDP growth projected at 3.5-4.0 percent. Economic activity is expected to pick up owing to an improved investment climate, reflecting a more stable external and domestic political environment. Inflation is targeted at 2.5 percent, and international reserves would increase moderately. The external current account deficit is projected to fall below 2 percent of GDP, with continued strong growth of traditional exports and a pick up in nontraditional exports under the expanded U.S. trade preference arrangement for Andean countries.

Continuing with their strategy of gradual medium-term fiscal consolidation, the authorities aim to reduce the combined public sector deficit to 1.9 percent of GDP in 2003 (reflecting mainly the full-year effect of tax reform measures implemented in 2002). Further tax reform measures are planned in 2003, as are continued efforts to fortify the financial position of the pension system, improve debt management, and strengthen bank supervision. Also, a phased introduction of fiscal decentralization will begin in 2003.

Executive Board Assessment

Directors commended the authorities for their skillful economic management that had facilitated a positive macroeconomic performance in 2002, despite the weakening external environment and difficult political situation. Indeed, the Peruvian economy has shown considerable resilience to adverse developments, especially compared with the region. Directors stressed that continued implementation of sound macroeconomic policies and structural reforms, including a strong effort on institution building, is essential for Peru to sustain growth, resist external shocks, and continue to successfully address the risks related to the highly dollarized banking system and the relatively large public debt.

Directors supported the authorities' overall policy framework, which aims at maintaining macroeconomic stability and reinforcing an already solid financial system. They noted that the policy framework centers appropriately on medium-term fiscal consolidation, inflation targeting with a floating exchange rate, and supporting structural reforms. Directors stressed that the authorities should garner the necessary political consensus for this policy agenda, as lack of adequate ownership could pose a serious risk to successful policy implementation. Equally, economic performance would benefit from a strengthening of governance in public sector operations.

Directors endorsed the authorities' strategy of gradual fiscal consolidation while supporting the economic recovery. They emphasized that completing the comprehensive tax reform begun in 2002 by phasing out regional and sectoral tax exemptions was key to putting the public finances on a sustainable basis. Most Directors expressed concern that the recent tax amnesty could undermine compliance and suggested that it be clearly indicated to taxpayers that the government will not rely on tax amnesties in the future. With regard to expenditures, Directors welcomed the recent restraint on increases in wages and pensions. They also welcomed the on-going work to improve the quality of public expenditure to ensure that the most vulnerable of the population are well protected. In addition, it would be important to increase the level of social spending in order to alleviate poverty-this could also help mobilize political acceptance for the reform agenda.

Directors stressed the importance of carrying out fiscal decentralization in a cautious and fiscally neutral manner. They encouraged the authorities to work closely with the World Bank and Inter-American Development Bank in implementing decentralization and considered that pilot programs for the transfer of expenditure responsibilities could be useful vehicles to test the fiscal impact of decentralization. Directors also stressed the importance of early congressional approval of the revised fiscal responsibility law as it contains important regulations on regional and local government finances.

Directors welcomed the authorities' intention to reactivate the domestic bond market, pointing out that the development of this market would have broad positive effects for the economy and provide protection against adverse developments in international capital markets.

While noting the change in the privatization strategy in view of strong public opposition to outright privatization, Directors encouraged the authorities to continue to seek ways for private sector participation in state enterprise operations. They welcomed the authorities' plans for continued reform of the public pension system. Directors warned, however, that the proposal to lower the retirement age in the public pension system was likely to have significant negative consequences for the public finances.

Directors endorsed the authorities' inflation-targeting framework for monetary policy and commended the central bank for maintaining inflation at low levels. They recommended continued work to refine the inflation forecasting process and to strengthen its integration with the monetary policy decision-making framework.

Directors considered that the current flexible exchange rate policy has served Peru well in adjusting to external shocks, and they supported the authorities' intention to continue with the present regime.

Directors welcomed the sound financial position of the banking system, which has improved in recent years in the wake of the significant consolidation that the system has experienced. They considered it important that the supervisory agency continue to enhance prudential oversight, especially in evaluating credit risk derived from foreign-currency lending operations and in ensuring that all banks have adequate capital.

Directors considered reducing the high degree of financial dollarization as an important goal that, while requiring time, will depend mainly on continued pursuit of prudent macroeconomic policies, aided by a strong prudential framework and development of the domestic capital market. They noted that the high level of official international reserves has been a key factor in Peru's ability to avoid the kind of contagion that has affected other highly dollarized economies in the region, and they welcomed the authorities' commitment to keep reserves at high levels.

Directors welcomed the authorities' progress with anti-money laundering and combating the financing of terrorism and encouraged them to continue their efforts in this area.

Directors supported the authorities' intention to continue to maintain both an open trade and payments regime and the current relatively flexible system of labor market norms. They encouraged the authorities to implement as soon as possible a mechanism for protecting the unemployed.

Directors noted that Peru was one of the early subscribers to the Special Data Dissemination Standard. They welcomed the improved transparency in monetary policy following the adoption of inflation-targeting and strengthened banking system data. Directors viewed the Reports on the Observance of Standards and Codes modules on fiscal transparency and data as important steps to improving information dissemination.

Peru: Selected Economic Indicators










(Annual percentage change, unless otherwise indicated)


Real economy


Real GDP






Inflation 1/






Terms of trade






Real effective exchange rate






(depreciation -) 1/ 2/


Nominal exchange rate (in soles per U.S. dollar) 1/






Money and credit


Base money






Broad money 3/






Credit to private sector 3/







(In percent of GDP, unless otherwise indicated)


Savings and investment


Gross domestic investment






National savings






External savings






Balance of payments


Current account






Capital and financial account






Gross official reserves (in months of imports






of goods and services) 1/


Gross official reserves (in percent of broad money) 1/






Public sector


Combined public sector primary balance 4/






Combined public sector overall balance 4/






Public sector medium- and long-term external debt






Sources: Central Reserve Bank of Peru; and IMF staff estimates and projections.

1/ At end of period.

2/ Based on Information Notice System. Data for 2002 correspond to September 2002.

3/ Flows in foreign currency are valued at program exchange rate.

4/ Revenue excludes privatization receipts.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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