Press Information Notice: IMF Concludes Article IV Consultation with Peru

June 22, 1998

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 June 3, 1998, the Executive Board concluded the Article IV consultation with Peru1.


Following the successful implementation of the rights accumulation program and the 1993-95 program supported by a first extended arrangement from the Fund, in July 1996 the Executive Board of the Fund approved the current extended arrangement in support of Peru’s program for 1996–98, which aims at consolidating the gains made under the previous arrangement.

Building on the progress made in 1996, macroeconomic performance in 1997 was strong. Output grew by 7.4 percent, led by investment and exports, with some pick up in consumption toward year-end. Inflation dropped from 11.8 percent in 1996 to 6.5 percent in 1997 while the decline in core inflation—which excludes volatile food items and urban transportation—was somewhat less pronounced (from 9.9 percent to 7.8 percent). The external current account deficit narrowed from 5.9 percent of GDP in 1996 to 5.2 percent in 1997 reflecting a significant increase in the volume of exports, including nontraditional exports, and an improvement in the terms of trade. Imports grew broadly in line with GDP. About two thirds of the external current account deficit was covered by long-term capital inflows. The net international reserves of the Central Reserve Bank of Peru (BCRP) rose by US$1.6 billion in 1997, with gross reserves reaching the equivalent of close to 12 months of imports of goods and services by year-end.2 This strong performance took place in the context of a flexible exchange rate regime with open trade and capital account. As in the previous years, all performance criteria under the program were observed.

In 1997 the overall position of the combined public sector was significantly better than envisaged in the program, as it reached equilibrium while the primary surplus of the combined public sector improved from 1.3 percent of GDP in 1996 to 1.7 percent. In 1997 the Peruvian government adopted various measures of tax rate reduction designed to enhance the competitiveness of the economy and offset in part pressures toward the real appreciation of the sol. The government also successfully contained the rate of growth of expenditure, despite preventive work undertaken in the second half of the year to minimize the effect of El Niño weather disturbance. The growth of credit to the private sector in real terms declined from 32 percent by end-1996 to 24 percent by end-1997. During the year commercial banks foreign borrowing abroad increased significantly. In 1997 the authorities proceeded with their structural reform program, although some delays were recorded in implementation.

Executive Board Assessment

Executive Directors noted that since the beginning of the 1990s Peru had established a record of prudent and skillful economic management, and they commended the authorities for the sustained implementation of wide-ranging structural reforms. Directors praised the authorities for their macroeconomic management during 1997, which had helped Peru weather relatively well the recent turbulence in world financial markets. They remarked that economic performance in 1997 had been impressive, with high growth, a further reduction in the rate of inflation, and some strengthening in the external position, accompanied by improvements in the confidence of domestic and foreign investors. They also welcomed the observance of all performance criteria under the program. Directors emphasized the need for the continued implementation of prudent macroeconomic policies and structural reforms in 1998, particularly in the context of the less favorable external environment.

Directors expressed satisfaction with the fiscal consolidation achieved during 1997, and noted that, in a context of large capital inflows and rapid economic growth, the authorities had acted well by tightening the fiscal stance beyond the program’s objective while undertaking preventive measures to help mitigate the adverse effects of El Niño on the economy. They noted that further progress had been made in 1997 in improving tax compliance, and encouraged the authorities to persevere in 1998 with their efforts to strengthen tax administration while strictly containing expenditure growth. Noting the relatively low revenue-to-GDP ratio and the scope for harnessing additional revenues by reducing the size of the informal sector, several Directors called for additional efforts to widen the tax net. Such resources also would be essential to allow for much needed increases in social outlays.

Directors commended the authorities for the progress made so far in strengthening the domestic financial system, and welcomed their plans to further enhance prudential regulation and supervision. Directors noted that in the context of a high degree of dollarization it was allthe more important to strengthen the prudential stance, including banks’ capital requirements. Several Directors also stressed that the high degree of dollarization made it particularly desirable to rely on a strong fiscal stance to control aggregate demand. Several Directors encouraged the authorities to keep developments in bank borrowing abroad under close scrutiny and to maintain an open view regarding actions to enhance prudential requirements in this area.

Directors noted that the external current account deficit would widen in 1998, in part because of the effects of El Niño, and stressed the importance of strengthening the external current account position in the coming years. Directors recognized the significant contribution of foreign direct investment to financing the deficit, but noted the importance of reducing the country’s reliance on foreign savings, including by raising private savings and maintaining a strong fiscal position over the short and medium term. Directors welcomed the authorities’ readiness to take prompt action to tighten fiscal policies if the external environment turned out to be worse than currently envisaged. Directors also noted that the successful resolution of the external debt issues had significantly improved Peru’s medium-term balance of payments outlook, and welcomed its expected graduation from Paris Club rescheduling by end-1998, at the expiration of the current multi-year rescheduling arrangement.

Directors encouraged the authorities to deepen and broaden structural reforms. They noted that in 1998 it will be important for the authorities to adhere closely to the structural reform program, regain momentum under the privatization process, continue labor market liberalization to accelerate the absorption of the informal sector into the formal economy, and move ahead decisively with the program of concessions. While welcoming the authorities’ efforts and determination to continue improving social conditions in Peru, Directors emphasized the importance of accelerating the pace of reforms in the social area and increasing social spending.

Peru: Selected Economic Indicators

  1994 1995 1996 1997 Proj.

  In percent
Real economy  
Real GDP, annual change 13.1 7.2 2.6 7.4 4.0
Inflation, end-of-period 15.4 10.2 11.8 6.5 7.5-9.0
  In percent of GDP
Gross domestic investment 22.0 24.3 23.5 24.6 24.7
Combined public sector overall balance1 -2.3 -2.8 -1.0 -- -0.1
Of which: primary balance 0.9 0.4 1.3 1.7 1.7
Public sector medium-and long-term external debt 49.8 45.2 42.9 30.0 29.3
  Changes in percent
Money and credit  
Broad money 49.4 28.9 38.2 19.8 15.8
Credit to private sector 59.0 43.6 47.8 32.1 19.4
  In percent of GDP
Balance of payments  
Current account balance -5.3 -7.3 -5.9 -5.2 -5.9
Medium and long-term foreign loan disbursements and foreign direct investment1 3.2 3.6 4.0 4.0 4.5
Gross international reserves (in months of imports)2 10.9 9.2 11.2 12.0 12.0

Sources: Peruvian authorities; and IMF staff estimates.

1Excludes privatization receipts.
2Includes foreign currency deposits of financial intermediaries and public pension funds with the BCRP.

1Under 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 directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.

2For the purposes of the extended arrangement, net international reserves exclude foreign currency deposits of financial intermediaries and public pension funds with the BCRP. Under this definition, net international reserves rose by US$1 billion in 1997 and gross reserves were equivalent to close to 8 months of imports of goods and services at end-1997.


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