Peru: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, May 23, 2018
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- Published: May 23, 2018
I. Context and recent developments
- Peru has been one of the top performers in Latin America since the turn of the century, but growth slowed to 2.5 percent in 2017 due to the worst floods and landslides in recent history and fallout from the Lava Jato corruption scandal.
- Recent policy and political actions:
- Resignation of President Kuczynski led to a new cabinet that requested special legislative powers in six areas: (i) tax policy and administration; (ii) competitiveness; (iii) post-El Niño reconstruction and closing infrastructure gaps (already granted); (iv) anti-corruption measures; (v) protection of vulnerable groups (and preventative measures); and (vi) modernization of the state.
- Fiscal measures include excise tax hikes, improving tax administration, and streamlining current expenditures.
- Law 30737 provides more clarity on civil damages in corruption cases and sets out rules for asset transfers by construction companies under investigation or those convicted.
II. Outlook and risks
- Growth projections and drivers:
- Growth expected to rebound to 3.7 percent in 2018.
- GDP growth of 3.2 percent in the first quarter of 2018 and high-frequency indicators for April point to a rebound.
- Public investment rising is a key driver; private investment projected to grow after four weak years.
- Growth projected to accelerate to over four percent in 2019 and medium-term potential growth raised to 4 percent from 3¾ percent.
- Inflation and monetary conditions:
- Inflation converging to the center of the BCRP’s target band; headline inflation expected to gradually increase toward the center of the central bank target range.
- External and fiscal balances:
- Current account deficit expected to widen somewhat due to stronger import demand but narrow toward estimated equilibrium.
- Fiscal deficit expected to converge to 1 percent of GDP by 2021, as stipulated by the fiscal rule.
- Risks (broadly balanced):
- Domestic downside risks: further delays to public investment projects and PPPs due to capacity constraints and ongoing corruption investigations.
- External downside risks: more protectionist trade policies, a slowdown in China, or a more rapid increase in international interest rates.
- Near-term upside risk: higher spillovers from commodity prices.
- Policy upside: authorities’ efforts to reduce impediments to investment projects could bear fruit earlier than expected.
III. Policy recommendations — short term and structural priorities
- Overall recommendation:
- Countercyclical fiscal and monetary policies remain appropriate in the short term; structural reforms are an indispensable complement.
- Key challenges: strengthening the tax system, improving public investment and PPP management, buttressing macroprudential policies and financial sector oversight, tackling governance vulnerabilities, and enhancing the pension system’s social protection role.
- Monetary policy
- Current stance: appropriate and should remain data dependent.
- Real policy rate stands at just 0.6 percent, significantly below the BCRP’s estimate of the neutral rate (around 1¾ percent), implying substantial monetary stimulus.
- Limited scope for additional interest rate cuts under staff’s baseline given core inflation and inflation expectations near the mid-point of the target range (two percent) and a projected narrowing of the output gap.
- Suggested enhancements:
- Communications: consider enhancements in communication of conditions for future policy rate moves.
- Exchange rate flexibility: continue limiting FX interventions to disorderly market conditions and allow further two-way exchange rate flexibility to stimulate market development and support dedollarization.
- Fiscal policy
- Support for planned increase in public investment and focus on boosting execution capacity.
- Improve framework for capital expenditure: strengthen long-term planning and credibility of investment budgeting, better prioritization, simplify project monitoring and evaluation, increase execution transparency, and build subnational capacity.
- PPPs: ensure ongoing and pipeline PPP projects continue to move forward.
- Medium-term consolidation strategy: focus on revenue-side measures and streamlining current expenditure to reach a deficit of 1 percent of GDP by 2021.
- Recent measures: increase in excise taxes viewed as welcome.
- If revenue overperforms, staff would support increasing public investment further; scope to cut some waste in current expenditure.
- Tax policy
- Support for tax reform to simplify the system, level the playing field and improve tax administration.
- Priority actions: reduce compliance gaps (especially in the VAT), move towards a less fragmented income tax regime, make personal income taxes more progressive, rationalize tax exemptions, increase revenues from property taxes.
- Financial sector policy
- Banking sector sound but vulnerabilities remain due to high concentration and correlated credit risk across large banks.
- Recommendations:
- Increase capital surcharges for systemic banks in line with the Basel III framework (SBS is considering this).
- Increase countercyclical provisioning in smaller banks.
- Continue monitoring off-balance sheet exposures.
- Dedollarization:
- Progress has been significant; further measures could include increasing risk weights on FX loans along recent Basel III guidelines and tying changes in FX reserve requirements to dedollarization or to address adverse macrofinancial shocks.
- Supervision and macroprudential framework:
- Remove legal limitations and enhance supervisory framework for consolidated supervision of financial conglomerates.
- Pass pending legislation to migrate supervision of saving and credit cooperatives to the SBS.
- Continue transition to risk-based supervision of the insurance sector.
- Consider enhanced mandates for macroprudential policy to the BCRP and the SBS and implement a memorandum of understanding to strengthen coordination.
- Financial development and inclusion:
- Focus on expanding financial access and inclusion and addressing high concentration and potential lack of competition.
- Strengthen legal and institutional framework for competition oversight, market conduct, and consumer protection.
- Reform the e-wallet Billetera Móvil (BiM): consider interoperability with bank accounts, digitization of government payments, and expanded access criteria.
- Consider regulatory sandboxes and lessons from Singapore and the U.K. to develop fintech while managing risks.
- Structural reforms and governance
- Multi-pronged approach to boost potential growth: focus on education, infrastructure, institutions, and labor market reform; remove barriers to growth of productive firms and labor formalization (tax distortions, burdensome regulation, limited access to credit).
- Governance priorities in response to Lava Jato:
- Law 30737 should reduce uncertainty in construction sector.
- Require conflict of interest statements from public officials (as envisioned in special legislative powers).
- Improve timely exchange of information and financial intelligence among anti-corruption agencies.
- Strengthen the asset declaration system (verification, beneficial ownership information and public access).
- Enhance risk-based AML/CFT supervision and the reporting system for suspicious transactions.
- Create a beneficial ownership registry and ensure customer due diligence for politically exposed persons.
- Staff offers continued support to authorities.
- Social policy and pensions
- Poverty and inequality declined during the commodity boom but increased in 2017; recalibration of policies may be warranted.
- Increasing tax revenues will help protect infrastructure and social spending.
- Increase progressiveness of personal income tax to enhance redistribution.
- Re-think revenue sharing formulas to reduce horizontal inequities by better reflecting spending needs (population size and poverty levels) in addition to natural resource production.
- Pension reform options to enhance social protection and reduce inequities (with public consultation and careful communication):
- Broaden non-contributory pillar (Pension 65).
- Shorten the minimum 20-year contribution period in the public system to allow more low-income workers to receive a pension (fiscal costs to be carefully assessed).
- Reduce high pension management fees and remove excessive flexibility to withdraw lump-sum amounts in the private system.
- Consider increasing contributions (noting potential adverse impact on labor formality).
- Longer-term: pursue larger institutional reform to better integrate private and public pillars, balancing adequacy, coverage and fiscal sustainability.
IV. Key statistics and projections (selected figures from Table 1)
- Real GDP growth:
- 2016: 4.1
- 2017: 2.5
- 2018 (Proj.): 3.7
- 2019 (Proj.): 4.2
- 2020 (Proj.): 4.0
- Real domestic demand (annual percentage change, selected):
- 2018 (Proj.): 4.5
- 2019 (Proj.): 4.7
- Output gap (percent of potential GDP):
- 2016: -1.1
- 2017: -0.8
- 2018 (Proj.): -0.2
- 2019 (Proj.): 0.0
- Consumer prices:
- End of period 2016: 3.2
- Period average 2016: 3.6; 2017: 2.8
- External sector (annual percentage change, selected):
- Exports 2016: 7.6; 2017: 21.3; 2018 (Proj.): 13.2; 2019 (Proj.): 3.9
- Imports 2016: -5.9; 2017: 10.0; 2018 (Proj.): 9.9; 2019 (Proj.): 6.0
- Money and credit (annual percentage change):
- Broad money 2016: 4.3; 2017: 7.7; 2018 (Proj.): 8.5; 2019 (Proj.): 7.9; 2020 (Proj.): 7.5
- Net credit to the private sector 2016: 5.0; 2017: 7.2; 2018 (Proj.): 6.8; 2019 (Proj.): 6.6; 2020 (Proj.): 6.5
- Public sector (percent of GDP, selected):
- NFPS revenue 2016: 23.2; 2017: 23.0; 2018 (Proj.): 23.4; 2019 (Proj.): 23.9; 2020 (Proj.): 24.3; 2021 (Proj.): 24.7
- NFPS primary expenditure 2016: 24.9; 2017: 25.4; 2018 (Proj.): 25.2; 2019 (Proj.): 24.2
- NFPS primary balance 2016: -1.4; 2017: -1.9; 2018 (Proj.): -2.0; 2019 (Proj.): -1.3; 2020 (Proj.): 0.5
- NFPS overall balance 2016: -2.5; 2017: -3.1; 2018 (Proj.): -3.3; 2019 (Proj.): -2.7
- NFPS structural primary balance (adjusted) 2016: -1.2; 2017: -1.5; 2018 (Proj.): -1.7
- Gross reserves (in billions of U.S. dollars):
- 2016: 61.7; 2017: 63.7; 2018 (Proj.): 64.7; 2019 (Proj.): 65.2
- Percent of short-term external debt (gross reserves as percent of short-term external debt):
- 2016: 450; 2017: 312; 2018 (Proj.): 486; 2019 (Proj.): 461; 2020 (Proj.): 514; 2021 (Proj.): 516; 2022 (Proj.): 517; 2023 (Proj.): 523
- Percent of foreign currency deposits at banks (gross reserves as percent of FX deposits):
- 2016: 230; 2017: 232; 2018 (Proj.): 229; 2019 (Proj.): 231; 2020 (Proj.): 234; 2021 (Proj.): 238; 2022 (Proj.): 242; 2023 (Proj.): 249
- Debt (percent of GDP, selected):
- Total external debt 2016: 38.2; 2017: 35.7; 2018 (Proj.): 33.1; 2019 (Proj.): 31.2; 2020 (Proj.): 30.2; 2021 (Proj.): 28.9; 2022 (Proj.): 27.6; 2023 (Proj.): 26.4
- Gross non-financial public sector debt 2016: 24.4; 2017: 25.3; 2018 (Proj.): 26.8; 2019 (Proj.): 27.8; 2020 (Proj.): 27.9; 2021 (Proj.): 27.4; 2022 (Proj.): 26.3
- External component 2016: 10.3; 2017: 8.7; 2018 (Proj.): 8.4; 2019 (Proj.): 8.2; 2020 (Proj.): 8.0; 2021 (Proj.): 0.0
- Domestic component 2016: 14.0; 2017: 16.6; 2018 (Proj.): 18.2; 2019 (Proj.): 19.4; 2020 (Proj.): 19.3; 2021 (Proj.): 18.9; 2022 (Proj.): 18.6; 2023 (Proj.): 18.3
- Savings and investment (percent of GDP):
- Gross domestic investment 2016: 22.6; 2017: 21.4; 2018 (Proj.): 21.9; 2019 (Proj.): 23.3; 2020 (Proj.): 23.8; 2021 (Proj.): 24.1
- Public sector investment (incl. repayment certificates) 2016: 4.8
- Private sector investment (incl. inventories) 2016: 17.8; 2017: 16.9; 2018 (Proj.): 17.1; 2019 (Proj.): 17.6; 2020 (Proj.): 18.7; 2021 (Proj.): 19.0
- National savings 2016: 19.9; 2017: 20.2; 2018 (Proj.): 20.7; 2019 (Proj.): 21.8; 2020 (Proj.): 22.1; 2021 (Proj.): 22.4
- Memorandum items:
- Nominal GDP (S/. billions) 2016: 659.7; 2017: 701.8; 2018 (Proj.): 749.0; 2019 (Proj.): 796.9; 2020 (Proj.): 848.1; 2021 (Proj.): 901.6; 2022 (Proj.): 958.0; 2023 (Proj.): 1016.6
- GDP per capita (in US$) 2016: 6,208; 2017: 6,762; 2018 (Proj.): 7,198; 2019 (Proj.): 7,533; 2020 (Proj.): 7,823; 2021 (Proj.): 8,133; 2022 (Proj.): 8,486; 2023 (Proj.): 8,864
Peru: Staff Concluding Statement of the 2018 Article IV Mission (May 23, 2018).