IMF Executive Board Approves Two-Year US$11 Billion Flexible Credit Line Arrangement for Peru
IMF News, May 28, 2020
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Bibliographic details
- Published: May 28, 2020
Arrangement summary and key statistics
- Arrangement type: Flexible Credit Line (FCL).
- Duration: two-year (24-month) arrangement with a mid-term review.
- Approved amount: SDR 8.007 billion (about US$11 billion, equivalent to 600 percent of quota).
- Press Release: No. 20/224.
- Approval date: May 28, 2020.
Rationale and purpose
- The FCL is designed for crisis prevention and provides the flexibility to draw on the credit line at any time during the arrangement period.
- Disbursements under the FCL:
- Not phased.
- Not conditioned on compliance with ex-post policy targets as in traditional IMF-supported programs.
- The large upfront access without ex-post conditionality is justified by the very strong track records of countries that qualify for the FCL.
Peru’s qualification and macroeconomic strengths
- Peru qualifies for the FCL by virtue of:
- Very strong fundamentals.
- Institutional policy frameworks.
- Track record of economic performance and policy implementation.
- Specific institutional/ policy features cited:
- Inflation targeting regime in place since 2002 contributing to low inflation and anchoring inflation expectations.
- Fiscal responsibility and transparency framework in place since 1999, supporting prudent fiscal management, lowering government debt, and building fiscal buffers.
- Effective financial sector supervision contributing to financial stability and financial development.
- Historical outcomes:
- Growth averaged nearly 5¼ percent over the past 15 years.
- Poverty has declined significantly.
Risks, policy response, and intended use of the FCL
- Shock: The Covid-19 shock is pushing the Peruvian economy into a recession.
- Authorities’ response:
- Stringent containment measures.
- A large policy package to limit socio-economic fallout, enabled by ample fiscal space and monetary policy credibility.
- Package objectives: contain the health emergency, support vulnerable businesses and households, and maintain adequate credit flows to the economy.
- Remaining vulnerabilities:
- Peru remains vulnerable to external tail risks despite strong policy buffers.
- A prolonged Covid-19 outbreak could have significant repercussions for trade and financial flows, place significant pressure on Peru’s balance of payments, and magnify the adverse domestic impact of the Covid-19 shock.
- Authorities’ stated intentions for the FCL:
- Treat the arrangement as precautionary.
- Reduce access and consider exit from the FCL arrangement when the exceptional set of external risks have subsided.
- Once risks subside, the insurance provided by the FCL arrangement would no longer be necessary given Peru’s large international reserves and policy buffers.
Context on the FCL instrument
- Established: March 24, 2009 as part of a major reform of the Fund’s lending framework (see Press Release No. 09/85).
- Designed purpose: crisis prevention for countries with very strong policy and institutional frameworks and track records.
Statement from IMF Managing Director
- Kristalina Georgieva, Managing Director and Chair, emphasized:
- Peru’s very strong policy and institutional frameworks have helped it achieve impressive macroeconomic outcomes and reduce vulnerabilities.
- The Covid-19 shock poses an extraordinary challenge requiring decisive policy responses.
- The 24-month FCL arrangement would serve as an appropriate temporary insurance to buttress confidence in the context of heightened global uncertainties.
IMF Press Release No. 20/224 (May 28, 2020).
