Peru: Staff Concluding Statement of the 2023 Article IV Mission
February 9, 2023
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC: An International Monetary Fund (IMF) mission met with the Peruvian authorities and other counterparts during January 24-February 8 to discuss recent economic developments and policy priorities. This concluding statement summarizes the mission’s main takeaways.
Against the background of a strong economic performance over the last quarter of a century, Peru has been hit by multiple shocks in the last several years. Adequate policies and very strong macroeconomic policy frameworks have made the economy resilient. Following a steep decline in 2020 at the outset of the pandemic and a rapid recovery in 2021, growth slowed significantly in 2022 as business confidence remains low, the policy stimulus was withdrawn to keep macroeconomic stability and external and financial conditions deteriorated. Recent political developments suggest that the government needs to work across the political spectrum to restore confidence, preserve stability, accelerate structural reforms to boost economic activity, and tackle inequality, poverty, and weaknesses in the education and health systems.
Slow Growth and An Uncertain Outlook, but Strong Policy Buffers
Growth slowed in line with global trends. Following the strong economic rebound of 2021 (when the economy grew 13½ percent), real GDP growth slowed down to 3½ percent (y/y) in the first half of 2022 and then to an estimated 1¾ percent (y/y) in the second half of the year, with the annual growth rate in 2022 estimated at 2¾ percent. The lower growth in 2022 was due to the withdrawal of the policy stimulus, a deterioration in the terms-of-trade, a slowing of external demand, a tightening of financial conditions, and the negative effect of road blockades and strikes at major mining sites on copper production and exports. The unemployment rate continues falling as the economy recovers but remains above the pre-pandemic levels. The fiscal deficit of the non-financial public sector (NFPS) fell to 1.6 percent of GDP in 2022 (almost 1 percentage point lower than in 2021), while the external current account widened to 4½ percent of GDP in 2022 (over 2 percentage points wider than in 2021). Poverty has also declined from the high levels observed in 2020 but remains above pre-pandemic levels despite some improvement in 2021.
Inflation is well above the target range despite some declines in the second half of 2022. Since mid-2021, inflation has risen well above the target band of 1-3 percent, driven by imported inflation and global supply shocks, including high energy and food prices. Headline inflation peaked at 8¾ percent (y/y) in June 2022, gradually declining to 8½ percent (y/y) in December 2022. In January, it increased again due to higher food prices in light of the recent road blockades and higher hotel and restaurant prices. Inflation has become increasingly broad-based, with core inflation rising to 5½ percent at the end of 2022. Wholesale price inflation fell from 13¾ percent in May 2022 to 7 percent in December 2022.
Economic activity is expected to recover slowly in the near term. Tighter global financial conditions, sluggish external demand, and heightened political uncertainty will have a negative impact on growth. Fertilizer shortages are likely to adversely affect the agriculture sector output, while the recovery of commodity prices, the new Quellaveco copper mine operations and the implementation of economic measures such as the “Impulsa Perú” plan and the “ Con Punche Perú” plan will support growth. All in all, real GDP growth is projected to slow down to 2.4 percent in 2023 before it converges to its potential of 3 percent in subsequent years. Inflation will remain stubbornly high in the short turn, but the proactive monetary policy tightening already in place, and weakening global and domestic demand are expected to bring inflation within the target range in late 2023-early 2024.
The outlook is very uncertain, and downside risks prevail. The main external risks to this outlook include an intensification of spillovers from Russia’s war in Ukraine, an abrupt global slowdown with an associated commodity price volatility, and a possible de-anchoring of inflation expectations forcing a further tightening in the global financial conditions. Key domestic risks include an intensification of political uncertainty, social unrest over political developments, and natural disasters, which could hinder economic activity and risk the planned medium-term fiscal consolidation. Upside risks include a “soft landing” in key trade partner countries, and an acceleration of structural reforms at home, which could increase Peru’s medium-term growth potential.
Peru maintains very strong fundamentals and institutional policy frameworks that underpin the resilience of the economy to external and domestic shocks. Public debt remains the lowest in the region. Sizable international reserves (about 30 percent of GDP), access to international capital markets, and a robust financial sector mitigate macroeconomic risks and support the country’s capacity to cope with additional adverse shocks. These buffers are complemented by a two-year Flexible Credit Line (FCL) arrangement for about US$ 5½ billion approved by the IMF Executive Board in May 2022.
Macroeconomic Policy Challenges
Bringing inflation under control is the most immediate policy challenge, and the central bank’s data-driven approach remains appropriate. While the recent surge in inflation is mainly driven by external supply factors and foreign inflation, both core inflation and inflationary expectations remain outside the target range. Large and sustained rate hikes have already taken the ex-ante real rate into contractionary territory, while inflation and inflationary expectations appear to have started to stabilize. The data-driven tightening policy stance will help insure against risks of disorderly adjustment to global financial conditions.
A targeted, temporary and timely small fiscal impulse is appropriate in the short term given the weaknesses in economic activity. The mission estimates that the NFPS deficit could reach 2 percent of GDP in 2023 (about ½ point higher than the year before) as the authorities’ stimulus program (Con Punche Perú) is expected to offset slower execution of public investment by subnational governments, while revenues remain buoyant due to high copper prices. The expected fiscal outcome for 2023 is well within the limits established by the fiscal rule (a deficit of 2.4 percent of GDP). The moderate fiscal impulse is appropriate in light of the weaker domestic growth prospects, a small negative output gap, the ongoing slowdown in the world economy, and domestic supply shocks. However, a larger stimulus should be avoided as it could add to inflationary pressures. Upside surprises to the growth outlook should be used to build further fiscal buffers, while the authorities should prepare contingency plans to address emerging fiscal risks, including from the passage of unfunded spending initiatives by Congress, and with a large state-owned enterprise.
Over the medium term, the planned gradual fiscal consolidation will stabilize the debt-to-GDP ratio and preserve fiscal sustainability . The authorities’ fiscal strategy envisions a gradual fiscal consolidation of about ½ percentage points of GDP per year during 2025-26. This can be achieved with additional efforts to improve tax administration and streamline tax expenditures, more effective control of public spending, and improved execution of public investment—all necessary to accommodate rising spending needs and preserve fiscal sustainability. The recent passage of legislation to enhance the effectiveness of the Fiscal Council is a welcome development that will further strengthen Peru’s fiscal framework.
A redesign of the pension system is needed to ensure regular income and address increasing old-age poverty risks. The comprehensive reform of the pension system has become a critical priority following successive rounds of early withdrawals from private pension accounts. Given the weak financial position of the pension system, there is a need to create social consensus on the different and difficult alternatives to capitalize the system. Any reform proposal should be within the current fiscal framework.
Prudential policies should maintain a tightening bias to return to pre-pandemic levels. The financial system has emerged from the pandemic in good health with adequate buffers to absorb the impact of tightening financial conditions, but some pockets of vulnerabilities exist. Withdrawal of the broad policy support provided during the pandemic has not resulted in an increase in NPLs, and the reintroduction of capital buffers has not impeded the flow of credit as voluntary provisioning was maintained at high levels. Closing remaining regulatory and supervisory gaps and continuing progress on systemic risk assessment will enhance financial resilience.
A Well-Articulated Strategy to Boost Growth and Resilience
The authorities should accelerate structural reforms to address the scarring effects of the pandemic and eliminate impediments to inclusive and sustainable growth. The OECD accession process provides an opportunity to define a well-articulated structural reform agenda. Reform efforts should focus on the following areas:
- Boosting productivity by reversing pandemic-related losses in education, enhancing infrastructure, reducing regulatory uncertainty, eliminating barriers to outsourcing, and improving the business climate.
- Enhancing human capital while reducing incentives to informality. Peru is poorly prepared for the technological challenges ahead and should invest more in human capital and improve public health services.
- Further improving governance through digitalization and enhanced transparency, stronger anti-corruption institutions, and corporate sector regulatory reforms.
- Reducing climate risks through both public investments and private sector contribution. Peru is highly vulnerable to climate risks.
Climate change risks and natural hazards expose Peru to severe economic and welfare losses . Peru has established ambitious objectives to reduce the emission of greenhouse gases (by 40 percent by 2030 and be a neutral emitter by 2050), for which the adoption of measures is required to ensure compliance with its goals. In addition to public investments in containing climate risks, the authorities could facilitate private sector contribution to the cause by creating a conducive regulatory environment and providing the right financing and insurance tools .
The mission would like to thank the Peruvian authorities for their cooperation and fruitful discussions during our visit.
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Table 1. Peru: Selected Economic Indicators |
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