Peru: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, February 9, 2023
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- Published: February 9, 2023
Mission overview and recent context
- IMF mission met with Peruvian authorities and counterparts during January 24-February 8 to discuss recent economic developments and policy priorities.
- Peru has had strong economic performance over the last quarter of a century but was hit by multiple shocks in the last several years; strong macroeconomic policy frameworks have supported resilience.
- Recent political developments require working across the political spectrum to restore confidence, preserve stability, accelerate structural reforms, and tackle inequality, poverty, and weaknesses in education and health systems.
Growth performance and short-term outlook
- Real GDP growth:
- 2021: 13½ percent
- 1st half 2022: 3½ percent (y/y)
- 2nd half 2022: 1¾ percent (y/y) (estimated)
- 2022 annual growth rate: 2¾ percent (estimated)
- Drivers of lower growth in 2022: withdrawal of policy stimulus; deterioration in terms-of-trade; slowing external demand; tightening financial conditions; road blockades and strikes affecting copper production and exports.
- Unemployment: continues falling as the economy recovers but remains above pre-pandemic levels.
- Fiscal and external balances in 2022:
- NFPS fiscal deficit: 1.6 percent of GDP in 2022 (almost 1 percentage point lower than in 2021)
- External current account: widened to 4½ percent of GDP in 2022 (over 2 percentage points wider than in 2021)
- Poverty: declined from high levels observed in 2020 but remains above pre-pandemic levels despite some improvement in 2021.
Inflation dynamics and monetary stance
- Inflation trajectory:
- Target band: 1-3 percent
- Headline inflation peak: 8¾ percent (y/y) in June 2022
- Headline inflation: 8½ percent (y/y) in December 2022
- Core inflation: 5½ percent at the end of 2022
- Wholesale price inflation: 13¾ percent in May 2022 falling to 7 percent in December 2022
- Inflation drivers: imported inflation and global supply shocks, including high energy and food prices; recent increases in January due to higher food prices from road blockades and higher hotel and restaurant prices.
- Policy stance: data-driven tightening by the central bank is appropriate; large and sustained rate hikes have taken the ex-ante real rate into contractionary territory; tightening expected to help bring inflation within target in late 2023-early 2024.
Near-term projection and risks
- Growth projection:
- 2023: real GDP growth projected to slow to 2.4 percent
- Subsequent years: converge to potential of 3 percent
- Inflation: expected to remain stubbornly high in the short term but brought within target late 2023-early 2024 by monetary tightening and weakening demand.
- Key downside external risks:
- Intensification of spillovers from Russia’s war in Ukraine
- Abrupt global slowdown with commodity price volatility
- Possible de-anchoring of inflation expectations forcing further global tightening
- Key domestic downside risks:
- Intensification of political uncertainty
- Social unrest over political developments
- Natural disasters hindering activity and risking planned medium-term fiscal consolidation
- Upside risks:
- “Soft landing” in key trade partner countries
- Acceleration of structural reforms increasing medium-term growth potential
Policy recommendations — fiscal
- Short term:
- A targeted, temporary and timely small fiscal impulse is appropriate given economic weaknesses.
- Mission estimates NFPS deficit could reach 2 percent of GDP in 2023 (about ½ point higher than the year before) as Con Punche Perú offsets slower subnational public investment execution while revenues stay buoyant due to high copper prices.
- Expected fiscal outcome for 2023 is within fiscal rule limits (a deficit of 2.4 percent of GDP).
- Avoid larger stimulus to prevent adding to inflationary pressures.
- Use upside growth surprises to build fiscal buffers.
- Prepare contingency plans for emerging fiscal risks, including passage of unfunded spending initiatives by Congress and risks from a large state-owned enterprise.
- Medium term:
- Planned gradual fiscal consolidation of about ½ percentage points of GDP per year during 2025-26 to stabilize debt-to-GDP and preserve fiscal sustainability.
- Achieve consolidation via improved tax administration, streamlined tax expenditures, more effective public spending control, and improved execution of public investment.
- Recent legislation to enhance effectiveness of the Fiscal Council is welcomed.
Policy recommendations — monetary and prudential
- Monetary:
- Continue data-driven tightening to bring inflation and inflation expectations back to target and to guard against disorderly adjustment to global financial conditions.
- Prudential and financial sector:
- Maintain a tightening bias in prudential policies to return to pre-pandemic levels.
- Financial system remains in good health with adequate buffers; some pockets of vulnerability exist.
- Withdrawal of pandemic-era support has not increased NPLs; reintroduction of capital buffers has not impeded credit flows due to high voluntary provisioning.
- Close remaining regulatory and supervisory gaps and continue progress on systemic risk assessment to enhance resilience.
Policy recommendations — pensions and social protection
- Pension system:
- Comprehensive redesign needed after successive rounds of early withdrawals from private pension accounts.
- Reform is critical given weak financial position of the pension system and rising old-age poverty risks.
- Need to create social consensus on difficult alternatives to capitalize the system.
- Any reform proposal should be within the current fiscal framework.
Structural reforms to boost growth and resilience
- Accelerate structural reforms to address pandemic scarring and eliminate impediments to inclusive and sustainable growth; use OECD accession process to define a reform agenda.
- Priority reform areas:
- Boost productivity by reversing pandemic-related losses in education, enhancing infrastructure, reducing regulatory uncertainty, eliminating barriers to outsourcing, and improving the business climate.
- Enhance human capital while reducing incentives to informality; invest more in human capital and improve public health services.
- Improve governance through digitalization and enhanced transparency, stronger anti-corruption institutions, and corporate sector regulatory reforms.
- Reduce climate risks through public investments and facilitating private sector contribution via conducive regulations and financing/insurance tools.
- Climate commitments and implications:
- Peru’s objectives: reduce greenhouse gas emissions by 40 percent by 2030 and be a neutral emitter by 2050.
- Adoption of measures, public investments, regulatory environment, and financing/insurance tools are required to meet goals.
- Peru is highly vulnerable to climate risks; climate change and natural hazards expose Peru to severe economic and welfare losses.
Key statistics and selected indicators (from Table 1)
- Social indicators:
- Poverty rate (total) 1/: 2019: 20.2; 2020: 30.1; 2021: 22.1
- Unemployment rate (percent; average): 2019: 6.6; 2020: 13; 2021: 10.7; 2022: 7.8
- Production and prices (annual percentage change unless otherwise indicated):
- Real GDP: 2019: 2.2; 2020: -11.0; 2021: 13.6; 2022: 2.7; 2023: 2.4; 2024: 3.0
- Output gap (percent of potential GDP): 2019: -1.6; 2020: -7.2; 2021: -0.3; 2022: -0.4; 2023: 0.0
- Consumer prices (end of period): 2019: 1.9; 2020: 2.0; 2021: 6.4; 2022: 8.5; 2023: 2.3
- External sector (annual percentage change):
- Exports: 2019: -2.2; 2020: -10.6; 2021: 47.2; 2022: 4.5; 2023: 3.9; 2024: 3.2; 2025: 2.9; 2026: 3.1; 2027: 3.3
- Imports: 2019: -1.8; 2020: -15.6; 2021: 39.2; 2022: 17.4; 2023: 1.3; 2024: 4.3; 2025: 3.7; 2026: 3.6
- External current account balance (% of GDP): 2019: -0.7; 2020: 1.2; 2021: -2.3; 2022: -4.6; 2023: -2.1; 2024: -1.5
- Gross reserves:
- In billions of U.S. dollars: 2019: 68.4; 2020: 74.9; 2021: 78.5; 2022: 74.0; 2023: 73.6; 2024: 75.0; 2025: 76.5; 2026: 78.3; 2027: 80.7; 2028: 82.4
- Percent of short-term external debt 5/: 2019: 429; 2020: 482; 2021: 594; 2022: 536; 2023: 525; 2024: 531; 2025: 483; 2026: 494; 2027: 500; 2028: 586
- Money and credit (annual percentage change; corresponds to depository corporations):
- Broad money: 2019: 8.8; 2020: 29.2; 2021: 8.6; 2022: 6.0; 2023: 6.7; 2024: 5.6; 2025: 4.7
- Net credit to the private sector: 2019: 14.0; 2020: 6.5; 2021: 5.5; 2022: 5.3; 2023: 5.7; 2024: 6.3
- Public sector (percent of GDP unless otherwise indicated):
- NFPS revenue: 2019: 24.7; 2020: 21.9; 2021: 25.6; 2022: 25.8; 2023: 25.4; 2024: 25.3; 2025: 25.1; 2026: 25.0; 2027: 24.8; 2028: 24.9
- NFPS primary expenditure: 2019: 26.6; 2020: 25.7; 2021: 24.3; 2022: 24.2
- NFPS primary balance: 2019: -0.2; 2020: -7.3; 2021: -1.0; 2022: -0.1; 2023: 0.1; 2024: 0.7; 2025: 0.6
- NFPS overall balance: 2019: -8.9; 2020: -2.5; 2021: -2.0
- Debt:
- Total external debt 4/: 2019: 34.8; 2020: 44.2; 2021: 45.1; 2022: 42.6; 2023: 38.9; 2024: 37.6; 2025: 35.6; 2026: 34.3; 2027: 33.0; 2028: 32.5
- NFPS gross debt 5/: 2019: 26.9; 2020: 35.0; 2021: 36.4; 2022: 33.5; 2023: 33.1; 2024: 33.7; 2025: 33.4
- External (percent of GDP): 2019: 8.4; 2020: 14.9; 2021: 19.5; 2022: 16.6; 2023: 16.3; 2024: 15.2; 2025: 14.4; 2026: 13.2; 2027: 13.0
- Domestic (percent of GDP): 2019: 18.5; 2020: 20.1; 2021: 16.9; 2022: 16.1; 2023: 16.4; 2024: 17.2; 2025: 19.1; 2026: 20.5
- Savings and investment:
- Gross domestic investment: 2019: 21.8; 2020: 19.7; 2021: 22.0; 2022: 23.8
- National savings: 2019: 21.1; 2020: 20.9; 2021: 19.2; 2022: 23.1; 2023: 23.0; 2024: 23.2
- Memorandum items:
- Nominal GDP (S/. billions): 2019: 775; 2020: 719; 2021: 877; 2022: 947; 2023: 1,029; 2024: 1,086; 2025: 1,143; 2026: 1,201; 2027: 1,261; 2028: 1,320
- GDP per capita (in US$): 2019: 7,006; 2020: 6,145; 2021: 6,679; 2022: 7,071; 2023: 7,757; 2024: 8,007; 2025: 8,309; 2026: 8,622; 2027: 8,939; 2028: 9,248
IMF mission concluding statement, February 9, 2023.