Peru: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, March 27, 2025
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- Published: March 27, 2025
Recent economic developments and main findings
- The IMF mission met with Peruvian authorities and counterparts during March 11 – March 26.
- The economy recovered in 2024:
- Growth accelerated to 3.3 percent, supported by a robust recovery in primary sectors, rising private consumption, and strong public investment.
- Inflation was firmly within the target band; inflation expectations are well anchored.
- The BCRP continued with its cautious monetary policy easing.
- The financial sector remained sound and profitable.
- The external current account surplus improved to 2.2 percent of GDP, underpinned by strong terms of trade.
- The fiscal deficit increased to 3.5 percent of GDP, above the revised fiscal rule deficit target of 2.8 percent of GDP, due to lower tax collection and higher public investment execution.
- International reserves remained at a comfortable level of about 27 percent of GDP.
- Non-performing loan (NPL) ratio started to improve in the second half of 2024 but remains elevated for small- and medium-sized firms.
- Public offerings in the domestic capital market have remained low since the pandemic; seven rounds of private pension withdrawals, most recently in 2024, have curtailed recovery.
Near-term outlook and risks
- Growth projections:
- Real GDP growth is projected at 2.9 percent in 2025, supported by favorable momentum in private consumption while public investment decelerates.
- Thereafter, growth would converge to its estimated potential of about 2.5 percent.
- External and fiscal balances:
- The current account is envisaged to remain in a surplus in 2025 and to gradually return to its norm—a deficit of about 1.5 percent of GDP—over the medium term as private investment recovers and terms of trade normalize.
- Inflation and credit:
- With a closed output gap and firmly anchored inflation expectations, headline inflation would remain within the target band.
- Credit growth is expected to rebound modestly, due to limited private investment.
- Risk assessment:
- Risks are tilted to the downside given elevated external uncertainty.
- Key domestic risks: intensification of political uncertainty, social unrest over security concerns, and weather-related shocks.
- Key external risks: trade policy uncertainty, tighter financial conditions, and commodity price volatility.
- Peru’s macroeconomic resilience is supported by low public debt, abundant international reserves, and access to international capital markets on favorable terms.
Monetary and exchange rate policy assessment
- The BCRP’s monetary policy stance is appropriate.
- With well-anchored inflation expectations and a closed output gap, a broadly neutral monetary policy stance is adequate.
- Given the recent decline in inflation expectations, additional monetary policy easing is possible.
- Given heightened external uncertainty, monetary policy should continue to be data dependent.
- Continued exchange rate flexibility should be maintained to help cushion the impact of external shocks.
Fiscal position and recommendations
- 2025 fiscal target and gaps:
- The 2025 Budget aims to reduce the fiscal deficit to the revised target of 2.2 percent of GDP.
- Most consolidation relies on cyclical and one-off tax revenue gains; expected revenue gains would likely fall short.
- Additional measures of about 0.4 percent of GDP would be required to comply with the 2025 target.
- Greater reliance on spending measures would make consolidation more credible and balanced.
- Reforms to significantly reduce Petroperú’s costs and enhance its transparency and governance are needed to safeguard fiscal credibility.
- Medium-term challenges:
- To comply with the fiscal rule deficit target of 1 percent of GDP by 2028 and the debt ceiling of 30 percent of GDP by 2035, the authorities’ medium-term plan envisages a reduction of current spending by about 0.4 percent of GDP per year between 2026 and 2028.
- The authorities plan measures to improve spending efficiency, including the new procurement law that becomes effective in April 2025, but the adjustment mostly relies on unidentified measures.
- Possible measures include cutting the wage bill, discretionary transfers, and inefficient public investment; revenue options include curtailing tax expenditures.
- Recent legislative initiatives have introduced non-negligible fiscal costs and reduced fiscal transparency due to lack of costing.
- Proposals to establish zero-tax special economic zones and tax benefits for the agricultural sector could further erode the tax base.
- In the absence of measures, public debt would gradually rise over the medium term, while remaining relatively low compared to peers.
Financial sector resilience and policy actions
- System soundness:
- The financial system is sound and systemic risks are limited; banks are profitable with ample liquidity and capital buffers.
- Credit growth has been sluggish amid weak corporate investment and cautious lending to lower-income households and small- and medium-sized firms.
- Macroprudential and supervisory measures:
- Focused macroprudential policies could reduce vulnerabilities from remaining dollarized credit, which is riskier and concentrated in large- and medium-sized firms in construction, commerce, and manufacturing.
- The financial supervisory authority is revising regulation to impose higher risk weights to unhedged dollar exposures; effectiveness could be enhanced by improving identification of unhedged positions.
- To ensure stability of dollar funding, authorities could consider introducing currency-specific Net Stable Funding Ratio (NSFR) to complement existing currency-specific Liquidity Coverage Ratio (LCR) limits.
- Capital markets and pension reform:
- Maintaining the prohibition against new private pension withdrawals, as approved in the recent pension reform, is critical to restore domestic capital market functioning.
- Authorities’ plans to introduce new retail investment products, such as sovereign exchange-traded funds (ETFs), could help attract funds back into the securities market.
- Regulatory implementation:
- Most institutions already comply with Basel III capital requirements.
- Authorities have revised the Basel III risk-weight framework and are reviewing countercyclical capital buffer (CCyB) activation criteria to combine data-dependent signals with expert judgement.
- Recovery plans for domestic systemically important banks have been submitted for review and should be extended to the financial group level and to resolution planning thereafter.
Mining, natural resources, and potential growth strategy
- Critical minerals and investment pipeline:
- Peru holds the second-largest global reserves of copper; the International Energy Agency projects a worsening global supply shortage for copper.
- A US$62 billion pipeline of mining investment projects has been mostly stalled for many years due to bureaucratic complexity and social conflicts.
- Unlocking these projects and channeling additional fiscal revenues to growth-enhancing public investment could permanently boost potential growth.
- Authorities should adopt the highest international environmental standards for mining; formalize small-scale miners and combat illegal mining.
- Fiscal decentralization and revenue sharing:
- Local governments receive nearly 2 percent of GDP in natural resource revenues and account for over 40 percent of public investment, but the development impact has been limited.
- Recommendations to improve outcomes:
- Enhance scale and impact of projects.
- Improve coordination between local, regional, and central governments.
- Revamp capacity of regional and local authorities in project formulation and implementation.
- Replace discretionary transfers with rules-based transfers.
- Trace final use of expenditure of transfers at local government level.
- Increase accountability and oversight from the central government.
- Natural resource revenue-sharing formulas should be redesigned so that:
- A share of revenues co-finances, with the central government, high-impact regional projects.
- Benefits accrue more equitably outside producing districts.
- Volatility of these revenues is reduced.
- Structural reform priorities to lift potential growth:
- Curb low but rising insecurity.
- Reform labor and tax regulations that impose excessive costs for formalizing or growing a business.
- Enhance independence and integrity of judicial bodies and tools to combat corruption impunity.
- Build resilience to natural disasters.
- The OECD accession process provides a roadmap for reforms to boost the business climate, reduce informality, and reform the civil service.
Peru: Staff Concluding Statement of the 2025 Article IV Mission