Press Release No. 01/9

The International Monetary Fund (IMF) today approved a one-year stand-by credit for Peru for SDR 128 million (about US$166 million) to support the government's economic program for 2001 and to ensure macroeconomic stability in the transition to the next administration. The stand-by credit replaces the Extended Fund Facility (EFF)¹ approved in June 24, 1999 (see Press Release 99/24), and the government intends to draw under it only if adverse external circumstances make it necessary.

In commenting on the Executive Board's decision, Eduardo Aninat, Deputy Managing Director, made the following statement:

"The Executive Board welcomed the Peruvian authorities' commitment to secure macroeconomic stability in the transition to a new government, while making progress on structural reforms. The successful implementation of the authorities' program should lay the basis for the next government to move forward with an economic program to promote sustained growth of output and employment and a declining external debt burden over the medium term. The program supported by the Fund should also strengthen public confidence and catalyze financing for the public sector, including adjustment lending by the multilateral institutions.

"The centerpiece of the economic program for 2001 is the reduction in the fiscal deficit to the limit established by the 1999 Fiscal Responsibility Law. Attainment of the fiscal target will limit fiscal pressures on the incoming administration and is consistent with the program objectives of maintaining low inflation, a further reduction in the external current account, and a modest increase in net international reserves.

"The fiscal adjustment in 2001 falls, appropriately, on the side of current expenditure, as the slowdown in economic activity limits the scope for increasing revenue. At the same time, it is essential to protect priority social expenditure. The preparation of a comprehensive tax reform proposal by midyear will allow the next administration to move quickly to improve the efficiency of the tax system and maintain a sound fiscal position in 2002 and beyond.

"Systemic risk in the financial sector appears to be limited. The authorities have reaffirmed their commitment to strengthen the banking system. It is also critical to ensure the implementation of the authorities' structural reform program, which covers further privatization and the granting of operating concessions, as well as an improvement in the targeting of social expenditure and fiscal transparency," Mr. Aninat said.

ANNEX

Program Summary

During 1991-97, Peru made major progress in eliminating large disequilibria that beset the economy at the beginning of the decade. The fiscal deficit was eliminated and the exchange rate liberalized. In 1998-1999, the Peruvian economy weakened under the influence of external shocks that included the El Niño weather disturbance, a drop in commodity export prices and a liquidity squeeze from turbulence in international financial markets. As a consequence, the fiscal situation deteriorated sharply, moving from balance in 1997 to a deficit of 3 percent of GDP in 1999.

Output grew by 3.6 percent in 2000, but slowed sharply in the second half of the year as a result of the weakening of domestic demand, as private investment fell on political uncertainty and government expenditure was tightened to offset overspending before the elections. The combined public sector deficit remained at 3 percent of GDP because of a shortfall in general government tax revenue. Employment declined 2.6 percent and inflation ended 2000 at 3.7 percent, despite a large increase in fuel prices. Strong demand for Peru's traditional exports, together with weak domestic demand, reduced the external current account deficit to an estimated 3 percent of GDP in 2000 from 3.5 percent in 1999.

Macroeconomic objectives include GDP growth of between 2 and 3 percent, as well as a combined public sector deficit of 1.5 percent of GDP, which will be essential for limiting fiscal pressures on the next administration. Additionally, inflation is to be brought down to about 3 percent by December 2001 and the external current account deficit to 2.4 percent of GDP.

To achieve these goals in 2001, Peru's fiscal policy will seek to keep general government revenue as a proportion of GDP at its 2000 level, with the fiscal adjustment coming mainly from a reduction in expenditure. In order to improve the efficiency and transparency of fiscal operations, the tax collection agency (SUNAT) will step up its efforts to reduce evasion. The authorities have confirmed their commitment to protect expenditure in priority social programs.

Monetary policy in 2001 will be guided by the inflation objective of the program; the central bank will continue to manage liquidity mainly through open market operations. The government has also restated its intention to minimize the fiscal cost of bank restructuring by encouraging market-based solutions, including mergers and capitalization of banks by the private sector.

The structural reform agenda in 2001 is aimed at complementing the ongoing programs with the Inter American Development Bank (IDB) and World Bank, which focus on improving the targeting of social programs and the transparency of government operations. It includes an increase in the pace of rural land titling and registration, the maintaining of the state oil company's petroleum prices at internationally competitive levels, as well as the sale of the remaining shares in previously privatized firms and the granting of operating concessions in seaports, forestry management, mining prospects, road construction and electricity transmission.

Peru joined the IMF on December 31, 1945, and its current quota² is SDR 638.4 million (about US$826 million). Its outstanding use of IMF financing currently totals SDR 428 million (about US$554 million).

Peru: Selected Economic Indicators         Prel. Prog.   1997 1998 1999 2000 2001             (Annual percentage change)             Production, prices, and trade           Real GDP 6.7 -0.4 1.4 3.6 2.5 Real domestic demand 6.7 -0.9 -2.6 2.9 1.9 Of which: private consumption 4.2 -1.0 -0.2 4.3 3.4 Consumer prices         End of period 6.5 6.0 3.7 3.7 3.0 Period average 8.5 7.3 3.5 3.8 3.3 Exports (U.S. dollars) 15.8 -15.7 6.2 14.8 8.9 Imports (U.S. dollars) 8.5 -3.9 -18.2 9.6 3.4 Terms of trade 5.6 -13.8 -6.6 -0.6 2.0 Real effective exchange rate           (depreciation -) 1/ 7.4 -11.1 -2.5 9.8 ...             Money and credit           Broad money 2/ 15.0 0.2 4.3 2.2 4.2 Credit to the private sector 2/ 27.4 7.8 -2.3 -1.9 3.0             (In percent of GDP)             Public sector           Combined public sector primary balance 1.9 1.3 -0.8 -0.7 0.8 Interest due 1.9 1.9 2.2 2.3 2.4 Combined public sector overall balance 0.0 -0.6 -3.0 -3.0 -1.5             Balance of payments           Current account -5.2 -6.4 -3.5 -3.0 -2.4 Capital and financial account 8.4 4.0 2.0 2.7 2.8 Net international reserves (increase -) -2.9 1.8 1.5 0.3 -0.4             Savings and investment           Gross domestic investment 24.6 24.2 22.0 20.6 20.0 Public sector 4.4 4.5 4.8 3.8 3.4 Private sector 20.2 19.7 17.2 16.8 16.6 National savings 19.4 17.8 18.5 17.6 17.6 Public sector 3/ 5.2 4.0 1.9 0.9 1.9 Private sector 14.2 13.8 16.6 16.7 15.7 External savings 5.2 6.4 3.5 3.0 2.4

Memorandum item:           Nominal GDP (S/. billions) 157.1 167.0 175.9 188.7 200.2             Sources: Central Reserve Bank of Peru; and Fund staff estimates and projections.             1/ Based on Information Notice System.     2/ Flows in foreign currency are valued at program exchange rate. 3/ Excludes privatization receipts.

1 The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4 ½-year grace period, and the interest rate, adjusted weekly, currently is about 4.27 percent. 2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.