## Peru: Concluding Statement of the 2017 Article IV Mission

_IMF News, May 26, 2017_

## Source details

**Canonical URL:** [Peru: Concluding Statement of the 2017 Article IV Mission](https://www.imf.org/en/news/articles/2017/05/25/ms052617-peru-concluding-statement-of-the-2017-article-iv-mission)

## Other formats

- [Markdown version](/en/news/articles/2017/05/25/ms052617-peru-concluding-statement-of-the-2017-article-iv-mission/index.md)
- [Structured JSON version](/en/news/articles/2017/05/25/ms052617-peru-concluding-statement-of-the-2017-article-iv-mission/index.json)
- [Bundle manifest](/en/news/articles/2017/05/25/ms052617-peru-concluding-statement-of-the-2017-article-iv-mission/bundle-manifest.json)

## Bibliographic details
- Published: May 26, 2017

---

### I. Context and Recent Developments
- Peru has experienced average growth of over 5¼ percent since 2000, with reduced unemployment and poverty, low single-digit inflation, strengthened fiscal position, and markedly reduced dollarization.
- Government structural reforms aim to modernize the economy, increase formality, and lift potential growth by addressing investment procedures, tax collection, financing costs, labor market, and social protection. Specific reforms include:
  - a new institutional framework for public and public-private infrastructure investment;
  - cutting administrative procedures and promoting digitalization of processes;
  - a new tax regime for small and medium enterprises to make the tax system more progressive, reduce compliance costs, stimulate electronic payments, and formalize the value chain;
  - moves to modernize labor regimes and the establishment of a Social Protection Commission to deliver a comprehensive and fiscally sustainable social security reform to increase coverage while reducing informality.
- Recent domestic shocks and external challenges:
  - The Odebrecht corruption scandal (broke in December 2016) is weighing on investment and confidence.
  - One of the worst flooding and landslides in over 50 years (related to el Niño) caused widespread infrastructure damage and raised domestic food prices.
  - Commodity prices have recovered somewhat since late 2016 but remain significantly lower than during the commodity boom.
  - Uncertainty about the U.S. outlook and potential rises in protectionist pressures globally.
- Authorities’ responses:
  - Ministry of Economy and Finance fiscal package of 1.3 percent of GDP targeted at reconstruction needs and public investment.
  - Near-term relaxation in the fiscal consolidation path.
  - Exemption from healthcare contributions (nine percent of monthly wages) for employers hiring new young entrants.
  - Initiatives to support affordable housing developments and easing SMEs’ access to financing.
  - SBS allowed banks to restructure retail debt in disaster-affected areas for up to six months without affecting borrowers’ credit ratings.
  - BCRP reduced reserve requirements four times since December 2016 and cut the policy rate by 25 basis points in May 2017 (first cut in 15 months).

### II. Outlook and Risks
- Growth projections and contributors:
  - Exports’ contribution to economic growth projected to decline from nearly 2½ percentage points in 2016 to just over ½ percentage point in 2017 due to copper projects reaching full capacity.
  - Government contribution to growth expected to increase by nearly 1 percentage point reflecting planned increase in government investment and stimulus/reconstruction funds.
  - Overall growth expected to decline to about 2.7 percent in 2017.
  - Inflation should gradually return to the target range as weather-related factors abate and food inflation declines.
- Medium-term projection:
  - After a bounceback in 2018–19, growth projected to converge to potential of 3¾ percent in the medium term.
  - Output gap expected to close by 2021, with government accelerating consolidation toward the (one percent deficit) target in the fiscal rule.
- Risks:
  - Downside risks in 2017: additional delays in investment project execution; larger-than-expected flood-related damages; faster rise in international interest rates; global spillovers from protectionism or a slowdown in China.
  - Upside potential in the medium term: faster implementation of structural reforms (e.g., meaningful labor market reform from Social Protection Commission recommendations); new mining projects; higher infrastructure spending in systemically important countries pushing up commodity prices.
  - Upside could increase potential growth to 4-4.5 percent.

### III. Policy Recommendations
- Overarching guidance:
  - A combination of countercyclical policies and structural reforms is appropriate given domestic headwinds and challenging external conditions.
  - Short-term: agile fiscal and monetary policies to meet reconstruction needs while preserving fiscal and inflation anchors.
  - Structural reforms are essential to close infrastructure gaps, diversify the production base, reduce informality, deepen financial intermediation, and improve governance including fighting corruption.

#### A. Tackling Multiple Fiscal Objectives
- Short-term fiscal stance:
  - A moderate and temporary fiscal loosening is justified given prior prudent fiscal policy and low net public debt.
  - The fiscal stimulus plan is appropriate given the output gap and expected domestic demand deterioration, but success depends on executing a high level of investment spending.
  - Staff welcomes efforts to raise execution rates, including annual transfers to subnational governments earlier in the year (by the end of the first quarter).
  - Medium-term credibility depends on converging back to the original deficit target of one percent.
- Fiscal rules and revenue:
  - Move away from a structural balance rule has advantages and challenges; the new headline deficit target maintains checks and balances (e.g., the Fiscal Council) and contains escape clauses for reconstruction.
  - Headline deficit targets require sustained efforts to broaden the tax base and avoid recourse to procyclical spending; avoiding increased spending rigidities is recommended.
  - Tax-to-GDP ratio has fallen to a low of around 14 percent of GDP.
- Institutional and transparency enhancements:
  - Staff welcomes plan to establish a medium-term budgeting framework (MTBF) to improve consistency between annual budget and macro-fiscal aggregates.
  - Recommendations to improve the PPP framework, procurement phase, and capacity at Proinversión.
  - Publish an annual comprehensive fiscal risks statement covering contingent liabilities and risks associated with investment plans.

#### B. Striking the Right Monetary Policy Balance
- Monetary stance and communication:
  - With a widening output gap, temporary weather-related price pressures expected to abate, and core inflation within target, staff supports BCRP’s recent policy rate reduction.
  - Fiscal policy should be first line of defense if flood damage is larger-than-expected; monetary policy can complement if demand deteriorates further.
  - BCRP should remain data dependent and monitor inflation expectations closely for persistent drift above the target range.
  - Future changes in local currency reserve requirements should be clearly tied to the credit cycle; clear communication on the temporary nature of price shocks is essential.
- Exchange rate and FX operations:
  - Increased exchange rate flexibility and unwinding of BCRP’s FX swaps have fostered market-determined exchange rates.
  - Peru’s external position assessed as broadly consistent with fundamentals and appropriate policy settings.
  - Future FX interventions should be limited to cases of disorderly market conditions to help develop hedging markets.

#### C. Fostering Financial Stability and Development
- Financial system soundness:
  - System remains sound; stability risks mainly from adverse economic developments and substantial exchange rate depreciation.
  - Corporate leverage has increased but sensitivity analysis suggests low risks.
  - Banks show high profitability and capitalization ratios, and low nonperforming loan ratios.
  - Growing financial cooperatives segment shows more variability; dollarization has declined but remains a structural risk.
  - BCRP and SBS solvency stress tests indicate largest risks come from decelerating economic growth and a large sudden currency depreciation; buffers appear sufficiently strong.
  - Joint probability of distress of the seven largest banks has declined since its peak in 2010 and remains at a low level. [1]
- Recommended measures to guard stability:
  - Consolidate dedollarization gains (e.g., targets on banks’ share of dollar loans; consider increasing FX provisions for FX loans to unhedged borrowers).
  - Establish a financial stability council to formalize regular meetings between BCRP, MEF, and SBS while maintaining mandates and autonomy of agencies.
  - Broaden regulatory and supervisory perimeter, bringing larger cooperatives under direct SBS supervision.
  - Develop a national house price index including other major cities to allow comprehensive risk assessment.
- Financial deepening and inclusion:
  - Branch penetration quadrupled over the last decade, but overall financial depth remains low relative to fundamentals and the region.
  - Global Findex (2014): about 30 percent of Peruvian population aged over 15 has a bank account (regional 51 percent; income peers 58 percent).
  - Capital markets lack depth and liquidity despite recent reforms; private mobile payment initiatives (Billetera Móvil) are welcome.
  - Further efforts to reduce informality and increase literacy and financial education are important.

#### D. Increasing Potential Growth through Structural Reforms
- Multi-pronged reform agenda:
  - Need to raise potential growth in the context of lower commodity prices by improving education, infrastructure, innovation, and institutions.
  - Comprehensive package likely required, including making labor regulations significantly more flexible and ensuring labor costs grow in line with productivity to reduce informality.
  - Social Protection Commission has an important mandate for these reforms.
- Anti-corruption and governance:
  - Odebrecht case underscored corruption problems; government measures include extending bans for corrupt public officials, designating a special investigative team for the Odebrecht case, barring companies that admitted/been convicted of corruption from new bids, and ringfencing their assets in Peru.
  - Additional measures likely needed: strengthen anti-corruption legal framework and institutions, adopt international best practices for the Office of the Comptroller General.
  - Implement effective anti-money laundering measures in line with international standards, e.g., enhanced due diligence for politically exposed persons.

*Concluding thanks to Peruvian authorities and private sector representatives for their hospitality and open and constructive dialogue.*

*Source: Peru: Concluding Statement of the 2017 Article IV Mission*

---


## References

- [Peru and the IMF](http://www.imf.org/external/country/PER/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [The IMF and Good Governance -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2023/the-imf-and-good-governance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2017/05/25/ms052617-peru-concluding-statement-of-the-2017-article-iv-mission_