Peru: Staff Concluding Statement of the 2019 Article IV Mission
IMF News, December 3, 2019
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Bibliographic details
- Published: December 3, 2019
Mission context and timing
- Mission period: November 5–18, 2019.
- The authorities consented to publication; views expressed are those of IMF staff and do not necessarily represent the IMF Executive Board.
Recent developments, outlook, and risks
- Historical performance:
- Annual real GDP growth averaged 5.4 percent over the past fifteen years.
- Recent slowdown drivers:
- Less benign external environment, trade tensions, increased international financial market volatility, and partial recovery of commodity prices from the 2011–15 decline.
- Domestic factors: 2017 El Niño weather event disruption; findings of the Lava Jato investigation hampering large investment projects.
- Short-term outlook:
- GDP grew by 2.2 percent in the first nine months of 2019.
- GDP growth for 2019 is projected to be 2½ percent.
- Projected GDP growth: 3¼ percent in 2020 and 3¾ percent in the following years.
- Negative output gap expected to persist; inflationary pressures should remain subdued.
- Risk assessment:
- Risks tilted to the downside: prolonged external uncertainty, continued trade tensions, sudden tightening of financial conditions, exchange rate movements magnified by partial dollarization, and domestic political uncertainty and corruption investigations.
- Policy buffers cited: favorable public debt position, considerable financial assets, large stock of international reserves, and a solid financial system.
Fiscal policy recommendations
- Use fiscal space:
- Authorities should make full use of the space available under the fiscal rule to provide a fillip to the economy.
- Policy aim: bring fiscal deficit below the 1 percent of GDP ceiling by 2021.
- Budget under-execution has led to a tighter stance than required by the fiscal rule, contributing to slowing growth.
- Government measures to remove financing and capacity constraints of local and regional governments should help speed up capital spending execution; close monitoring and supporting measures may be necessary.
- Public investment and fiscal consistency:
- National Plan of Infrastructure for Competitiveness identifies priority projects amounting to 13 percent of GDP to be executed in the next decade.
- To be consistent with the fiscal rule, additional measures would be required: enhancements in revenue administration, improved performance of public enterprises, and reduced current spending.
- Revenue mobilization:
- Peru’s tax revenue ratio remains comparatively low with modest progress over the last twenty years.
- Continued improvements in revenue administration are paramount; maintain SUNAT’s ability to focus on core activity and attract top quality staff.
- Recent measures: introduction of electronic invoicing and adoption of best practices on international taxation.
- Authorities’ intention to simplify tax regimes for small businesses could help reduce loopholes and increase compliance.
- Fiscal framework flexibility:
- Consider introducing more flexibility in the fiscal framework to avoid procyclical fiscal stance and create space for infrastructure spending.
- Low debt and strong fiscal framework would limit risks associated with a modest increase in the deficit ceiling; existing expenditure rules would continue to limit current spending.
Monetary and exchange rate policy recommendations
- Monetary stance:
- Recent easing of monetary policy stance is appropriate given weakening growth, increased uncertainty, and muted inflationary pressures.
- Inflation expectations well anchored; output gap expected to remain negative; fiscal policy contractionary.
- Forward guidance from the central bank indicates the last policy rate cut did not necessarily imply further cuts; policy remains data-driven.
- Further policy easing might be needed if downside risks to the inflation outlook materialize.
- Real interest rate now close to zero; authorities should remain vigilant against emergence of financial sector vulnerabilities.
- Exchange rate flexibility and dollarization:
- As dollarization declines, the central bank could allow greater exchange rate flexibility to absorb external shocks and promote financial development.
- Loan dollarization: 39 percent for firms and 10 percent for households.
- Use of foreign exchange intervention (FXI) has declined over time.
- Limiting central bank intervention to cases of disorderly market conditions could help reduce dollarization further, encourage hedging instruments, and strengthen the interest channel of monetary policy.
Financial sector policy recommendations
- Progress and remaining actions:
- Important steps taken to strengthen financial sector oversight, including the new law on credit cooperatives and measures responding to Financial Sector Assessment Program recommendations.
- Implemented measures to limit systemic risks; enhance governance and control frameworks; broaden supervision of bank and insurance sectors; and strengthen financial integrity.
- Further steps needed: reinforce legal protection of supervisors; mandate the SBS to exercise consolidated supervision; enhance effectiveness of the AML/CFT framework.
- Bring some regulations in line with Basel III, including risk weights for foreign currency loans, to help reduce dollarization further.
Structural reforms and social protection
- Prioritization and approach:
- National Competitiveness Plan (released in June) covers a large spectrum of reforms; a focused approach with clear timelines recommended.
- Legal and product market reforms would ensure high growth payoff and potentially greater popular support.
- Governance and anti-corruption:
- Continue efforts to improve public sector transparency and governance.
- Additional anti-corruption reforms recommended: simplify and make government procurement more transparent and competitive; reform the National Control System to better manage risks and increase accountability; introduce independent internal auditors in some entities while strengthening external audits.
- Economic diversification and agriculture:
- Foster economic diversification; extension of the agriculture promotion law appears crucial.
- Social protection and inclusion:
- Reform pension system to ensure sustainability and enhance coverage.
- Provide more equitable distribution of natural resource revenues across regions.
- Deepen financial development and inclusion as identified in the National Competitiveness Plan.
- Reforms to reduce labor market rigidities and other costs that prevent shifts from informal to formal sector.
Mission acknowledgement
- The mission thanks the authorities for their generous hospitality and the candid and constructive discussions during November 5–18, 2019.
Selected economic indicators (staff projections)
- Social Indicators:
- Poverty rate (total) 1/: 20.5 (2018)
- Unemployment rate: 6.7 (2018)
- Production and prices (Annual percentage change; unless otherwise indicated):
- Real GDP: 4.0 (2018); 2.4 (2019); 3.2 (2020); 3.7 (2021); 3.7 (2022)
- Real domestic demand: 4.2 (2018); 3.4 (2019); 3.9 (2020)
- Consumer Prices (end of period): 2.2 (2018); 1.9 (2019); 2.0 (2020)
- External sector:
- Exports: 8.0 (2018); -4.8 (2019); 3.6 (2020); 4.3 (2021); 4.8 (2022)
- Imports: 8.1 (2018); -0.3 (2019); 2.7 (2020); 5.6 (2021)
- External current account balance (% of GDP): -1.6 (2018); -2.1 (2019); -1.4 (2020)
- Gross reserves (In billions of U.S. dollars): 60.3 (2018); 66.7 (2019)
- Percent of short-term external debt: 363.5 (2018); 446.2 (2019); 452.0 (2020); 447.1 (2021); 434.8 (2022)
- Money and credit (Corresponds to depository corporations):
- Broad money: 9.5 (2018); 8.3 (2019); 7.8 (2020)
- Net credit to the private sector: 10.3 (2018); 7.3 (2019); 6.9 (2020); 7.1 (2021); 6.6 (2022)
- Note: Foreign currency stocks are valued at end-of-period exchange rates.
- Public sector (In percent of GDP; unless otherwise indicated):
- NFPS Revenue: 24.5 (2018); 25.1 (2019); 25.4 (2020); 25.7 (2021)
- NFPS Primary Expenditure: 25.2 (2018)
- NFPS Primary Balance: -0.9 (2018); 0.0 (2019); 0.5 (2020)
- NFPS Overall Balance: -2.3 (2018); -1.7 (2019); -1.5 (2020); -1.0 (2021)
- Debt:
- Total external debt: 34.5 (2018); 35.2 (2019); 34.8 (2020); 33.7 (2021); 32.5 (2022)
- NFPS Gross debt (including Rep. Certificates): 26.1 (2018); 26.8 (2019); 27.0 (2020); 26.6 (2021)
- External: 8.8 (2018); 9.6 (2019); 9.7 (2020); 9.4 (2021); 9.1 (2022)
- Domestic: 17.3 (2018); 17.2 (2019); 17.1 (2020); 17.0 (2021)
- Savings and investment:
- Gross domestic investment: 21.5 (2018); 22.0 (2019); 22.3 (2020); 23.1 (2021); 23.6 (2022)
- National savings: 19.9 (2018); 20.7 (2019); 21.6 (2020); 22.2 (2021)
- Memorandum items:
- Nominal GDP (S/. billions): 741 (2018); 775 (2019); 816 (2020); 864 (2021); 916 (2022)
- GDP per capita (in US$): 7,007 (2018); 7,106 (2019); 7,296 (2020); 7,600 (2021); 7,928 (2022)
IMF staff concluding statement, December 3, 2019.