Peru: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, March 22, 2024
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- Published: March 22, 2024
Recent performance and near-term outlook
- Economic growth declined to -0.6 percent in 2023, driven by climate-related shocks and social turmoil.
- Inflation is converging towards the target following the BCRP’s decisive monetary policy tightening.
- Fiscal deficit (of the non-financial public sector) reached 2.8 percent of GDP in 2023 (above the fiscal rule target of 2.4 percent of GDP), reflecting a shortfall in tax revenues due to the economic slowdown.
- The current account registered a surplus of 0.6 percent of GDP in 2023, led by sizable import compression and better terms of trade.
- International reserves remain at a comfortable level of about 28 percent of GDP.
- Outlook and projections:
- Real GDP is projected to grow by around 2.5 percent in 2024 with a negative output gap closing gradually until 2026.
- The current account is envisaged to return to a low deficit in 2024 as growth normalizes and to stabilize at about -1.5 percent of GDP in the medium term.
- Inflation is expected to decrease towards the middle of the target band while the BCRP continues easing to bring the policy rate to a neutral level.
Risks and macroeconomic buffers
- Key domestic risks:
- Intensification of political uncertainty.
- Social unrest.
- Climate-related shocks.
- Key external risks:
- Weak trading-partner growth.
- Commodity price volatility.
- Sharp tightening of global financial conditions.
- Upside scenario: a decisive resurgence in confidence catalyzed by large infrastructure and mining projects could strengthen private consumption and investment.
- Macro buffers and resilience:
- Low public debt.
- Abundant international reserves.
- Access to international capital markets on favorable terms.
- Access to the Flexible Credit Line (FCL).
Monetary policy and exchange rate
- The BCRP’s data-driven monetary policy easing remains appropriate with inflation entering the target band and anchored expectations.
- Additional data-dependent monetary policy easing is warranted.
- With the interest rate differential against the U.S. expected to narrow, the BCRP should continue to allow exchange rate flexibility.
Macroprudential and de-dollarization measures
- Credit dollarization fell from around 49 percent in mid-2013 to 22 percent in 2022, but the trend has stalled.
- Authorities could consider:
- Foreign exchange targeted macroprudential measures.
- Removing hurdles to the development of capital markets to reduce unhedged positions.
Fiscal policy, consolidation, and revenue mobilization
- The 2024 budget envisages a deficit of the non-financial public sector of 2 percent of GDP, consistent with the fiscal rule target.
- Contingent recommendation:
- If 2023 shock effects lead to lower-than-expected revenues, delaying consolidation by one year (setting a fiscal target for 2024 of 2.5 percent of GDP instead of 2.0 percent) could support the growth recovery and lessen the risk of missing the target again.
- Risks to attaining the 2024 target: new tax benefit and unfunded spending initiatives by Congress.
- Fiscal consolidation path:
- The fiscal deficit is set to gradually decline by 0.5 percent of GDP per year to reach a deficit of 1 percent of GDP by 2026.
- Revenue mobilization options:
- Expanding taxes to the digital economy.
- Homogenizing tax rates on capital and labor income.
- Curtailing sectoral tax benefits, special regimes, and other tax expenditures.
- Addressing modest personal income tax revenues by reviewing rates and high-income thresholds.
- Strengthening tax administration and compliance (note: implementation likely requires additional resources for the tax authority).
- Petro-Peru governance: recent restructuring announcements are positive, but further financial support should be conditional on firm viability.
- Improving fiscal policy guidance could bolster credibility.
Pensions and social protection
- A reform proposal before Congress includes:
- Expanding the minimum and social pension.
- Introducing automatic enrollment.
- Periodic assessment of parameters.
- Recommendations to strengthen the proposal:
- Clarify language limiting withdrawals.
- Increase coverage and benefit amounts for minimum and social pensions to reduce old-age poverty with limited fiscal cost.
- Improve targeting of the non-contributory pension.
- Over the medium term, a comprehensive pension reform is essential to address weak coverage and adequacy.
- New rounds of early withdrawals from the private pension scheme are ill advised.
Financial sector resilience and regulation
- Systemic risks are limited; banks remain profitable with ample liquidity and capital buffers.
- As the economy recovers, non-performing loans are expected to decline gradually.
- Vigilance is needed for pockets of vulnerability in small financial institutions and to ensure private pension funds have appropriate liquidity cushions against potential withdrawals.
- Regulatory implementation and timing:
- Most financial institutions are prepared for the full implementation of the Basel III capital requirement in September 2024.
- New rules for countercyclical capital buffers and provisioning will be effective in June 2024; the SBS should consider recalibrating activation criteria.
- Recovery and resolution plans for domestic systemically important banks have been submitted for review and should be extended to the financial group level.
- Support innovation while managing risks:
- Lower barriers to entry for Fintech providers.
- Maintain appropriate risk-based regulation.
- Implement interoperability regulations and introduce frameworks for Open Banking and Finance.
Productivity, climate resilience, digital transformation, and governance
- Growth and productivity:
- Average and potential growth have fallen to about 2.5 percent, driven by a decline in total factor productivity growth across firm size, region, and industry.
- Barriers cited include special corporate tax regimes and labor legislations/regulations that do not incentivize formalization and growth.
- Continued efforts to simplify procedures for business formalization and construction and operating licenses are welcome.
- Climate change and resilience:
- Peru is highly vulnerable to climate change; damages from natural disasters will likely increase and undermine potential growth.
- Progress exists in enhancing public infrastructure and identifying adaptation gaps, but climate spending remains low, budget planning lacks adequate costing of key adaptation measures, and territorial planning should be strengthened.
- Scaling up investments in climate adaptation and resilience would unlock potential output gains and fiscal savings over the long term.
- A recent government initiative to shift focus to ex-ante resilience building is noted as positive.
- Digital technologies and artificial intelligence:
- Progress in FinTech and GovTech: digital payments and wallets have increased financial account ownership; VAT e-invoicing and electronic tax payments are in place.
- Artificial intelligence can raise productivity in finance, government, education, health, IT, and construction, but requires workforce reskilling to manage social transitions.
- Governance and anti-corruption:
- Authorities reaffirmed commitment to combating corruption; multiple frameworks exist (integrity officers, digital complaint platforms, beneficial ownership registry) but implementation requires prioritization and adequate resources.
- Recommendations include strengthening independence and integrity of judicial bodies through robust vetting and reducing reliance on temporary judges, and improving coordination among agencies to enhance prosecution and reduce impunity.
Policy priorities and reform agenda
- Near-term priorities:
- Continue data-driven monetary easing and exchange rate flexibility.
- Use targeted macroprudential tools to facilitate de-dollarization.
- Preserve fiscal prudence while allowing temporary flexibilities if warranted by weaker revenues.
- Advance pension reform, avoiding further early withdrawals.
- Fully operationalize new financial regulations and monitor small-institution vulnerabilities.
- Medium-term priorities:
- Strengthen revenue mobilization and tax policy design.
- Scale up climate adaptation and resilience spending with better budget costing.
- Unlock productivity through regulatory simplification, improved business formalization, and capital market development.
- Harness digital technologies and artificial intelligence while investing in worker skills.
- Deepen anti-corruption implementation and judicial independence.
- Structural reform momentum:
- Government efforts in cutting red tape, unblocking large infrastructure projects, streamlining the tax system, reforming procurement, and the recently approved political reform are welcome.
- The OECD accession process provides a roadmap for reforms to enhance local government capacity, improve the business climate, reduce informality, and reform the civil service.
Mission thanks the Peruvian authorities for their cooperation and discussions during February 21 – March 7.