## Peru: Staff Concluding Statement of the 2024 Article IV Mission _IMF News, March 22, 2024_ ## Source details **Canonical URL:** [Peru: Staff Concluding Statement of the 2024 Article IV Mission](https://www.imf.org/en/news/articles/2024/03/21/cs32124-peru-concluding-statement-2024-art-iv-mission) ## Other formats - [Markdown version](/en/news/articles/2024/03/21/cs32124-peru-concluding-statement-2024-art-iv-mission/index.md) - [Structured JSON version](/en/news/articles/2024/03/21/cs32124-peru-concluding-statement-2024-art-iv-mission/index.json) - [Bundle manifest](/en/news/articles/2024/03/21/cs32124-peru-concluding-statement-2024-art-iv-mission/bundle-manifest.json) ## Bibliographic details - 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.* --- ## 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) - [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/2024/03/21/cs32124-peru-concluding-statement-2024-art-iv-mission_