IMF Executive Board Concludes 2008 Article IV Consultation with Peru

Public Information Notice (PIN) No. 09/12
February 3, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 30, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Peru.1


Peru has enjoyed an impressive economic performance against the backdrop of a favorable external environment in recent years. Led by consumption and investment, real GDP is estimated to have grown above 9 percent in 2008, marking the country's longest expansion on record. On the back of high food and fuel prices, headline inflation reached 6.7 percent in 2008, exceeding the 1-3 percent target range, but remaining one of the lowest by regional standards.

The sound policy framework put in place in recent years and the build up of a solid international reserves position have contributed to reduce vulnerabilities significantly, lower poverty, and enhance the business environment. The strong fiscal surpluses achieved in recent years are the backbone of this success, as they have supported a significant reduction in public debt, improved maturity structure, and the build up of important fiscal buffers. A sound monetary policy, entrenched on an inflation targeting framework, has also been instrumental in helping to maintain macroeconomic stability and reduce dollarization. Structural reforms have reduced fiscal and financial vulnerabilities, while reforms to open new trade destinations, lower informality, streamline procedures, and improve the business climate have helped improve long-term growth prospects and support poverty reduction.

These achievements have placed Peru on a strong position to weather the expected deterioration in external conditions. Building on Peru's strong fundamentals, including a resilient financial system, several measures have been appropriately implemented by the authorities that would help to limit spillovers, preserve adequate liquidity conditions in the domestic markets, and bolster domestic confidence. As a result, orderly liquidity conditions in the financial system have been preserved, and despite some increase in deposit dollarization between September and November 2008, preliminary data to December suggests that it has renewed its downward trend of recent years.

The authorities have been implementing reforms to further strengthen the financial system. Large official reserves-currently at around US$30 billion-and strong financial soundness indicators, along with the banks' limited financial reliance on external funding have helped preserve the system's stability. The authorities have recently introduced prudential measures-including more restrictive rules for consumer credit; new dynamic provisioning made effective last December, and strengthened banks' minimum capital requirements as Basel II is gradually implemented.

On the fiscal area, the authorities have announced several measures to shield the economy from the global crisis and enhance confidence. These include measures to maintain a program of public investment and support construction, as well as to support micro and small enterprises, exporters, and social programs. To further boost confidence, the authorities have also lined up access to contingent credit lines from official creditors.

As a result, the near term domestic economic outlook still remains favorable, but with risks on the downside. The pace of economic growth is expected to decelerate to 6 percent in 2009, reflecting the global slowdown, lower terms of trade, and tighter financial conditions that would affect net exports and private investment. With the global price disinflation underway, inflation would decelerate toward the 1-3 percent target range. A more severe and prolonged global slowdown could also extend the downside risks into 2010. Nevertheless, Peru's medium-term prospects are favorable and require preserving prudent macroeconomic policies and dealing with long-standing structural challenges.

Executive Board Assessment

Executive Directors praised the Peruvian authorities for their sustained implementation of sound macroeconomic policies and structural reforms, which—supported by favorable external conditions—have fostered the country's longest economic expansion. Sustained fiscal surpluses, supported by a prudent conduct of monetary policy, have been the backbone of this success, while important structural reforms have enhanced the resilience and depth of the financial system and capital markets and improved the business environment. These policies have yielded an impressive economic performance with robust economic growth, relatively low inflation, reduced vulnerabilities, and important gains in poverty alleviation.

Despite the adverse impact of the global economic downturn and financial crisis, a soft landing for Peru's economy seems likely, owing to its strong fundamentals and the authorities' sound policy framework. Nevertheless, with downside risks increasing, Directors endorsed as timely and appropriate the authorities' preparedness plan, and welcomed as well the authorities' commitment to make further advances in tackling structural challenges. If the global slowdown were to prove more severe and prolonged than expected, Directors concurred with the authorities' intention to implement prudent countercyclical measures.

Directors supported the authorities' target of a neutral fiscal stance in 2009, geared to allowing automatic stabilizers to operate fully and phasing public investment execution evenly, while boosting resources for subnational governments to increase their investment. Directors emphasized the importance of broadening Peru's tax base and proceeding with the reform of tax exemptions planned for March 2009. They welcomed the recent issuance of the methodological guidelines for assessing tax exemptions.

Directors encouraged the authorities to further strengthen the institutional framework for fiscal policy, most notably by gradually developing a structural fiscal rule to enhance the credibility of fiscal policy. Reforms to minimize fiscal risks, including from Public-Private Partnerships, will be important, as will their proper fiscal accounting. Other key priorities are aligning the expenditure limits for subnational governments with the Fiscal Responsibility and Transparency Law and the Decentralization Law, fully implementing the Treasury Single Account, and reforming the Fuel Stabilization Fund to make its price-band adjustment mechanism automatic.

Executive Directors welcomed the efforts to make further advances on poverty reduction, by improving the effectiveness and targeting of social programs, and strengthening large social programs. They also supported the authorities' plans to tackle the challenges posed by existing regional disparities.

Directors considered that Peru's inflation targeting framework should remain focused on preserving low and stable inflation. They welcomed the central bank's commitment to ensure a gradual convergence to the inflation target range in 2009, while providing adequate liquidity to support domestic demand. In this context, Directors supported the authorities' intention to continue to monitor closely the path of domestic demand, inflation, and inflation expectations, and to adjust policies as warranted. Delinking the appointment of the central bank's president and board members from the presidential cycle would further bolster the credibility of the inflation-targeting framework.

Directors noted the staff assessment that the real effective exchange rate is broadly aligned with fundamentals. Peru's exchange rate policy has appropriately balanced exchange rate flexibility and dollarization risks. Directors supported the authorities' foreign exchange intervention, which has reduced exchange rate volatility and increased official reserves. They generally agreed that Peru's improved fundamentals provide scope for greater exchange rate flexibility but considered that such a transition should await more stable external conditions.

Directors commended the progress made in strengthening the financial system. Continuing steady implementation of Basel II, as well as enactment of minimum capital requirements for microfinance institutions, remain key priorities. The authorities have taken important steps by establishing new procyclical provisioning rules and tightening prudential regulations on consumer loans. Directors welcomed the authorities' efforts to enhance their crisis preparedness, underscoring the need to strengthen the framework for providing adequate liquidity to all financial entities and to gradually recapitalize the Deposit Insurance Fund.

Directors congratulated the authorities on Peru's highly successful Stand-By Arrangement with the Fund and welcomed warmly Peru's inclusion in the Fund's Financial Transaction Plan.

Peru: Selected Economic Indicators

          Prog. CR/08/258 Proj. Proj. CR/08/258 Proj


2004 2005 2006 2007 2008 2009

Social Indicators


Life expectancy at birth (years)

... 70.7 ... ... ... ... ... ...

Infant mortality (per thousand live births)

... 22.8 ... ... ... ... ... ...

Adult literacy rate

87.8 87.9 ... ... ... ... ... ...

Poverty rate (Total) 1/

48.6 48.7 44.5 39.3 ... ... ... ...

Unemployment rate

9.4 9.6 8.5 8.4 ... ... ... ...
(Annual percentage change; unless otherwise indicated)

Production and prices


Real GDP

5.1 6.7 7.7 8.9 8.2 9.4 6.5 6.0

Real domestic demand

4.0 5.7 10.3 11.8 11.0 12.8 7.1 6.8

Of which: Private sector

4.4 5.9 9.0 11.4 11.2 12.4 6.4 7.7

Consumer Prices (end of period)

3.5 1.2 1.1 3.9 4.3 6.7 2.8 2.8

Consumer Prices (period average)

3.7 1.6 2.0 1.8 4.8 5.8 3.0 4.7

External sector



40.9 35.6 37.0 17.4 18.5 12.8 3.5 -17.7


19.5 23.2 23.0 31.8 35.0 44.7 11.7 -4.1

Terms of trade (deterioration -)

9.2 5.9 28.3 3.6 -1.8 -9.5 -5.8 -10.6

Real effective exchange rate (depreciation -) 2/

-1.6 -0.5 -1.3 -0.6 ... ... ... ...

Money and credit 3/ 4/


Liabilities to the private sector

8.3 18.4 8.8 22.7 14.9 26.6 12.4 10.3

Net credit to the private sector

-0.3 16.3 6.2 30.8 13.4 31.1 10.3 11.6
(In percent of GDP; unless otherwise indicated)

Public sector


General government current revenue

17.0 18.0 19.8 20.7 20.3 20.7 19.2 19.6

General government noninterest expenditure

16.2 16.7 16.2 16.0 16.0 17.1 16.2 17.3

Combined public sector primary balance

1.0 1.6 4.1 5.1 4.5 3.5 2.9 2.0

Interest due

2.0 1.9 1.9 1.8 1.5 1.5 1.3 1.5

Combined public sector overall balance

-1.1 -0.3 2.2 3.3 3.0 2.0 1.6 0.6

Combined public sector overall balance (including CRPAOs)

-1.1 -0.3 2.1 2.2 2.4 1.3 1.2 0.2

External Sector


External current account balance

0.0 1.4 3.0 1.4 -0.6 -3.3 -0.7 -3.0

Gross reserves


In millions of U.S. dollars

12,649 14,120 17,329 27,743 37,243 30,743 41,243 30,243

Percent of short-term external debt 5/

163.9 311.4 182.4 456.1 582.4 442.8 503.9 358.1

Percent of foreign currency deposits at banks

137.3 125.9 151.7 208.5 264.4 165.8 258.2 158.0



Total external debt

44.8 36.1 30.5 31.5 25.1 29.2 22.4 28.9

Combined public sector debt (including CRPAOs)

44.3 37.7 33.1 30.9 22.0 24.8 19.0 21.7


9.2 9.7 9.2 11.0 7.3 8.2 6.5 7.4

External 6/

35.1 28.0 23.9 19.9 14.7 16.5 12.6 14.4

Savings and investment


Gross domestic investment

18.1 17.9 20.2 22.9 25.8 28.0 27.7 30.1

Public sector 7/

2.8 2.9 2.8 3.1 4.1 4.4 4.9 4.8

Private sector

15.3 15.1 17.4 19.8 21.7 23.6 22.8 25.3

National savings

18.1 19.4 23.2 24.3 25.2 24.8 27.0 27.0

Public sector 8/

1.7 2.6 5.1 6.4 7.2 6.3 6.4 5.4

Private sector

16.4 16.8 18.1 17.9 18.0 18.5 20.5 21.6

External savings

0.0 -1.4 -3.0 -1.4 0.6 3.3 0.7 3.0

Memorandum items


Nominal GDP (S/. billions)

238.0 261.9 302.8 335.7 382.9 379.0 414.3 413.5

GDP per capita (in US$)

2,602 2,920 3,346 3,826 4,868 4,550 5,505 4,723

Sources: Central Reserve Bank of Peru; Ministry of Economy and Finance; ECLAC 2002-03; National Statistical Institute (INEI); and IMF staff estimates/projections.

1/ Defined as the percentage of households with total spending below the cost of a basic consumption basket.
2/ Based on Information Notice System.
3/ Corresponds to the banking system.
4/ Foreign currency stocks are valued at end-of-period exchange rates.
5/ Short-term debt is defined on a residual maturity basis, and includes amortization of medium- and long-term debt.
6/ Includes debt by the Central Reserve Bank of Peru.
7/ Includes CRPAOs.
8/ Excludes privatization receipts.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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