Press Release No. 99/24

The International Monetary Fund (IMF) today approved a three-year credit for Peru equivalent to SDR 383 million (about US$512 million) under the Extended Fund Facility (EFF) ¹ to support the government’s economic reform program for 1999-2001. The government intends to treat the EFF credit as precautionary, and will only draw under it if adverse external circumstances make it necessary.

In commenting on the Executive Board’s discussion of the request by Peru, Stanley Fischer, First Deputy Managing Director of the International Monetary Fund (IMF), made the following statement:

"Directors welcomed the authorities’ overall strong record of prudent economic management in the face of a number of external shocks that adversely affected economic performance in 1998 and early 1999. Based on continued timely policy adjustment, the program for 1999 assumes that a recovery will gradually build momentum in the course of the year.

"Directors endorsed the fiscal program, which provides for a modest decrease in the primary surplus in 1999. They agreed that it strikes an appropriate balance between the need to adapt fiscal policy at a time of sluggish economic activity and the need for further fiscal consolidation over the medium term. Directors endorsed the authorities’ aim of bringing the fiscal accounts close to balance in the course of the next two to three years.

"Directors welcomed the emphasis being placed on more efficient, higher quality fiscal expenditure, as well as on further improvements in tax administration, as ways of mobilizing resources for priority expenditures, including in education, health, and poverty alleviation. Several Directors also encouraged the authorities to keep open the various options for increasing the yield and efficiency of the tax system.

"Directors endorsed the authorities’ two-pronged approach to poverty alleviation that stresses both macroeconomic policies that foster strong and sustainable growth, and targeted social programs aimed at helping lift individuals and families out of poverty.

"Several Directors stressed the importance of continued close monitoring of the banking system. They welcomed the recent reform of banking legislation, which in their view should improve the ability of the bank supervisory agency to address bank problems at an early stage, and give a better chance of resolving them before a state of insolvency is reached.

"Directors welcomed the authorities’ intention to give renewed emphasis to the government’s structural reform agenda, including the privatization and concession program. Directors observed that the flexible exchange rate system had helped the economy adjust to external shocks, and supported the authorities’ intention to maintain this flexibility."

ANNEX

Program Summary

Throughout the 1990s, Peru has accomplished much under IMF-supported programs in laying the basis for sustainable and strong economic growth. Inflation has declined to low levels; a severe external debt problem has been virtually overcome; and the economy has moved onto a path of greater efficiency as a result of a series of fiscal and other structural reforms, market liberalization, and the transfer of productive activities to the private sector. In 1998, economic activity weakened under the combined influence of external shocks, which included the El Niño weather disturbance, a sharp drop in export commodity prices, and a liquidity squeeze stemming from turbulence in international financial markets.

The medium-term strategy of the program ² is to promote sustainable growth of output and employment, consolidate progress toward external viability, and continue efforts to reduce inflation. The objectives of the program include raising output growth to 6% a year and lowering the annual inflation to 3%. The fiscal deficit, after increasing in 1999, would be nearly eliminated by 2001. The program for 1999 assumes a 3% growth in real GDP, and envisages an annual inflation rate of 6%, a decline in the external current account deficit to 5% of GDP, and a moderate accumulation of net international reserves that would keep gross reserves in the range of 11-12 months of imports of goods and services. To these ends, efforts will be made to improve the quality and efficiency of expenditure, and to emphasize increases in the yield, efficiency, and equity of the tax system.

The structural reform agenda encompasses the implementation of recently revised banking legislation, improvements in the pension system, privatization, and the granting of concessions for shifting control over productive activities from the public sector to the private sector. In addition, the government plans to adopt measures to foster development of the domestic capital market, to promote titling of private land, as well as the sale of government-owned agricultural loans, both of which are aimed at raising growth in the agricultural sector.

In the social sector, the government attaches high priority to reducing poverty and improving the overall impact of social programs, including better targeting of resources for nutrition, education, health, and rural development. To this end, the government plans to identify key social programs that would be protected from budget cuts, including basic education and basic health. At the same time, it will seek to strengthen existing poverty alleviation programs through better design and closer coordination among ministries.

Peru joined the IMF on December 31, 1945, and its current quota ³ is SDR 638.4 million (about US$853 million). Its outstanding use of IMF financing currently totals SDR 589 million (about US$787 million).

¹ The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4 ½-year grace period, and the interest rate, adjusted weekly, is currently about 3.34% a year.
² Details on the program are available on the IMF ’s website: http://www.imf.org.external/np/loi/mempub.asp
³ A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.

Peru: Selected Economic Indicators 1998 Projections 1995 1996 1997 Prog. Prel. 1999 1/ 2000 2001 (Annual percentage change) Real GDP 7.3 2.5 7.2 4.0 0.7 3.0-4.0 5.5 6.0 Real domestic demand 11.9 0.2 6.7 3.6 - 0.2 -1.7 5.1 5.5 Of which: Private consumption 8.1 1.6 4.0 3.5 - 0.3 1.4 4.4 5.0 Consumer prices 10.2 11.8 6.5 7.5-9.0 6.0 5.0-6.0 4.0 3.0 End of period 11.1 11.5 8.5 ... 7.3 4.4 5.3 3.5 Period average Exports (U.S. dollars) 21.9 5.8 15.5 - 4.0 - 16.0 9.4 13.9 11.5 Imports (U.S. dollars) 38.7 1.8 8.3 4.1 - 4.1 -6.3 10.3 7.6 Terms of trade 2.8 0.2 5.2 - 5.1 - 8.0 -11.2 3.8 4.2 Real effective exchange rate (depreciation -) 2/ - 3.3 0.9 7.4 ... - 11.1 ... ... ... I. Money and Credit Broad money 3/ 24.2 28.0 15.0 11.0 0.4 7.3 10.7 10.5 Credit to the private sector 3/ 37.6 35.6 27.4 12.4 8.4 10.8 10.0 9.4 (In percent of GDP) II. Savings and Investment Gross domestic investment 24.4 23.3 24.5 24.7 24.6 22.9 23.4 23.8 Public sector 4.3 3.8 3.8 3.9 3.8 3.8 3.9 3.9 Private sector 4/ 20.1 19.5 20.6 20.8 20.7 19.1 19.6 19.9 National savings 17.1 17.4 19.2 18.8 18.5 17.9 18.4 19.0 Public sector 5/ 2.1 3.5 4.4 4.3 3.6 2.8 3.1 3.5 Private sector 14.9 13.9 14.9 14.5 14.9 15.0 15.3 15.5 External savings 7.3 5.9 5.2 5.9 6.0 5.0 5.0 4.8 III. Balance of Payments Current account - 7.3 - 5.9 - 5.2 - 5.9 - 6.0 -5.0 -5.0 -4.8 Capital and financial account 8.9 9.0 7.8 6.9 4.3 5.7 6.0 5.6 Net international reserves (increase -) - 1.6 - 3.2 - 2.7 - 0.9 1.6 -0.7 -1.0 -0.7 IV. Combined Public Sector Combined public sector primary balance 0.4 1.3 1.7 1.7 1.3 0.9 1.3 1.6 Interest due 3.2 2.3 1.7 1.7 1.7 2.1 2.1 2.0 Combined public sector overall balance - 2.8 - 1.0 0.0 0.0 - 0.5 -1.2 -0.8 -0.3 Sources: Central Reserve Bank of Peru; and IMF staff estimates and projections. 1/ The program was designed on the basis of real GDP growth of 3 percent and inflation during 1999 of 6 percent. 2/ End of period; based on Information Notice System. 3/ Flows in foreign currency are valued at program exchange rate. 4/ Includes change in inventories. 5/ Excludes privatization receipts.