Press Release No. 04/245

Press Release: IMF Executive Board Completes First Review Under Peru's Stand-By Arrangement

November 19, 2004

The completion of the review makes available for drawing a total equivalent to SDR 126.06 million (about US$191.2 million), but the Peruvian authorities intend to continue treating the arrangement as precautionary.

Following the Executive Board discussion, Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"The Peruvian economy continues to perform well. Economic activity is robust, inflation remains low, and the external position is strong. The outlook for next year and the medium term is positive, as prudent macroeconomic policies and structural reforms are expected to continue to be implemented. Peru has built important buffers to mitigate vulnerabilities, including a comfortable level of international reserves and a well-capitalized banking system. The national consensus on prudent policies and reform needs to be preserved in order to further reduce the vulnerabilities associated with Peru's public debt and financial dollarization, and thereby help set the basis for Peru's strategy for exiting from Fund-financial support.

"Preserving macroeconomic stability and promoting poverty reduction continue to be

co-objectives of the authorities. The 2004 fiscal target is well within reach and the draft 2005 budget aims at further fiscal consolidation. Since wage pressures are expected to remain strong in the months ahead, it will be important to prepare contingency measures to ensure compliance with the 2005 fiscal targets.

"The central bank remains committed to keeping inflation low. Allowing the exchange rate to move more freely is important, among other things, to limit the costs of sterilized intervention and avoid the risks associated with one way bets to capital inflows.

"Several growth-enhancing reforms are under way, and the authorities are committed to addressing the delays registered in some areas of the structural reform agenda. The authorities' focus has been on awarding infrastructure transportation in concession to the private sector and reforming the preferential public pension regime. The planned establishment of a commercial court by end-2004 will help enhance the business climate. In addition, private sector investment is expected to be boosted with the awarding of two major roads in concession by end-April 2005. Other important structural areas in which progress has been made include completing a census of government employees and pensioners and taking the first step toward reducing labor costs by eliminating the special payroll tax by year-end," Mr. Carstens said.