Press Release No. 08/181

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

July 24, 2008

The Executive Board of the International Monetary Fund (IMF) has completed the third review of Peru's economic performance under a 25-month Stand-By Arrangement in the amount equivalent to SDR 172.4 million (about US$280.7 million).

The authorities reiterated their intention to continue treating the arrangement as precautionary. The arrangement was approved on January 26, 2007 (see Press Release No. 07/15).

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said:

"Peru has achieved record-high economic growth, rising employment, and significant poverty reduction, despite heightened risks in the global economy. This impressive performance, underpinned by the authorities' prudent policies and structural reform efforts, has helped Peru achieve investment grade status. Sustaining these efforts will be critical to entrenching long-term growth and poverty reduction.

"The authorities remain focused on preserving macroeconomic stability. They have tightened monetary policy to contain underlying pressures and help anchor inflation expectations. Fiscal policy has also been tightened, and the authorities are committed to maintaining their prudent strategy of past years to help achieve a neutral fiscal stance.

"While rising inflation has been driven mostly by international developments, it is important to continue using all monetary policy instruments to bring inflation gradually toward its target range while ensuring an orderly dedollarization process.

"The authorities have made significant progress in enhancing the fiscal structural framework. A comprehensive law for Public-Private Partnerships provides more balanced risk-sharing between the public and private sectors, and a new Customs Law maintains customs and domestic tax administration under a single agency. Continued reforms are important to minimize fiscal risks, including by preserving a sound public investment policy; amending the Fiscal Responsibility Law to introduce sanctions for noncompliance and ensure that spending limits are observed by all government levels; and reforming the Fuel Price Stabilization Fund to better align domestic and international prices and reduce its fiscal burden.

"Peru has made great strides on poverty alleviation. The launching of the Fund for Regional and Local Investment, as well as the recent reforms to the National System of Public Investment and the continued leadership of the Interministerial Committee for Social Affairs in implementing the poverty alleviation strategy will help entrench these gains.

"The authorities continue to focus on strengthening of financial sector, and very significant steps were achieved through the recent amendment of the General Banking Law that will align minimum capital requirements and those on exchange-rate-related risks with Basel II. In the period ahead, it will be important to amend the General Banking Law to raise the minimum capital requirements of microfinancial institutions, and to align the regulatory framework for public banks with that of private banks to help maintain a level playing field in the private sector. The increase in the legal limit for foreign investment by private pension funds will help deepen domestic capital markets.

"Important steps have been taken towards the completion of a set of wide-ranging reforms oriented to boost competitiveness and enhance the business environment, and to ensure their steadfast implementation. The new legal framework for micro and small businesses is a welcome advance that will help reduce informality and provide workers with better access to social security and health benefits," Mr. Portugal said.