Press Release No. 02/6

Press Release: IMF Approves Two-Year Stand-By Credit for Peru

February 1, 2002

The International Monetary Fund (IMF) today approved a two-year stand-by credit for Peru for SDR 255 million (about US$316 million) to support the government's economic program for 2002-2003. The government of Peru will treat the stand-by credit as precautionary and does not intend to make any drawings.

In commenting on the Executive Board discussion, Eduardo Aninat, Deputy Managing Director and Acting Chairman, said:

"The Executive Board welcomed the Peruvian authorities' commitment to maintain macroeconomic stability and pursue a comprehensive structural reform agenda. The successful implementation of the authorities' program should lay the basis for sustained high growth of output and employment and a steady reduction in poverty. The program supported by the Fund should also strengthen public confidence and catalyze financing for the public sector, including adjustment lending by the multilateral institutions.

"The centerpiece of the economic program for 2002-2003 is the implementation of a broad-based tax reform that would improve the neutrality and equity of the tax system through a widening of the tax base. This reform, together with government expenditure restraint, would enable the combined public sector deficit to decline gradually over the program period. Attainment of the program's fiscal targets is critical for achieving the program's objectives of a recovery in economic activity, low inflation, a moderate external current account deficit, and a modest increase in net international reserves. The revision of the Law on Fiscal Transparency and Responsibility will facilitate fiscal policy over the medium term.

"The fiscal adjustment in the first year of the program falls, appropriately, on the side of expenditure restraint, before shifting to the revenue side following the full implementation of the tax reform. Expenditure restraint in 2002 comes mainly from a stricter control of current outlays, and from cuts in the areas of defense and security that in turn would protect spending on priority social programs. In 2003, the tax reform combined with continued improvement in the efficiency of government expenditure-supported by the World Bank, the Inter-American Development Bank, and the Andean Development Corporation-should create room for a moderate increase in wages and pensions.

"The ambitious privatization and concession program should aid in efforts to attract private investment in important infrastructure sectors and provide financing for the fiscal deficits during the program period. To allow for additional spending on infrastructure needs in the country, the fiscal deficit target for 2002 could be increased moderately to the extent that privatization receipts in the year exceed the baseline projection.

"Systemic risk in the financial sector appears to be limited, but the authorities should continue to strengthen oversight of the banking system. This would include granting adequate legal protection to the staff of the Superintendency of Banks (SBS), strengthening bank capital requirements, limiting credit risk, and maintaining the budgetary independence of the SBS.

"The newly-created state-supported financial institution should be operated prudently, with an eye to containing any potential future costs. More broadly, the authorities should guard against committing additional public resources to support specialized regional or sectoral financial institutions," Mr. Aninat said.

ANNEX

Program summary

During 1991-1997, Peru made significant progress in stabilizing the economy and implementing structural reforms that helped boost economic growth. Real GDP growth in the period averaged 5.3 percent a year, inflation was brought down from hyperinflation levels to single digits, and poverty levels fell significantly. Subsequently, performance deteriorated mainly as a result of adverse external shocks and domestic political difficulties. Between 1998 and 2000 economic growth averaged only one percent a year, and unemployment and poverty rose.

The interim government that took office in November 2000 was successful in maintaining a stable macroeconomic situation through the end of its term of office in July 2001, in the context of a program supported by the IMF. Economic activity, however, continued to weaken. The deficit of the combined public sector for 2001, estimated at 2.4 percent of GDP, is above the limit under the Law of Fiscal Transparency and Responsibility, and reflects a shortfall in government revenue. Despite some deterioration in the country's terms of trade, the external current account deficit is estimated to have fallen to 2.1 percent of GDP, owing to the weakness in domestic demand. Adverse developments in other countries in the region had little effect on Peru's financial indicators, which were more influenced by domestic events.

The authorities' program for 2002-2003 seeks to lay the basis for a sustained high expansion of output and employment and a steady reduction in poverty. The program envisages a recovery of output growth, which is estimated at zero in 2001, to 3.7 percent in 2002 and 5 percent in 2003 as a result of an improved investment climate, reflecting a more stable political environment, and the authorities' ambitious privatization program.

Annual inflation under the program is targeted at 2.5 percent in 2002 and 2 percent in 2003, international reserves are envisaged to increase moderately over the program period. The external current account deficit is projected to widen somewhat in 2002-2003, in line with the envisaged recovery in economic activity, but would remain under 3 percent of GDP.

The program seeks an appropriate balance between the need for further fiscal consolidation and the risk of jeopardizing the incipient recovery in economic activity. The combined public sector deficit is targeted to decline gradually, to 1.9 percent of GDP in 2002 and 1.4 percent of GDP in 2003. The fiscal target for 2002 would be adjusted upward to the extent that privatization receipts for the year exceed US$700 million (with a maximum adjustment of 0.3 percent of GDP). The reduction of the fiscal deficit in 2002 will come mainly from expenditure restraint, particularly in the areas of defense and national security. For 2003 the fiscal effort would include a significant increase in government revenue and continued expenditure restraint. A key element of the authorities' fiscal program is a comprehensive reform of the tax system to be introduced in 2002, which will include new tax measures and a strengthening of tax administration.

Peru joined the IMF on December 31, 1945, and its current quota¹ is SDR 638.4 million (about US$791 million). Its outstanding use of IMF financing currently totals SDR 307.8 million (about US$381 million).