News Brief No. 02/126

News Brief: IMF Completes First Review of Peru's Stand-By Agreement, Approves $154 Million Disbursement

December 13, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the first review of Peru's performance under the two-year SDR 255 million (about $340 million) Stand-By Arrangement, approved on February 1, 2002 (see Press Release No. 02/6). The completion of this review enables the release of SDR 115.625 million (about $154 million) to Peru. So far the country has not made any drawings under the arrangement.

In completing the review, the Executive Board approved the modification of the 2002 fiscal deficit target from 1.9 percent of GDP to 2.3 percent of GDP, and the replacement of the Net Domestic Asset (NDA) target by a consultation mechanism on inflation.

Following the Executive Board's review of Peru, Eduardo Aninat, Deputy Managing Director and Acting Chair, said:

"Economic performance under the program in 2002 has been encouraging. Despite a difficult environment, growth is recovering, inflation is low, and the external position is robust.

"The policy framework for 2003 aims at a further recovery in economic activity, with continued low inflation. The fiscal deficit is targeted to decline moderately, balancing the need to support the recovery while giving further credibility to the government's medium-term fiscal consolidation goals. The authorities should seek to garner the necessary political consensus for the needed policy actions.

"Achieving the fiscal target for next year will require cautious implementation of decentralization to ensure that its impact is fiscally neutral. Moreover, to put the public finances on a sustainable basis, it is essential that the comprehensive tax reform plan introduced in 2002 be completed by phasing out regional and sectoral tax exemptions. It would also be important that the government does not resort to tax amnesties in the future. The government's financing plan for 2003 requires that the domestic bond market for government securities be reactivated. Enhanced social spending would be important to help poverty alleviation efforts-and could also serve to gain broader acceptance for the authorities' reform efforts.

"The improved financial performance of most banks in 2002 is encouraging. In addressing dollarization in the financial system, the authorities appropriately focus on maintaining a high level of official international reserves, developing the local bond market, and further strengthening the prudential framework, especially in monitoring the credit risk arising from banks' foreign-currency lending operations.

"The authorities are seeking alternatives to privatization to encourage private participation in public sector operations. Other important structural reforms on the agenda include steps to enhance the efficiency of social expenditure programs and to improve the equity and strengthen the financial position of the public pension system," Mr. Aninat said.