This Selected Issues paper reviews economic developments in Peru during 1995–98. In July 1996, the Executive Board of the IMF approved a follow-up extended arrangement in support of Peru’s program for 1996–98. After a slowdown in 1996, economic activity picked up in 1997 while inflation declined significantly. The net official international reserves position strengthened further, and gross reserves reached the equivalent of close to eight months of imports of goods and services at end-1997. During 1996–97, Peru restructured the debt owed to foreign commercial and Paris Club bilateral creditors.


This Selected Issues paper reviews economic developments in Peru during 1995–98. In July 1996, the Executive Board of the IMF approved a follow-up extended arrangement in support of Peru’s program for 1996–98. After a slowdown in 1996, economic activity picked up in 1997 while inflation declined significantly. The net official international reserves position strengthened further, and gross reserves reached the equivalent of close to eight months of imports of goods and services at end-1997. During 1996–97, Peru restructured the debt owed to foreign commercial and Paris Club bilateral creditors.

I. Recent Economic Developments

1. Following the successful completion of a Fund-monitored rights accumulation program, in early 1993 the Peruvian government adopted a comprehensive economic program covering the three-year period 1993–95 supported by an extended arrangement from the Fund. Over this three-year period, economic growth averaged 8.9 percent a year and inflation was reduced from 57 percent in 1992 to 10 percent in 1995. In the context of large private capital inflows, largely in the form of foreign direct investment and medium- and long-term foreign borrowing, the external current account deficit averaged 5.3 percent of GDP during 1993–94, and widened to 7.3 percent in 1995 reflecting a relaxation of the fiscal stance. The net official international reserves position improved significantly during 1993–95, with gross reserves reaching the equivalent of about six months of imports of goods and services by end-1995.1

2. In July 1996 the Executive Board of the Fund approved a follow-up extended arrangement in support of Peru’s program for 1996–98. This program aims at consolidating the stabilization gains made under the previous arrangement while advancing structural reforms further. The authorities’ strategy includes a significant improvement in the primary balance of the combined public sector. Performance during the first two years under this program has been strong. After a slowdown in 1996, economic activity picked up in 1997 while inflation declined significantly. The net official international reserves position strengthened further, and gross reserves reached the equivalent of close to eight months of imports of goods and services at end-1997. During 1996–97 Peru restructured the debt owed to foreign commercial and Paris Club bilateral creditors, as well as most other creditors.

A. Macroeconomic Developments

3. In the context of a significant tightening of the fiscal stance, real GDP growth slowed from 7.2 percent in 1995 to 2.6 percent in 1996. The slowdown in economic activity was particularly pronounced in agriculture and the sectors of the economy directly affected by the tightening of the fiscal stance, such as the construction and construction-related sectors. By the last quarter of 1996, however, activity picked up in most sectors, and in 1997 real GDP grew by 7.4 percent. Economic growth in 1997 was broad based, and particularly strong in the construction, manufacturing, and mining sectors. High growth in construction activity and mining contributed to an increase in gross domestic investment from 23.5 percent of GDP in 1996 to 24.6 percent in 1997. Toward the end of the year, however, economic activity slowed down, owing mainly to the impact of El Niño weather phenomenon, and output growth in the first quarter of 1998 abated to 1½ percent compared with the same period of 1997.

4. Labor market developments have been mixed. In 1997 the economy created an estimated 300,000 new jobs which, however, was not sufficient to absorb the increase in the labor force. The labor force participation rate rose by 3 percentage points, to 63 percent, reflecting in part the entry into the labor market of the “baby boomers” born in the 1970s and the continued migration of workers from rural areas, especially women. Open unemployment reached 8.3 percent in 1997, up from 7.9 percent in 1996, while underemployment decreased slightly, from 42.6 percent to 41.8 percent of the labor force. Labor statistics show that private sector remunerations remained broadly unchanged in real terms during 1997. In 1997 the authorities raised the minimum wage by 60 percent in nominal terms, to S/. 345 a month (about US$123); data for the third quarter of 1997 showed that 9.2 percent of the labor force was earning the minimum wage.

5. End-of-period inflation rose somewhat in 1996, from 10.2 percent in 1995 to 11.8 percent, reflecting both higher world oil and cereal prices and the lagged effect of the relaxation of fiscal policy in 1995. During 1997 inflation dropped to 6.5 percent, with a somewhat less pronounced decline in core inflation (from 9.9 percent to 7.8 percent), which excludes public transportation and volatile food items; the slowdown in volatile food items reflected exceptionally favorable weather conditions before the onset of El Niño and lower international cereal prices.

6. The external current account deficit narrowed from 7.3 percent of GDP in 1995 to 5.3 percent in 1996–97, reflecting both lower public sector interest obligations and an improvement in the trade deficit due to strong export volume growth, favorable terms of trade, and overall fiscal consolidation. During 1996–97 exports in U.S. dollar terms rose by 10 percent a year on average, while import growth was close to 5 percent. Nontraditional exports rose by 16 percent a year in U.S. dollar terms, with particularly strong growth in textile and chemical goods. The external current account deficit was more than covered by private capital inflows, with over two thirds of inflows accounted for by foreign direct investment (including privatization) and private medium- and long-term borrowing. Following the conclusion of debt-reduction operations with foreign creditors, public sector external debt fell from 45 percent of GDP in 1995 to 30 percent in 1997 (Box 1).

7. In 1996 and 1997 the authorities achieved a substantial strengthening of the fiscal position, and the overall balance of the combined public sector shifted from a deficit of 2.8 percent of GDP in 1995 to equilibrium in 1997. In the meantime, the primary surplus rose from 0.4 percent of GDP in 1995 to 1.3 percent in 1996 and further to 1.7 percent in 1997. This improvement reflected the performance of the central government, and was made possible both by an increase in tax revenue and a reduction in expenditure. The improvement in central government current revenue (from 13.3 percent of GDP in 1995 to 14 percent in 1997) was associated mainly with improved income and value-added tax (VAT) collections and the implementation, beginning end-1996, of the tax arrears regularization program. Also, in 1997 the government reduced several tax rates but the ratio of tax revenue to GDP remained broadly unchanged because of improvements in tax administration (see paragraph 13 below). Noninterest expenditure of the central government declined from 11.8 percent of GDP in 1995 to 11.1 percent in 1997, reflecting for the most part lower purchases of goods and services and capital outlays. The government raised public sector wages by 16 percent in November 1996 and again by 16 percent in August 1997.

Peru: Debt-Restructuring Operations, 1996–97

  • In 1966–97 Peru finalized debt-reduction arrangements with foreign commercial creditors and most non-Paris Club creditors. Altogether, these operations resulted in a reduction of about US$6 billion in the stock of Peru’s external public debt.

  • The debt and debt-service reduction (DDSR) operation with commercial creditors was closed on March 7, 1997. Under the terms of the agreement, creditors were given the option of either selling their debt to the government through a debt buy-back scheme or exchanging eligible principal for discount bonds, par bonds, or front-loaded interest reduction bonds (FLIRB). Past due interest was exchanged for 20-year graduated repayment bonds with a 5-year grace period.

  • The up-front cost of the operation was US$1.4 billion. Total cash buy-back amounted to US$1.3 billion of principal and US$1.2 billion of attached interest. Remaining principal was exchanged for bonds. Among the bonds, most creditors choose the FLIRB, which has a 20-year maturity and an 8-year grace period.

  • In May 1997, US$742.3 million of Brady bonds were cancelled. Final figures show that, after all operations were completed, total commercial debt, with an original value of US$10.6 billion was reduced by about half, and exchanged for bonds totaling US$4.1 billion.

  • In July 1996 Peru agreed on a rescheduling with Paris Club creditors for maturities falling due during 1996–98. In addition, principal maturities arising from the 1991 Paris Club rescheduling and falling due after 1998 were reprofiled through the year 2018.

  • During 1997 Peru canceled debt owed to the Russian Federation, with a face value of US$1.1 billion.

  • The authorities made significant progress in resolving the debt arrears situation with other creditors. At end-1997, principal arrears amounted to about US$30 million only.

8. In the monetary area, base money growth abated to 9.2 percent in 1996 and remained somewhat below nominal GDP growth during most of 1997; in the last quarter of 1997, however, base money growth picked up momentum, and rose to 19 percent by year-end. In the context of significant capital inflows and growing bank reintermediation, the growth of bank credit to the private sector in 1996 remained high in real terms, at 32 percent. To curb credit expansion, in 1996 the authorities reduced the rate of remuneration of the required reserves on foreign currency deposits from LIBOR to LIBOR minus 1⅜ In 1997 the growth of credit to the private sector in real terms abated to 24 percent. During the year commercial banks increasingly shifted their resource base away from foreign currency deposits and toward short-term borrowing abroad.

9. In 1996–97 the authorities continued implementing a flexible exchange rate policy. In real effective terms, the new sol remained broadly stable during 1996, but it appreciated by 7½ percent in 1997, mainly owing to the strengthening of the dollar vis-à-vis other major currencies. The impact of the real effective appreciation on competitiveness was offset in part by the above-mentioned tax rate reduction measures.

B. Structural Reforms

10. During 1996–97 the authorities continued implementing their structural reform program, including privatization. They initiated a program of concessions for the provision of public services by the private sector, and established Promcepri as a specialized agency to coordinate this program. The authorities also established regulatory agencies in the sectors of the economy where the provision of service was privatized; further strengthened tax administration; made progress in the implementation of the Integrated System of Financial Administration (SIAF); introduced new capital market legislation; continued enhancing the regulatory framework; enhanced private sector provision of health and education services; reduced the average external tariff rate; and introduced more flexibility in the labor market. As described below in Chapters II, III, and IV, the authorities also took steps to consolidate the pension reform initiated in 1992, strengthen the banking system, and deepen social policies.

11. Privatization receipts amounted to US$2.5 billion in 1996–97. In the telecommunications sector, in July 1996 the government sold most of its remaining shares in the telephone company Telefónica for US$1.2 billion. In the energy sector, the privatization of the state petroleum company Petroperú was initiated in 1996 with the sale of an oil refinery (La Pampilla) and two oil fields, and in December 1997 the government transferred Petroperú’s oil storage facilities to the private sector through an operating concession agreement. In 1996–97 the government also sold several electricity plants and, in January 1998, granted a 30-year operating concession on the Mantaro-Socabaya electricity transmission line. The government also privatized several units of the state mining companies Centromin and Mineroperú; completed the privatization of the fishing company Pescaperú; and sold a steel mill (Siderperú) and other assets in the mining and energy sectors. In 1997 the government also began the sale of irrigated public land in the coastal region.

12. In 1997 the authorities established regulatory agencies with financial and institutional autonomy in the areas of energy, ports, and highways. In the energy area, they established OSINERG, which is in charge of overseeing firms that have been granted operating concessions or participated in privatizations. OSINERG has authority to: ensure that the companies carry out their investment commitments and follow tariff schedules; impose fines on companies that do not comply with their contractual agreements; and hear consumer complaints. In the area of ports and highways, the authorities established OSITRAN in December 1997, which is scheduled to begin operations by June 1, 1998.

13. The strengthening of tax administration has been a central part of reforms in recent years. In 1996–97 the efforts of the tax administration agency SUNAT focused on the following areas:

  • Implementation of the program of tax arrears regularization that became effective in late 1996.

  • Broadening the coverage of the VAT audit programs based on invoice cross-checking (COA) among medium and large taxpayers and their suppliers to include the expenditure of the public sector and intensifying its application (starting with the tax returns for 1997, the SUNAT is carrying out two half-yearly audits under the COA program).

  • Improving the rules in the VAT area for the recording of transactions among related parties to reduce tax avoidance.

  • Extension to medium taxpayers of the enhanced monitoring and payments program that previously applied to large taxpayers only.

  • Stepping up the fight against tax evasion through in-depth sectoral audits in sectors of the economy where evasion is high.

14. The SIAF project, which consolidates the budget management, accounting, and treasury operations of the government, is the core of a strategy aimed at modernizing treasury operations at the Peruvian Ministry of Finance. In 1996–97 the government made important progress in the design and implementation of the SIAF and introduced a new budget methodology. In mid-1997 spending units started registering their payment operations with the SIAF and, by March 1998, 80 percent of all units were reporting to the SIAF in real time.

15. In 1996–97 the government issued legislation and accompanying norms to facilitate Peru’s integration into international capital markets. In October 1997 the government published new capital market legislation, that: empowered the National Commission for the Supervision of Enterprises and Financial Instruments (CONASEV) to regulate public offerings in Peru and offerings of Peruvian firms abroad; raised minimum capital requirements for mutual funds, brokerage houses, and investment funds; established prudential limits on investments of mutual funds; and authorized the operation of eight derivative markets (including for foreign exchange, interest rates, and several agricultural products).

16. In the area of land reform, the government issued in 1997 the regulations for the implementation of the Land Tenure Law and the Agricultural Promotion Law, and continued implementing land titling programs in both urban and agricultural areas. In urban areas, a total of 180,000 land titles were issued in 1996–97 under the supervision of COFOPRI, and progress was made in the Urban Land Registration system. In rural areas 70,000 land titles were issued in 1997.

17. In the health insurance market, a comprehensive general health law regrouping various texts and norms was approved in July 1997, and the government issued legislation allowing the provision of primary health services by private companies. Under this program, employers are allowed to allocate 25 percent of the Peruvian Social Security Institute (IPSS) contribution to contract primary health care from private providers. A superintendency of private health care providers was established in January 1998. The government also issued in 1997 and early 1998 the regulations in implementation of the 1996 Education Law, designed to facilitate the provision of educational services by the private sector.

18. In the trade area, in April 1997 the authorities implemented a reduction in tariff rates while introducing a temporary 5 percent import surcharge on certain agricultural and agro-industrial products. The net effect was a decline of the average import tariff rate from 15.3 percent to 13.4 percent. Also, in 1997 Peru reached agreement with the other members of the Andean Group on a process of gradual trade liberalization through the year 2005. In 1996 the members of the Asia-Pacific Economic Cooperation (APEC) forum admitted Peru as a member of the group effective in 1998.

19. In October 1996 the government introduced several changes in labor legislation. Severance payments for arbitrary layoffs were increased from a month’s salary per year of work to 1½ months, with the maximum severance payment remaining unchanged at the equivalent of 12 months’ salary. To enhance labor market flexibility, the maximum percentage of employees that a firm can hire under the apprenticeship regime was increased from 30 percent of the workforce to 40 percent, and the maximum proportion of workers allowed under temporary contracts was increased from 20 percent to 50 percent of the workforce. The procedures associated with laying off workers for technological or economic reasons were simplified and greater freedom was given to employers to organize the work schedule.


Gross reserves are defined here as net of financial intermediaries’ foreign currency deposits with the central reserve bank. Including these deposits, gross reserves rose from the equivalent of 9 months of imports of goods and services at end-1995, to 11 months at end-1996 and 12 months at end-1997.

Peru: Selected Issues
Author: International Monetary Fund