This paper assesses Peru’s Request for a Stand-By Arrangement (SBA). The authorities’ program for 2002–03 seeks to set the basis for sustained high growth of output and employment and a steady reduction in poverty. The authorities are requesting IMF support for their program through an SBA to emphasize their commitment to sound policies. The IMF staff is of the view that the authorities’ program is consistent with the objective of creating the conditions for sustained high rates of economic growth that would support a steady reduction in poverty.

Abstract

This paper assesses Peru’s Request for a Stand-By Arrangement (SBA). The authorities’ program for 2002–03 seeks to set the basis for sustained high growth of output and employment and a steady reduction in poverty. The authorities are requesting IMF support for their program through an SBA to emphasize their commitment to sound policies. The IMF staff is of the view that the authorities’ program is consistent with the objective of creating the conditions for sustained high rates of economic growth that would support a steady reduction in poverty.

I. Introduction

1. Discussions on an economic program that could be supported by a Fund arrangement were held in Lima during August 28-September 4 and November 12–20, 2001, and concluded from headquarters.1 In a letter to the Managing Director dated January 18, 2002, the authorities describe the policies they intend to follow during 2002–3 and request a two-year Stand-By Arrangement in an amount equivalent to SDR 255 million, equal to 20 percent of quota on an annual basis (Attachment I).2 The authorities intend to treat the arrangement as precautionary. A recent safeguards assessment of the Central Reserve Bank of Peru conducted by the Treasurer’s Department concluded that the safeguard controls in place at the bank are generally adequate and the bank is implementing most of TRE’s recommendations (Appendix I).

II. Background and Recent Developments

2. During 1991–97, Peru made significant progress in stabilizing the economy and implementing structural reforms that helped boost economic growth, but subsequently performance deteriorated mainly as a result of adverse external shocks and domestic political difficulties. In 1991–97, real GDP growth averaged 5.3 percent a year, inflation was brought down from hyperinflation levels to single digits, and poverty levels fell significantly. Between 1998 and 2000, however, economic growth averaged only 1 percent a year (Figure 1) and unemployment and poverty rose, reflecting the adverse effects of the El Nino weather phenomenon, a weakening in the terms of trade, a liquidity squeeze stemming from international financial turmoil, and domestic political upheaval.3 During this period, the fiscal position deteriorated sharply, moving from balance in 1997 to a deficit of 3.2 percent of GDP in 2000, and the banking sector weakened, with a doubling in nonperforming loans and a stagnation in credit to the private sector. In this environment, stock prices fell significantly. On the positive side, inflation continued to decline and international reserves remained at comfortable levels.

Figure 1.
Figure 1.

Peru: Selected Economic Indicators, 1996–2001

Citation: IMF Staff Country Reports 2002, 027; 10.5089/9781451830972.002.A001

3. In a context of high political uncertainty, the interim government that took office in November 2000 introduced an economic program supported by the Fund which aimed at maintaining a stable macroeconomic situation in the transition to the new government that would enter in July 2001. The program envisaged real GDP growth of 2.5 percent in 2001 and a slight decline in inflation to 3 percent by year-end (Table 1). The external current account deficit was projected to narrow moderately to 2.4 percent of GDP, and international reserves to increase modestly. Consistent with these objectives, and with a view to keeping confidence in the authorities’ commitment to macroeconomic stability, the combined public sector deficit was targeted to fall to 1.5 percent of GDP, the limit for 2001 in Peru’s Law on Fiscal Transparency and Responsibility. The authorities were to continue implementing a flexible exchange rate policy and maintaining an open trade regime. The reform agenda, which took into account the government’s short transition period and lack of a majority in congress, included some privatizations and the granting of operating concessions, and enhancing fiscal transparency and the targeting of social programs.

Table 1.

Peru: Selected Economic Indicators

article image
Sources: Central Reserve Bank of Peru; and Fund staff estimates and projections.

End of period. Based on Information Notice System. Data for 2001 correspond to November 2001.

Flows in foreign currency are valued at program exchange rate.

Excludes privatization receipts.

4. The interim government was successful in maintaining macroeconomic stability during its tenure, but economic activity in the first half of 2001 was lower than expected and some measures introduced during this period weakened the medium-term outlook for the public finances. All end-June performance criteria under the program were observed (Table 2).4 The fiscal target for the first half of the year was met with a margin of 0.8 percent of the period’s GDP (mostly reflecting lower-than-programmed expenditure), international reserves increased, and inflation declined. Some progress was made in the structural reform area, including the awarding of operating concessions for the Camisea gas field and Lima airport, initiating the sale of an electricity company, and setting up a website with extensive information on the public finances that significantly enhanced fiscal transparency. However, real GDP fell by 1.6 percent (year-on-year) in the first half of 2001, mainly owing to a fall in domestic demand, and several measures were introduced with negative implications for the fiscal accounts.5

Table 2.

Peru: Quantitative Performance Criteria, January-June 2001

article image
Sources: Central Reserve Bank of Peru; Ministry of Economy and Finance; and EBS/01/25.

The targets and limits have been adjusted in accordance with the table attached to the letter of intent dated February 6, 2001, which is appended to the staff report (EBS/01/25).

Excluding arrears associated with nonrescheduled debt to foreign creditors outstanding as of end-2000.

5. Faced with continued weakness in economic activity, the new administration of President Toledo provided a fiscal stimulus in the second half of 2001, while monetary policy was gradually loosened in light of a persistent decline in inflation. At the same time, steps were taken to improve the medium-term outlook for fiscal revenue. The fiscal stimulus included reducing the special payroll tax (IES), hiking public sector wages and pensions (by 9 percent), and starting a temporary jobs program in areas of the country hardest hit by the recession.6 To improve the medium-term prospects for the fiscal accounts, personal and corporate income tax rates were increased (effective in 2002), thus preventing most of the revenue loss that would have resulted from the income tax changes introduced during the previous government. Also, some of the revenue-reducing measures introduced earlier in the year were reversed and excise taxes on fuels were increased.

6. For 2001 as a whole, real GDP is estimated to have remained constant (with part of the recovery in the second half of the year reflecting the initial operations of a mining mega-project, Antamina), and annual inflation fell to zero by year-end. Employment during the first nine months of the year was down by 1.5 percent with respect to its level in the same period a year earlier (Figure 2). The deficit of the combined public sector is estimated at 2.4 percent of GDP, above the limit under the Law on Fiscal Transparency and Responsibility (but still 0.8 percent of GDP lower than in 2000), mainly reflecting a shortfall in government revenue. Owing to the weakness in domestic demand, the trade balance strengthened (Figure 3), and the external current account deficit is estimated to have fallen to 2.1 percent of GDP, despite some deterioration in the country’s terms of trade. Credit to the private sector remained stagnant (Figure 4), as banks continued to have concerns about the creditworthiness of their clients, and thus concentrated their lending on preferential clients, paid down lines of credit from abroad, and accumulated remunerated dollar deposits (other than reserves requirements) at the central bank.7

Figure 2.
Figure 2.

Peru: Labor Market Indicators, 1994–2001

Citation: IMF Staff Country Reports 2002, 027; 10.5089/9781451830972.002.A001

Figure 3.
Figure 3.

Peru: Trade Indicators, 1996–2001

Citation: IMF Staff Country Reports 2002, 027; 10.5089/9781451830972.002.A001

Figure 4.
Figure 4.

Peru: Monetary Indicators, 1996–2001

Citation: IMF Staff Country Reports 2002, 027; 10.5089/9781451830972.002.A001

7. Some indicators of bank soundness improved during 2001 and the authorities continued in their efforts to strengthen the banking system, in line with suggestions from FSAP missions of late 2000 and early 2001. Nonperforming loans remained stable at about 11 percent of total loans, while loan provisioning and the risk-adjusted capital-assets ratio increased during the year for the system as a whole (Figure 5).8 The FSAP missions concluded that systemic risks were limited and that the authorities’ strategy for resolving banking system problems was broadly appropriate, but that the system would continue to face pressures. Since then, the authorities have concentrated their efforts on improving consolidated supervision of financial conglomerates, strengthening the supervision of money laundering prevention practices, and limiting maturity mismatches.

Figure 5.
Figure 5.

Peru: Banking Indicators, 1995–2001

Citation: IMF Staff Country Reports 2002, 027; 10.5089/9781451830972.002.A001

8. During 2001, the authorities continued to implement a floating exchange rate system, with infrequent interventions in the foreign exchange market, and by year-end international reserves remained at a comfortable level. The currency weakened early in the year mainly reflecting growing political uncertainty in the period leading to the general elections, but subsequently strengthened despite a decline in domestic-currency interest rates relative to dollar interest rates (Figure 6). In the last quarter of the year, the central bank intervened in the foreign exchange market by purchasing foreign exchange (in modest amounts), as the authorities considered that prevailing pressures for appreciation were of a temporary nature. The currency appreciated in real effective terms by 3 percent through November (the latest data available), continuing a trend initiated the previous year (Figure 7). Net international reserves increased moderately in 2001, and by end-year gross reserves were equivalent to 1.5 times the stock of short-term external debt on a residual maturity basis (Table 3).9

Figure 6.
Figure 6.

Peru: Interest Rates, 1997–2001

Citation: IMF Staff Country Reports 2002, 027; 10.5089/9781451830972.002.A001

Figure 7.
Figure 7.

Peru: External Indicators, 1995–2001

Citation: IMF Staff Country Reports 2002, 027; 10.5089/9781451830972.002.A001

Table 3.

Peru: Financial and External Vulnerability Indicators

(In percent; unless otherwise indicated)

article image
Sources: Central Reserve Bank of Peru; and Fund staff estimates and projections.

At end of period. Data for 2001 correspond to November 2001.

Defined as the inverse of the ratio of end-period broad money to annual GDP.

Annual average. Since 2000, includes adjustment for nonperforming loans that were temporarily exchanged for government bonds. Data for 2001 correspond to September 2001.

Data for 2001 correspond to October 2001.

Includes Central Reserve Bank of Peru debt.

Includes debt service to the Fund.

Short-term debt includes amortization of medium- and long-term loans falling due over the following year.

At end-period exchange rate.

Includes financial system’s foreign currency deposits in central bank as reserve liability.

Over U.S. Treasury bond yields of comparable maturity.

9. Adverse developments in other countries in the region during 2001 had little effect on Peru’s financial indicators, which were more influenced by domestic political events. The spread on sovereign bonds rose early in the year, but subsequently subsided when the political outlook improved following the general elections. By end-2001 the spread on Peruvian Brady bonds was lower than at end-2000 by 166 basis points. Peru’s international credit ratings were unchanged in 2001; its long-term foreign currency sovereign risk is rated Ba3 by Moody’s and BB- by Standard and Poor’s (both noninvestment grade).

III. The Program for 2002–3 and Policy Discussions

10. The government’s program aims at creating the conditions for sustained high growth of output and employment and a steady reduction in poverty, through the implementation of prudent macroeconomic policies, a comprehensive program of structural reforms, and enhanced efforts at addressing priority social needs. The authorities are seeking Fund support for their program in order to foster investor confidence and catalyze financing for the public sector, including adjustment lending of the multilateral institutions.

11. On fiscal policy, the program envisages a gradual reduction of the combined public sector deficit, which would be supported by a tax reform that would help to put the public finances on a sustainable basis over the medium term and by a revision to the Law on Fiscal Transparency and Responsibility (both of which require legislative approval). Monetary policy will continue to be geared towards maintaining low inflation, in the context of a floating exchange rate system. The reform agenda includes, in addition to the actions in the fiscal area mentioned above, an ambitious privatization and concessions program, a strengthening of banking supervision, a reform of the public and private pension systems, and an improvement in the efficiency of social safety net programs.

12. The program for 2002–3 is based on an expected recovery of real GDP growth to 3.7 percent in 2002 and to 5 percent in 2003. Economic activity is envisaged to pick up mainly as a result of an improved investment climate generated by a more stable political environment and the authorities’ privatization and concession program, with growth in 2002 also reflecting the full-year operation of the Antamina project. Inflation is targeted at around 2–2.5 percent and international reserves would increase moderately over the program period. The external current account deficit is projected to widen somewhat, in line with the pick up in economic activity, to 2.3 percent of GDP in 2002 and 2.7 percent of GDP in 2003.

A. Fiscal Policies

13. Seeking 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 (Table 4 and Table 5).10 To provide further room for addressing unemployment problems, while simultaneously ensuring that the fiscal program is properly financed, the target on the fiscal deficit for 2002 would be adjusted upward to allow for additional government capital projects (for up to 0.3 percent of GDP) to the extent that privatization receipts for the year exceed the baseline projection of US$700 million (1.2 percent of GDP).11

Table 4.

Peru: Fiscal Operations of the Combined Public Sector

(In percent of GDP)

article image
Sources: Central Reserve Bank of Peru; Ministry of Economy and Finance; and Fund staff estimates and projections.

Net of tax on assets of public enterprises and of central government payroll tax (IES) payments.

Net of transfers among nonfinancial public institutions.

Net of social security and other contributions.

Trend GDP is computed using a Hodrick-Prescott filter.

Table 5.

Peru: Fiscal Operations of the Central Government

(In percent of GDP)

article image
Sources: Central Reserve Bank of Peru; Ministry of Economy and Finance; and Fund staff estimates and projections.

Net of tax on assets of public enterprises and of central government payroll tax (IES) payments.

Includes wages, salaries, and employer contributions to social security.

14. The reduction of the fiscal deficit in 2002 would come mainly from expenditure restraint, particularly in the areas of defense and national security (Table 6). The positive impact of the tax reform (explained below) on revenue in 2002 will be largely offset by the negative effect of the tax measures taken in 2001 that were not reversed (0.3 percent of GDP); thus general government current revenue is projected to remain at about 17 percent of GDP.12 On the expenditure side, the authorities’ program focuses on a reduction in non-productive outlays and a general wage and pension freeze (overall, real spending on defense and national security would be cut by 14 percent). The authorities are confident that the programmed level of general government noninterest expenditure for 2002 of 17.3 percent of GDP is adequate to ensure that the most vulnerable of the population are properly protected. They will continue to work with multilateral institutions to streamline government programs in the area of social protection to improve the efficiency and targeting of social programs.13

Table 6.

Peru: Functional Classification of Budget Expenditure 1/

article image
Source: Ministry of Economy and Finance.

Budget coverage includes central government and some autonomous agencies (i.e. ONP, FCR, FONAHPU).

Includes education, health and sanitation, and other social assistance.

Total expenditure by Essalud, the public health insurance administration.

Net operations of the national housing fund (Fonavi), loan disbursements and amortizations received.

15. The fiscal effort in 2003 would include a significant increase in government revenue and continued expenditure restraint. The full effect of the tax reform is projected to result in a rise in general government current revenue to 17.5 percent of GDP. Government expenditure would grow somewhat less than GDP, but there would be room for a moderate wage and pension increase.14

16. A key element of the authorities’ fiscal program is a comprehensive reform of the tax system to be introduced in 2002, which would include new tax measures and a strengthening of tax administration (along the lines of the recommendations of the June 2000 FAD technical assistance mission). The reform aims at increasing revenue and improving the system’s neutrality and equity through a widening of the tax base by: (i) eliminating tax exemptions and tax benefits for specific sectors and regions of the country (with a portion of the increased revenue to be allocated to poverty relief programs in these same regions); (ii) mitigating the impact of previously granted generous depreciation allowances through the creation of an alternative minimum corporate tax (that would take the form of a modified income tax); (iii) abolishing the IES; (iv) requiring the inclusion of tax expenditures in the budget (starting in 2003); (v) creating a system of mining royalties; (vi) closing corporate income tax loopholes that have been used to hide personal income of executives (e.g., provisioning of automobiles); and (vii) strengthening of local government real estate tax regimes. The reform will also incorporate measures to improve the efficiency of the tax collection agency (SUNAT), including by establishing a system that uses large-firms in the production chain to act as tax-retention agents. The full revenue effect of the tax reform is projected at 0.8 percent of GDP (see Appendix IV for details).

17. The mission urged the authorities to give tax reform the highest priority in their legislative agenda, given some indications of political opposition to the reform and the government’s lack of a majority in congress. The authorities indicated that the government is fully committed to seeking legislative approval of the reform. The staff also noted that congress was considering a plan to provide relief to taxpayers in arrears (by expanding the coverage of previous tax amnesty programs, lowering the interest rate on rescheduled tax debts, and lowering the penalty rate on unpaid installments), and indicated that the implementation of such plan could reduce the incentives for tax compliance and hamper tax administration. The authorities explained that they would present to congress an alternative plan, with limited relief, which would prevent a negative effect on tax collections. They also gave assurances that they would not introduce further measures to widen the scope for rescheduling of tax liabilities, nor grant tax relief to particular sectors or regions.

18. The authorities are committed to revising the country’s Law on Fiscal Transparency and Responsibility to allow for a gradual fiscal adjustment and to strengthen compliance incentives. The current law, approved in late 1999, imposed limits on the fiscal deficit of 2 percent of GDP in 2000, 1.5 percent of GDP in 2001, and 1 percent of GDP thereafter.15 The law also established that in the event of actual or projected recession the deficit limit maybe increased to 2 percent of GDP. The law’s deficit limits were breached in 2000 and 2001, and would be breached in 2002 as well (formally, the limits for 2001 and 2002 were suspended by congress). A revised law, being drafted with support from the IDB, will be submitted to congress before mid-2002. In broad terms, the revision would allow for a transitional period to reach the medium-term deficit target following a recession, and would require the immediate implementation of measures (in periods of positive growth) when the fiscal program goes off-track.

19. The authorities intend to undertake an ambitious program of privatization and granting of operating concessions that should aid in their efforts to attract private investment and provide financing for the fiscal deficits during the program period. Receipts are expected to reach about 1.2 percent of GDP in each year of the program (in the baseline projection), with privatization focusing on the electricity sector and operating concessions to be granted for seaports, airports, road maintenance, and petroleum refining.

20. The authorities are contemplating a reform of the public and private pension systems that over time would seek to reduce current inequities, improve somewhat the longer-term outlook of the public finances, and enhance the performance of private pension funds. As a first step, congress approved legislation, in late 2001, that: (i) begins to reduce preferential benefits for certain beneficiaries under the privileged public system (Cédula Viva-DL 20530);16 (ii) raises the minimum pension in the general public pension system (DL 19990), which is well below the cost of the standard family consumption basket; and (iii) guarantees a minimum pension in the private system, aimed mainly at those who have not had sufficient time to accumulate an adequate pension. In a second phase, to be introduced this year, the reform would: (i) make more flexible the investment options for the private pension plans; (ii) reduce the operating costs of the private pension administrators partly by limiting the number of times in a year that one can switch between pension funds; and (iii) close the Cédula Viva to new entrants.17 The mission supported this plan but stressed that further steps to bring the benefit structure of the Cédula Viva in line with the general public pension plan would be needed for markedly improving equity across public pension plans and lowering the long-term fiscal cost of the public pension system.

B. Monetary and Financial Sector Policies

21. Monetary policy will be guided by the inflation objective of the program, and the central bank will continue to manage liquidity mainly through open market operations. The monetary program for 2002 assumes that base money, the intermediate target, will increase broadly in step with nominal GDP, while credit to the private sector is expected to pick up in line with the anticipated recovery in economic activity (Table 7). Interest rates and the exchange rate will continue to be market determined. The central bank is considering moving to a formal inflation-targeting framework for monetary policy, but no decision has been reached. The mission considered that adopting such a framework would help strengthen further public confidence in the authorities’ commitment to low inflation, provide a firm anchor for inflation expectations, and further enhance transparency in the design and implementation of monetary policy.18

Table 7.

Peru: Monetary Survey

article image
Source: Central Reserve Bank of Peru; and Fund staff projections.

Excludes subscriptions to the IMF and the Latin American Reserve Fund (FLAR), Pesos Andinos, credit lines to other central banks, Corporation Andina de Fomento (CAF) bonds, and foreign assets temporarily held by the BCRP as part of swap operations. Gold holdings are valued at the price of gold assumed in the program for each particular year.

Flows in foreign currency are valued at program exchange rate.

22. The authorities were considering whether to reduce reserve requirements on U.S. dollar deposits as a way of stimulating bank lending. The mission was of the view that a generalized reduction in average reserve requirements on U.S. dollar deposits (now at 33 percent) was unlikely to help spur bank credit given the ample liquidity in the banking system (interbank interest rates are at historically low levels, and banks hold sizable dollar deposits—other than reserve requirements—at the central bank), and that such a policy would more likely result in a loss of international reserves (bank reserve requirements plus other deposits held at the central bank constitute about 40 percent of official international reserves). The authorities agreed with the mission on the need to manage prudently reserve requirements on U.S. dollar deposits so as to maintain an adequate level of international reserves.

23. The authorities will continue to strengthen the Superintendency of Banks’ (SBS) oversight of the financial system. They indicated that the system remained sound, and noted that: (i) there had been no further deterioration in the performance of bank loan portfolios since July 2000; (ii) one large bank recently received a sizable capital injection from its foreign owners; and (iii) the situation of two small banks with problems had recently been resolved (in one case through closure, and in the other through merger). To strengthen SBS oversight of the financial system, the government plans to submit draft legislation to congress to provide statutory protection to SBS staff in the discharge of their duties and will continue to grant the agency budgetary independence. Regarding regulatory issues, the SBS is continuing in its efforts to improve consolidated supervision of financial conglomerates, and during the program period, the government will propose legislation to strengthen capital requirements and reduce single credit exposure limits. The mission urged the authorities to follow the FSAP recommendations of broadening the use of explicit time limits for the capitalization of weak banks, and improving the SBS’s power to take remedial action in cases of persistent bank liquidity problems. The authorities were not ready to specify the steps they might take in these areas.

24. The authorities recently created a state-supported “agrarian bank” to aid the agriculture sector, introduced a scheme for the state-owned Banco de la Nacion to provide credit to low-income public sector employees and pensioners, and are developing a state-supported program to facilitate lending to the housing sector. The mission argued against the introduction of specialized state-supported lending programs in general, pointing that these programs usually create contingent fiscal costs and generate political pressure for government support to other sectors, and that previous programs of sector-specific state development banks (including an agrarian bank) had failed in Peru. The authorities were of the view that these programs were needed to help generate activity in the agricultural and housing sector, and more generally to help jump-start the economy. It was agreed that these programs would be implemented in a way that limits their potential fiscal costs. In particular, the size of the programs for public sector employees and pensioners and for the housing sector would be subject to limits which would constitute performance criteria under the program.

25. The creation of the agrarian bank had broad political support, including from the president, as it was perceived that private banks were providing insufficient financing to small and medium-size agricultural producers. The mission expressed the view that a more effective means of promoting adequate bank lending to the agricultural sector was through improving the legal framework for loan collateral, in part by accelerating the titling and registration of land (small producers could continue to be helped through existing farm-aid programs in the budget). The authorities, however, considered that a new state-supported financial institution was needed to help the agricultural sector. They also noted that, although the bank was initially being capitalized only by the government, the law allows for private capital and eventual majority private ownership. In order to protect public resources, the authorities agreed that: (i) the bank’s first-tier operations would be strictly limited to providing loans to small-scale farmers, funded through resources already identified in the budget for agricultural support; and (ii) the bank’s on-lending operations would involve the channeling of resources from external credit lines to other agricultural producers through financial institutions regulated by the SBS and under strict lending standards.

26. The authorities considered that Banco de la Nacion’s program would induce private banks to lower their own interest rates on consumer loans, thereby providing a broad-based stimulus to the economy, and that the program would not put fiscal resources at risk because loan repayments would be automatically deducted from payrolls and pension deposits. The mission considered that, given current pressures from congress for private banks to refinance their consumer loans, Banco de la Nacion could also be pressured to weaken the conditions on its loans and to extend eligibility to a wider set of borrowers. It was agreed that under the program: (i) net lending of the scheme would be limited to the authorities’ proposed path (which reach a maximum of 0.2 percent of GDP); (ii) the lending terms and lending limits under the program would not be altered; and (iii) the program would not be extended beyond its original closing date of end-2002.

27. For housing loans, the authorities plan to establish a mortgage security insurance program, along the lines of the United States Federal Housing Administration (FHA), but the exact conditions of the program (e.g., the percentage of mortgage guarantee) are still being developed. The mission cautioned the authorities that the FHA model (and its 100 percent mortgage guarantee) might not be appropriate for Peru, owing to the country’s relatively weaker systems of judicial review and bankruptcy workout procedures, and encouraged the authorities to consider a relatively low rate of mortgage guarantee. The authorities were not ready to take a position in this area, but agreed to limit the size of contingent losses for housing lending to the equivalent of 0.3 percent of GDP.

C. External Sector Policies

28. The authorities intend to maintain the floating exchange rate system, undertaking exchange market intervention only to the extent that it is needed to avoid excessive short-term exchange rate volatility, and to continue the practice of not intervening in the forward foreign exchange market. The authorities and the mission shared the view that exchange rate flexibility has served Peru well in helping the economy adjust to external shocks.

29. The external current account deficit is projected to widen somewhat in 2002–3 on the basis of a recovery in imports in line with the envisaged economic upturn, but would remain under 3 percent of GDP (Table 8). Export values are projected to show solid growth on the strength of full-year operations of Antamina and some improvement in export prices. Net private capital inflows are projected to rise during the program, mainly owing to increased political stability and the privatization program, while net public sector inflows would decline somewhat, primarily reflecting lower financing needs. These projections are consistent with a targeted modest increase (about US$ 110 million a year) in net international reserves during the program period (Table 9).19

Table 8.

Peru: Balance of Payments

article image
Sources: Central Reserve Bank of Peru; Ministry of Economy and Finance; and Fund staff estimates and projections.

Includes medium- and long-term flows of the financial public sector, as well as subscription payments into international funds.

Includes COFIDE and Banco de la Nacion.

Debt relief for 2002–2003 from Paris Club creditors.

Most of the external arrears are owed to unguaranteed suppliers, some of which are in discussions with the government, while the rest have not been located.

Table 9.

Peru: External Financing Requirements and Sources

(In millions of U.S. dollars)

article image
Sources: Central Reserve Bank of Peru; and Fund staff estimates and projections.

Excluding the IMF.

Original maturity of less than one year. Equals stock at the end of the previous period. Excludes BCRP short-term debt (US$16mn

Most of the external arrears are owed to unguaranteed suppliers, some of which are in discussions with the government, while the rest have not been located.

Includes bath loans and grants.

Includes subscription payments to international organizations (mainly CAF, also IBRD’s FOE) and changes in Banco de la Nation’s long-term as

Includes all other net financial flows (incl. exceptional financing), and errors and omissions.