Statement by the IMF Staff Representative on Peru

This paper examines Peru’s 2002 Article IV Consultation, First Review Under the Stand-By Arrangement, and a Request for Modification and Waiver of Performance Criteria. The fiscal policy was tightened in early 2002 from the expansionary stance in the second half of 2001. The baseline medium-term outlook is favorable, albeit not without risks. Assuming sound macroeconomic policies and structural reforms continue, Peru should be able to achieve medium-term growth of 5 percent. However, the domestic political situation contains clear risks, potentially holding up tax reform and undermining fiscal discipline.

Abstract

This paper examines Peru’s 2002 Article IV Consultation, First Review Under the Stand-By Arrangement, and a Request for Modification and Waiver of Performance Criteria. The fiscal policy was tightened in early 2002 from the expansionary stance in the second half of 2001. The baseline medium-term outlook is favorable, albeit not without risks. Assuming sound macroeconomic policies and structural reforms continue, Peru should be able to achieve medium-term growth of 5 percent. However, the domestic political situation contains clear risks, potentially holding up tax reform and undermining fiscal discipline.

1. This statement summarizes economic information that has become available since the release of the staff report as well as the preliminary findings of the recent fiscal transparency module of the Report on Observance of Standards and Codes (ROSC). This information does not change the thrust of the staff appraisal.

2. On recent economic developments:

  • Economic growth is somewhat stronger than assumed in the program. The index of economic activity in September was up by 7.3 percent from a year earlier, and third quarter real GDP growth was 5.2 percent (year-on-year). It is now likely that GDP growth for the entire year 2002 will be at least 4 percent (the program assumed 3.7 percent).

  • Inflation is at the lower end of the authorities’ target range. The 12-month rate of inflation in November was 1.5 percent, at the lower end of the 1.5-3.5 percent target range under the authorities’ inflation targeting framework. The authorities expect inflation in the months ahead to be comfortably within the target range.

3. The recent ROSC module on fiscal transparency finds that Peru has launched important initiatives to increase fiscal transparency. In particular:

  • budget formulation has been strengthened and based on a medium-term macro framework;

  • an integrated financial management information system is being phased-in;

  • a modern public procurement process has been introduced;

  • the cost of tax expenditures has been estimated and published; and

  • most public entities have been mandated to disclose a large amount of important information.

4. At the same time, the ROSC also noted remaining weaknesses in some areas, including the need for:

  • a clearer definition of the scope and functions of public sector operations;

  • a more stable and unified legal framework for fiscal activities;

  • greater transparency of the legislative process in taxation; and

  • a strengthened capacity to carry out external audits of public sector operations.