Abstract
This paper focuses on Peru’s Second Review Under the Stand-By Arrangement (SBA). Progress was made on structural reforms, but key reforms remain to be implemented, including the completion of tax reform and implementation of a fiscally neutral decentralization. Both are crucial to fiscal sustainability over the medium term but face considerable risks in the current political environment. The 2003 program aims at maintaining prudent macroeconomic policies, including moderate fiscal adjustment, and pressing ahead with structural reforms. Moderate fiscal adjustment is also needed to give credibility to the authorities' medium-term deficit target.
This statement provides information that has become available since the staff report was issued. The new information does not change the thrust of the staff appraisal.
Real GDP grew by 4.6 percent in January (y/y), and the 12–month inflation rate (CPI) rose to 2.8 percent in February; core inflation was 1.7 percent.
Gross reserves have increased by US$867 million since end–2002 (to US$10.6 billion as of March 21), mainly reflecting two international government bond issues (US$750 million). In addition, the central bank has purchased some US$145 million in the foreign exchange interbank market.
On March 13, 2003, the government issued a decree aimed at capping retail fuel prices by adjusting fuel excise taxes in the event of a substantial further increase in international crude prices. The decree, effective for 90 days, reduces the specific excise tax on fuels if West Texas Intermediate (WTI) crude prices exceed US$40 per bbl over any 10–day period.1 The tax would be unchanged if WTI prices are between US$30–40/bbl, and would be raised if they drop below US$30/bbl (to recover any previous revenue loss). So far in 2003, the state-owned petroleum refinery has raised prices by 12 percent on average (with the private refinery following suit). The authorities have told staff that they remain committed to the fiscal targets under the program and would absorb any temporary revenue loss through delays in certain investment projects and cuts in current outlays. In light of this commitment and given the likely small size of the potential impact of the measure on the budget,2 staffs assessment is that the authorities’ fiscal program remains intact and appropriate.
On March 21,2003, the authorities issued regulations to establish a system of primary dealers of domestic government bonds, selected five banks as primary dealers, and announced the bond placement calendar for 2003.