Peru
Selected Issues
Author: International Monetary Fund
Publication Date:
23 Apr 2010
eISBN:
9781455206674
Language:
English
Keywords:
ISCR; CR; output gap; dollarization; Peru; exchange rate; balance rule; fiscal policy objective; debt limit; Peruvian FRTL rule; countercyclical fiscal policy response; Commodity price shocks; Global
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This paper assesses the performance of Peru’s alternative fiscal rules in supporting medium-term fiscal policy objectives. Peru has shown steady fiscal surpluses and declining debt vulnerabilities. Subnational government constrains to borrow internationally have been relaxed, which could become a concern in the future. Current debt levels are already low, which may allow the authorities to move quicker toward a structural balance rule, or even propose a small structural deficit, without jeopardizing debt sustainability.

Abstract

This paper assesses the performance of Peru’s alternative fiscal rules in supporting medium-term fiscal policy objectives. Peru has shown steady fiscal surpluses and declining debt vulnerabilities. Subnational government constrains to borrow internationally have been relaxed, which could become a concern in the future. Current debt levels are already low, which may allow the authorities to move quicker toward a structural balance rule, or even propose a small structural deficit, without jeopardizing debt sustainability.

Performance of Alternative Fiscal Rules: An Application to Peru

This chapter assesses the performance of alternative fiscal rules in supporting medium-term fiscal policy objectives. Three main conclusions emerge from the analysis. First, there is no dominance of one rule to the others but rather each one involves trade-offs in terms of sustainability, cyclicality, volatility of main fiscal variable, and different degrees of implementation challenges. Second, the selection of a particular rule should be based on its performance relative to a prioritized set of fiscal policy objectives. In the case of Peru, the analysis suggests that a structural approach could result in important gains in terms of limiting pro-cyclical effects. However, a formal structural balance rule can be demanding in terms of economic and institutional prerequisites, entailing lengthy preparatory steps. Third, the current Fiscal Responsibility and Transparency Law (FRTL) has been critical for debt reduction in Peru, with embedded flexibility to adapt to evolving objectives. A change in FRTL parameters can replicate some of the features of a structural balance rule, while preserving debt limit objectives.

I. Background

1. The Peruvian authorities have shown a strong commitment to prudent fiscal policy. In 1999, the first version of the Fiscal Responsibility and Transparency Law (FRTL) was introduced, representing a structural change in fiscal strategy in Peru (Box). While the FRTL was instrumental for fiscal consolidation, controlling spending has been challenging and caps frequently proved to be difficult to enforce, particularly at the sub-national level. Overall, against a backdrop of strong growth and high commodity prices, fiscal policy has been slightly counter-cyclical.

2. The current global financial crisis has strained national fiscal rules over the world, with fiscal rules in many countries being modified, including in Peru.2 Thanks to large saving accumulated in recent years, Peru was able to implement a significant fiscal stimulus that entailed a positive fiscal impulse of about 2½ percent of GDP in 2009—a 14 percent increase in real general government primary spending, far beyond the cap established in the FRTL. Also, the FRTL was modified to increase the 1 percent of GDP deficit limit to 2 percent in 2009–2010. In 2010, with increasing evidence of a self-sustained rebound, fiscal policy is moving towards a neutral fiscal stance, returning to the FRTL debt limit in 2011.

3. While recent efforts to strengthen the fiscal framework have been significant, challenges remain to formalize a more explicit medium-term orientation of fiscal policy. Main challenges comprise the adoption and implementation of a fiscal rule that could help maintain public finances on a sustainable path, smooth output fluctuations, and create a budgetary cushion against adverse shocks and long-term fiscal pressures.

4. This chapter assesses the performance of alternative fiscal rules in supporting medium-term fiscal policy objectives. Three principal conclusions emerge from the analysis. First, none of the rules examined clearly dominates the others. Rather, each one involves trade-offs in terms of sustainability, cyclicality, volatility of main fiscal variable, and different degrees of implementation challenges. Second, the selection of the appropriate rule should be based on its performance relative to a prioritized set of fiscal policy objectives. In the case of Peru, the analysis suggests that a structural rule could have substantial gains while risks remain contained. However, a structural rule can be demanding in terms of economic and institutional prerequisites, entailing lengthy preparatory steps. Third, the current FRTL has proven to be flexible and a change in parameters can replicate the results of a structural rule, while preserving debt limit objectives.

II. Main Results

5. This section assesses the fiscal implications of alternative fiscal rules under a variety of scenarios. To illustrate how fiscal variables behave under alternative rules, we present two sets of simulations. First, we simulate how fiscal variables would have behaved if these rules had been in place during 1998–2008—i.e., a deterministic backwards looking exercise. Second, we discuss the results of the implementation of the same rules for the next five years (2009–2015) under both deterministic and stochastic scenarios.

6. Four fiscal rules are considered in the simulations: (i) a basic balance budget rule, which targets a zero nominal overall balance; (ii) a expenditure rule, which caps real primary expenditures increase to 5.5 percent a year; (iii) a structural balance rule, which targets a zero primary balance adjusted to account for medium-term output and commodity prices levels; and (iv) the Peruvian FRTL rule, which allows for an overall fiscal deficit of up to 1.0 percent of GDP in “bad” times, while capping the increase in real expenditures to 3.0 percent in “good” times.3,4

7. Assessing the performance of alternative rules entails trade-offs between various policy objectives and medium-term fiscal risks. Fiscal rules can serve different policy objectives, such as: promote fiscal sustainability, provide cyclical flexibility (the ability to respond to shocks), promote economic stabilization, contain the size of the government, support intergenerational equity, etc. Each type of fiscal rule has different properties relative to key policy objectives. Furthermore, priorities may change over time once gains from past policies are achieved, which may justify a change of the fiscal rule in place.

Peruvian Fiscal Rule

Legal status of the rule. As part of the effort to alleviate medium-term PFM shortcomings, the “Ley de Responsabilidad y Transparencia Fiscal” (FRTL) was enacted in December 1999 as a permanent institutional device to promote fiscal discipline in a credible, predictable, and transparent manner. In 2003 the Fiscal Management Responsibility Act was introduced with a clear objective of debt consolidation.

Rationale for the fiscal rule. The FRTL included a combination of a deficit target and real current expenditure ceiling for the nonfinancial public sector and general government respectively, as well as debt ceilings for subnational governments. The main features of the Peruvian FRL can be summarized as follows:

  • It contains procedural and transparency provisions; particularly, the government must prepare the Multi-Annual Macroeconomic Framework (Marco Macroeconómico Multianual) containing three-year macroeconomic projections of revenue, expenditure, public investment, and public debt.

  • Numerical fiscal targets are embedded in the law (see table below).

  • Institutional coverage is broad, covering the nonfinancial public sector (although not for all targets).

  • Sanctions are only institutional.

  • Escape clauses allow deviations from numerical targets during periods of low growth.

  • Cyclical considerations are taken into account by establishing fiscal stabilization funds to mitigate cyclical variations.

Historical compliance with the rule. The numerical targets embedded in the law were changed over time, such as in 2003, 2007 and 2009. The following table summarizes the main changes introduced to the FRTL.

Numerical Targets of the Fiscal Responsibility and Transparency Law (FRTL)

article image
Source: Montoso, Carlos and Moreno, Eduardo, “Reglas Fiscales y la Volatilidad del Producto” Estudios Económicos, Banco Central de Reserva de Perú, and staff updates.

Numerical rules for subnational governments are not included in this table.

Following the national definition, consumption comprises expenditures on wages and salaries, goods and services, and pensions.

Response to the global financial crisis. The impact of the recent global financial crisis has been significant, which called for countercyclical monetary and fiscal policies. Escape clauses in the law were not applicable for this particular shock. However, the FRTL includes an exceptional escape clause that allows for a temporary relaxation of the targets with Congressional approval. The relaxation of the FRTL targets was approved in May 2009 to allow a deficit of 2 percent of GDP and to undertake a countercyclical fiscal policy response.

8. We use summary indicators to compare the performance of alternative rules to achieve different policy objectives. Rules are compared with regards to its ability to: (i) ensure a sustainable debt path (sustainability); (ii) ensure a neutral stance relative to the cycle (cyclicality);5 (iii) help deliver the required adjustment without requiring a significant fiscal effort that may not be politically feasible; (iv) minimize volatility of main fiscal variables; and (v) allow for the accumulation of fiscal buffers in “good” times. To obtain a more realistic assessment of the merits of alternative fiscal rules in the medium-term we introduce a stochastic approach to discuss the appropriate level of risks that the authorities might be willing to take.

Application of Alternative Rules for 1998–2008

9. As a deterministic backward looking exercise for the period 1998–2008, we simulate the fiscal path under the four alternative rules, assuming that they were binding and met every year. Table 1 and Figure 1 present the main results.

Table 1.

Comparative Performance of Alternative Fiscal Rules, 1998–2008.

article image
Source: Staff estimations.

Cumulative pro-cyclical impulses over the reference period (as proposed by Debrun, et altri (IMF WP/08/87). That means improvements in the primary balance during bad times, and deteriorations of the primary balance in good times (in % GDP).

Figure 1.
Figure 1.

Output Gap, change in Output Gap and Fiscal Impulse, 1998–2008

Citation: IMF Staff Country Reports 2010, 099; 10.5089/9781455206674.002.A001

Source: Staff estimates.1/ BBR (balance budget rule); EXR (expenditure rule); SBR (structural balance rule); PER (Peruvian rule).

10. Key conclusions emerge from this exercise:

  • All proposed rules show similar results in terms of fiscal sustainability. Debt ratio remains around 40 percent of GDP in average for the period, similar to actual levels.

  • Not surprisingly, the structural balance rule and, to a lesser extent, the actual fiscal data exhibit a more neutral stance; while the balance budget rule is procyclical and the expenditure rule countercyclical. The Peruvian theoretical rule gives similar results to the expenditure rule for this period.

  • Discrepancies between the results of the Peruvian theoretical rule and actual fiscal data derive from temporary deviations of actual policy from the theoretical rule. As shown in Figure 1, in 2008 actual fiscal data shows a procyclical stance (real expenditures increased significantly over the cap in the context of a highly positive output gap), while under the theoretical rule fiscal stance would have been counter cyclical.

  • The structural balance rule requires the lowest fiscal effort, measured as the minimum real change in primary expenditures in one year. The Peruvian theoretical rule and the balance budget rule are the ones requiring the larger fiscal effort.

  • The expenditure rule shows the lowest volatility, measured by the standard deviation of real changes of primary expenditures. Under the balance budget rule, shocks to GDP affect tax revenues and lead to a corresponding adjustment in expenditures. Under the structural rule, shocks to GDP would also affect the output gap offsetting the required adjustment in expenditure, thus resulting in a smoother expenditure pattern. The Peruvian theoretical rule shows very similar results to the structural balance rule in terms of spending fluctuations during this period.

  • The Peruvian theoretical rule allows for the highest accumulation of fiscal surpluses in “good” years, followed by the structural balance rule. These two rules promote the building up of fiscal buffers that could be used in less favorable years. The balance budget rule does not allow for accumulation of fiscal surpluses by construction. Under the expenditure rule, while fiscal performance improves in good years, it is not enough to generate an overall surplus during this period.

Application of Alternative Rules for 2009–2015

11. To illustrate how alternative rules would perform under different macroeconomic conditions, we use both a deterministic and a stochastic approach. This results in two sets of exercises: (i) we simulate the rules under three different deterministic scenarios (Box 2); and (ii) to give a more nuanced assessment of the uncertainty surrounding fiscal variables, we simulate the rules under stochastic scenarios. For the later, we use a modified version of the Celasun, Debrun, and Ostry algorithm, where we estimate the joint probability distributions of economic shocks faced by the Peruvian economy to construct a large number of scenarios that capture covariances among disturbances as well as dynamic response of the economy.6 Based on actual data for 2008, we assume that the rules are implemented in 2009 and are binding and met every year.

(a) Deterministic scenarios

12. We use three deterministic scenarios—a baseline, a growth boom-bust, and a negative commodity price shock—to compare the performance of alternative fiscal rules. Details of the assumptions used in each scenario are presented in Box 2, whereas Table 2 and Figure 2 show main results of the simulation exercise.

Table 2.

Comparative Performance of Alternative Fiscal Rules, 2009–2015

article image
Source: Staff estimations.

Cumulative pro-cyclical Impulses over the reference period (as proposed by Debrun, et altri MF WP/08/87). That means improvements in the primary balance during bad times, and deteriorations of the primary balance in good times (In percent of GDP).

Figure 2.
Figure 2.

Output Gap, Change in Output Gap, and Fiscal Impulse, 2009–2015

Citation: IMF Staff Country Reports 2010, 099; 10.5089/9781455206674.002.A001

Source: Staff estimates.1/ BBR (balance budget rule); EXR (expenditure rule); SBR (structural balance rule); PER (Peruvian rule).

13. The results suggest that a structural balance rule would smooth expenditure patterns over time and reduce the cyclical bias of other rules. Despite that it could lead to somewhat higher debt levels, this risk remains well-contained.

  • In all cases, debt remains below 30 percent of GDP, suggesting no sustainability concerns in the next five years in any of the scenarios. It should be noted that, in general, the structural balance rule leads to higher levels of debt, even though debt remains stable in the different scenarios.

    All the rules show a predictable fiscal stance over the cycle. Under the balance budget rule, fiscal stance remains highly pro-cyclical in all scenarios, particularly in the boom-bust case. The expenditure rule, and to a lesser extent, the Peruvian theoretical rule results in a countercyclical stance, except in the case of a boom-bust scenario where they become pro-cyclical (see Figure 2).

  • Fiscal effort and volatility of primary expenditures remain lower in the expenditure rule, followed by the structural rule.7 The Peruvian theoretical rule shows a similar spending pattern to the balance budget rule, where fluctuation in revenues are followed by corresponding adjustments in expenditures. In this regard, the structural balance rule would smooth expenditure pattern and absorb part of the risks of spending fluctuations associated with unexpected macroeconomic shocks.

  • The Peruvian theoretical rule allow for building up fiscal buffers in good times under the baseline scenario. However, no significant accumulation of assets would be possible under any rule in the rest of the scenarios.

Deterministic Scenarios

The following three scenarios were used to analyze the performance of alternative fiscal rules:

  • Baseline scenario: Growth is assumed to reach 6.3 percent in 2010 and gradually converge to the potential growth rate by 2013 closing the output gap. After a moderate increase in 2010, commodity exports remain broadly constant for the rest of the period

  • Boom-bust scenario: Real growth is assumed to peak in 2010 and 2013 deteriorating sharply in the following years. Commodity exports do not contribute to the volatility of the output gap, remaining at the baseline levels.

  • Commodity price shock: Commodity prices are assumed to decrease further in 2010 causing a negative output gap of 3.0 percent of GDP in 2010. The shock dissipates only gradually in subsequent years.

GDP Growht Rates and Commodity Exports Assumed in Simulation Exercises

article image
uA01fig02

Peru: Output Gap for alternative scenarios

Citation: IMF Staff Country Reports 2010, 099; 10.5089/9781455206674.002.A001

(b) Stochastic scenarios

14. An assessment of the risks of alternative fiscal rules warrants incorporating explicitly the probabilistic nature of fiscal variables. The three scenarios presented in the previous section give a broad sense of the sensitivity of fiscal variables to alternative rules and a range of likely shock combinations. Yet, the deterministic approach has significant methodological limitations, particularly in a volatile macroeconomic environment. To account for the effect of uncertainty in fiscal projections, this section seeks to assess alternative fiscal rules under a more realistic constellation of shocks.

15. The simulations comprise three steps. First, we impose, one at a time, four fiscal rules as a predetermined fiscal behavior for every year of the forecasting horizon;8 second, we calibrate the distribution of shocks to fit the statistical properties of historical data for Peru;9 and finally, we combine the predetermined fiscal rules with the stochastic scenarios to produce annual paths for the main fiscal variables: debt, primary balance, and primary expenditures. We use fan charts to depict confidence bands of varying degrees of uncertainty around the median projection for each fiscal variable—which corresponds to the baseline scenario presented above. The fan-charts resulting from this exercise are presented in Table 3.10

Table 3.
Table 3.

Comparative Performance of Alternative Fiscal Rules under Stochastic Scenarios, 2009–2015

Citation: IMF Staff Country Reports 2010, 099; 10.5089/9781455206674.002.A001

Source: staff estimates.

16. Stochastic scenarios provide the risk profile of different fiscal rules. The probability distributions of main fiscal variables can prove to be especially useful for policymakers to manage fiscal risks to acceptable levels. It is important to acknowledge that the simulated frequency distributions of fiscal variables are not the true probability distributions at a point in time, since structural changes may have affected variances and co-variances. The assessment is contingent on the historical period over which the VARs are estimated.11 Wide confidence intervals inevitably reflect past crises, and may thus overestimate the true magnitude of risks.

17. The key results are the following:

  • Overall, the outcome of the deterministic scenarios falls within the 30 percent confidence interval, confirming that deterministic stress tests do not account for the overall risks inherent to fiscal variables. Fan chart analysis provides a more reliable picture of the uncertainty surrounding fiscal variables.

  • For all the rules the median debt path remains sustainable (i.e., the debt ratio is stable or declining over the simulation horizon). However, in the expenditure rule and, to a lesser extent, in the structural balance rule we observe growing debt ratios in the second and third deciles. Thus, in extreme cases, there is at least a 30 percent chance that a combination of adverse shocks may lead the debt to GDP ratio to increase up to 40 percent, which is still within reasonable limits.

  • Under the Peruvian theoretical rule, and to a lesser extent, in the expenditure rule we observe negative debt ratios at the end of the period (a creditor position) in the three lower bands. Thus, there is a probability of accumulating a significant amount of financial assets.

  • Under the balance budget rule, by construction, the primary balance and therefore debt risks are contained, while the expenditure pattern is very volatile.

  • Under the structural balance rule, there is a small chance that the debt ratio will increase slightly above 30 percent of GDP, but the volatility of expenditures is very limited.12

  • Under the expenditure rule, while volatility of expenditures is low, risks are high in terms of debt since the primary surplus is very volatile. This is an important difference between the expenditure rule and the Peruvian theoretical rule. While both rules show a similar fluctuation pattern for primary expenditures, the Peruvian rule has lower debt risk, since it caps the overall balance reducing the risks of debt increasing over 30 percent of GDP.13

  • It should be noted that, while the structural balance rule shows the lowest volatility of primary expenditure to GDP ratio (Table 3), the expenditure rule leads to a smoother spending pattern when volatility is measured as the standard deviation of real primary expenditures (Table 2).

III. Policy Considerations

18. The selection of a fiscal rule should be guided by its performance relative to a prioritized set of fiscal policy objectives. There is no one-size-fits-all fiscal rule that would always and everywhere be ideal. Priorities of fiscal policy may change, once policies succeeded in achieving certain goals such as reducing public debt. The current rule has proved instrumental for debt consolidation, and consideration is being given now to reducing pro-cyclicality.

19. Peru’s FRTL was very successful in reducing the debt ratio, being opportunistic in good times and conservative in bad times. In earnest, fiscal buffers built in recent years proved very important to implement the fiscal stimulus plan in 2009. Yet, controlling spending growth has been challenging over the years, with caps difficult to enforce—particularly at a sub-national level.

20. Moving to a structural balance rule poses significant challenges in the short-term, but it can help over the medium-term to institutionalize past prudent policies. Adopting a structural rule requires that important economic and institutional preconditions be met (Annex 1). But a structural fiscal approach can be beneficial, once debt sustainability and financing constraints are no longer of concern, by separating temporary effects related to the business cycle and commodity prices, limiting volatility of public expenditures, and reducing potential procyclicality.

21. Changing current parameters of the FRTL can replicate some features of a structural approach, while retaining debt limit objectives. The design of the FRTL, with deficit and expenditure growth limits, has an embedded flexibility to adapt to evolving objectives. Adjusting the current parameters of the FRTL, mainly through changes in expenditure caps, could shift the focus of fiscal policy closer to a structural approach, reducing pro-cyclicality bias and retaining debt limit objectives, which still remain important to the authorities.

Annex 1. Structural Fiscal Rules: Implementation Challenges

22. There is a trade-off between potential benefits of a structural rule and its implementation challenges. Accepted preconditions for the introduction of a new rule in general, and of a structural balance rule in particular, may require time in Peru. We focus on implementation challenges arising during the transition period toward a structural rule.

Appropriate Timing14

23. Regardless of the rule selected to improve the fiscal policy framework, appropriate timing for introducing the rule is crucial for its success. Extraordinary situations, such as the current global financial crisis, may not be conducive to introducing a new rule. Caution suggests that any change should be introduced gradually and be linked to a medium-term objective. In the context of an unusual level of uncertainty, the introduction of a new rule, or a rapid return to previous fiscal targets implied by the existing rule, may be politically and economically challenging. The authorities may not be ready to support a new fiscal framework since it involves credibility risks, while the required adjustment to return to the existing rule may be excessive and/or not politically feasible. Consequently, the authorities face at least two challenges: first, selecting the appropriate rule under high uncertainty; and second, managing the time table to introduce any change to current fiscal strategy.

24. International experience suggests that fiscal rules should not be introduced in an excessively uncertain economic environment. Under these circumstances, a gradual approach focused on medium-term targets is preferable. In the case of Peru, the analysis suggests that adjusting the parameters of the existing rule could approximate the results obtained under a structural rule—e.g., setting the real expenditure cap at the potential GDP growth rate, extending its coverage to primary expenditures of the general government, while preserving the deficit limit of 1 percent of GDP for the nonfinancial public sector. Nonetheless, it may be helpful to design and announce early-on a credible medium-term rule-based framework, and a time table for its introduction, or for a return to the existing rule or a modified version, as appropriate.15 Meanwhile, preparatory steps could be undertaken to ensure a successful implementation of a structural rule.

Fiscal Consolidation and Macroeconomic Stability

25. Progress achieved in terms of fiscal consolidation and macroeconomic stability facilitates the transition to a new fiscal framework. In this context, a low debt level resulting of past fiscal consolidation is a prerequisite for implementing a structural rule. During recent years, Peru has shown steady fiscal surpluses and declining debt vulnerabilities. Public debt has been reduced in terms of international comparison, but some concerns remain. Public debt is still highly dollarized, regardless of significant efforts done by the authorities in recent years. Subnational government constrains to borrow internationally have been recently relaxed, which could become a concern in the future. Contingent liabilities related to public servant pension schemes may add pressures on current debt level.

26. Adopting a structural balance rule at the time when the output gap is close to zero would minimize medium-term debt risks. A structural balance rule would increase debt risks derive from unexpected shocks. Under the current rule, risk from negative shocks are fully absorbed by the adjustment of expenditure (above an overall deficit of 1.0 percent of GDP), thus reducing the impact on the debt ratio. Under the structural rule negative shocks would increase the fluctuation of the primary balance that would translate in larger debt ratios. Based on the results presented in previous sections, under the baseline scenario the output gap would be closed by 2012. However, current debt levels are already low, which may allow the authorities to move quicker towards a structural balance rule, or even propose a small structural deficit, without jeopardizing debt sustainability.

27. The choice of the target for the structural rule should be guided both by social and macro policy objectives. Given the low medium-term debt risks, the significant infrastructure gap, and poverty reduction goals, it could be argued that a structural rule that allows for a small structural deficit could serve well current policy objectives. In the past, it was clear that one of the main fiscal policy objectives was the debt consolidation. At present, given the success of past policies, a balance structural rule may seem too restrictive. However, the need of rebuilding financial buffers and avoiding political pressures to increase public spending together with low enforcement capacity of expenditure caps at a subnational level, warrants exercising caution.16

Institutional requirements

28. Structural rules require strong institutions. This entails strong commitment to transparency, well-established policy credibility, and good governance structure and quality of institutions. Additionally, structural rules require good forecasting and planning capacity, as well as strong accounting and information systems.

29. Despite several reforms to strengthen fiscal policy through the adoption of a new legal framework, some weaknesses remain in the Peruvian PFM.17 Recent TA missions have focused on some shortcomings of the budgetary process, mainly the financial management information system (SIAF), the budget classification and chart of accounts,18 the treasury management,19 and the organization of the Ministry of Finance. In addition, risks to public investment have increased in the last years with the relaxation of some regulations for assessing and approving investments in the context of efforts to implement the stimulus plan. It is crucial that these institutional weaknesses are resolved before moving towards a structural rule.

30. Given well know technical difficulties in implementing structural rules,20 an independent agency with responsibility for auditing and/or determining the dating of the cycle could help to increase policy credibility. However, delegating core aspects of fiscal policy to an independent agency may raise political concerns. The authorities should feel comfortable delegating this function to outsiders, which may warrant a trial period.

Fiscal Decentralization

31. Structural rules are easier to implement when a centralized budget process overseen by a powerful Ministry of Finance is in place. Budgetary procedures should be conductive to the rule’s smooth operation. In highly decentralized economies, such as Peru, additional challenges arise in the implementation of a structural rule. Weak fiscal policy coordination between central and subnational levels combined with a high degree of budget decentralization, might well interfere with the ability to comply with national fiscal targets.21 This again, raises concerns about the appropriate allocation of fiscal targets across government levels, and overall, about the feasibility of adopting a structural rule in the short-term.

32. Overall, authorities should take a gradual approach in moving forward a structural rule. Carefully calibrating its timing and formalizing the rule once the benefits are proved, will be crucial for its success. Finally, special attention should be given to ensuring that the structural rule is clearly linked to a medium-term objective and supported by a strong institutional and legal framework.

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1

Prepared by I. Rial (FAD).

2

For a detailed assessment of the international experience see “Fiscal Rules: Anchoring Expectations for Sustainable Public Finances” IMF Policy Paper, November.

3

Bad times are defined as those years where real GDP growths below its potential rate. Good times are defined accordingly.

4

For simplicity purposes, the “theoretical” Peruvian rule is a stylized version of the “real” rule.

5

To measure the procyclical bent in a fiscal rule we calculated the cumulative pro-cyclical impulses over the reference period (as proposed by Debrun, et altri IMF WP/08/87). That means improvements in the primary balance during bad times, and deteriorations of the primary balance in good times (in percent of GDP). The higher the indicator, the more procyclical the rule is.

6

O. Celasun, X. Debrun, and J.D. Ostry (2006), “Primary Surplus Behavior and Risk to Fiscal Sustainability in Emerging Market Countries: A Fan-Chart Approach”, WP/06/67.

7

By construction, volatility is lower under the expenditure rule when measured as the standard deviation in real primary expenditures. However, when measured as percent of GDP, the structural rule is less volatile.

8

Since our objective was to simulate the implementation of alternative fiscal rules, we depart from the Celasun, Debrun, and Ostry algorithm in that we did not incorporate a fiscal reaction function. Instead, we imposed each alternative rule as a predetermined fiscal behavior to be binding and met every year of the forecasting horizon.

9

The historical properties of the Peruvian data are captured in an unrestricted VAR model which: (i) describes comovements among the determinants of debt dynamics (GDP growth, commodity prices, domestic and foreign interest rates, and exchange rate); (ii) estimates the conditional variances and covariances of the shocks; and (iii) generate a consistent set of projections for the determinants of debt (one thousand stochastic scenarios).

10

Fan charts summarize risks to fiscal variables dynamics by representing the frequency distribution of a large sample of paths generated by means of stochastic simulations. Different colors delineate deciles in the distribution of fiscal variables, with the zone in dark blue representing the 20 percent confidence interval around the median projection and the overall colored cone, a confidence interval of 90 percent.

11

In this case, we used quarterly data from 1993–2008.

12

Here volatility refers to the expenditure to GDP ratio.

13

The overall deficit cannot exceed 1 percent of GDP therefore its distributions is skewed towards the downside.

14

This section draws heavily from “Fiscal Rules: Anchoring Expectations for Sustainable Public Finances” IMF, Policy Paper, November.

15

For example, the German fiscal rule, recently modified, provides a transition period of five years during which substantial adjustment is envisaged before the rule becomes operational.

16

It should be noted that the simulations shown in previous sections included a structural balance rule just for illustration purposes, not as a position on the optimal level of the structural surplus.

17

The framework includes a financial administration law (2003), and treasury (2006), accounting (2006), and budget (2004) laws.

18

The authorities have finalized the development on manual on a new budget classification and a chart of accounts consistent with international standards (GFSM 2001). However, progress in still needed in the complete integration of the budget classification and the chart of accounts and its incorporation in a new technological platform.

19

The treasury has taken some measures to improve cash management and create a TSA. These include daily sweeps to TSA accounts with resources invested in central bank instruments and work to modify the SIAF to generate outputs in a format that replicates that of a treasury-general-ledger.

20

Such as choosing the optimal level to target for the structural balance, determining mineral prices to project revenues, defining output gap, etc.

21

Afonso, A. and Hauptmeir (2009) noted that for the EU 27 countries an increase in the ratio of subnational spending over central government spending contributes to an increase in the total primary spending-to-GDP ratio in the subsequent period. Working Paper Series, No. 1054, ECB.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Peru: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2010: Issue 099
Publisher:
International Monetary Fund
ISBN:
9781455206674
ISSN:
1934-7685
Pages:
74
DOI:
https://doi.org/10.5089/9781455206674.002
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    Output Gap, change in Output Gap and Fiscal Impulse, 1998–2008

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    Output Gap, Change in Output Gap, and Fiscal Impulse, 2009–2015

  • View in gallery

    Peru: Output Gap for alternative scenarios

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    Comparative Performance of Alternative Fiscal Rules under Stochastic Scenarios, 2009–2015

Output Gap, change in Output Gap and Fiscal Impulse, 1998–2008

Output Gap, Change in Output Gap, and Fiscal Impulse, 2009–2015

Peru: Output Gap for alternative scenarios

Comparative Performance of Alternative Fiscal Rules under Stochastic Scenarios, 2009–2015