This Selected Issues paper examines application of fiscal framework alternatives to the case of Peru. Although growth has been at historical highs over the last decade, Peru still has an important infrastructure gap and a quarter of its population still lives in poverty. This paper applies illustratively new modified frameworks recently developed by the IMF to the case of Peru. It takes stock of analytical considerations to resource management, and analyzes Peru’s natural resource wealth and the investment climate. The paper also presents results from simulating alternative Permanent Income Hypothesis (PIH) based approaches and expenditure smoothing fiscal rules.


This Selected Issues paper examines application of fiscal framework alternatives to the case of Peru. Although growth has been at historical highs over the last decade, Peru still has an important infrastructure gap and a quarter of its population still lives in poverty. This paper applies illustratively new modified frameworks recently developed by the IMF to the case of Peru. It takes stock of analytical considerations to resource management, and analyzes Peru’s natural resource wealth and the investment climate. The paper also presents results from simulating alternative Permanent Income Hypothesis (PIH) based approaches and expenditure smoothing fiscal rules.

Peru: Fiscal Framework Alternatives For a Resource Rich Country1

A. Introduction

1. Many resource-rich developing countries (RRDCs) have to reconcile high development and infrastructure needs with low per capita incomes, scarcity of domestic capital, and limited access to international capital markets. They face the challenges of transforming resource wealth into other assets that support sustained development, while also maintaining mechanisms to avoid the boom-bust cycles that stem from volatility in natural resource revenues. Given these challenges, the common advice, based on traditional consumption-savings/investment theories, has been difficult to assimilate and justify at the individual country level. Taking this experience into the account, the Fund has recently developed a macro-fiscal framework that presents new policy analysis tools for RRDCs that could help them target multiple objectives of development and saving.

2. While growth has been at historical highs over the last decade, Peru still has an important infrastructure gap and a quarter of its population still lives in poverty.2 Like other RRDCs, Peru has been confronted with the problem of finding an optimal solution to raise per capita income through sustainable growth and investment while safeguarding macro stability against the price volatility and exhaustibility of its natural wealth. While Peru depends much less on revenue resources than many oil-producing countries, the linkages to the fiscal accounts and the real economy are significant enough to warrant the design of an appropriate fiscal anchor to help the country deal with the challenges posed to fiscal management by the “resource curse.”3 A fiscal framework, like the one recently approved, anchored by suitable fiscal rules and strong institutional setup would help Peru reach these multiple objectives.

3. This paper applies illustratively new modified frameworks recently developed by the Fund to the case of Peru. It takes stock of analytical considerations to resource management in section B, overviews Peru’s natural resource wealth and the investment climate in Section C, recaps the fiscal framework and the recent changes in Section D. Section E presents results from simulating alternative Permanent Income Hypothesis (PIH) based approaches and expenditure smoothing fiscal rules, and offers some options for Peru.

B. Analytical Considerations to Resource Management4

4. Virtually all natural resource-rich countries are faced with two main issues relating to the proper use and price volatility of resource wealth. More specifically, the issues are (i) how much of resource revenues to consume and invest and how to save the remainder; and (ii) how to cope with the uncertainty and price volatility of resources which affect exports, revenues, and non-resource GDP growth. As mentioned before, for RRDCs the former is complicated by greater pressure to spend as their development needs are considerable. At any rate, it is important to consider the length of the extraction horizon. If the horizon is relatively long, in the short to medium term, identifying policies to cope with the price uncertainty takes precedence to the issue of exhaustibility. Uncertainty, in turn, relates to the size of reserves, extraction potential in a given period, average prices, and their likely volatility in the short term.

5. While estimating reserves and production levels is certainly difficult, a much greater challenge is to deal with commodity price fluctuations. Given the ever-changing global environment, it has proven extremely difficult to forecast prices with a reasonable degree of confidence, even over the medium term. Large swings in prices also complicate the task of policy makers who wish to assess whether a shock is permanent (warranting adjustment) or temporary (warranting smoothing). In addition, production might be disrupted by technical difficulties, accidents, strikes, social and political unrest, and cross-border disputes. Production forecasts may prove too optimistic because of delays in investment or for economic reasons (e.g., drop in international demand, substitution to other commodities).

6. Volatility and uncertainty call for a holistic approach to natural resource management. Many countries deal with the unforeseen swings in resource envelopes through building up a liquidity fund to smooth consumption spending. Saving for precautionary (prudential) reasons is conceptually different from other motives, such as saving for future generations or temporary parking of revenue to minimize absorptive capacity disruptions. Additional savings can be used to pay down debt, ramp up domestic investment spending, or invest in external financial assets (for example, when absorptive capacity constraints make it impossible to invest faster).

C. Natural Resources and Fiscal Framework in Peru

Peru’s Wealth and Investment Climate

7. Peru is rich in various natural resources. In 2011, Peru occupied a leading position in the global production of the following mineral commodities:

  • Copper. Second after Chile

  • Silver. Second after Mexico

  • Tin. Third after China and Indonesia

  • Zinc. Third after China and Australia

  • Lead. Fourth after China, Australia, and the United States

  • Molybdenum. Fourth after China, the United States, and Chile

  • Gold. Sixth after China, Australia, the United States, Russia, and South Africa

In Latin America, Peru was first in the production of gold, lead, tin, and zinc, and second in the production of cadmium, copper, mercury, molybdenum, phosphate rock, selenium, and silver. Peru also has large actual and potential reserves, including of natural gas (Table 1). In 2012, Peruvian mining production amounted to US$27 billion, equivalent to about 4 percent of global mining production, placing Peru in seventh place among the world’s largest mining producers.

Table 1.

Peru: Reserves of Major Minerals, 2011

(Thousand metric tons unless otherwise specified)

article image
Sources: “Anuario de la Minería del Perú”, 2012.

8. Peru’s economy is relatively dependent on extraction and export of natural resources. In 2011 (latest data available for this breakdown), Peru’s resource GDP constituted about 18 percent of nominal domestic product, comparing to about 13 percent in 2001 (Table 2). In real terms, however, this share has actually decreased from over 15 percent of GDP to about 13 percent over the same period due to changes in terms of trade. After growing at an average of 5.2 percent in the first half of the 2000s in real terms, the sector’s growth rate in 2012 slowed to the same rate of a decade ago (3.5 percent). Exports (which broadly follow production) accounted for 15.5 percent of GDP in 2012, growing 8 percentage points, in dollar terms, over the past decade.

Table 2.

Peru. Resource Dependency

article image
Sources: Peru’s Statistical Agency; Ministry of Economy and Finance; Central Reserve Bank of Peru; and Fund staff calculations.

2011. Minerals and hydrocarbons.

9. Investment in the minerals and petroleum sector in Peru has been growing at an impressive rate. This was due to increased world demand (not least from China) and low extraction costs, but also due to the country’s macroeconomic stability, a good investment climate, and increasing engagement of the operating companies with the local community. The stability of the Peruvian judicial framework has also helped encourage investment in this sector. Foreign direct investment (of which 70 percent goes to the extractive sector) has tripled over the last decade to some 6 percent of GDP in 2012. Investment in the minerals and hydrocarbon industries was about US$8.5 and US$1.5 billion in 2012, respectively, together resulting in a sevenfold increase since 2001 (Figure 1). In 2012, Peru was fifth in the global destinations for exploration of nonferrous metals, behind Canada, Australia, the U.S., and Mexico, at par with Chile.5 The leading countries investing in Peru’s mining sector were China, the United States, Canada, Switzerland, Australia, Mexico, and Brazil. The cumulative level of mineral commodity investments are in copper ($35.4 billion), gold ($6.9 billion), iron ore ($6.8 billion), copper-zinc ($2.1 billion), and polymetallic minerals, including silver ($0.6 billion each).6 According to the Ministry and Energy and Mining, US$28 billion (with total portfolio at US$57.4 billion) is expected to be invested through 2016 in the mining sector.7 Production of a flagship mineral—copper—is expected to double by 2016 with the coming on stream of the four large mines (Toromocho, which started in December 2013, Las Bambas, Constancia, and Cerro Verde). Some analysts estimate that copper production could quadruple by 2021 if the intended investment materializes (Table 3). According to the Hydrocarbons Committee, the portfolio of projects in the hydrocarbon sector amounts to US$12 billion.8

Figure 1.
Figure 1.

Peru: Investment in Natural Resources Sector

(Billion of US dollars)

Citation: IMF Staff Country Reports 2014, 022; 10.5089/9781475563580.002.A001

Sources: Central Reserve Bank of Peru;National Institute of Statistics and Information.
Table 3.

Peru: Investment in Metal Minerals Industry

article image
Source: Ministry of Energy and Minerals.

10. Resource revenue is an important source of revenue for the budget. The significance of resource revenue is further underscored by the revenue sharing agreements established by law between the central government and resource producing regions (in particular, under the law known as Canon Minero). These regions, in turn, are required to spend funds on infrastructure and education projects (Figure 2, Table 2).9

Figure 2.
Figure 2.

Peru: Mining Revenue and Investment

Citation: IMF Staff Country Reports 2014, 022; 10.5089/9781475563580.002.A001

1/ Net of restitutions.2/ National Accounts data.Source: Ministry of economy and Finance, World Economic Outlook., Fund staff calculations.

11. A mining taxation reform was approved in September 2011, aimed at increasing progressiveness of the tax system, while preserving competitiveness of the sector. The new reforms included: (i) new royalties based on operating profits of 1 to 12 percent to replace the sales–based royalties, for companies with no stability contracts with the government10; (ii) a new special mining tax (IEM)—going to the central government—levied on a sliding scale between 2 to 8.4 percent of operating margins (ratio of operating profit divided by net sales) applicable to companies with no tax stability contracts; and (iii) a special (voluntary) levy (GEM) of 4 to 13 percent of profits on the extraction of mineral resources targeting companies holding stability contracts. The reform was well received by the investor community. At the time, revenues were expected to increase by about 0.5 percent of GDP on an annual basis but the recent sharp drop in metal prices has lowered the effective tax rate.

12. Future growth of the extractive industry will depend on further improving the investment climate. In the volatile global environment which affects commodity prices, special attention is being placed on cultivating domestic investment conditions that safeguard previous commitments and generate new investment. Political stability, a reasonable tax regime and adherence to best business practices have been identified as key elements to maintaining investor interest. According to the World Bank’s “Doing Business Indicators,” Peru’s relative strength lies in protecting investors, ease of getting credit, and registering property (Table 4). While Peru compares relatively well with other countries in the region, additional measures to enhance competitiveness in such subcategories as enforcing contracts, resolving insolvency, dealing with construction permits, ease of paying taxes, and getting electricity are warranted. Reforms announced by the government in 2013 aim at reducing excessive paperwork and facilitating faster granting of permits. However, due to limitations in capacity implementation, these reforms are likely to require time to take effect.

Table 4.

Peru: Doing Business in Selected Latin American Countries

Ranking (2013)

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Source: Doing Business, 2013.

13. Social stability is seen as equally important for maintaining conducive business environment. In Peru, social conflicts have increased by 300 percent during the last five years with 149 recent disputes involving extractive industries. While mining regions within Peru have benefited from an established transfer mechanism, local and regional governments have a limited capacity to manage such windfall revenue, and governance challenges appear to be limiting the benefits from mining at the regional and local level. Much of the funding remains unspent, contributing to antimining protests and depriving poor communities of necessary infrastructure, such as water treatment facilities, roads, education, and health care. The absence of government services may have created unrealistic demands—and dependency—on the mining companies. The authorities are well aware of these challenging issues and are working with the local governments and investors on finding best suited solutions to accommodate local development and infrastructure needs and to be able to benefit from Peru’s vast natural wealth.11

D. Fiscal Framework and Recent Changes

14. The previous fiscal regime served the country relatively well. The Fiscal Responsibility and Transparency Law (FRTL) approved in 1999 and valid until 2013 included a combination of a nominal deficit target and real current expenditure ceiling for the nonfinancial public sector (NFPS) and central government respectively, as well as debt ceilings for subnational governments. By limiting real current spending at a rate lower than the growth of the economy, it was highly successful in reducing the country’s debt from 44 to 20 percent of GDP from 2004 to 2012; and the public sector now boasts financial assets of around 15 percent of GDP.

15. However, the 1999 FRTL fell short of providing an adequate fiscal anchor and a framework to deal with commodity-related challenges, did not prevent pro-cyclicality and its coverage was not applied consistently.12 Fiscal policy was pro-cyclical in 2008 due to increased spending beyond the limits imposed by the FRTL, and in 2010, despite the rapid recovery of output post 2009 global financial crisis. Moreover, the FRTL allowed for discretional changes in tax rates, as in 2011, when the authorities reduced several tax rates, which was pro-cyclical. Expenditures caps changed several times, including the use of deflators and targets for real growth rates and transactional coverage used to set the cap (i.e., from current to consumption expenditures). Moreover, the institutional coverage of the rule was not applied consistently across subsectors since expenditure caps applied only to central government, while the overall deficit limit covered the nonfinancial public sector. The use of exceptional clauses proved to be challenging and there was no direct mechanism for saving high-cycle commodity revenues, despite the existence of the Fiscal Stabilization Fund (FEF). Finally, subnational governments were constrained by a different set of rules.

16. To address the aforementioned shortcomings, a new fiscal framework was approved in October 2013.13 The revised framework, inter alia, outlines a stronger regulatory structure though a more comprehensive spending rule, creates an independent body to contribute to the technical analysis of fiscal and macro policy, and introduces corrective actions in cases of breaches in the fiscal rule. Some detailed provisions include the following:

  • Structural fiscal objective. After general elections, the new administration within 90 days of taking office has to present a declaration of the macro-fiscal policy for the period of the presidential mandate, with a numerical structural fiscal objective for the presidential period which should not exceed a deficit of 1 percent of GDP.14,15

  • Budgetary implications. The limit of non-financial public spending has to be aligned to the structural fiscal objective as well as the assumptions on revenues consistent with the business cycle and commodity prices. The limit can be altered if spending in the previous year was less than budgeted. In that case, the amount of the subsequent year’s spending can be adjusted upwards by no more than 0.2 percent of GDP.

  • Countercyclical policy. If there is a positive or negative output gap of at least 2 percent of potential GDP, the spending limit should be adjusted through transitory counter-cyclical measures which together cannot exceed 0.5 percent of GDP.

  • Fiscal revenues. If measures are adopted to generate a permanent increase in fiscal revenues of at least 0.3 percent of GDP, the spending limit can be adjusted by the same amount.

  • Regional and local governments. The level of debt cannot be more than 100 percent of the average total current revenues of last four years, and the annual growth of non financial expenditure cannot be more than the moving average growth of annual revenues over the past four years. The governments can only borrow under the state guarantee and only for capital projects.

  • Corrective measures. In case of deviations from the spending limit, corrective measures are to be taken within a two years if over-spending is below 0.5 percent of GDP, and immediately if it is above this threshold, with an exception of those years when there is a negative output gap of more than 2 percent of potential GDP.

E. Alternative Fiscal Balance Targets and Sustainable Investment Approach

Simulating Alternative Permanent Income Hypothesis (PIH)-Based Fiscal Rules

17. While Peru’s new fiscal framework establishes an important structural anchor, targeting a non-resource primary balance (NRPB) could also be an alternative that would also help generate a certain level of savings. Above the line, the overall fiscal balance can be decomposed into resource revenues, non-resource revenues, primary expenditure, income from financial assets and interest payments on the stock of liabilities. The overall fiscal balance is also equal to the change in the net financial assets. Below the line, the NRPB is defined as the difference between non-resource revenues minus primary expenditure. Resource-rich countries often run overall fiscal surpluses, which can facilitate the accumulation of substantial financial assets over time, but the NRPB is often in deficit. In this exercise, the NRPB is anchored around the expenditure envelope that could be maintained over the long term and is consistent with the stabilization of the net resource wealth. Over long horizons, the net present value (NPV) of future resource revenues should be equal to the NPV of future non-resource primary balances. Over shorter horizon, a stable level of net wealth should be maintained.

18. Simulations can help analyze and visualize the trade-offs associated with alternative Permanent Income Hypothesis (PIH)-based approaches.16 The simulations compute fiscal sustainability benchmarks and enable a comparison of key fiscal indicators for three alternative PIH-based rules (see Annex I for details): (i) the traditional PIH rule, with the main stipulation that in order to meet the inter-temporal budget constraint, the annual level of primary balance should be equal to the return on net wealth; (ii) the modified PIH (MPIH), which allows for an increase in the non-resource primary balance above the PIH sustainability benchmark but needs to be offset with a consolidation effort to return to the PIH benchmark, while there is no impact on growth from investment; and (iii) the fiscal sustainability framework (FSF), which incorporates the impact of higher public investment on growth, and non-resource revenues, generating a fiscally sustainable path consistent with a lower level of financial wealth. The results of simulations for Peru are presented in Box 1.

Peru: Simulating Alternative PIH-based Fiscal Rules

Several key assumptions underpin the simulations: (i) the hydrocarbon reserves last until 2050 at 2013 production rates; (ii) other commodities have various production horizons ranging between 5 and 50 years, (iii) non-resource sector grows at a constant growth rate of 4 percent in real terms per year; (iv) the hydrocarbon and mineral revenue share accruing to the government remains constant;1 and (iv) inflation is at 2 percent per year, while the average real rate of return on financial assets is 1 percentage point above the non-resource growth rate. The simulations compute fiscal sustainability benchmarks and enable a comparison of the paths for the non-resource primary deficit, financial wealth, primary expenditure, and non-resource revenue for three alternative PIH-based rules (Figure 3 and 4):

Figure 3.
Figure 3.

Peru: Fiscal Sustainability Frameworks

Citation: IMF Staff Country Reports 2014, 022; 10.5089/9781475563580.002.A001

Source: Fund Staff calculations.
Figure 4.
Figure 4.

Peru: Fiscal Sustainability Frameworks for Resource-Rich Countries

Citation: IMF Staff Country Reports 2014, 022; 10.5089/9781475563580.002.A001

Souce: Fund staff calcuations.
  • Traditional PIH rule, where the NRPB remains constant over time and is financed with the rate of return on the net present value of projected resource revenues. In this case, the PIH sustainability benchmark is equal to around -1 percent of non-resource GDP (NRGDP).

  • Modified PIH (MPIH), which allows for an increase in the NRPB above the PIH sustainability benchmark by about 1.6 percentage points of NRGDP per year on average during 2012–18 (if investment increases 20 percent a year). The simulation provides an estimate of the inter-temporal trade-off between an increase in spending in the short term and future fiscal adjustment needs, given that the additional investment is not expected to generate higher growth. As shown in Figure 3, the front-loaded investment would need to be offset with a consolidation effort of about 0.5 percent of NRGDP per year on average, smoothed over 18 years in order to return to the PIH benchmark of around -1 percent by 2036.

  • Fiscal sustainability framework (FSF), which incorporates the positive impact of higher public investment on growth, and non-resource revenues, generates a fiscally sustainable path that is consistent with a lower level of financial wealth. Under this approach, fiscal spending can still be stabilized at a higher level because part of the resource wealth has been transformed into physical assets and higher growth will have “fiscal returns” through larger non-resource revenues and notwithstanding lower financial wealth relative to the PIH and MPIH approaches.

1 In 2012, the ratios of fiscal revenue to export values were 68 and 15 percent for hydrocarbons and minerals, respectively.

Structural Primary Balance Based Sustainability Framework

19. As discussed above, the choice of fiscal targets should also depend on the duration of the resource reserve horizons. For RRDCs with short reserve horizons, exhaustibility is the main concern and the key fiscal indicator to assess the fiscal stance should be NRPB—in some variant of the framework described above. Excluding resource revenues from fiscal targets (as the NRPB rule suggests) is, however, less relevant to countries with relatively long horizons (Peru) and to countries that derive an increasingly large part of their revenue from natural resources. In this case, a structural primary balance (SPB) is a more relevant target which complements the NRPB indicator.

20. To address cyclicality and sustainability issues targeting an SPB with some sort of price smoothing and/or expenditure growth rules would be appropriate.17 While a price-based smoothing rule does not offer a direct link to sustainability benchmarks, it can help support solvency through “prudent” forecasting of structural revenues by deliberately under-projecting the sustainable resource price.18 On the other hand, an expenditure growth rule can help to limit pro-cyclicality and can help guide the scaling up of public investment. Figure 5 presents the results for overall balances and savings when targeting SBP between -1 and 1 percent of GDP under a 5/1/5 rule.19

Figure 5.
Figure 5.

Peru: Projected Outcomes with the Different Structural Primary Balance Targets with Price Rule 5/1/5 1/

Citation: IMF Staff Country Reports 2014, 022; 10.5089/9781475563580.002.A001

1/ Price for copper.Sources: Fund staff calculations.

Alternatives for Peru

21. In Peru, considerations for savings need to be balanced against expenditure needs that could boost potential economic growth. As mentioned, Peru has pressing social needs (with elevated poverty in rural areas) and ranks relatively low in education and human capital. There are also large public infrastructure investment needs that could enhance economic growth in the future. While Peru compares favorably with its South American neighbors in terms of overall ratio of investment to GDP, with private investment averaging 17 percent of GDP against 13 percent for the rest of South America, it does not come out as well when it comes to public sector investment, which averages less than 4 percent against more than 5 percent for the region although efforts have been made in the past few years to raise the average (Figure 2). Besides other fiscal pressures and priorities, this relatively low spending on public investment could also be explained by short- and medium-term capacity constraints that have hampered its effectiveness and execution.20 Therefore, Peru is, perhaps, best placed to take a gradual approach to increasing investment spending (PIH) and save more of its resource revenues in financial assets, even if only temporarily, while investment capacity is built domestically. Sustainable—or gradual—investing will also continue to mitigate Dutch disease, and reduce the costs of absorptive capacity constraints.

22. However, the need to close the infrastructure gap may require alternative fiscal framework. The PIH, or even the Modified PIH, could be seen as too constraining for Peru’s circumstances since public investment is not very high by emerging market country standards. Peru could thus consider applying the fiscal sustainability framework (FSF) with a fast scale up of investment spending. This would be consistent with recent IMF guidance for RRDC with relatively longer reserve horizons, which puts less emphasis on the issue of the exhaustibility of resources for medium-term planning. Introducing FSF, however, would require expedient improvements in capacity constraints and a good public understanding of the rule that could generate better support and credibility on its enforcement. Furthermore, to ensure quality and continuity of investment, there is merit to first develop a long-term national infrastructure plan.

23. Taking the above considerations into account, it would seem most appropriate to target a SBP supported by price rules. Simulations show that with a SPB rule of -1 percent of GDP, the cumulative financial saving would be negative, whereas with a zero SPB target the cumulative saving would reach only around 4 percent of NRGDP by 2040, around the time when copper reserves are projected to be exhausted (Figure 5). A target of a SPB of 1 percent of GDP seems more reasonable and would generate a cumulative financial saving of around 40 percent of NRGDP over the same period at the overall NFPS of about 1 percent of NRGDP. Over the last decade, Peru has averaged an overall NFPS surplus of 0.5 percent of NRGDP; and 1–1.8 percent in SPB to GDP (Figure 6).21 Peru’s new fiscal framework gives an opportunity to implicitly target a structural balance, and the authorities would be well advised to aim for structural primary surpluses between 0.5 and 1 percent of GDP to successfully pursue multipronged objectives of sustainability, continue to accumulate buffers and savings, while persevering with the investment and development agenda.

Figure 6.
Figure 6.

Peru: Fiscal Balances

Citation: IMF Staff Country Reports 2014, 022; 10.5089/9781475563580.002.A001

1/ Adjusted for economic cycle and commodity prices. Uses as equilibrium commodity prices a moving average estimate that takes five years of historical prices and 3 years of forward prices accoording to World Economic Outlook.

Annex. Peru: The New Framework for Fiscal Policy in RRDCs

Non-Resource Primary Balance (NRPB) Based Sustainability


The framework proposes three alternative approaches to guide long-term sustainability considerations. A comparison of the primary balance path under the three approaches (which are more or less accommodative to public investment) gives policymakers a better understanding of the trade-offs implied when deciding to invest or save. The framework provides estimates for long-term paths of NRPB and financial savings under different scenarios.

A. The PIH-based Rule

  • Inter-temporal budget constraint. To be sustained for an infinitely long period, the annual level of primary balance should be equal to the return on net wealth, adjusting for inflation.

  • Inadequacy. However, the PIH-based rule might be inadequate for RRDCs as some tilting of consumption paths toward relatively poorer current generations may be welfare-improving.

B. The Modified PIH-based Rule

  • Scaling up. This approach accommodates scaling up of public investment.

  • Front-loading. Assumes that government front-loads investment spending above the baseline forecasts until the last year of investment front-loading, year F. The additional front-loaded capital spending could be financed by “saving” less natural resource revenue during the scaling up period.

  • Possible policy failure. The approach is based on two additional assumptions: (i) The front-loading investment may not have growth impact; and (ii) over the long run (year T), the level of financial wealth from this front-loaded investment scenario has to be equal to the level from the usual PIH fiscal framework, requiring some future adjustment.

  • Future adjustment. These two assumptions together imply that the front-loaded investment has to be fully compensated by a fiscal adjustment in the medium term (spread over T-F years). Hence, the level of financial wealth after year T would be the same for the two alternative fiscal paths.

  • Outlines worst case scenario. The MPIH approach provides an ex-ante measure of possible future fiscal adjustment needs if the scaling up of investment does not have an impact on growth. It therefore provides a future fiscal adjustment path in a worst case scenario where higher public investment has no impact on growth and hence provides a measure of the potential implications for future fiscal adjustment.

C. The FSF-based Rule

  • Tolerates lower savings. This approach stabilizes net wealth at lower levels than the PIH or the MPIH. Higher investment is assumed to have a positive impact on growth, which generates higher non-resource revenue, but also increases operation and maintenance outlays.

  • Asset substitution strategy. The intuition behind this framework is that instead of accumulating higher financial savings, the country has accumulated higher physical assets that also provide a fiscal and social return.


  • Comisión Técnica para el Perfeccionamiento del Marco Macrofiscal, 2013, “Marco Macrofiscal del Peru, Propuestas para Fortalecerlo”, Ministry of Economy and Finance of Peru (Lima).

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  • Gurmendi, A., 2011, “The Minerals Industry of Peru”, U.S. Geological Survey Minerals Book.

  • Instituto de Ingenieros de Minas del Perú, 2011, “Minería Peruana: Contribución al Desarrollo Económico y Social,Ministry of Energy and Minerals of Peru (Lima).

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  • International Monetary Fund, 2010, “Performance of Alternative Fiscal Rules: An Application to Peru,IMF Country Report No. 10/99 (Washington: International Monetary Fund).

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  • International Monetary Fund, 2012, “Fiscal Regimes for Extractive Industries: Design and Implementation,IMF Policy Paper, (Washington: International Monetary Fund).

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  • International Monetary Fund, 2012, “Macroeconomic Policy Frameworks for Resource-Rich Developing Countries—Analytical Frameworks and Applications,IMF Policy Paper (Washington: International Monetary Fund).

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  • International Monetary Fund, 2012, “Towards a Structural Fiscal Framework”, IMF Country Report No. 12/27 (Washington: International Monetary Fund).

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  • International Monetary Fund, 2013, “Fiscal Objectives: Lower Debt or Higher Savings”, IMF Country Report No. 13/46 (Washington: International Monetary Fund).

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  • International Monetary Fund, 2013, “Revamping the Fiscal Framework in Azerbaijan”, IMF Country Report No. 13/165 (Washington: International Monetary Fund).

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  • Ministry of Economy and Finance of Peru, 2011, “Dotación de Recursos Naturales como Palanca de Desarrollo”, Informe Preelectoral Administración 2006–2011 (Lima).

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  • Ministry of Energy and Minerals of Peru, 2013, Libro Anual de Reservas de Hidrocarburos, Resumen Executivo (Lima).

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Prepared by S. Vtyurina (WHD).


Some analysts estimate the infrastructure gap in 2012 to be around 44 percent of GDP, or about US$88 billion.


Resource curse is a term coined by Richard M. Auty to describe the phenomenon that many RRDCs often develop more slowly than counties with fewer natural resources.


This section draws from IMF (2012).


Metals Economics Group, 2013.


Ministerio de Energía y Minas, 2012; ProInversión—Private Investment Promotion Agency in Peru, 2012.


US$35 billion relates to copper projects, US$7.1 billion to iron projects, and US$6.7 billion to gold projects.


Among the major projects include the southern gas pipeline, the LPG pipeline between Pisco and Lima, and the petrochemical and oil tender.


Managing Peru’s mineral wealth is complex because of decentralization arrangements giving regional and local governments a claim on mining revenues. Subnational governments’ own revenues are relatively low, with their main source of income being transfers from general government natural resource revenues. Subnational governments receive 50 percent of the canon. All royalties paid by mining companies are transferred to the region where exploration takes place. Hydrocarbon exploration companies also pay royalties, half of which are transferred to subnational governments. Transfers from mining revenue can be used only for capital spending, which is usually under-executed and results in subnational governments’ accumulating financial assets despite running overall deficits (IMF, 2013).


Tax stability contracts were offered to mining companies to ensure a stable legal, tax and administrative environment to attract multinational companies in the mid-1990s.


The Mining law includes a non-binding consultation clause (Consulta Previa) where investors have to meet with the local community to discuss the future project and identify solutions to any issues (environmental, social, etc.) that may arise from its implementation.


The design of the new fiscal framework followed the recommendations of the commission of experts appointed in 2012, and involved the participation of the central bank, technical assistance from the Fund, and independent experts to provide more transparency and commitment to the process.


The structural fiscal balance corrects for the business cycle (which affects non-mining revenues) and deviations of metal prices from a long-term “shadow” price (which affects mining-related revenues). The key parameters needed for the calculation of the structural fiscal balance are: (i) the output gap; and (ii) the “shadow” price of metals (to be used in calculating structural mining-related revenues).


A commission has been appointed to propose the methodology used in the calculation of the structural fiscal balance under the new fiscal framework. The commission is expected to announce their conclusions by March 2014.


The simulations were generated with a model developed by the Fiscal Affairs Department of the IMF.


See IMF, 2010 and 2012, on considerations for structural rules options.


The FAD model also facilitates the simulations of alternative price-based fiscal rules. This would not be a straight forward exercise to apply in Peru as it depends on several commodity prices, different production capacities and resource horizons. If considered, however, results may point to the trade-offs of alternative price-based rules in terms of smoothing out volatility and generating different levels of financial assets. For a given price formula, higher/lower structural targets would be associated with an increase/decrease the level of financial savings over time. The FAD model is not yet set up to accommodate multiple commodities (which is the case in Peru). For scenarios, which take into account different production horizons and reserves to calculate the government’s intake from the resource revenue, outcomes were normalized by a constant relative price of copper to project an overall metals production level.


The “5/1/5” rule uses 5 years of past prices, the current year price, and a 5 year projection for the calculation.


Capital spending execution has averaged about 85 percent of the budgeted amounts over the past several years.


Staff and the authorities’ estimates, respectfully. The authorities use a moving average of last 15 years filter of prices of resource exports to estimate the structural primary balance to GDP.

Peru: Selected Issues Paper
Author: International Monetary Fund. Western Hemisphere Dept.