Peru: Fiscal Transparency Evaluation

This paper assesses Peru’s fiscal transparency practices in comparison with the IMF’s Fiscal Transparency Code, including the new draft pillar on resource revenue management. Peru’s practices meet most of the principles of the IMF’s Fiscal Transparency Code at good or advanced level. The country provides an extensive set of fiscal information with financial statements covering the entire public sector. There is a comprehensive budget supported by a solid fiscal framework with clear policy objectives embedded in numerical fiscal rules. The country also has a clear and comprehensive legal and fiscal regime for the management of resource revenue.


This paper assesses Peru’s fiscal transparency practices in comparison with the IMF’s Fiscal Transparency Code, including the new draft pillar on resource revenue management. Peru’s practices meet most of the principles of the IMF’s Fiscal Transparency Code at good or advanced level. The country provides an extensive set of fiscal information with financial statements covering the entire public sector. There is a comprehensive budget supported by a solid fiscal framework with clear policy objectives embedded in numerical fiscal rules. The country also has a clear and comprehensive legal and fiscal regime for the management of resource revenue.


1. Over the last few years, the Peruvian authorities have significantly improved their macro-fiscal framework and strengthened fiscal transparency arrangements. In 2013, they adopted a new fiscal responsibility and transparency law (FRTL) that became effective in January 2015. The new law introduces spending rules for each level of government based on a structural balance target to help manage the budget impact of macroeconomic fluctuations, including those from resource revenue. The law also mandates the creation of an independent fiscal council and requires reporting explicit contingent liabilities. In addition, since 2007, the authorities have been rolling out a performance-based budget and, in 2012, began developing a medium-term expenditure framework. These efforts build on past reforms to improve fiscal management, with numerical fiscal rules and reporting obligations dating back to the nineties.

2. Recent assessments suggest, however, that fiscal transparency in Peru could be further improved. In 2012, Peru’s open budget index was above the average of other Latin American countries, but was lower than neighbors like Brazil, Colombia and Chile, and had declined since 2010. The latest 2009 Public Expenditure and Financial Accountability (PEFA) report identified the absence of a well-developed medium-term expenditure framework and the significant deviations between initial budget and actual spending as key shortcomings of public accountability in the country.


Open Budget Index, 2012

(Latin American Countries, 100-point scale)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: Open Budget Survey, 2012.

3. This report assesses fiscal transparency practices in Peru and pilots the new pillar of the IMF’s Fiscal Transparency Code on resource revenue management. The report relies on publicly available reports (Table 0.3) and focuses on the three pillars of the IMF’s 2014 Code: fiscal reporting, budget and forecasting, and fiscal risks analysis and management. It also assesses practices in managing resource revenue against the principles set in the new draft pillar of the Code released for public consultation in December 2014. Resource revenues in Peru are significant. In 2013, the mineral and petroleum sectors accounted for about 12 percent of GDP, around 70 percent of country’s exports, and constituted about 10 percent of the non-financial public sector’s revenue (40 percent of local governments’ revenue). The economic relevance of the sector poses the issue of how transparent is the management of resource revenue in the economy and in public accounts.

Table 0.3.

Peru: Main Fiscal Reports

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Source: Authorities, IMF Staff.Notes: Modified cash: “devengado” for expenditure and “cash” for revenue. N/C: not communicated; N/A: Not applicable; Nat: National budgetary nomenclature; NICSP: national accounting standards based on IPSAS.

4. This fiscal transparency evaluation (FTE) is organized as follows. Chapter 1 reviews fiscal reporting practices in Peru. Chapter 2 evaluates the comprehensiveness, orderliness and credibility of budget and forecasting procedures. Chapter 3 assesses government’s practices in disclosing, analyzing, and managing risks to public finances. Chapter 4 pilots the new draft pillar of the Code to assess the openness and transparency in managing resource revenue in Peru.

Fiscal Reporting

Fiscal reports in Peru cover the entire public sector, consolidating main stocks and flows, and generally classify information according to international standards. However, different institutional coverage across reports, the lack of information on some balance sheet items, and limited internal consistency, make it difficult to convert this richness of data into a consistent set of fiscal information. Improving fiscal reporting would require enhancing comparability across fiscal reports, widening the coverage of stocks and flows, and strengthening internal consistency and external controls.

5. This chapter assesses the quality of fiscal reporting in Peru against the principles set out in the first pillar of the IMF’s Fiscal Transparency Code (FTC). According to the Code, fiscal reports should provide a comprehensive, timely, reliable, comparable, and accessible summary of the government’s financial performance and position.1 In assessing these requirements, the chapter focuses on the following four dimensions:

  • Coverage of institutions, stocks and flows;

  • Frequency and timeliness of fiscal reports;

  • Quality of fiscal reporting (e.g., classification standards, internal consistency); and

  • Integrity of fiscal reports (e.g., independence of report compiling and auditing functions). The assessment is based on a wide set of reports and information publicly available (Table 1.1).

Table 1.1.

Peru: List of Fiscal Reports

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Source: Authorities, IMF Staff.Notes: N/C: not communicated; N/A: Not applicable; Nat: National budgetary nomenclature; GG: General government; Mo: Monthly; Qtr: Quarterly; Rev: Revenue; Exp: Expense; Trans: Transactions; Fin: Financial; NFPC: Nonfinancial Public Corporations; SS: Social Security; Ann: Annual; NFIS: national accounting standards based on IPSAS.

A. Coverage of Fiscal Reports

1.1.1 Coverage of institutions (Advanced)

6. In 2013, the public sector in Peru comprised 2,421 institutional entities that accounted for about 28 percent of GDP by expenditure (Table 1.2). The Accounting Department of the Ministry of Economy and Finance (DGCP) is responsible for compiling and publishing annually the register of public sector institutional units and its subsectors (institutional entities may cover more than a budget unit or pliego). In 2013, out of the 2,421 public sector entities, the general government included 2,247 units and public corporations accounted for 173 units (of which, 157 were non-financial corporations of which 25 were under liquidation), plus the central bank. In turn, the general government comprised 256 central government units (including the health insurance system, the military pension scheme, and 3 housing funds), 26 regional government, and 1,965 local government units. Among these numerous local units, a significant number is supposedly not operational, but are not closed.

Table 1.2.

Peru: Public Sector Institutional Composition and Finances, 2013 1/

(Percent of GDP)

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Source: CGR 2013, FONAFE Budget Execution 2013, Financial Statements 2013: BCRP, Banco de la Nación, Mivivienda, Agrobanco, COFIDE, FCR, ONP, EsSalud, Memoria Anual BCRP 2013.

Subsectors are reclassified following international standards as follows: (i) budgetary central government includes national government as presented in CGR, minus Fondo Consolidado de Reservas (FCR) and Oficina de Normalización Provisional (ONP); (ii) Extrabudgetary units (EBU) include Mivivienda, PeruPetro, and entities of enterprise treatment (ETE); (iii) SS includes EsSalud, FCR, ONP, and the Military Police Pension Fund (CPMP); (iv) state government includes regional governments from the CGR; (v) financial corporations include Banco de la Nación, Agrobanco, COFIDE and Cajas Municipales, CGR does not include Banco de Comercio controlled by CPMP and as such reflected in the CPMP financial statements; (vi) non-financial corporations are as from the CGR 2013, and individual firm data are from FONAFE. Consolidated figures are from the CGR and have been adjusted to account for reclassifications. Net balances are reported as from the budget statement.

7. Financial statements cover the entire public sector while the coverage of other fiscal reports is more limited. Peru is one of the few countries in the world to publish annual financial statements (Cuenta General de la República, CGR) that consolidate the entire public sector, including financial and non-financial public entities. In 2013, the general government accounted for about 78 percent of public sector total spending, 60 percent of which was concentrated at the central government level and the remaining 40 percent at the sub-national government (SNG) level. Financial statements serve mainly for accountability purposes and are complemented by other fiscal reports with more limited coverage and used for fiscal monitoring and policy decision purposes. These other reports include fiscal statistics prepared by the central bank (BCRP) and the Ministry of Economy and Finance (MEF) that cover most of the general government in intra-year reports and annually the non-financial public sector (NFPS) (Figure 1.1). They also include the MEF’s budget execution reports covering the general government as defined by national legislation, and the annual fiscal rule monitoring report.

Figure 1.1.
Figure 1.1.

Peru: Coverage of Public Sector Institutions in Annual Fiscal Statistics

(Percent of Expenditure)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: IMF staff calculations.

8. Apart from coverage, fiscal reports differ in the definitions of subsectors, in some cases, not following international standards, making it difficult to compare information across reports. Financial statements and budget execution reports follow national legislation and, differently from international standards, exclude from the central government extra-budgetary units (in particular PeruPetro, some social security and housing funds, and the military pension scheme (see Chapter 2). 2 Fiscal statistics follow instead international, although outdated, standards (GFSM 1986). The impact of these classification issues is, however, not large. In 2013, using international standards would have led to reclassify about 1.8 percent of GDP as central government’s expenditures. Despite the limited impact, using different definitions of institutional subsectors makes it difficult to compare information across fiscal reports, reducing the utility of the broader fiscal statements for policy decision making. Looking ahead, it would be desirable to align the institutional coverage of all fiscal reports to the most recent international standards, such as GFSM 2014.

1.1.2 Coverage of stocks (Good)

9. The MEF publishes each year the consolidated balance sheet of the public sector. The balance sheet provides detailed information on both financial and non–financial assets and liabilities, as well as net worth of all subsectors (Table 1.3). In 2013, total public sector liabilities amounted to about 81 percent of GDP of which around half were financial liabilities in the form of central government debt and pension liabilities. Assets amounted to 94.5 percent of GDP of which 44.6 percent of GDP were in the form of central government’s deposits and central bank’s securities. As a result, the public sector reported negative financial worth of 28.5 percent of GDP, mainly concentrated at the central government level and associated with debt securities, loans, and pension liabilities. Significant non-financial assets (infrastructure and equipment) of central and local governments generated a positive net worth of about 13 percent of GDP for the year.

Table 1.3.

Peru: Public Sector Balance Sheet, 2013 1/

(Percent of GDP)

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Source: CGR 2013, Financial Statements 2013: BCRP, Banco la Nación, Mivivienda, Agrobanco, COFIDE, FCR, ONP, EsSalud, Extrabudgetary units.

Subsectors are reclassified according international standards and following GFSM 2014, regions are classified as state governments.

10. However, the public sector balance sheet does not fully reflect all government assets and liabilities and their true value (Table 1.4, Figure 1.2). The main differences arise because in the financial statements:

  • Subsoil assets are not reported (25.2 percent of GDP). The subsoil assets have been tentatively evaluated by staff at about S/. 138 billion (see Section 3.2.6).

  • Tax receivables are only partially reported (overall gross value about 20 percent of GDP). In 2013, recorded tax receivables amounted to S/. 49 billion (9 percent of GDP) and were fully depreciated. However, additional tax claims disputed by taxpayers were disclosed as memorandum items and not reported as claims (S/. 52 billion; 9.5 percent of GDP). These claims should be reported in the balance sheet and depreciated based on probability of materialization. More generally, probability analysis, based on past recovery trends should be performed to better assess the actual value of these assets.

  • Public service pension liabilities are only partially recorded (about 11.3 percent of GDP). The balance sheet reports S/. 122 billion in total pensions liabilities covering both part of the civil servants system (so called DL20530) and the National Pension System (SNP) for private and public employees. It also reports additional S/. 62 billion (11.3 percent of GDP) as memorandum items to be incorporated in the liabilities over time. Following GFS standards, all future pension payments related to the civil servants system (DL20530) should be reported as liabilities, while future pension payments related to SNP should be reported as contingent liabilities (Box 1.1). Moreover, the actuarial valuation of these liabilities is dated and an update as well as reclassification of these liabilities are likely to affect significantly the financial net worth.

  • Accounts payables are not recorded (1.5 percent of GDP). The balance sheet does not include payables on the assumption that, by the time the final financial statements are prepared (after March 31st), payments have been fully processed. This leads to systematic under-recording of liabilities.

  • Loans and debt securities are registered at face value rather than market value. The valuation methods to assess loans and debt securities vary across fiscal reports (e.g., face value, amortized costs) and none of these valuation methods are consistent with international standards, which require using market value or nominal value assessment. While most financial liabilities are reported in the balance sheet (an exception arises about PPP, see below), an accounting issue arises about the definition of debt used in other fiscal reports (see Section 3.2.2).

  • Financial liabilities related to PPPs are likely underreported. The balance sheet reports about S/. 5 billion in financial liabilities from PPPs. This amount only corresponds to the value of administrative certificates of work completion provided to private contractors (called CRPAO). However, according to international accounting and statistical standards, PPP liabilities should be registered each time the government acquires the related asset (and not only when CRPAO are issued). Indeed, the amount of PPP-related liabilities reported in the balance sheet is small compared to the large pool of projects under PPP contracts, and the estimated value of the potential liabilities is clearly underestimated (see Section 3.2.4).

  • Other non-financial assets appear significantly underestimated. Infrastructure and equipment are recorded at historical value and often fully depreciated. This procedure affects particularly the valuation of buildings and structures, many of which have a residual value in the balance sheet of only S/. 1.3

Table 1.4.

Peru: Estimated Public Sector Balance Sheet, 2013

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Source: CGR 2013, FONAFE Budget Execution 2013, Financial Statements 2013: BCRP, Banco de la Nación, Mivivienda, Agrobanco, COFIDE, FCR, ONP, EsSalud, Memoria Anual BCRP 2013, IMF Staff estimates.

Following current practices, unreported additional tax receivables have been fully depreciated with no impact on net worth.

No reliable data are available on PPP related liabilities beyond those registered as CRPAO.

SNP pension scheme is partially reported in the balance sheet, however according to statistical standards this pension scheme should be treated as a contingent liability (see Box 1.1).

Figure 1.2.
Figure 1.2.

Peru: Public Sector Balance Sheet and Coverage in Fiscal Reports, 2013

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: CGR 2013, IMF staff estimates.

Some of these issues are already being addressed. In 2014, regulations were issued to improve the financial instruments valuation methods, a module for recording of buildings and structures was developed, and an inventory process initiated.

11. Taking a more comprehensive view of the public sector balance sheet alters the estimated fiscal position and may potentially change the source and size of fiscal risks. Initial estimates of the true value of the public sector balance sheet put the estimated net worth in 2013 at about 32.6 percent of GDP, 19.3 percent of GDP higher than currently reported. This increase is mainly due to the inclusion of unreported subsoil assets in the balance sheet. Future re-evaluation of some of the main assets and liabilities (e.g., infrastructure, pensions) and assessment of PPP related liabilities could potentially affect the assessment of the main sources and size of fiscal risks.

Peru: Overview of Pension Schemes for Public Employees

Pension Schemes for Public Employees in Peru

In Peru, there are three public pension schemes for employees: (i) the National Pension System (SNP), to which public employees are affiliated and private employees can opt for; (ii) the Military Police Pension Fund (CPMP); and (iii) the civil servants system (so called DL20530), closed to new affiliations since 2004. Both the SNP and the DL20530 are administered by the Oficina de Normalización Provisional (ONP), a budgetary public entity responsible for collection of contributions and payment of pension benefits. A separate fund runs the military pension scheme.

Statistical Treatment of Pension Schemes

According to GFSM 2014, the statistical treatment of pension schemes in public accounts depends on the nature of the scheme. The nature of the pension scheme depends on whether the scheme is contributory or not, whether it is a defined-benefit or defined-contribution, and whether it is a social security or employment related scheme:

  • Contributory schemes. The requirement to make payments of social contributions by the protected persons or by other parties on their behalf to obtain entitlement to the benefits indicates the existence of a social insurance scheme.

  • Defined-benefit schemes are schemes in which the ultimate benefit is calculated by means of a formula embodied in terms of the social insurance scheme. However, the statistical treatment differs depending on the type of beneficiaries: when the beneficiary is the general population, or a large segment of the general population, the scheme would be considered a social security scheme; whereas if individuals, households, or a group of employees are eligible to receive social benefits, the scheme would be considered an employment-related social insurance scheme. Their statistical treatment differs:

    • ➢ Under social security schemes, the link between benefits and contributions is not considered sufficiently strong to give rise to a financial claim on the part of contributors. As a result, no liabilities are recorded, but an estimate equal to the net implicit obligations for future social security benefits should be presented as a memorandum item to the balance sheet.

    • Employer-related insurance schemes are, on the contrary, considered to involve a contractual liability towards employee and registered as liabilities.

Statistical Treatment of Pension Schemes in Peru

The three pensions systems described above fall into defined-benefit social insurance scheme. All systems rely on transfers from the government to pay benefits, even though SNP and the CPMP have separated institutional funds that accumulate assets overtime. However, while DL20530 and CPMP are employer-related insurance schemes covering only public employees, civil or military, the SNP is a social security scheme that covers large segments of the general population. Therefore, liabilities related to the first two schemes should be treated as liabilities in the balance sheet of the public sector, while SNP’s pension liabilities should be treated as contingent liabilities in memorandum items.

1.1.3 Coverage of flows (Basic)

12. Fiscal reports are prepared on a cash and modified cash basis. All annual and intra annual reports present revenue on a cash basis and expenditures on a modified cash basis (devengado), i.e., registered when the obligation for payment is recognized.4 In this respect, fiscal reporting in Peru does not meet the most advance accounting and statistical practices (e.g., IPSAS and GFSM 2014). In particular, the lack of full accrual recording implies that non-cash flows and other economic flows are not fully recorded.

13. Cash to accrual adjustments significantly affect the fiscal balance of the public sector. While CGR’s operating statement contains some accrued economic flows (e.g., depreciation of assets and variation of the pension stock), it does not cover a number of flows related to missing items in the balance sheet (e.g., accrued expenses related to accounts payable, change value of debt). Once all accrual adjustments are accounted, the public sector fiscal balance in 2013 would improve from a surplus of 1.9 percent of GDP on a modified cash basis to a surplus of 2.4 percent of GDP (Table 1.5 and Figure 1.3).5

Table 1.5.

Peru: Public Sector Cash to Accrual Adjustments, 2013

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Source: CGR 2013 and Staff estimates.

Fiscal balance as presented in the financial statements. Not enough information is available to make adjustments using fiscal statistics.

Fiscal balance as presented in the financial statements, including accrual based items. Financial statements also include fully depreciated revenue of about 11 percent of GDP not reported here that, according to the authorities, refers to tax receivables disputed by taxpayers.

Estimate provided by the authorities.

Figure 1.3
Figure 1.3

Peru: Reconciliation of Cash to Accrued Expenditures, 2013

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: CGR 2013, authorities, staff estimates.

14. Apart from cash-accrual adjustments, some flows across subsectors are not fully reported, leaving substantial transfers across different levels of government undisclosed. Specifically, two sets of transfers are not appropriately registered. First, regional and local governments are authorized to spend against the ordinary revenue of the central government, but this use is not recorded as grants, while the expenditure is reported at sub-national government level. In 2013, these missed transfers amounted to about S/. 17.3 billion for regions (3.2 percent of GDP) and S/. 3.8 billion (0.7 percent of GDP) for local governments. Second, once PeruPetro is reclassified as a central government agency, all revenue it collects and transfers to SNG should be registered, according to international standards, as national government revenue, with a subsequent transfer to SNGs. Instead, they are currently reported as SNG revenue. 6 Overall, in 2013 the amount of transfers to SNGs not appropriately registered was about 4.2 percent of GDP.

1.1.4 Coverage of tax expenditures (Good)

15. The government has been annually publishing estimates of revenue foregone from tax expenditures since 2003 as part of the Multiannual Macroeconomic Framework (MMM). Tax expenditures are defined as any exception to the general tax norm (following the so-called legal approach) and are assessed on a foregone revenue basis. Estimates of revenue losses cover the main tax expenditures of the central government and provide information on losses by tax (e.g., VAT, excise tax, etc.) and expenditure (e.g., credit, deduction, etc.), by geographical area and economic sector (e.g., education, construction, etc.), including for natural resources.7 Over the past decade, tax expenditures ranged from 1.8 to 2.2 percent. In 2015, estimated revenue losses amount to about 2.2 percent of GDP, lower than in some neighboring countries, and are concentrated in agriculture and fishing, and general tax expenditures that apply mainly to the Amazonia region (Figure 1.4). Tax expenditures in the mining and hydrocarbon sector amount to 0.1 percent of GDP (5 percent of the estimated total).

Figure 1.4.
Figure 1.4.

Peru: Tax Expenditures, 2015

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: MMM (2015-2017), IMF Fiscal Monitor (April 2011).1/ All estimates are for 2010, except Peru for 2015 estimates are reported. International comparisons of the size of tax expenditure are only indicative as estimation methodologies may vary across countries.

16. Tax expenditure estimates cover the central government only and have no explicit budgetary limit. Tax expenditures do not cover taxes levied by sub-national governments and taxes and fees levied by other government entities (e.g., PeruPetro), although these are expected to be relatively small due to the limited tax capacity of non-central government entities. While no limit exists on the size of tax expenditures, some expenditures are temporary and cannot last more than 6 years. However, VAT and income tax expenditure have no explicit time limit. Introducing explicit controls and budgetary objectives for the size of tax expenditures would bring Peru in line with advanced practices.

B. Frequency and Timeliness

1.2.1 Frequency of in-year reporting (Advanced)

17. Peru produces a wide array of in-year fiscal reports with a high degree of frequency and timeliness. The BCRP publishes monthly and quarterly cash-based fiscal reports covering the general government and the non-financial public sector within two weeks from the end of the month. Monthly cash-based budget expenditure execution reports covering the budgetary national, regional and local units are also regularly published by the MEF within 30 days from the end of the month. Finally, the MEF prepares an MMM execution report every six months and in 2015 will start a quarterly fiscal report as mandated by the new FRTL.

1.2.2 Timeliness of annual financial statements (Good)

18. Peru publishes annual consolidated financial statements for the public sector within nine months of the end of the financial year. DGCP collects annual financial statements from public sector entities by March 31st (three months after the end of the financial year). Financial statements are prepared and submitted for audit by the General Auditor Office by June 20th. After receiving the auditor general report (by August 10th), DGCP sends the audited accounts to congress (by August 15th). At the same time, financial statements are published in the MEF’s website, pending approval by Congress.

C. Quality

1.3.1 Classification (Advanced)

19. Fiscal reports present revenues and expenditures by administrative, economic and functional classifications largely following international standards (Table 1.6). Financial statements present revenue and expenditure according to the economic, administrative and functional classifications and include information on the sources of funds. Budget execution reports contain programmatic information according to COFOG standards. Fiscal statistics published by the BCRP also provide breakdowns by administrative and economic classifications although following the outdated GFSM 1986 standards.

Table 1.6.

Peru: Classification vs. International Standards

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Source: Nota Semanal, Nota de Estudios, Memoria Anual (various years), CGR.

20. A consistent classification appears to be used across different levels of government. Accounting and budgetary entries are recorded in the state information system (SIAF) by all public sector entities, excluding public corporations. Therefore, the charts of accounts and budgetary nomenclatures are similar across most entities within the general government.

1.3.2 Internal consistency (Basic)

21. Only limited internal consistency checks and reconciliation of fiscal aggregates required under the FTC are undertaken. Fiscal statistics by the BCRP show no discrepancy between fiscal balance and financing because any discrepancy is included under domestic financing that acts as a residual item. Reported public debt varies across fiscal reports because of different definitions, making it difficult to reconcile debt issues and debt holding data. Financial statements contain such reconciliation, but rely on the narrow definition of public debt provided by the national legislation that does not meet international standards. No attempt is made to reconcile financing and change in the debt stock.

22. Despite limited consistency checks, available data suggest that discrepancies are contained. Staff calculations suggest that over the period 2011-13, the discrepancy between fiscal balance and financing averaged about 0.8 percent of GDP (Figure 1.5a). Over the same period, calculations suggest that stock-flow adjustments averaged about 2 percent of the GDP (Figure 1.5b). The stock-flow adjustment can be seen as the sum of three elements: net acquisition of financial assets, debt adjustment effects, and statistical discrepancies. Staff calculations suggest that the main elements explaining the stock-flow adjustment over the last few years are net acquisition of financial assets and revaluation of debt with minimal statistical discrepancies, except in 2013, when the discrepancy reached about -1 percent of GDP. Given the range of possible discrepancies, systematically performing internal consistency checks in the future would greatly improve fiscal transparency.

Figure 1.5.
Figure 1.5.

Peru: Internal Consistency Reconciliations, 2013

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: Memoria Anual BCRP, CGR 2013.Notes: Change in domestic credit provided by BCRP; Revaluation of the debt is estimated by applying the change in exchange rates to the debt denominated in foreign currencies.

1.3.3 Historical revision (Not met)

23. There is no systematic publication of revisions to fiscal aggregates in any of the fiscal reports, although ex-post revisions appear not to be significant. Fiscal statistics are updated as the estimates of fiscal aggregates move from provisional to final following the outcome of the auditing process. However, the final outcomes appear as new figures in the following year’s report, without any comparison, explanation or bridging tables reconciling the different vintages. However, over the last few years, annual revisions to the fiscal balance were less than 0.05 percent of GDP.

D. Integrity

1.4.1 Statistical integrity (Good)

24. Fiscal statistics are produced and disseminated by the BCRP and MEF in line with the IMF’s Special Data Dissemination Standard (SDDS) practices. The statistical methodology used by BCRP and MEF for the compilation of the nonfinancial and financial accounts is the same—GFSM 1986. Statistics have not moved yet to the more recent international standards (GFSM 2014).

25. The Constitution assigns to the BCRP the responsibility to disseminate fiscal statistics. The MEF compiles and also disseminates fiscal statistics. Both BCRP and MEF use SIAF as the main source of data and collaborate to ensure consistency of fiscal statistics. However, no protocol or other regulations appear to exist defining formally any division of tasks and cooperation arrangements between the two institutions.

1.4.2 External audit (Basic)

26. The Comptroller General of the Republic provides independent oversight of public finances. The Comptroller General is an independent body established under the Constitution to audit public entities, with a focus on compliance audits. It undertakes financial audits of fiscal statements in accordance with the International Standards on Auditing (ISA) and International Standards of Supreme Audit Institutions (ISSAI).

27. The Comptroller General provides opinion on the consolidated statements and delegates most of the audits of individual entities’ financial statements. The Comptroller General focuses on ensuring that the aggregation of the accounts and eliminations of internal transactions have been correctly performed. While it may directly audit the financial statements of public entities, it outsources to local accounting firms most of the audits of individual entities.

28. The coverage of external audits is large, although it focuses on a limited number of entities. In 2013, audits covered around 230 entities (around 10 percent of public entities), which accounted for about 90 percent of total assets, expenditures, and revenue reported in the financial statements for the public sector. This approach, however, leaves outside the scope of audit a significant number of entities, which may have significant contingent liabilities, although not audited entities appear to be mainly small, and supposedly non-operational, local entities.

29. The audit of the consolidated financial statements in 2013 resulted in a number of disclaimers, particularly at the SNG level (Figure 1.6). The analysis and statistics presented to Congress in 2013 shows that the quality of accounts at the sub-national level is a concern. All audits performed at the regional government level and 75 percent of audits performed at the local government level resulted in qualified or adverse audit opinions. While Congress approval of audits accounts is requested by the constitution, it is not mandatory and financial statements in 2010 and 2013 have not been approved by Congress.

Figure 1.6.
Figure 1.6.

Peru: Audit Findings, 2013

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: Comptroller General of the Republic.

1.4.3 Comparability of fiscal data (Basic)

30. Fiscal reports have only a basic degree of comparability. Annual budget outturn documents are the only fiscal reports prepared on the same basis and institutional coverage, as the budget. They present and compare final outturns (revenue and spending categories) with their forecasts (initial budget and modified budget). The fiscal rule monitoring reports compare fiscal outturns with MMM forecasts, however outturns are not reconciled with fiscal statistics or final accounts.

31. In general, information on fiscal outturns differs across reports, making any reconciliation difficult. For instance, the budget outturns published in the annual budget execution reports differ from the outturns published in the financial statements. Budget reports and financial statements adopt the same recording basis for revenue—even if budget execution data mixes revenue and financing sources of funding—and expenditure but are not homogeneous in terms of coverage of institutions and coverage of flows, making any reconciliation not immediate. The differences are even larger when comparing outturns in budget execution reports and outturns reported in fiscal statistics. In this case, reconciliations would reclassify as central government spending about 1 percent of GDP (i.e., around 8 percent of net expenditure), with a similar discrepancy on the revenue side. The result is that a number of fiscal balances are published in Peru and they differ quite substantially (e.g., in 2013, the NFPS balance was 1.9 percent of GDP in financial statements and 0.9 percent of GDP in fiscal statistics). While no reconciliation between different reports and fiscal balances is undertaken, it would be important to reconcile the different reporting standards.

E. Conclusions and Recommendations

32. Peru’s fiscal reporting practices meet good or advanced standards in several areas and provide a richness of fiscal data (Table 1.7). Unlike many other countries, financial statements in Peru provide full institutional coverage of the financial and non-financial public sector, consolidating the main stocks and flows of all subsectors. Fiscal reports are prepared frequently and in a timely manner and generally classify information according to international standard. Fiscal statistics are compiled and disseminated according to international standards and financial statements audited by an independent audit institution. Controls over the reliability and quality appear limited though, with most of the practices meeting only basic requirements or presenting important gaps.

Table 1.7.

Peru: Summary Assessment of Fiscal Reporting Practices

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33. Taking full advantage of Peru’s richness of fiscal data requires, however, improvements in a number of areas. Despite a wide coverage, a number of items in the balance sheet and operating statements are not recorded (e.g., accounts payable) or evaluated according to best accrual accounting principles (e.g., infrastructure and equipment, PPP liabilities, pensions). While fiscal statistics are compiled according to international standards, the most recent guidelines (GFSM 2014) have not been adopted yet. Despite a general reliability of data, controls on the consistency of fiscal reports are little developed. Moreover, while numerous fiscal reports are published, comparability across reports is limited as the institutional coverage varies across reports. Finally, although financial statements are subject to an independent external audit, audits have limited scope. These shortcomings combined unduly limit the information base that could be used for fiscal-decision making.

34. Strengthening fiscal reporting practices in Peru requires focusing on a number of priorities:

Improve the coverage of stocks and flows and, in particular,

  • Include the main missing assets, liabilities, and flows in financial statements and update valuation methods. Specifically, on the assets side, (i) record all tax receivables and develop a methodology based on recovery rates for depreciation; (ii) assess the present value of the main tangible assets (sub-soil, infrastructure, land and buildings). On the liabilities side, (i) record accounts payable; (ii) revise the value of pensions (actuarial valuation) and record their full liability; and (iii) record liabilities related to PPPs in accordance with international standards.

  • Over time, adopt GFSM 2014 standards (accrual basis) for fiscal statistics.

Improve the comparability of fiscal reports, and

  • Harmonize the institutional coverage and the definition of subsector across the various fiscal reports.

Strengthen internal controls and external audit functions, in particular,

  • Undertake and publish internal consistency checks of fiscal data contained in various reports.

  • Develop the internal control function and, in particular, develop in-year controls on the quality of fiscal accounts at all levels of government.

  • Develop capacities at the comptroller general office, and expand the coverage of the individual financial statements audited.

  • Undertake a review of existing public sector entities, and close those that are inactive.

Fiscal Forecasting and Budgeting

Peru has a fairly comprehensive budget, formulated within a fiscal framework that has clear policy objectives embedded in numerical fiscal rules. However, different institutional coverage across fiscal documents and an institutional practice of automatic supplementary budgets make it difficult to connect macro-fiscal objectives with annual and medium-term budget planning. Improving forecasting and budgeting practices requires strengthening the link between the budget and medium-term fiscal planning, enhancing reconciliation of different vintages of fiscal forecasts, and making operational the already legislated independent fiscal council.

35. This chapter assesses the quality of fiscal forecasting and budgeting practices relative to the standards set by the IMF’s FTC. It focuses on four main areas:

  • Comprehensiveness of the budget and associated documentation;

  • Orderliness and timeliness of the budget process;

  • Policy orientation of budget documentation; and

  • Credibility of the fiscal forecasts and budget proposals.

The assessment is based on information publicly available (Table 2.1). A special feature of Peru is the possibility for the public to access the government’s online databases containing detailed information on budget execution, investment, and performance information.

Table 2.1.

Peru: Fiscal Forecasting and Budget Documents and Online Information

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Source: Authorities, IMF Staff

A. Comprehensiveness

2.1.1 Budget unity (Basic)

36. The annual budget covers revenue, expenditure, and financing of the general government, with the exception of some social security entities and PeruPetro (Figure 2.1). The annual budget is structured into national, regional, and local governments and all flows of and between the various levels of governments are fully reflected in the budget documentation and budget execution data.8 However, compared to the internationally accepted definition of central government, the budget does not cover some central government units, specifically a few extra budgetary entities providing social services (notably the health insurance agency, EsSalud), and some smaller entities which support the poor and disabled (Sociedades de Beneficencia Publica). In addition, the budget does not reflect the revenue that PeruPetro retains to cover its costs. As discussed in Chapter 1, following GFS rules, PeruPetro should be considered a central government entity and its own revenue registered as part of the budget. Despite these missing items, the annual budget still covers more than 90 percent of central and general government expenditures.

Figure 2.1.
Figure 2.1.

Peru: Institutional Coverage of Budget and Central Government Expenditures, 2013

(in billions of nuevos soles)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Sources: Budget execution reports, BCRP statistics, staff estimates.Notes: Figures refer to 2013 direct primary expenditure data. Budget execution data differ from central government statistics due to various transfers among levels of governments. Part of transfers from the national to the regional and local governments are reflected as direct revenue in budget execution reports (e.g., VAT redistribution fund).

37. The budget captures well the large size of own revenues in Peru, by presenting all expenditure and revenue on a gross basis, with the exception of some petroleum revenue (those retained by PeruPetro).9 Budget tables provide a clear distinction between expenditure funded through general revenue and expenditure funded through own source revenue. There are two mechanisms for entities to retain general revenue. First, some ministries and agencies can retain some revenue directly collected. The most significant example is the tax and customs agency (SUNAT) which keeps 2 percent of gross tax collection to cover its costs. This withholding is reflected in the budget by reporting total gross revenue collected and a transfer on the expenditure side. PeruPetro is, however, an exception as the petroleum revenues that it retains to cover its costs are not reflected in the budget (about S./ 1.2 billion, 19 percent of gross petroleum revenue). A second mechanism to retain general revenue is earmarking revenue to specific programs. In this case, expenditure funded with earmarked revenue is also reflected in the budget and clearly identified. All included, in 2013, total expenditure funded with own revenue in Peru represented about 21 percent of central government expenditure, a share which is significant compared to other countries for which data is available (Figure 2.2).

Figure 2.2.
Figure 2.2.

Peru: Expenditure Funded with Own Revenue, 2013

(Percent of central government expenditure)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Sources: Budget Execution Report 2013, Staff estimates, national budgets.

38. The revenue reporting of some off-budget accounts could also be improved. Revenue earmarked to off-budget accounts kept by the Treasury are reflected in the budget only when the resources are appropriated for spending. Over the past three years, the average revenue flow to these accounts amounted to about S/. 2.5 billion of which less than ¾ is annually used (and reflected in the budget), and in 2014 the remaining balance was about S/. 3 billion (0.5 percent of GDP). Although the accounting treatment of these funds does not seem to create an issue in terms of transparency in the use of resources, timeliness of revenue and outstanding balances should be disclosed in budget documentation. This disclosure is particularly important since part of the resources earmarked come from natural resources (see Chapter 4 for a discussion on the allocation of resource revenues). Similar arrangements exist for the Fondo Consolidado de Reservas (FCR) which participates in the funding of pensions, and receives resources from ElectroPeru (see Chapter 3).

2.1.2 Macroeconomic forecasts (Advanced)

39. Peru’s fiscal and budget documentation provides a clear and comprehensive analysis of the key macroeconomic forecasts underlying the budget and their assumptions. The MMM includes the current and the three year-ahead forecasts of key macroeconomic aggregates, such as real GDP, inflation, exports and imports, commodity prices, and balance of payments along with the last two years outturns. The MMM also contains a detailed discussion on the assumptions underlying the forecasts and presents downside macroeconomic scenarios relevant to Peru. The MMM is generally updated in August (only 2 out of the past 15 MMM reports have not been updated).

40. While Peru’s one year-ahead macroeconomic forecasts are relatively accurate, medium-term forecasts tend to show conservative biases. One-year ahead real GDP forecasts have been relatively accurate when compared to other institutions and general consensus (Table 2.2) and the average deviation over the period 2003-2013 was 0.6 percentage points. However, medium term real GDP projections generally exhibit a more conservative bias (Figure 2.3). The conservative bias in the real GDP projections combines with inflation forecasts that rely on the central bank’s mid-range inflation target (systematically under-projecting actual annual inflation) and lead to constantly underestimating nominal outturns. Not surprisingly, revenue forecasts for 2003-2013 also exhibit a conservative bias (about 1.8 percent of GDP lower than outturn). Despite these trends, no document reports reconciliations of macroeconomic forecasts with outturns or discusses the drivers of forecast deviations. Looking ahead, reconciling and discussing deviations between forecasts and outturns could prove helpful in improving forecasts.

Table 2.2.

Peru: Real GDP Growth and Revenue Forecasts One-Year Ahead, 2012-2014

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Sources: MMM, BCRP Inflation Report, WEO, Consensus Forecast (various years).Note: BCRP, IMF, and Consensus Forecast are from the month close to the MMM publication date. Revenue refers to general government level. While GDP was rebased in 2014, for comparison purposes with forecasts, actual revenue ratios are presented using non-rebased GDP.
Figure 2.3.

Peru: Bias in Macroeconomic Forecasts, 2000-2013

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: MMM (various years), WEO.

2.1.3 Medium-term budget framework (Basic)

41. The MMM includes medium term projections of aggregate revenue, expenditure, and financing of the general government and the balance of the NFPS. It includes outturns of the two preceding years, an update of the current year and a projection of fiscal aggregates for the next three years. Since 2014, it also includes binding spending ceilings for the national government and the whole of regional and local governments for the next year and projections for the following years. However these ceilings are presented using a classification basis that differs from that adopted in the annual budget (see Chapter 1).

42. The credibility of medium term fiscal projections appears, however, limited. Medium term projections of the general government primary balance are significantly revised from one MMM to the next and display limited relation to actual outturns (Figure 2.4). Over the decade 2003-2013, the average two-year forward primary balance forecast error was 1.9 percent of GDP. This error may in part reflect macroeconomic forecast errors and partly the fact that the MMM is not informed by a detailed bottom-up analysis of future spending trends (see below). Despite these errors, the volatility of the primary balance in Peru is not higher than in neighboring countries (Figure 2.5).

Figure 2.4.
Figure 2.4.

Peru: Medium-Term Primary Balance Forecast History, 2000-2013

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: MMM (various years), WEO.
Figure 2.5.
Figure 2.5.

Peru: Average Volatility of Primary Balance in Selected Countries, 2001-2013

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: WEO (October 2014).

43. Medium-term macro-fiscal projections and spending ceilings cannot be immediately reconciled with annual and medium-term budget planning. In 2012, the government began developing a medium-term expenditure framework or multiannual budget plan (PMP) published annually at the start of the fiscal year. The plan presents expenditure forecasts over two forward years on a comparable basis with the budget. However, the projections of the MMM and the PMP present a divergent evolution of expenditure because of different underlying assumptions and coverage (Figure 2.6). The MMM reflects a top-down approach based on the constraint set by the fiscal rules and is based on standard international coverage and classification concepts (i.e., GFSM). The PMP reflects a bottom-up approach with conservative estimates based on ongoing policies made by spending units and follows the national budget classification (i.e., exclude some central government entities and funds). As the MMM and the PMP are prepared independently they tend to present a divergent evolution of expenditure. Well functioning medium-term budgeting would require reconciling these top-down and bottom up approaches to perform spending planning in the contest of clear macro-fiscal forecasts and inform more accurately fiscal policy decision making.

Figure 2.6.
Figure 2.6.

Peru: Comparability of Medium-Term Expenditure Forecasts

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Sources: Revised 2015-2017 MMM, 2015-2017 PMP

2.1.4 Investment projects (Good)

44. Public investment projects are subject to cost-benefit analysis and their procurement follows competitive tenders. All public investment projects, including at the sub-national level, are subject to the national framework for public investment (SNIP) defined and monitored by the MEF. Feasibility studies, including cost-benefit analysis, and validation of projects by the MEF, are required for all projects with value above S/. 10 million. A dedicated selection process is followed for projects funded through PPPs, with the intervention of a specific government agency, ProInversion (see Chapter 3). Public procurement regulations provide for open and competitive tenders for investment projects above S/. 11,500 with the specific requirements varying based on the size of the project. All information regarding individual projects and procurements processes is available on two web portals administered by the MEF.

45. Despite the increasing size of public investment and recent efforts to boost it further, total obligations under multi-annual projects are not systematically monitored. The budget framework only provides for the recording and monitoring of annual commitments, hence a project can be included in the budget as soon as resources are available to cover its first year costs.10 Following this practice, over the past ten years, public investment has doubled to 6 percent of GDP and Peru now has higher public investment spending than most neighboring countries (Figure 2.7.a, b). In part, this may reflect a need for more productive investment given the overall low quality of infrastructure in Peru compared to other countries (Figure 2.7.c). Lately, however, the government has taken further steps to unlock investment financing, including with several new financial mechanisms (see Chapter 3), and the size of approved projects, in the past two years, has been significantly higher than the actual investment spending (Figure 2.7.d). At end 2014, overall commitments for capital projects could be as high as S/. 120 billion (20 percent of GDP). These commitments are not fully and systematically monitored and can raise concerns about the sustainability of current investment spending trends. Many countries in this situation have adopted regulations for monitoring the size of multiannual commitments and, in some occasions, modified their budget frameworks to better control multiyear spending (See for example France, Box 2.1). Recently, the government in Peru has taken initial steps to better assess the medium-term fiscal impact of some investment projects.11

Figure 2.7.
Figure 2.7.

Peru: Selected Public Investment Indicators

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Sources: WEO (Fall 2014), Global Competitiveness Index, 2014-15, SNIP, BCRP, IMF staff elaborations.

Multiannual Commitments Controls in France

As part of the comprehensive reform of its budget framework in 2001, France introduced multiannual commitment authorizations (MCA) as a new central feature for monitoring legal commitments and future payments of the government. The budget is now presented both in MCAs and in payment authorizations. The commitment phase of budget execution has moved from an annual basis (as is now the compromiso phase in Peru) to a multiannual basis meaning the total cost of a legal commitment into which the government is entering has to be fully recorded against available MCAs. Authority to cover these legal commitments with payments is still provided on an annual basis, and the IT system keeps record of payments made against previously committed MCAs. Annual reports disclose the amount of MCAs to be covered in the future, per program. This information is then used for preparing the baseline estimates of the detailed medium term budget framework.

B. Orderliness

2.2.1 Fiscal Legislation (Advanced)

46. The Constitution, the Budget Framework Law, and Congress Regulations provide a comprehensive and clear legal framework governing the budget timetable and its content. The Constitution (Section 78) requires the government to submit the annual budget to Parliament by end-August, and Congress Regulations grant three months to Congress for approving the budget. Beyond this term, the initial proposal of the Government is automatically adopted. The Budget Framework Act clearly defines the format and content of the supporting documentation to the annual budget proposal.

47. The legislative framework also limits the legislative’s power to amend the budget proposal. Members of Congress cannot create or increase public spending (Section 79 of the Constitution). Congress can however reallocate funding although, in practice, reallocations are limited. For the 2015 budget, Congress reallocated less than half a percent of total expenditure.

2.2.2 Timeliness of Budget Documents (Advanced)

48. The annual budget is submitted to Congress by end-August of each year and approved one month before the start of the year. This timing is in line with legal requirements (see Section 2.2.1) and has been systematically respected over the last few years (Table 2.3).

Table 2.3.

Peru: Budget Submission and Approval Dates, 2013-2015

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Sources: Authorities, official Gazette.

C. Policy Orientation

2.3.1 Fiscal Policy Objectives (Good)

49. Peru’s fiscal policy objectives are clearly stated and embedded in time-bound numerical fiscal rules set by the new FRTL and reported against. Before 2014, the government’s fiscal objectives were set by the 1999 FRTL. This law introduced fiscal rules focusing on budget balance targets, spending ceilings and debt limits for the NFPS, and on central and sub-national governments. Since 2005, the rules were regularly reported against with a special report submitted to parliament for the NFPS and the central government while compliance by sub-national governments was not systematically reported. However, rules were often modified and compliance at sub-national government level was poor. Starting in 2015, the government’s fiscal objectives are anchored in the new 2013 FRTL. The new law sets spending limits for the general government (used to determine spending ceilings for the national and sub-national governments) anchored in a structural fiscal target for the NFPS, together with debt rules for different levels of government and other more specific rules (Table 2.4).

Table 2.4.

Peru: New Fiscal Rules

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Sources: IMF staff elaborations based on Law 30099.

The limit can rise by up to 0.2 percent of GDP in case of budget under-execution in the previous year. If the expected output gap (positive or negative) is larger than 2 percent, the expenditure limit must adjust, counter cyclically, by up to ¼ of the output gap or 0.5 percent of GDP. When new tax measures yield a permanent change in revenue by 0.3 percent of GDP or more, the expenditure limit changes accordingly.

In the first seven months of an election year, two additional limits apply: (1) budget execution of national government’s primary spending cannot exceed 60 percent of the annual budget; and (2) no measures can be taken that increase future current spending or reduce the fiscal space for the future administration.

50. Preserving the stability and securing the compliance with the new fiscal rules is critical for the credibility of the new fiscal framework. In the past, frequent changes to the fiscal rules and a lack of compliance at the sub-national government level have reduced rules effectiveness. Peru has changed its fiscal rules more frequently than its peers (Figure 2.8). Specifically, between 2003 and 2011, the cap on the spending rules was suspended three times and the rules changed four times mainly to relax the ceilings or reduce their coverage. At the same time, compliance with the rules at the sub-national level was poor. In 2010, only 15 percent of regional governments and 3 percent of local governments complied with all fiscal rules. Looking ahead, preserving the stability of the new fiscal rules introduced by the new FRTL is critical for the credibility of the new fiscal framework and would facilitate achieving advanced practices under the FTC.

Figure 2.8.
Figure 2.8.

Peru: Frequency of Changes in Fiscal Rules

(Number of Countries)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: IMF Fiscal Rules dataset, 2013; Schaechter et al (2012), IMF staff calculations.

2.3.2 Performance information (Advanced)

51. Performance information on the outcomes of major policy areas is regularly disclosed, with some results included in budget documentation. In 2007, the authorities started rolling out a performance-based budget system. More than 240 indicators are produced for monitoring the performance of budget programs, of which three quarters are outcome indicators, the rest being output indicators.12 Each indicator is selected after a review process conducted by the MEF. All performance indicators are available online (Resulta). Since 2013, budget documentation includes forecasts for a selection of the indicators considered most important and compares forecasts with past performance. Looking ahead, this already comprehensive framework should be further integrated with the budget by, for instance, providing a measure of performance of non-program actions and linking future budget allocations with clearly stated performance targets.

2.3.3 Public Participation (Good)

52. Since 2013, the authorities have published an annual orientation guide to the budget. The guide is published alongside the draft budget proposal. The guide provides information on the six areas identified by the Open Budget Index to define a Citizen’s Budget.13 It presents the implications of the budget for a typical citizen but does not provide perspectives from the point of view of different demographic groups.

53. While the central budget process does not provide for formal public participation, a participative budget process exists at regional and local levels. This initiative is not mandatory but is encouraged by the MEF, which provides guidelines for engaging with citizens and selecting projects. An educational guide on this initiative is posted on the MEF website. A web portal allows monitoring of the process, including for citizens who submitted a project.

D. Credibility

2.4.1 Independent Evaluation (Good)

54. The independent Central Bank of Peru regularly provides an assessment of the government’s economic and fiscal forecasts. The FTRL requires the MMM and any revised MMM to be submitted for review to the Central Bank, which has 15 days to provide its assessment. The assessment of the Central Bank covers both macroeconomic (GDP and balance of payments) and fiscal projections, discusses consistency of fiscal and monetary policies, and is collated to the MMM. This formal procedure is preceded by regular technical contacts between staff from the MEF and the central bank to discuss macroeconomic assumptions, especially about inflation and exchange rates.

55. The appointment of an independent fiscal council, mandated under the 2013 FRTL, should strengthen the independent evaluation of government’s fiscal forecasts and performance. According to the law, the fiscal council should provide opinions on: (i) compliance with and modification of fiscal rules, (ii) economic and fiscal forecasts included in the MMM, (iii) short and medium term developments of fiscal policy, and (iv) methodologies for assessing the structural component of fiscal accounts. At the time of the present evaluation, the authorities expected the implementation decree to create the fiscal council to be published during the current year. Given Peru’s performance in budget forecast and a history of revising fiscal targets (see Section 2.3.1), the establishment of an independent fiscal council will be in important institutional feature to improve transparency and fiscal performance.

2.4.2 Supplementary Budget (Not met)

56. The budget framework allows for appropriating additional resources during the course of the fiscal year without the need for supplementary budgets. The Budget Framework Act provides rules to automatically appropriate (and change the initial budget or PIA) various sources of funding:

  • Additional retained revenue (Recursos Directamente Recaudados) and earmarked revenue (Recursos Determinados) can be automatically appropriated, and the unspent balance (Saldo de Balance) can be carried over without restriction.

  • New loans and transfers can also be appropriated automatically.

  • Ordinary revenue (Recursos Ordinarios) can only be appropriated with an act of Congress, and carryovers require prior approval by Congress. However additional revenue can also be appropriated via Urgency Decrees, without Congress approval (in 2014, these appropriations amounted to S/. 2.2 bn).

57. Additional automatic appropriations in the course of the fiscal year lead to significant and systematic over-execution of the initial budget. The automatic appropriation of new funding described above leads each year to an increase in available appropriations (the modified budget or PIM) of about 20-25 percent and are associated to an over-execution of the initial budget by about 7 percent (Table 2.5). These trends undermine the role of the budget as a credible mechanism to implement government’s intended policies. The outcome of these processes is that budget execution in Peru deviates significantly from the initial budget compared to the performance of other countries both in terms of overall amount and the magnitude of the change made to the initial distribution of spending among functions (Figure 2.9).14

Table 2.5

Peru: Determinants of Budget Over-Execution, 2012-2014 (in millions of nuevos soles)

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Sources: Authorities, Consulta Amigable, IMF staff calculations.
Figure 2.9.
Figure 2.9.

Peru: Budget Execution in Selected Countries

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Sources: National Budgets, IMF staff calculations.Note: Right graph reports budget over/under execution for at the level of ten COFOG functions (left axis). Green and yellow indicate small variations, orange and red indicate large variations.

58. The process of incremental adjustments to the initial budget spending allocations may undermine the compliance with the fiscal rule that sets hard spending ceilings. Under the new fiscal rules, aggregate spending limits are set for each level of government in the MMM and expenditure can only be increased if new structural revenue becomes available (Table 2.4). Hence, a conflict can arise between the ex-ante spending ceilings set under the new fiscal rules and the budget process of increasing budget spending during the year. Depending on the magnitude of adjustments to the PIA finally executed, current budget practices can lead to the violation of the spending ceilings (Figure 2.10).

Figure 2.10.
Figure 2.10.

Peru: Reconciliation of Budget and MMM Over-Execution of Primary Spending, 2013

(in billions of nuevos soles)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Sources: Consulta Amigable, Budget Exposicion de Motivos, Fiscal Rules compliance report, IMF staff calculations.

2.4.3 Forecast reconciliation (Not met)

59. The MMM provides relatively limited information and discussion about the sources of often substantial revisions to successive fiscal medium term forecasts. The MMM compares revised aggregate fiscal forecasts with latest forecasts, but only offers generic reasons for the differences between those forecasts, even if they may involve at times significant revisions to specific spending items, such as investment (Figure 2.11). The only exception has been the 2015-2017 revised MMM. The inclusion of reconciliation tables breaking down the relative impact of different factors underlying the revisions would help improve the credibility of the government forecasts.

Figure 2.11.
Figure 2.11.

Peru: Revisions to Capital Expenditure Forecasts

(in billions of nuevos Soles)

Citation: IMF Staff Country Reports 2015, 294; 10.5089/9781513595504.002.A001

Source: MMMs, IMF staff calculations.Note: For calculations, figure b assumes that capital expenditure is the only adjustment variable in the MMM revision process.

E. Conclusions and Recommendations

60. Peru’s fiscal forecasting and budgeting practices meet good or advanced standards in most areas. The budget has a wide coverage and covers the whole of general government, with the exception of PeruPetro and some social security institutions. Medium-term macroeconomic and fiscal projections are detailed and comprehensive, despite a conservative bias and frequent revisions. Fiscal policy objectives are embedded in clear, although complex, fiscal rules. The legal framework clearly sets the rules for the preparation, approval and execution of the budget, as well as the legislative power to amend budget proposals.

61. Translating Peru’s credible macro-fiscal framework into advanced annual and medium-term budget practices requires, however, improvements in a number of important areas. Fiscal policy objectives are clearly stated, but the connection between these objectives and budget planning is not transparent due to the different institutional coverage between fiscal rules and the budget and because of the institutional practice of automatic incremental changes to the initial budget. In addition, despite well-developed macro-fiscal forecasts, the medium term budget framework remains to be developed. Moreover, while fiscal forecasts are generally reliable, they are at times subject to significant changes that are not explained.

62. Strengthening fiscal forecasting and budgeting practices in Peru requires focusing on the following policy priorities:

Enhance budget presentation, coverage, and controls on multi-year spending, in particular:

  • Include in the budget documentation tables bridging the budget and the MMM presentations and some discussion on how to reconcile budget forecasts (revenue and expenditure) with the fiscal forecasts presented in the revised MMM.

  • Disclose in the budget documentation forward looking financial information for institutions not included in the budget (EsSalud, etc.), and discuss their financial links with the budget.

  • Record all revenues, expenditure, and savings of PeruPetro, FCR, and off-budget accounts and clarify the mechanisms for transferring appropriations between spending entities.

  • Adopt regulations and tools for monitoring and controlling the size of multiannual commitments and disclose their size in budget reports.

Strengthen annual and medium-term budget planning, and:

  • Revise the budget framework to reduce automatic supplementary appropriations and facilitate compliance with fiscal rules.

  • Integrate the MMM and the PMP into a medium term budget framework to guide the preparation of the annual budget.

  • Preserve the stability of the fiscal rules, and adopt enforcement mechanisms.

Improve macro-fiscal forecasts and forecast reconciliation, in particular:

  • Report and discuss the reasons underlying any deviations in macroeconomic forecast from actual outturn.

  • Explain in the MMM the different determinants underlying revisions of fiscal forecasts.

Enhance independent evaluation:

  • Make operational the already legislated independent fiscal council.

Table 2.6.

Peru: Summary Assessment of Fiscal Forecasting and Budgeting Practices

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Fiscal Risk Analysis and Management

Fiscal risk management in Peru is, in some respects, in its infancy. Some risks are reported regularly, while others on a more ad hoc basis or not reported. Overall, there is not yet a comprehensive vision of fiscal risks and often single specific fiscal risks are not assessed thoroughly. However, the implementation of the new FRTL that mandates the disclosure of specific fiscal risks is likely to result in Peru adopting more advanced risk management practices.

63. This chapter assesses the government’s analysis, reporting, and management practices of fiscal risks in Peru relative to the principles set out in the IMF’s FTC. Following the Code, the chapter focuses on three dimensions:

  • Disclosure and analysis of fiscal risks;

  • Management of fiscal risks emanating from specific sources (e.g., government guarantees, public-private partnerships, financial sector); and

  • Risks arising from fiscal decision-making between central government, sub-national governments, and public corporations.

The assessment relies on information on various fiscal risks available in a number of different public documents (Table 3.1).

Table 3.1.

Peru: Selected Reports Describing Fiscal Risks

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Source: Authorities, IMF Staff.

A. Disclosure and Analysis

3.1.1 Macroeconomic risks (Basic)

64. Peru is exposed to substantial macroeconomic volatility, which in turn poses sizeable budget risks. Over the last decade, Peru’s nominal GDP growth volatility was higher than in most of neighboring countries and commodity prices, which affect about 10 percent of general government revenue, also exhibited significant volatility (Figure 3.1). These elements have contributed to the high volatility of real revenue growth experienced over the past decade.15

Figure 3.1.