On behalf of the Peruvian authorities, we would like to thank staff for the comprehensive assessment of our request for a Flexible Credit Line (FCL) arrangement. We also reiterate the authorities’ appreciation to Directors for their positive words, useful suggestions, and commendation of our very strong policy framework. Once again. we confirm our strong commitment to preserve macroeconomic stability and pursue sustainable and inclusive growth.

As was discussed at the time of the Article IV consultation, Peru’s very strong macroeconomic policy framework has been successful in allowing for a long period of high growth rates, single-digit inflation, and declining poverty. Our monetary policy has successfully kept inflation on target, with inflation volatility at levels comparable with advanced economies, while maintaining exchange rate flexibility as an appropriate shock absorber for a small open economy like Peru, still reliant on commodity exports. Moreover, Peru has made substantial inroads in mitigating key vulnerabilities by reversing dollarization, strengthening financial soundness, and increasing financial intermediation. Peru’s sound fiscal position, low debt, large external buffers and robust financial sector had brought the economy to an expectant position to relaunch growth-supportive policies before the Covid-19 pandemic hit.

We are relying on the strengths of our macroeconomic policy framework to overcome the challenges posed by the Covid-19 pandemic. The world is suffering a rupture in its economic fabric due to the pandemic, with a pervasive impact on the normal functioning of our social systems. Peru is not an exception, and for this reason, our government reacted early by putting in place a comprehensive plan to contain the damage to our health and economic systems. In the first stage, the main objectives were to enhance the capacity of our health systems to respond to the rising demands due to the pandemic, to provide temporary economic support to households and firms, and to prevent major disruptions in payment chains.

Emergency health assistance covered not only our health institutions but also the education sector and public transportation. Economic support to the vulnerable population has rapidly expanded to include our large informal sector and households in remote areas. Delays in tax obligations, temporary tariff reductions for health-related imports, payroll subsidies, allowances to use part of social security funds, and the provision of government-guaranteed credit have all helped to mitigate the unavoidable decline in economic activity. However, the mobilization of the population in a country with complex geography and high informality like Peru has conspired against further progress in containing the propagation of the virus, with more than 100 thousand cases and three thousand deaths as of last weekend despite significant efforts in ramping up testing for more selective interventions. The government has extended the state of emergency until the end of June, with stricter rules for more affected regions, accompanied by measures to gradually reopen some businesses within a comprehensive plan for a gradual normalization of economic activity.

Our fiscal rule has been suspended for the period 2020–21 because of the emergency. However, we have maintained market access, being able to issue sovereign bonds for US$3 billion at very favorable terms with eight times oversubscription at the time of issuance. Our government bond yields in secondary markets have remained broadly stable and credit rating agencies have confirmed their investment grade rating assessments. Even after additional external borrowing, our public debt remains low, mostly held by private creditors. The central bank cut the policy rate by 200 basis points to a record low 0.25 percent to counter the impact of the Covid-19 pandemic, among the lowest rate within emerging markets. Reserve requirements were lowered for domestic and foreign currency liabilities and repo maturities were extended, expanding the list of acceptable collateral. Central bank swap auctions have helped contain exchange rate volatility. In addition, the central bank has provided liquidity to the new government-guaranteed credit line through loan-portfolio repos at a rate determined through an auction, currently slightly above one percent on average. The superintendency of banks has allowed modifications in loan terms for companies affected by the pandemic without modifying the loan classification.

Despite these efforts, the economy is still operating at 44 percent of its capacity because of containment measures internally and worldwide. We plan to continue implementing timely and well-targeted measures consistent with the aims of the second stage of our emergency economic plan, to avoid a long-lasting impact on our growth prospects with the view to facilitate a fast economic recovery once the crisis subsides. To ensure an appropriate use of resources, we will include an assessment of the fiscal impact of Covid-19 at the time of the publication of our Fiscal Responsibility Report. Also, the government has authorized additional resources to the Comptrollers Office, who is now conducting early concurrent assessments of the delivery of new expenditures and government services associated with the national emergency. More generally, the government is continuously assessing improvements to their public financial management framework for a more transparent and efficient budget process, and upgrades to revenue administration practices with the view to enhance revenue mobilization and prevent leakages. Our Anti-Corruption Plan 2018–2021 is fully in place, with our network of “integrity offices” in line ministries ensuring its implementation through strengthening internal controls, compiling relevant information regarding possible unethical conduct by public officials, and following up on complaints. In addition, our Council for Judicial Reform established in 2019 continues coordinating and monitoring judiciary reform initiatives.

For the medium term, we maintain our commitment to improve revenue mobilization and the budget process, and we remain committed to allow the exchange rate to be determined by fundamentals, keeping foreign exchange interventions circumscribed to periods of disorderly market conditions. We plan to upgrade our Banking Law to incorporate provisions for consolidated supervision and enhance our anti-money laundering framework. On structural reforms, the authorities will accelerate the implementation of our National Plan of Competitiveness and Productivity as the crisis recedes, to guide policies to promote strengthening of our human capital, faster technological innovation, integration of informal workers and firms into the formal economy, and upgrading of the business environment; as well as the implementation of our National Infrastructure Plan for Competitiveness aiming at narrowing our infrastructure gap by allowing better planning and monitoring of projects at different government levels.

My authorities intend to treat the two-year FCL with access of 600 percent of quota as precautionary. We believe that this arrangement will help maintain investors’ confidence by providing insurance against extreme tail risks. Going forward, a gradual normalization of global conditions would make it appropriate to lower the access size at the time of the midterm review, as part of a gradual exit strategy, conditional on the evolution of external risks. In this way, the FCL would have fulfilled its intended purpose to complement the strengths of Peru’s economic policy framework to preserve confidence in the economy during uncertain times.