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MISSION CONCLUDING STATEMENT 


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PERU: STAFF CONCLUDING STATEMENT OF THE 2024 ARTICLE IV MISSION

March 22, 2024

A Concluding Statement describes the preliminary findings of IMF staff at the
end of an official staff visit (or ‘mission’), in most cases to a member
country. Missions are undertaken as part of regular (usually annual)
consultations under Article IV of the IMF's Articles of Agreement, in the
context of a request to use IMF resources (borrow from the IMF), as part of
discussions of staff monitored programs, or as part of other staff monitoring of
economic developments.

The authorities have consented to the publication of this statement. The views
expressed in this statement are those of the IMF staff and do not necessarily
represent the views of the IMF’s Executive Board. Based on the preliminary
findings of this mission, staff will prepare a report that, subject to
management approval, will be presented to the IMF Executive Board for discussion
and decision.



Washington, DC: An International Monetary Fund (IMF) mission met with the
Peruvian authorities and other counterparts during February 21 – March 7 to
discuss recent economic developments and policy priorities. This concluding
statement summarizes the mission’s main takeaways.

The Economy is Recovering after Consecutive Shocks

The economy had a slight contraction in 2023, due to multiple consecutive
shocks, while inflation decelerated rapidly. Economic growth declined to -0.6
percent in 2023, due to climate-related shocks and social turmoil. Inflation is
converging towards the target thanks to the BCRP’s decisive monetary policy
tightening. Strong supervision maintained financial stability. The fiscal
position remained strong, although the fiscal deficit (of the non-financial
public sector) reached 2.8 percent of GDP (above the fiscal rule target of 2.4
percent of GDP), reflecting a shortfall in tax revenues due to the economic
slowdown. Led by sizable import compression and better terms of trade, the
current account registered a surplus of 0.6 percent of GDP. International
reserves remain at a comfortable level of about 28 percent of GDP.

A rebound is expected in 2024 with growth converging towards its potential over
the medium term. A strong recovery in agriculture and fishing after El Niño
ends, ongoing momentum in mining, and a looser monetary policy (consistent with
lower inflation) are expected to support a growth revival. However, only a
modest recovery in private consumption and investment is expected, as political
uncertainty continues to hamper consumer and business confidence. Real GDP is
projected to grow by around 2.5 percent in 2024 with a negative output gap
closing gradually until 2026. The current account is envisaged to return to a
low deficit in 2024 as growth normalizes and to stabilize at about -1.5 percent
of GDP in the medium term. Inflation is expected to decrease towards the middle
of the target band, aided by the normalization of supply shocks and a negative
output gap, while the BCRP continues with its easing cycle to bring the policy
rate to a neutral level.

Evolving risks are broadly balanced, and Peru has ample buffers to cope with
shocks. Key domestic risks include an intensification of political uncertainty,
social unrest, and climate-related shocks. Key external risks comprise weak
trading-partner growth, commodity price volatility, and a sharp tightening of
global financial conditions. On the upside, a decisive resurgence in confidence,
catalyzed by large infrastructure and mining projects, could strengthen private
consumption and investment. Peru’s proven macroeconomic resilience is reinforced
by very strong buffers including low public debt, abundant international
reserves, access to international capital markets on favorable terms, and access
to the Flexible Credit Line (FCL).

Ensuring a Resilient and Inclusive Recovery

The BCRP’s data-driven monetary policy easing remains appropriate. With
inflation entering the target band and anchored inflation expectations,
additional data-dependent monetary policy easing is warranted. With the interest
rate differential against the U.S. expected to narrow, the BCRP should continue
to allow exchange rate flexibility.

The authorities could use targeted macroprudential measures to facilitate
de-dollarization. Credit dollarization has fallen from around 49 percent in
mid-2013 to 22 percent in 2022, but the trend has stalled. The authorities could
consider foreign exchange targeted macroprudential measures and removing hurdles
to the development of capital markets to reduce unhedged positions.

The authorities remain committed to the fiscal prudence. The 2024 budget
envisages a deficit of the non-financial public sector of 2 percent of GDP,
consistent with the fiscal rule target. While the required adjustment is within
reach, given available fiscal space, if lingering effects from the shocks in
2023 lead to lower-than-expected revenues, delaying the consolidation by one
year (setting a fiscal target for 2024 of 2.5 percent of GDP instead of 2.0
percent) could help support the growth recovery and lessen the risk of missing
the target again. New tax benefit and unfunded spending initiatives by Congress
would also jeopardize attaining the target. Recent announcements to restructure
the governance of Petro-Peru are steps in the right direction, but further
financial support should be conditional on the viability of the firm. Improving
fiscal policy guidance could also bolster fiscal policy credibility.

Revenue mobilization measures could strengthen fiscal consolidation plans in the
medium term. The fiscal deficit is set to gradually decline by 0.5 percent of
GDP per year to reach a deficit of 1 percent of GDP by 2026, to preserve
medium-term fiscal sustainability. To achieve these targets, a more balanced
composition of the envisaged consolidation would be preferable, given Peru’s
relatively low tax burden. To increase revenues, the authorities could also
consider expanding taxes to the digital economy; homogenizing the tax rates on
capital and labor income; and curtailing sectoral tax benefits, special regimes,
and other tax expenditures. Personal income tax revenues are modest, partly due
to low rates, but also because of the high-income thresholds that effectively
exempt the majority of formal workers. The authorities’ plans to improve tax
administration and compliance are important but will likely require additional
resources for the tax authority.

A long-awaited pension reform is urgently needed to address low coverage and
adequacy. A reform proposal is being considered by Congress with noteworthy
initiatives, such as expanding the minimum and social pension, introducing
automatic enrollment, and periodically assessing parameters. However, the
proposal could maximize its impact by clarifying the language limiting
withdrawals, increasing the coverage and benefit amounts for the minimum and
social pensions (to reduce old-age poverty with only a limited fiscal cost), and
improving the targeting of the non-contributory pension. Over the medium term, a
comprehensive pension reform remains essential to fully address weak coverage
and adequacy. New rounds of early withdrawals from the private pension scheme
are ill advised, as they undermine old-age income support and the functioning of
the domestic capital market.

 

 

Enhancing Financial Sector Resilience

Systemic risks are limited, but the authorities should continue to closely
monitor and proactively contain financial vulnerabilities. Banks remain
profitable, with ample liquidity and capital buffers. As the economy recovers,
non-performing loans are expected to decline gradually. The regulator should
remain vigilant of emerging pockets of vulnerability, particularly in small
financial institutions (which were relatively more affected by weak economic
growth) and ensure that private pension funds have appropriate liquidity
cushions against potential withdrawals.

Fully operationalizing new regulations and closing remaining gaps would enhance
financial resilience. Most financial institutions are prepared for the full
implementation of the Basel III capital requirement in September 2024. New rules
for countercyclical capital buffers and provisioning will be effective in June
2024, but the SBS should consider recalibrating their activation criteria.
Recovery and resolution plans for domestic systemically important banks have
been submitted for review and should be later extended to the financial group
level. The authorities should build on their success and continue lowering
barriers to entry for Fintech providers, while maintaining appropriate
risk-based regulation, implementing interoperability regulations, and
introducing frameworks for Open Banking and Finance.

Lifting Productivity and Boosting Resilience

Policies to boost productivity should focus on removing constraints for firms to
grow. GDP growth has disappointed since 2014, with average and potential growth
falling to about 2.5 percent, driven by a decline in total factor productivity
growth, which has been broad based across firm size, region, and industry. This
decline could be related to special corporate tax regimes, as well as labor
legislations and regulations that do not create incentives for formalization and
growth. Progress in improving regulatory quality, particularly in simplifying
procedures for business formalization and construction and operating licenses,
is welcome. Efforts should continue to focus on simplifying legislations and
regulations that impose excessive costs for formalizing or growing a business.

Given Peru’s high vulnerability to climate change, increased efforts in building
resilience are needed to unlock output gains. Climate change will likely
increase damages from natural disasters and undermine potential growth in the
future. The authorities have made progress in enhancing public infrastructure,
bolstering financial resilience, and identifying adaptation gaps. Nevertheless,
climate spending remains low, budget planning lacks adequate costing of key
adaptation measures, and territorial planning should be strengthened. Scaling up
investments in climate adaptation and resilience would unlock significant
potential output gains and fiscal savings over the long term. A recent
government initiative to shift the focus to ex-ante resilience building to
climate change is a positive step.

Digital technologies and artificial intelligence offer a pathway to enhance
productivity. There has been progress in FinTech and GovTech, including recent
innovations in digital payments and wallets that have increased financial
account ownership, as well as VAT e-invoicing and electronic tax payments.
Artificial intelligence holds the potential to elevate productivity, especially
in the finance, government, education, health, IT, and construction sectors, by
increasing the quality-to-price ratio and improving services. Automation through
artificial intelligence also presents social challenges as workers will need to
transition to new jobs. It is crucial, therefore, to encourage workers to
develop skills for effectively integrating artificial intelligence into their
work.

Effective governance institutions would also reinforce inclusive growth. The
authorities reaffirmed their commitment to combating corruption to attract
investment and augment the trust in government. Several anti-corruption
frameworks are in place (such as integrity officers in public agencies, digital
platforms for citizen complaints, and a beneficial ownership registry), but
their implementation must be prioritized and supported with adequate resources.
Independence and integrity of judicial bodies should be enhanced through robust
judicial vetting processes and reduction in the high reliance on temporary
judges. Improving coordination among relevant agencies could contribute to
effective prosecution and ending corruption impunity.

A more ambitious reform agenda is required to durably raise growth. Government’s
efforts in cutting red tape and unblocking large infrastructure projects,
streamlining the tax system, and reforming the procurement framework; and the
recently approved political reform are welcome. The OECD accession process
provides a clear roadmap for critical reforms to enhance local government
capacity, improve the business climate, reduce informality, and reform the civil
service, to boost productivity and green and inclusive growth.

 

The mission would like to thank the Peruvian authorities for their cooperation
and fruitful discussions during our visit.

 

IMF COMMUNICATIONS DEPARTMENT

MEDIA RELATIONS

PRESS OFFICER: Jose Luis de Haro

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson

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