On January 8, 2020, the Executive Board of the International monetary Fund (IMF) concluded the Article IV consultation with Peru.
Peru continues to be one of the best-performing Latin American economies. With annual real GDP growth averaging 5.4 percent over the past fifteen years, Peru has been one of the fastest-growing economies in the region, which enabled it to make significant progress in reducing poverty. A sound macroeconomic policy framework has supported growth and helped build and maintain large policy buffers.
Nonetheless, a less benign external environment and adverse domestic factors have caused growth to lose momentum in recent years, and productivity has disappointed. Trade tensions have reduced global growth and increased uncertainty, international financial markets have become more volatile, and commodity prices have only partially recovered from the 2011–15 decline. Domestically, the adverse 2017 El Niño weather event caused significant economic disruption and the findings of the Lava Jato investigation hampered large investment projects.
Against this backdrop, growth in 2019 has largely underperformed, and is projected to close at just 2.4 percent. The economy is, however, expected to gradually recover, with a strengthening of demand from Peru’s trading partners, higher execution of the public investment budget, and resilient private consumption and investment all helping to raise GDP growth to 3¼ percent in 2020 and 3¾ in the following years. Inflation is expected to remain anchored within the central bank’s 1–3 percent target range.
Executive Board Assessment
Directors commended Peru for continuing to be one of the best-performing economies in Latin America, despite the recent growth deceleration. Noting the country’s strong policy buffers and long track record of prudent economic policies, Directors indicated that the authorities would be in a strong position to mitigate the potential impact of any external and domestic risks to the Peruvian economy. In that context, Directors encouraged the authorities to provide short-term policy stimulus to support the recovery as well as undertake growth-enhancing structural reforms to address productivity and infrastructure gaps. They also called for measures to improve governance, and implementation of social protection policies to achieve strong and inclusive growth that would help the country converge to higher income status.
Directors commended the authorities’ strong fiscal position demonstrated by low and sustainable public debt and ample fiscal buffers. However, given pro-cyclical fiscal policy and significant infrastructure gaps, Directors called for further efforts to address low capital budget execution that hamper Peru’s productivity and competitiveness. In this context, Directors welcomed the recently announced relaxation of the deficit ceiling for the 2021-23 period and the intent to use the extra room for public investment. Noting that frequent modifications of the fiscal rule could undermine its credibility, Directors encouraged the authorities to consider introducing additional flexibility to the fiscal framework rather than relying on periodic modifications of the deficit ceiling. Over the medium term, Directors also encouraged enhanced domestic revenue mobilization, especially in terms of VAT compliance and tax administration, and lower current spending to create space for much needed infrastructure and social spending.
Directors welcomed the renewed monetary easing implemented in the second half of 2019 and suggested that the policy stance should continue to be data-driven while remaining vigilant against the emergence of financial sector vulnerabilities. As dollarization declines, Directors also saw room for additional exchange rate flexibility to absorb shocks and promote financial market development while stressing that foreign exchange interventions should be limited to addressing disorderly market conditions. Also, the remaining non-binding capital flow measure should be phased out.
While commending the authorities’ actions to strengthen financial sector supervision, including through progress in implementing the 2018 FSAP recommendations, Directors encouraged further efforts to deepen the legislative and regulatory agenda and improve the effectiveness of the AML/CFT framework.
Directors welcomed the authorities’ efforts to improve governance and transparency under the Anti-Corruption 2018-21 Plan and called for continued efforts in this area, including limiting the scope for corruption, through independent audits, procurement system simplification and judicial reforms.
Directors welcomed the authorities’ structural reform agenda under the National Plan for Competitiveness and Productivity, to boost potential growth and achieve sustainable income convergence. Priorities include reforming the legal system and product markets, addressing labor market rigidities and enhancing integration of migrant workers, which would also help address informality and promote more inclusive growth. Directors also encouraged further efforts to improve social welfare, including through pension system reforms, to ensure adequate social protection, a more equitable distribution of natural resource revenues across regions, and deepening financial development and inclusion.