IMF Executive Board Concludes 2022 Article IV Consultation with Peru

May 2, 2022

Washington, DC
:
The Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation

[1]

with Peru on April 29, 2022.

Economic activity in Peru rebounded strongly in 2021 from its deepest
downturn in decades. The strong policy response in 2020 help mitigate the
impact of the pandemic and created the conditions for a rapid recovery.
Progress in the vaccination campaign allowed a gradual lifting of Covid-19
mobility restrictions. Real GDP rose 13.3 percent in 2021, supported by
robust external demand, favorable terms of trade, and pent-up domestic
demand. Real GDP surpassed its pre-pandemic level but remains below its
pre-pandemic trend. Labor force participation and total employment haven’t
fully recovered. Poverty increased significantly in 2020 and is still above
pre-pandemic levels despite some improvement in 2021. Volatility in
financial markets has increased amid heightened political uncertainty.

Uncertainty around the outlook is high and the balance of risks is tilted
to the downside. Growth is expected to slow to 3 percent in 2022 as
external conditions tighten and the policy stimulus is withdrawn. External
risks from ongoing geopolitical tensions, a sharp tightening of global
financial conditions, extended global supply chain disruptions, and an
abrupt growth slowdown in China, Peru’s main trade partner could weigh on
growth. Domestically, new Covid outbreaks could prompt the reintroduction
of containment measures, while political uncertainty and social unrest
could weigh on private investment. Inflationary pressures could be more
persistent, requiring faster tightening of monetary policy. More rapid
progress on containing the pandemic, both globally and domestically, and
reduced political uncertainty could result in positive surprises.

Peru’s very strong policy frameworks and macroeconomic buffers, further
complemented by an FCL arrangement expiring on May 27, will help shield the
economy from downside risks. Strong external and fiscal accounts, adequate
reserve coverage, access to international capital markets, low public debt,
and a resilient financial sector provide Peru with ample buffers to face
adverse shocks.

Executive Board Assessment

[2]

Executive Directors agreed with the thrust of the staff appraisal. They
commended the Peruvian authorities for a decisive macroeconomic policy
response, sustained by very strong policy frameworks and buffers, that
helped mitigate the impact of the Covid-19 pandemic and support a strong
economic recovery. Directors noted, however, that the macroeconomic outlook
remains uncertain, and external and domestic risks are still elevated.
Against this background, they concurred that the policy mix should strike a
balance between responding to rising inflation and managing downside risks
to growth, as the impact of the pandemic on employment and poverty
continues to be reversed. Directors also underscored the importance of
maintaining and further strengthening policy institutional frameworks.

Directors agreed that fiscal policy should remain broadly neutral in the
short term but a gradual consolidation, encompassing revenue mobilization
and expenditure rationalization, including pension reforms, will be
necessary to address emerging spending needs while preserving fiscal
sustainability. They welcomed the authorities’ steps to clarify policy
intentions by aligning the fiscal rules and the medium-term budgeting
framework, as well as their commitment to strengthen the Fiscal Council
with technical assistance from the Fund.

Directors agreed that further tightening of monetary policy is warranted to
bring inflation and inflation expectations back to the target range and
help adjust to tighter global financial conditions. While foreign exchange
intervention is warranted to contain excess volatility, Directors
underscored that
reducing its frequency would facilitate market development and

de-dollarization.

Directors supported the gradual unwinding of pandemic-era prudential
policies in a context of limited financial system vulnerabilities. They
concurred that closing remaining regulatory and supervisory gaps and
further enhancing systemic risk assessment will be important to strengthen
financial resilience. Directors noted that exploring the introduction of a
central-bank digital currency will require a thorough assessment of risks
and costs.

Directors agreed that a renewed structural reform agenda in the context of
the OECD accession process will be critical to mitigate scarring from the
pandemic and support a green and inclusive recovery. They stressed the
importance of addressing informality in the labor market, especially among
women. More effective public services and greater transparency, including
through civil service reform and anti-corruption measures, as well as a
stable and predictable legal and regulatory environment, will be key to
these efforts. Steps will also be needed to reduce risks from climate
change, ease the transition to a low-emission economy, and contribute to
global mitigation efforts.

[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.

[2]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.IMF.org/external/np/sec/misc/qualifiers.htm

Peru: Selected Economic Indicators

				Projections
	2019	2020	2021	2022	2023	2024

Social Indicators
Poverty rate (total) 1/	20.2	30.1	22.1	…	…	…
Unemployment rate (in percent; average)	6.6	13.9	10.9	…	…	…

	(Annual percentage change; unless otherwise indicated)
Production and prices
Real GDP	2.2	-11.0	13.3	3.0	3.0	3.0
Output gap (percent of potential GDP)	-1.6	-7.3	-0.4	-0.3	0.0	0.0
Consumer prices (end of period)	1.9	2.0	6.4	4.0	3.0	2.3

External sector
Exports	-2.2	-10.6	47.1	16.1	3.4	2.8
Imports	-1.8	-15.6	39.3	17.9	4.7	4.8
External current account balance (% of GDP)	-1.0	0.8	-2.8	-1.5	-1.4	-1.5
Gross reserves
In billions of U.S. dollars	68.4	74.9	78.5	78.2	77.9	78.9
Percent of short-term external debt 5/	428	487	586	561	537	565

Money and credit 2/ 3/
Broad money	8.8	29.0	2.6	8.4	6.6	6.6
Net credit to the private sector	6.4	14.0	6.3	8.7	7.8	5.6

	(In percent of GDP; unless otherwise indicated)
Public sector
NFPS revenue	24.8	22.0	25.6	24.4	24.3	24.3
NFPS primary expenditure	25.0	29.2	26.6	25.5	25.1	24.5
NFPS primary balance	-0.2	-7.3	-1.0	-1.0	-0.8	-0.2
NFPS overall balance	-1.6	-8.9	-2.6	-2.6	-2.1	-1.5

Debt
Total external debt 4/	34.7	43.3	46.1	43.5	40.0	37.8
NFPS gross debt 5/	27.1	35.1	35.9	34.4	34.7	34.4
External	8.5	14.9	19.6	20.2	19.4	18.5
Domestic	18.6	20.2	16.3	14.2	15.3	15.9

Savings and investment
Gross domestic investment	21.0	19.3	21.3	25.1	24.7	24.5
National savings	20.0	20.0	18.6	23.6	23.3	23.0

Memorandum items
Nominal GDP (S/. billions)	771	717	872	958	1,018	1,070
GDP per capita (in US$)	6,963	6,127	6,643	7,034	7,475	7,748

Sources: National authorities; UNDP Human Development Indicators; and IMF staff estimates/projections.
1/ Defined as the percentage of households with total spending below the cost of a basic consumption basket.
2/ Corresponds to depository corporations.
3/ Foreign currency stocks are valued at end-of-period exchange rates.
4/ Includes local currency debt held by non-residents.
5/ Includes repayment certificates and government guaranteed debt.

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