IMF Affirms Peru's Economic Progress in 2023 Consultation

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Peru on March 22, 2023.

Against the background of a strong economic performance over the last quarter of a century, Peru has been hit by multiple shocks in the last several years. Adequate policies and very strong macroeconomic policy frameworks have made the economy resilient. Following a steep decline in 2020 at the outset of the pandemic and a rapid recovery in 2021, growth slowed significantly in 2022 as the policy stimulus was withdrawn and external and financial conditions deteriorated, while road blockades and strikes at major mining sites adversely affected copper production and exports. Inflation has declined recently but remains well above the target range. The unemployment rate and poverty continue falling but are still above the pre-COVID-19 pandemic levels. While volatility in financial markets has recently increased in line with global trends, the Peruvian banking system remains well-capitalized, and its profitability continues to recover from the impact of the pandemic. Recent developments suggest that the government needs to work across the political spectrum to restore confidence, preserve stability, accelerate structural reforms to boost economic activity, and tackle inequality, poverty, and weaknesses in the education, health, and pension systems.

The outlook is very uncertain, and downside risks prevail. Growth is expected to slow to 2.4 percent in 2023 as external conditions tighten and political uncertainty remains high. Inflation is expected to decline to the target range at end-2023-early-2024. The main external risks to this outlook include an intensification of spillovers from Russia's war in Ukraine, an abrupt global slowdown with an associated commodity price volatility, and a possible de-anchoring of inflation expectations forcing a further tightening in the global financial conditions. Key domestic risks include an intensification of political uncertainty, social unrest over political developments, and natural disasters, which could hinder economic activity and risk the planned medium-term fiscal consolidation. New COVID-19 outbreaks may also significantly affect economic activity. Upside risks include a "soft landing" in key trade partner countries and an acceleration of structural reforms at home, which could increase Peru's medium-term growth potential.

Peru's very strong policy frameworks and macroeconomic buffers, further complemented by an FCL arrangement, will help shield the economy from downside risks. Public debt remains the lowest in the region. Sizable international reserves (about 30 percent of GDP), access to international capital markets, and a robust financial sector mitigate macroeconomic risks and support the country's capacity to cope with additional adverse shocks. These buffers are complemented by a two-year Flexible Credit Line (FCL) arrangement for about US$ 5½ billion, approved by the IMF Executive Board in May 2022.

Executive Board Assessment[2]

Executive Directors noted that Peru's very strong economic fundamentals and policy frameworks, and sustained track record of implementing very strong macroeconomic policies have helped the country absorb large adverse shocks in recent years. The current FCL arrangement with the Fund has helped bolster these strong buffers. However, the pandemic's adverse effects on employment and poverty persist in an environment of slow growth and still‑high inflation. Against the backdrop of increased downside risks, Directors urged the authorities to continue implementing prudent policies while working to create greater social cohesion and consensus for accelerating structural reforms to achieve more broad‑based and inclusive growth.

Directors commended the authorities for their decisive response to high inflation and advised continuing to implement monetary policy in a flexible and well‑communicated manner. Directors supported the authorities' resolve to stand ready to take further measures, if needed, to bring inflation to the target range. In addition, they considered that a deeper and more developed forward foreign exchange market, combined with further reductions in financial dollarization, would limit the need for frequent interventions, allowing the exchange rate to play a larger role as a shock absorber.

Directors noted that the banking system remains resilient. They urged the authorities to maintain a tightening bias in financial sector policies to create space for renewed support, if needed, in a deteriorating financial environment. Directors welcomed the significant steps taken by the authorities to strengthen financial sector oversight, and also stressed the importance of closing regulatory and supervisory gaps, including related to AML/CFT.

Directors agreed that the fiscal policy stance is appropriate, with a temporary, targeted, and small fiscal impulse supporting a weaker economy in the short term while avoiding adding to inflationary pressures. They underscored the need to identify specific measures, particularly in the areas of tax administration and expenditure rationalization, to support the announced fiscal consolidation in 2025‑26 aimed at preserving fiscal sustainability while creating space for priority social and infrastructure spending. Directors agreed with the need to prioritize pension reform. They welcomed the recent reforms to enhance the effectiveness of the Fiscal Council and called for additional enhancements, including to strengthen its operational independence.

Directors encouraged the authorities to use the OECD accession process to promote social consensus around a well‑articulated structural reform agenda to deal with the scarring effects of the pandemic and support green and inclusive growth. Priority should be given to boosting productivity, enhancing human capital and reducing informality, further improving governance, and reducing climate risks.