IMF Concludes 2022 Article IV Consultation with Peru

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 Growth is expected to slow to 3 percent in 2022 as external conditions tighten and the policy stimulus is withdrawn.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.