IMF Wraps Up 2024 Peru Article IV Consultation

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation^[1] with Peru on May 20, 2024.

The economy is recovering from consecutive climate-related shocks and social turmoil at the beginning of 2023. Inflation has receded thanks to the central bank's decisive monetary policy tightening, while the fiscal position and the financial system remain strong. The country is in a period of relative political stability, but lingering political uncertainty is denting the appetite for pressing reforms to boost potential growth.

A rebound in growth to 2.5 percent is expected in 2024, supported by a strong recovery in agriculture and fishing, continued momentum in mining, and a looser monetary policy stance. However, only a moderate recovery is expected for private consumption and private investment, as nominal wages gradually regain their purchasing power and elevated political uncertainty weighs on consumer and business confidence. As the effects from El Niño dissipate, inflation would rapidly decline towards the midpoint of the target band, aided by a negative output gap and the normalization of supply shocks, as the Central Bank continues with its cautious monetary policy easing cycle. The current account is envisaged to return to a deficit of 1.1 percent of GDP in 2024 as growth normalizes and to stabilize at 1.5 percent of GDP in the medium term, with external financing and debt rollover risks remaining low.

Evolving risks are broadly balanced, and Peru has ample buffers to cope with adverse shocks, although the outlook remains uncertain. In the short term, 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 stronger recovery in confidence could support stronger private consumption and investment growth. Peru's proven macroeconomic resilience is reinforced by very strong buffers including relatively low public debt, abundant international reserves, and access to international capital markets on favorable terms.

Executive Board Assessment[2]

Executive Directors commended the Peruvian authorities for their sustained track record of very strong macroeconomic policies and institutional frameworks, that have effectively steered the country through social turmoil and severe climate shocks and supported the ongoing recovery. They positively noted that low public debt, abundant international reserves, a robust financial sector, and favorable access to international capital markets provide strong buffers against adverse shocks. Against this background, they supported the authorities' decision to exit the Flexible Credit Line arrangement upon its expiry in May 2024 given broadly balanced risks and the strength of Peru's buffers. Directors noted the authorities' commitment to maintaining sound institutions and policies to further strengthen Peru's resilience against external risks.

Directors welcomed the strong fiscal position and the authorities' commitment to fiscal sustainability. They generally agreed that, given available fiscal space, a more gradual fiscal consolidation path could help support growth in the short run. However, Directors highlighted the need for ambitious revenue mobilization to support a more balanced medium‑term consolidation plan. They also called for measures to further strengthen the fiscal framework, including reviewing the optimality of the medium‑term fiscal target, the debt ceiling, and liquidity buffers, supported by Fund TA, and bolstering the effectiveness of the Fiscal Council. Directors highlighted the importance of pension reforms to address subpar income replacement and coverage, early withdrawals, and potential long‑term fiscal contingencies.

Directors commended the central bank's early decisive monetary tightening, which was successful in anchoring inflation expectations and reducing inflation towards the target band. In that context, they agreed with the ongoing cautious data‑dependent monetary policy easing. Directors also encouraged the central bank to maintain exchange rate flexibility to act as a shock absorber and support faster economic recovery. Noting the resilience of the financial system, Directors encouraged the authorities to remain vigilant and to continue to facilitate de‑dollarization and capital market deepening.

Directors stressed that structural reforms are urgently needed to revive growth. They emphasized that efforts to boost productivity should focus on reforming labor and tax regulations, building resilience to climate shocks, and embracing the digital and artificial intelligence revolution. They commended the authorities' commitment to addressing corruption and encouraged the authorities to strengthen the effectiveness of governance institutions. Directors concurred that the OECD accession process provides a clear roadmap for more ambitious reforms to boost the business climate and ensure sustainable and inclusive growth.

[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.