IMF praises economic performance in Peru

IMF praises economic performance in Peru

Peru has seen stronger than expected economic growth in 2012 with domestic demand offsetting a fall in export performance, according to a new report from the International Monetary Fund (IMF). The country’s near term outlook remains favourable, but is subject to risks, particularly further falls in exports, the IMF assessment says.

‘Macro-prudential measures should be used more proactively to limit the build up of financial vulnerabilities in the context of large capital inflows and strong credit growth. Additional exchange rate flexibility will help the Peruvian economy to absorb external shocks, and assist the private sector to better internalise foreign exchange risks’ it explains.

‘Prudent implementation of the 2013 budget is expected to continue and Peru should tackle long standing structural bottlenecks to enhance productivity and revamp infrastructure through a well designed national investment strategy,’ it adds.  Inflation fell to 2.7% in November 2012, falling within the inflation target range of 1 to 3% and is expected to remain subdued.

However, the report also points out that there are downside risks from the global economy which could have a significant effect on Peru. ‘The combination of a sharp relapse in global growth and a return of global risk aversion is the principal tail risk that could encumber the growth outlook. A significant fall in metal prices triggered by a larger than envisaged slowdown in China, Peru’s largest trading partner, would have a significant negative effect on exports, investment and growth prospects,’ the report says.

The country’s 2013 budget includes a number of measures related to strengthening tax compliance and enforcement as well as additional spending on social programmes and wages for civil servants whose salaries have been frozen for several years.  ‘Despite the strong fiscal position for 2013, the budget accommodates an increase in primary spending of about 10% in real terms to gradually achieve the goals set by the government on social inclusion and public sector reforms to promote a better civil service’ the report explains.

Quote from Gringos.com : “With the rest of the world floundering in their own economies, Peru actually grew their economy by 5.38% in January. Take a look at the numbers and see.”

It also points out that Peru needs to put in place an ambitious reform agenda to enhance potential growth, supported by a more socially inclusive strategy. ‘Economic growth will need to be increasingly driven by higher productivity,’ the report suggests. Key strategies should include enhancing competitiveness by boosting human capital and maintaining labour market flexibility; improving the business climate to foster investment and innovation; and further developing the local capital markets to facilitate investment and better allocate savings.

‘These reforms, together with more effective implementation of social programs in line with the agenda of the Ministry of Social Development and Inclusion, will allow the authorities to deliver more socially inclusive economic growth,’ the report adds.  Improving the tax system could be challenging and the report points out that Peru’s tax collections are low compared with other emerging markets. However, the government’s goal of raising tax revenues to 18% of GDP by 2016 will allow the country to achieve similar tax collections as in other emerging economies.