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Text File | 1994-05-02 | 17KB | 339 lines

<text> <title> Peru: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Peru </hdr> <body> 1. General Policy Framework The inauguration of President Alberto Fujimori on July 28, 1990 began a period of stabilization and liberalization of the Peruvian economy. The new government inherited a country without international reserves and shunned by the international financial community. The economy was in deep recession, inflation was accelerating alarmingly, and the infrastructure had deteriorated over the previous ten years. The government was supporting a diverse portfolio of unprofitable public sector companies. On August 8, 1990, the Fujimori administration eliminated price controls on basic food items and raised fuel and energy prices by as much as three thousand percent in an effort to have prices reflect production costs. The end of subsidized public services, such as mass transit, was part of the anti-inflationary effort, combined with the realignment of key relative prices. Under the previous government, fiscal revenues had fallen to four percent of gross domestic product, while government expenditures continued at much higher levels. August 1990 inflation reached an historic high of almost 400 percent, but has since fallen to below 5 percent monthly. Since September 1990, the government has imposed tough fiscal austerity policies, requiring current spending to be paid out of (and not exceed) current revenues. The slight fiscal deficit is due to capital expenditure and external debt payments. The key fiscal priority is tax reform to boost revenues. Government revenues are currently inadequate to fund basic health, education, law enforcement, and defense. The government has proposed a simplified system of taxes on income, wealth, sales, and imports, but the desperate need for revenues has led to "special", "temporary", and "extraordinary" taxes. A tax administration reform, initiated in early 1991, has already restored much public trust in the tax system and doubled Government of Peru revenues to 8 percent of GDP. The lack of external credit, and the size of the fiscal deficit, drove monetary policy in earlier governments. The Central Bank's key challenge now is to allow enough liquidity to financial markets so that economic growth can resume, but not so much as to contribute to a surge of inflation. Open market operations are used frequently to inject liquidity into the system. The Central Bank has eliminated interest rate ceilings and lowered reserve requirements. As of July 1, 1991, Peru's domestic currency is the New Sol. The improved fiscal situation, lower household purchasing power, and the continued lack of liquidity led to a severe depression in late 1990. The first half of 1991 saw some recovery, with real growth of close to 3 percent expected for the year. U.S. exports to Peru have benefited from significantly liberalized trade and investment regimes and from the overvalued Peruvian currency. 2. Exchange Rate Policy The Fujimori Government has liberalized the exchange rate regime, eliminating multiple rates, licensing requirements and other cumbersome mechanisms. The exchange rate is determined by market forces, subject to Central Bank intervention. No restrictions exist on the purchase, use or remittance of foreign exchange. Exporters are no longer required to channel foreign exchange earnings through the Central Reserve Bank (BCR), nor are importers required to obtain foreign exchange from the BCR. Currency transactions are conducted freely by exporters and importers on the open market. The Central Bank has intervened frequently in the market, usually in an effort to keep devaluation of the New Sol on a gradual course. On the basis of purchasing power parity, the New Sol remains at least 30 percent overvalued, according to the most conservative estimate. The government's overriding concern, however, is to avoid a resurgence of inflation, which many fear would be the inevitable result of too abrupt a devaluation. 3. Structural Policies Deep structural reforms are underway in Peru, although much remains to be done. One of the most fundamental measures taken so far was the elimination of subsidized prices for the goods and services provided by government enterprises and the removal of subsidies. Other important measures have been taken to liberalize the trade, exchange rate, financial system, and labor regimes. The government of Peru has announced its intention to privatize or liquidate many of its parastatals. This would eliminate the government's responsibility for continuing losses and should increase efficiency. The terms of a proposed Inter-American Development Bank loan for financial sector adjustment commit Peru to combine its four development banks into one and to privatize other state-held banking interests. 4. Debt Management Policies In September 1991, the IMF agreed to an arrangement to clear Peru's nearly $900 million in arrears to that institution by the end of 1992, and approved Peru's economic stabilization and adjustment program. Peru's roughly US$ 400 million in debts to the Inter-American Development Bank were paid. An agreement to clear Peru's $900 million in arrears to the World Bank is expected soon. Also during September, the Paris Club agreed to reschedule Peru's debts to official creditors under. Negotiations with the commercial banks' steering committee are expected to begin in early 1992. 5. Significant Barriers to U.S. Exports The key barriers to U.S. exports to Peru have been systematically dismantled by the Fujimori Government over the past year. Import licensing requirements, the list of banned imports, and nearly all quantitative import restrictions have been eliminated. Import tariff surcharges remain, however, on dairy products and some agricultural commodities. Although almost all Peru's imports have a uniform 15 or 25 percent ad valorem duty, a tariff surcharge is levied on 10-18 key farm commodities to protect local producers. This surcharge is a variable import levy, based on a "band of prices" determined weekly by the Minister of Agriculture. Imposed in May 1991, the Government of Peru describes these surtaxes as anti-dumping duties to protect Peruvian farmers from subsidized international competition. The surcharge regime effectively limits U.S. farm products access to the Peruvian market. The Peruvian Government has eliminated the government monopoly on reinsurance and on providing insurance to state entities. There are no longer any restrictions on foreign investment in financial services, mass communication, or transport. Foreign investment in Peru is guaranteed treatment equal to that provided to national investment under the 1979 Constitution. A prohibition on foreign investment remains in areas considered essential for national security. All restrictions on remittances of profits, royalties and capital have been eliminated. The 1985 expropriation of the assets of Belco, a U.S. oil producer, was resolved in December 1991. The Government of Peru and American International Group (AIG), Belco's insurer, signed a framework agreement for the Government of Peru to pay AIG $185 million in compensation. Government procurement is ordinarily handled by public international tender. Exceptions are permitted for government entities declared in a state of emergency. The state of emergency determination has been used in the past to avoid tender requirements. Peru has simplified import tariffs to two rates: 15 and 25 percent ad valorem. The average tariff rate is 17 percent, down from 80 percent at the end of the previous government. Tariffs may be lowered further, either in the Andean Pact context or unilaterally. In an effort to improve export performance, the Fujimori government has taken a number of steps to liberalize port and sh