Peru is a diversified economy. Copper, gold, fish meal and textiles are the main export products and the manufacturing sector accounts for around 20% of GDP. Energy production is also being stepped up while considerable additional investment is targeting the mining sector.

A new Extended Fund Facility Agreement was signed for 1999-2001. The government is pursuing major structural reforms, including the privatization of remaining public enterprises and a concession program. Reducing the incidence of poverty remains a high priority for the government.

During 1998 a drastic reduction in the terms of trade (the largest in the last 40 years) and the impact of El Niño have joined to widen the external imbalance and reduce the economic growth to 0.3%. Fishing and agricultural sectors were the most affected, specially during the first quarter of 1998. In the last quarter of 1998, the Peruvian economy was also affected by the international financial crisis, which reduced capital flows to the domestic economy.

In 1999 GDP is expected to increase by around 3% with respect with 1998. Fishing will recover its normal level and domestic demand is expected to resume its long-term growth trend by the last quarter of the year.

The annual inflation rate dropped to 6.0% in 1998 from 6.5% a year earlier. The temporary effect of El Niño on food prices during the first quarter of 1998 was reversed in the second half of the year. For 1999, the inflation has been targeted to be within a range of 5.0% to 6.0%.

Unemployment in the Lima Metropolitan area remained at the same level as the previous year (7.7%).

The current account deficit increased from 5.0% in 1997 to 6.0% of GDP in 1998, due basically to the increase in the trade balance deficit. The higher deficit was in response to the decrease in exports (16%, in US dollar terms), which was related to the reduction in the terms of trade and the El Niño phenomenon. In 1999, a current account deficit of around 5% of GDP is expected.

The resource sector has been an important factor attracting foreign direct investment to Peru, especially in the mining, telecommunication and banking sectors. In 1998 foreign direct investment, excluding privatization receipts, amounted to 3.0% of GDP. This level of capital inflow is higher than that received the previous year, despite the international financial crises.

Market forces determine Peru’s exchange rate. Central bank interventions in the exchange market are consistent with non-inflationary growth of the monetary base. In 1998, nominal depreciation of the domestic currency (Nuevo Sol) was 15.4%. In real terms, it implied a significant depreciation of 11.6%.

Peruvian fiscal accounts have showed a primary surplus since 1991. In 1998, the primary surplus was 1.1% of GDP compared with a primary surplus of 1.8% in the previous year. For 1999 it is expected a primary surplus of 0.9% of GDP.

The reduction of the primary surplus is related to the slow-growth of GDP and the decrease in the terms of trade, which caused a decline in the current revenues of the public sector.

The Peruvian government is currently involved in the promotion of private investment via an outstanding concession process, which began in 1997. This process includes the energy, communications and tourism activities.

Peru’s monetary authorities target an inflation range. To reach this goal, control of monetary aggregates has been applied since 1990, with the monetary base allowed to grow in line with demand for money to avoid inflationary pressures. Monetary instruments include: exchange rate intervention; open market operations; rediscounts; and reserve requirements.

Economic growth is projected to reach 3.0% for the year 1999. A growth of 5.5% and 6.0% is expected for years 2000 and 2001 respectively, based on the predicted performance of exports and investment. The inflation rate should continue to fall in 1999 and the goal is to reach international levels in the following years. The temporary widening of the trade deficit in 1998 will be reversed in 1999 and the current deficit is projected to reach less than 5% of GDP by the year 2002. Long-term capital inflows will continue to be the main financing source of the current account deficit.

The government will continue the program of structural reforms that was started in the early 1990s. In 1998, structural reforms included the concession on public services. This process and the privatization of the remaining public enterprises will continue during 1999. Other areas to be covered include the regulatory framework, financial sector reform, and social programs such as in education, health, and poverty alleviation.

Peru: Overall Economic Performance

Notes:

(1) Budget balance refers to the non-financial public sector;

(2) Capital account balance includes exceptional financing;

(3) End of period;

(4) Excludes deposits in foreign currency;

(5) Short-term interest rate is the discount rate in domestic currency (end of period);

(6) Average of the period;

(7) Refers to Lima Metropolitana and the third quarter of the year.

Table 2. Forecasting Summary (% change from previous year)

Note: The IMF forecast is from the World Economic Outlook (IMF, April 1999).