Peru - Economic Briefing March 2002

Economy Moves Ahead Amid Buoyant Mining and Strong Public Spending (continued)

Government expected to overshoot fiscal deficit target despite increased revenues

The fiscal deficit in 2001 reached 2.5% of GDP, compared to 3.2% of GDP in 2000.  The improvement over the previous budget execution was entirely due to fiscal discipline enacted under the interim government of President Paniagua.  The Toledo administration has opened the public coffers, which resulted in a 5.7% of GDP deficit in the fourth quarter, which was 0.6 percentage points above the deficit recorded for the same period the year before.  Despite the less than glorious fourth quarter performance and the government’s ambitious spending plans, panellists believe the fiscal deficit target of 1.9% of GDP agreed to with the International Monetary Fund (IMF) will be overshot only slightly this year.  In fact, the Consensus deficit figure dropped 0.2 percentage points since last month.  Next to an economic recovery and the automatic rebound in the tax take, the government plans to hike revenues by implementing a broad-based tax reform, which would widen the tax base.  In addition, the administration can count on privatization and concession proceeds resulting from resumption of the privatisation programme, which had been put on hold during the times of political turbulences.  However, part of the additional privatization receipts are already earmarked for additional spending on infrastructure needs in the country.

Deflation firmly entrenched

In February, consumer prices dropped 0.04%.  The price level was mainly pushed downward by lower prices for food and beverages and, to a lesser extent, transport and communication prices. Health costs and education and culture prices, on the other hand, registered upward pressures.   The February price movement represented the fourth consecutive month of deflation.  Furthermore, as a result of the February price decline, the annual inflation rate dropped further to -1.1% following the 0.8% deflation registered in January.  Producer prices registered even further downside pressure, dropping 0.44% in February, which lowered the annual rate of variation to -3.1% from -2.5% in January.  Panellists have further lowered their year-end inflation forecast  since last month to a level well below the central target rate of 2.5% established by the monetary authorities.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.