Peru - Economic Briefing January 2003

Another Year with a Buoyant Economy Ahead (continued)

Inflation ends year just within target range after hovering around deflation threshold throughout most of the year
In December, consumer prices remained virtually unchanged, as higher prices for transport and communications were offset by lower prices for housing, fuels and electricity as well as education and cultural activities. Despite the price stability in the final month of the year, annual headline inflation edged up slightly from 1.46% in November to 1.52% in December. The year-end inflation rate was thus just a nick above the lower limit of the inflation target range of 1.5% to 3.5% set by the Central Bank for 2002, but remains below the 1.7% expected by the Consensus last month. Last year was an unusual year regarding inflation. Throughout most of the first half or 2002, Peru hovered on the brink of inflation/deflation. As recent as July, the annual headline inflation rate was still in negative territory and surpassed the 1% threshold only in October, after three months of sizeable price increases. In November, however, prices dropped again, breaking the upward trend in annual headline inflation, which rendered an accurate year-end forecast particularly difficult. For 2003, Consensus Forecast panellists lowered their year-end inflation forecasts a notch over last month to 1.9% -- below the 2.5% inflation target -- and long-term forecasts indicate that inflation, which under the government of Alan García in 1990 reached 7,650%, appears to have been tamed for good, as forecasts for the next six years do not exceed 2.0%.

IMF endorses higher fiscal deficit in 2002 and approves economic policy
In mid-December, the International Monetary Fund (IMF) completed the first review of Peru's performance under the two-year US$ 340 million stand-by arrangement from 1 February 2002. The completion of this review permits the release of about US$ 154 million in multilateral funds to Peru, which so far has not made any draw-downs under the agreement. In general, the IMF approved the economic policy framework adopted by the Toledo government but stresses the need to garner the necessary political consensus needed to progress with the privatization programme and highlighted the importance of carrying out fiscal decentralization in a cautious and fiscally neutral manner. In completing the review, the IMF approved the modification of the 2002 fiscal deficit target from 1.9% to 2.3% of GDP. According to the current Consensus, the Toledo administration exceeded the revised fiscal deficit target by a notch. For 2003, the government expects the deficit to decline moderately to 1.9% of GDP. The 2003 budget is based on the assumption of a further recovery in economic activity, with GDP growth projected between 3.5% and 4.0%, as inflation continues to remain subdued at __%. Consensus Forecast panellists expect the government to overshoot the 2003 fiscal target slightly, with deficit reaching 2.1% of GDP.