Peru - Economic Briefing March 2003

Economy Remains in Regional Top Spot (continued)

Headline inflation accelerates amid higher oil prices but core inflation well behaved
While annual inflation remains relatively low in absolute terms, consumer prices have been showing a sharply accelerating trend in the past five months. In March, consumer prices increased 1.12% over the previous month, the highest monthly increase in five years and more than twice the pace observed in February. As a result of the March spike in consumer prices, annual headline inflation jumped from 2.8% in February to 3.4% in March. While this is still relatively low in absolute terms, the accelerating trend is causing concern among some observers. Only eight months ago, in July 2002, annual headline inflation was still in negative territory. However, acceleration began by October 2002, when annual inflation reached the 1%-threshold, and continued to 2% in January, rising further only two months later to the 3% mark. However, even though the rise in headline inflation may seem alarming, given its pace, the rapid increase is mainly due to higher oil prices. In March fuel prices increased 4.86% on a monthly basis and 29.5% on an annual basis. Core inflation, on the other hand, which excludes the erratic shifts of the oil price, increased only 0.08% in March, the same rate as registered in February. The annual core inflation rate remained unchanged at 1.7% in March. Consensus Forecast panellists have reflected the upward trend in headline inflation and seem to anticipate that increasing domestic demand will exert additional pressure on consumer prices. Thus, the forecast for annual inflation has been hiked by 0.3 percentage points over last month.

Tax revenues surge in March
In March, tax revenues increased 40.1% in inflation-adjusted terms. The March increase in the tax take was the eighth consecutive monthly rise and the highest rate observed in 52 months. However, the numbers were inflated by an accounting change at state-owned Banco de la Nación and a low comparison base for the same month last year, when tax revenues had declined 13.0%. The Toledo administration plans to increase tax revenues by 0.5 percentage points of GDP from 12.2% of GDP in 2002 to 12.7% of GDP this year, according to a government letter sent to the IMF in mid-March. To do this, the authorities plan to introduce a fiscal decentralization law, to begin phasing out regional and sectoral tax exemptions in exchange for investment in regional infrastructure and strengthen the law on fiscal prudence and transparency. Simultaneously, the government intends to cap non-financial spending growth at 2.0% in real terms this year. The planned fiscal adjustments should lower the deficit from 2.3% of GDP last year to 1.9% of GDP this year. Consensus Forecast have gained confidence in the government’s ability to lower the fiscal deficit to the announced level and have lowered their projection a notch since last month to just barely above the target at 2.0% of GDP.