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PROGRAM INFORMATION DOCUMENT (PID)
CONCEPT STAGE
Report No.: AB2600
FIRST PROGRAMMATIC FISCAL MANAGEMENT AND
Operation Name
COMPETITIVENESS DPL
LATIN AMERICA AND CARIBBEAN
Region
Sub-national government administration (45%);Central
Sector
government administration (35%);General industry and trade
sector (20%)
P101335
Project ID
MINISTRY OF ECONOMY AND FINANCE
Borrower(s)
MINISTRY OF ECONOMY AND FINANCE
Implementing Agency
October 12, 2006
Date PID Prepared
November 6, 2006
Estimated Date of
Appraisal Authorization
Estimated Date of Board December 12, 2006
Approval
1. Key development issues and rationale for Bank involvement
Peru is strengthening and consolidating its democratic political system. Following the Fujimori regime and a brief
transitional government, the administration of former President Toledo governed a country at peace and with
economic growth during 2001-2006. Despite many political difficulties and a generally low public approval
rating, Toledo faced no major threats to his democratic authority, and was able to not only complete his mandate
in office but also to muster enough support in Congress to undertake several reforms and to maintain disciplined
control over economic policy. By the end of Toledo’s term, it appeared that a majority of Peruvians had come to
see the benefits of a stable, democratic political system.
President Alan García won the second round of presidential elections in June 2006 by 53 percent against 47
percent for Ollanta Humala, a former military officer. The nationalist platform of Humala failed to convince a
majority of voters, who preferred the more democratic style of García, despite the memories of his difficult first
presidential term in the late 1980s. At the same time, the narrowness of García’s victory and the success of
Humala in Peru’s poorer regions—especially the southern Andes—points to dissatisfaction of many Peruvians
with the thus-far limited improvements for the poor after years of economic growth.
President García faces a fragmented Congress, which will require building coalitions to pass legislation. His
APRA party has 37 seats, compared to 44 for Humala’s Unión por el Peru (UPP) and 39 divided among five other
parties. UPP has said it will strongly defend their candidate’s platform, meaning it will likely form the core of
opposition to García’s agenda, requiring APRA to seek coalitions with the other parties. García’s first cabinet, led
by Prime Minister Jorge del Castillo and Finance Minister Luis Carranza, is a mix of APRA members and wellrespected technocrats, with a record six women in ministerial posts. The latest poll numbers show García’s public
support between 60 and 70 percent. The first major test for the new government will be the November 19
elections for 26 regional presidents and all 1,832 municipal governments.
Social protests remain an issue in Peru, but they are generally isolated and limited to specific grievances, and have
not had a major destabilizing impact on either the economy or the political system. One flashpoint is the mining
industry, which has been accused by community residents near some mines of polluting, leading to protests,
particularly in remote areas with limited state presence. Government policies supported by this operation to
improve the flow of resources from mining royalties to local governments are intended to help with this problem.
In the past four years, Peru has had one of the best-performing economies in Latin America, surpassed only by
Venezuela – an oil exporting country – and Argentina – which is coming out of a deep recession. Based on sound
macroeconomic policies and strong demand for Peruvian commodity exports, GDP grew 5 percent on average in
the four years since 2002, and reaching a remarkable 6.4 percent in 2005. This growth has been all the more
impressive considering the external shock of Argentina’s economic crisis as well as the political instability that
prevailed during the Toledo administration.
Table 1: Key Economic Indicators
2000 2001 2002 2003
Annual GDP growth rate
3.0
0.2
5.2
3.9
Inflation rate (CPI, end of period)
3.7
-0.1
1.5
2.5
Overall Public Sector Balance/GDP
-3.3 -2.5 -2.2 -1.7
Public Sector Debt
45.7 46.1 46.9 47.5
Exports (FOB); % change p.a.
14% 1% 10% 18%
Imports (CIF); % change p.a.
9%
-2%
3% 11%
External Current Account/GDP
-2.9 -2.3 -2.0 -1.6
Source: BCRP, Revised Marco Macroeconómico Multianual 2006-2008.
2004
5.2
3.5
-1.0
45.1
41%
19%
0.0
2005
6.4
1.5
-0.3
37.8
35%
23%
1.4
2006e
6.6
1.5
0.6
32.8
31%
26%
1.1
Growth has been led by an impressive upswing in exports, which rose 26 percent annually on average in 20022005, and the external current account posted a surplus of 1.7 percent of GDP in 2005. This increase was driven
in good measure by the boom in commodity prices, particularly for mineral exports, as well as the coming on line
of new mining and hydrocarbon projects. Although mining production account for over half of all Peruvian
exports, non-traditional exports have grown rapidly, 20 percent on average annually since 2000, particularly in
specialized agricultural products such as asparagus, grapes and avocados. Other export sectors such as fisheries
and textiles have also posted significant gains in recent years. Private investment, encouraged by the growing
economy and sound policies, has also helped fuel growth, rising nearly 14 percent in real terms during 2005.
Fiscal and monetary policy has been well-managed during recent years, with steady declines in public sector
deficits and low, stable inflation rates. The combined public sector deficit has come down every year since 2001,
falling from 2.5 percent of GDP in 2001 to 0.3 percent of GDP in 2005, lowering public debt from 46 percent of
GDP in 2001 to 38 percent of GDP in 2005 (of which 28 percent is foreign and 10 percent domestic). These gains
came from increases in revenue from mining taxes, which could revert if conditions change, as well as from cuts
in needed public investment spending. Tax collection remains under 14 percent of GDP, low by international
standards and below the 18 percent of GDP collected in the mid-1990s. This indicates that improvements in
broadening the tax base and increasing collections remain needed. Year-end inflation for 2005 was 1.5 percent, at
the low end of the target range of 1.5-3.5 percent.
While Peru’s macroeconomic performance has been very good in the past few years, poverty remain stubbornly
high. The national poverty rate dropped only two percentage points between 2002 and 2004, and half the
population (51.6 percent) lives in conditions of poverty. However, since 2003 per capita incomes of the poor and
the rates of poverty and extreme poverty have started showing improvements, especially in rural areas, driven by
broadening economic growth. Average incomes of the poorest tenth of the population rose 33 percent between
2001 and 2004, while the incomes of the wealthiest tenth of the population remained level over the same period.
Growth has had the most impact on extreme poverty rates, especially in rural areas. Extreme poverty declined
from 24 percent to 19 percent between 2001 and 2004 nationally, but rural extreme poverty fell from 50 percent to
40 percent over the period, while urban extreme poverty declined from 10 percent to 8 percent. Although no
poverty numbers are available after 2004, recent improvements in employment in certain areas of the country
indicate that the growth of 2005 and this year are having further impacts on poverty. Income inequality also
remains relatively high, with the Gini coefficient improving slightly from 0.52 to 0.50 during the same period.
2. Proposed objective(s)
In the short term, the DPL will have the twin benefits of:
 Strengthening the GoP’s fiscal position with timely budget financing at reasonable terms; and
 Giving the World Bank a strong position to help the GoP push ahead with its public sector reform agenda.
In the medium and long term, reforms supported by the proposed loan series will greatly improve the efficiency
and quality of public sector institutions and the provision of services in Peru. This will in turn result in budgetary
savings that can be directed toward priority poverty programs; more and higher quality public services for the
citizenry; and more sustainable and broad-based economic growth.
3. Preliminary description
The proposed DPL is intended to be the first in a series of four loans supporting the GoP’s reform plan to improve
the functioning of Peru’s public sector institutions and administration. The loan focuses on three broad areas of
policy reform:
 Fiscal Consolidation and Growth
 Increased Efficiency Quality of Public Spending
 Strengthened Governance Institutions and Human Resources
In each of these areas, the GoP has committed to a detail series of important policy changes as part of an
integrated strategy to progressively reform public administration in ways that will show results and be difficult to
reverse.
4. Environment Aspects
The policies supported by this DPL operation, which focus on reforming economic and social policies
and institutions on the macro level, are not expected to entail any impact on the environment. The Bank
recently completed a Country Environmental Assessment, highlighting shortcomings in Peru’s
institutional framework for environmental protection and sustainability. It also pointed to the need to not
only continue focusing on protection natural areas such as tropical forests, but also mitigating the serious
health impacts and high costs of environmental degradation, particularly related to air and water
contamination. As a result of this study and the ensuing dialogue with government authorities, the Bank
is preparing two DPLs as part of the new CPS for Peru. Principal topics to be addressed in the loans will
be reordering the institutional and legal oversight for the environment, both at the national level—
possibly through the creation of a new, single authority—and at regional and municipal levels.
Decentralized environmental oversight of the mining sector will be a priority, as well as adjusting
spending priorities to achieve concrete results in reducing air and water contamination.
5. Tentative financing
Source:
BORROWER
INTERNATIONAL BANK FOR RECONSTRUCTION AND
DEVELOPMENT
Total
6. Contact point
Contact: Rossana Polastri
Title: Economist
Tel: (202) 473-9228
Fax: (202) 614-0166
Email: [email protected]
($m.)
0
150
150