Peru Restores Macroeconomic Balance, Normalizes Relations with Creditors
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Page 321
The following article is based on the recent Article IV discussions by the staff of the IMF's Western Hemisphere Department with the Peruvian authorities.
In early 1990, the Peruvian economy faced a severe economic crisis. It suffered from hyperinflation and a sharp drop in output stemming from large fiscal imbalances, negative real interest rates, widespread wage and price controls and subsidies, and a highly distorted exchange rate system. Unsustainable fiscal and monetary policies implemented during the second half of the 1980s had resulted in the accumulation of large external arrears. With the escalation of rural and urban terrorism, the social environment had also deteriorated. Since 1990, the authorities' determined implementation of sound financial policies and comprehensive reforms has helped consolidate macroeconomic stability and improve living standards. Inflation has declined to singledigit levels, and a protracted period of economic contraction has shifted to one of strong expansion. At the same time, external debt arrears have been virtually eliminated. A reduction in urban and rural terrorism has also had a positive impact on the social sector.
The administration that took office in Peru in July 1990 introduced ambitious stabilization measures and structural reforms supported by an IMF-monitored Rights Accumulation Program (under which members in protracted arrears to the IMF are able to accumulate rights to future drawings of IMF resources upon successful completion of the program). ThePage 329 economic adjustment program aimed at drastically reducing inflation, creating the conditions for sustained economic growth and a progressive return to external viability, while re-establishing relations with the international financial community. Peru was in arrears to most foreign creditors, and as the program called for a reduction in fiscal imbalances-while avoiding domestic financing- mobilization of external financing, particularly from multilateral institutions, was important to support fiscal adjustment.
A key step to Peru's securing renewed access to financing was the endorsement, in September 1991, by the IMF's Executive Board of the 15-month Rights Accumulation Program, under which Peru was to accumulate rights to draw SDR 624 million (about $854 million)-corresponding to the outstanding stock of arrears-upon observance of quarterly performance criteria. Under this program, and a subsequent Extended Fund Facility (EFF), Peru sought comprehensive rescheduling agreements with Paris Club official creditors. This fostered an environment for...
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