VZCZCXYZ0017
PP RUEHWEB

DE RUEHPE #0338/01 0371711
ZNR UUUUU ZZH
P 061711Z FEB 07
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC PRIORITY 3875
INFO RUEHQT/AMEMBASSY QUITO 1003
RUEHBO/AMEMBASSY BOGOTA 4344
RUEHBR/AMEMBASSY BRASILIA 7210
RUEHBU/AMEMBASSY BUENOS AIRES 2787
RUEHCV/AMEMBASSY CARACAS 0154
RUEHLP/AMEMBASSY LA PAZ FEB SANTIAGO 1112
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS LIMA 000338 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
USTR FOR BHARMAN AND MCARRILLO 
 
E.O. 12958:  N/A 
TAGS: ECON EINV EFIN ELAB PGOV USTR PE
SUBJECT: IMF COMMENDS PERU, BUT CHALLENGES REMAIN 
 
REF: LIMA 210 
 
¶1. (U) Summary: On January 26, the International Monetary Fund (IMF) 
approved a stand-by agreement with the GOP for 2007-2009 during 
which the IMF will support the GOP's economic program.  The IMF 
commended the GOP for its prudent conduct of fiscal policy in recent 
years, which is largely responsible for Peru enjoying its longest 
period of economic expansion on record, with low inflation, a solid 
external position (a rising current account surplus with strong 
foreign investment), and declining indebtedness ratios.  However, 
the IMF noted that the level of poverty in Peru and the structural 
weakness of the economy remain as challenges.  End Summary. 
 
¶2. (U) A stand-by agreement is significant for Peru as it signals 
the IMF's support for current macroeconomic policies and that Peru 
can borrow funds from the IMF providing that Peru "observes specific 
terms in order to be eligible to receive a disbursement."  The new 
stand-by agreement is the GOP's fourth since 2001.  The GOP did not 
draw on IMF reserves during the three previous stand-by agreements 
nor did it on the Extended Fund Facility of 1999-2001. 
 
IMF PRAISE FOR GOP 
------------------ 
 
¶2. (U) A key factor in support of the IMF's decision to agree to a 
stand-by agreement was Peru's recent macroeconomic performance which 
now has the country "harvesting the results of good economic 
policies" established over the past several years.  The IMF cites 
high commodity prices and strong domestic demand as key factors in 
the GOP's economic performance, with prudent fiscal policy playing a 
major role, expecting that strong growth may materialize even if 
current high metals prices decline somewhat.  The IMF pointed out 
that Peru's Public Sector debt is estimated to have declined to 31.5 
percent of GDP by end-2006, or 15 percentage points below its 
end-2002 level.  Also, inflation declined from 2.9 percent in April 
to 1.1 percent in December. 
 
IMF IDENTIFIES CHALLENGES: POVERTY AND INFORMAL LABOR 
--------------------------------------------- --- 
 
¶3. (U) The IMF Board noted that major challenges remain, including 
the high rate of poverty (51 percent), regional income disparities, 
and the still-high dollarization of the economy.  Structural reform, 
the IMF says, is necessary to address poverty, specifically a 
reduction in the size of the informal labor market and a concerted 
effort to improve the flexibility of the labor market.  The GOP is 
currently considering a series of measures to address these labor 
market issues.  Javier Silva Ruete, an IMF Director, emphasized the 
importance of creating better competition in Peru's labor market and 
the necessity for creating more employment in the formal sector of 
the economy.  The report also urged the GOP to decisively tackle the 
high poverty rates, improve tax policy and administration by 
reducing exemptions, and simplifying the code to broaden the base. 
They also warned that fiscal decentralization should be implemented 
cautiously. 
 
GOP MINISTER OUTLINES STRATEGIES TO ADDRESS THE CHALLENGES 
--------------------------------------------- --- 
 
¶4. (U) Luis Carranza, GOP Minister of Economy and Finance (MEF), 
stated January 29 that the GOP's policies aim to reduce the poverty 
level from slightly over 50 percent to 40 percent during this 
administration's term -- ending in 2011.  The GOP's economic 
strategies for poverty reduction will include a substantial 
improvement in social expenditures and improvement of government 
investment.  The "three pillars" of the GOP's economic plan are 
institutionalizing macroeconomic discipline; rationalizing public 
expenditures through reduction of administrative expenses; and 
reducing economic volatility by maintaining economic growth between 
6 and 7 percent. 
 
¶5. (SBU) Carranza said an integral part of the government's strategy 
is to develop, in the near future, a tax framework that is efficient 
and equitable so that more workers can be absorbed into the formal 
economy through tax simplification.  In the meantime, the immediate 
strategy is to make better use of existing tax revenues and curtail 
the loss of revenues through special exonerations.  Silva Ruete 
commented that the IMF is willing to provide technical cooperation 
to assist the GOP in reducing the impact of exonerations on 
potential tax revenue. 
 
COMMENT 
------- 
 
¶6. (U) The GOP has made steady economic progress as per reftel and 
the IMF's assessment.  Nonetheless, key challenges remain, of which 
some of the most pressing are reducing poverty, broadening the tax 
base, and reforming the labor market.  Observers, such as former 
Prime Minister Pedro-Pablo Kuczynski, give the government high marks 
for its efforts; yet admit that while there are program initiatives 
and projects, there is no overall plan.  The former Prime Minister 
and Finance Minister under the previous administration recently 
noted that the current government had inherited an economy in 
excellent condition, but warned the government that social pressures 
would increase if the benefits of the country's economic growth were 
not shared more broadly -- precisely Alan Garcia's campaign 
platform. 
STRUBLE