Over the past decade, Peru has been one of the region’s fastest-growing economies, with an average growth rate 5.9 percent in a context of low inflation (averaging 2.9 percent). A favorable external environment, prudent macroeconomic policies and structural reforms in different areas created a scenario of high growth and low inflation. The strong growth in employment and income have sharply reduced poverty rates. Moderate poverty (US$4 a day 2005 PPP) fell from 45.5 percent in 2005 to 19.3 percent in 2015. This is equivalent to 6.5 million people getting out of poverty during this period. Extreme poverty (US$2.5 a day 2005 PPP) declined from 27.6 percent to 9 percent over the same period.
GDP growth continued to accelerate in 2016 on the back of higher mining export volumes as several large mining projects entered into production and/or reached full capacity. The economy is estimated to have grown above potential at 3.9 percent in 2016 due to that temporary peak in mining production. Higher growth in mining export volumes was partially attenuated by lower dynamism in domestic demand, as public spending receded and investment continued to decline. The current account deficit declined significantly from 4.9 to 2.8 percent of GDP in 2016, owing to the surge in export growth and lower imports. Net international reserves stood at the comfortable level of 32 percent of GDP as of February 2017. The average headline inflation amounted to 3.6 percent in 2016, above the upper limit of its target range for a third straight year, as supply-side shocks on food prices offset weak domestic demand. Peru faced a moderate fiscal deficit of 2.6 percent in 2016. The higher deficit stems from a decline in revenues that came with the economic slowdown, the 2014 tax reform, and an increase in recurrent expenditures in recent years, especially for goods and services and wages. However, at 23.8 (8.5) percent of GDP, Peru’s gross (net) public debt remains one of the lowest in the region.
For 2017, GDP is expected to slow slightly due to the leveling off in the mining sector and still weak private investment- the latter affected by adverse global conditions and the uncertainty related to corruption scandals in projects signed in past years.
Fiscal policy remains prudent, even as deficits have increased over the last years. The higher deficit stems from a decline in revenues that came with the economic slowdown, the 2014 tax reform and increases in recurrent expenditures in recent years, especially for goods and services, and wages. In the context of supporting the economy as mining production levels off, the authorities are expected to more aggressively increase public investment in 2017, thus maintaining or marginally increasing the 2016 deficit level. The Government expects to phase out current fiscal deficits gradually over the medium term on the back of expenditure measures and plans to improve tax collection.
Growth projections are vulnerable to external shocks in commodities prices, a further deceleration of China’s growth, capital markets volatility, the speed of monetary policy tightening in the United States. The economy is also exposed to natural risks, including recurrent climatic phenomena such as El Niño. Raising growth requires structural and fiscal reforms to unleash productivity, reduce informality, and improve efficiency of public services.
Last Updated: Apr 17, 2017