The World Bank In Peru

After a rapid post-pandemic recovery, GDP grew by 2.7 percent in 2022, driven by domestic demand and exports. Government cash transfers and exceptional withdrawals from private pension funds stimulated domestic demand. Exports increased thanks to the elimination of health restrictions and the beginning of production of the Quellaveco mining project. GDP growth in 2023 will reach an estimated 2.4 percent, led by primary sectors and services. The pace of growth is expected to increase slightly over the next few years, to approximately 2.8 percent, assuming a gradual improvement in business confidence and renewed investment in large-scale mining projects.

Inflation has been on the rise since 2021, mainly reflecting the global increase in food and energy prices and the domestic demand stimulus to support the recovery following the health crisis, and, more recently, to the temporary interruption in local distribution chains. To curb inflation, the Central Bank tightened its monetary policy, raising the reference policy rate to 7.75 percent in January 2023, the highest rate in over two decades. At the same time, the government launched a one-time cash transfer to alleviate food insecurity, which was distributed in late 2022 and early 2023.

Nevertheless, poverty reduction has been slow. The 2022 poverty rate remained 3 percentage points above that of 2019. Higher inflation and the sluggish recovery of the labor market affected vulnerable populations and the middle class alike. Nearly 700,000 formally middle-class Peruvians were at risk of poverty and another 700,000 slipped from a vulnerable situation to poverty.

Fiscal policy stabilized quickly following the substantial pandemic-related stimulus. The annual fiscal deficit continued trending downwards and stood at 1.6 percent of GDP in 2022, compared with 2.5 percent in 2021. The reduction was largely driven by the increase in fiscal revenues, associated with recovery of economic activity and high mineral prices. In 2023-2025, it is estimated that the fiscal deficit will fall below 2 percent and public debt will remain stable at 34 percent of GDP.

The external debt reached 4.3 percent of GDP in 2022 owing mainly to higher mining company profits.  Over the next few years, the foreign debt gap is expected to gradually decline in a context of increased exports and lower transportation costs. It is estimated that the inflow of long-term capital, mainly foreign direct investment, will help close this gap, as has been the case in previous years.

Overall, Peru's macroeconomic fundamentals remain strong. Public debt as a percentage of GDP is low, international reserves are sizeable and the Central Bank is reliable. Important structural challenges for the Peruvian economy include reducing the relative size of the informal sector, which employs three-quarters of workers in low productivity jobs, and improving the quality of government services such as education, health and water. Overcoming these challenges is critical for driving Peru’s long-term growth and poverty reduction.

Last Updated: Apr 10, 2023

Summary of World Bank Group Program in Peru

• The new Peru Country Partnership Framework has been published for the period FY23-FY27. The previous partnership framework covered the fiscal years 2017-2021.
• The WB has an active portfolio of US$2169m, that includes 13 investment projects and one development policy operation (US$750m) to support policies for a more resilient, greener, and inclusive economic recovery; and to support policies to protect and invest in human capital accumulation. Projects are focused mainly on health, infrastructure (transport, water), justice, urban and environment sectors.
• IFC's own account committed portfolio of US$ 381m works with 9 institutions in the country. IFC's portfolio by industry includes financial institutions (65%); infrastructure (25%); logistics (9%); and telecommunications (1%). IFC´s additional mobilized resources ascend to $64m. The IFC portfolio had declined in recent years (from 21 institutions and $610m in 2017) mainly due to prepayments and exits that were motivated by strong local market conditions. During recent years there has been abundant liquidity in the local banking and pension systems, displacing IFC's resources and limiting its range of action.  However, given the uncertainty of impact of the new administration’s priorities, investment officers have recently noted renewed interest from the private sector to engage IFC financing and advisory services (already reflected in FY22 commitments of $60m to BBVA Continental for green building finance and $100m to MiBanco for financing to women-owned SMEs).
• As of September 2022, MIGA’s outstanding exposure in Peru stood at US$693 million, across two projects in the financial sector. The Agency’s exposure in Peru is the third largest in the LAC region and the ninth in MIGA’s overall portfolio. In June 2022, MIGA issued guarantees of US$351 million, in support of Fondo MiVivienda S.A, the largest provider of affordable housing financing in Peru. The MIGA-guaranteed loan supports increasing access to finance for certified green housing in Peru. The mortgages, aimed primarily at vulnerable and middle-income households, will benefit from reduced interest rates, as well as grants/subsidies that will lower the price of certified green social housing to levels comparable with the price of conventional housing. In addition, in June 2018, MIGA issued guarantees against the risk of expropriation of mandatory reserves of Banco Santander Peru. The aim of the project is to enable Santander Peru to extend more credit in Peru, including credit and other financial instruments to support climate finance and infrastructure investments in the country.

Last Updated: Apr 04, 2023

Detailed performance results can be found at Peru Country Partnership Strategy for 2023-2027 (Annex 2). The following section presents results by objective for the 2016-2021 period.

Connectivity in critical corridors of the territory  

The World Bank supported projects in urban transport, ports, rural highways and telecommunications. These resulted in a 50 percent increase in the container storage capacity at the Port of Callao. Progress was also made on Lima metro, the subnational transportation program and the extension of the Lima Metropolitana bus system. Regarding the telecommunications industry, the World Bank supported regulatory reforms to promote private investment and competition, which will eliminate barriers and facilitate infrastructure development.

Absorption of skills and technologies

Projects in this area successfully contributed to the acquisition of new skills and technology in the fields of agriculture, artisanal fishing and aquaculture and in higher education. A total of 31,634 agricultural producers adopted new technologies and 78 percent of beneficiaries of artisanal fishing and aquaculture projects agreed to implement an innovation project. In higher education, the World Bank supported a program to accelerate the digitization process; Peru is now a world leader in digital transformation.

Environment for sustainable private sector investments

The World Bank provided policy program support to enhance the private sector environment. It assisted in the entry, operation and exit of firms through: a) the incorporation of more than 40,000 new firms in the online registry; b) the reduction of the capacity of government agencies to impose regulations and administrative procedures outside the national legal framework; c) the simplification of the sales tax withholding system to lower companies’ operating costs; and d) the introduction of e-auctions for selling assets to reduce costs and insolvency risks. Emergency cash transfers were expanded to reach approximately 2.5 million households that did not participate in traditional schemes (mostly poor and informal workers who could not obtain their daily income). Incorporation into the digital payment network facilitated these transfers. The World Bank also supported companies facing severe and sudden demand crises through the creation of Reactiva Perú, an innovative credit guarantee mechanism that mobilized the equivalent of 8.5 percent of GDP in private liquid funds to grant loans to small and medium-sized enterprises. The competitive liquidity allocation system led to inflows of private sector credit that were among the most significant in the world at the time, supporting USD 16.5 billion in liquidity and achieving historically low interest rates for end-borrowers. Half of formal workers are employed in firms that benefited from the Reactiva Perú program.

Water and sanitation services in key urban areas

The World Bank supported projects such as the improvement of the sewage system in Lima, which substantially improved the efficiency, continuity and reliability of water supply services for 64,878 households in northern Lima. Non-revenue water losses declined from 40 percent to 25 percent in the project intervention area.

Natural resource management

The projects related to natural resource management sought to improve forest management practices, the legal protection and recognition of indigenous communities and the security of land tenure. The World Bank supported the platting out and titling of lands of 58 communities covering 230,000 hectares. It also contributed to the recognition of 253 indigenous communities and the financing of 44 community production subprojects --including 16 initiatives led by women-- that promoted sustainable forest management, increased food security and income generation activities in 119 indigenous communities of the Peruvian Amazon.

Disaster risk planning and financial management

The World Bank provided assistance to the Government of Peru in the development of a comprehensive strategy for financial protection against natural disasters. It issued the Pacific Alliance Joint Catastrophe Bond for USD 200 million in February 2018 to protect against earthquakes over a three-year period. The bond provided coverage of USD 65 million when an earthquake affected the country in 2019. These bonds complemented Peru's staged financing strategy with traditional and non-traditional financial instruments.

The Bank also supported government efforts to improve the financial protection of public-private partnerships against disasters. In 2019, the Ministry of Economy and Finance included a chapter on insurance in its guidelines for the design of public-private partnership contracts. It also helped strengthen the risk and insurance databases of Peru and other Pacific Alliance countries. Additionally, the World Bank assisted the Banking and Insurance Authority (SBS) in strengthening the legal framework regulating the insurance industry.

Last Updated: Apr 10, 2023