IMF Executive Board approves two-year US$11bn flexible credit line arrangement for Peru

"Peru's very strong policy and institutional frameworks have helped it achieve impressive macroeconomic outcomes and reduce vulnerabilities. The inflation targeting regime in place since 2002 has contributed to low inflation and an anchoring of inflation expectations. Prudent fiscal management, supported by a fiscal responsibility and transparency framework in place since 1999, has been instrumental in lowering government debt and building fiscal buffers," IMF Managing Director and Chair Kristalina Georgieva said in a statement following the Executive Board's discussion on the South American country.

"Effective financial sector supervision has contributed to preserving financial stability and improving financial development. In such a context, growth has been robust —averaging nearly 5¼% over the past 15 years— while poverty has declined significantly," she added.

According to Georgieva, the COVID-19 shock poses an extraordinary challenge. In this sense, the authorities have responded decisively by putting in place stringent containment measures and a large policy package to limit the socio-economic fallout, "which has been possible thanks to Peru's ample fiscal space and monetary policy credibility."

"Nonetheless, and despite its very strong policy buffers, Peru remains vulnerable to external tail risks. In particular, a prolonged COVID-19 outbreak would have significant repercussions for trade and financial flows, which could put significant pressure on Peru's balance of payments and magnify the adverse domestic impact of the COVID-19 shock," she warned.

The new 24-month FCL arrangement would serve as an appropriate temporary insurance to buttress confidence in the context of heightened global uncertainties. The authorities have stated their intentions to treat the FCL arrangement as precautionary, as well as to reduce access and consider exit from the FCL arrangement when the exceptional set of external risks have subsided.

In that context, the insurance provided by an FCL arrangement would no longer be necessary, "and Peru's large international reserves and policy buffers would be sufficient to manage risks."

The FCL was established on March 24, 2009, as part of a major reform of the Fund's lending framework.

It was designed for crisis prevention purposes as it provides the flexibility to draw on the credit line at any time during the period of the arrangement (one or two years), and subject to a mid-term review in two-year FCL arrangements. 

Disbursements are not phased nor conditioned on compliance with policy targets as in traditional IMF-supported programs.

This large and upfront access without ex-post conditionality is justified by the very strong track records of countries that qualify for the FCL, which gives confidence that their economic policies will remain strong.

(END) NDP/MVB