The Peruvian government-designed structural reforms, such as simplifying public investment processes, promoting innovation and diversifying exports, are “steps in the right direction,” the International Monetary Fund (IMF) affirmed.
According to a report, issued by IMF economists Melesse Tashu and Kevin Ross, the wide structural program reform introduced by Peruvian authorities is aimed at tackling challenges to keep the economy expanding.
Economists claimed the “baseline scenario estimates potential growth at 4½ percent, assuming structural reforms proceed at a slightly faster pace, in line with the authorities' ongoing agenda.”
The report indicates over the past few decades, Peru consistently implemented a series of structural reforms and solid macroeconomic and investment frameworks. For example, the government introduced a fiscal rule in 1999 and a well-designed inflation targeting regime in 2002.
The experts claimed Peru is now a regional leader, rising from the bottom of a relative ranking among the six largest Latin American economies in the mid-1980s.
In this sense, “these advancements allowed the country to take full advantage of a sizable and prolonged improvement in its terms of trade and historically low global interest rates.”
The result was a surge in investment and foreign direct investment flows, and a significant gain in productivity.
During 2003-13, growth averaged 6.2 percent, with investment contributing around half to actual GDP growth. Not surprisingly, these events also led to an increase in Peru’s estimated potential growth rate, from around 4 percent in 2003 to about 6 percent in 2013.
Changes in the external environment, however, call for a reassessment of potential growth. The two key factors that provided a strong tailwind to growth—positive terms of trade changes and easy global financial conditions—have started to reverse, and investment growth has been slowing, they added.
According to the economists, if structural reforms were to improve at the same rate as during the commodity boom, potential growth would only be 3.2 percent.
Nonetheless, the experts’ baseline scenario estimates potential growth at 4½ percent, assuming structural reforms proceed at a slightly faster pace, in line with the authorities’ ongoing agenda.
The report indicates “one overriding challenge” the government faces is “high informality,” for it “limits firm size, human capital development, innovation and financial deepening, all of which constrain productivity.”
Likewise, it suggests the need to cut red tape, which “increases costs and hampers investment.”
The government-driven actions can tackle those issues, the economists assure. Thus the IMF highlights: “Ongoing efforts to reform the civil service, streamline permit procedures, strengthen public enterprise governance, simplify public investment processes, enhance innovation, and diversify exports” considered "steps in the right direction."