Economy of Peru

Economy - overview: The Peruvian economy has become increasingly market-oriented, with major privatizations completed since 1990 in the mining, electricity, and telecommunications industries. Thanks to strong foreign investment and the cooperation between the Fujimori government and the IMF and World Bank, growth was strong in 1994-97 and inflation was brought under control. In 1998, El Niño's impact on agriculture, the financial crisis in Asia, and instability in Brazilian markets undercut growth. And 1999 was another lean year for Peru, with the aftermath of El Niño and the Asian financial crisis working its way through the economy. Lima did manage to complete negotiations for an Extended Fund Facility with the IMF in June 1999, although it subsequently had to renegotiate the targets. Pressure on spending is growing in the run-up to the 2000 elections. Nevertheless, improved commodity prices and the recovery of the fishing sector should help drive GDP growth above the 5% mark in 2000.

Economy - in greater depth:
From 1994 through 1997, the economy recorded robust growth driven by foreign direct investment, almost 46% of which was related to the privatization program. The economy stagnated from 1998 through 2001, the result of the century’s strongest El Niño weather phenomenon, global financial turmoil, political instability, a stalled privatization program, increased government intervention in markets, and worsening terms of trade. President Alejandro Toledo implemented a recovery program after taking office, maintained largely orthodox economic policies, and took measures to attract investment, including restarting the privatization program. Nonetheless, political uncertainty led to GDP growth of 0.2% in 2001. The Lima Stock Exchange general index fell 34.5% in 2000 and 0.2% in 2001. Inflation remained at record lows, registering 3.7% in 2000.

The year 2001 saw deflation of 0.1%. The government's overall budget deficit rose sharply in 1999 and 2000 to 3.2% of GDP, the result of hikes in government salaries, expenditures related to the 2000 election campaign, higher foreign debt service payments, and lower tax revenues. The government brought the deficit down to 2.5% of GDP in 2001, and set a target of 1.9% of GDP for 2002. Peru's macroeconomic stability brought about a substantial reduction in underemployment[?], from an average of 74% from the late 1980s through 1994 to 43% in the 1995-96 period, but the rates began climbing again in 1997-2002 to over half the working population. The poverty rate remained at 54% in 2001, with 24% of Peruvians living in extreme poverty.

Foreign Trade and Balance of Payments
The current account deficit dropped in 2001 to about 2.2% of GDP ($1.17 billion)--from 3.1% in 2000--while the trade balance registered a small deficit. Exports dropped slightly to $7.11 billion, while imports fell 2.1% to $7.20 billion. After being hit hard by El Niño in 1998, fisheries exports have recovered, and minerals and metals exports recorded large gains in 2001 and 2002, mostly as a result of the opening of the Antamina copper-zinc mine. By mid-2002, most sectors of the economy were showing gains. After several years of substantial growth, foreign direct investment not related to privatization fell dramatically in 2000 and 2001, as well as in the first half of 2002. Net international reserves at the end of May 2002 stood at $9.16 billion, up from $8.6 billion at the end of 2001.

Foreign Investment
The Peruvian Government actively seeks to attract both foreign and domestic investment in all sectors of the economy. International investment was spurred by the significant progress Peru made during the 1990s toward economic, social, and political stability, but it slowed again after the government delayed privatizations and as political uncertainty increased in 2000. President Alejandro Toledo has made investment promotion a priority of his government. While Peru was previously marked by terrorism, hyperinflation, and government intervention in the economy, the Government of Peru under former President Alberto Fujimori took the steps necessary to bring those problems under control. Democratic institutions, however, and especially the judiciary, remain weak.

The Government of Peru's economic stabilization and liberalization program lowered trade barriers, eliminated restrictions on capital flows, and opened the economy to foreign investment, with the result that Peru now has one of the most open investment regimes in the world. Between 1992 and 2001, Peru attracted almost $17 billion in foreign direct investment in Peru, after negligible investment during the 1980s, mainly from Spain, the United States, the United Kingdom, Panama, and Netherlands. The basic legal structure for foreign investment in Peru is formed by the 1993 constitution, the Private Investment Growth Law[?], and the November 1996 Investment Promotion Law[?]. Although Peru does not have a bilateral investment treaty with the United States, it has signed an agreement (1993) with the Overseas Private Investment Corporation (OPIC) concerning OPIC-financed loans, guarantees, and investments. Peru also has committed itself to arbitration of investment disputes under the auspices of ICSID (the World Bank's International Center for the Settlement of Investment Disputes[?]) or other international or national arbitration tribunals.

Economic Outlook
Forecasts for the medium- and long-term remain positive, even though both the economic situation and political climate remain difficult. Peru’s real GDP growth in 2002 will likely be among the highest in the region, expected to be over 3%. Inflation is likely to remain low, at about 2%, while the budget deficit is expected to fall to about 2% of GDP. Private investment should begin to pick up, mostly as a result of privatizations. Exports and imports are expected to rise. The unemployment and underemployment indexes (11% and 54%, respectively, in Lima) should begin to come down again as the economic picks up. Over the next few years, the country is likely to attract both domestic and foreign investment in the tourism, agriculture, mining, petroleum and natural gas, and power industries.

Narcotics[?]
The fight against narcotics trafficking in Peru has resulted in an unprecedented 70% reduction since 1995 in the number of acres of illegal coca leaf under cultivation. The impact of this illicit industry to the national economy is difficult to measure, but estimates range from $300-$600 million. An estimated 200,000 Peruvians are engaged in the production, refining, or distribution of the narcotic. Many economists believe that large flows of dollars into the banking system contribute to the traditional depression in the dollar exchange rate vis-a-vis the sol, and create a climate in which money-laundering can flourish. The Central Bank engages in open market activities to prevent the price of the sol from rising to levels that would otherwise hurt Peruvian exports.

Hurt economically by successful Peruvian Air Force[?] interdiction efforts in the mid-1990s, drug traffickers are now using land and river routes as well as aircraft to transport cocaine paste and, increasingly, cocaine hydrochloride[?] (HCL) around and out of the country. The airbridge denial interdiction program was suspended in April 2001 after the Peruvian Air Force misidentified a U.S. missionary aircraft as a drug trafficker and shot it down, killing two American citizens on board. Aerial interdiction of drug traffickers may resume once adequate training and safety measures have been instituted by the U.S. and Peruvian Governments. Peru continues to arrest drug traffickers and seize drugs and precursor chemicals, destroy coca labs, disable clandestine airstrips, and prosecute officials involved in narcotics corruption.

Working with the U.S. Agency for International Development (USAID), the Peruvian Government carries out alternative development programs in the leading coca-growing areas in an effort to convince coca farmers not to grow that crop. Although the government previously eradicated only coca seed beds, in 1998 and 1999 it began to eradicate mature coca being grown in national parks and elsewhere in the main coca growing valleys. In 1999 the government eradicated more than 15,000 hectares of coca; this figure declined to 6,500 hectares in 2000, due largely to political instability. The government agency "Contradrogas[?]," founded in 1996, facilitates coordination among Peruvian Government agencies working on counter narcotics issues.

GDP: purchasing power parity - $116 billion (1999 est.)

GDP - real growth rate: 2.4% (1999 est.)

GDP - per capita: purchasing power parity - $4,400 (1999 est.)

GDP - composition by sector:
agriculture: 13%
industry: 42%
services: 45% (1998)

Population below poverty line: 54% (1991 est.)

Household income or consumption by percentage share:
lowest 10%: 1.9%
highest 10%: 34.3% (1994)

Inflation rate (consumer prices): 5.5% (1999 est.)

Labor force: 7.6 million (1996 est.)

Labor force - by occupation: agriculture, mining and quarrying, manufacturing, construction, transport, services

Unemployment rate: 7.7%; extensive underemployment (1997)

Budget:
revenues: $8.5 billion
expenditures: $9.3 billion, including capital expenditures of $2 billion (1996 est.)

Industries: mining of metals, petroleum, fishing, textiles, clothing, food processing, cement, auto[?] assembly, steel, shipbuilding, metal fabrication

Industrial production growth rate: 1.2% (1996)

Electricity - production: 18.28 billion kWh (1998)

Electricity - production by source:
fossil fuel: 24.53%
hydro: 74.79%
nuclear: 0%
other: 0.68% (1998)

Electricity - consumption: 17.002 billion kWh (1998)

Electricity - exports: 0 kWh (1998)

Electricity - imports: 2 million kWh (1998)

Agriculture - products: coffee, cotton, sugarcane, rice, wheat, potatoes, plantains, coca; poultry, beef, dairy products, wool; fish

Exports: $5.9 billion (f.o.b., 1999 est.)

Exports - commodities: fish and fish products, copper, zinc, gold, crude petroleum and byproducts, lead, coffee, sugar, cotton

Exports - partners: United States 25%, China 8%, Japan 7%, Switzerland, Germany, United Kingdom, Brazil (1997)

Imports: $8.4 billion (c.i.f., 1999 est.)

Imports - commodities: machinery, transport equipment, foodstuffs, petroleum, iron and steel, chemicals, pharmaceuticals

Imports - partners: US 19%, Colombia 6%, Venezuela 5%, Chile 4%, Brazil 4% (1997)

Debt - external: $31 billion (1998 est.)

Economic aid - recipient: $895.1 million (1995)

Currency: 1 nuevo sol (S/.) = 100 centimos

Exchange rates: nuevo sol (S/.) per US$1 - 3.500 (January 2000), 3.383 (1999), 2.930 (1998), 2.664 (1997), 2.453 (1996), 2.253 (1995)

Fiscal year: calendar year

See also : Peru