Economy of Peru

The Peruvian economy has become increasingly market oriented, with major privatizations completed since 1990 in the mining, electric/power, and telecommunications industries. Thanks to strong foreign investment and the cooperation between the former Fujimori administration, the IMF, and the World Bank, growth was strong in 1994-97 and inflation was brought under control.

In 1998, El Nino’s impact on agriculture, the financial crisis in Asia, and instability in Brazilian markets undercut growth. 1999 was another lean year for Peru, with the aftermath of El Nino 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 grew in the run-up to the 2000 elections.

Growth up to 2005 has been driven by construction, investment, domestic demand, and exports to different world regions. Peru’s economy is one of the better-managed in Latin America. Over the next few years, the country is likely to attract both domestic and foreign investment in the tourism, agriculture, mining, construction, industry, petroleum and natural gas, and power industries.

It has taken steps to consolidate a possible free trade agreement with United States of America by April 2006; both countries wait for the approval of the terms by their respective congresses. Peru is negotiating a Free Trade Agreement with Chile, Mexico and Singapur which may be finished between March and April 2006.

Peru currently has a free trade agreemente with the Andean Community, which is composed of Colombia, Ecuador, Bolivia and Venezuela. It also holds free trade agreements with many of the countries in Mercosur as well as Thailand, and during the recent APEC summit, Peru voiced intentions to sign free trade agreements with China, Japan, South Korea.

It is also pushing for a free trade agreement with the European Union. All these negotiations will broadly expand the markets in which the Peruvian products are traded. Peru has a great export potential in agricultural products (coffee, asparagus, paprika, artichokes, bananas, tomatoes, carrots, lettuce, tropical fruits-such as oranges, lemons, limes, papayas, pineapples, peaches, coconuts, sugar, cotton, potatoes -where it is originally from- flowers, avocadoes, olives, mangoes, apples, grapes, ethanol -byproduct of sugar cane), textiles and clothing, shoes, petroleum derivatives (gasolines, light oil, plastics, synthetic fibers, etc), natural gas, minerals (copper, gold, molibdenum, silver, zinc, plumbum, antimonium, etc), as well as fish and seafood products (oil fish, tuna, shrimp, Peruvian King crab, etc), tourism, and manufacturing (electrical and electronic equipment and machinery, automobiles, assembly parts for equipment, hydraulic pumps, ships, small aircraft, sub-assemblies, etc).

In 2005 Peruvian exports reached USUSD 17.1 billion (an increase of 34.6% compared to 2004) and it is expected to grow 35% for this year reaching USUSD 23.5 billion at the end of 2006. Also, the economy has shown a healthy grow in all its sectors (energy, construction, commerce, fishing, manufacturing, tourism, etc) in 2005 growing over 6.67% (one the fastest growth rates in Southamerica) and it is projected to grow a strong 7% for 2006 considering that commodity prices, which Peru is a great producer, will have an estimated increment of 25% on average.

For the next five years (until 2010) the Peruvian government has registered over USUSD 10 billion in private investment (both domestic and foreign) in the mining and energy sectors, as well as investments of USUSD 15 billion in other sectors such as industry, commerce, tourism, seafood and agriculture, which will keep the economy growing at healthy levels of 5% or more, anually.

Unfortunately poverty in Peru is still very high, with a rate of 51,6% of the total population, however the poverty rate is being reduced slowly and it is expected to be reduced to 25% of population in 15 years.

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 Nino’s impact on agriculture, the financial crisis in Asia, and instability in Brazilian markets undercut growth.

1999 was another lean year for Peru, with the aftermath of El Nino 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.

Greater Depth

From 1994 through 1997, the economy has 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 Nino 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 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. In 2005 the numbres changed, nowadays 18% Peruvians live in extreme poverty and the poverty rate is now at 51,2%.

Foreign Trade and Balance of Payments

In 2001 the current account deficit dropped to about 2.2% of GDP (USUSD 1.17 billion)–from 3.1% in 2000–while the trade balance registered a small deficit. Exports dropped slightly to USD 7.11 billion, while imports fell 2.1% to USD 7.20 billion.

After being hit hard by El Nino 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 USD 9.16 billion, up from USD 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 USD 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 economy picks up, other cities in Peru like Cajamarca, Ica, Cuzco and Trujillo are starting to show less unemployment nowadays. 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, power industries and financial institutions.

Narcotics

The fight against narcotics trafficking in Peru has resulted in an unprecedented 70% reduction since 1995 in the area of illegal coca leaf under cultivation. The impact of this illicit industry to the national economy is difficult to measure, but estimates range from USD 300-USD 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. 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 150 km² of coca; this figure declined to 65 kmandsup2 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.

Statistics

GDP: purchasing power parity - USD 168.3 billion (2004 est.)

GDP - real growth rate: 4.5% (2004 est.)

GDP - per capita: purchasing power parity - USD 5,450 (2004 est.)

GDP - composition by sector:
agriculture: 8%
industry: 27%
services: 65% (2004 est.)

Population below poverty line: 51% (2003 est.)

Household income or consumption by percentage share:
lowest 10%: 0.8%
highest 10%: 37.2% (2000)

Inflation rate (consumer prices): 3.8% (2004 est.)

Labor force: 11 million (2004 est.)

Labor force - by occupation: agriculture 9%, industry 18%, services 73% (2001)

Unemployment rate: 7.7%; extensive underemployment (1997)

Budget:
revenues: revenues: USD 13.6 billion
expenditures: USD 14.6 billion, including capital expenditures of USD 1.8 billion (2004 est.)

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

Industrial production growth rate: 7.2% (2004 est.)

Electricity - production: 29,880 GWh (2004 est.)

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

Electricity - consumption: 27,220 GWh (2002

Electricity - exports: 0 kWh (2004)

Electricity - imports: 0 kWh (2004)

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

Exports: 16.8 billion f.o.b. (2005 est.)

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

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

Imports: USD 9.6 billion f.o.b. (2004 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: USD 29.79 billion (2004 est.)

Economic aid - recipient: USD 491 million (2002)

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

Exchange rates: nuevo sol (S/.) per USUSD 1 - 3.240 (Sep 2005), 3.303 (Oct 2004), 3.45 (December 31, 2003), 3.51 (December 31, 2002), 3.63 (2001), 3.50 (2000), 3.383 (1999), 2.930 (1998), 2.664 (1997), 2.453 (1996), 2.253 (1995)

Fiscal year: calendar year