Announcement of World Bank Approves Three Hundred Million Dollar Loan to Peru in Support of Stabilization and Structural Reforms on March 26, 1992

FOR IMMEDIATE RELEASE World Bank 1818 H Street, N.W ., Washington , D.C. 20433, U.S.A. • Telephone: (202) 477-1234 BANK NEWS RELEASE Contact: Antonio M. Pimenta-Neves (202) 473-8722 WORLD BANK APPROVES S300 MILLION LOAN TO PERU IN SUPPORT OF STABILIZATION AND STRUCTURAL REFORMS WASHINGTON, March 26, 1992 The World Bank approved today a $300 million structural adjustment loan to Peru in support of the country's efforts to stabilize the economy and carry out far-reaching sectoral reforms. The loan is part of a World Bank program to assist Peru in reestablishing its ties with the international financial community. Under the program, Peru has paid all debt service obligations falling due to the Bank since October 1990. As with the trade policy reform loan, approved by the Bank on February 4, 1992, the structural adjustment loan will not be signed or become effective until all arrears to the Bank are cleared. The proceeds of the loan will therefore not be disbursed until after Peru clears its pre-October 1990 arrears to the Bank, which is expected to occur towards the end of 1992. Disbursements will depend also on the implementation of the structural reforms undertaken by the Fujimori administration. The reforms supported by the loan will help Peru stabilize the economy and increase the rate of economic growth through more efficient use of the country's resources. Peru has already moved decisively to eliminate controls on prices, wages, interest rates and exchange rates. The government has also overhauled the tax system and is expanding the tax base, while limiting public expenditures to the amount of cash revenues it can generate. To promote privatization, the government has established a special commission, which is responsible for the design and execution of a sweeping program of public divestiture in such sectors as banking, fisheries, mining, oil, gas, power, telecommunications, transport and water and sewage. In February 1992, the commission established 20 committees to implement the privatization of specific companies. More recently, the commissi:en announced a list of 14 companies which would be offered for sale in the next 60 days. The government also intends to privatize a large part of the social security system. To strengthen property rights and encourage investment in agriculture, the government has removed restrictions on land ownership and is allowing small landowners to use their land as collateral for credit. Land reform carried out in the early 1970s had severely restricted the marketability of land and its use as collateral. . The Fujimori administration inherited an economy in shambles, with a legal structure and policy environment inimical to development. The tax code was complex and full of loopholes, tax administration was ineffective, and tax evasion widespread. Job security was constitutionally protected and strictly enforced, and, together with very high tax rates on labor, helped shrink the NOTE: Money figures are expressed in U.S. dollar equivalents.  - 2 - formal sector. Trade policy relied on import substitution with high tariffs and many non-tariff barriers, depr i ving the country of the benefits of its comparative advantage in international trade. Regulatory policies conferred special privileges to existing businesses, protecting them against new competitors. The financial sector was heavily burdened by direct government interference, including tight control of interest rates. The previous administration had introduced widespread exchange controls on current- and capital-accounts, and multiple exchange rates that were frequently changed. It had increased minimum wages, expanded directed credit and subsidies, reduced the value-added tax rate, and decreased public sector prices. This strategy led to a severe fiscal deficit, financed by a sharp increase in the money supply. Between 1985 and 1987, this increase had little effect on prices, given the demand for local currency generated by the Garcia's administration initial credibility among Peruvians. Economic activity expanded by 17 percent, the rate of price increases fell, and real domestic liquidity experienced unprecedented growth . The "boom" proved to be unsustainable. After 1987, the markets lost confidence, inflation rebounded, and the economy deteriorated sharply. In 1989, the price level was 267 times higher than in 1987, output had contracted by 19 percent, and real wages had collapsed to less than half their 1985 level. In August 1990, a month after the Fujimori administration took office, the inflation rate reached a peak of 12,375 percent over that of August 1989. In December 1991, the inflation rate had fallen dramatically to 139 percent over that of December 1990. The Bank's assistance to Peru through the structural adjustment loan will help the government address its economic development and poverty alleviation needs. The World Bank loan is for 20 years, including five years of grace, with a variable interest rate, currently 7.73 percent, linked to the cost of the Bank's borrowings. It also carries an annual commitment charge of 0.25 percent on the undisbursed balance. - 0 -