Peru - Policies to stop hyperinflation and initiate economic recovery (Vol. 1 of 2) : Main report

Report No. 7460-PE Peru Policies to Stop Hyperinflation and Initiate Economic Recovery (In Two Volumes) Volume 1: Main Report December 15, 1988 Country Department IV Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY U~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Document of the World Bank This report has a restricted distribution and may be used by recipients only ir the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Inti (I/.) Official Exchange Rate (Effective December 1, 1988) I/. 1.00 = US$0.002 US$ 1.00 = I/. 500 FISCAL YEAR January 1 to December 31  FOR OMCIAL USE ONLY PREFACE This report was prepared a.d drafted prior to the announcement of two packages of economic measures by the Peruvian Government, first in September 1988 and then in November 1988. A description of these measures as well as an update on the current state of the economy is contained in the Addendum provided in the last section of Volume I. This report is based on findings and analysis or Bank economic missions which visited Lima in October 1987, November/December 1987, and March/April 1988. Support for the Bank work with the Government was provided by the United Nations Development Programme (UNDP). Participaticn in the missions, which varied in size and composition, was as fcllows: William Tyler (Mission Chief); Ricardo Lago (Deputy Mission Chief and principal author); Ulrich Lachler (trade and exchange rate policies); Daniel Oks (consultant, macroeconomics); Jeno Malatinszky (public enterprises): Ricardo Martin (projections); Fernando Rezende (consultant, taxation); Javier Escobal (consultant, agriculture); Bruce Herrick (consultant, labor markets); Cesar Burga (projections statistical .rnnex, and research assistance). Pedro Mercader (UNDP Lima Representative) accompanied the work of the missions in Lima and provided valuable guidance and overall support. Valuable comments on an earlier draft were provided by Rudiger Dornbusch. Michel del Buono provided a short note on the state of the energy sector. Brian Wesol provided research assistance in one of the missions. Dorothy Jenkins provided secretarial work throughout the cycle of the report. Milagros Aquino-Divino provided secretarial assistance in the final stage of the report. This report was discussed in great detail with the Government's economic team in Lima during October/November 1988 by Messrs. Tyler and Lago. While there was general agreement between the Bank and the Government's economic team as to the diagnosis and analysis of the situation, the Government's economic team stressed political and social constraints to taking strong policy action to forestall hyperinflation and indicated the need for a more gradual policy approach. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  PERU - POLICIES TO STOP HYPERINFLATION AND INITIATE ECONOMIC RECOVERY TABLE OF CONTENTS VOLUME Is THE MAIN REPORT Page No. COUNTRY DATA EXECUTIVE SUMMARY i RESUMEN EJECUTIVO xvi CHAPTER I. THEE VOLTICN OF THE PERUVIAN ECONOMY .............. 1 A. Background . ... . ................ . 1 B. Recent History .......... ....................... 1 C. The Diagnosis of the Economy in 1985 and Strategy of the Incoming APRA Government ...... 3 D. The Implementation of the Policies, July 1985 to December 1986 .................. . 4 E. The Results in 1986: Reactivation and Disinflation . .......... 9 F. Economic Policy in 1987 ........................ 12 G. Economic Performance in 1987: Stagnation of Production and Intensification of Inflationary Pressures .. . . 19 H. Economic Policy during January-August 1988 ..... 21 CHAPTER II. TEE ECONOMIC PROSPECTS IN THE ABSENCE OF MAJOR POLICY REFORMS .....................* .*999o ..... 23 A. The Diagnosis of the Current Crisis ............ 23 B. The Likely Evolution of the Economy without Major Corrective Measures ............ 28 CHAPTER III. THE MAIN ECONOMIC ISSUES AND POLICY RECOMMENDATIONS 38 A. Public Finance ............... ................. . 39 1. The Tax System: Evolution, Structure, and Recommendations ...................... 41 2. Prices and Tariffs of State Enterprises: Evolutions, Structure, and Recommendations .......................... 47 3. Public Investment: Recent Trends and Recommendations .......................... 54 4. The Central Bank's Quasi-Fiscal Deficit: Definition, Measurement, and Recommendations .......................... 56 B. External Sector Policies . ...................... 60 1. Exchange Rate Policy: Evolution, Structure, and Recommendations ........... 60 2. Import Restrictions: Structure, Assessment, and Recommendations .......... 68 3. Export Incentivest Structure, Assessment, and Recommendations ......... 76  - ii - C. Other Resource Allocation Issues 0............... s 3. Financial Policy: Main Issues and Recommendations .....0........ s 2. Price Controlss Structure and Recommendations .......................... 85 3. Agricultural Prieng and Subsidies: Policies, Assessment, and Recommendations .......................... 87 4. Labor Market Issues and Recommendations .... 92 5. The State Enterprise Sector ................ 96 CHAPTER IV. ECONOMIC POLICY TO STABILIZE INFLATION AND SET THE CONDITIONS FOR MEDIUM-RUN GROIUTH ........... 99 A. The Preconditions for Stabilization ............. 99 B. Resumption of Growth and the Foreign Debt Problem .................... 100 C. Overall Macroeconomic Strategy . ........ 103 D. Illustrative Evolution of the Economy under Stabilization and Structural Adjustment ...... 112 ADDnEDUM - AN UPDATE ON RECENT DEVELOPMENTS. ................... 120 VOLUME II: ANNEXES AND STATISTICAL APPENDIX Annex 1. Inflation and Inflationary Finance ....... 1 Annex 2. The Inflation Tax: Theoretical Derivation and Calculation for 1980-87 ...... 4 Annex 3. The Central Bank's Quasi-Fiscal Deficit.. 17 Annex 4. Main Characteristics of the Peruvian Tax System ............................. 28 Annex 5. Misalignment of Prices and Tariffs of State Enterprises: A Preliminary Calculation ............................ 38 Annex 6. The Working of the "Mesa de Negociacion" of Foreign Exchange Certificates ........................... 41 Annex 7. The Financial System: Inst!tutional Characteristics ........................ 42 Annex 8. Population, Income Distribution, and Labor Market Segmentation .............. 47 Annrex 9. The State Enterprise Sector .............. 58 Annex 10. The Interaction of Fiscal and Monetary Policy ................................. 79 Annex 11 Reserve Requirements and their Remuneration ........................... 92 Annex 12 Brief Background on the Agricultural Sector..... ........... 93  - iii - STATISTICAL APPENDIX .... .............................. ...... . 95 I. POPULATION AND EMPLOYMENT ................... . .. .. ..... 95 1.1 Total Population Distribution ................ 95 1.2 Demaographic Indicators ....................... 96 1.3 Employment and Labor Productivity ............ 97 1.4 Un- and Under-Employment ..................... 98 II. NATIONAL ACCOUNTS ......... .............. *#** .... 99 2.1 GDP by Sectoral Origin (Constant Intis) ...... 99 2.1(A) Real GDP Average Growth Rates (Percentages).. 100 2.2 Nominal GDP by Sectoral Origin (Current Intis) ............... 101 2.2(A) GDP: Percentage Distribution . ......... 102 2.2(B) GDP Deflators .... 103 2.2(C) GDP Deflators: Yearly Percentage Changes... 104 2.3 GDP by Expenditures (Constant Intis) . ..... 105 2.4 GDP by Expenditures (Current Intis) . ..... 106 2.5 Domestic Income ............................. 107 2.5(A) (Percentage Distribution) . . . 108 2,6 Gross Capital Formation by Goods and Origin.. 109 2.7 Real GDP Per Capita .......................... 110 2.8 Per Capita GDP by Departments . .11....... i III. BALANCE OF PAYMENTS .. ............ . ...... * ... . 112 3.1 Summary Balance of Payments ................. 112 3.1(A) (As a Percent of GDP) ....................... 113 3.2 Merchandise Exports by Commodities (Current Dollars) ................................. 114 3.3 Merchandise Exports by Commodities (Constant Dollars) ............... 115 3.4 Merchandise Imports (Current Dollars) 116 3.5 Merchandise Imports (Constant Dollars) 117 3.6 Export, Import and Terms of Trade Indexes 118 IV. EXTERNAL DEBT. ... . .............. ............... . 119 4.1 Total External Debt Outstanding and Disbursed ................................. 119 4.2 Service Payments, Disbursements and Outstanding Amounts of External Public. Debt ...................................... 120 V. PUBLIC FINANCE ... ............... 121 5.1 Non-Financial Public Sector Operatioii ........ 121 5.1(A) (As a Percent of GDP) .............. 122 5.2 Central Government Operations . ......... 123 5.2(A) (As a percent of GDP) ........................ 124 5.3 Non-Financial Public Enterprise Operations ... 125 5.3(A) Non-Financial Public Enterprise Operations ... 126 5.3(B) Non-Financial Public Enterprise Operations by Company . .. . 127  - iv - 5.4 Current Revenue of the Central ,overnment by Source .................. 128 5.4(A) (As a Percent of GDP) ........................ 129 5.5 Current Expenditures of the Central Goverrnment .................. 130 5.5(A) (As a Percent of GDP) ........ . 131 5.6 Fiscal Cost of Exemptions on Import Tariffs by Sectors .............. 132 VI. MONETARY STATISTICS .............................. I......... 133 6.1 Summary Accounts of the Consolidated Financial System ................ 133 6.2 Summary Accounts of the Consolidated Banking.. System .................... 134 6.3 Summary Accounts of the Central Reserve Bank.. 135 VII. PRODUCTION STATISTICS ....................v..#*........ ,. 136 7.1 Agricultural Production . ............ 136 7.2 Volume Index of Manufacturing Production ..... 137 VIII. PRICES AND EXCHANGE RATE ........................... ...... . . 138 8.1 Consumer Price Indexes for Metropolitan Lima.. 138 8.2 Exchange Rates ................................ 139 8.3 Real Exchange Rate Index ...................... 140 COUNTRY NAP  COUNETRY DATA - PERU Poge 1 of 2 _________________._ AREA POPULATION Totol : 1,2865215 Km2 20.7 million (1987) Orowth Rote t 2.6 X pa POPULATION CHARACTERISTICS (l987) HEALTH (1907) Crude Birth per 1,000 04.8 Pop per Phys!cion (thou) 1.5 Cruda Death Rate per 1,000 9.4 Pop per Hospital Sed (thou) 0.6 Infant Mort lity per 1,000 live births 88.2 ACCESS TO SAFE WATER (1986) ACCESS TO ELECTRICITY (1987) X of population - urban 80.6 % of dwellings - urban 54 - rural 9.8 - rurnl 7 NUTRITION (1987) EDUCATION (1937) Per capita daily caloric Intake 2120 Primary school (enrollment rate) 12ZX Per capita protein intake (groms/day) 62 Pupils reaching grade 6 655 ONP PER CAPITA IN 1987 : US8 1,212 GROSS DOMESTIC PRODUCT (GODP) IN 1987 ANNJAL RATE OF GROWTH (t constant 1979 prices) Billions Intl 3 1976-79 1980-84 1995 1936 1937 GDP at Market Prices 760 100.0 2.1 -1.0 2.4 9.6 6.9 Gross Domstic Investment 187 24.6 -4.2 -8.8 -10.2 47.8 12.5 Gross National Savings I5O 19. .. .. . Current Account Balance (87) -4.9 .. .. Exports of Ooods & NFS 72 9.5 12.4 0.2 4.4 -12.3 2.8 Imports of Goods & NS a6 11.1 -4.9 -7.2 -8.6 26.7 8.6 WTPUT, LABOR FORCES AND PROOUCrIVITY IN 1937 Valued Added (VA) Labor Force VA Por Worker (Billions Intli) x 000 3 (Millions Intl) Agriculture 76 10.0 2,460 86.2 81 Mining 21 2.7 168 2.4 122 Industry 171 22.5 720 10.8 2J8 Others 498 64.8 3,642 52.1 1it Total 760 100.0 6, 990 100.0 109 CENTRAL GOYVRNMENT OPERATIONS Millions Intia As X of GDP 1980 1985 1936 1987 1930 lO 1986 197 Current Revenues 1,019 27,96a 45,191 64,424 17.1 14.0 11.9 8.7 Curr,nt Expe diture, 9S 2V,266 47,755 91,288 16.0 18.6 12.5 12.0 Current Surplus 121 708 (2,564) (24,814) 2.0 0.4 -0.7 -8.8 Capital Expenditures 268 6,052 10,968 17,064 4.4 2.5 2.9 2.2  CtiMTRY DATA - PERU Pogo 2 of 2 FINANCIAL SYSTEM LGNEY, CREDIT AND PRICES 1935 1994 1645 1980 197 (Millions of Intlo Outstanding end Period) Money *na Quasi-Monoy 6,086 19,161 42,617 70,062 147,760 Domestic Credit to Public Sector 8,160 6,178 4,418 1J,JO; 52,780 Domestic Credit to Private Sector 7,247 10,074 88,202 67,848 117,751 (Pereontoag or Index Numbers) Money and Quasi Money as X of ODP 24.6 26.8 21.8 16.4 19.4 Conumer Price Index (1979 * 100) 969.6 2,0 8.0 6,t88.2 9,561.1 17,760.4 Annual Percentage change In: Consumr Price Index 111.1 110.2 168.4 77.9 865. Dometic Credit to Public Sector 181.7 68.7 -14.7 202.6 296.0 Dom etic Credit to Private Sector 98.9 121.9 106.6 74.2 103.6 BALANE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE) (Millons USJ) (Millions USS) 1log 198o 1986 1987 10-4 X 1985-67 X Exports of Goods A NFS 4,630 8,792 8,80S 8,628 Flhmeal 161 4.6 184 6.6 Imports of Ooods A NFS 8.9?0 2,790 8,626 4,209 Coffee 121 $.6 190 7.0 Resource Balance 660 1,002 (820) (686) Copper b2s 15.6 460 17.7 Silver 290 6.7 118 4.2 Accrued Interest Payments 1,111 1,816 1,126 1,162 Loed 269 6.1 208 7.7 Other Factor Payments (not) (202) (188) (98) (65) Zinc 279 6.4 249 9.2 Net Transfers 147 184 96 102 Petroleum 678 20.2 J84 14.2 Balance on Current Account (102) (47) (1,267) (1,701) Other 299 9.0 205 7.6 Non-Traditional 718 21.6 692 26.6 Direct Foreign Investment 92 (123) 17 186 ----- ---- _ ---- Net Capital Flows 871 (486) (978) (1,187) Total 8,824 100.0 2,706 100.0 Disburements 1,680 894 476 4B0 Amortlzotlon 1,209 1,829 1,468 1,617 EXTERNAL DEBT DECEVER 81,1987 (Millions USJ) Increose In Arrears 0 1,J80 1,969 2,857 Short-Tern A Private NO 2,669 Short-Term Capital, E&O 81 (589) (276) (569) Public Medium & Long-Term 6,612 Change In Reserves 722 192 (656) (915) Accumulated Arrears 7,069 RATE OF EXCHANGE ,1987 (AVERAGE) Total 16,860 USS 1 * I/. 21.9 (trade weighted) DEBT SERVICE RATIO FOR 1997 X - Accrued 79.6 - Paid Debt Service 12.5 DRD LENDING (AUGUST 22,1997) (Millions USS) DOD 1,166 DOM Incl. Undisbureed 1,5680  GLOSSARY OF ACRONYMS Spanish English APRA - Alianza Popular Revolucionaria American Popular Revolutionary Americana Alliance BAP - Banco Agrario del Peru Agricultural Bank of Peru BCR - Banco Central de Reserva del Peru Central Reserve Bank of Peru BOP - Balanza de Pagos Balance of Payments CD - Certificados de Deposito Certicates of Deposit CRB - Banco Central de Reserva del Peru Central Reserve Bank of Peru CENTROMIN - Empresa Minera del Centro Central Peruvian '4:ning Enterprise CERTEX - Certificado de Reintegro Export Tax Reimbursement Tributario a la Exportacion Certificate COFIDE - Corporacion Financiera de Development Finance Corporation Desarrollo CONADE - Corporacion Nacional de National Development Corporation Desarrollo CPI - Indice de Precios al Consumidor Consumer Price Index ECASA - Empresa de Comercializacion Rice Marketing Enterprise del Arroz ELECTROPERU - Empresa Electrica del Peru Peruvian Electricity Enterprise ENCI - Empresa Nacional de Inputs Marketing Enterprise Comercializacion de Insumos FENT - Fondo de Exportaciones Fund for Non-Traditional Exports No Tradicionales FRASA - Fondo Nacional para la National Fund for Agrarian Reactivacion del Agro Reactivation and Nutritional y Seguridad Alimentaria Security GDP - Producto Bruto Interno Gross Domestic Product GNP - Producto Nacional Bruto Gross National Pcoduct HIERROPERU - Empresa Minera del Hierro del Peru Peruvian Iron Mining Enterprise ICE - Instituto de Comercio Exterior Institute of Foreign Trade IDB - Banco Interamericano de Inter-American Development Bank Desarrollo INE - Instituto Nacional de Peruvian Statistical Institute Estadistica IGV - Impuesto General a las Ventas Sales Tax IMF - Fondo Monetario Internacional International Monetary Fund LIBOR London Inter-Bank Offer Rate MEF - Ministerio de Economia y Ministry of Economy and Finance Finanzas MINEROPERU - Empresa Minera del Peru Peruvian Mining Enterprise MN - Mesa de Negociacion Negotiation Table MUC - Mercado Unico de Cambios Official Exchange Market OCN - Otras Cuentas Netas Net Unclassified Assets PAIT - Programa Nacional de Apoyo al Temporary Income Support Program al Ingreso Temporal PETROPERU - Petroleos del Peru Peruvian Petroleum Company PROEM - Programa de Empleo Temporal Temporary Employment Program PSBR - Requerimientos Financieros del Public Sector Borrowing Rights Sector Publico QFD - Deficit Quasi-Fiscal Quasi-Fiscal Deficit QRs - Restricciones Cuantitativas Quantitative Restrictions TINTAYA - Empesa Estatal Minera Asociada Tintaya S.A. WPI - Indice de Precios al por Mayor Wholesale Price Index  EXECUTIVE SUMHARY lA. Recent Evolution of the Economy 1. The Economic Situation in 1985. When the current administration took office in July 1985, the economy had not yet recovered from the 1983 output plunge. Unemployment was high and excess industrial capacity wide- spread. In addition, rampant inflation had translated into progressive financial instability, with capital flight approaching 3 percent of GDP and "dollarization" of bank deposits accounting for more than half of all internal liabilities of the financial system. In late 1983, in view of the difficulties in arranging international commercial bank financing, the previous Administration reluctantly began to accumulate undeclared arrears on external debt payments, so that by mid-1985 arrears had mounted to over US$2 billion. On the positive side, however, efforts to stabilize the economy undertaken by the Belaunde Administration in 1984/85 left the incoming Government with a strong international reserves position, a competitive real exchange rate, and adequate public sector prices and tariffs. Against this economic background, the socio-political situation had quickly deteriorated, with continuous labor strikes and violent incursions in the cities by terrorist groups based in the Andean Highlands. 2. The Diagnosis by the Incoming Government. The diagnosis of the economy and, relatedly, the economic strategy of the incoming Government, were based on the belief that the demand management policies followed itn the early 1980s had been recession-inducing, as well as ineffective in dealing with inflation and the balance of payments disequilibrium. The new Government also believed that Peru had fallen into a "debt trap" in the sense that efforts made to meet external financial obligations had, on the one hand, put undue pressure on Peru's meager savings capacity and thus investment potential; and, on the other, accelerated exchange rate devaluation and consequently inflation. Furthermore, it was perceived that the magnitude of international financial support was likely to be insufficient to allow the country to grow. 3. The Implementation of the Program. Consistent with this diagnosis, the incoming Government launched an economic program based on a set of unconventional economic guidelines. The rationale was to prompt a quick economic recovery by boosting consumption demand and using existing idle industrial capacity. Consumption demand was fueled by increasing real wages, tax-rate cuts and exonerations, and freezing state enterprises' prices and tariffs. The use of idle capacity was promoted by closing the domestic market to imports competing with domestic production. The Government also established multiple exchange rates and price controls. In order to deal with inflation, the Government decreed a one-year price, cost and exchange rate freeze, and scaled-down interest rates. Agricultu.al subsidies and preferential credit to agriculture were expanded so as to improve the standard of living of the rural poor. Resources to finance this economic program were to come from a reduction in external debt payments. Thus, in his inauguration speech President Alan Garcia unilaterally announced a limit of 10 percent of exports for external debt service payments. The Government's program, officially termed "Plan de Emergencial, was given a duration of one year, but was later extended  - ii - through December 1986. For the post-reactivation era the Government envisaged a second phase, where the focus would be on investment and exports, so as to switch from demand-led output expansion into sustainable growth. This strategy, however, was never fully articulated, nor was there an established cutoff date to change strategies. 4. The Results in 1986-87. The initial response of the economy to the program was an unparalleled output expansion. GDP expanded 9.5 percent in 1986 and 6.9 percent in 1987. Along with output, employment in the formal sector of the economy grew by a cumulative 10 percent in the two- year period. With the price freeze, inflation declined from 200 percent in the twelve-month period before the freeze to 63 percent in 1986. These positive results, however, were reached at the expense of growing financial and external imbalances and also of increasing misalignments in key relative prices. These imbalances, in turn, indicated that the model followed was unsustainable and that in the absence of corrective measures the economy would lapse into a critical state. First, total public sector revenues dropped by a cumulative 17 percent of GDP in 1986-87. In turn, foreign exchange and financial losses of the Central Bank--resulting from the operation of multiple exchange rates and from interest rate subsidies, respectively--grew rapidly to a level of 2.8 percent of GDP in 1987. As a result, and notwithstanding a reduction in public expenditures (parti- cularly investment), the public sector deficit--as gauged by total Public Sector Borrowing Requirements (PSBR)--more than doubled, jumping from 5.1 percent of GDP in 1985 to 11.2 percent in 1987. Second, the real exchange rate appreciated by 44 percent between July 1985 and October 1987. This, together with booming aggregate demand, rendered GDP expansion to be highly import intensive and, since exports declined, the external current account went from rough equilibrium in 1985 into a deficit of about 5 percent of GDP in both 1986 and 1987. The ultimate effect of this was a sustained drop of gross international reserves from a peak of US$2.5 billion in March 1986 to less than US$1 billion in December 1987. Finally, the focus on boosting consumption ruled out the potential for investing the surplus gained by the moratorium, thereby trading-off short- run expansion for futuze sustainable growth. 5. The Strategy Revisited. In 1987, inflation picked up fueled by the pressure of the domestic financing of an overly expansionist budget on a narrow financial sector. Thus, inflation accelerated from 63 percent in 1986 to 115 percent in 1987. During 1987-88 several adjustments to prices and tariffs were effected but these lagged considerably behind inflation. By contrast, wage hikes continued to be granted regularly--every four months--with the idea of keeping real wages on a steady rise. In July 1987, commercial banks, finance firms, and insurance companies were nation- alized on the grounds of "democratizing credit allocation and breaking the links between industrial groups and financial institutions." Tr. October and then again in December 1987, in view of the deteriorating international reserve position, the Central Bank devalued the weighted average of all exchange rates--at that time there were as many as nine rates for commercial transactions alone--by a cumulative 78 percent. However, the spread between the lowest and the highest rates widened and exchange  - iii - losses enlarged. During 1988, the Central Bank continuied to devalue monthly the rates applicable to exports in line with domestic inflation, but the rates for imports were either left unchanged or adjusted insufficiently. Consequently, exchange losses became even greater. Several tax measures were enacted in 1988: increases in sales t-: and consumption excise rates and a better proxy system to estimate prepayments on profit taxes. However, both tax and state enterprise revenues continued to decline in real terms during the first half of 1988. As a result, the budget deficit continued to widen due to both lower revenues and higher exchange losses. Interest rates, which had been kept unchanged from March 1986 to March 1988, were adjusted three times during 1988, but remained at levels significantly below inflation. B. The Economic Prospects in the Absence of Major Policy Reforms The Risk of Hyperinflation 6. The recent acceleration of inflation, from 115 percent in 1987 to an annual rate of 535 percent during the first seven months of 1988, occurred despite a 120-day freeze decreed in March and effective until June. The key reason underlying this inflationary acceleration is the growing public sector deficit in the face of an unpostponable balance of payment adjustment and a shrinking financial sector. The projected fiscal deficit for 1988, estimated at no less than 12 percent of GDP and most of which to be financed domestically, requires levels of seignoriage that are not sustainable at any stationary rate of inflation, for the broadest definition of money now totals only about 9 percent of GDP and the narrow equals 4 percent. The point has been reached where accelerating inflation is bringing about even faster drops in real broad money; thus, over the first seven months of 1988, the stock of real broad money has dropped to 63 percent of the December 1987 level. In other words! the velocity of money has almost doubled. This indicates that further inflation will likely cause revenues from inflation to drop instead of rise. An additional problem is that a large part of real resources shifted to the Government by inflation is transferred back to the private sector in the form of financial subsidies (that also rise with inflation). Therefore, the net inflation tax is thinly based and insufficient to cover the huge targeted deficit of the nonfinancial public sector. 7. Three additional channels are at work that complicate further the dynamics of the current inflationary upsurge. First, foreign exchange losses rise as a percentage of GDP with inflation. This occurs because the current exchange rate adjustment rule consists of moving export rates along with inflation, while import rates are allowed to lag behind. Second, tax and state enterprise revenues have the proclivity to drop (as a percentage of GDP) with higher inflation. This results from the fact that the tax system is poorly indexed to inflation and there are significant lags in tax collection (the so-called Tanzi-Olivera effect) and also from the fact that prices and tariffs are adjusted discretionally and by less than inflation. Third, there is considerable backward-looking indexing of wages and minimum wage adjustments are revised regularly with the idea of ex-ante maintaining real wages. In turn, exchange rate devaluation (black market and/or official rates) closes the inflationary cycle.  - iv - 8. The current course of partial and intermittent policy measures is insufficient to take the economy away from the present unstable inflation- ary path. Instead, a strong stabilization package, comprising coherent measures in the areas of, inter alia, public finance, exchange rate and financial policy, is required to avert the risk of a full-blown hyper- inflation. If timely measures are not taken, inflation would probably escalate from a projected 650 percent in 1988 into four or perhaps five digits in 1989-90. As experienced by European countries in the 1920s, and more recently by Bolivia, hyperinflation would imply a collapse of the price system, full dollarization of the modern sector of the economy and transition to barter in the rural sector. In parallel, declining public sector revenues and seignoriage from inflation, as GDP percentages, would force down public expenditures. In turn, probable rationing and shortages of basic foodstuffs combined with declining real wages and shortening of wage settlements could rekindle social and labor unrest. In this environment, production and employment would fall consistently. Since hyperinflation is not a viable macroeconomic and monetary regime--it ends with full repudiation of the national currency by economic agents--at some point the fundamental economic problems and issues (reduction of subsidies, viable real wages, realistic prices and tariffs, tax reform) will have to be confronted. C. The Main Economic Issues and Policy Recommendations 9. A clear implication of the foregoing paragraphs is that there is no alternative to adjustment; the choice is rather between an orderly stabilization, where accounts balance ex-ante and the ccsts are distributed equitably among social groups, or else a disorderly process in which hyperinflation does the dirty work of closing the gaps ex-post and distri- buting the costs arbitrarily and unevenly. Moreover, the poor stand to lose more than the rich in the latter process. 10. On the other hand, stabilizing inflation will not per se solve Peru's long standing economic distortions and structural problems, although it will contribute to it. What is needed is macroeconomic stabilization within a medium-term program of phased economic recovery and structural reform. This should comprise, in addition to the budgetary and financial policy actions to deal with inflation, specific macroeconomic and sectoral reforms in the areas of, inter alia, the exchange rate regime, the structure of foreign trade barriers and incentives, interest rates and credit allocation policies, price controls, tax structure, agricultural pricing, and labor market restrictions. Moreover, in a world of increasing interdependency, the success and credibility of such a program will require confronting the now "dormant" external debt problem. These economic issues can be classified into three broad categories: public finance, external sector policies, and other resource allocation issues. Public Finance 11. Peru's public finance problems can be summarized as: a sustained drop of tax proceeds and state enterprise revenues; a proliferation of foreign exchange, financial and agricultural subsidies; and a considerable  v increase in the Government's wage bill. The inevitable consequence of these trends has been stagnation of public investment and enlargement of the budget deficit. In effect, public sector revenues declined from 43 percent of GDP in 1985 to 26 percent in 1987, and an additional drop to 22 percent is projected for 1988. In turn, Central Bank foreign exchange and financial losses soared to nearly 3 percent of GDP in 1987 and may well reach as much as 5 percent of GDP in 1988. Similarly, agricultural subsidies--excluding preferential credit--reached about 1 percent of GDP in 1987. On the expenditure front, the public sector wage bill grew from 7.9 percent of GDP in 1985 to 8.7 percent in 1987, while public investment decreased from the already low level of 6 percent of GDP in 1985 to 4 percent in 1987. 12. In addition to macroeconomic instability, the aforementioned public finance trends have given rise to distortions in resource allocation and impediments to future growth. Indeed, low prices and tariffs of state enterprises have not only hampered investment in normal maintenance of public enterprises but have also made the private industrial plant unduly dependent on cheap fuels and electricity, and thus promoted capital intensive activities. In turn, foreign exchange subsidies to imported inputs and capital goods have yielded similar results. Likewise, tax shelters and exonerations to agriculture, fishing and other activities have rendered financially viable endeavors and firms that could face serious financial trouble when these incentives are eventually removed in an attempt to restore needed tax revenues. On the other hand, high subsidies to basic foodstuffs, medicines and gasoline, coupled with price controls and an overvalued official exchange rate, have not only increased transitorily the purchasing power of wages to levels that are not viable in the medium run, but also resulted in significant smuggling of these items to neighboring countries at the expense of the Treasury and domestic producers. Finally, huge credit subsidies have, along with expanding financial losses of the Central Bank, eroded the financial discipline of borrowers and promoted a discretionary allocation of credit unrelated to the prospective returns on projects. 13. The Tax System. Tax proceeds declined from 14 percent of GDP in 1985 to 8.8 percent in 1987. Currently, Peru's tax burden to GDP ratio is about half of the average for a sample of countries with comparable development. The main problems of the tax system are; fragmentation of the tax base (e.g., the coexistence of profit taxes and net-worth taxes); a pervasive system of exonerations under all major taxes; lack of protection of tax revenues against inflation; and lax enforcement of tax laws and weak tax administration. The Government announced in 1987 that it intended to raise the tax burden to 16 percent of GDP by 1990. 14. Recommendations. The following recommendations could help in reaching that target, while improving the efficiency of the tax system: (a) The current tax system is too complex, particularly in view of the unpreparedness of the Tax Department to administer it. Thus, it would be advisable to carry out a full-fledged tax reform oriented towards simplifying the tax structure into a system consisting of a few  - vi - broadly-based and easily collectable taxes (e.g., a value-added tax, a corporate net worth tax, a few excises on consumption, tariffs, and personal income tax for professionals over a certain income threshold). Recent experience in Bolivia in this direction illustrates the potential pay-off of such a strategy. Preparative analytical work of tax reform could start now with a view of phasing in the new tax system in 1scal year 1990. (b) Immediate action is needed in two areas: first, reduCing collection lags and fully indexing tax liabilities to inflation; and second, scaling down current exonerations, conservatively estimated by the Ministry of Finance at no less than 4 percent of GDP. (c) Increasing tax compliance and broadening the tax base through strengthening tax administration and simplification of tax laws. Recent steps to create a Superintendencia General de Administracion Tributaria, that will encompass all tax duties now fragmented under different bodies, are positive and need to be coupled with manpower training and centralization of tax files. (d) Regarding tax rates, three recommendations are pertinent. First, the tariff code needs to be evened out (current tariffs range from 0 to 155 percent, with 42 different tariff rates) and exonerations reduced. Second, the sales tax rate could be increased from 10 to 16 percent over two years, a level comparable with international standards. Third, further hikes to selective c-nsumption excises other than gasoline do not appear convenient (most are already above 100 percent) since they could encourage black market sales. 15. Prices and Tariffs of State Enterprises. Price controls have been particularly stringent in the case of public sector prices and tariffs. As a result, prices and tariffs have lagged consistently behind inflation over the last three years, and state enterprise revenues have declined from 26 percent of GDP in 1985 to 14 percent in 1987. Most prices and tariffs are now at less than 35 percent of their relative level (with respect to the consumer price index) in July 1985. Prices of hydrocarbons, including gasoline, have become increasingly lower than border prices of similar products; for instance, the ex-refinery price of gasoline is now US$0.11 per gallon, when the border price is US$0.60. Besides, low gasoline prices have meant declining tax proceeds from excises to which these products are subject (about one quarter of all tax revenues). The price of rice to consumers--rice is marketed by Empresa de Comercializacion del Arroz, S.A. (ECASA)--has become half of the price paid to producers, raising the rice subsidy to 0.3 percent of GDP in 1987 and encouraging spurious speculative arbitrage. 16. According to recent data on consumption patterns by income strata (the 1985-86 living standard measurement survey for Peru), it can be argued  - vii - that most price subsidies (e.g., gasoline, water, electricity, telephone) are unwarranted on income distribution grounds, vince they are consumed relatively more by the relatively rich. Likewise, subsidies to energy inputs (fuels and electricity) for industry foster relatively capital- intensive industrial activities and technology choice, which dampens employment. As for the subsidies to staples (rice, potatoes, milk, public transportation), which are justifiable on distributional grounds, methods need to be devised to target these subsidies to identifiable needy population groups instead of using indiscriminate price subsidies. 17. Recommendations. Confronting the current budgetary problem inevitably involves moving into and maintaining realistic public sector prices and tariffs. In devising a policy of prices and tariffs, two separate aspects need to be considered: static efficiency and dynamic rules of adjustment. Static efficiency dictates that the structure of prices and tariffs to be optimal needs to reflect true scarcities and therefore be in line with "shadow prices" (border prices for tradable commodities and long-run marginal cost for utilities and other nontradable services). In turn, from a dynamic perspective, the issues are twofold: first, the need for a timetable to bridge the transition from the current price structure to the optimal one; and second, the need to devise automatic rules for price adjustments so as to ensure that, in the future, prices and tariffs are not eroded by inflation. In the presence of high and volatile inflation, the only pragmatic approach to achieve the latter is by forward-looking indexing of prices and tariffs to inflation (or the exchange rate, depending on the commodity) at short intervals. 18. Public Investment. Revenue constraints as well as reduced foreign partnership (the latter brought about by Peru's unilateral foreign debt stance) have led to a decline of public investment to the lowest level in the decadet 3.9 percent of GDP in 1987, or about half the average for 1980-84. Reportedly, present capital expenditures in most state enter- prises are insufficient for maintenance of existing capital stock, let alone new investments. As a result, capacity constraints have been reached in key sectors. In the petroleum sector. low investment by both Petroleos del Peru (PETROPERU) and foreign license contractors--together with unchecked growth in demand--have resulted in a drop of proven reserves from 12 years production in 1981 to 8 years in 1987. Moreover, in 1988, Peru has become again a net oil importer (in value terms) after having been an exporter since the early 1980s. Likewise, in the electrical sector, low investment and fast-growing demand indicate that the excess capacity of recent years will disappear in 1989. 19. Recommendations. Recent public investment trends will have serious repercussions on future growth. Again, the importance of raising prices and tariffs to realistic levels is evident. This is needed both to restore the financial position of the public sector (thus, closing the fiscal imbalance and restoring public investment potential) and also to correct unchecked growth in demand for publicly supplied goods and services. In a different vein, the decline in investment has also unveiled Peru's need for and reliance on external partnership and technical assistance, and also the direct relation between the latter two and Peru's posture regarding the foreign debt.  - viii - 20. The Central Bank's Quasi-Fiscal Deficit. Foreign exchange losses, arising from the operation of multiple exchange rates, and financial losses, resulting from the heavily subsidized interest rates granted by development banks (particularly Banco Agrario), have become one of the most important budgetary problems. For the current year, foreign exchange losses alone will amount to betwe-nn 3 and 5 percent of GDP; the lower bound estimate on the optimistic assumption that multiple exchange rates were unified during the remainder of the year. Unification of exchange rates alone would correct more than one-third of the current budgetary imbalance. In any case, foreign exchange and financial subsidies should ideally be transparent, subject to the budgetary cycle and under the responsibility of the Minister of Finance. External Sector Policies 21. Exchange Rate. Peru's exchange rate system has been subject to considerable changes in the rules of the game in recent years. Multiple excha.ge rates were first introduced in August 1985 with the idea of granting more favorable rates to manufacturing exports than to traditional exports. Later, the scope of multiple rates was extended to imports by granting preferential rates to "priority' imports. The total number of rates has varied considerably over the last three years. Almost monthly there have been changes in the structure, and, at one point, there were as many as nine rates for commercial transactions alone. At present (July 1988), there is a total of six rates for commercial transactions with two different rates applicable to exports and five rates to imports. In addition, there is an official financial rate for commercial bank transactions and also a black market rate. The dispersion of the rate structure is large; high priority inputs are given a rate of 33 Intis/US dollar, while some exports are granted a rate of 167 Intis/US dollar, and the black market rate runs at 300 Intis/US dollar. As for the management of exchange rates, from August 1985 to January 1986, the benchmark rates were frozen in an attempt to stabilize inflation. In January 1987, a crawling peg was initiated--at the rate of 2.2 percent per month--that lasted until July 1987. Finally, in December 1987, the rates applicable to exports started to be moved monthly according to inflation of the previous month, while import rates lagged behind. 22. Recommendations. Multiple exchange rates have led to substantial Central Bank losses. In addition, multiple rates entail relative price distortions, duplicate the incentive structure derived from tariff and export taxes, are costly to administer, elicit rent-seeking behavior from economic agents, and draw scarce public managerial talent to a non- productive task. All these factors imply efficiency losses, difficult to estimate, but likely to be not any smaller than pure budgetary losses. Therefore, the economy stands to gain by unification of rates. Regarding the management of the exchange rate, both a floating-rate regime and a properly managed crawling peg are viable regimes. However, in the current situation of impeded governmental control over fiscal and monetary variables and depleted reserves, a floating rate would probably be a superior and more credible policy approach.  - ix - 23. Quantitative Restrictions. Since March 1987, all imports are subject to a two-stage approval process: first, from the Institute of Foreign Trade, and then from the Central Bank. Moreover, about 10 percent of all input items are prohibited. Import licenses are issued in accordance with a foreign exchange budget drawn up annually and subject to quarterly revisions. Since January 1988, importers are allowed to obtain automatic licenses for imports to be financed with importers' own foreign exchange. 24. Recommendations. Replacing quantitative restrictions with an appropriately designed tariff structure would result in: (i) efficiency gains in production because quantitative restrictions grant absolute protection, typically to inefficient domestic industries, but also uncertain protection, depending on the discretion in license approvals; and (ii) treasury gains, both in reduced bureaucratic costs inherent with administering quantitative restrictions and increased import duty revenues that, under quantitative restrictions, are captured by selected importers as rents. Successful liberalization (substitution of tariffs for quantitative restrictions) requires fiscal discipline and exchange rate flexibility. A stable macroeconomic environment is a central element to stabilize price signals brought about by tariff protection. In addition. removal of quantitative restrictions puts pressure on the balance of payments that needs to be offset by adequate exchange rate and aggregate demand policies. 25. Tariffs. Peru's current tariff structure comprises 42 different tariff rates, ranging from 0 to 155 percent. The average tariff is 67 percent. The tariff pattern is typical for a country with an import substitution strategy, where final goods with the least value added receive the highest protection, at the expense of intermediate goods and the agricultural and mining sectors. This spurious incentive structure is reinforced by quantitative restrictions. From a fiscal standpoint, actual tariff revenues (as a share of total import value) have declined from 33 percent in 1985 to 29 percent in 1987, as a result of both increasing use of tariff exonerations and tightening of quantitative restrictions. In turn, multiple exchange rates give rise to additional protection, since, by allowing different imports and exports to enter at different exchange rates, some are implicitly subsidized and others taxed. The exchange rate structure leads to a cascade pattern of protection similar to the one granted by tariffs. Therefore, the combined system of protection magnifies the distortions inherent to both structures. 26. Recommendations. Current restrictions to imports in the form of licenses, tariffs and multiple exchange rates provide artificially high incentives for import substitution of consumer goods to the detriment of import substitution of capital goods and intermediate inputs and, above all, to the detriment of exporting sectors. This is the fundamental cause of the chronic failure to develop exports and also of the prevalence of an assembly-type industrial sector fully dependent on imported inputs. The economy stands to gain in efficiency and future growth by moving to a protective system based exclusively on tariff protection within a two to four-year period. Moreover, the current tariff structure is dispersed and complex and needs to be simplified into a system of, say, five basic  rates il the range from 10 to 50 percent also over a two-to four-year period. If, at the same time, all tariff exonerations are phased out, these lower tariffs would yield at least the same tariff revenue as now, but with enhanced productive efficiency. For the medium term, consideration should be given to move towards a uniform tariff rate of, say, 10 or 20 percent at the pace allowed by public revenue constraints. 27. Export Incentives. To count-- the anti-export bias of import restrictions, several incentives for nltraditional exports (mostly manufactured goods) have been established. The most important are: (i) temporary admission system that exonerates exporters from tariffs and sales taxes related to the importation of inputs for exports production; (ii) Certificado Tributario de Exportacion (CERTEX), an export subsidy at varying rates over the FOB value of exports; and (iii) Fondo de Exportaciones No-Tradicionales (FENT), concessJonal credit for pre- and post-shipment financing of exports. Few exporters avail themselves of the temporary admission system, because it does not allow exporters to circumvent import licenses and prohibitions and also because it reduces the claim of CERTEX subsidies. These three incentives reduce only marginally the anti-export bias derived from import barriers. 2-8. Recommendations. When the anti-export bias of import protection policies is high, as is the case in Peru now, it is difficult to provide adequate compensation to exporters without placing a heavy burden on the Treasury or eliciting countervailing duties from trading partners. The more advisable course of action is to remove the root of the anti-export bias through lifting quantitative restrictions, tariff reform, and maintaining an adequate real exchange rate. Moreover, this is a more cost- effective policy than trying to compensate one set of distortions with another. 29. To the extent that specific export promotion policies are pursued, more emphasis needs to be placed on temporary admission and less on CERTEX. The former is a transparent mechanism and is not subject to the risk of countervailing duties. To this end, imports under temporary admission should be exempted from import licenses and prohibitions. Also, the CERTEX subsidy could be redefined as a flat rate over domestic value-added measured at international prices. Other Resource Allocation Issues 30. Financial Policy. The main issues on financial policy are: low nominal interest rates compared to inflation; heavy financial subsidies channelled by development banks; and regional and sectoral restrictions to credit allocation. Real interest rates have been negative over the last three years. Recent adjustments to rates effected in March, June and August 1988 to levels of 120 percent for savings and 260 percent for lending have been insufficient in the face of rapidly accelerating inflation (projected at 650 percent in 1988). The effects of this policy have been: (i) an unprecedented drop of real financial savings, particularly in 1988 (by August 1988, total real internal liabilities of  - xi - the financial sector had dropped to one-half of the level in December 1987); (ii) stringent credit rationing in the formal financial sector, coupled with the upsurge of a flourishing informal credit market; and (iii) permanent pressure on the black market exchange rate reflecting capital flight. Financial sabsidies result from the fact that development banks (particularly Banco Agrario) on-lend resources, raised through Central Bank financing, at rates much lower than the average cost of fund' of the Central Bank, which, in turn, is much lower than inflation. For example, Banco Agrario lends at nominal rates as low as 0 and 10 percent. Restrictions to credit allocation take the form of regional and sectoral mandatory investment coefficients imposed on commercial banks. These restrictions impede the free flow of savings to the most profitable financing opportunities. 31. Recommendations. Formal sector financial intermediation needs to be restored by moving to a policy of positive real returns on deposits and loans. In the present circumstances of high and unstable inflation, the only viable way to ensure ex-ante positive returns is by indexing the principal of time deposits and loans to inflation and setting adequate real premia or, preferably, allowing for endogenous determination of real premia by the financial market. In turn, interest rates charged by development banks also need to be linked to inflation to prevent the size of financial subsidies from rising with higher inflation. However, since the public sector is a net debtor in the domestic economy, it is important that fiscal adjustment precedes financial liberalization so as to avoid additional pressure on the fiscal deficit before inflationary expectations are cut down. Finally, current restrictions on credit allocation by commercial banks should be phased out. They lead to a suboptimal use of financial resources and are unnecessary, since selective credit to regions and sectors is already channelled by existing regional and development banks. 32. Agricultural Pricing and Subsidies. Subsidies to agriculture are granted through different channels: exchange rate, credit, input prices, and guaranteed output prices. These subsidies are handled by two public marketing boardst ECASA (rice marketing) and ENCI (marketing of inputs and other agricultural products). Credit subsidies are channelled by Banco Agrario. ENCI and ECASA get their funding from government transfers and profits accrued on the importation of foodstuffs (in particular, wheat and maize) at low exchange rates and later sale of thosi products at marked-up prices. Total subsidies to agriculture are estimated at no less than 2.5 percent of GDP. The most important is the rice subsidy, which arises because ECASA sells the product at half the price it pays to producers. This subsidy alone totalled 0.3 percent of GDP in 1987. The incentive structure for agricultural production has translated into high rates of effettive protection for import substitution crops and negative protection rates for Peru's two export crops (coffee and cotton). 33. RecoTmendations. The incentive structure offered to agriculture is overly complex, with the overall balance being unclear. The Government could consider opting for a smaller number of instruments of promotion. Guaranteed priceb for the main staples are probably the best planning mechanism because prices are the best incentive for production. Care should be taken that selling prices by ECASA and ENCI are not lower than  - xii - guarantee prices paid by them to avoid spurious arbitrage. Disparities in yields among regions of similar climates indicate t'sat there is scope to increase productivity through training and extension services. 34. Price Controls. At present, market forces determine the prices of only about one-c,aarter of the items that consumers buy. The rest are subject to a greater or lesser degree of negotiation between authorities and producers. Price controls have provoked shortages, downgrading of quality, and black market sales, including smuggling across the border. Moreover, despite controls, inflation has accelerated virulently in 1988. 35. Recommendations. Removal of price controls would improve significantly resource allocation and promote growth. The best strategy to prevent oligopolistic producers from exercising market power is by opening the economy to foreign trade and competition. In another vein, using some form of price controls transitorily to stabilize inflationary expectations requires, for effectiveness, that such controls be implemented in conjunction with adequate fiscal and monetary policies. 36. Labor Market Issues. The main labor market issues are: (i) layoff restrictions, short probation, and high fringe benefits for formal sector employment; and (ii) nhigh" real wages resulting from the periodic wage hikes above inflation granted in 1986-87. To counter the problem of employment restrictions, legislation was enacted to create a temporary employment program (PROEII) in late 1985. This program, which had a duration of two years, was very successful and has recently been renewed for two additional years. Consideration should be given to incorporating PROEM as a permanent legal provision so as to spur labor market mobility and also to avoid precautionary layoffs in the months at the end of the program's term. In addition, consideration should be given to allowing exporting firms to hire and layoff without restrictions so that they can adjust to the swings in exterfial markets. Likewise, severance payments and labor stability laws could be made more flexible. Regarding real wages, that have started to fall in 1988 in the wake of growing inflation,the current situation calls for bringing them down in line with underlying economic forces on at least three counts. First, the economy is falling into a recession; second, lower real wages are central to achieving the now required real depreciation of the exchange rate; and third, Peru can no longer run an external trade deficit that could sustain high real wages. The important point is that the real wage drop should be achieved through ex-ante nominal wage restraint and moderation so that inflationary pressures are minimized. 37. The State Enterprise Sector. The deteriorating performance of Peru's public enterprises is a major source of macroeconomic and structural problems. There are now some 135 nonfinancial state-owned enterprises, that employ 130,000 people and produce about 10 percernt of GDP. The sector fully controls the supply of electricity, telecommunications, oil and gas production and about one-third of the sectors of mining and transport. State enterprises have been traditionally viewed as a means to provide inputs, services and consumer goods at low controlled prices and to create employment, while their productivity and profitability has been given secondary importance. As a result, they are overstaffed and operate at high costs; in addition, the goods and services they provide are in  - xiii - general of low quality. The Government intends to embark on major restructuring of the sector that would include divestiture of some enter- prises and liquidation of others. The tentative proposal for divestiture comprises 30 to 40 firms which represent about 4 percent of the book value of total assets of the sector. However, there is a larger group of enterprises, particularly in manufacturing, that could be operated by the private sector more efficiently without detriment to the Government's capacity to control the strategic areas of the economy. The Government may also consider sale to foreign investors especially in areas where they could bring technology transfer and management skills. (The creation of a debt-to-equity swap program could significantly contribute to both divestiture and foreign debt reduction.) As to the selling method, open subscription of bids and/or public placement in the stock exchange could prove to be more transparent and effective mechanisms than engaging in expensive and time consuming economic engineering studies of enterprise pricing. D. Economic Policy to Stabilize Inflation and Establish the Conditions for Medium-Run Growth 38. The Preconditions for Stabilization. At present, the policy options are limited to either allowing the economy to undergo a full-blown hyperinflation or else implementing a strong stabilization program that would push the economy away from the current unstable path. By contrast, it is uncertain whether gradual and intermittent policy adjustments would provide sufficient momentum to escape hyperinflation. In addition to a fully consistent macroeconomic program "on paper," successful stabilization requires: (i) political commitment to implement the program coherently; and (ii) understanding and broad-based support from diverse economic, social and political groups. This, in turn, implies establishing stable rules of the game and distributing the costs of adjustment as equitably as possible among the different social groups. The latter might require establishing well-targeted subsidies for the poorest population groups so as to alleviate the adverse impact of removal of indiscriminate price subsidies and of (at least transitory) lower real wages that would be brought about by stabilization. 39. Resumption of Growth and the Foreign Debt Problem. Peru has already pursued, and exhausted, the alternative of obtaining de facto external financing by suspending payments on the external debt. In turn, the possibility of immediate external support--that would be feasible on the assumption of "first best' policies--would require some sort of a debt work-out. This means that part of any fresh external resources would have to be used to address Peru's unsettled debt problem. Clearly, under these circumstances, the country's growth strategy in the near future will have to be based primarily on mobilization of domestic savings, export growth and increased productive efficiency. However, the importance of reaching a settlement orn the debt transcends the pure accounting of debt flows. The severe strains to the Peruvian economy imposed by the present unilateral approach are high and will rise over time given the intrinsic integration of Peru's economy with the rest of the world. In particular, in the absence of a settlement, it might prove formidably difficult to carry out  - xiv - an export oriented growth strategy or to obtain needed external financing and technical innovation to exploit some of Peru's natural resources (e.g., hydrocarbons). Moreover, it is uncertain whether stabilization would be viable and credible without confronting the debt problem. These costs should be weighed against the financial benefit from simply ignoring the debt problem. 40. Peru's foreign debt, now standing at US$16.4 billion, is not overwhelmingly high when compared to other Latin Anerican countries. In relative terms, it totals about 70 percent of GDP and about US$827 per capita. Thus, Peru's debt is relatively lower than that of Chile, Costa Rica, Ecuador and Mexico. Nonetheless, Peruvian debt now trades in secondary markets at only 5 cents on the dollar, far below the rates for the other countries. The huge discount on the debt opens the door to the use of market-based debt-reducing schemes. International support to use these schemes will in itself be positively affected by a decisive macroeconomic adjustment effort. 41. Overall Macroeconomic Strategy. The po.icy approach suggested here to deal with inflation consists of strong conventional fiscal-monetary and exchange rate policies together with income policy, with some similarities to the program put forward in Mexico in 1987. The thrust of incomes policy would be to break existing backward-looking indexation rules (the so-called desagio), in particular for wages, and move into a forward- looking indexing rule for wages, public prices and tariffs, and interest rates. Indexing periods would be either weekly or monthly. A budgetary financial program consistent with reducing inflation from a projected 650 plus percent in 1988 to a target of 50 percent in 1989 is presented and analyzed in Chapter IV of the report. It is calculated that to reach that target, Central Bank financing of the deficit would have to be cut fron. an estimated 10.7 percent of GDP in 1988 to about -0.1 percent in 1989. This would mean that the total public sector deficit (including all interest accrued on the external debt and arrears) would decline from 14.1 percent of GDP in 1988 to 4.9 percent in 1989. Specific measures to achieve this reduction include exchange rate unification, tax measures and realignment of prices and tariffs (as detailed in Chapter III, Section A) as well as reduction of public sector wages and subsidies. Tax and state enterprise revenues would need to be raised by about 13 percent of GDP in 1989. The targeted level of Central Bank financing would have to be enforced through tight credit ceilings in nominal terms so as to anchor th, inflation target. Forward indexing of wages and prices and tariffs would provide twfo additional anchors for inflation. By contrast, it is not recommended that the exchange rate be utilized as an anchor, for the Central Bank does not have enough reserves to honor any preannounced rule. Instead, it is suggested that the official excharge rate be allowed to floatl/ or else be managed in a non-preannounced flexible crawling peg. In order to allow for relative price realignments and also to dry up current excess liquidity, it is suggested that all prices be liberalized during an interim period before the onset of the program. Adjustments to prices and tariffs, geared to 1/ The float could be in the modality of an "auction" managed within the so-called Mesa de Negociacion currently operated by the Central Bank.  - xv - make up for accumulated lags, should also be effected during this interim period. Monetary policy would be tightened during 1989 by increasing the legal reserve requirements for commercial banks. In addition, with a one- to two-month lag after the fiscal adjustment, the principal of loans and deposits would be indexed to actual inflation and real premia for loans and deposits would either be set at adequate levels or, preferably, allowed to be determined by financial market forces. In subsequent years, the fiscal adjustment would continue, with or without the use of incomes policy, basically by increasing public revenues at an average pace of 2 percent of GDP per annum, and reducing the overall public sector deficit from 4.9 percent of GDP in 1989 to 3.9 percent in 1991, and to 3 percent in 1993. Under the recommendled macroeconomic policy program, inflation could be targeted to decline from 50 percent in 1989, to 30 percent in 1991, and to 10 percent in 1993. In addition, the remonetization of the economy (increase in the demand for money) brought about by lower inflation, together with the amortization of domestic debt by Government (derived from the scaling back of the deficit combined with its foreign financing), would allow for increasingly higher shares of overall credit to the private sector (to be achieved by gradually lowering reserve requirements on bank deposits), thereby promoting a crowding-in process of private investment. 42. Illustrative Evolution of the Economy under Stabilization and Structural Adjustment. The main features of the scenario that illustrates the path that the economy could follow in a high policy case are the following. First, GDP growth could resume in 1990 and positive per capita consumption growth in 1991, after a considerable setback in both 1988 and 1989. Second, there is considerable scope for export growth of both manufacturing and traditional exports; current export levels are far lower than they were three years before. Moreover, with the recommended policies, exports could well rise at an average real rate of 15 percent per annum for manufacturing exports, and 5 percent for traditional exports. Third, in the projections scenario the creditworthiness ratios improve slowly but steadily: the debt-to-GDP ratio falls from 74 percent in 1990 to 66 percent in 1993 and the interest-to-exports ratio from 36 percent in 1989 to 30 percent in 1993. The proportion of interest accrued that would need to be refinanced through fresh money requirements every year is high, although declining. To the extent that there could be debt reduction schemes as part of a negotiated debt work-out, the improvement in the creditworthiness indicators would be greater and also the intensity and social cost of adjustment could be somewhat attenuated. Therefore, debt- reducing schemes along with conventional rescheduling (the so-called menu approach) would be a suitable avenue to render the projections scenario viable. Without some form of debt relief, a consistent and sustainable economic work-out will be unlikely.  - xvi - RESUMEN EJECUTIVO A. Evoluci6n Reciente de la Economia 1. Situaci6n de la Economia en 1985. Cuando el actual Gobierno asumi6 el poder en julio de 1985, la economia aun no se habia recuperado del grave descenso de la produccion registrado en 1983. El desempleo era elevado y habia un considerable exceso de capacidad industrial. Ademds, el proceso de inflaci6n galopante habla provocado una situaci6n de inestabilidad financiera progresiva, en la que la fuga de capitales se acercaba al 3Z del producto bruto interno (PBI) y la "dolarizacion" de los dep6sitos bancarios afectaba a mas de la mitad de las obligaciones internas del sistema financiero. A finales de 1983, en vista de la dificultad de obtener financiamiento de los bancos comerciales internacionales, el Gobierno anterior empez6, con renuencia, a acumular atrasos no declarados en los pagos de la deuda externa. A mediados de 1985 dichos atrasos ascendian a mas de US$2.000 millones. Por otra parte, empero, los esfuerzos por estabilizar la economia llevados a cabo por la Adm.inistraci6n de Belaunde en 1984-85 dejaron al Gobierno entrante un legado positivo en tdrminos de un nivel elevado de reservas internacionales, un tipo de cambio real, competitivo y un nivel adecuado de precios y tarifas. En este contexto econ6mico, la situaci6n sociopolltica se habia deteriorado rApidamente en medio de huelgas constantes e incursiones violentas en las ciudades por grupos terroristas que operan desde la Sierra Andina. 2. El Diagn6stico del Nuevo Gobierno. El diagn6stico de la situaci6n econ6mica que hizo el nuevo Gobierno asi como su estrategia econ6mica se basaron en la creencia de que las politicas de contraccion de la demanda, en vigor desde principios de los aftos ochenta, hablan inducido a la recesi6n, ademas de haber sido ineficaces para eliminar la inflaci6n y el desequilibrio de la balanza de pagos. Tambien se crela que el Peru habia caido en una "trampa de endeudamiento", en el sentido de que los esfuerzos realizados para cumplir con las obligaciones financieras externas, por una parte, hablan imnpuesto una carga excesiva sobre la escasa capacidad de ahorro y el potercial de inversi6n del pals y, de otro lado, hablan acelerado la devaluaci6n del tipo de camnbio y, en consecuencia, ia inflaci6n. Se tenia, por otro lado, la percepci6f de que la magnitud del apoyo financiero internacional probablemente no seria suficiente para hacer posible el crecimiento del pals. 3. La Aplicacidn del Programa. De acuerdo con ese diagn6stico, el nuevo Gobierno lanz6 un programa econ6mico basado en un conjunto de directrices econ6micas no convencionales. La estrategia consistia en provocar una rApida recuperaci6n econ6mica mediante la expansi6n de la demanda para fines de consumo y la utilizaci6n de la capacidad ociosa exlstente. La demanda se estimul6 por medio de aumentos en los salarios reales, reducciones y exoneraciones impositivas, y congelaci6n de los precios y tarifas de las empresas estataLes. Se promovi6 la utilizaci6n de la capacidad ociosa mediante el cierre del mercado interno a las importaciones que competian con los productos del pals. Asimismo, el Gobierno estableci6 tipos de cambio mumltiples y controles de precios. Con objeto de hacer frente a la inflaci6n, se decret6 una congelaci6n, durante  - xvii - un afio, de los precios, costos y tipos de cambio, junto con disminuciones de las tasas de interes. A fin de mejorar el nivel de vida de los pobres del sector rural, se expandieron los subsidios y el credito preferencial para la agricultura. Los recursos para financiar este programa econ6mico habrian de provenir de una reducci6n de los pagos de la deuda externa. Asi pues, en su discurso de toma de posesi6n el Presidente Alan Garcia anunci6 un tope unilateral en los pagos por servicio de la deuda externa, equivalente al 102 del valor de las exportaciones. Este programa del Gobierno, denominado oficialmente "Plan de Emergencia", se decret6 inicialmente por un affo, pero posteriormente fue prorrogado hasta diciembre de 1986. Para el pe:iodo posterior a la reactivaci6n, el Gobierno prevela una segunda fase en la que el enfasis se centraria en la inversi6n y las exportaciones, a fin de pasar de una expansi6n de corto plazo a una plataforma de crecimiento sostenido. Sin embargo, nunca se lleg6 a formular plenamente la estrategia correspondiente a la segunda fase ni se estableci6 una fecha para el cambio de estrategias. 4. Los Resultados en 1986-87. La reacci6n inicial de la economia al programa fue una expansi6n sin precedentes de la produccl6n. El PBI aument6 en un 9,52 en 1986 y un 6,9% en 1987. Junto con la producci6n, el empleo en el sector formal de la economia creci6 a una tasa acumulada del 10% en esos dos aflos. Con la congelaci6n de precios, la inflaci6n descandi6 de un 2002 en los 12 meses anteriores a la adopci6n de esa medida al 63Z en 1986. Sin embargo, estos resultados positivos se alcanzaron a expensas de crecientes desequilibrios financieros y externos, asi como de crecientes desfases de los precios relativos clave. Estos desequilibrios, a su vez, ponian de manifiesto que la estrategia no era sostenible y que de no tomarse medidas correctivas la economia desembocarla en una crisis. En primer termino, los ingresos totales del sector pCtblico descendieron por un monto total del 17% del PBI entre 1985 y 1987. A su vez, las perdidas cambiarias y financieras --resultantes respectivamente de la aplicaci6n de tipos de cambio mCltiples y subsidios a las tasas de interes-- aumentaron rapidamente al nivel del 2,8% del PBI en 1987. Ccmo consecuencia de ello, y a pesar de una reducci6n de los gastos pdblicos (particularmente en inversiones), el deficit del sector p6blico --medido por el total de "requerimientos financieros del sector p(tblico"-- aument6 a mas del doble, pasando del 5,1Z del PBI en 1985 al 11,2Z en 1987. En segundo lugar, el tipo de cambio real se sobrevalu6 en un 44% entre julio de 1985 y octubre de 1987. Esto, sunado al gran auge de la demanda agregada, hizo que la expansi6n del PBI fuera muy intensiva en importaciones y, puesto que las exportaciones descendieron, la cuenta corriente de la balanza de pagos pas6 de un equilibrio aproximado en 1985 a un deficit de alrededor del 5% del PBI tanto en 1986 como en 1987. La consecuencia de ello fue un descenso sostenido de las reservas internacionales brutas de un maximo de US$2.500 millones en marzo de 1986 a menos de US$1.000 millones en diciembre de 1987. En tercer lugar, el enfasis en aumentar el consumo limit6 la posibilidad de invertir el excedente derivado de la moratoria de pagos al exterior, y asi la expansi6n a corto plazo redujo el potencial para crecer en el futuro. 5. El Replanteamiento de la Estrategia. En 1987 la inflaci6n se intensific6 a causa de la presi6n del financiamiento interno de un presupuesto excesivamente expansionista en un sector financiero muy estrecho. La tasa de inflaci6n aument6 de 63% en 1986 al 115% en 1987. En 1987-88 se efectuaron diversons ajustes a los precios y tarifas, pero, a  - xviii - pesar de ello, Astos quedaron considerablemente rezagados respecto de la inflacion. En contraste, continuaron concedi6ndose aumentos regulares de salarios3-cada cuatro meses--con objeto de mantener el crecimiento de los salarios reales. En julio de 1987, se r xcionalizaron los bancos comerciales, las empresas financieras y las compaflias de seguros con el prop6sito de "democratizar la asignaci6n del credito y romper los nexos entre los grupos industriales y las instituciones financieras". En octubre, y luego en diciembre de 1987, en vista del deterioro en la situaci6n de reservas internacionales, el Banco Central devalu6 el promedio ponderado de todos los tipos de cambio (por entonces coexistIan nueve tipos de cambio solo para las transacciones comerciales, en un porcentaje acumulado del 78Z. Sin embargo, se ampli6 la d4ipersi6n entre el tipo de cambio mds bajo y el mds alto, y aumentaron las perdidas cambiarias. En enero de 1988, el Banco Central empez6 a devaluar mensualmente los tipos de cambio aplicables a las exportaciones con arreglo a la inflaci6n interna, pero los aplicables a las importaciones se mantuvieron invariables o no se reajustaron lo suficiente, y en consecuencia las p4rdidas cambiarias se hicieron a6n mayores. En 1988 se promulgaron varias medidas tributarias: aumento de los impuestos a las ventas y al consumo selectivo, y un mejor sistema para estimar los pagos anticipados del impuesto sobre las utilidades. Sin embargo, tanto los ingresos tributarios como los de las empresas estatales continuaron disminuyendo en terminos reales durante el primer semestre de 1988. En consecuencia, el deficit presupuestal sigui6 en aumento tanto por el menor nivel de ingresos pfibicos como por las mayores perdidas cambiarias. Las tasas de interes, que se habian mantenido invariables entre marzo de 1986 y marzo de 1988, se reajustaron tres veces en 1988, aunque a niveles considerablemente inferiores a la inflaci6n. B. Las Perspectivas Econ6micas en Ausencia de Reformas Iuportantes de las Politicas El Riesgo de Hiperinflaci6n 6. La reciente aceleraci6n de la inflaci6n, de un 115? en 1987 a una tasa anual de 5352 en los primeros siete meses de 1988, ha ocurrido a pesar de una congelaci6n por 120 dias decretada en marzo y vigente hasta el mes de junio. La raz6n fundamental de esta aceleraci6n de la inflaci6n es el creciente deficit del sector pOblico en el contexto de un ajuste impostergable de 1 balanza de pagos y a un sector financiero en rapida contracci6n. La proyoccion del deficit fiscal para 1988, estimado en por lo menos 122 del PBI (la mayor parte del cual ha de financiarse internamente), exige niveles de impuesto inflacionario que no son sostenibles a ninguna tasa estacionaria de inflacion, puesto que el agregado monetario mas amplio es equivalente a 9Z del PBI y el agregado mAs estrecho 4?. Se ha llegado al punto en que el ritmo cada vez mas rapido de crecimiento de los precios esta produciendo una caida progresiva de la cantidad real de dinero. Asi, durante los siete primeros meses del 1988, la cantidad real de dinero (en su definici6n mAs amplia) descendi6 al 63Z del nivel que tenia en diciembre de 1987; en otras palabras, la velocidad de circulaci6n del dinero casi se ha duplicado. Ello significa que en lo sucesivo mayores tasas de inflaci6n probablemente tengan el efecto de reducir la recaudaci6n real por concepto de impuesto inflacionario. Un problema adicional es el hecho de que una gran parte de los recursos reales que percibe el Gobierno por raz6n de la inflaci6n se transfiere de nuevo al sector privado en forma de subsidios financieros (que tambien aumentan con  la inflacion). Por consiguente, la base del impuesto inflacionario neto es estrecha e insuficiente para cubrir el enorme deficit del sector p%iblico no financiero. 7. Hay otros tres mecanismos que complican a6n mas la dinamica del actual repunte de la inflaci6n. En primer lugar, con la inflaci6n las perdidas cambiarias se elevan como porcentaje del PBI. Esto ocurre porque la regla actual de ajuste de los tipos de cambio consiste en ajustar los tipos a las exportaciones de acuerdo con la inflaci6n, mientras que se dejan rezagados los aplicables a las importaciones. En segundo lugar, los ingresos tributarios y los ingresos de las empresas estatales tienden a descender (como porcentaje del PBI) cuando aumenta la inflacifn. Esto es resultado del bajo grado de indexaci6n del sistema tributario y d3 la existencia de retrasos considerables en la recaudaci6n de impuestos (el llamado " efecto Tanzi-Olivera"), y tambien del hecho de que los precios y las tarifas se ajustan en forma discrecional y a tasas inferiores a la inflacion. En tercer lugar, hay una amplia indexaci6n "hacia atrAs" de los salarios sujetos a convenios colectivos, y los salarios minimos se revisan regularmente con la finalidad de mantener ex ante los salarios reales. A su vez, la devaluaci6n del tipo de cambio (del mercado negro, del oficial, o de ambos) completa el ciclo inflacionario. 8. La politica de ajustes graduales e intermitentes seguida en la primera mitad de 1988 no es suficiente par& sacar a la economia de su actual trayectoria inflacionaria inestable. En su lugar, se requiere un en6rgico plan de estabilizaci6n, que comprenda, inter alia: medidas coherentes en materia de finanzas p6blicas, tipo de cambio y politica financiera con el fin de prevenir el riesgo de caer en una hiperinflaci6n plena. Si no se adoptan medidas oportunas, con el tiempo la inflacion ascendera probablemente de un nivel proyectado de 6502 para 1988 a niveles de cuatro o quizas cinco digitos en 1989-90. Las experiencias de los paises europeos en los aflos veinte y mAs recientemente la de Bolivia, muestran que la hiperinflaci6n produciria el colapso total del sistema de precios, la plena dolarizaci6n del sector moderno de la economia y una transici6n al trueque en el sector rural. Paralelamente, la declinaci6n de los ingreses del sector pdblico y de la recaudaci6n inflacionaria, como porcentajes del PBI, forzarian una reducci6n ex-post de los gastos plblicos. A su vez, el racionamiento y escasez probables de alimentos bAsicos, combinados con descensos de los salarios reales y acortamiento de los convenios salariales, contribuirian al descontento social y laboral. En estas circunstancias, tanto la producci6n como el empleo descenderian en forma sostenida. Dado que la hiperinflaci6n no es un regimen macroecon6m'Jco y monetario viable--pues a la larga lleva al pleno repudio de la moneda nacional por los agentes econ6micos--en algin momento seria necesario encarar los problemas econ6micos fundamentales (reducci6n de los subsidioa, salarios reales viables, precios y tarifas realistas, reforma tributaria). C. Principales Problemas Econ6nicos y Recomendaciones en Materia de Politica Econ6_ica 9. Los parrafos precedentes indican claramente que no hay alternativa al ajuste, que la 6nica elecci6n posible es entre una estabilizaci6n ordenada en que las cuentas se equilibren ex ante y los costos se distribuyan equitativamente entre los grupos sociales, o bien un  - xx - proceso desordenado en que la hiperinflaci6n realice la sucia tarea de cerrar las brechas ex post y de distribuir los costos arbitraria y desigualmente. AdemNs, en este 61timo proceso los pobres saldrian mas perjudicados que los ricos. 10. Por otra parte, el solo hecho de estabilizar la inflacion no resolverA las distorsiones econ6micas seculares del PerC ni tampoco sus problemas estructurales, aunque si contribuird a ello. Lo que se precisa es, por tanto, la estabilizaci6n macroecon6mica el contexto de un programa a mediatno plazo de recuperaci6n econ6mica y reforma estructural. Tal programa deberia comprender--ademas de las medidas presupuestales y financieras para hacer frenta a la inflaci6n--reformas microecon6micas y sectoriales especificas en las areas de regimen cambiario, estructura de barreras e incentivos al comercio exterior, politicas de tasas de interes y de asignaci6n del cr6dito, controles de precios, sistema fiscal, precios agropecuarios y restricciones del mercado laboral, entre otras areas. Asimismo, en un mundo cada vez mas interrelacionado, el exito y la credibilidad de tal programa requieren que se enfrente el problema de la deuda externa, actualmente "latente". Todos estos temas econ6micos pueden clasificarse en tres grandes categorias: finanzas pdblicas, politicas relativas al sector externo, y otros temas relacionados con la asigna,16n de recursos. Finanzas P6blicas 11. Los problemas del Perfi en materia de finanzas publicas pueden resumierse en los siguientes t6rminos: un descenso sostenido de la recaudaci6n tributaria y los ingresos de las empresas estatales; una proliferacifn de subsidios cambiarios, financieros y agricolas, y un considerable incremento de los costos salariales del Gobierno. La consecuencia inevitable de estas tendencias ha sido el estancamiento de la inversi6n p(iblica y el crecimiento del deficit presupuestal. En efecto, los ingresos del sector pdblico descendieron del 432 del PBI en 1985 al 26Z en 1987, proyectandose que en 1988 bajardn al 22Z. A su vez, las perdidas c.ambiarias y financieras del Banco Central se elevaron a casi el 3% del PBI en 1987 y pueden muy bien alcanzar hasta un 52 el PBI en 1988. En forma analoga, los subsidios agricolas --excluidos los creditos preferenciales-- llegaron a alrededor del 1 del PBI en 1987. Por el lado de los gastos, los costos salariales del sector paiblico subieron del 7,92 del PBI en 1985 al 8,7% en 1987, mientras que la inversi6n p%Tblica disminuy6 de un nivel ya bajo del 6% del PBI en 1985 al 4% en 1987. 12. Estas tendencias de las finanzas pfiblicas han dado lugar no solo a inestabilidad macraecon6mica sino tambien a distorsiones en la asignaci6n de recursos y a impedimentos al crecimiento en el futuro. En efecto, los bajos niveles de los precios y tarifas de las empresas estatales, ademAs de impedir la inversi6n minima en mantenimiento de estas, han provocado que la planta industrial privada dependa en grado indebido de combustibles y electricidad baratos, promoviendo asi actividades relativamente intensivas en capital y, por ende, poco intensivas en trabajo. Los subsidios cambiarios a los insumos y bienes de capital importados han conducido a resultados similares. A su vez, las exoneraciones de impuestos a la agricultura, pesca y otras actividades han promovido que resulten financieramente viables actividades y empresas que podrian experimentar graves dificultades financieras cuardo esos incentivos se eliminen en un  - xxi - intento por alcanzar los ingresos tributarios necesarios. Por otra parte, los elevados subsidios a los alimentos bAsicos, los medicamentos y la gasolina, sumados a los controles de precios y a un tipo de cambio sobrevaluado, no s6lo han acrecentado transitoriamente el poder adquisitivo de los salarios (a niveles que no son viables a mediano plazo), sino que ademas han resultado er un considerable contrabando de esos articulos hacia los paises vecinos, a expensas del Tesoro y los productores internos. Finalmente, los subsidios al credito, ademtq de provocar crecientes perdidas financieras al Banco Central, han menoscabado la disciplina financiera de los prestatarios y favorecido una asignaci6n discrecional del credito no relacionada con los rendimientos de los proyectos. 13. El Sistema Tributario. La recaudacifn tributaria ha descendido de un 14% del PBI en 1985 al 8,82 en 1987. En la actualidad, la relaci6n entre la carga tributaria del Peru y el PBI es aproximadamente la mitad del promedio correspondiente a una muestra de paises de desarrollo comparable. Los principales problemas del sistema tributario son: fragmentacion de la base tributaria (por ejemplo, coexistencia de impuestos a las utilidades e impuestos al patrimonio neto de las empresas); sistema generalizado de exoneraciones en todos los principales impuestos; falta de protecci6n de los ingresos tributarios frente a la inflaci6n, y bajo nivel de cumplimiento de las leyes fiscales junto con una debil administraci6n tributaria. En 1987 el Gobierno anunci6 el objetivo de elevar la carga tributaria al 162 del PBI para el afio 1990. 14. Recomendaciones. Las siguientes recomendaciones podrian ayudar a lograr dicha meta y, al mismo tiempo, a mejorar la eficiencia del sistema tributario: (a) El sistema tributario actual es demasiado complejo, en especial dado el nivel de preparaci6n del Tesoro para administrarlo. Por consiguiente, parece indicado llevar a cabo una ieforma tributaria exhaustiva consistente en simplificar la estructura tributaria en unos pocos impuestos de amplia base y fAcilmente recaudables (por ejemplo, impuesto al valor agregado, impuesto al patrimonio neto de las empresas, unos cuantos impuestos al consumo selectivo, aranceles y un impuesto sobre la renta personal de profesionales aplicable por encima de un determinado nivel de ingresos). La reciente experienca boliviana en esta direcci6n ilustra los beneficios de tal estrategia. El trabajo analitico preparativo podria empezar ahora, con miras a poner en vigor el nuevo sistema fiscal en el atio fiscal de 1990. (b) Se precisa acci6n inmediata en dos Areas: en primer lugar, reducci6n de los rezagos en la recaudaci6n e indexaci6n de las obligaciones tributarias a la inflaci6n y, en segundo lugar, disminuci6n de las actuales exoneraciones que, segGn estimaciones conservadoras del Ministerio de Economia, representan por lo menos el 4% del PBI. (c) Cumplimento mas estricto de las le-es fiscales mediante el fortalecimiento de la administracion tributaria y la simplificacion de las leyes. Las medidas recientes  - xxii - tendientes a la creaci6n de una Superintendencia General de Administraci6n Tributaria, en la que se concentrarAn todas las funciones tributarias actualmente fragmentadas en diversos organismos, son positivas y podrian complementarse con actividades de capacitaci6n del personal y centralizaci6n de los archivos tributarios. (d) En lo que se refiere a las tasas impositivas, son pertinentes tres recomendaciones. Primero, el c6digo arancelario podria ser objeto de una reducci6n a la dispersi6n de los aranceles (los actuales van desde 0 hasta el 1552, con un total de 42 posiciones arancelarias) y tambien una reducci6n de las exoneraciones. Segundo, la tasa del impuesto a las ventas podria aumentarse del 102 al 162 en el cutso de dos afios, nivel perfectamente comparable con los promedios internacionales. Tercero, no parece conveniente aumentar mas las tasas de los impuesto selectivos al consumo con excepci6n de los aplicables a la gasolina (la mayoria son ya superiores al 100Z), pues con ello podrian estimularse las ventas en mercado negro. 15. Precios y Tarifas de las Empresas Estatales. Los controles de precios han sido particularmente estrictos en el caso de los precios y tarifas del sector publico. Como consecuencia de ello, Ostos han estado constantemente rezagedos respecto de la inflaci6n en los tres (iltimos anos, y los ingresos dj las empresas estatales han descendido de un 25? del PBI en 1985 al 142 en 1987. La mayoria de los precios y tarifas se encuentran actualmente por debajo del 35? de su nivel relativo (respecto del indice de precios al consumidor) de julio de 1985. Los precios de los hidrocarburos, incluida la gasolina, son cada vez mas bajos que los precios en frontera de productos anAlogos; por ejemplo, el precio "en refineria" de la gasolina es actualmente equivalente a US$0,11 el gal6n, cuando su precio en frontera es de US$0.60. Ademas, los bajos precios de la gasolina han provocado menores ingresos por concepto del impuesto selectivo que grava a estos productos (alrededor de un cuarto de todos los ingresos tribujarios). A su vez, el precio del arroz al consumidor cobiido por ECASA ha llegado a ser igual a la mitad del precio que esa entidad paga a los productores, elevando el subsidio a este producto al 0,31 del PBI en 1987 y estimulando arbitraje especulativo. 16. Seg6n datos recientes sobre la estructura del consumo por estratos de ingresos (la encuesta de medici6n de niveles de vida del Perui elaborada en 1985-86), es posibie argair que la mayoria de los subsidios de precios (tales como los de la gasolina, el agua, la electricidad y el telefono) no se justifican por razones de distribuci6n del ingreso, puesto que estos productos son consumidos en proporci6n mayor por las personas relativamente mAs ricas. De modo similar, los subsidios a los precios de los insumos energeticos (combustibles y electricidad) otorgados a la industria fomentan las actividades industriales y el uso de tecnologias relativamente intesivas en capital, lo cual desfavorece el empleo. En cuanto a los subsidios a los articulos de primera necesidad (arroz, papa, leche, transporte pwiblico), que sin duda tienen justificaci6n distributiva, seria conveniente elaborar metodos para orientar estos subsidos especificamente a los grupos necesitados de la poblaci6n en lugar de emplear subsidios indiscriminados via precio.  - xxiii - 17. Recomendaciones. Para hacer frente al problema presupuestal se requiere adoptar y mantener un sistema de precios y tarifas realista. Al formular una politica de precios y tarifas, es preciso considerar dos aspectos distintos, a saber: eficiencia estttica y normas de ajuste dinamico. La eficiencia estatica prescribe que para que la estructura de precios y tarifas sea 6ptima debe de reflejar las escacez relativas de los distintos bienes y servicios; es decir, estar en consonancia con los "precios sombraf (precios en frontera para los bienes comerciables y costo marginal de largo plazo para servicios pfiblicos y otros servicios no comerciables con el exterior). Desde una perspectiva dinamica, hay que tener en cuenta dos cuestioness en primer lugar, la necesidad de un calendario para la transici6n de la estructura actual de precios hacia la estructura 6ptima; en segundo lugar, la necesidad do elaborar reglas automtticas para los ajustes de precios, de tal formsa que se asegure que, en el futuro, los precios y las tarifas no sufran erosi6n a causa de la inflaci6n. En una situaci6n de inflaci6n elevada e inestable, el inico enfoque pragmatico para lograr esto 6ltimo es la indexaci6n "hacia adelante" de los precios y tarifas respecto a inflaci6n (o al tipo de cambio, segfin el producto de que se trate) a intervalos breves. 18. La Inversi6n P6blica. Las restricciones en materia de ingresos p(blicos, asi como la reducci6n del cofinanciamiento extranjero (esto (ltimo ocasionado por la postura unilateral del Perd respecto de la deuda externa), han conducido a un descenso de la inversi6n piblica al nivel mts bajo de la decada: 3,92 del PBI en 1987, o alredeor de la mitad de la registrada en el periodo de 1980-84. En la mayoria de las empresas estatales los gastos de capital actuales son insuficientes para cubrir el mantenimiento de la planta instalada, y para llevar a cabo un programa minimo de inversiones. Como consecuencia de ello, se ha llegado a limitacionee de capacidad en algunos sectores clave. En el sector petrolero, el bajo nivel de inversi6n tanto de PETROPERU como de concesionarios extranjeros--junto con el crecimiento desenfrenado de la demanda--han tenido como consecuencia una caida de las reservas probadas, de 12 antos de producci6n en 1981 a solo 8 aftos en 1987. En 1988, ademas, el Perd ha pasado nuevamente a ser importador neto de petr6leo (en terminos de valor) tras haber sido pais exportador desde los primeros affos de la decada. Del mismo modo, en el sector de energia eldctrica las pocas inversiones y el rapido crecimiento de la demanda indican que el excedente de capacidad de los afnos recientes podria desaparecer en 1989. 19. Recomendaciones. Las tendencias recientes de la inversi6n pdblica pueden tener graves repercusiones en el crecimiento futuro. De nuevo es evidente la importancia de elevar los precios y tarifas a niveles realistas. Esta elevaci6n es necesaria tanto para restablecer la posici6n financiera del sector pfiblico (que haga posible cerrar la brecha presupuestal y tambien recuperar el potencial de inversi6n) como para corregir el crecimiento desenfrenado de la demanda de bienes y servicios producidos por empresas estatales. Por otra parte, el descenso de la inversi6n tambien ha revelado la importancia de las relaciones con el exterior en materia empresarial y tecnica, asl como la ligaz6n directa entre estas relaciones y la postura en relaci6n a la deuda externa.  - xxiv - 20. El Deficit Cuasifiscal del Banco Central. La perdidas cambiarias, producidas por la aplicaci6n de tipos de cambio mOltiples, y las perdidas financieras,, causadas por las tasas de inter4s muy subvencionadas que otorgan los bancos de desarrollo (especialmente el Banco Agrario), han llegado a ser uno de los problemas presupuestales mdas importantes. En 1988 s6lo las p6rdidas cambiarias ascenderdn a entre 3Z y 5Z del PBI; el extremo inferior de esta estimaci6n se basa en el supuesto optimista de que los tipos de cambio multiples se unifiquen durante lo que queda del aflo. Con el solo hecho de unificar los tipos de cambio se corregiria mas de un tercio del desequilibrio presupuestal actual. En todo caso, si persisten los subsidios cambiarios y financieros, es importante que estos sean transparentes, esten sujetos al ciclo presupuestal y bajo la responsabilidad del Ministro de Economia. Politicas Relativas al Sector Externo 21. Tipo de Cambio. Las "reglas del juegol del sistema cambiario del Per(i han experimentado cambios considerables en afios recientes. En agosto de 1985, se introduieron por primera vez tipos de cambio muiltiples, con la idea de ofrecer tipos mas favorables para las exportaciones de bienes manufacturados que para las exportaciones tradicionales. Mas tarde, se ampli6 la aplicaci6n de tipos de cambio m(xltiples a las importaciones, concediendose tipos preferenciales para importaciones "prioritarias". El n(mero total de tipos de cambio ha variado considerablemente en estos tres *ultimos aftos. La estructura se ha modificado casi cada mes, y en un momento dado hubo hasta nueve tipos solo para las transacciones comerciales. En la actualidad (julio, 1988) hay un total de seis tipos de cambio para las transacciones comerciales, dos tipos son aplicables a las exportaciones y cinco a las importaciones. Existen ,ademas, un tipo de cambio financiero oficial para las transacciones de los bancos comerciales, y un tipo de cambio de mercado negro. La dispersi6n en la estructura de tipos de cambio es amplia; a los insumos de alta prioridad se les aplica un tipo de 33 intis por US d6lar, mientras que a ciertas exportaciones se les aplica un tipo de 167 intis por d6lar; en el mercado negro el tipo llega hasta 300 intis por d6lar. Con respecto al manejo del nivei de los tipos de cambio, los tipos de referencia estuvieron congelados desde agosto de 1985 hasta enero de 1986 en un intento por estabilizar la inflacion. En enero de 1987 se empez6 a utilizar un deslizamiento cambiario --a raz6n de 2,2Z al mes-- el cual dur6 hasta julio de 1987. Por Oltimo, en diciembre de 1987, se empezaron a modificar cada mes los tipos de cambio aplicables a las exportaciones segdn la inflaci6n registrada en el mes anterior, mientras oue los tipos para las importaciones quedaron rezagados. 22. Recomendaciones. Los tipos de cambio multiples han provocado considerables perdidas al Banco Central. Adem