Statement by Juan L. Cariaga at the Board meeting of July 22, 1997

International Bank for Reconstruction and Development International Development Association 87259 International Finance Corportation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS97-284 July 18, 1997 Board Meeting of July 22, 1997 Statement by Juan L. Cariaga PerU. - Country Assistance Strategy On behalf of my Peruvian authorities, I thank management for preparing a well thought through and highly professional assistance strategy for Peru. Let me also state that my Peruvian authorities agree with the proposed overall Bank strategy. As we represent the country whose strategy is under discussion, we just want to present to the Board my authorities views on some issues included in the proposed strategy. First, we will document Peru's excellent economic performance under the present administration. Second, we want to comment on the speed of the structural reform process. Third, we want to explain the gradual improvement in Peru's portfolio. Fourth, we want to highlight the crucial role Non lending services has to play in this strategy. Fifth, we want to comment on the specific role IFC should play in private sector development. Finally, we want to comment on how the government sees the risks in implementing the proposed strategy. Economic Performance. Economic performance has been excellent. Four weeks ago the IMF Board approved a review of a second EFF for Peru. Peru has complied with all IMF performance criteria during the last five years with margins. On an annual basis, GDP growth is running above 7 percent led by exports and investment. Inflation is below 10 percent. The external current account balance is narrowing to 4.5 percent ofGDP and international reserves have increased to 15 months of imports. These results are backed by a very strong fiscal stance. Public expenditures are being kept under control and tax revenues have increased despite the recent reduction in import tax rates. The strong fiscal position and the conclusion of debt reduction and rescheduling agreements with official and commercial creditors have permitted a significant reduction in interest rates, despite the maintenance of a tight monetary policy. Overall public debt is at manageable levels. Domestic debt is practically nil and the contingent liabilities derived from public pension system are well spaced into the future. 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. -- -~---------,------  2 Speed of structural reforms. Structural reforms in Peru have been broad, fast and deep. This is the main reason why Peru did not suffer any major impact of the Mexican crisis and has rapidly recuperated growth after the soft landing that followed that crisis. The apparent slow down in privatization before the 1995 presidential election was mainly a natural cautionary reaction of the potential privatization bidders . Privatization has resumed strongly thereafter and a new concession scheme has been implemented to concession what cannot be directly privatized. Moreover, structural reform in . other fronts has proceeded smoothly. In February 1997 the Board approved a Pension Adjustment Loan, featuring an unprecedented transfer of one billion dollars from privatization proceeds to an intangible fund to back contingent liabilities from the public pension system. The Government of Peru (GOP) is planning to further increase that fund in 1.5 billion dollars in the near future. Last month the GOP enacted the by-laws of the rural land law, completing the legal framework to firm up property rights on rural land. Since early 1996 the GOP has launched. a radical reform of the judicial system. The CAS states that institutional reforms are taking more time to implement than policy reforms. This is just natural in any country because·ofthe very nature of institutional reforms. It is more · so in Peru that in 1990 was practically destroyed by terrorism, hyperinflation, economic depression and isolated from the international community. However, despite these adverse initial conditions, Peru has made progress in institution building and reform. It focused its initial reforms in the most needed institutions for addressing the most pressing problems, such as the Ministry of Economy and Finance, the Central Bank, the Tax Superintendency, the Customs Administration, among others. Decentralization is a complex reform. The process of capacity building is gradual; particularly in the sub-national governments where the initial endowment of human capital is low. The GOP is of the opinion that decentralization should be a gradual process, preceded by pilot projects, to be effective in the medium term. Improving Portfolio Management Peru has a young portfolio with the Bank and with the other IFis, and has limited experience in administering project loans. Peru interrupted its relations with the Bank in the late 80s when the state practically collapsed due to the application of populist policies. In 1990 Peru resumed relations with the Bank. In the 1990-1993 period Peru was under the Rights Accumulation Program which focused exclusively in policy loans. The preparation of project loans only began in 1993. Building capabilities to administer project loans take time, and more so for loans with significant institutional reform components as those in health and education. The GOP is aware that is has to improve in this front and has manifested its willingness to address these issues. The GOP welcomes the support of the region and EDI in its efforts to build an efficient system to administer the public investment program. As the CAS reports, important progress has been already made in improving the portfolio. __llfl________ ----r~-- --------  3 The Crucial Role of Nonlending Services in the proposed CAS. The GOP is deeply interested in the Bank's support in its fight against poverty and in institutional development. These are areas in which the Bank has strong comparative advantage. The GOP is interested in Bank support not only with ESW, but also with the actual implementation of programs and projects to fight poverty and to reform institutions. In this respect the GOP welcomes new bank products, such as small learning and innovation loans, to address institutional building issues. Poverty reduction is first priority in the GOP development agenda. Therefore the GOP requests the Poverty Sector Board to select Peru as a country· for special support in the design and implementation of poverty strategies. The proposed mix of lending and nonlending services presents a challenge for the Bank to develop strong partnerships with other key donors for enhancing the development impact of the proposed strategy, despite its relatively reduced financial leverage. Private Sector Development. The bulk of structural reforms to liberalize the economy and in particular the privatization program make it very clear that in Peru the private sector is the main engine of growth. Therefore, we agree with the enhanced role for IFC and MIGA in the proposed strategy. But we are also looking for a more focused role for IFC. We believe that IFC should focus on develuping business with the domestic private sector and in helping this sector, in particular the manufacturing sector, to reorient its activities towards the export market. In this way IFC could maximize its development impact. Risks are manageable. Even though in a low finance scenario the discussion of risks is less relevant, let me address the risks of reversal of reforms and of deterioration of macro policies. On the reversal of reforms, the GOP has a proven track record of seven years of consistent progress in the reform agenda . Moreover, most of the reforms are already internalized in the population at large as appropriate for the economic and social progress of the country. On the weakening of the current account balance, the GOP has already demonstrated a rapid capacity to correct undesired developments on the external accounts in 1995. Moreover, the external position of the economy, measured by the coverage of the external liabilities by the net international reserves from the Central Bank at about 100 percent , is very strong. Therefore the probability of a deterioration of the macroeconomic situation is very low. Let me conclude by stating the compromise of my Peruvian authorities to give its full support to the implementation of the proposed assistance strategy for Peru. --~---·-- -------