Peru Strengthens Fiscal Management to Boost Economic Recovery

The Inter-American Development Bank (IDB) approved a $600 million loan to strengthen fiscal management sustainability in support of Peru's economic recovery program.

The Program to Support Fiscal and Economic Recovery in Peru II, approved by the IDB's Board of Executive Directors, assists the Peruvian government in promoting measures to safeguard the fiscal framework. It also focuses on increasing tax collection at both the national and municipal levels, boosting public investment while maintaining spending levels that allow for economic and fiscal recovery, and promoting the effectiveness of public spending.

This is the second and last operation of a programmatic series under the Policy Based Lending (PBL) modality.

"In the first program, approved in 2021, the IDB supported fiscal measures that the Government of Peru undertook to address the pandemic," said Axel Radics, lead specialist at the IDB's Fiscal Management Division. "This second operation will deepen the implementation of structural measures to consolidate the strengthening of fiscal management sustainability and thus contribute to the country's economic recovery."

The program will benefit Peru's population at large, which will gain access to more public works and services because the government will have additional tax resources and will be able to make public spending more efficient and equitable. Companies will also benefit thanks to tax transparency, which promotes private investment, and women will have more opportunities to contract with the State.

The program will be implemented through four components. The first will seek to maintain an appropriate macroeconomic context. The second will focus on safeguarding the fiscal framework, supporting the improvement of macro-fiscal government projections to include analysis of macroeconomic and fiscal risks of climate change-related natural disasters, with emphasis on the El Niño phenomenon. Institutional strengthening of Peru's Fiscal Council is also supported.

The third component aims to strengthen tax policy and management, supporting government efforts to better identify property taxpayers and increasing information exchanges with other countries to boost tax revenues from audit findings and voluntary compliance.

Lastly, the program seeks to improve public expenditure management, promoting greater efficiency in the execution of public investment and public procurement, a new cost accounting model to use public resources more efficiently, and better budget allocation through measures for a higher quality of spending.

The $600 million loan has a 20-year amortization period, a grace period of 5.5 years, and an interest rate based on SOFR (Secured Overnight Financing Rate).