Documet of

The World Bank

FOIt OFFICLAL USE ONLY

RportN0 12997 PE

EORANDUN OF THE PRESIDENT

OF THE

InTERNATIONAL BANK FOR

RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY

OF THE

WORLD BAW GROUP

FOR

PERU

OCTOBER 28, 1994

Country Department IIILatin America and the Caribbean Region

This document has a esticted ditibution and may be used by reiets ony in th pefomanc oftheir official duties Its contents may not otherwis be diclosed without WoM Dan& authoriation.

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DATE OF LAST CAS

April 20, 1993

CURRENCY EOUIVALENTS(As of August 31, 1994)

Currency Unit - Nuevo Sol (S/.)US$1.00 - S/.2.25S/.1.00 - US$0.44

WEIGHTS AND MEASURES

Metric System

FISCAL YEAR

January 1- December 31

ABBREVIATIONS AND ACRONYMS

AEROPERU - Empresa de Transpone Aereo del Perd (Arine Company)AFPs - Adminisadoras de Fondos de Pensiones (Private Pension Funds)CORPAC - Corporacin Nruana de Aeropuertos y Aviaci6n Comercial S.C. (Comercial Aviation Corporation)C*PT - Compafa Perana de Telefonos (Penivian Telephone Company)CPV - Conpafifa Penana de Vapores (Peuvian Shipping Company)DDSR - Debt and Debt Service ReductionECASA - Empresa de Comercializaci6n de Arroz S.A. (Agricultural Marketing Company)ELECTROLIMA - ELECTROLIMA (Lima Electric Company)BLECTROPERU - ELECTROPERU (Perd Elctric Company)ENAFER - Empress Nacional de Ferrncarriles (National Railrad Company)ENCI - Empresa Nacional de Comercializaci6nde lnmos (National Inputs Marketing Company)ENTEL - Empresa Nacional de Telecomunicaciones (National Telecommuniations Company)ESW - Economic and Sector WorkFONCODES - Fondo Nacional de Compensaci6n y Desarrollo Social (National Social Compensation and

Development Fund)FSAL - Financial Sector Adjustment LoanGDP - Gross Domestic ProductGTZ - Gesellschaft fir Technische Zusammenarbeit (German Technical Cooperation Agency)IBRD - International Bank for Reconstmction and DevelopmentIDA - International Development AssociationIDB - Inter-American Development BankIFC - International Pinance CorporationIFls - lnternational Financial IntutionsIMF - International Monetaty FundINDECOPI - Inshduto Nacional de Defensa de la Competencia y de la Propiedad ItelectuW (Instiute for the

Defence of Intellectual Property and Free Competition)MDB - Multilateral Development BanksMIGA - Multilateral Investment Guarantee AgencyNGOs - Non-Govermmental OrganiationsPEs - Public EnterprisesPESCAPERU - PESCAPERU (Peruvian Fishing Company)PETROMAR - Petr6leos del Mar S.A. (Offshore Oil Exploration Company)PETROPERU - PETROPERU (Peruvian Oil Company)SAL - Stuual Adjustment LoanSEDAPAL - Servicios de Agua Potable y Alcantarillado de Lima (Water Supply and Sewerage Agency)TPRL - Trade Policy Reform Loan

FOR OFFICIAL USE ONLY

Table of Contents

Recent Economic and Social Performance ......................................... I

A. Historical Perspective . ................................. 1...... B. Economic Developments Since July 1990 ........ ..................... 2C. Macroeconomic Assessment: Three Years

of the Economic Program . ..................................... 6

External Environment ............................................. 8

Peru's Development Objectives and Policies . ...................................... 10

Bank Group's Country Assistance Strategy . ........................................ 14

(a) Infrastructure Development . .................................... 15(b) Income Disribution/Poverty Alleviation ............................ 17(c) Institution Building . ........................................ 17(d) Macroeconomic Sustainability ............. ...................... 17

Agenda for Board Discussion ............................................. 21

Annexes

Annex Al: Peru: Selected Indicators ofBank Portfolio Performance and Management ............... ........ 23

Annex A2: Peru: Bank Group Fact Sheet, FY91-97EBRD/IDA Lending Program, FY91-97 ........................ 24

Annex A3: Peru: Priority Poverty IndicatorsSupplementary Poverty IndicatorsResources and Expenditures .25

Annex A4: Peru: Key Economic Indicators .28Annex A5: Peru: Key Exposure Indicators .31Annex A6: The Status of Bank Operations in Peru

Statement of IBRD Loans and IDA Credits .32

Tables

Table 1: The Changing Role of the State in the Economy. 3Table 2: Peru: External Financing Requirements .12Table 3: Bank Group's Country Assistance Strategy .16

Boxes

Box 1: Peru: A Snapshot. 1Box 2: Peru: Key Structurd Reform Measures .2Box 3: Poverty and Indigenous Population .5

ox 4: Peru: E Nifio .7

MEMORANDUM OF THE PRESIDENT OF THE NTERNATIONALBANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON ACOUNTRY ASSISTANCES1RATEGY

OF THE WORLD BANK GROUPFOR PERU

Recent Economic and Social Performance

I. Peru is generously endowed with minerals, fish and hydrocarbons. Yet,despite its richness, it has heretofore failed to achieve a stable political, social and economicenviromnent capable of promoting social and economic development. Over the last thirtyyears Pern's economy has had adismal performance and it is today Box Per: A Snapshotone of Latin America's poorest Box_1____A_Snapshot

countries (see Box 1). By 1992, percapita income had fallen to levels Populatioui: According to the 1991 census, Peru's popuation is

simiiar to that of 1960. Welfare about 23 million, of which 28.9 penent five in Limn. Theaverage annual, growth rate since 1981 has been 2.2 percenindicators for Perd are among the The costa is the most populated area with 53 percent of toalworst in Latin America. It has the population, followed by the sierra wift 35 percent, the seva-second worst life expectancy at with 12 percent. About 70 percent of the population lv inbirth, just above that of Bolivia, and urban areas. Per capita inconme is US$1,490.the sixth worst infant mortality rate. Age Distribution: Peru is a country of young people. About 31Its income distribution is highly percent of Peruvians are below 15 years old; onl 4 perce a$eskewed, with the poorest fifth older than 64 years.earning only 4.1 percent of the Povry Profge: Natonwide it is esaed that about.20income, while the wealthiest tenth percent of all households are extremely poor and about 50receive 35 percent of income. percent are poor (uing adjustd poverty lines). Extremewpov

is concentated in the mral sierra where 50 percent of thehousebolds are extremely poor. In Lima, 10 percent ofhouseholds are extremely poor.

A. Hstorical aPesp tiveLngse: 'me predominant language bs Spanish, but Quecdu,-

2. During the past 40ya and other ie l es are also spoken.

years, the Peruvian economy hasmoved from feast to famine. Throughout the 1950s, when government intervention waslimited, there was a steady increase in per capita income. Economic activities were mostlyunregulated and the economy was open to foreign trade. Nevertheless, economic wealth andsocial status were tightly concentrated in a small elite, mostly located in Lima.

3. Pardy in reaction to this concentration, these outward market-oriented policieswere gradually abandoned, starting in 1963, and increasingly reversed by subsequent civilianand military governments. A poorly administered agranan reform, frequent changes inproperty rights, administered prices and overexpansion of state participation in the economyreplaced prior economic po icies. Policy makers looked inward, the economy was partiallyclosed to foreign trade and foreign corporations were natonalized. All these strategies werefueled by expansionary monetary and fiscal policies. The public sector deficit expanded,inflation accelerated and foreign debt grew rapidly.

4. By the 1980s, the results for both economic growth and poverty alleviationwere devastating. PoliLdes aimed at social reform only worsened and perpetuated poverty.Frequent experiments in social engineering created economic and institutional uncertainty anda prolonged deterioration in governance. These, in turn, undermined productivity, fosteredanarchy and public turmoil, and ultimately made poverty reduction impossible. The steadydeterioration of the economy and the sociopolitical situation paved the way for terrorism.Attacks of Perd's terrorist movements and drug traffickers were responsible for a drop of 8percent in per capita income between 1983 and 1990.

5. By the time President Alberto Fujimori took office in mid-1990, politicalviolence was claiming more than 3,000 lives each year; tax collection was less than 6 percentof GDP, down from around 14 percent in 1985; real wages had declined by 60 percent since1985; and the country was under hyperinflation. Prices had increased by a factor of 27million over the previous three decades.

B. Economic Develonments Since Julv 1990

6. In July 1990, Box 2 PerM: Key Structura Reform Measuresthe new administrationinherited a government Fhm,6aincapable of providing basic * ltberaaon of inerest and exchange raes.services, including health, * elbmnaon of public developmen banks and stae inteveion

in the allocation of crdieducation and security; a . establishment of a framework for a private pension fund system.collapsed economy; badly . improvement of banking laws, as well as regulatoy anddamaged infrastructure; and supervision functio.severe social inequality Tradeexacerbated by hyperinflation. ompesv lbeian of the foreign trade sector.The new Government elimination of barriers to domesti trade.implemented the most

liaborcomprehensive program of refrm of labor ruls eliminaig labor sabit and establishingeconomic reforms in the more flexible regulation r ing the probationary peio dcountry's history, aimed at fixed-em contracts.reducing inflation, stabilizingthe economy and radically F privatzaion program dtat includes the sale of all PEs to eiherchanging the state-dominated national or foreign buyers.economy into a market-oriented one (see Box 2).

scuring property rights faciliating land transctios.These reforms have been in grengdt the capacity of the state as a regulator of somelarge part embodied in the economic activities.Constitution ratified by a close * elmtion of pdoe ons and public monopolies.margin in an October 1993 * creation of the lute for the Defence of Intellectual Propertypopular referendum (see n Fe C Table 1).

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TABLE 1: THE CHANGING ROLE OF THE STATE IN THE ECONOMYA COMPARISON OF THE 1979 AND 1993 CONSTITUliONS

1979 Constitution 1993 Constitution

Art. 111: The state formulates the economic policies and No equivalent exists. Eliminates the concept of centralsocial development plans that regulate the actvities of the planning.public sector.

Art. 112: The state guarantees economic pluralism. Art. 60: The state recognizes econonic pluralism. Onlywhen authorized by a specific law, and in case of highpublic interest can the state became involved in subsidiarybusiness activity.

Art. 116: The state promotes and protects the free No equivalent exists. Eliminates the promotion ofdevelopment and autonomy of businesses and cooperatives.cooperatives.

No equivalent exists. Art. 65: The state defends the interest of consumers andguarantees the right to information on goods and servicesprovided by the market; ir. particular for the health andsecurity of the population.

Art. 122: The state sthmulates mining activity. No equivalent exists. Mining is no longer subject tospecial treatment.

Art. 138: Economic and financial administradon of the Art. 77: The budget guides the activity of the state. Itscental government is guided by the annual budget programming and execution respond to criteria ofapproved by Congress. Local and regional governments efficiency, basic social needs, and decentralizaion. Thehave their own budgets. budget is consolidated.

7. The program included stringent fiscal and monetary measures and radicalmacroeconomic reforms. A cash management committee has maintained public expenditurein line with tax collection, and credit from the Central Bank to the public sector waseliminated. The tax system was reorganized and interest rates and foreign-exchangetransactions were liberalized. Structural reform also called for deregulation at both nationaland sectoral levels, including the elimination of state monopolies. The program strengthenedthe role of market mechanisms in the allocation of resources, and implicitly defined asubsidiary role for the state in the economy with the privatization of all public enterprises(PEs). Policy, legal, and regulatory reforms were introduced in virtually all sectors of theeconomy to promote competition, private sector participation and efficiency. Under theprogram, Peru made the initial steps to reintegrate into the international financial communityby reestablishing relations with multilateral financial institutions and the Paris Club.However, a debt deal with commercial banks is still pending (para. 26).

8. Agriculture. In the agriculture sector, the Government implemented afundamental reform. It moved quickly to liberalize product, financial and land markets and

to reduce the budgetary drain caused by subsidies and price guaantee mechanisms. Pricecontrols were removed while price guarantees were replaced by a price floor mechanism foressential agricultural products. ECASA, the agricultural marketing agency, was liquidated,while ENCI, the agricultural import monopoly agency, was restructured and its monopolyremoved. Preferential interest rates in agriculture were eliminated and the unprofitable stateagricultural bank liquidated. Land can now be more easily traded, leased or mortgaged.Maximum land holding limits were raised and land registration procedures simplified. Aland titling agenda for small holders is being developed. The Government has also madeprogress in the liberalization of water markets. Management and operation of publicirrigation networks is being transferred to user groups while water tariffs are being adjustedto ensure cost recovery for operations and maintenance. It is expected that existing waterrights will be vested in existng users and rew water rights will be auctioned to create awater market, where farmers will assume full financial and technical responsibility forrehabilitation of water works.

9. Ener and Industrv. In the energy and industry sectors, the Governmentimplemented a wide-ranging structural reform program aimed at establishing market-basedpolicies, a transparent legal and regulatory environment, and a radically reduced role of thepublic sector. Competition and private investment were promoted by comprehensiveprivatization. More than 30 companies have been privatized in the last two years, yieldingroughly $2.6 billion in cash proceeds plus $700 million in future investment commitments.Of the major privatizations remaining, the Government plans to privatize: (a) electricitygeneration, (b) PETROPERU, the oil company, (c) CENTROMIN, a major mining complex,and, (d) Banco Continental, the second largest bank. A new hydrocarbons law becameeffective in November 1993, liberalizing the sector, eliminating PETROPERU's monopolyrights, deregulating petroleum product prices and establishing new procedures for contractuaarrangements between the govemment and petroleum companies. The tax regime forpetroleum products was brought in fine with the general tax system and PETROPERU'sprivatization was initiated with the sale of its subsidiaries. In mining, a leading exportsector, the 10 percent export tax was removed. A new mining law was enacted as well asregulations to foster private investnent. By early 1994, five state-owned mining companieswere privatized, resulting in US$172 million in cash and US$635 million in investmentcommitments. In power, a new electricity law and accompanying regulations were enactedduring 1992-93, to open the sector to private investment, and promote competition via theseparation of generation, transmission and distribution activities. The distribution network ofELECTROLIMA, one of the two largest power PEs, has been privadzed, and its generationand transmission are being prepared for privatization. ELECTROPERU, the other largepower PE, is being prepared for privatization. In fisheries, the second most important exportsector, the monopoly rights of the state-owned fish marketing and distribution agencies wereeliminated. The sector was opened to foreign investment and a new fisheries law enacted.The Government is currently developing a fisheries management regime consistent with thislaw to prevent depletion of the resource. PESCAPERU, the fish processing PE, is beingprepared for privatization. In telecommunications, a new telecom law was enacted inNovember 1991, and ENTEL and CPT, the telephone companies, were privatized inFebruary 1994.

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10. Infrastructure. The Government has taken bold steps to restructure thephysically deteriorated and grossly mismanaged infrastructure sector. Early on, it removedall price, entry and route regulations affecting the provision of transport services, includingtrucking, intercity bus, urban and air transport. Major transport PEs were privatized,including the shipping company (CPV), the national airline (AEROPERU) and the urban buscompanies in Lima, Trujillo and Arequipa. Privatization of others, such as the railroadcompany (ENAFER) and the civil aviation authority (CORPAC), are underway. S-veralprofit-making ports are under preparation for privatization and cargo handling wastransferred to the private sector. As a result of these measures, transport costs havedeclined, services have increased and transport options multiplied. Subsidies to loss-makingenterprises were eliminated and the role of the private sector enhanced. In the water sector,the Government is preparing the privatization of the Lima water company (SEDAPAL),along with a regulatory framework to ensure water quality wLlle promoting private sectorparticipation. In housing, the government has withdrawn from direct provision of housing infavor of the private sector.

11. Poverty Alleviation. In the face of overwhelming problems in the socialsectors, particularly for the indigenous community (see Box 3), the Government establishedin 1990 a social emergency program to provide direct food and health assistance to the poor.This program was replaced in August 1991 by FONCODES, the National Fund for SocialCompensation and Development, a mechanism for channeling government and donorresources to labor-intensive projects. Since its creation, FONCODES has become the

Box 3 IPar Pveoty and the g Iblpdaton

The indigenous population, defined by individuals that speak ony Quedwa, Aymara or another indienulanguage represent about 11.3 pcrcent of the total popuadon. Pem is a mesio county, however, sad Ibis.definion understates the share of the indigenous population by not coumng individuals that speak bot anishand an ifdigenous language. The indigenous populaton mostly resides in the rural sierra, the poorest aea of tancountry. According to a 1991 household srvey:

* poverty and language are highly correlated: 79 percent of nonpanis-speaking households are poor ai:d55 percent are extremely poor. Morwver, the non-spanish-speakig poulaion is 1.3 times nore eiiy.:to be poor than the rural spanish-speakig populto;

* the educational gap between the spanish-speaking and non-spanish-spe population is dcinin butthe survey shows that non-spanish-speaking men still average 3.3 years of schooling o les an-aiS-'speaking men. The educaional gap is greater for women;

* unemnployment is higher in the non-spanish-speakingpopultion (46 percet than it is in toe sp;:shspeaking population (36 percemnt). The smuvey also reports that the non-spanish-speaking populatonprimarily employed in frming;

* average income for the spanish-speaking population is more tban double the average inome of-the mu-spanish-seaking population;

* the non-span-speakigpopulation has less access to public servces like runnmg water, seweelectricity. In rual areas only 4 percent ca no-speaking-people have access to pbli seweiv Y

-aciities;

* non-spanish-speakcing infant mortality is more ta double infant notli~yi pns-paig am ilie^

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Government's main instrument to achieve its goal of reducing extreme poverty, locatedprimarily in Per6's rural areas, from 20 percent to 15 percent by 1995. FONCODESencourages close involvement of community representatives, and responds to demands frompoor communities for rehabilitating social and economic infrastructure, and improving accessto basic social services.

12. In early 1993, the Government prepared its first poverty alleviation strategy.This strategy seeks to promote broad based economic growth and to improve the livingconditions of the extreme poor through FONCODES as well as through food assistance,health, and education programs coordinated through the Ministries of Health and Education.In health, the Government is seeldng to enhance the quality of primary health services,particularly for maternal and child health. In education, the Governuent has sought to laythe basis for education reform widh improved participation of the private sector. Resourcesfor managing educational services would be shifted to local communities. The Governmentseeks to increase the efficiency and quality of primary education and to improve literacy andjob skills among non-literate adults. A national nutrition program is providing food tovulnerable groups to meet their nutritional requirements.

13. Environment. In late 1990, Perd adopted an environmental code, which tookthe critical steps of abolishing legislation that provided incentives for colonizing the Amazonregion and requiring the preparation of an environmental impact statement for any activity inthe Amazon-public or private. From 1993 to 1994 additional legislation was passedrequiring environmental impact studies for investments in the development of mining,industry and fishing. Parallel to these legislative efforts, the Government has taken steps tostrengthen the institutions responsible for the naural environment. In 1990, the NationalSystem of Natural Areas Protected by the State (SINANPE) was established, creating anational park system. This was followed by the creation in 1993 of the National Institute ofNatural Resources (INRENA), which principally coordinates the management andconservation of Perd's natural parks, and establishes and monitors standards for pollutionassociated with agricultral activities.

C. Macroeconomic Assessment: Three Years of the Economic Program

14. The Peruvian economy has reacted positively to the stabilization and structuralreform program. Inflation dropped from 7,650 percent in 1990 to 40 percent in 1993.However, economic growth has been more erratic. GDP increased in 1991 by 2.7 percentbut declined in 1992 by 2.8 percent, largely as a consequence of the occurrence of "el Nifno"(see Box 4). El Niuo caused a severe drought that reduced Perd's capacity to generateelectricity. It also was responsible for output declines in fishing, agriculure, manufacturing,and mining. On top of el Niub, fish exports were also hurt by the cholera epidemic thatstruck Perd in 1992, which was a result of the deterioration of the state's capacity tomaintain and provide public services such as sanitation and clean water.

15. The economy recovered Box4 Ps* ElNiIstrongly in 1993. The driving force of theecononic growth was not government El Niflo is a phenomenon that strikes Peru aboutspending, but the participation of a buoyant every four to eight years. changing sea currentprivate sector. Peru's GDP grew by 7 and weather conditions. Its intensity is irregular,percent, with labor productivity in the but the strongest occur about eveiy fifty years.manufacturing sector growing by about 21 During this century, el Nlfto has returned to Perupercent. Productivity has increased at an in 1914, 1925126, 1931/32, 1941/42, 1953a54,1957/58, 1965, 1972/73, 1975/76, 1982/83 andannual rate of 11 percent since 1990. The 1992. The strOngeSt were in 1925 and 1982.source of this increase in productivity hasbeen a lower and more stable rate of The effects of el Nifio on Peru's most importantinflation, maintenance of stuctural reforms, export sectors cm be devastating. Fishing andincluding deregulation and trade agriculture can collapse due to its effects on sealiberalization, and the reestablishment of currents and weather conditions. Manufacturingand mineral extraon can be severely slowedpublic order. Part of the GDP growth in down by el Nifno's effects on the weather, which1993 was the result of the recovery of reduces the capacity of Peru to generatesectors affected by the 1992 drought. electicity.Fishing grew by 24 percent, with the -___fishmeal industry setting output records.Agriculture production was up by 10.3 percent and mining by 7.8 percent. The constructionsector picked up in 1993, growing by 14 percent during the year. Since August 1990,construction has more than doubled.

16. With accelerated economic activity, the current account deficit increased from2 percent of GDP in 1989 to 6 percent in 1993. This increase reveals a growing gapbetween aggregate investment and national savings. While high, the deficit is sustainable inthe near-term given the trend in capital inflows. These have increased greatly since 1990,because of high real interest rates and a reduction of the perceived country risk. Part of theinflow is foreign in origin, mostly in portfolio investment and proceeds from privatizations,while part is the return of domestic flight capital and the proceeds from the illegal drugtrade. These flows of private capital have not only sustained a growing current accountdeficit, but also increased net intemational reserves at the Central Bank (excluding reservedeposits in U.S. dollars) by US$819 million during the 1990-93 period. As the stabilizationprogram consolidates, significan: capital inflows are expected to continue.

17. The fiscal discipline and tight monetry policy maintainedd during the past threeyears provide a strong indicatian of the Government's commitment to reform. As aconsequence of these sound pclicies, the primary fisal balance moved from a deficit of 2percent of GDP in 1990 to a surplus of 0.1 percent of GDP in 1993, while the consolidatedpublic sector deficit declined from 6.5 percent of GDP in 1990 to 3.1 percent in 1993 (bothbefore privatization revenues). Revenue collected by the central government, including taxcollections and other sources of revenue, increased from 9.5 percent of GDP in 1990, to10.5 percent of GDP in 1993. Nevertheless, tax collection remains a problem. It declinedfrom 10.2 percent of GDP in 1992 to 9.6 percent of GDP in 1993 due to lower excise taxes

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and continued tax evasion. The tax collection rate, although increasing in the first eightmonths of 1994, remains low compared to other Latin American countries and to Perd'slevels during the 1970s and early 1980s.

18. Adjustment of the fnancial sector continues. The main elements of the reformare: (a) a modern banking famework which encourages competition among bankinginstitutions; (b) the privatization of state-owned commercial banks; (c) the downsizing ofBanco de !a Naci6n, the state-owned Bank that offers services exclusively to the publicsector; (d) a new capital markets framework that redefines the role of security brokers; (e)the introduction of the private sector in the pension fund system; (f) strengthened bankingsupervision; and (g) the liquidation of the development banks. The new rules of the gameare forcing private financial institutions to re-think the way business is conducted,restructuring portfolios and changing lending strategies. The remaining major risk to thefinancial sector is its high concentration: the two largest commercial banks account for 46percent of total assets--one of the largest concentrations in the world. For this reason,interest rates are defined by these two institutions. Other serious problems include the lackof long-term financing, high interest rates, low intermediation levels, and the high number offinancial conglomerates, which represent an impediment to effective regulation andsupervision.

19. Following the economic reforms introduced in mid-1990, the real exchangerate appreciated until it stabilized in the second quarter of 1994. In spite of thisappreciation, there is little evidence of exchange rate overvaluation. The appreciation of thereal exchange rate has been caused by domestic policies congenial with long-te.n economicexpansion, and by changes in the international financial community's perception of the regionin general, and Perd in particular. These domestic and external effects have generatedconditions for the capital inflows which have supported the real appreciation. Nevertheless,prudent economic policies have offset, in part, the effects of capital inflows on the realexchange rate. Moreover, any negative impact of the appreciation of the sol onCOmpetitiveness has been compensated by increases in productivity (paragraph 15).

Exteral Environment

20. Peru's economy remains highly vulnerable to exogenous factors and changes inits external environment. Besides climatic shifts, recent external events that have had asignificant impact on the country's economy and the Bank Group's assistance strategyTnclude: (a) foreign trade; (b) external debt; and (c) privatization.

21. Foreign Trade. Peru's traditional exports are concentrated in minerals,commodities and hydrocarbons. Exports of goods and non-factor services declined in realterms at an average rate of 1.4 percent during 1980-91. This decline reflects both thepolicies of the 1980s as well as adverse external factors. Perd's terms of trade declined by65 percent during 1980-92. Severe macroeconomic instability, misallocation of resources

and appreciation of the Peruvian currncy during the 1980s also adversely affected exportperformance. Terrorist activities, moreover, contributed to the decline of mining andtourism.

22. The Govenmment has implemented a full-scale trade liberalization as part of itsprogram of stabilization and structural reforms. It included the elimination of most non-tariffbarriers and the reduction of the Pumber, level and dispersion of tariffs. Perd now has twoimport tariffs (25 and 15 percent), and is moving towards unification at 15 percent and theelimination of the remaining non-tariff barriers. Overall, exports in dollar terms haveexpanded modestly-by 6 percent-since 1990, masing an important shift. Non-traditionalexports have grown rapidly, increasing as a percent of total exports from 30 percent in 1990to 36 percent in 1993. In 1993, traditional exports declined by 7 percent while non-traditional exports expanded by 19 percent. The poor performance of traditional exportsstemmed from: the low internatonal prices of most traditional exports from Per6, antiquatedand poorly maintained infrastructure and facilitating services, the cholera epidemic of 1992,and recurrent natural disasters such as el Nifio.

23. Future - cts are brighter; exports are forecast to grow by 7 percentanually on average d ^994-96, reflecting expected trends in the external environment.These growth rates can be sustained because: (a) the structural reform program--particularlythe privatization of mineral and other PEs--is expected to expand Perd's capacity to export;(I) world growth and world trade are expected to pick up; (c) terrorist activities havedeclined; (d) changes in Perd's terms of trade are expected to be minor; (e) Perd's smallshare in world trade and the mix of its exports makes it unlikely to be targeted forprotectionist or retaliatory measures; and (f) Peri, along with other Andean Groupmembers, is reducing regional trade barriers and thus expanding regional trade. Peru isplanning to fully rejoin the Andean Group when commercial policies between members arecompatible. In the meantime, it will expand bilateral agreements with Andean Groupmembers.

24. Externl Debt. Perd's remains heavily indebted; total external debtoutstanding was US$21.4 biLlion at the end of 1993, representing 500 percent of exports ofgoods and services and 47 percent of GDP. Total debt service iu 1993 was US$5.5 billion,equal to 129 percent of exports Lf goods and services, up from 24 percent in 1992, due inpart to the debt workout arrangements with IFIs and the Pans Club. Total debt tocommercial banks in 1993 was US$7 billion, more than half of which is past due interest.The accumulation of interest arrears to commercial banks during 1993 alone increasedinterest past due by US$400 million.

25. Perd is addressing this heavy debt burden in stages. The Govermnent ofPresident Fujimori has made significant progress in reintegrating PerG into the internationalfinancial community. The overall external debt strategy has involved agreements with IFlsand the Paris Club, and first steps to solve the commercial bank debt problem. Perd clearedarrears with the IDB in September 1991, and with the IMF and the World Bank in March

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1993. The Government rescheduled its official bilateral debt with Paris Club creditors inSeptember 1991 and May 1993. The current agreement expires in March 1996, and willneed to be renewed.

26. Perd is moving forward to resolve its commercial bank debt arrears. InNovember 1992, the Government issued a tolling declaration to the Bank AdvisoryCommittee representing foreign commercial banks, paving the way for the first negotiationsbetween Perd and commercial banks. Several meetings have followed, and Perd has offeredthe use of a debt-for-equity conversion program, attached to the privatization of PEs, as away to advance negotiations. Legal issues which had blocked further negotiations haverecently been resolved, and an agreement may follow in 1995.

27. Privatization Revenues. Perd's privatization program, a source ofconsiderable foreign interest and capital inflows, has netted about US$2.6 billion in cash,US$1 billion more than expected. The Government earned this windfall, which representsapproximately 3 percent of GDP and 32 percent of tax revenues in 1993, mainly from thesale in Febnrary 1994 of Per6's telephone system to the Spanish telephone company. Withseveral large privatizations still in the works, it is likely that revenues could reduce furtherthe squeeze on the budget and give the Government an opportunity to improve its socialprogrms, within the limits of its absorptive capacity. At the same time, the exceptionalrevenues could contribute to driving up the price of resolving Peru's arrears with foreigncommercial banks. The Government should not jeopardize the stabilization program byspendig beyond its capacity, but instead should use some of the privatization revenues toresolve its extensive unfunded liabilities, such as domestic debts pending to the publicpension fund and left behind by the liquidated development banks, and/or its foreignobligations. These unfunded liabilities are estimated to be over US$4 billion.

Peri's Development Objectfves and Policies

28. Perl's economy has improved remarkably due to firm fiscal discipline and anequally firm commitment to economic reforms. However, resuming growth and reducingpoverty on a sustainable basis after 30 years of stagnation are difficult tasks; manychallenges lie ahead. On the social and political front: (a) poverty, a skewed incomedistnrbution, and ethnic alienation continue to divide the country; (b) terrorism and drugtrafficking drain scarce resources, and weaken the efforts to integrate the country; and (c)political instability remains a risk; if it increases, fundamental economic reforms could beslowed down or even reversed. On the institutional front: (a) government institutionalcapacity remains weak, government decision-makimg is highly centalized, and thegovernment has yet to design and implement its decentralization agenda; (b) weak sectoralministries and central government officials' distrust of NGOs and local administations hinderthe implementation of an ef.icient anti-poverty program; and (c) fragmentation ofenvironmental responsibility among ministries remains, and Peri has not yet followed thelead of other countries which have created a national planning agency or ministry specificallyfor the environment. On the economic front: (a) infrastucre remains badly deteriorated

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from years of neglect and mismanagement, creating bottlenecks which inhibit economicgrowth; and (b) the fiscal situation remains precarious, especially because of low taxcollection and unfunded obligations of the central government, including external debt andpension liabilities.

29. To meet these challenges, the Government's present strategy is to concentrateon two broad strategic objectives: the promotion of a free market system integrated with' heglobal economy; and the development of a state centered on the capacity to provide basiLpublic services, including social services, infrastructure, public security, environmentalprotection, and a stable environment for economic growth and poverty alleviaton.

30. The Government's 1993-95 program, supported by an External FinancingFacility (EFF) of the IMF, reflects the Government's intention to stay the course in terms ofmaintaining economic stability and to continue to implement the program of structralreforms. In 1994, the GDP growth target will be substantially exceeded-reaching at least 10percent--while inflation will be reduced from 40 percent in 1993 to about 20 percent. Thefiscal situation, although still fragile, is expected to improve. Foreign investors areresponding positively to the privatization program, the surplus in the capital account of thebalance of payments has been increasing, and international reserves have grown.Nevertheless, the reserves position requires further strengthening in the near term. Neftingout short-term liabilities of the central bank to residents and likely use of privatizationproceeds to meet unfunded liabilities', available reserves are equivalent to about 3 months ofimports, and further reserve accumulation is justified to protect against the potenialvariability of capital flows.

31. In the medium-term, given the favorable policy environment and improvedsecurity situation, gross domestic investment is expected to increase to 20 percent of GDP by1995, up from 16 percent in 1992. This should make possible sustained GDP growth ratesof 5-6 percent per year. (See Annex 4.) Exports are expected to grow at an average of 7percent, with non-traditional exports gaining a higher share of the total. (Although the realexchange rate may appreciate further if good economic management and improved securitycontinue to attract capital inflows, the governmevt's clear commitment to tight fiscal andmonetary policy will help maintain Per6's external competitiveness). Given rising importsfueled by strong investment and GDP growth, the cufrent account deficit in the next fewyears is projected to be in the range of 5 percent of GDP. Taking into consideration theneed for principal repayments and additional reserve accumulation, the financing needs overthe medium-term would average about 6.4 percent of GDP. Assuming a base case lendingscenario for IBRD (see paragraph 45), it is estimated that PerG can expect about 1.6 percentof GDP from net MLT disbursements from official sources. The remaining gap of 4.8

' Out of the grmss internafional reseres of about US$6.5 billion in mid-1994, more than US$3.8 bilion constiue the resererequirements against dollar deposits in dte banking system, i.e., shortterm liabilities of die central bank to rdents. And over US$2.4billion are ptoceeds from die privatiaon, which are assets of the treasury that should be used in part to resolve its subsUntial unfidedhabities, including external debt (see paragraph 27). It is reasonable to assume t at least US$1 billion is allocated in the near term forthat purpose.

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debt from private sources, and short-term capital inflows. Reliance on substantial short-termcapital inflows is too risky, and Perd must take furither steps to complete its reintegration intothe international financial community. Toward this end it is essential to conclude a debt anddebt service reduction agreement with its commercial bank creditors. Under this scenario ofcontinued good economic management, efficient private sector-led investment and high GDPgrowth would lead to sustainable external debt ratios.

TABLE 2: PERU - EXTERNAL FINANCING REQUIREMENTSUS$ billions

1994 1995 1996 1 19,7 1998

Fmancing Needs 5.0 2.8 3.6 4.3 4.6

1. Current Account Balance 2.6 2.5 2.7 3.2 3.4

a. Non-Iterest Current Account 1.7 1.6 1.6 2.1 2.3

b. Interest Payments Due 0.9 0.9 1.1 1.1 1.1

2. Principal Repayments Due 0.5 1.4 0.7 0.8 0.8

3. Reserve Changes 2.0 (1.1) 0.2 0.3 0.3

Finning Sources 5.0 2.8 3.6 4.3 4.6

1. Net MLT Disb. from Official Sources 1.2 0.8 0.8 0.8 0.8

2. Net Foreign Direct Investment 3.1 0.7 0.8 0.8 0.9

3. Official Grants 0.1 0.1 0.1 0.2 0.2

4. Other Private Sector* 0.7 1.2 1.9 2.5 2.7

Me; o, Items:

i Reserves** 2.7 1.6 1.8 1.9 2.0

Months of Imports 6.0 3.0 3.0 3.0 3.0

* Including net short term capital flows.**Reserves are calculated as follows: total liquidity minus international short-term liabilities minus

resident short-term liabilities (mostly required reserves of commercial banks).

32. While the economic program has achieved remarkable results and laid thefoundatior for growth, key constaints to sustainable development remain. Perd's taxcollection remans low due to a large informal sector, continued tax evasion and a small taxbase; this restricts the government's capacity to provide basic services and reduce poverty.The effectiveness of Perd's public expenditures can still be improved. There are largeexpenditure needs in social security and infrastructure, a weak civil service organization andadministrative practices, and continuous tension between central and local governments. In

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addition, the Government must absorb significant costs in its continuing efforts to defeatterrorism. Recognizing its low implementation capacity, the Goverunent has restrictedpublic investment. This could prove unsustainable in the long-term given Perd's needs in thesocial and infrastructure sectors. Perd's poor and deteriorated infrastructure limits itscapacity to compete abroad and inhibits economic growth. Pervasive poverty and ethnictensions hinder economic development. Degradation of the natural environment jeopardizesPeri's tourism potential, the availability of potable water, and the sustainability ofinvestments to exploit Peri's natural resources, in particular timber, petroleum, natural gas,gold and fisheries. And finally, a weak judicial system for contract enforcement and thelegacy of two decades of state intervention have imposed limits on the speed of private sectoradjustment. It will take time to rebuild social and economic institutions in Perd and generatethe human capital needed to ensure sustained development.

33. The Govermment is addressing these constraints through its reform policies. Itis broadening the tax base, eliminating tax exemptions, refomiing tax laws and enforcingthem. This in turn will improve tax collection and reduce the tax burden on the formalsector. The Government is planning to privatize most of the remaining PEs by the end of1995, which will continue to reap major efficiency gains, increased tax collection, reductionin transfers and substantial direct eamings. The authorities plan to strengthen budgetary andaccounting procedures and develop a unified information system to control efficiency inpublic spending.

34. The Government has begun to rehabilitate basic inftructure-especially intansportation, water supply and sanitation and urban and rural services-both to improveconditions of the poor and to promote growth. Infrastructure rehabilitation concentrates onareas where the poor live. To reduce poverty and ethnic tensions, the Govermnent will alsoconinue to use targeted intervention programs in areas of extreme poverty, like the ruralsierra, and in urban pueblos jovenes, via FONCODES. It will also use part of theprivatztion earnings to advance its social agenda. The Government will continue to takeimportant steps to improve the natural environment, including strengthening management ofits national parks, improving sanitation, and completing and enforcing environmentallegislation and regulation in the energy, mining and fisheries sectors. A key action will bethe Government's effort to restore public order, especially in areas previously controlled byterrorism, to better integrate all elements of the country.

35. Finallv, the Government plans to deregulate capital, labor, and land and watermarkets to increase productivity, reduce costs in reallocatng resources in the economy andelimnate distortions that obstruct the development of these markets. Deregulating the labormarket will help to integrate the informal sector into the formal economy. Developing amarket for land and water rights will require an efficient mechanism for titling andregistering land and water ownership rights and an efficient judicial system capable ofenforcing contracts. However, before appropriate laws can be enacted, the Government stillhas to overcome the strong opposition to labor, land, and water markets reforms, and buildconsensus among all sectors of society on the long-term benefits of these reforms.

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Bank Group's Counpry Assstance Strateg

36. After Peri resumed debt servle payments to the Bank in October 1990, ourinitial lending strategy, presented to the Board in July 1991, was to support theGovermnent's macroeconomic stabilization and strucural reform program through a series ofadjustment loans. These loans contributed to Pern's multilateral debt work-out and wereconsistent with the Bank's policy for countries with protracted arrears. The policy reformssupported by these loans, two of which were fully disbursed upon arrears clearance in March1993, have dramatically changed the orientation of the economy from the state to the privatesector, and have been largely achieved2.

37. The last Country Assistance Strategy, presented to the Board on April 20,1993, initiated a shift toward investment lending intended to help the Government achieve itslong-term objectives of growth and poverty reduction. It introduced the elements that weplan to pursue over the long-term: poverty alleviation, mfrastructure development, andinstitution building. Based on that strategy, while stdll focussing on structural reforms-th gh adjustment lending and policy advice, during FY94 we supported the fight againstpoverty with targeted investment programs for health and nutrition and FONCODES.Likewise, we began supporting infrastructure development, with loans of an emergencynare, for long-neglected maintenance and rehabilitation of the transport system, especiallyhighways. In institution building we continued to provide technical assistance in support ofthe institutions responsible for privatization and the complementary regulatory and legalframework. This strategy was also fully reflected in the ESW program which included aPoverty Assessment Report (May 1993), a Country Economic Memorandum (March 1994),and a Public Expenditure Review (to be released).

38. The proposed strategy for FY95-97 will continue to pursue the long-termobjectives of poverty alleviation, infrastructure development, institution building andmacroeconomic sustinability as set forth in the previous CAS but will make a morepronounced shift to address these long-term challenges and will more fully reflect thefollowing considerations:

Poverty reduction is the central objective of the Bank's involvement in Perd.This must be achieved through both private sector-led and environmentally-sustainable growth and investments in public goods and services which directlybenefit the poor. Given that much has already been achieved in creating apolicy environment for overall growth, increasing attention must be given toinvestment in public goods needed for growth and poverty reduction whilesustaining good macroeconomic management.

TIe reform progtam in the finanal sector is sdll ongoing, and the final tranche of one of the loans, the Financial Sector AdjusmenLoan, is still pending the compleion of the program. Likewise, tie privadzaion program condnues at full speed, anth ie third tanche ofthe Pdvtizaion Adjusm Loan, approved immediatey aftr the debt workout, is also pending.

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* In pursuing this central objective of poverty reduction, the Bank must beselective, concentrating its attention and resources to ensure its effectivenessand relying on partnerships with other institutions to pursue other essentialobjectives. The roles envisioned by the IDB and IMF are discussed inparagraphs 52-53 below.

* Given that PerG has completed or will soon complete the core agenda ofstructural reforms, our strategy involves a further shift from adjustmentlending to investment lending. Following the Electricity PrivatizationAdjustment Loan which is presented to the Executive Directors together withthis CAS, we would consider only one additional adjustment loan if needed tosupport public sector reforms and provide financing for a possible Brady dealwith commercial bank creditors.

39. With these considerations in mind, the Bank will concentrate its efforts duringFY95-97 primarily on investment lending in the infrastructure and social sectors, includingsupport for the corresponding public institutions, and on sustaining good macroeconomicmanagement. Given Peru's stage of development, we believe that concentrating our effortsin these areas will maximize the Bank's contribution to poverty reduction. The followingparagraphs provide more detail about our proposed involvement in these four areas ofconcentration, and Table 3 provides a summary of the planned lending operations and ESWprogram consistent with the proposed strategy.

(a) Infrastucture Development

40. In the infrastructure sector, the Bank's long-term objective is to improve theperformance of infrastructure services--focussing on roads and highways, urban, intercity andrural transport, water supply, sewerage, and urban and rural services--so as to provide thebasis for robust economic growth, particularly in the private sector, and to increase theeffectiveness of infrastructure services in addressing poverty in both rural and poor urbanareas. To achieve this strategy, the Bank will support the Government's efforts torehabilitate greatly deteriorated infrastructure, restructure institutions in the subsectorsmentioned above to open the way for private sector involvement, and at the same time,strengthen public sector institutions at the central and local level to assume their role in therestructured environment. In particular, we will assist the Government in defining andimplementing a strategy to redirect expenditure on infrastructure to directly benefit lowincome populations. Other key elements in this strategy will be to address the resourcemobilization issues in the infrastructure sectors, both at the central and local level, toimprove the effectiveness of expenditure through better programming and budgetingprocesses, and to ensure appropriate environmental impact assessments.

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TABLE 3: BANK GROUPS COUNTRY ASSISTANCE STRATEGY

Policy Priorities Proposed Bank ActivMtesObJectiveObjective_______________ _ _ Lending Economic and Sector Work

Infrastructure * Improve performance of Electricity Privatization Adjustment Loan (FY95) Water Resource Management (FY95)Development infrastructure services, particularly Lima Water Rehabilitation and Management Project Provision and Regulation of Urban Transport (FY97)

urban, intercity, and rural transport, (FY95)water supply, sewerage, and urban Irrigation Subsector Project (FY95)services. Rural Roads Rehabilitadon and Maintenance Project

(FY96)Municipal Finance and Management Project (FY96)Land-Water Management Project (FY97) l

Social Sector * Promote human resource Primary Education Project (FY95) Poverty and Income Distribution (FY96)Development development and encourage targeted Primary Health (FY97)

measures that reach poorer groups.

Institution Building * Improve effectiveness of public Lima Water Rehabilitation and Management Project Assessing Local Government Investment Capacityagencies and redefine the role and (FY95) (FY95)structure of both local and central Irrigation Subsector Project (FY95) Public SRector Reform (FY96)Government institutions. Municipal Finance and Management Project (FY96)

Primary Education Project (FY95)Primary Health (FY97)Mining Envircnment Project (FY97)

Macroeconomic * Sustain fiscal and monetary policies Electricity Privatization Adjustmnent Loan (FY95) Economic Policy Notes (annually)Sustainabilily and continuation of key reforms. Country Economic Memorandum: the Reform

Experience (FY97)

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(b) Social Sector Development

41. To help the govermnent develop Perd's most important resource, its people,the Bank will assist in designing and implementing programs to improve primary educationand health services. Priority will be given to improving the efficiency and sustainability ofexpenditures, strengthening both central and local instutions, and deliveing these servicesto the poor. This will involve financing both infrastructure investments in these sectors andtechnical assistance. Considering the particular relevance to social sector policies, we willanalyze poverty and income distribution based on the results of the 1994 LAving StandardsMeasurement Survey fmanced by GTZ and th- IDB. This work should provide usefulinformation about the effects of recent economic policies on the distribution of income andon poverty and also provide a better basis for targeting of public expenditures toward thepoor.

(c) Insitu&ion Buildng

42. The Bank's strategy is to assist the Government in redefming the role andstructure of both central and local Governmen institutions to (a) conform with the needs ofa market economy and a reduced role for the state, (b) improve capacity to design andimplement public policy, and (c) provide more effective service delivery. The Bank willassist the Government with reforms aimed at strengthening the weak institutional base in thesocial and infrastructure sectors, which inhibits the implementation of programs in theseareas. We will also assist the Government in designing public sector reform to improvegovernment efficiency in virtually all sectors. To supplement our lending and sector work,and due to the Government's reluctance to borrow for technical assistance, we will continueto seek grant financing to assist the Govermment in this area.

(d) Macroeconomic Sustainabiy

43. Despite the very significant progress in the last four years, Perd'smacroeconomic situation remains fragile. Therefore, we will conime to provide support forgood macroeconomic management in several ways, thereby complementing the likelycontinued involvement of the IMF. First, the Electricity Privatization Adjustment Loan willrequire maintenance of a satisfactory macroeconomic program. Second, if needed to supporta Brady deal with commercial bank creditors which would reduce the debt overhang andthereby contribute to the credibility of the macroeconomic program, we would consider anadditional adjustment loan (particularly focussed on further public sector reforms) and/or afree-standing DDSR lending operation. And third, part of our economic and sector workprogram-particularly short policy notes responding to policymakers' concerns--would dealwith topical issues of economic management.

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44. Environment and Private Sector Development. Although environment andprivate sector development issues will not be areas of Bank concentration in the near-term,we will be involved selectively, taking into consideration the roles of partner institutions. Inaddition to providing urban water and sanitation, our program will include attention toenvironmental sustainability in key extractive sectors which are essential for private sector-led growth. Specifically, through the on-going Privatization Adjustment Loan, we remaininvolved in the development of a sustainable policy regime for fisheries. Also, as a follow-up to the on-going technical assistance loan on mining and the environment, we anticipate alending operation to fully establish and promote good environmental practices in the miningsector. The planned involvement in land and water management would be directly primarilyat preventing soil and water degradation in rural areas and hence serve the complementaryobjectives of rural poverty alleviation and environmental protection. Finally, we are nowpreparing a GEF grant which would provide support for the protection of national parks inthe Peruvian Amazon. Our principal involvement in private sector development will becontinuing support for the privatization program and associated legal and regulatory reforms.In addition to the Privatization Adjustment Loan and the Technical Assistance Loan forprivatization, the two new lending operations presented to the Executive Directors at thesame time as this CAS--the new Electricity Privatization adjustment Loan and Lima WaterRehabilitation and Management Project-will support the privatization in these key sectors.Finally, we will continue to be involved in the reforms of the financial sector through thecompletion of the on-going Financial Sector Adjustment Loan.

45. Lending Levels and Composition. Under a base case lending scenario, newIBRD commitments to Perd are expected to average about US$425 million annually duringFY95-97. This level of lending would be contingent on a continuation of goodmacroeconomic management (including tight fiscal and monetary policies which prevent aresurgence of inflation) and continued progress in the structural reform programs alreadyinitiated by the government (including privatization and development of a policy environmentconducive to private sector development). Under this base case scenario the Bank's lendingprogram includes the Electricity Privatization Adjustment Loan (amounting to 30 percent ofplanned lending in FY95) and investment loans for infrastructure development (water,irrigation, and transport), education, health, and municipal development.

46. Under less favorable developments, Bank lending during FY95-97 would bereduced from the base case level. The scope and size of the lending program will dependupon the Government's performance in three areas: (a) macroeconomic policy; (b) policydialogue with the Bank in key sectors; and (c) implementation and absorptive capacity. Adeterioration in macroeconomic policy, particularly a loss of fiscal discipline, and/orimportant reversals of structural reforms would trigger a reduction in the lending program.Likewise we would lower lending in the case of strong disagreement with the Government onpolicies and strategies in key sectors. In particular we would lower our lending levels in theevent that the Government does not demonstrate a serious poverty reduction effort. Also ifimplementation and absorptive capacity prove to be lower than currently expected in keysectors, we would reduce lending levels to those specific sectors in order to avoid inefficient

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use of Bank resources. Under such adverse circumstances, lending could fall to an averageof about US$200 million annually, which would constitte a core program focused oninstitution building and poverty alleviation.

47. If, in addition to the conditions required for the base case scenario, there is aneed for Bank support for a Brady deal with commercial bank creditors, average lendingcould increase to about $500 million annually, and the program could include an additionaladjustment operation, focussed on support of public sector reform, and/or a free-standingDDSR operation.

48. Portfolio Implementation. Implementaton of the initdal series of adjustmentloans progressed well and the portfolio is rated satisfactory. However, given the five-yearhiatus in Bank lending for Peru and the prior poor performance of the portfolio, there is apronounced need to familiarize Per6's officials with Bank operating procedures. To avoidportfolio problems before they redevelop, we are holding project launch workshops andseminars to train officials in Bank procurement, disbursement, fmancial reporting, auditigand debt servicing requirements. In addition, we are keeping project design simple andinvolving local participation in design and implementation of projects. To facilitate projectsupervision, we have taken steps to open a Resident Mission in Lima in FY95.

49. Creditworthiness and Exposure. Under the base case lending scenario, theBank's exposure to Perd is projected to increase from US$1.5 billion in 1994 to US$2.3billion in 2000. Given the good macroeconomic management required for the base casescenario, Per4's capacity to service debt would increase substanially. Hence, debt service toIBRD as a percentage of exports would average about 3.5 percent over 2000-2003.However, assuming a significant lending program by IDB and relatively modest growth ofnon-preferred debt, the share of public debt service to preferred creditors would increase atthe end of the decade to around 35 percent.

50. IFC and MIGA Activides. Since beginning operations in Perd in the late1960s, IFC has approved 28 investments. Mining has been the most important sector.Although IFC processed an average of two projects amnuafly in the past, no new project wasprocessed between FY86 and FY92 due to the poor investment climate and macroeconomicpolicies. However, in March 1990, IFC participated in the capital increase of Compafifa de:Ainas Buenaventra S.A. by exercising its preemptive rights and purchasing additionalshares, raising IFC's shareholding from 5 to 6 percent. Since 1992, IFC has made loansworth US$26.3 million (including syndications) and equity investments worth US$7.6 millionin capital markets, oil and mining. As of June 30, 1994, IFC held US$19.8 million inoutstanding loans, and US$11.96 million in equity investments in 19 companies. Totalexposure (outstanding investments plus undisbursed commitments) represents about 0.2percent of IFC's total portfolio. Currently, IFC is advising the Govermnent in theprivatization of Electrolima. Over the next few years, IEC will continue its involvement inmining in view of Peri's comparative advantage, but will also diversify its activities to othersectors, including infrastructure, consumer goods, and agro-industries.

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51. Perd became a member of MIGA in December 1991. MIGA guarateed itsfirst investment in Peru in August 1993, a US$45 million investment in a gold mine, MineralYanacocha S.A. A second project involving investment by Citibank in Profuturo, a privatepension fund, was insured by MIGA in early September 1993. MIGA's total exposure inPerG is currently US$38 million. MIGA anticipates a large volume of continuing business inPeru, based on the number of preliminary applications it bas received.

52. Cooperation with Other Institudons. The proposed concentration of ourefforts in the coming years in infrastructure and the social sectors takes into consideration thecomplementary roles played by the IDB, the IMF and bilateral donors. During themultilateral debt workout, the Bank and the IMF worked together to assist Perd in preparingand implementing the Government's stabilization and structural reform program. The 1MP iscurrently supporting Perd through an Extended Fund Facility that will close in 1995, and theBank is continuing to work with the IMF in monitoring the macroeconomic program andsecuring the external fmancing agreed under this facility. The Govemment observed allprograim performance criteria for end-1993, and is on track to meet the 1994 targets. TheIMF also is providing, in coordination with the IDB, long-term technical assistance to assistthe Government to improve tax administration, gain better control over public expenditures,and to reorganize and strengthen the Central Bank. Because of the strong involvement of theIMF and IDB, the Bank has chosen not to be involved in these areas.

53. The Bank will contnue coordination with the IDB on policy reforms andproject design. The IDB's assistance strategy in Perd focuses on supporting the consolidationof stabilization and structural reforms and promoting medium- and long-term development.It emphasizes: (a) economic recovery and sustainable growth; (b) poverty alleviation andthe social sectors; (c) public sector efficiency; and (d) basic infasre bilitation.Like the Bank, the IDB program includes mostly investment lending and technicalcooperation; however the program may also include a small share of quick-disbursing loans.The two institutions coordinate programs in the same sectors closely, sometumes cofinancingand other times dividing responsibilities within sectors. Currently, in preparing a rural roadsproject we are undertaking joint missions, sharing background studies and will jointly financea commonly identified investment program. In education, the Bank is financing primaryeducation whereas the IDB will focus on preschool and technical education. In the watersector, the Bank is achieving synergies and cost savings by sharing IDB financed studies.However, the IDB pursues a number of programs in sectors without a strong presence by theBank. For example, the IDB is directly involved in governance issues, including reform ofthe judicial system and the Congress. Also, through a special program the IDB is involvedin support to micro enterprises. Besides the technical cooperation activities discussed inparagraph 52, the IDB is financing an environmental assessment and the design andimplementation of a national environment framework, as well as activities linked to a secondphase of financial sector reform, including strengthening capital markets and the second-tierfinancing institution.

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54. The Bank has taken a leading role in aid coordination, and will continueworking closely with bilateral donors to ensure the successful implementation of theGovernment's medium-term economic and structural refonn program, and to help ensurefunding for priority programs and technical assistance. Given the magr'+ude of Peri'sresource needs, we are encouraging cofinancing with concessional loans and grants. TheBank held an Informal Consultative Group meeting for Peri in June 1993, where donorsdiscussed the Government's economic program, poverty alleviation strategy, and the profilesof priority social projects. A second Consultative Group meeting was held in May 1994,where donors reviewed the Government's stabilization and structural reform program and itsprogress with respect to poverty alleviation, and evaluated the Government's publicexpenditure program.

Agenda for Board Discusson

55. Economic and Social Prospects. Since 1990, Perd has undertaken anambitious macroeconomic stabilization and structural reform program. Pragmatism and aclear commitment to reform have generated steady progress, resulting in improved economicperformance. Inflation has steadily declined, productivity has increased, fiscal discipline hasbeen unbroken, government effectiveness is slowly increasing and Peru has taken decisivesteps toward reintegration into the international financial community. Public order isgradually being restored and terrorism has abated. Notwithstanding these importantaccomplishments, the Peruvian economy remains fragile. Resuming growth and reducingpoverty on a sustaiable basis after 30 years of economic stagnation and social instability,while ensuring equitable access to the benefits of such growth to all its people, will taketime. It will depend on the consolidation of the macroeconomic stabilization and structuralreform program and on a contied effort for broad-based economic and social development.

56. Perd's problems remain both serious and mumerous, imposing risks both to itsdevelopment program and to t!ie Bank's assistance strategy. The Government's insdtutionalcapacity remains weak, since there has been little progress in reforming the publicadministration and the civil service. Lack of institutional mechanisms to control efficiency inpublic spending and low tax collection constrain the production of public goods and services,as well as government effectiveness. Basic infrastructure remains badly deteriorated andneeds to be rehabilitated. Poverty and ethnic tension continue to divide the country andresidual terrorism and drug trafficking drain scarce government resources. Moreover, Perd'seconomic prospects and its ability to service external obligations will depend on a favorableexternal environment. Peri is broadening its export base to reduce its vulnerabilty toexogenous shocks; nevertheless, a heavy debt service burden and the lack of a solution tocommercial bank debt arrears constrain long-term growth and development.

57. The Government's focus has recently shifted from economic reforms andlong-term development toward a short-term political agenda, and some reforms are beingslowed or postponed unil after the presidential elections in April 1995. As an element of

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this short-term strate, part of the privatization revemnes will feed increased governmentspendig. This might weaken the economic program if it increases inflaton and reduces thecredibility of some administrative and strucural reforms.

58. Bank Asistance. The Bank's strategy for FY9S-97 is to promote povertyreductdon primarily through investment lendig focussed on inrAstructure, socil sectors, andinstition building and through connued support for good macroeconomic management.This strategy recognizes and builds on Perd's achievements to date in terms ofmacroeconomic stability and stuctural reforms and takes into account the roles of partnerinstitutions. In developing a pipeline of investment loans, we plan to keep projects simpleand use ESW and policy dialogue exensivcly to support improved economic and socialpolicies. This parallel-track approach will facilitate project implementation, given Perd'sweak institutions and constaints. Under the base case program, Bank lending to Peru willaverage about US$425 million annuaLly for FY9S-97. The Bank will continually monitor andrevise its program according to economic policy and portfolio performance.

Lewis T. PrestonPresident

c:i

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Aum= Al

PERU - Selected Indicats ofBank Portfolo Performance ad Maagement

Idicator 1nW FM2 fl03 FMW(Curent)

Potfolio Performance

Number of projects under implemention 7.0 8.0 6.0 7.0Average implemenation peod (years)' 7.4 5.3 6.1 0.8Avetge ratiUs

Development objectivesP 2.9 2.9 1.0 1.0Overall stas 3.4 3.5 1.0 1.8

Percent of projects raed 3 or 4Development objectivee S7.2 25.0 0.0 0.0Overal staes 71.4 62.5 0.0 0.0

Canceled during FY 2.0 5.0 0.0 0.0Diburemt rtio (%)Y 0.0 0.0 0.0 120.0Disbursement lag (%y 0.0 0.0 100.0 13.0Memorandum item: % completed projects

rated unusatistor' - - 0

Porfolio Management

Supervision resources (total staff-weeks) 22.8 26.8 82.7 143.0Average supevision (staff-weeks/project) 3.3 3.4 13.8 23.8Supervision resources by locaton (in %) 100.0 100.0 100.0 100.0

Percent headquarters 100.0 100.0 100.0 100.0Percent resident mission

Supervision resources by rating category(staff-weeks/project)Projects rated I or 2 1.4 7.7 13.8 23.8Projecs rated 3 or 4 4.3 1.2 -

Memotandum item:Next CPPR: May 1995

a. Average age of projects in the Bank's counuy potfoo.b. Extent to which the project will meet its developmet objctives (see OD 13.05, Annex D2).c. Assessment of overall perfomanxeof the prto,c bed on the radigs gin to inva aspects of project implemenaon (e.g., mmgemem,

availabilty of funds, compliance with legal covenanis) and to delopment objeces (aem OD 13.05. A=nex D2). Ihe overall sus is not given abetter rating than that given to project deveont objelv.

d. Ratio of dibursem during the year to tho umbed banc of th Dks potfolio at the begning of the year's investme projes oy.e. For aDl projects comprisng the Bank's county pordoli, the pementaped ce between actual cumulative dis eme and the cumulative

disbursements estimaes as given in the Orginal S R PocaatW or, if the loan amoun have been modified, in the 'Revised Forecast'. Thecountry portfolio dibrsm lag is effively dte weighte avetage of dibusement lags for projects compisig the Bank's country pordblio, wherethe weights used are the respective ptoject shares in dth total cumulaive disbrse esmiates.

f. For current PY only: from the OED databse.

- 24 -

Annex A2Page 1 of 2

PERU - Bank Group Pact Sheet, PY91-97IBRD/IDA Leading Progam, PY91-97

AW Qureat Planned'

Category FY91 FY92 FM93 FY94 FY9S FY96 FY97

Commibnes (US$m) 0.0 1,000.0 291.8 284.0 475.0 300.0 425.0

Sector (%)b

Agricur 0.0 0.0 o .0 0.0 16.0 0.0 40.0

lbdustry and finance 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Ery 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Power 0.0 0.0 0.0 0.0 32.0 0.0 0.0

hubbk sector manag_et o0.0 0.0 0.0 0.0 0.0 0.0 0.0

hfrasucr and urban development 0.0 0.0 0.0 52.8 32.0 100.0 0.0

Hman resouces 0.0 0.0 0.0 47.2 20.0 0.0 20.0

Enironme 0.0 0.0 0.0 0.0 0.0 0.0 20.0

Mining and olher extacive 0.0 0.0 0.0 0.0 0.0 0.0 20.0

Mu_sector 0.0 Q2Q nu 0 0LQ ° 0.0

TOTAL 0.0 100.0 100.0 100.0 100.0 100.0 100.0

Adjusment loans 0.0 100.0 100.0 0.0 30.0 0.0 0.0

Specific ivestm loans and olhets 0 OD I0 ZQ0 100.0 100.0

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Disbursmets (USSm)

Adjusment loans 0.0 0.0 975.0 0.0 175.0 250.0 0.0

Specific investmem lons and others 0.0 0.0 0.0 13.0 100.2 131.0 158.8

Repayme (USSin) 94.0 93.9 485.0 90.0 67.5 72.5 77.5

Inerest (US$m) 83.0 99.9 450.0 109.0 118.0 131.0 139.5

a. Ranges dont relect most liey scenaio presented n tme Country Stgy hper.

b. Par fawure lending, rounded to nearest 0 or 5%.

c. Suucutal a4jusmem los, setor adjsusm lon, and debt and debt sev reduction oans.

-25 -

AnMw A2PE}u - NC ud Mm Pira FY9I94 Poe 2 of 2

past Cuurent

Category FY9l P92 FY93 FYN4

IPC Approvals (US$m) 0.0 11.5 51.6 40.7

Sector (%)

Agribusiness 0.0 0.0 39.0 0.0

Capial markets 0.0 100.0 0.0 35.0

Chemicalslferdlizers 0.0 0.0 0.0 0.0

Infastructure 0.0 0.0 0.0 0.0

Manufkctuing 0.0 0.0 0.0 0.0

oil/mining 0 Q 6L0 6i

TOTAL 0.0 100.0 100.0 100.0

Invesunent instument (X)

LoanS * 0.0 87.0 76.0 89.0

Equity/Qai-equity 1 X 11.0

TOTAL 0.0 100.0 100.0 100.0

MIGA Gutantees (US$m) 0.0 0.0 0.0 38.0

MIGA Commiments (US$m) 0.0 0.0 0.0 0.0

*/Includes sycons

- 26 -

Annex A3

Peru Page 1 of 2

Ci S_t 4~ u~mate Mwu~ sdddie- Lacemaha o NInU 197#77 59554$ 1957f CeAve mea. r

Priority Poverty Indicators

POVERTlUpperpo lie local c.. 617 _ -

Headoon xt iNd %ofpop. . - 32Lrpovus line looalcmu. 315 .. .HUdtouftIAdSZ . %*fpp. - 12 22 .. .

GN?perchp USS 1,000 930 950 .690 3,870SHORr TERM DNCOMZ INDICTOtSUnskle sueal wagRorwal .~. .. .. ..

Cosumerpuce h a 1987100 * 0 30 17,989,340 _ _Lo loincoo__ Foold * 33 466 .

Urb=~~~~~~~~~~~~~

SOaAL INDICATOUPubflcexaeoubssoclesices %ofWDP _ 3.6 2.4 _ _

P.na % sbol Sgepop. 113 122 106 107male * 114 125 - -FWemle * 99 . 120 . -

pe fiion.l bths 96.0 74.0 52. 44.0 45.0 40.0Under 5m y .* ' _ - 68.4 56.0 59.0 51.0Meas8es 8# U. ._ 32.0 81t 78.9 - 82.0DPr - 26.0 81.4 73.8 _ 73.8

Cbildmalmdw_ 13.4 10 . 8 10 _Utx peclany '''*oul YOM 56 59 65 68 68 69

Fae ad g * 3A . 3.7 3.8 5.6 6.4 63Total*lt . per 5.3 : 4.1 33 3.0 3.1 .9Maena s. Woillylte per 100,000II, bkinls~ . . 165 _ _ . _ _

SuplezentzyPoverty Indicatonshxpeadiraoua dd * x %o Io l 6 - .. _ _

Socal sm cove % em ce pop. - _ 39.1 ..-A to sak. tot %ofpop 47.0 SS.0 S8.0 803 .. . 85.6

Urba* 72.0 73.0 78.0 91.0 943Rwdu' 15.0 17.0 22.0 643 73.0

Access to healt e

Popuadton growth rste GNP per capagwh rate Deveopment diamondawu,,pecet (=Mana avenqme percent

to {w_ t~gPqLiteqpeancy

4 r

2-- pu I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~piumay

*z . .10 ~. aeroimea

.10 Acces to sale wowe1970-75 198045 198742 1970.75 198045 198792

-Lowidd-m - Lowidnoe

. Sdce tehn ial DM p389. b. Tne ep id, uWed oan fuicy indt shows avea levd of devope I ie counycompod wilh Ins ome pwqp Seeaghe Ieduaon

-27 -

Annex A3Peru Page 2 of 2

mew Sam qeAak*WMVVW ip e

Resources and ExpendituresKUNLUN RSOURtCESPopulation (mre-1992) tosds15.141 19,383 22.37 453.294 9424347 477.960Age dependency urai radQ 0.88 0.77 0.10 0.67 0.66 0.64urban V.of pop. 61.J 673 70.8 72.9 57.0 71.7Populazion loWth rma annual % 2.8 2.2 1.9 1.1 1.4 1.6Urban 4.1 3.0 .: 2. 2.6 4.8 2.51

Labor hore (15.64) thousands 45$48 6,204 .. : 7s43 164.091 - 181.414AlpctulnU 6 of labor famce 43 40.-.-Industry is 18 Femae *22 24 24 27 36 29Females per 100 malesUrban number to99- Rural too 96-

NATURAL RESOURCES4Are thou. sq. Ion 1,28.22 1,28.22 l1,2822 20,5.07.48 40,699737 21,836.02Density pop. per sq.lou 1I. 1S.[ 17.1 21.7 22.8 21.4ASriculwmal land 7%of land mle 23.7 .24.1 24.1 40.2 .. 41.7Change in apleticulall land annual % 0.0 0.0 0.0 C.S. 0.3Agriculutrai land underirrtgatou 56 3.7 3.9 4.1 3.2 ... 9.3Formst and woodland thou. sq.io 722 697 482Dfoxesmtion (net) 0nu.4. -G

INCOMEHousehold incomeShwre orwp20% ofhousehwlds %omicome 61Share ofbouom 40$' of households *7 . .-.

Share ofbouom 20% of iouseholds *2 .

EXPENDITUREFood % of OP -. 24.2 -.

Staples .. .8--Meat, fish. muIk, cheese, egg -. 10.4

Cereal imports thou. metslc tmmie 1,182 1.227 2,015 25,032 74,94 49.174Food aid in cereals * 37 216 464 1,779 4,054 282Food production per capita 19817-100 117 *.97 95 104 .. 109Fertilizer consmtinkgfl 3.4 . 24 2.5 15.5 . 68.8Sham ofagic GuiODP %OfGODP 16.4 .. 10.2 .. 8.9 . 8.1Housing % ofGOP .. 10.4 ...

Average household size- persns pe househod 4.8 ..

Urban e4.9 .

Fixed invesunen housing %6of ODP .. 54- .

Fuel and power %of GDP .. 2.1 Eneargy consumption pe capkit kg of oil equiv. 472 377 330 912 1,882 1,649Households with electleiriYUrban % ofhouseholds - 17.5 ..

Rural Transport and eomzuvuieatfo V. of'ODP 7.0-Fixed invesunenc fanspot equipment 3.5 2.2 ..

Totalmad length thou. km S5 68 70INVESTMEN'T IN HUMAN4 CAPffALHealthPopulation par physician persos 1,900 1.071 ;39Population per nurse 657 -i3'Population per hospital bad * 0 9 7 0 5162354Oral rchydyration theray (under-5) % or cases - -254 .5

EducadionGross enrollment ratoSecondaz~ % of school-age pop. 46' 47 47 -. 53

Female *41 60 .. -

Pupil.eachcr ratio: primay pupils per eahr39 35 28 25 26 2Pupil-teacher ratio: secanday 5.24 21 21 - ,Pupils reaching grad 4 Y.Of cohort 82 84 .. .. 7Repeatrrate: Prmaty % oftotowl olt 10 14 .. 14 I I1Illiteracy % ofpop. (Sp I5.) 28 Is IS5 Is .. 14Female %of m((e g.qIS-) .. 26 2 1 17 I I1

Newspaper circulation pe thou. pop. 9 83 79 99o10 117wortd 85ank " ;,; %Ienaoa Peonomaucs Depamrunnt Apn I W4

- 28 -

Annem A4Page 1 of 3

remn - KIR Deoamml hmtomm

Actad EWbate Projectedbmcr 198 1990 1991 1992 1993 1994 1995 1996

Nana accmns (% of GDP at c ru im)

Gross domesic productAgricl 13.3 12.7 12.6 12.2 12.1 12.2 12.4 12.4

lduty at 34.3 34.4 34.2 33.2 34.1 35.1 35.4 35.6

Services bl 523 52.9 53.2 54.6 S3.7 52.7 52.2 52.0

Total Consumpt 77.8 83.9 85.3 87.1 84.7 82.9 83.2 83.4

Gross domesic. fixed investmen 19.1 16.8 16.8 16.3 18.6 19.9 20.0 20.0

Govenunt nvstm 3.6 2.7 4.7 4.2 3.8 4.3 4.0 4.0

Prvate ineme 15.5 14.1 12.0 12.1 14.8 15.6 16.0 16.0

Exports GNPS 18.4 13.2 9.8 10.4 10.4 9.7 9.9 10.4

Imports GNPS 15.3 13.9 11.8 13.7 13.6 12.5 13.1 13.8

Goss domestic savings 22.2 16.1 14.7 12.9 15.3 17.1 16.8 16.6

Gross otinal savings c/ 16.4 12.0 11.8 10.2 12.7 14.2 14.0 14.0

Mmorandup ieu

Gross domesic product (US S m) dV 24249 32080 42672 41918 41232 46854 48370 49043

ONP per capita (Adas USS) 1660 1006 1466 1708 1898 1955 1941 1961

Red annha - sates. calculated from 1989 prices) ol

Grossdomesdcprdact utmetpdoes -11.8 .4.4 2.7 -2.8 6.S 10.0 6.0 6.0

Gross domestic income -13.6 -9.1 0.8 -5.3 6.0 4.4 4.7 5.6

Real arsual per capita grwwld raesM. callted from 1989 prices) ./

Oss domeic prduc at mare pric -13.5 *6.2 0.6 -4.7 4.4 7.8 3.9 3.9

Total consuraption -13.5 1.1 2.4 -2.7 2.0 0.8 3.2 4.2

Plivuet c_nmum -13.3 2.7 2.8 -3.1 2.2 1.0 3.4 4.4

- 29 -Aum4 M

d)~~~~~~~~~~ao of

huacatoi 198P 1990 1991 1992 1993 7 - 199S 19

FDaam of pqnautds (UJsm)

EXPOrs (GNFS) 4470 4248 4165 4345 4273 4529 4801 5089

Merhadise f..ob. 3488 3231 3329 3484 3433 3585 3853 4174

Impons (GMFS) 3721 4467 5054 5762 5623 5861 6334 6755

Merchandie f.o.b. 2291 2885 3494 4051 3995 4133 4510 4906

Resource balace 749 -219 4389 -1417 -1350 -1332 -1533 -1666

Net curn transfes -1207 -1288 -1310 .1072 -1265 -1267 -994 -1053

Currmt account balance 458 -1507 -2199 -2489 -2615 -2599 -2527 -2719

Net foreign prvate dietoiwanstmn 59 34 -7 127 537 3050 f 650 750

Long tm loans (not) 635 416 712 485 500 172 -703 23

Oficial 247 88 356 6 567 337 211 -130

Prvate 388 328 356 479 -67 -165 -914 g 153

Oher captda (net wncding errands omisimns) 627 1193 2745 2369 2078 1334 1466 2157

Change in reserves h/ 4-63 -136 -1251 -492 -500 -1957 1114 -211

Memorand Item

R rceu baance (% of GDP) 3.1 -0.7 -2.1 -3.4 -3.3 -2.8 -3.2 -3.4

Real atmand growh rates%erchandise expoMts (f.o.b) 22.8 -12.1 1.1 3.7 -4.3 1.4 4.3 5.2

Primary 22.3 -12.9 1.3 2.9 -9.4 -1.3 3.0 4.3

Manudacrurs 24.1 -5.6 -4.2 5.5 9.0 6.8 6.8 6.8

Maechandise imporw (c.l.f.) -22.2 19.5 18.8 14.9 -4.3 0.4 5.9 5.6

- 30 -

Amne A4

Page 3 of 3Pens - KW Rsonoe Sndcators

AaM stMte ProjectedIndicator I989 990 -M 1992 ]WQ }99m 1995 1996

Pubbe finae (% of GDP at cument prices) ir

Current revenues 7.1 9.5 9.5 10.6 10.5 12.5 14.2 14.8

Cuent expendiures 10.5 11.8 9.0 9.7 9.5 11.0 13.4 g 12.5

Current account surphs/deficit -3.4 -2.3 0 5 0.9 1.0 1.5 0.8 2.3

Privatization proceeds 0.0 0.0 0.0 0.5 0.7 5.1 f 2.1 0.6

Capital expenditre 2.3 1.4 1.4 2.1 2.0 3.2 3.4 3.8

Foreign fimanc;ng 1.7 1.9 1.9 0.8 1.1 1.2 1.2 0.9

Moneary hts

M2IGDP (at current market prices) 21.5 17.7 12.8 14.6 15.7

Growdt of M2 (%) 2116.9 4924.8 269.1 81.4 68.5Private sector credit growth/total credit growth (%) 74.5 79.4 168.2 133.6 132.7

Price indhe (L98.9100)

Merchandise export price index 100.0 104.4 94.8 96.6 89.5 92.2 95.6 100.9

Merchandise import price index 100.0 106.4 108.5 111.5 112.1 115.9 119.3 122.8

Merchandise terms of tade Index 100.0 98.3 87.4 86.6 79.9 79.6 80.3 82.2

Real exchange rate j/ 100.0 103.9 128.4 137.4 127.2

Real interest rates (%) k/ -18.6 -40.4 15.5 40.1 34.2Consumer price index (e.o.p. % growth rate) 2775.0 7649.6 139.2 56.7 39.5 20.0 12.0 10.0

GDP deflator (% growth rate) 2670.3 6142.3 421.1 72A 47.9 20.4 12.2 10.0

Notes:a/ Ildudes fishn, mining, and manfauing.b/ Inludes consutction, government, commerce, and other.c/ Includes net unrequtd transfers exchldig officia cpital gants.d/ Calculated using average nomil exchange rates.e/ Calculated from GDP in dometc cuenwc.ft Inchldes US$ 2A billion of privatation poceeds.g/ Includes projected use of US$ I billion to pay for unfunded liabilities.h/ Includes use of IMP resources. A negative change indicates an ics in reserves.i/ Cental governmenLj/ An nrease in the mdex denotes appreciation.k/ Real interest mte in doneAc curmrecy. Credit in domestc cuncy represetd 22 percem of total credit in December of 1993.

- 31 -

Antw AS

am - iKy Ezpuuft IniIets

Acftda Zawfe ____________

ndicator 1989 19W) 1991 1992 193 1T 19s 199

OWI debt outadWing an disbursd (T ) (US$m) at 18583 20068 20720 202 21170 21742 2187 24047[et disbursements (USSm) a/ -28 128 208 336 185 1171 774 785'otal debt service (TDS) (US$m) 407 476 1153 1033 5492 b 2764 3080 c 2060Iebt and debt service indicators (X)

TDO/XGS dt 415.7 472.4 497.5 467.1 495A 480.1 455.5 472.5TDO/GDP e/ 76.6 62.6 48.6 48.4 51.3 46.4 45.2 49.0TDS/XGS d/ 9.1 11.2 27.7 23.8 128.5 61.0 64.2 40.5ConcessionallTDO 1.2 1.1 1.1 1.1 1.0 1.0 1.0 0.9

BRD exposure indicators (%)IRD DS/public DS 0.0 0.0 16.7 20.2 58.2 25.3 31.1 12.0Prefenred creditor DS/public DS 17A 12.8 62A 42.1 64.4 56.9 67.7 27.7IBRD DSIXGS dt 0.0 0.0 4.2 4.5 21.9 4.0 4.2 4.2IBRD portfolio share 1.4 1.3 1.2 0.9 1.4 IA 1.4 IA

FC (US$m)Loans NA NA 0.0 87.0 76.0 89.0 NA NAEquity and quasi-equity f/ NA NA 0.0 13.0 24.0 11.0 NA NA

GiGAMIGA guarants (US$m) NA NA 0.0 0.0 0.0 38.0 NA NA

lotes:/ Inclhdes public and pubLicly guaned debt, pivae ounted. use of IM credits. and net sbot tem capia.J Inludes bridge loans to pay anears to IBRD and IMP. it also ind anears paid to 3RD and IMP.I Includes US$ 1 bilLion to pay for unfimded liabilities.V XGS' denotes exports of goods and services, including workes' remittances./ GDP in USS calculated usig average nm al exne aes.I Inchldes equity and quasi-equity types of both loan and equy sumesm.

- 32 -

Annex A6

The Status of Bank Oprations in PeruStatement of IBRD lon and IDA Credits

September30. 1994

Amoru in US$ milion Disbursement Last ARPP(Less canelations Lag supervision ratng

Lao or Facal Development OveralCredit No. Year Borrower Purpose mmRD Undisbrsed objecaives objectives

Sixty four loans fblly disbursed 1,801.7

of which Program Loan,SECAL. SAL

*1693 1979 Penr Program Loan 115.0

3437 1992 Peni Trade Policy Reform 300.0

3452 1992 Peru Strutural Adjustment 300.0

715.0

3489 1992 Penu Financial Sect. Adjust. 400.0 100.0 25

3540 1993 Peru Priv3atation T.A. 30.0 27.1 78

3595 1993 Peru Privatizaion Adjustment 250.0 100.0 40 5 S

3610 1993 Pent Eney ScMiningT.A. 11.8 10.9 100 S S

3684 1994 Pent Social Dev. & Compensation 100.0 85.7 na. S S

3701 1994 Peru Basic Health & Nutrition 34.0 33.0 n.a. S S

3717 1994 Pent Tmansporrton Rehabilitadon 150.0 144.6 n.a. HS 5

TOTAL 2,777.5

of which has beenrmpaid 978.9

Total nowOutstanding 1.798.6

Amount sold 18.3of which hasbeen repaid 18.3

Total now held byBank l816.9

Total undused 5ur

SBCAL, SAL or Prgrm Loan

NotW. The _ta of tre projecta listed is described in a separate report on aI Bank/IDA finaed projects in exeution, which is updatd twice yearly and circulated toth Excutive Directrs on April 30 and October31.

' / ~~~ ~ ~~~~ ~ ~~ ~~7'8° 7 1z 74t- 7'2- j

> E C U A D O R / < a C O L O M B I A

21 2~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

.<\X ~ ~~ ~~ ~ fi vp do no

of DPAROETS' NL

SAN ~ ~ ~ ~ ~ ~ ~~~~~J M~~ASODRTATEL IG

35r s"S. p: MAN M TEC PLOW

3~~~~~~~~~ EN~~~~~~~~~~~AVER RALOAD S

>BASIC OTHERALTHANDER b\ROAIS

TU ~ ~~~~~~~ on*o10> e QTo

DEPARTMENTS INOUN EDARE

.oesbTMI. Ed=.u.§ p> 0 tctn ti° i 2 ORET

LOW~~~~~~~~~1O

iF~~~~~~C %7ozrdss PAYEF/ o BD PROJECT5.- D OTE ALLWETHR It°c S°w pOro rio4fTANSPt3RAnO

t\ tUt^P t /2 B \ // so4 z EN~~~~~~~~~~~~~~~~~AILROA18RADTW _ >tupo r>.(BAPOTSC EU N UM1N

C g_ ;x«yiuu5;1iWot#Z++v>as 4g4 J ~~~~~~~~~~~~~DEPARTMENTS BONDARIEDS

; <mAt^tAYœQUE~~~~~~~~~~~~~Hut4t5 zt roVR tD:-0 I DqO C + | OEATt O

PASCO f3;7ijetqmz Q t li ' \ PAVED ROADS6;.=lRT P ANq Tqoabo I '£ -LO

'aTJi SO'^ o o ,6 74 72 k C I0I DP

8~~~~~~~~ I A;4_t< otp OT

CAWM LIa# * PS CA c j / i

1t C Ey A3 N M DR DE IO

P A C I F I C \ i 83 tys OQeilitqaniq \ .i'Ado

Jn h I ;5 A ~~~~~~~AYACUCHO C q_. > .Pq l-) 2 \_J J G~~~~~~, . c%'S_\.*q~~~~~~~~~~~ y*_io w < P U No er o

P .....E .... ....... R U Sqn Ju ¢.0w_

POVERTY INDEX BY DEPARTMENT >bAEUP w8.< -16- AND orq Q 3f .SELECTED IBRD PROJECTS, 1994A t\,

Cmaneott/ . dUEGAxe.S

rFONCODES: Th soiot 4veIop.ddt fund is t ) i A) \.}f

050 100 ISS 200 250 I d;oa ltfiloj-f. lt gbJ.onoy 1994, f X

Xi ~~~~~~~~~~~KLOM)ETERS cori-tttnarzndCosmtra.ducer -.. /

ro E(t- ~~~ ~ ~~~ ~ ~~ ~~7Sv 74-1 74- 72- rc7-CI.