WASHINGTON, December 19, 2006 – The World Bank’s Board of Executive Directors discussed the new Country Partnership Strategy (CPS) for Peru, which projects financial assistance of up to US$3.5 billion between July 2007 and June 2011 to support the country’s development agenda. In addition, the Board of Directors approved two loans for a total of US$250 million to support fiscal management and competitiveness, as well as rural transport. “With this CPS, the World Bank intends to support the new administration and help it achieve its objectives in the areas of poverty reduction, inequality, and governance,” said Marcelo Giugale, World Bank Director for Bolivia, Ecuador, Peru, and Venezuela. “This strategy provides greater flexibility to the government in terms of the amounts of financing and the content and timing of the lending operations than previous assistance strategies. This CPS is designed to keep up with Peru’s status as a rapidly-developing middle-income country.” The CPS, which includes a lending range of up to US$700 million a year, seeks to support the new government’s priorities. The strategy was designed in partnership with the Peruvian authorities, and also benefited from the input of diverse stakeholders, including civil society, private sector, donor community, and government representatives. These groups participated in workshops in Ayacucho, Cajamarca, and Lima. The new strategy proposes a selective program of operations from the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), which is the private sector arm of the World Bank Group. The program is built upon three strategic pillars to support Peru’s efforts to increase economic growth and competitiveness, reduce poverty and inequality, and strengthen the country’s public institutions. 1. Economic Growth Peru’s new administration inherited a stable macroeconomic situation from the previous government - the result of sound economic policies and a favorable external environment. Among the impressive achievements of recent years are: growth greater than 4 percent in each of the last four years; growth and diversification of exports (up 35 percent from 2004 to 2005); reduction in country risk (down 21 percent from 2004 to 2005); stronger tax collection effort (up 14 percent from 2004 to 2005); and projected fiscal surplus for 2006 (expected to be between 0.2 and 0.6 percent of GDP). Over the next five years, the challenges will be to maintain macro stability and reduce vulnerabilities, accelerate the rate of growth and widen its base, and make it environmentally sustainable. The Bank will support these efforts by: - Consolidating the macroeconomic policy framework and reducing vulnerabilities to natural disasters and social conflicts.
- Improving economic infrastructure and the business environment to deepen integration through the free trade agreements and broaden the basis for economic growth.
- Managing water resources, biodiversity conservation and forest cover, controlling air and water pollution, as well as the sustainability of extractive industries.
2. Social Development
Despite recent strong growth, there has been limited progress in poverty and inequality. The national poverty rate declined only from 54 to 51.6 percent between 2001 and 2004. Inequality, measured by the Gini coefficient, stood at 0.43 - below the Latin American average of 0.52, but still high by international standards. Policies focusing on promoting new social policy standards and addressing basic needs are key to improving these indicators. Lack of sufficient and adequate human capital, and of initial support systems for the poor are among the fundamental causes of poverty, particularly in the areas of education, health care, nutrition, and social assistance. Therefore, Bank assistance to reduce poverty and inequality will focus on: - Improving access to water, sanitation, housing, and electricity services.
- Expanding land titling.
- Introducing standards and strengthening accountability to support achieving results in education, health, and nutrition.
3. Modernization of the State
The challenge for the government going forward will be to gather support to reform those areas within the state’s structure that people care most about: decentralization and public service access, improvement of the efficiency and quality of public spending, and improvement of the justice system to reduce corruption. Bank activities within this pillar will focus on: - Consolidating the decentralization process.
- Strengthening public sector management.
- Improving perceptions of rule of law and access to justice.
In addition to discussing the CPS, the Board approved a US$200 million loan to support fiscal management and competitiveness, and a US$50 million loan for rural transport. First Programmatic Fiscal Management and Competitiveness Development Policy Loan The US$200 million First Programmatic Fiscal Management and Competitiveness Development Policy Loan is the first in a series of possibly three or four loans supporting the government’s reform plan to improve the functioning of Peru’s public sector institutions and business environment. The programmatic series on improving fiscal management and competitiveness is at the core of the CPS’s proposed assistance program and directly addresses the economic growth pillar. This loan focuses on two broad areas of policy reform: efficiency and quality of fiscal management, and competitiveness. In the short term, the loan will have the twin benefits of strengthening the Government of Peru’s fiscal position, and supporting the government’s public sector and competitiveness reform agenda. In the medium and long term, reforms supported by the loan series will solidify Peru’s overall fiscal framework, improve the efficiency and quality of public sector spending, and reduce bottlenecks to faster economic growth. Some of the reforms supported by this loan include: - Simplifying and improving tax collection;
- Controlling sub-national debt;
- Implementing incentives for greater sub-national revenue creation and judicious use of natural resource revenues;
- Promoting performance-based budgeting;
- Expanding e-governance procedures;
- Streamlining administrative obstacles faced by the private sector; and
- Strengthening Peru’s ability to take advantage of opportunities offered by international trade.
“The reforms supported by this loan will in turn result in budgetary savings that can be directed toward priority poverty programs that promote human capital development and act as a social safety net for the poor,” said Rossana Polastri, World Bank task manager for the operation. “At the same time, Peru’s greater integration into the world economy will expand and diversify markets, creating greater opportunities for economic growth and development,” added Fernando Rojas, World Bank co-task manager for the operation. The US$200 million, fixed-spread loan is repayable in 11.5 years, including 6.5 years of grace. Decentralized Rural Transport Project The second US$50 million loan approved today for the Decentralized Rural Transport Project will improve access of rural households and entrepreneurs to goods, social services, and income-generating opportunities through reduced transport costs and better rural transport infrastructure. The project will do so by supporting the following activities: - Improve rural transport infrastructure by rehabilitating or improving rural roads prioritized through participatory planning; improving and building bridges that are critical to ensure connectivity on rehabilitated rural roads; periodically maintaining rural roads; improving non-motorized transport tracks; improving other types of rural transport infrastructure (including river-based equipment); and piloting an initiative for the stabilization of slopes and the protection of rural roads against river-based erosion.
- Provide a comprehensive institutional strengthening package at the local and central levels. The main objective of this component is to strengthen regulatory capacity at the national level, while empowering municipalities to define and implement their rural transport policies.
- Enhance the impact that improved transport conditions can make on rural development by scaling up the Local Development Window model developed during the second Rural Roads Project, and experimenting in 15 Peruvian provinces a Rural Infrastructure Pilot that will include specific incentives to promote greater complementarities across rural infrastructure investments.
“This project is closely aligned with the priorities of the new CPS, particularly when it comes to building an economy that generates jobs fast and in a sustainable way, and a state Peruvians can feel proud of because it delivers the services they need,” said Nicolas Peltier-Thiberge, World Bank task manager for the project. The US$50 million, fixed-spread loan is repayable in 11.5 years, including 10 years of grace. | 
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