DEVELOPMENT HIGHLIGHTS
As a consequence of strong economic policy and a favorable external environment, Peru’s economy has ranked among the best performers in Latin America. GDP growth jumped from 7.7 percent in 2006 to a remarkable 8.9 and 9.8 percent in 2007 and 2008. The impact of such strong growth on employment and incomes has expanded beyond Lima and resulted in significant reductions in poverty rates. The national poverty rate fell 12.4 percent points between 2004 and 2008, from 48.6 to 36.2 percent. Over the same period, extreme poverty dropped 4.5 percent points, from 17.1 percent to 12.6 percent. Despite such significant progress, poverty rates are still high for a country with income levels like Peru’s. Between 2006 and 2008, Peru’s fiscal indicators remained robust. The non-financial government bottom line recorded a surplus between 2.1 and 3.1% of GDP over that period, comparing favorably with 2.5% GDP government deficit recorded at the beginning of such decade. Such improved governments accounts are accomplished by the raise of revenues resulting from a boom in mining exports and overall strong growth, as well as from prudent expenditure management. Public debt has fallen quickly from 46% of GDP in 2001 to approximately 24 percent of GDP in 2008. Simultaneously with improved internal indicators, the strong fiscal position explained that in 2008, Peru was awarded investment grade by several international rating agencies. Now, Peru faces the global financial melt-down armed with strong macro-economic indicators and sound economic and social policy management. The country enjoys enviably high foreign currency reserves (over 20 months’ worth of imports), a healthy financial industry, a manageable foreign currency account and a strong portfolio of foreign investment commitment. Despite Peru’s relatively strong position, the global financial crisis has already started hurting key sectors of the economy. Since the third quarter of last year, a drop in mineral quotations and overall foreign demand resulted in a slower economy. Falling export product prices and a degrading international environment are also hurting government revenues, external accounts and the stock market. The international decline is casting shadows on Peru’s short-term outlook. Growth forecasts for 2009 point to a significant slowdown. Lower commodity prices and slower global demand will hurt government revenues, as one third of tax revenues are levied on commodities. Peru is strongly positioned to resume the path of growth once the global economy stabilizes. However, the current administration is aware of the risks involved in the global financial crisis and is responding through an economic stimulus package to prevent losing whatever progress was accomplished in recent years in reducing poverty, including the Juntos conditional cash transfers program in Peru’s poorest districts and infrastructure investments in rural areas. To meet potential future financing needs, the government of Peru has asked the World Bank and other financing sources to provide certain contingency loans. Peru: Economic Indicators - Sustained GDP growth, at rates exceeding 5% in 2002 and 2005; 8% in 2006, 9% in 2007 and 9.8% in 2008.
- Diversified and growing exports (24% annual average growth from 2002 to 2007)
- Sovereign risk below Latin American average (EMBI Global + 273 base points in 2008 compared the 426 base points regional average)
- Strong public debt management (Debt was 29.6% of GDP in 2007, and 24.0% in 2008)
- Debt repayment (% of goods and services’ exports: 26% average in 2000-06, 19% average in 2007-08)
- High market liquidity (25.2% higher bank system liquidity in 2008)
- Stronger tax collection (from 12.2% of GDP in 2000 to 15.6% of GDP in 2008); fiscal surplus of 3.1% of GDP in 2007 and 2.1% in 2008
Peru: Social indicators - Child mortality fell 33 per 1,000 live births in 2000 to 21 per 1,000 live births in 2006.
Source: World Development Indicators 2008 - Live expectancy rose from 69.2 years in 2000 to 71 years in 2006.
Source: World Development Indicators 2008 
Source: World Development Indicators 2008 THE CHALLENGES AHEAD Defeating poverty
Sustained economic growth over the last six years has had a positive impact on reducing poverty and creating jobs. Official figures for 2009 show poverty in Peru fell from 39.3% to 36,2% between 2007 and 2008, or a 3.1% reduction. Poverty fell both in cities, where it dropped from 25.7% in 2007 to 23.5% in 2008, as well as in the countryside, where it dropped over the same period from 64.6% to 59.8%. Extreme poverty nationwide reached 12.6% in 2008, 1.2 points less than in 2007. Economic growth is a necessary but not a sufficient condition for success. In addition to speeding up economic growth, it is important to involve wider segments of the population. One of every two people lacks the required human capital endowment to succeed in life. Compared to a wealthier Peruvian girl, a poor one is likelier to die before turning five years old, is twice as likely not to attend primary school and will only have one third chance to have safe drinking water available throughout her life. Social safety network
The Government of Peru has asked the Bank to prepare a diagnosis and a set of recommendations to improve its social programs. As a consequence, a recommendation was made to improve targeting and efficiency of the main programs that get 80% of expenditure, health and education accepted. This program includes the Juntos conditional cash transfers program, FONCODES, the new FONIPREL investment fund, the Construyendo Perú urban job creation program and the most important food assist ace programs, i.e. Vaso de Leche (Glass of Milk) and the PRONAA national food program. Now, efforts should focus on improving these social programs, making their goals clearer and establishing effective accountability mechanisms. Such reforms relate to undergoing efforts by the Ministry of Economy and Finance (MEF) to introduce results-driven management for public programs, including goals setting and results-based plans. Environment
Peru has made considerable progress in recent years in improving the institutional and legal framework for environmental management. Thus, rules and regulations were enacted defining roles in environmental permitting, to strengthen the environmental framework for key industries (mining, energy and forestry) and encouraging better managing of protected natural areas. These measures created the regulatory framework to establish the Ministry of the Environment. Such steps open the door to the reforms Peru needs to make if it wishes to be in a position to rise to its many environmental challenges. It is against this background that the World Bank has made a programmatic loan to support Peru’s environmental effort. Transportation
Road safety also emerges as a challenge for the future. Having recorded 25 fatalities for every 10 thousand vehicles, Peru shows one of the highest road mortality rates in Latin America. Traffic accidents cost Peru about 1.5% of its annual GDP. Consequently, at the request of the government of Peru, the World Bank is supporting the Ministry of Transport and Communications to design and put in practice a road and safety program to create a framework, means and institutional and management arrangements that hopefully will lead to a drop in traffic accidents. WORLD BANK ASSISTANCE TO PERU In consultation with the Bank’s technical team, the Garcia administration prepared a Country Partnership Strategy (CPS) for Peru, presented to the World Bank Executive Board in December 2006. This partnership arrangement provides greater flexibility than the prior country assistance strategy and was made possible by Peru’s current status as a rapidly developing middle-income country. Such flexibility is reflected in financing from the Bank being made available for up to $3.5 million over a CPS horizon running from FY 2007 to FY 2011, as well as in the contents and timeliness for various transactions. The present CPS underscores the country partnership relation, as well as the flexibility in setting the programs and projects’ goals. Peru’s 2009 investment portfolio is comprised of some 20 operations for a total commitment reaching US$1.8 billion (pdf) The following graph shows the percent distribution of the loan investment portfolio by sector. 
After two years of implementing the Country Partnership Strategy, a progress report was discussed at the World Bank’s Executive Board Meeting in February 2009. This report provided the basis for program adjustments over the next two years. Although the objective set forth in the Country Partnership Strategy to accomplish sustained economic growth and reduce poverty remained relevant, changes in the world context required even greater program flexibility. The Government’s concern about the impact of the ongoing global crisis has translated into greater demands for Bank loans since September 2008. To reach this goal, a number of contingent credit programs have been scheduled.
PROJECT ACCOMPLISHMENT The Bank’s support to increased competitiveness with an emphasis on social development and inclusion was provided through a number of loans for development policies, technical assistance, investment operations and analytical tasks. Some examples of the present project portfolio are provided below. Present and past environmental issues linked to the agricultural, mining and fisheries industries in particular, cost dearly in terms of human health and biodiversity loss in Peru. The main studies undertaken were “Wealth and Sustainability: The Environmental and Social Dimensions of Mining Sector in Peru" (pdf) and “Environmental Sustainability: A Key to Poverty Reduction in Peru" (pdf) Implementation of the Regional Adaptation to Rapid Glacier Retreat in the Tropical Andes Project started in May 2008 in Bolivia, Ecuador and Peru with a focus on mountain and glacier areas. This initiative seeks to strengthen local ecosystems and economies hurt by the accelerated retrenchment of tropical glaciers through a number of pilot adaptation initiatives that bring forth the cost and benefits of alternative adaptation measures. These pilot projects will be introduced in priority basins, chosen for their strategic positioning regarding agricultural production, electric energy generation, population, and importance of water resources generally, that will be affected by glacier melting. They are the Mantaro River watershed, the Vilcanota-Urubamba River watershed and the areas linked to the Quelccaya and Qori Kalis glaciers. The World Bank is providing project funding to the tune of US$7.49 million, through the Andean Community that acts as the implementing organization. The Participatory Management of Protected Areas Program (GPAN) is one of Peru’s largest conservation projects. It aims at assisting in conserving biological diversity of global importance and promoting civil society and the private sector’s participation in managing protected areas. Another project objective is to improve conservation of the main and priority natural resources within its area of intervention through sustainable local development practices, investment in conservation, equipment and management capacity building for the protected areas and preparing specific management documents. The project was designed to introduce a modern management style in protected areas (Sistema Nacional de Áreas Naturales Protegidas por el Estado, SINANPE). It includes sound governance principles, result-driven management and takes account of recommendations issued at international meetings relating to protected areas while simultaneously seeking to strengthen the role of the State, among other objectives. This project is funded by a grant from the Global Environmental Facility (GEF) with the World Bank acting as implementing agency. The executing agencies are the Peruvian Natural Resources National Institute (INRENA) and the National Fund for Natural Resources Protected by the State (PROFONANPE). (s) Investment projects
The Innovation and Competitiveness of Peruvian Agriculture Program (INCAGRO) is a Ministry of Agriculture program created to provide competitive co-financing for agricultural technological innovation projects for growers in partnership with technological services provider institutions. Up to its second stage, it had financed approximately 630 projects, having committed US$63 million for both stages. Producers and generally executing agencies, contributed $20.5 World Bank financing is provided through a US$ 25 million loan. This program has contributed to strengthen associations among producers and to create a wide tissue of public and private innovation network with multiplying and sustainable impacts. Likewise, this program promotes access to technology and a culture of innovation among farmers nationwide. The Judiciary is executing The Improving Justice Services Project with World Bank financing worth US$12 million. The project started operating in 2005 and some of its main accomplishments so far include improving court’s management through results-driven budgeting, in other words preparing budgets based on results and with a participatory team approach. This approach has been adopted so far in the Judicial districts of Apurimac, Arequipa, Cajamarca, Loreto, Tumbes, Piura, Lima, Ayacucho, Huaura, and La Libertad; using information technology to improve services, for which purposes pilot tests are underway in Huaura and Lima; to introduce for biometric systems for digital fingerprint, face and iris recording; introducing free legal advice through the ALLEGRAS program, for the neediest people, in Tumbes, Huaura, Loreto, Cerro de Pasco, Puno and Huancavelica. Up to its second implementation stage (2007-2011), the Real Property Rights Consolidation Project managed to attenuate the negative impact of informality while consolidating the legal framework to secure ownership rights. As a consequence, a multi-sector commission was established to look into ownership rights’ issues. Other accomplishments include reducing the time to register a property to a maximum of 5 days, and having awarded 32,282 ownership titles. Amount? The World Bank provided an investment loan totaling US$45 million to the transportation sector to build the Segregated High Capacity Corridor (Lima Urban Transport Project– COSAC) the first stage of which, managed by Protransporte (s), concluded recently. This Project is also known as El Metropolitano and is a mass transportation system equipped with large capacity buses running on natural gas along dedicated lanes in a trunk route, and smaller buses running along feeder routes. Metropolitano will reduce travel time, improve safety for passengers and operate at low environmental pollution levels. This system is expected to move 713 thousand passengers daily. The Sub-sector Irrigation Project (PSI) aims at increasing irrigation and agricultural output and productivity on the coastal band through initiatives to enhance the financial and management abilities of irrigation Water Users Boards (Juntas de Usuarios), improving use of water resources and increasing efficiencies in soil utilization. Projects implemented so far have benefited approximately 49 thousand households through the rehabilitation and improvement of existing irrigation facilities. In addition, implementing infrastructure to introduce new irrigation technology has benefited over one thousand rural households. Users Boards are provided management training while farmers are taught irrigation techniques. To improve equity and access to mother-child health services in rural Peru, the World Bank’s Executive Board approved on February 17, 2009 a US$15 million loan for the Government of Peru who will use it in the second stage of the Parsalud program, to be executed over five years by the Ministry of Health (Minsa). This initiative’s total budget reached US$162 million for the nine priority areas across Peru. Parsalud II (s) will continue with Peru’s efforts to reduce mother and child mortality, which remains a serious problem. Moreover, the program will contribute to improve health services networks operated by the Regional Health Directorates to provide local culture-adapted services meeting the needs of the indigenous population for obstetrics and peri-natal emergencies. The program, in addition, aims at providing comprehensive health and nutrition services to women and children, such as child growth controls, and pregnant women and labor monitoring. Analytical studies
Under the name of “A New Social Contract” (s), the Bank prepared an analysis of Peru’s social situation. The studies included diagnoses of long-term developments with social impact that identified the constraints to improvement. “A New Social Contract” also proposes an agenda for the future and suggests the need of a new social contract, making a call for an alternative approach to reform, fundamentally based on a clear definition of measurable objectives and involvement of all stakeholders. In addition, in recent decades, coverage of Peru’s education has expanded significantly. However, children’s learning and young people’s job training required improvement, as they are low quality and poorly distributed across Peru. Based on local research and recent studies, the World Bank prepared a report called “Toward High-Quality Education in Peru” (s), to assess education quality and inequality problems and suggest ways to address them. Likewise, in June 2008, it published a report called “What can a regional government do to improve education?” (s) where specific proposals are made for regions to lift themselves out of education stagnation without having to wait until changes take place at the national level. Towards the end of 2007, the results of a study on "Social Safety Network in Peru" (s) prepared by the World Bank were published to promote the right of children to good nutrition. The study holds Peru’s food programs fail to significantly improve nutrition because they lack clear standards and a strong accountability framework. The failure to reduce malnutrition or poverty with resources already allocated has brought social protection programs to a “low level equilibrium”. This makes it hard to advocate for more funding and, as a result, expenditure in social network is extremely low compared to existing needs and also the country’s capacity. The study recommends once Peru introduces a consistent accountability framework, expenditure should increase in social services, though provided through a clearly differential strategy for urban and rural sectors. In 2009 the Bank published its report on “Impact Evaluation of the JUNTOS Program" (pdf), identifying the strength and likely improvements of the conditional cash transfer program. Development Policy Loans
This year, the Bank approved a Second Programmatic loan to finance the Strengthening of Fiscal Management and Competitiveness for a total US$370 million. This loan is a central component of the World Bank’s Partnership Strategy with Peru. It has been designed to support the country’s efforts to spur economic growth and continue its struggle against poverty. It supports the government’s reform program to strengthen fiscal management and ensure favorable environment for private activity in Peru. It focuses on two general areas, namely the efficiency and quality of government expenditure and competitiveness improvements. In December 2008, the Bank approved an increase in financing for Peru worth US$330 million. This increase was included as the second of four loans comprised in the fiscal management and competitiveness strengthening program. As for the original loan, approved in August 2008, Peruvian authorities showed the Deferred Disbursement Option (DDO), which makes available a contingent credit line for the country to use whenever it may require budget financing. Such Deferred Disbursement Option is a risk management financial tool the World Bank has made available to middle-income countries with strong macroeconomic policies. This is an extremely useful tool given the present international financial crisis, or in case of natural catastrophe. The program of reforms supported by this series of programmatic loans aims at consolidating sustainable growth through healthy government accounts and results-driven fiscal policy, to create a State at the service of its citizens that simultaneously fosters productive activities. On February 17, 2009, an environmental loan for US$330 million was approved to strengthen the recently created Ministry of the Environment and improve Peru’s environmental management in key sectors of the economy, from mining to urban transport, through fisheries and conservation of biodiversity. The Second Programmatic Loan for Social Sector Reforms seeks to support Peruvian government’s efforts to improve the quality of education and health services and social programs, including the emblematic “Juntos” conditioned cash transfers program. This loan for a total US$330 million was approved in April 2009 and provides budget support to improve social expenditure in Peru and to introduce counter-cyclical measures to help Peru face the impacts of the international financial crisis. Water and Sanitation Program
- Regional plans
In 2008, the World Bank Water and Sanitation Program (s) has supported the Ministry of Housing, Construction and Sanitation and the regional governments of Cajamarca, Lambayeque, La Libertad and San Martín to prepare their Comprehensive Sanitation Regional Plan (Planes Regionales de Saneamiento Integral, PRSI). These plans were prepared with the explicit goal of creating a shared vision of these sectors’ development in selected territories at the three levels of government so as to prevent duplication of efforts while creating synergies among services and to match complementary funds. To accomplish these goals, in addition, these plans include a multi-annual investment program to address identified priority problems included in the regional diagnoses. These plans aim at increasing the efficiency and effectiveness of investments based on estimates of available resources, so the people can receive an adequate service. - Technical assistance
WSP partnered with COSUDE to support the initial steps to transfer two water and rural sanitation programs to the Cusco and Cajamarca regional governments, for two years (through 2011). Cooperation assistance will assist in transferring lessons learned, provide technical assistance and train authorities in designing and implementing their regional strategies. - Radio campaign to create a water culture
In August 2008, the “Water Culture in Peru” radio campaign was launched, an initiative of Grupo Agua and Radio Programas del Peru (RPP) to promote rational use of water resources and strengthen citizens’ education and participation concerning responsible use of water. This campaign was designed based on the results of a perception study funded by Japanese cooperation. The study called “Building a water culture in Peru” (“Construyendo una cultura del agua en el Perú”) revealed 64% of Peruvians are not yet aware of the issues created by water scarcity. In radio spots and special programs, key issues including the cost of water, the impact of climate change and the importance of sanitation services were addressed. This campaign should encourage people to act and to support those who lack water and sanitation services in Peru. - Peruvian Sanitation Convention (PERUSAN 2008)
In November 2008, the Peruvian Sanitation Convention , gathered over 1200 participants from government, the private sector and civil society to jointly address the issue of sustainable sanitation that will help address a situation where over half of the people lack access to basic sanitation services and more than 70% of waste water is not treated before final disposal. As a consequence of this major gathering, the Ministries of Housing, Construction and Sanitation, Health and the Environment signed a Ministry Declaration where they commit to prioritize sanitation issues. During the half-year before the conference, a number of regional events were organized in Cusco, Cajamarca, Ancash, Lima, Lambayeque, and Iquitos where the regional governments, the regional Housing and Sanitation Directorates and public and private regional stakeholders, together with cooperation agencies, including COSUDE, WSP and local NGOs, met to examine sanitation and solid waste management issues. Their conclusions and commitments were subsequently submitted to the National PERUSAN Conference. - Hand Washing Initiative
Another initiative with major results was the Hand Washing Initiative, an effort that brings together over 50 public and private institutions throughout Peru to promote this hygiene practice among poor Peruvian households and reduce diarrhea and respiratory infections in children under 5 years. This initiative will be implemented in 23 regions across Peru and will include a strict impact measurement approach. At present, this initiative is included in MINSA, MVCS-Pronasar programs and operates in conjunction with the CRECER strategy and the JUNTOS social program. In 2008, regional and local partnerships were formalized in 21 regions of Peru. More than 21 workshops were organized and close to 9,500 social agents were trained to lead the behavior change process. The impact objective is to have 1.3 million mothers and children adopt hand washing with soap behavior patterns to cut diarrhea diseases by 20% among children under 5 years. - Alternative Sanitation Solutions Initiative
Over 11.7 million Peruvians lack access to quality sanitation services. Out of these about 40% are willing to invest in access to or improvement of sanitation services. Such demand resulted in the launching of the “Alternative Sanitation Solutions” (s) initiative to promote inclusive sanitation markets based on a public private social sectors partnership models. In addition to the interest and commitment by households in five pilot zones, this initiative has involved to date more than 60 partners, including private entities, financial entities, national, regional and local government agencies and NGOs. At present, work is ongoing to design ways to include it in the JUNTOS social program and Mivivienda, a housing fund. In 2008, other major campaigns were undertaken to promote sanitation products and services, provide various financial options for households and suppliers, and train community sales agents and a range of local suppliers. A school-level sanitation education program was also undertaken. International Financial Cooperation (IFC)
IFC is a member of the World Bank Group. It encourages sustainable economic growth in developing countries by providing investment financing to the private sector, mobilizing private capital in local and international financial markets, and supplying advisory and risk mitigation services to firms and governments.
The strategy includes reaching out to new beneficiaries by providing access to credit for medium and small companies for mortgage finance and education, and through support to local governments for improving their service-rendering capacity. IFC invests in highly competitive sectors, including agro-industry and tourism. It invests in and develops projects to remove bottlenecks that prevent access to basic services and infrastructure; it addresses informality through technical advice projects to support reforms aimed at improving the investment climate, and it supports environmentally-friendly and socially- sustainable growth. IFC’s traditional and most significant activity is to finance private sector projects in developing countries. It provides loans, capital and quasi-capital (subordinated debt, convertible loans and others). It also provides financial risk management and guarantee products. Some examples of private sector projects financed by IFC include Mibanco, Agrokasa, Alicorp, USMP, and others. IFC also provides consultancy services to improve the business planning in the private sector, strengthen competitiveness among micro, small and medium-sized companies and improve impacts of IFC investments in key sectors. Some examples include the National Municipal Simplification Plan, the National “Canon” Mining Royalty Program in Peru, among others. Doing Business Reform Advisory in Peru At the request of the government of Peru and to assist in reforms to improve the business climate in Peru, as measured in the Doing Business annual report that looks into regulations to improve or constrain business activity, the Doing Business Reform Advisory (DB Reform Advisory) in coordination with IFC and the World Bank submitted and discussed a Memorandum Reform addressed to Mr. Yehude Simon, Peru’s Chief of Staff. The document summarizes the country’s performance as measured by DB indicators and issues a number of reform recommendations in all areas where DB is concerned so as to improve the climate business, in ways conducive to increase investment, speed economic growth, reduce informality and expand job creation. The Action Plan prepared in coordination with the National Council for Competitiveness in Peru (CNC-Perú Compite) focuses on priority actions identified by the Peruvian government to introduce short and medium-run reforms and identify key areas for action. It also reviews reform proposals in these areas and their viability for implementation. It finally identifies future technical assistance needs. CONTACT PERSON
Sandra Arzubiaga
Communications Official
Telephone: (511) 6150660 extension 339
sarzubiaga@worldbank.org
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