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Country Profile 2005

PeruThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.

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ISSN 0269-5944

Symbols for tables�n/a� means not available; �� means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

ECUADOR

COLOMBIA

BRAZIL

BOLIVIA

CHILE

LIMACallao

Chiclayo

Trujillo

ArequipaArequipa

Tumbes

TalaraNegritos

IquitosIquitos

Yurimaguas

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HuarÆz

OtuzcoOtuzco

ChachapoyasChachapoyasCutervo

LAMBAYEQUE

PIURA

MBES

Cutervo

Jaen

Pacasmayo

Chimbote

Paramonga

Huacho

Pisco

San JuÆn

Chincha Alta

HuaralHuaral

Cerro de PascoCerro de Pasco

La OroyaLa Oroya

HuancayoHuancayo

Ayacucho

San FranciscoHuanta

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Abancay

Urubam

baR

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APURIMACAbancay

CuzcoCuzcoUrubambaUrubamba

SicuaniSicuani

Puerto MaldonadoPuerto Maldonado

AyaviriAyaviri

JuliacaJuliaca

PunoPuno

Tacna

Mollendo

Camana

Ilo

San Francisco

Ica

NazcaPuquio

NazcaPuquio

Moquegua

TACNA

MOQUEGUA

AREQUIPA

Moquegua

HuancavelicaHuancavelica

San Vicente de Caæete

Huanta

TarmaTarma

JaujaChosica

JaujaChosica

HuanucoHuanuco

YanahuancaYanahuanca

Chepen

Paita

Sullana

Piura

SullanaChulucanasChulucanas

San IgnacioSan Ignacio

Bagua GrandeBagua Grande

BambamarcaBambamarca

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PERUSAN MARTIN

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MADRE DE DIOSMADRE DE DIOS

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TUMBES

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CAJAMARCACAJAMARCA

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PUNO

0 km 100 200 300 400

0 miles 100 200

' The Economist Intelligence Unit Limited 2005

January 2005

Main railway

Main road

International boundary

Department boundary

International airport

Capital

Major town

Other town

Country Profile 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Comparative economic indicators, 2004

Gross domestic productUS$ bn

Sources: Economist Intelligence Unit estimates; national sources.

0 50 100 150 200

Paraguay

Bolivia

Uruguay

Ecuador

Peru

Chile

Colombia

Venezuela

Argentina

Brazil

Mexico

0 2 4 6 8 10 12

Paraguay

Colombia

Bolivia

Mexico

Peru

Brazil

Chile

Ecuador

Argentina

Uruguay

Venezuela

0 2 4 6 8 10

Chile

Ecuador

Peru

Paraguay

Argentina

Bolivia

Mexico

Colombia

Brazil

Uruguay

Venezuela

0 1 2 3 4 5 6 7

Bolivia

Paraguay

Colombia

Ecuador

Peru

Brazil

Argentina

Uruguay

Venezuela

Chile

Mexico

Gross domestic product% change, year on year


Consumer prices% change, year on year


Gross domestic product per headUS$ �000


644.7

603.8

16.0 21.8

Peru 1

© The Economist Intelligence Unit Limited 2005 www.eiu.com Country Profile 2005

Contents

Peru

3 Basic data

4 Politics4 Political background7 Recent political developments10 Constitution, institutions and administration10 Political forces13 International relations and defence

15 Resources and infrastructure16 Population17 Education18 Health19 Natural resources and the environment20 Transport, communications and the Internet23 Energy provision

24 The economy24 Economic structure26 Economic policy28 Economic performance31 Inflation31 Regional trends

32 Economic sectors32 Agriculture33 Mining and semi-processing34 Manufacturing35 Construction36 Financial services37 Other services

38 The external sector38 Trade in goods39 Invisibles and the current account40 Capital flows and foreign debt43 Foreign reserves and the exchange rate

44 Regional overview44 Membership of organisations

45 Appendices45 Sources of information46 Reference tables46 Population46 Population: national source47 Telecommunications indicators

2 Peru


47 Transport statistics47 Electricity production48 Central government finances48 Non-financial public sector accounts49 Money supply49 Interest rates49 Gross domestic product50 Gross domestic product by expenditure50 Gross domestic product by sector51 Prices and earnings51 Agricultural production52 Minerals production52 Manufacturing production53 Stockmarket indicators53 Exports54 Traditional exports by volume54 Imports54 External trade price and volume indices55 Main trading partners55 Balance of payments, national series56 External debt, World Bank series56 External debt, national series57 Foreign reserves57 Exchange rates

Peru 3


Peru

Basic data

1,285,216 sq km

26.75m (mid-2002 government estimate)

Population in �000 (1993 census)

Lima (capital) 5,708 Piura 278Callao 640 Iquitos 275Arequipa 619 Chimbote 269Trujillo 509 Huancayo 258Chiclayo 412 Cuzco 256

Varies by region and altitude. In general, temperate on the coast, tropical in thejungles, cool in the highlands. The western highlands have a dry climate, butthere is heavy rainfall in the eastern and northern highlands between Octoberand April

Hottest month, February, 19-28°C (average daily minimum and maximum);coldest month, August, 13-19°C; driest months, February, March, 1 mm averagemonthly rainfall; wettest month, August, 8 mm average monthly rainfall

Spanish is the principal language and the lingua franca for the large numbers ofQuechua and Aymara speakers; Quechua and Aymara also have official status

Metric system; also old Spanish measures, particularly in rural areas

Nuevo sol (Ns). Average exchange rate in 2003: Ns3.478:US$1; exchange rate onDecember 14th 2004: Ns3.275: US$1

5 hours behind GMT

January 1st, Easter (half-day Maundy Thursday and all day Good Friday),May 1st (Labour Day), June 29th (Saint Peter and Saint Paul), July 28th(Independence Day), August 30th (Santa Rosa de Lima), October 8th (Battleof Angamos), November 1st (All Saints Day), December 8th (ImmaculateConception), December 25th (Christmas Day)

Land area

Population

Climate

Currency

Time

Main towns

Weather in Lima(altitude 120 metres)

Public holidays

Languages

Measures

4 Peru


Politics

Peru is a presidential republic with a 120-member unicameral legislature and astrong executive. Alejandro Toledo of Perú Posible was elected to thepresidency for a five-year term in a two-round election in April-June 2001, andinaugurated in July 2001. He leads a minority government that has becomeincreasingly fragile.

Political background

Peru is the birthplace of the Inca empire, one of the most important centres ofpre-Hispanic civilisation in the Americas. From their base in the high southernPeruvian Andes, Cuzco, the Incas dominated the other tribes of the Andes, aswell as those on the Pacific coast from modern-day southern Colombia tocentral Chile. An elaborate system of roads, garrisons and colonial settlementsallowed the Incas to keep tight control of their empire for more than a century.Some of the Inca heritage survives in the Peruvian Andes today, in the structureof communally owned lands, irrigation systems and shared community labour.

Drawn by well-founded rumours of great wealth, the first Spanish conquerorsarrived in Peru in 1532. Led by Francisco Pizarro, they overcame the forces of theInca Atahualpa and the empire soon fell to the conquistadores. The new capital,Lima, was founded in 1535 and the vice-royalty of Peru was established in 1544.After the final defeat of the Incas in 1572, Spanish authority remained almostunchallenged until reform of the tax structure led to the Tupac Amaru uprisingof 1780, the largest indigenous revolt in the Andes. Fear of unrest delayed thedesire for independence among both landowners and criollos, the descendantsof European settlers.

Peru declared its independence from Spain on July 28th 1821 and, after nearlyfour years of fighting, the Spanish capitulated in 1824. Following a wave ofmilitary infighting, political stability was secured by mid-century, partly owingto the income earned from the export of guano (a natural fertiliser composedchiefly of bird excrement) to the UK. The final years of the 19th century weremarked by the War of the Pacific (1879-83), in which Peru and Bolivia sufferedignominious defeat!and the loss of important areas of nitrate-rich territory!atthe hands of Chile.

The political history of Peru in the 19th and 20th centuries was characterised bya succession of civilian caudillos, military strongmen and dictators of variouspersuasions. In the 1930s the political left and the nationalist left-wing party, theAlianza Popular Revolucionaria Americana (Apra), were excluded from politicsand the army was used to ensure the dominance of the political right. Theelection of Fernando Belaúnde Terry appeared to be a turning-point, providinga centrist option, but he was overthrown by a coup in 1968. The military, led byGeneral Juan Velasco Alvarado, took power with a left-wing nationalist agenda,believing that it could reform Peru faster than a civilian government. The firstphase of military rule (1968-75) resulted in land reform, increased national

The Inca empire

Spanish conquest

Independence

Caudillos, coups anddictatorships

Peru 5


control of natural resources and industrial partnership. Spending and foreignborrowing spiralled and the regime ended with a bloodless coup in 1975, whenGeneral Morales Bermúdez was installed as president.

Peru returned to democracy in 1980 when Mr Belaúnde, elected for a secondterm, began attempts at reform and liberalisation. However, a debt crisis, aparticularly severe El Niño (a global weather phenomenon) and politicalviolence took their toll on the economy. Mr Belaúnde�s party, the centre-rightAcción Popular (AP), lost support, and in the 1985 general election Apra wasswept into office. Apra�s leader, a 36-year-old lawyer, Alan García Pérez, becamepresident amid high expectations of change. His unorthodox economic policiesinitially generated high GDP growth rates, but eventually led to hyperinflation,increased poverty and a crumbling infrastructure. In 1987 a move to nationalisethe banking system rallied the opposition. Mr García�s economic policies in thelate 1980s were a disaster, and by 1990 the rate of inflation exceeded 7,500%.

Guerrilla violence flourished during the 1980s, with a Maoist group based inthe Andean department of Ayacucho, Sendero Luminoso (Shining Path), and apro-Cuban group, the Movimiento Revolucionario Tupac Amaru (MRTA), thetwo most active groups. Sendero Luminoso used a combination of terror tacticsand political ideology to dominate peasant communities. Its sphere of activityspread to the central Andes and the Huallaga valley, the heartland of the cocatrade, before it extended its armed struggle to the capital. The MRTA usedkidnap and ransom demands to try to achieve its aims. In the mid-1980s thearmy was given responsibility for counter-insurgency operations; widespreadviolations of human rights ensued. Guerrilla-related violence claimed over25,000 lives and cost an estimated US$22bn in damage to infrastructure.

A political unknown, Alberto Fujimori, the son of Japanese immigrants, wonthe 1990 presidential election with promises of pragmatism, hard work andhonesty. He opposed the right�s plan to apply shock therapy to revive theeconomy, and had no party, but his message struck a chord with voters. Onceelected, he renounced his pledges and introduced a radical stabilisationprogramme that brought hyperinflation under control, but led to a deeprecession. He adopted a zero-tolerance policy on terrorism, putting largesections of the country under emergency rule and using the army andintelligence services to round up anyone suspected of terrorist activities. Trialswere held in closed military courts, with harsh sentences meted out, often withlittle more than circumstantial evidence. After the capture of its leader,Abimael Guzmán, in September 1992, Sendero Luminoso began to disintegrate.

In April 1992, with the legislature opposed to his policies, Mr Fujimori,supported by the military, dissolved Congress and suspended the judiciary. Anew constitution, enacted in 1993, reduced the power of the legislature andreinforced centralism, enhancing the already substantial power of the executive.In 1995, with the economy booming, Mr Fujimori was re-elected as presidentwith an overwhelming majority. In his second term, public expectations of job-creation were disappointed by slowing economic growth, and there wasgrowing dissatisfaction with his government�s abuses of power and the

The 1980s: democracy, debtand hyperinflation

Guerrilla violence flourishes

Alberto Fujimori is electedpresident in 1990

The president develops anauthoritarian style

6 Peru


subordination of democratic institutions. Allegations of interference by theServicio de Inteligencia Nacional (SIN), the National Intelligence Service,prompted protests in Lima and the provinces. Despite a constitutional limit oftwo consecutive terms as president, Mr Fujimori formed a new coalition, Perú2000, to fight for the presidency again. When the Constitutional Tribunal ruledagainst a third term, Mr Fujimori replaced the three dissenting judges withjudges who viewed his position more favourably. The Tribunal ruled that, as hisfirst term (1990-95) had been under a different constitution, he could stand for athird term.

Mr Fujimori, with the SIN on his side and the media, judiciary and electoralbodies under his control, won the election despite strong popular support forMr Toledo, who ran on a ticket of greater democracy. Mr Fujimori then setabout manufacturing a majority for Perú 2000!which he had failed to gain inthe congressional election!through a combination of bribery, granting favoursand dropping judicial proceedings. The use of these tactics was proved inSeptember, when an opposition congressman, Fernando Olivera of the FrenteIndependiente Moralizador (FIM), obtained a videotape showing Mr Fujimori�ssecurity adviser and de facto head of the SIN, Vladimiro Montesinos, handingover US$15,000 in cash to a Perú Posible congressman who defected to Perú2000, Alberto Kouri. The scandal caused by the videotape led to Mr Fujimoriseeking residency in Japan in November, from where he resigned as Peru"spresident. He remains in exile in Japan, from where the Peruvian government istrying to extradite him. After six months as a fugitive, Mr Montesinos wastracked down and arrested and is now imprisoned in Peru; over 70 chargeshave been made against him, ranging from money-laundering, corruption andarms dealing, to ordering death-squads. He faces up to 25 years in jail ifconvicted of the charges related to human rights abuses.

The president of Congress, Valentín Paniagua, was made interim president.Mr Paniagua�s administration, which received broad political and publicbacking, oversaw free and fair presidential and congressional elections in April2001, while starting a process of political and democratic reform, andmaintaining economic stability.

The interim government of 2000-01 appointed an independent prosecutor,José Ugaz, to investigate Vladimiro Montesinos, Mr Fujimori�s security adviserand de facto head of the SIN, the National Intelligence Service. Revelations ofhis network of illicit arms-dealing, money-laundering and influence-peddlingovershadowed the approaching election. The main scandal focused on thediscovery of hundreds of so-called vladivideos, which had been recordedsecretly by the SIN in the final three years of Mr Fujimori�s administration, andwhich provided damning evidence of corruption. Owners of four differentopen-signal television stations were captured on tape receiving money or legalassistance from Mr Montesinos in exchange for support for Mr Fujimori�s re-election bid. Some of the more prominent public officials involved included theformer head of the Jurado Nacional de Elecciones (JNE, the National ElectionsBoard) and two Supreme Court judges. The Oficina Nacional de ProcesosElectorales (ONPE), the National Office for Electoral Process, was similarly

The Fujimori regimedisintegrates

Investigations into corruptionand political violence

Peru 7


discredited. Both the JNE and the ONPE have since been overhauled, and anew and more independent leadership and staff appointed. The heads of thearmy, navy and air force were also arrested, along with many other seniorofficers close to Mr Montesinos. The corruption investigations are ongoing, andtrials will continue through 2005 and beyond. Mr Montesinos received asentence of nine years in mid-2002 in the first of over 50 cases against him. Iffound guilty of human rights abuses, he faces a sentence of up to 25 years.

The Comisión de la Verdad y Reconciliación (CVR), Truth and ReconciliationCommission, was set up by Mr Paniagua, in June 2001 to investigate politicalviolence between 1980 and 2000, to identify those responsible, to determinewhat should be done to recompense the victims, and to move towardsreconciliation. The CVR released its final report in August 2003, concluding that69,000 people!more than twice the previous official estimate!died ordisappeared in parallel wars by the guerrilla movements, Sendero Luminoso(Shining Path) and Movimiento Revolucionario Tupac Amaru (MRTA), theTupac Amaru Revolutionary Movement, or at the hands of the state. Thecommission estimated that, of the 23,900 documented deaths, 54% were killedby Sendero Luminoso and 30% by the security forces. The report said thatalmost half of the victims came from around Ayacucho, where theSendero Luminoso was formed in 1980, and that three-quarters of the victimswere native Quechua speakers. It is estimated that about 10% of Peru�sAshaninka Indian population of around 100,000 died in the conflict.

Recent political developments

Two serious candidates emerged in the election campaign in 2001: Mr Toledoand Mr García, the left-wing former president and leader of Apra, who hadreturned from exile in January. Mr García, although discredited in his first termas president, attracted voters with his charisma and populist style, and edgedLourdes Flores, the leader of a centre-right coalition, Unidad Nacional, out ofsecond position in the first round of voting. Mr Toledo won the second-roundelection in June, beating Mr García with 53.08% of the valid votes cast. Theelection passed peacefully and was praised by international observers as cleanand transparent, in sharp contrast to the tainted vote held a year earlier.

Mr Toledo was inaugurated as president for a five-year term on July 28th 2001.He pledged to create 400,000 new jobs in his first two years, to continuedemocratic reforms, to increase social spending and to pull Peru out ofrecession through liberal economic policies. His first cabinet was technicallystrong, but politically fallible, as his choice of liberal-minded and independenttechnocrats as prime minister and finance minister proved unpopular withboth Congress and many members of Perú Posible, who had hoped for moreparty representatives in the cabinet and a less orthodox policy stance. In thefirst 18 months of his presidency, successive cabinet changes resulted in astronger representation of Perú Posible activists.

Cross-party support for Mr Toledo is essential, as Perú Posible is in a minorityposition in the 120-member Congress. When he was elected president, theparty held just 45 seats, but the party has been divided and disorganised, and

Mr Toledo wins a second-round election

Mr Toledo heads a minoritygovernment

8 Peru


defections and expulsions had reduced the party�s congressional representationto just 36 by end-November 2004. The president has been able to rely on theFIM for support, but has lost the support of the centre-right Somos Perú party,led by Alberto Andrade, as well as that of the AP. In 2002 these parties joinedwith the left-leaning Unión por el Perú-Democracia Social (UPP-DS) in aparliamentary group known as the Unión Parlamentaria Descentralista, theDecentralist Parliamentary Union.

Mr Toledo�s administration has become increasingly unpopular, primarilybecause of the failure of his government to live up to the extravagant promisesmade in the election campaign regarding employment creation. He is viewed asa weak leader, a poor communicator, and both indecisive and rash when itcomes to decision-making. His delay in taking a DNA test over a paternity suit(he eventually took the test in late 2002, almost 18 months after becomingpresident) gave more ammunition to opponents who denounce him asuntrustworthy and a liar. His main assets have been steady economic growthand the lack of will to have him removed from office, stemming from the factthat none of the potential main contenders for the presidency in 2006!Mr García, Ms Flores and Mr Paniagua!has had a sufficiently broad base ofsupport to feel able to win a presidential election. All three are steadily tryingto build support before the next election.

Public protest and governmental mishandling of crises have been centralcharacteristics of Mr Toledo"s presidency. The first major example of this camein June 2002 when, despite months of public protest at high unemployment, alack of public funds and continued economic orthodoxy, the government wentahead with the sale of two electricity-generating companies in Peru�s secondcity, Arequipa, triggering three days of violent protest. The government wasforced to back down and reverse the decision to privatise, and shortlyafterwards the pro-market champions in his cabinet were the highest-profilecasualties in a cabinet reshuffle. The privatisation programme was thenshelved. Other protests since!particularly by coca farmers, teachers and healthworkers!have also seen the government react late, often climbing down in theface of protest.

Peru held its first regional elections on November 17th 2002, at the same timeas municipal polls. At the start of his presidency, Mr Toledo had promised tobegin a process of political decentralisation quickly. Although the complexprocess appeared rushed, the move has been welcomed as a positive step interms of regional empowerment. Peru has been divided into 25 regions plusMetropolitan Lima, with each regional government comprising a president,vice-president and council. Lima is not classified as a region, but its mayor hasthe same rank as the regional presidents. As expected, Mr Toledo�s party, PerúPosible, fared badly in the elections, winning just one of the 25 regions.Mr García�s party, Apra, emerged as Peru�s only party with truly nationwideappeal, winning 12 of the regional presidencies. Overall, however, the resultsindicated a politically fragmented country. Independent regional groupingswon seven of the regions, and the left-leaning Unión por el Perú (UPP) wontwo. Nuevo Izquierda, Somos Perú and the FIM each won one region. In Lima,

Mr Toledo�s popularity slides

Public protest a feature ofMr Toledo's government

The process ofdecentralisation begins

Peru 9


Luis Castañeda, running under the banner of the centre-right Unidad Nacional,beat the incumbent mayor, Alberto Andrade.

The opposition claims that the central government retains too much powerover the regions, but the government is trying not to devolve power andbudgets too rapidly to regions that have no experience in administration andwhich, for the most part, lack the training and capacity to govern effectively. Asa result, decentralisation will be a long process.

Important recent events

April-June 2001

Alejandro Toledo wins the presidential election, beating Alan García, the left-wingformer president and leader of the Partido Aprista Peruano (Apra), in the secondround of voting. Mr Toledo pledges an open and accountable government, politicaldecentralisation, a continuation of democratic reform, poverty reduction,employment creation and a return to economic growth.

June-July 2002

Following months of discontent and protests at Peru�s economic policy direction,riots in Peru�s second city, Arequipa, force the government to reverse a decision toprivatise two electricity-generating companies. Half of the cabinet is subsequentlyreplaced and the privatisation programme is shelved.

November 17th 2002

Peru holds its first-ever regional elections. Perú Posible wins just one of the 25regions, Apra wins 12, independent regional groupings seven, and the left-leaningUnión por el Perú (UPP), two. Nuevo Izquierda, Somos Perú and the FrenteIndependiente Moralizador (FIM) each win one region.

May 2003

A series of disruptive strikes and protests by a number of different groups lead to thepresident declaring a 30-day state of emergency in an attempt to restore order. Thelargest protests begins when Peru�s 280,000 public school teachers go on strike onMay 12th, and then spread to include farmers and workers in the justice system andin the EsSalud public health system.

June 2004

Congress approved a change in its regulations, establishing that a presidentialimpeachment now requires the support of a minimum of 80 of the 120 legislators,up from 61 previously. This reinforced institutional stability by closing the possibilityof an opportunist presidential impeachment by a slim congressional majority.

July 2004

With his popularity down to below 10% according to local polls, and following ageneral strike and suggestions that Mr Toledo might not see out his constitutionalterm, the opposition took control of Congress for the first time, whenAntero Flores Aráoz, of the opposition centre-right Partido Popular Cristiano (PPC),was elected president of Congress. Upon taking up office, Mr Flores Aráoz moved toquash speculation that his election would create renewed impetus behind moves to

10 Peru


impeach Mr Toledo in connection with allegations of corruption in theexecutive branch.

Constitution, institutions and administration

Peru�s 1993 constitution, its fifth in the 20th century, replaced the 1979constitution. Like most of its predecessors, the 1993 constitution is pragmatic,designed to bring the formal legal framework into line with new realities, inresponse to pressure from the international community, notably theOrganisation of American States (OAS), for a return to democratic rulefollowing Mr Fujimori�s autogolpe (self-coup) in April 1992. The constitution wasdrafted by the Congreso Constituyente Democrático, an 80-member constituentassembly elected in November 1992. The main opposition parties boycotted thecongressional election, and Mr Fujimori�s Cambio 90-Nueva Mayoría coalitiongained a majority in the legislature. Several controversial changes were givenunobstructed passage through committee and plenary sessions. When put tothe electorate for ratification in a plebiscite, the new constitution was approvedby a narrow margin.

The constitution enshrines free-market economic principles and reduces therole of the state. It also eliminates many congressional checks on the president,enhancing the already substantial powers of the executive. In 1999 Mr Fujimorieffectively overruled the constitution by passing an interpretative law allowinghim to stand for a third term as president. Under the constitution, Congresscomprises a single chamber with 120 members, who are elected every fiveyears through a multi-district system.

A new constitution is being debated in Congress, but many changes had yet tobe decided by end-2004. This process started under Mr Paniagua in late 2000.Reforms have produced a number of important changes, including greaterindependence for the judiciary and media, more congressional checks on theexecutive, and improvements to the accountability of the security services andarmed forces to independent public bodies. The constitution was amended inOctober 2000 to prevent a president from sitting for two consecutive terms.

Decentralisation is the other main focus of reform. Given the lack ofadministrative and technical capabilities and experience at the regional level,the government wants to devolve power and budgets slowly. Regional electionson November 17th 2002 created 25 new regional presidents, most with limitedor no administrative experience, who face inflated local expectations withscarce powers and resources.

The cabinet comprises 15 ministers under a premier, known as president of theCouncil of Ministers, currently Carlos Ferrero. The finance minister is animportant figure, controlling the budgets of all other ministries.

Political forces

The ten-year presidency of Mr Fujimori, who had no links with the country�straditional political classes, transformed the political map in the 1990s, a period

The 1993 constitution

Constitutional reform

The political map wastransformed in the 1990s

Ministries

Peru 11


which saw the influence of traditional parties decline and independentpoliticians emerge. In municipal elections in October 1998 and July 1999 anunprecedented number of local independent candidates rose to becomemayors in the provinces, with most campaigning on local issues. The principalnational movements are increasingly mistrusted, and the national election in2000-01 and regional elections in 2002 reflected greater public demand forattention to regional and local interests.

Following the collapse of the Fujimori regime in 2000, a wide range of broad-based political movements emerged and traditional parties, such as Apra andAP, started to regroup. Mr Toledo�s party, Perú Posible, has the largestrepresentation in Congress (now with 35 of 120 seats), but was established onlyin 1994, and is a loosely formed movement with no clear political ideology. Itsmembers became increasingly divided over the first half of Mr Toledo"spresidency, becoming in effect a collection of different voices with no bindingideology and little partisan loyalty. The party has become so riven by divisionsthat it appears unlikely to survive beyond the 2006 elections. Apra hasregrouped successfully under Mr García and is the second-most representedparty in Congress, with 28 seats, as well as the best organised and mostdisciplined. Ms Flores�s centre-right Unidad Nacional, a loosely formedmovement established for the 2001 election, has 17 seats. Three parties, Uniónpor el Perú, Somos Perú and Acción Popular, have formed a congressionalcoalition called the Unión Parlamentaria Descentralista (UPP-AP-SP), which has13 seats. Much of the opposition has supported Mr Toledo"s economicprogramme in Congress, while maintaining an opposition stance. The FIM,formed in 1990, has 11 seats and at present supports Perú Posible. The FIMgained prominence when its leader, Mr Olivera, brought down Mr Fujimori�sadministration by releasing the first videotape indicting Mr Montesinosof corruption.

Main political figures

Alejandro Toledo

Narrowly won the presidency for 2001-06 and heads a minority government. Bornin a tiny village in the mountain department of Ancash, he escaped poverty bysecuring scholarships to train as an economist in the US, and is Peru�s first presidentof indigenous Andean origin. Mr Toledo formed Perú Posible in the mid-1990s andcontested the presidency unsuccessfully in 1995 and 2000. He showed courage andtenacity in the fight to prevent Alberto Fujimori from completing an unconstitutionalthird consecutive term in office. His popularity slumped in his first years in officeowing to public disillusion with his government"s failure to fulfil its campaignpromises, his own perceived weakness as a leader and his refusal to take a DNA testin a paternity suit. This raised doubts about his ability to complete his five-year term.Despite strong economic growth, his approval ratings hovered at around 10%throughout 2004, according to Apoyo polls.

Valentín Paniagua

A constitutional expert, university professor, and a politician with cabinetexperience, he achieved the stature of respected elder statesman when interimpresident in 2000-01 by managing a free and fair election and a seamless political

Loosely formed movementsmake up the party system

12 Peru


transition. However, he lacks a significant party support base: his Acción Popular(AP), a traditional centrist party, lost virtually all its popular support in the 1990s andhas now only three members of Congress. However, opinion polls show thatMr Paniagua is the politician with the highest credibility in Peru and he has fewpolitical enemies. This has kept him among the leading contenders in the race for thepresidency in 2006. He is trying to form a wide coalition, incorporating left-wing aswell as centre-right parties to support his presidential campaign and ensuregovernability in 2006-11.

Alan García

As president in 1985-90, his heterodox policies led the country to hyperinflation andeconomic collapse. He failed to restrain terrorist groups, which by the end of hisregime were capable of mounting significant military challenges to the government.Mr García spent eight years in exile to escape prosecution on charges of corruptionand embezzlement, but was able to register as a presidential candidate for the 2001election after the Supreme Court lifted his arrest warrant. A talented public speakerand charismatic politician, Mr García lost narrowly to Mr Toledo in a run-off vote inJune 2001, but his strong showing helped to revitalise his party, the Alianza PopularRevolucionaria American (Apra), making it the second-largest party in Congress. Heis eager to return to the presidency, but must overcome a credibility problem.

Carlos Ferrero

Twice previously the president of Congress, Mr Ferrero was appointed primeminister in December 2003. He was first elected to Congress under the formerpresident, Alberto Fujimori, in 1995, but switched to Mr Toledo"s Perú Posible partyfor the elections in 2000, when he ran as Mr Toledo"s vice-presidential candidate. Hehas a laid-back style and is viewed as a consensus-builder, respected by both theopposition and by Perú Posible. In November 2004 he survived a vote of no-confidence in Congress.

Ántero Flores-Aráoz

A leading member of the right-wing Partido Popular Cristiano (PPC), and of the UNcoalition, Mr Flores-Aráoz won the presidency of Congress on July 26th 2004 as thecandidate of an unlikely opposition alliance formed by the UN and its traditionalfoes, Mr García"s Apra party. This leaves him placed as the likely interim president ifMr Toledo fails to complete his term. Mr Flores Aráoz is shoring up his position bymaintaining a good relationship with Apra, and in August even called for the UN tomaintain the alliance for the 2006 elections. This put him on a collision course withthe UN�s leader, Lourdes Flores Nano, for whom such a prospect is unthinkable.

Pedro Pablo Kuczynski

Appointed economy and finance minister for the second time in February 2004,Mr Kuczynski has served as a senior executive in various US financial institutions.He was economy and finance minister in Mr Toledo"s first cabinet, from July 2001 toJune 2002, and was replaced following his aborted efforts to privatise two electricity-generating companies in the southern city of Arequipa. The announcement of thesale led to riots in Arequipa, after which the privatisation programme was shelved.He is viewed as an independent and able technocrat, who takes few risks withfiscal policy.

Peru 13


International relations and defence

Since 1940 Ecuador and Peru have fought three border wars over a 77-kmsection of their 1,600-km border, most recently in January 1995, when askirmish between border patrols escalated into hostilities in which anestimated 80 soldiers died. The dispute was resolved in October 1998, whenboth sides signed an accord ratifying the boundaries established by the RioProtocol!a peace treaty signed by Peru and Ecuador in 1942 after an outbreakof hostilities the previous year!with a few concessions. Ecuador was givennavigation rights on the Amazon River and granted permission to use two sitesin Peru to operate port services. Ecological parks have been created in the zone,which will remain demilitarised.

Relations with Chile deteriorated sharply in mid-2004 as Peru sought arenegotiation of the maritime border between the two countries. Chileinformed Peru that it considered the issue of maritime limits between Peru andChile settled in a 1952 agreement. The case will now go to arbitration at theInternational Court of Justice (ICJ) in The Hague. Although Peru�s historicrivalry with Chile continues to give rise to occasional tensions, bilateralrelations are generally co-operative.

Peru and Bolivia are seeking to turn their traditional friendship into closereconomic integration, particularly in the energy field. Peru is also seeking toincrease infrastructure integration with Brazil, and is hoping to build an exportroute to the Pacific through Peruvian ports for Brazilian exports from theAmazon region.

After the collapse of the Fujimori regime, the government removed armyofficers accused of involvement with Mr Montesinos, and scaled downexpenditure on the armed forces. The armed forces were also weakened in2003 by the findings of the Comisión de la Verdad y Reconciliación (CVR),Truth and Reconciliation Commission, which investigated those responsible foran estimated 69,000 deaths in parallel wars by the Sendero Luminoso andMRTA in the 1980s. The commission estimated that, of the 23,900 documenteddeaths, 30% were killed by the security forces.

Security risk in Peru

The threat of guerrilla violence was greatly reduced over the 1990s, and Peru isconsidered one of the least risky countries in Latin America in which to do business.However, the demise in 2000 of the government led by Alberto Fujimori, which haddeployed strong-arm tactics to fight rebel violence and political dissent, producednew dangers, with some rebel groups emboldened by the more permissiveenvironment under the administration of Alejandro Toledo. However, there remainfears that guerrillas representing Sendero Luminoso (Shining Path) could step upactivities, particularly during the retrials of its leaders, which started in November2004. Street crime remains a problem in the cities. The public, anxious forimprovements to living standards, is also organising more defiant protests.

Relations with south Americanneighbours are generally good

Influence of the armedforces wanes

14 Peru


Armed conflict

Following the settlement in 1998 of a long-standing border dispute with Ecuador,there is little risk of armed conflict involving Peru. The most serious risk is posed byColombian guerrilla groups and drug mafias seeking to establish safe havens anddrug production bases in Peru�s Amazon region as Colombia�s US-funded waragainst terrorism intensifies. Peru is maintaining a military presence along thePutumayo River to prevent border crossings, making sure its operations are informedand co-ordinated with the Colombian authorities in accordance with a bilateral co-operation agreement on security signed by the two countries in January 2002.Although a long-standing border dispute with Chile was resolved in 1999, relationsbetween the two countries have soured in the last year over a disputed maritimeborder. However, armed conflict is a remote possibility.

Terrorism

Mr Fujimori all but eradicated the Sendero Luminoso and MovimientoRevolucionario Tupac Amaru (MRTA) guerrilla groups in the 1990s, relegatingterrorism to a criminal rather than a political problem. However, there are still asmall number of operatives in the jungles of Ayacucho and the Huallaga valley, andthere are signs that terrorist activity may be increasing. Emboldened by a degree ofpolicy confusion on internal security matters, the 200-300 Sendero Luminoso armedrebels still at large have launched isolated attacks, ranging from a prison uprising to abomb attack in the capital, Lima, in March 2002, that left nine dead, to a 30-hourkidnapping of 71 gas-pipeline workers in June 2003. These attacks highlighted severeweaknesses in Peru"s security services. The terrorists have survived through linkswith Huallaga�s drug-trafficking mafias and may be strengthened by a growingdemand for Peruvian coca if Plan Colombia, a US programme that provides supportand resources to the Colombian government to destroy coca plantations, weakenstheir Colombian competitors. The interior minister, Javier Reátegui, has openlyexpressed fears that Sendero Luminoso is stepping up activities, and also infiltratingthe teachers� union, Sutep, and public universities. In September 2004 eight teacherslinked to Sendero Luminoso were arrested and there are reports that over 100 otherteachers are being investigated for having links to Sendero Luminoso. Should thegroup be allowed to grow through a lack of resolve by the security forces, narco-terrorism might again become a serious problem for Peru in the medium term.

Civil unrest

Social unrest resulting from high expectations of an improvement in living standardsafter a decade of authoritarian rule, and high levels of unemployment remains amore immediate problem for business. The greater political openness underMr Toledo has also helped to encourage protest; although this is positive fordemocracy, Mr Toledo�s administration has at times caved in to protest, encouragingfurther and more violent protests. There has been an atmosphere of unrest andprotest since Mr Toledo was inaugurated. Most recently, in April 2004 a popularuprising against the mayor of Ilave (a small city in the southern region of Puno)escalated into violence, leading to the official�s death by lynching. While the unrestin Ilave was at its height, the government faced a protest by cocaleros (growers ofcoca, the raw material for cocaine). The strike was initially focused on the Huallagaand Ucayali valleys, where strikers blocked roads. Public-sector doctors and portworkers also walked out on strike in this period.

Peru 15


On July 14th 2004 the Confederación General de Trabajadores (CGT), Peru�s largesttrades union federation, staged a one-day general strike to protest against thegovernment�s economic policy. The strike was Peru�s first general stoppage since1999. In the second half of 2004, protests from cocaleros briefly held 20 touristshostage in an Incan temple in the city of Cusco; and in October, several hundredcocaleros occupied the administrative offices of the San Gabán hydroelectric plant inPuno in a bid to stop coca eradication; and in mid-November, around 200 protestersattacked a mining camp in the northern Cajamarca region, torching the barracks andfour company vehicles and destroying a power generator. One person died andseveral others were injured when police clashed with the protesters.The prime minister, Carlos Ferrero, has acknowledged that in many instances thegovernment has not known how to prevent the social conflicts and claimed that theclimate of democracy in Mr Toledo�s government and the disillusion of citizens withnew regional authorities had contributed to the higher level of protests.

Violent crime

Although not approaching the levels found in neighbouring Colombia, crime is highand has risen in recent years, linked in part to economic deprivation. Violent crime,including car-jacking, assault and armed robbery, is not uncommon in Lima. Touristcentres such as Cuzco, Arequipa and Puno have seen an increase in street crime inrecent years.

Drug-smuggling and organised crime

Peru is the world�s second-largest coca and cocaine producer after Colombia,although efforts in the 1990s to reduce the area harvested enjoyed some success. In2002, Peru and the US signed a new trade agreement, the Andean Trade Promotionand Drug Eradication Act (ATPDEA), which grants tariff-free access to the US toaround 6,000 export products in exchange for Peru committing to a reduction inillegal coca plantations. After initial fears that Peru was not going to meet its targets,in November 2003 the US Department of State declared that around 15% of Peru"sillegal coca plantations had been eradicated in 2003. The Comisión Nacional para elDesarrollo y Vida sin Drogas (Devida), the National Commission for Developmentand Life without Drugs, claims that by the end of 2003 Peru had eradicated 8,555hectares (ha) of coca plantations in the year, above the targeted 8,000 ha.The Peruvian and US authorities are also concerned about a rise in the amount ofopium-poppy growing. Poppies have been found from the northern department ofAmazonas to the central highland department of Abancay. In comparison to coca,poppies are easy to cultivate and conceal.

Resources and infrastructure

When Mr Fujimori became president in 1990 Peru�s infrastructure was in apoor state, following a decade of underinvestment. Falling government incomein the late 1980s!as the economy contracted and tax revenue was eroded byhyperinflation!was insufficient for basic repair and maintenance. Members ofSendero Luminoso regularly bombed roads, bridges, power installations andcentral city sites. Telephone provision was among the lowest in the continent.Since 1990 private investment has transformed telecommunications, andimproved power supplies and some airport facilities. Some public investmenthelped to improve the road infrastructure, but it remains inadequate. The

16 Peru


current government, led by Mr Toledo, has pledged further improvements tothe infrastructure through public and private investment, particularly in thetransport network.

PopulationPopulation, 2002('000)

0-14 9,01415-64 16,42465+ 1,311

Total 26,749

Source: Instituto Nacional de Estadística e Informática.

According to the 1993 census, Peru�s mid-year population was 22.6m. Censusofficials estimated that 532,000 people had not been contacted, along with60,000 jungle-dwelling Indians. An estimated 37% of all inhabitants were underthe age of 15. Population growth in 1997-2002 averaged 1.6% per year. Officialstatistics estimate the population in mid-2003 at 27.15m. The overall populationgrowth rate is expected to remain steady for the next few years, giving a totalprojected population of 27.95m by 2005.

Millions of Peruvians have migrated from the Andean highlands to the coastalcities in the past 30 years, in search of a better standard of living and thehealthcare and educational facilities usually lacking in the less accessiblehinterland. Internal migration rose in the 1980s when Sendero Luminosobecame a serious threat to isolated rural communities.

In 2002 the Instituto Nacional de Estadística e Informática (INEI), the nationalstatistics institute, estimated that 72.2% of the population lived in urban areas,up from around 70.1% in the 1993 census and 65.2% in 1981. The trend towardsurbanisation has slowed in recent years as more peaceful conditions in thecountryside have stemmed the flow of migrants, and as thousands of farmingfamilies have returned to their lands. Government funding of several smallinfrastructure projects, combined with improvements to roads and commun-ications in general, have improved living standards in the provinces.

According to INEI, 54.8% of the population lived in poverty in 2001, of whomalmost half lived in extreme poverty. The proportion of those living in povertyincreased sharply after 1998, when it was estimated at 42.4%. The number inextreme poverty is reported to have fallen between 1998 and 2000, but newmethodology adopted in 2001 provides a more accurate picture of theprevalence of extreme poverty in the country; this total is now estimated at24.4% of the population.

Urbanisation has acceleratedsince the 1980s

Steady population growth

Poverty

Peru 17


Poverty indicators(%)

1997 1998 1999 2000 2001b

Living in povertya

National total 42.7 42.4 47.5 48.4 54.8

Living in extreme povertyUrban 5.3 5.2 4.7 4.1 9.9Rural 41.5 40.0 44.4 35.6 51.3National total 18.2 17.4 18.4 15.0 24.4Absolute number ('000) 4,482 4,357 4,702 3,901 6,513

aIncludes those classified as living in poverty and in extreme poverty. bFigures in 2001 are notcomparable owing to more rigorous methodology.


Peru has several large indigenous groups among its population. Quechua andAymara Indians are integrated in Peruvian society, but some tribes living in theremote Amazon Basin have not yet had contact with the outside world. Themost numerous of Peru�s non-integrated Indians are the Ashaninkas, who aremainly concentrated in the central jungle region east of Satipo. The number ofAshaninkas!many of whom live in small, extended family groups under achief and who are dedicated to hunting, fishing and, to a lesser extent,agriculture!is estimated at between 80,000 and 100,000.

Education

Public education standards in Peru are among the lowest in Latin America. Ascompanies have been forced to compete in the international marketplace, thefailings of the education system have been thrown into stark relief. Mr Toledohas started to address the problem of underfunding by increasing teachers�wages. The new government�s first budget statement in September 2001 raisedthe budget for the Ministry of Education by 139%, because teachers� salaries,which were previously paid through the Ministry of the Presidency, are nowbeing handled by the education ministry. However, the government has imposedsevere spending restrictions, and although education expenditure is rising, yearsof underinvestment in staff and textbooks will take time to turn around.

Education indicators(% of population)

1998 1999 2000 2001 2002Rural illiteracy rate (% of over-15s) 40.5 39.3 37.6 37.0 37.4

Urban illiteracy rate (% of over-15s) 8.1 8.2 8.0 9.2 8.7Average number of years of study of

those aged 15-19 8.5 8.5 8.6 8.6 8.7Average number of years of study of

those aged 20-29 10.3 10.5 10.4 10.2 10.1

Number of state education centres 61,787 60,820 62,255 63,688 65,452


The indigenous population

Education levels remain low

18 Peru


Although primary education is notionally free and compulsory for all, around8% of the population has received no education at all. A further 30% areeducated to primary level only; around 40% have been educated to secondarylevel; and 20% have received some further education. Illiteracy figuresunderline the problem, especially when taken in the context of poverty: in2000, 18.5% of the population aged over 15 years that were classified as living inpoverty were illiterate, compared with 7% of the population aged over 15 yearsliving above the poverty line. In the rural departments of Apurimac,Huancavelica and Ayacucho, the illiteracy rate stood at over 30%, according tothe 1993 census, compared with less than 5% in Lima and Callao.

There are around 80 universities in Peru, one-third of them in Lima. Technicaleducation is poorly provided for. Good-quality training in practical skills at thetertiary level is mainly available through two institutions. The first, the ServicioNacional de Adiestramiento en Trabajo Industrial (Senati), the NationalIndustrial Training Service, was born of a private-sector initiative and operatesnationwide to provide full apprenticeships as well as short and sandwichcourses. The Instituto Superior Tecnológico (Tecsup), the Institute of AdvancedTechnology, is a privately funded technological institute catering for 1,000 full-time students in Lima and Arequipa.

Health

There have been advances in healthcare in recent decades, but there is still along way to go. Female life expectancy at birth rose from 69.8 years in 1994 to72.3 years in 2002, whereas infant mortality fell from 118 deaths per 1,000 livebirths in 1970 to 42.5 per 1,000 live births in 2002. However, regional variationsin infant mortality are pronounced. Vaccination programmes ensure thatalmost all children are protected against polio, diphtheria, measles, tetanus andtuberculosis. Child malnutrition, measured by height and weight statistics,remains a serious problem, especially in the more remote rural districts.

Life expectancy(av; years)

1998 1999 2000 2001 2002Male 66.1 66.3 66.6 66.9 67.2

Female 71.0 71.3 71.6 72.0 72.3

Source: ProInversión.

Infant mortalitya

1998 1999 2000 2001 2002Male 49.1 47.3 45.6 44.0 42.5

Female 38.8 37.4 36.0 34.7 33.5

a Deaths of infants under one year of age per 1,000 live births.

Source: ProInversión.

Healthcare for most of the population is provided by the Ministry of Healthand the social security system. More than 300 hospitals, clinics and health

Schools

Higher education

Social indicators are improving

Healthcare funding has beenreformed

Peru 19


centres around the country provide health services to 6.5m Peruvians, 2.5m ofwhom are employees on official company payrolls, and the remainder ofwhom are their spouses and dependants. Until 1995 employers paid socialsecurity contributions for their employees equivalent to 6% of salary, whereasemployees paid 3% of salary. The contribution is now paid in full by employers,whereas employees either contribute to the Oficina de NormalizaciónPrevisional (ONP), the state pension fund, or to administradoras de fondos depensiones (AFPs), private pension funds.

The armed forces and the police have health schemes for their personnel andfamily members. Some universities, municipalities and professional associ-ations also have their own hospitals and health centres. The number of privateclinics in major cities has grown rapidly since 1990. Private health insuranceschemes have proved attractive to the well-off. Those who are not affiliated tothe state national insurance scheme or to other insurance providers, and whohave no private health insurance, are entitled to healthcare provided by thehealth ministry. Technically this is free, but most public hospitals are so under-funded that many patients buy their own medicines.

Natural resources and the environment

Peru covers 1.29m sq km, making it the fourth-largest country in Latin America.It is divided into three topographic regions: the coastal plain, the Andean high-lands and the jungle. The narrow and arid coastal region, bounded by thePacific Ocean to the west and the Andean foothills to the east, is the mostdensely populated. Around 60 rivers flow down from the Andes into thePacific and their valleys are intensively farmed. To the east are the valleys andhigh plains of the Andes, the population centres of the pre-Hispanic cultures,which continue to house around one-third of the population. Further to theeast are the mountain slopes, lowlands and tropical rainforest of the jungle;these areas constitute about three-fifths of national territory, but are sparselysettled and have little agriculture or other development.

The coastal climate is dominated by the cold current known as the Humboldt,which flows from the Antarctic along the coasts of Chile and Peru, whereaverage temperatures range between 18°C and 23°C. Rainfall is rare, but densecloud cover and fine mist are common between June and October. In theAndes, there are extremes of temperature between day and night and in somehighland areas it may drop from 34°C to below freezing in a few hours. In thetropical forest, a hot and humid climate prevails, with more than 200 days ofrain a year and average annual rainfall of over 250 cu m.

Peru is one of the most ecologically diverse countries in the world. Soil use ishighly differentiated, depending on the region. In parts of the coastal andAndean regions some Inca terraces are still in daily use for agriculture. Thetropical forests appear fertile, but the soils are fragile and intensive agriculture isdifficult to sustain. The highlands have suffered severe deforestation, mostly asa result of small-scale wood-cutting. There has been little exploitation of thetimber resources of Peruvian Amazonia.

Geography

Climate

Land use

20 Peru


Peru has a wealth of mineral deposits, particularly copper, gold and zinc. Oilhas been found in the Amazon Basin and in other eastern river basins, andoffshore in the north. Huge natural gas deposits exist in the central andsouthern selva (forests), which are now starting to be exploited; natural gas fromhuge reserves in Camisea is due to reach Lima in early 2004. Peru�s Pacificcoastal waters constitute some of the world�s richest fishing grounds andabundant, fast-flowing rivers provide huge potential for hydroelectricpower generation.

In recent years businesses and government have started to concern themselveswith the environment. Legislation on environmental standards is slowly beingimplemented for mining and fishing. However, parts of the Pacific coast stillsuffer from the massive dumping of waste by fishmeal plants. Many mines alsodump tailings into nearby rivers. The Consejo Nacional del Ambiente (Conam),the National Council for the Environment, has been set up, and all productivesectors are regulated, but control mechanisms remain weak.

Transport, communications and the Internet

Peru has 78,436 km of roads, of which only 13.2% are paved, an extremely lowfigure by regional and international standards; most paved roads are indesperate need of maintenance. The 1990s saw over US$2bn of investment inthe motorway network and an extensive overhaul of Peru�s two mainmotorways. However, investment remains insufficient to maintain the networkadequately. Other improvements were made to roads linking the departmentaland provincial capitals, rural roads and streets in Andean towns. However,investment in roads stood at just 0.43% of GDP in 2001, compared with the 2-3%of GDP that the Inter-American Development Bank (IDB) estimates is needed tobring the roads network up to scratch. Peru�s national road network (it also hasdepartmental and local networks) comprises 17,267 km of roads, 8,500 km ofwhich are paved; the government plans to increase this to 9,500 km by 2006through concessions tendered to private operators. The government is hoping toencourage private-sector investment of around US$800m for thenational network.

Deregulation during the 1990s made Peru�s 37 ports that deal with merchandisetrade cheaper and more efficient, but they remain uncompetitive comparedwith those in neighbouring countries. In September 2004 the recently createdAutoridad Portuaria Nacional (APN), the National Port Authority, approved anew Plan Nacional de Desarrollo Portuario, the National Plan for PortDevelopment. Callao, Peru"s largest port, will be the first beneficiary of theplan, with private-sector investment of US$200m expected to start in 2005. TheAPN is also undertaking a feasibility study for the construction of a newcontainer terminal at Callao. It is hoped that Ilo, a free-trade and industrialzone, will eventually handle a large proportion of trade with Bolivia. The porthas gained in importance as mining projects have come on stream.

Air transport is extremely important owing to the mountainous terrain. De-regulation has encouraged a number of small operators to start regular services

Resources

The environment

Ports

Air services

Peru 21


to towns in the Andes and jungle areas that are inaccessible by road. Scheduledservices to major provincial cities have increased sharply in number, andcompetition has resulted in improved punctuality. There are more than 50airports in Peru, the busiest being Lima�s Jorge Chávez international airport.Cuzco, Tacna, Arequipa and Iquitos are also classified as international airports.

In 2001 the government awarded a contract to manage Lima�s Jorge Chávezinternational airport to a consortium headed by Frankfurt airport, Lima AirportPartners, with a US company, Bechtel, and Peru�s Cosapi. Under the contract,Peruvian officials secured 46.5% of gross annual revenue in royalties, as well asinvestment commitments in excess of US$1.2bn for the 30-year concessionperiod. In the first year of the concession, Lima Airport Partners handed overUS$43m to the government. The government plans to grant concessions to theprivate sector for the operation of six other airports in Peru.

Following the demise of a former state airline, Aeroperú, in March 1999,AeroContinente took over as the country�s major domestic operator, controlling60% of the domestic market. Lan Perú entered the market in 1999, as did TacaPerú, part of the Central American Grupo Taca, in 2001. In 2004 the industryslipped into crisis, when in June the US government placed the owner ofAeroContinente, Fernando Zevallos, on its list of top international drugstraffickers, prohibiting any US company from doing business with the airline.As a result, the company failed to renew its insurance in July and wasgrounded by the Peruvian Ministry of Transport, leaving thousands stranded.Peru�s other airlines have struggled to fill the void left by AeroContinente, butby the end of 2004 Lan Perú controlled around 70% of the domestic market.

The railway system has for years been in a poor state of repair. The mostcommercially attractive stretches have been sold off as concessions, promisingmuch-needed investment for the network. In November 2000 a concession torun the southern, central and south-eastern railways was awarded.Ferrocarriles del Peru, a consortium of eight companies, won the bid for theconcession with an offer to pay the government 33.4% of its annual income.The 30-year concession includes all track, signalling, stations, workshops androlling stock.

The 590-km central railway runs from the port of Callao to La Oroya andHuancayo and carries mainly minerals from mines in the Andes. The 900-kmsouthern railway runs from the Matarani seaport through the Andeanhighlands to Juliaca (in Puno department), where it branches towards the cityof Puno on the shores of Lake Titicaca and the city of Cuzco. The railwaymoves bulk cargoes such as grain and petroleum products, and is also a touristcircuit. The 120-km south-eastern railway covers the popular tourist circuit ofCuzco to the Machu Picchu ruins.

For social reasons, the government continues to operate the unprofitable 129-km Huancayo-Huancavelica railway in the highlands. This is the only viablemeans of transport in the area and is relied upon by impoverished peasantfarmers. The service would not survive without subsidy.

Railway concessions are sold

22 Peru


The privatisation of the state-owned telecommunications (telecoms) companiesin 1994 and the subsequent liberalisation of the market led to rapiddevelopment of the Peruvian telecoms sector. Initially, changes came as a resultof government efforts to modernise the sector, and since 1998 the markets haveopened to competition. However, the fixed-line market is still an effectivemonopoly, and Telefónica del Perú (a subsidiary of Spain�s Telefónica) has ashare of more than 95%.

The mobile market has expanded rapidly, owing in part to strong competition,and in 2002 the number of mobile subscribers overtook the number of fixedlines, more than doubling to 3.8m mobile subscribers in September 2004 from1.8m in 2001. In 1997 Telefónica held 73.4% of the mobile market, but its sharehad fallen to 51.8% in September 2003, following the entry of BellSouth andTelecomItalia Mobile (TIM), which each held around a 20% share. Nextel is theother mobile operator, accounting for around 5% of the market. The mobilemarket has stretched beyond the capital, Lima, and the major cities, and TIMnow has a presence in all of Peru�s 24 departments. The high level of poverty inPeru has led mobile operators to compete on price, and pre-paid tariffs haveproved particularly popular. In September 2004 there were 3m pre-paidaccounts, compared with just 779,749 monthly accounts.

In early 2004 Telefónica announced the purchase of BellSouth�s mobileoperations, effectively raising its share of the mobile market to over 72%. Thereare concerns that the reduced competition in the market will prove counter-productive and that rates will stay artificially high. However, the telecomsregulator, the Organismo Supervisor de la Inversión Privada enTelecomunicaciones (Osiptel), has pledged to continue to regulate prices,particularly on charges from fixed to mobile phones, which are double those inChile and almost twice those in Argentina and Brazil. The entry of a Mexicancompany, Telmex, into the market in November 2003, following its purchase ofUS-based AT&T�s operations, also promises to increase competition once more.At end-September 2004, Telefónica accounted for 52.2% of the mobile market;BellSouth (now owned by Telefónica) for 18.3%; TIM for 24.9%; and Nextelfor 4.6%.

The number of regular Internet users in Peru has surpassed 2m, with over 1maccessing the Internet at least once a week. Ownership of personal computersis low, as is home Internet access, but there is a large number of Internet cabinsand cafés throughout the country, and personal ownership is increasingsteadily. According to the Organismo Supervisor de la Inversión Privada enTelecomunicaciones (Osiptel), the telecoms regulator, in June 2004 there were556,125 subscribers to the Internet: 357,601 residential; 197,011 businesses; 766public Internet cafés; and 747 public-sector bodies. Extensive use of the Internetat both the corporate and non-corporate levels has resulted in a significantincrease in the number of Internet service providers (ISPs) and Internet publiccabins (IPCs). The most common ways of connecting to the Internet are viadial-up or WAP access. Other modes including integrated services digitalnetwork (ISDN), cable modem, advanced digital subscriber line (ADSL) andwireless are also available. The arrival of wireless local loop (WLL) technology

Telecommunications

Internet

Peru 23


through Millicon (Luxembourg), Orbitel (US) and Telefónica is expected tospeed up the development of broadband access to the Internet.

The dominant news medium in Peru is television, followed by radio. Thecountry has nine national network television channels, as well as a host oflocal, satellite and cable channels. There are several daily national and localnewspapers, but they reach fewer people!the leading national newspapers areEl Comercio, La República and Expreso; Gestión is an economics-focusednational. Caretas, which is published weekly, contains political andeconomic analysis.

Energy provision

Peru has extensive untapped energy potential in both gas and petroleum. Oiloutput rose in the late 1970s to peak at 191,000 barrels/day (b/d) in 1980, butunderinvestment by the state and a lack of exploration by private companiescaused output to slump to 91,351 b/d in 2003. Around 90% of output comesfrom four companies: Occidental Petroleum of the US, the national company,Petrotech, and Pluspetrol and Pecom (previously Pérez Companc) of Argentina.Owing to falling output and rising demand, Peru is no longer self-sufficient inoil, but still exports heavy crude (which earned US$665m in 2003). Since 1987the country has imported rising quantities of light crude. It has run an oil tradedeficit since 1992.

After the discovery by a UK company, Shell, of the huge Camisea naturalgasfields in the south-eastern jungle of the Cuzco department in 1987,exploration companies widened their interest in Peru�s hydrocarbons potential.The Camisea fields contain gas and condensates equivalent to 2.4bn barrels ofoil, almost seven times the size of existing proven oil reserves. A consortiumcomprising Shell and Mobil of the US signed a contract with the government in1996 to develop the deposits, but withdrew in 1998 following disagreementswith the government about distribution and export sales.

The state finally auctioned the natural gas exploitation stage in February 2000to a consortium comprising Pluspetrol of Argentina (40%), Hunt Oil of the US(40%) and the SK Corporation of South Korea (20%). Pluspetrol-Hunt-SK isinvesting US$1.6bn in the exploration phase. The consortium has the rights todevelop the fields for 40 years. The second-stage auction for transport anddistribution was won by the only bidder, a consortium led by an Argentiniancompany, Techint, which made a total investment commitment of US$1.45bn,including a gas pipeline from Camisea to Lima and a natural-gas distributionnetwork in Lima and Callao. Within the consortium, Techint holds a 30% stake;Pluspetrol and Hunt Oil both hold 19.2%; a local company, Graña y Montero,holds 12%; and Sonatrach of Algeria and SK Corp hold 10% and 9.3% respectively.The final sale of the distribution contract in Lima and Callao was won by aBelgium-based company, Tractebel. The gas reached the capital on schedule inAugust 2004, and a second stage of the project, to export gas to the west coastof the US and Mexico, should be on-stream by 2007.

Oil

Media

Gas

24 Peru


Peru had 5,970 mw of installed electric-generation capacity at the end of 2003,half of which was hydroelectric and half thermal, according to the Ministry ofEnergy and Mines. Total production in 2003 was 22,983 gwh, of which 81% wasgenerated through hydroelectric resources and 19% through thermal sourcessuch as diesel, coal and fuel oil. Most of the power sector is state-owned. Thegovernment is trying to reduce its dependency on hydroelectric power, whichfluctuates because of rainfall patterns, by developing natural-gas-fired plants inthe light of the massive discoveries at the Camisea gasfield.

Electricity is delivered through two main interconnected systems and severalsmaller isolated systems. Power supply exceeds demand, and has beenconsolidated further by a boost in capacity of the northern-centralinterconnected system, the largest in Peru.

A state-owned company, ElectroPerú, is the largest power generator. Otherleading power generators include Edegel, Egasa and Egesur, all of which arestate-owned. The government�s efforts to privatise the electricity sector havefaced stiff opposition from the public, leading to riots in Arequipa in 2002 thatforced the government to back down on its plans to sell Egasa and Egesurto Tractebel.

The economy

Economic structureMain economic indicators, 2003Nominal GDP (Ns bn) 210.7

GDP growth (%) 3.8Consumer price inflation (%; av) 2.3

Exports fob (US$ m) 8,985.6Imports fob (US$ m) -8,254.5Current-account balance (US$ m) -1,060.7 Current-account balance (% of GDP) -1.8Exchange rate (av; Ns:U$) 3.478

International reserves (US$ m; year-end) 10,239.5Import cover (months) 11.3

Source: Banco Central de Reserva del Perú.

The Peruvian economy is split between a relatively modern sector on thecoastal plains and a subsistence sector in the mountains of the interior, which isisolated by poor transport and communications. Economic power has tradition-ally been in the hands of an elite of European descent. Services account for 65%of GDP, whereas industry, including mining, accounts for around 26% andagriculture for 9%. Mining is important for the balance of payments, providing51.2% of Peru�s merchandise export earnings in 2003, a proportion thatincreased further in 2004 owing to production increases and high internationalprices for metals. The huge Antamina copper and zinc mine started productionin July 2001 and immediately provided a substantial boost to minerals exports,and other investment projects are in the pipeline. The manufacturing industry

Peru has a dual economy

Electricity generation

Peru 25


is small but fairly diverse, with food, fishmeal, metals, steel, textiles andpetroleum-refining being the largest sectors.

Peru is largely a land of peasant farmers and underemployed shantytowndwellers. According to the 1993 census, of the 7.1m economically activepopulation (EAP, aged 14 years and over), 20% were unskilled and 19% wereskilled agricultural workers. Of the total workforce, 10% described themselvesas professionals, 5% as technicians and 6% as office managers and workers.According to official statistics, the services sector employs 50% of the EAP inLima. However, this figure conceals a harsh reality, as most of those included init eke out a precarious existence selling low-value consumer items in theinformal economy or driving unlicensed taxis. The adjustment programmeapplied in the 1990s led to a sharp reduction in formal employment, whichhad already declined in the 1980s. Reductions in state bureaucracy and therationalisation of former state-owned companies following privatisation led tothe loss of hundreds of thousands of jobs.

Primary products represent the bulk of Peru�s export earnings, with mining andfisheries production the two major traditional export categories. Mining�s shareof exports has risen in recent years as a result of high volume growth,particularly for gold and copper, and falls in agricultural and fisheries exports.In 1994 Peru became the world�s second-largest fishing nation after China, witha total catch of 11.7m tonnes. This had fallen to 5.9m tonnes by 2003, followingyears of overfishing, which had depleted stocks and led to occasional bans inan effort to replenish them. Fishing earned US$1bn in export earnings in 2003(11.4% of total merchandise export earnings), principally through sales ofprocessed fishmeal, but also through exports of canned, frozen and salted fish.The sector is vulnerable to climatic change, as in 1998 when output plunged asa result of the warming effects of the global weather phenomenon El Niño onthe Pacific Ocean, which drove the anchovies off the Peruvian coast to colderwaters. Fishmeal prices are volatile and inversely linked with global soyaprices, the other main source of animal feed.

In years when mineral and commodity prices are high, about three-quarters offoreign-exchange earnings come from exports of minerals, fishmeal, oil andtraditional semi-processed agricultural products such as cotton, coffee or sugar.This dependence on the export of primary products exposes the economy toshocks from volatile commodity prices and weather conditions.

In October 2002 textiles production and exports were given a boost when theAndean Trade Promotion and Drug Eradication Act (ATPDEA) came into effect.ATPDEA replaced the Andean Trade Preferences Act (ATPA), which expired inDecember 2001. In addition to the items that were covered under ATPA, whichare mainly agricultural products, the new act permits Peru, Bolivia, Colombiaand Ecuador to export tuna and garments made from local cotton and woollenproducts tariff-free to the US. The government has signalled that it will promotetextiles and woollen products, given Peru�s strong potential in the industry,particularly for fine wool from alpacas, llamas and vicuña. The government iscurrently negotiating a more wide-ranging permanent free-trade agreement

Peru�s wealth is dependent onprimary products

26 Peru


(FTA) with the US, which would make permanent the conditions ofthe ATPDEA.

Comparative economic indicators, 2003Peru Ecuador Chile Colombia Brazil

GDP (US$ bn) 60.6 27.2 72.1 81.8 505.5

GDP per head (US$) 2,228.2 2,154.8 4,736.9 1,835.1 2,858.2GDP per head (US$ at PPP) 5,233.0 3,795.7 10,893.1 6,739.7 8,081.1

Consumer price inflation (av; %) 2.3 7.9 2.8 7.1 14.7Current-account balance (US$ bn) -1.1 -0.5 -0.6 -1.3 4.0 Current-account balance (% of GDP) -1.8 -1.7 -0.8 -1.6 0.8

Exports of goods fob (US$ bn) 9.0 6.2 21.0 13.7 73.1Imports of goods fob (US$ bn) -8.3 -6.3 -18.0 -13.3 -48.3

External debt (US$ bn) 29.7 17.0 43.4 36.2 230.7Debt-service ratio, paid (%) 33.4 21.7 28.5 31.5 70.7

Source: Economist Intelligence Unit, CountryData.

Economic policy

The economic policies of the 1980s almost ruined the country. Hesitantliberalisation under Fernando Belaúnde Terry (1980-85) collapsed with theadvent of a debt crisis, and Peru declared a moratorium on the servicing of itsexternal debt. GDP fell, inflation accelerated and the government retreated intoprotectionism. In 1985 the new president, Alan García, devalued the currency,raised wages, increased food subsidies, restricted debt servicing and bannedmany imports in an attempt to provoke demand-led growth. An unsustainableboom in 1986-87 proved to be short-lived, and, by the time Alberto Fujimoritook power in 1990, GDP had contracted by more than 20% in three years andinflation was running at over 40% per month.

Mr Fujimori�s election marked a radical change in policy direction. Heeliminated price controls and state subsidies, which had an immediate effect ofpushing up prices, but within a few months his policies began to show resultsand inflation subsided. A programme of economic liberalisation and structuralreform was launched in 1991, incorporating trade, capital-market and exchange-rate liberalisation. Other measures included fiscal stabilisation!reducingexpenditure through abolishing subsidies!and privatisation. The tax authoritywas reorganised and tax collection increased from less than 5% of GDP in 1990to 12.5% in 1999.

In 1993 the Banco Central de Reserva del Perú (BCRP, the Central Bank) beganto base monetary policy on the control of net domestic credit, under whichsoles in circulation have to be fully backed by foreign reserves. Relations withthe international financial institutions were restored following a monitoringagreement and three consecutive extended fund facilities (EFFs) with the IMF.Other reforms in the early 1990s included the abolition of the state-owned andsubsidised development banks; the development of the commercial bankingsector; the creation of private pension funds with voluntary affiliation; labourmarket reform, including more freedom to hire and fire; and legislationproviding equal treatment and guarantees to foreign investors.

Debt crisis in the 1980s

Free-market reformtransformed the economy

Peru 27


Between 1991 and 1997 the fiscal accounts were transformed through therestructuring of the public sector. Spending on salaries fell sharply in real termsas the state sector was cut, whereas proceeds from privatisation and greater taxcompliance increased revenue. In 1997 the public sector showed an overallsurplus excluding privatisation receipts equivalent to 0.1% of GDP, comparedwith a deficit of 8.7% of GDP in 1990. Reform slowed in Mr Fujimori�s secondterm (1995-2000), and he started to pursue more populist expenditure policies.The slowing pace of reform coincided with a severe El Niño (a disruption of theocean-atmosphere system in the tropical Pacific) in 1997-98 and an internationalfinancial crisis, and the economy stagnated. As a result of a pre-electoralexpenditure boost and falling revenue, the non-financial public-sector (NFPS)deficit increased to 3.4% of GDP in 2000, following two years of recession andpolitical uncertainty.

Economic policy since has focused on reducing the fiscal deficit. Despite hispolitical difficulties, Alejandro Toledo"s administration has largely been able tomaintain a broadly orthodox economic policy direction, helping thegovernment to keep a falling trend in the deficit. We estimate that the deficit fellto 1.3% of GDP at the end of 2004, despite the suspension of the privatisationprogramme in mid-2002, following violent protest at the privatisation of twoelectricity-generating companies. The fall has come about through acombination of economic growth, the tax authority being run more efficiently,some rate increases in 2003, and the introduction of a new tax in 2004. InAugust 2003 a temporary 1-percentage-point increase in the rate of theImpuesto General a las Ventas (IGV), the value-added tax, from 18% to 19% wasintroduced. The corporate tax rate also increased, from 27% to 30%. A new 0.1%tax on banking transactions was introduced in April 2004, which is scheduledto remain in force until the end of 2006. As a result, tax revenue increased by14.6% year on year over the first ten months of 2004 (overall revenue was upby 12.6% over the same period), compared with an increase in expenditure of6.1% year-on-year.

The monetary policy introduced in 1993 was based on the control of netdomestic credit, and aimed to ensure that the currency was fully backed byforeign reserves. High capital inflows caused foreign reserves to rise sharply in1994-97. The BCRP allowed the accumulation of reserves to expand themonetary base, having little recourse to sterilisation, and judged that expansionof the base and other monetary aggregates was warranted by economic growth.The remonetisation of the economy following the hyperinflation of the late1980s and rapid monetary growth did not fuel inflationary pressures. From 1995,the BCRP began to issue certificates of deposit (CDs) as a means ofcontrolling liquidity.

In 2002 the BCRP introduced inflation-targeting, with annual targets of 2.5%within a range of one percentage point. To achieve this, every month the BCRPsets a range for the liquidity of commercial banks� current accounts held at theBCRP, and sets its own interest rate to guide commercial rates. In this way, thebank aims to avoid inflationary or deflationary pressures while supportingeconomic activity. The BCRP is also increasing transparency in its operations,

Monetary policy

Fiscal reform loses momentumin late 1990s

The deficit narrows after 2001

BCRP prioritises price stability

28 Peru


and now publishes a report every four months to explain its policy. The BCRPmaintains a floating exchange-rate regime, limiting its role to interventions tosmooth out volatility.

Given the absence of adequate levels of internal savings, economic policy inthe early 1990s focused on growth led by foreign direct investment (FDI). To thatend, the government passed a series of laws encouraging private investmentand imposing specific codes for various productive sectors. As a result, Peru hasliberal foreign investment laws, with foreign nationals as free to invest asPeruvian nationals. The principal stimulus to foreign investment in the 1990swas the privatisation programme, which was originally designed to transfer allstate companies to the private sector by 1995. The programme began in late 1992with the sale of the iron producer, Hierroperú, followed by the national airline,Aeroperú, in 1993. The sale in 1994 of stakes in the two telecommunications(telecoms) companies, Empresa Nacional de Telecomunicaciones (Entel) andCompañía Peruana de Teléfonos (CPT), attracted over US$1.3bn in cash andUS$700m in investment commitments from Telefónica of Spain. Almost allsales in telecoms, banking, tourism and industry were completed by 1998, afterwhich the programme stalled, particularly in the energy, water and transportsectors. Mr Toledo�s attempts to complete the programme ended in 2002following protests at the sale of two electricity generators. The governmentplans to sell concessions to manage Peru�s ports, airports and major roads toattract investment into and improve its transport infrastructure.

Parallel to the privatisation programme, and following the example ofneighbouring Chile, Peru instituted a system of Administradoras de Fondos dePensiones (AFPs), private pension funds, in the mid-1990s. The purpose of thesystem is to reorganise the chaotic state social security system and offerappropriate retirement pensions to fund members, while encouraging domesticsavings and the deepening of the local capital market.

Economic performance

In the early-to-mid 1990s Peru�s economy underwent a profound transitionfollowing the virtual collapse of the economy in 1988-90. Capital inflowsfuelled a strong investment-led economic recovery, which was especially rapidin 1994-95. A surge in private and public investment raised the investment/GDPratio from 16.7% in 1990 to 21.2% in 1994. Growing confidence in the economyand a strong currency stimulated a consumer boom from 1994 to mid-1998.Despite high interest rates, purchases of consumer durables on instalment planssoared!high import tariffs had starved consumers of imported goods andluxuries for decades. Once import tariffs fell, pent-up demand was released,contributing to a widening trade deficit; between 1993 and 1998, the tradedeficit widened from US$738m to US$2.5bn.

Agricultural harvests in 1997-98 were affected by El Niño, with freak rainsflooding cultivated land and disrupting the transport of farm products to Lima.Peru�s fishing industry suffered from the warm currents brought by El Niño asfish, particularly anchovies, deserted Peruvian shores for cooler waters. The

Foreign investment andprivatisation programme

Private pension funds followChile�s example

Major transition in themid-1990s

Peru 29


economy was then hit by Russia�s debt default and devaluation in August 1998,which dramatically increased investors� risk aversion. International credit linesdried up and the Peruvian economy, which had been largely dependent onforeign capital for growth, felt the squeeze. The effects fed into all sectors,forcing up interest rates and restricting domestic credit. The banking sectoravoided collapse, but struggled thereafter with a high bad-debt portfolio.

Gross domestic product(% real change, year on year)

Annual average1998-2002 2002 2003

Private consumption 1.6 4.4 3.1

Government consumption 1.7 0.2 2.9Gross fixed investment -5.3 -0.7 5.4

Exports of goods & services 7.1 6.8 5.9Imports of goods & services -0.8 2.1 3.3

GDP 1.6 4.9 3.8


Economic growth remained sluggish in 1999-2001, driven almost solely by theprimary sectors of the economy, particularly mining. Construction, non-primary manufacturing and services all performed poorly. Domestic demandremained depressed throughout the period; public expenditure in the run-up tothe elections in April and May 2000 stimulated demand, but politicaluncertainty in the electoral period led to low levels of inward FDI. Thiscontinued to July 2001, when Mr Toledo took up office, as a result of politicalinstability, fiscal austerity under the interim Paniagua administration, anduncertainty over the future direction of economic policy.

In July 2001 the huge Antamina copper-zinc mine started production. Thisboost to mining output coincided with a newfound political stability followingthe election of Mr Toledo, and his economic team�s performance has beensolid. GDP grew by 4.9% in 2002 and by 3.8% in 2003, with all sectors except forfishing showing signs of growth. Monetary easing by the Central Bank in early2002 reduced interest rates, helping to spur credit demand, and the strugglingmanufacturing and commercial sectors started to increase output. Incomparison with much of the rest of Latin America, which remained mired inrecession, the Peruvian economy started to give cause for optimism.

Gross domestic product by sector(% real change, year on year)

Annual average1998-2002 2002 2003

Agriculture & livestock 4.7 5.7 2.2Mining & fuel 4.0 11.6 6.7Construction -3.0 7.9 4.8

Fisheries 4.0 5.7 -13.4Manufacturing 1.2 4.2 2.2

Services 1.4 4.0 4.2GDP 1.6 4.9 3.8


30 Peru


Economic activity continued to increase at a firm rate in 2004 (we estimate full-year growth of 4.5%), benefiting from a benign external environment. Althoughmining remained the most dynamic sector of the economy, growth was moreeven than in 2003. Private consumption under-performed compared with theoverall economy, growing by 3.1% year-on-year in January to September, but an8.7% year-on-year increase in private investment and 12.5% growth in exportsover the first three quarters of the year drove growth. Despite a sharp increasein fiscal revenue, public investment fell, by 5.2% year-on-year.

The strength of private investment since the second half of 2002 stems mainlyfrom investment in the massive Camisea natural gas project, which totalledUS$1.6bn by August 2004, when the gas pipeline was completed and the gasstarted to arrive in Lima. Investment in the project will continue as the so-called phase two!a project to export the gas to the west coast of the US!gearsup. Investment in the mining sector has also remained firm.

GDP growth(% change, year on year)

1999 2000 2001 2002 2003Primary GDP growth 12.5 5.7 2.8 6.5 2.5Non-primary sectors -0.9 2.1 -0.2 4.5 4.2Domestic demand growth -3.1 2.3 -0.6 4.0 3.3

GDP growth 0.9 2.9 0.2 4.9 3.8


In terms of growth, the Peruvian economy has outperformed all other LatinAmerican economies since Mr Toledo took up office in July 2001. However, therecovery has been based primarily on the mining and export sectors, and hasfailed to improve the living conditions for the majority of Peruvians.Unemployment and underemployment have crept up over this period, and in2003 reached its highest level since 1993. Poverty levels also remain stubbornlyhigh. One of the Toledo government"s failures so far has been to translateeconomic growth into an improvement in living standards for most Peruvians.

Urban underemployment is classified according to hours worked and wagesreceived. The depressed state of the domestic economy in 1998-2001 wasreflected in falling employment rates, and promises of job creation became oneof the central themes of the 2001 presidential election. The economy started asolid recovery in mid-2002, but unemployment and underemploymentremained stubbornly high in 2003-04. Economic growth has been driven bymining and natural gas, which provide few linkages to employment. Incomedistribution is unequal and this trend is continuing, with the poorest 20% of thepopulation receiving under 5% of national income.

Unemployment(% of economically active population, Oct)

2000 2001 2002 2003 2004Unemployment 7.4 9.4 8.1 9.1 9.2

By genderMale 7.3 9.4 7.0 8.8 7.5Female 7.5 9.4 9.5 9.4 11.4

Peru 31


Unemployment(% of economically active population, Oct)

2000 2001 2002 2003 2004By age group14-24 13.4 13.8 14.2 15.5 17.025-44 5.5 8.1 6.0 7.0 6.945-54 4.6 7.8a 6.3a 6.7a 6.2a

55+ 6.2 n/a n/a n/a n/a

a 45 years and over.


There was little upward pressure on consumer prices in 1999-2003, owing tosubdued domestic demand, average idle capacity in industry standing ataround 50% and a stable exchange rate. However, high international oil pricesin early 2004 fed into domestic consumer prices, which overshot the upper endof the Central Bank�s 1.5-3.5% target range every month between June andNovember. High food prices caused by scarce food supply, owing to a harsh dryseason in the Peruvian highlands, also contributed to the rise in inflation in thefirst half of 2004. Changes in international fuel prices (at present Peru is a nethydrocarbons importer), and in the cost of basic foodstuffs (dependent ondomestic agriculture and climate) have the greatest impact on Peru�s consumerprice inflation.

Inflation(% change)

2003 2004Consumer prices Wholesale prices Consumer prices Wholesale prices

Monthly Annual Monthly Annual Monthly Annual Monthly AnnualJan 0.23 2.28 -0.16 1.69 0.54 2.80 0.55 2.73Feb 0.47 2.80 0.43 2.58 1.09 3.43 1.27 3.58

Mar 1.12 3.39 0.83 3.31 0.46 2.76 0.99 3.75Apr -0.05 2.59 -0.21 2.41 -0.02 2.78 0.61 4.60May -0.03 2.42 -0.14 2.25 0.35 3.18 0.64 5.42

Jun -0.47 2.17 -0.30 1.96 0.56 4.26 0.63 6.40Jul -0.15 1.98 -0.29 1.08 0.19 4.61 0.21 6.94

Aug 0.01 1.89 0.16 1.05 -0.01 4.59 -0.18 6.57Sep 0.56 1.98 0.66 0.80 0.02 4.03 0.10 5.98

Oct 0.05 1.30 0.17 0.45 -0.02 3.95 -0.02 5.77Nov 0.17 1.88 0.19 0.91 0.29 4.07 0.35 5.94Dec 0.56 2.48 0.65 2.01 - - - -

Annual average 2.26 - 1.70 - - - - -


Regional trends

Peru is a country of marked income-distribution inequalities, with thewealthiest 20% of the population accounting for 51% of income and the poorest20% just 4.4%. The greater the distance from Lima, the worse the economic andsocial indicators. An attempt by the government of Mr García (1985-90) todevolve power to a dozen newly created regions was swiftly halted byMr Fujimori, who centralised power in Lima. The Toledo administration has

Decentralisation begins

Inflation rises above targetin 2004

32 Peru


started to devolve some power to the provinces, and this process ofdecentralisation got under way in November 2002, when municipal andregional elections were held (see Politics: Recent political developments).

Economic sectors

Agriculture

The wide diversity of climatic conditions allows most varieties of crops to begrown in Peru, and about 1.3m hectares (ha) of the country is under cultivation.Agriculture in the Andes is largely carried out at subsistence level. The coastalplain offers huge potential for export crops, but investment has been hinderedby unfavourable legislation. To encourage investment and to moderniseagriculture, in the 1990s the government passed a series of land laws. Lowlimits on land ownership were raised, and land once again became a tradeablecommodity. Some surviving co-operatives chose to turn themselves into limitedcompanies and sold land to private investors. The sugar industry, whichstagnated under co-operative ownership, is struggling to secure the funds itneeds and is in danger of becoming obsolete. Low international prices haveexacerbated the industry�s problems, and sugar workers have periodically beenin conflict with the government since 2002, demanding more support andhigher prices.

Prospects for the agricultural sector!particularly non-traditional agro-exportproducts!received a boost in October 2002 with the introduction of theAndean Trade Promotion and Drug Eradication Act (ATPDEA) in October 2002,which extends preferential treatment to 6,000 products produced by Peru,Bolivia, Colombia and Ecuador, allowing them to enter the US market tax-freeuntil 2006. Earnings from non-traditional agriculture and livestock increased by42.1% between 2001 and 2003, to US$621m.

The eastern slopes of the Andes and the high jungle are suitable for agricultureand the production of high-quality tea and coffee crops. Cocoa is also grown,but the country�s poor transport infrastructure and low prices have encouragedmany farmers to turn to coca, from which cocaine is produced. Commercialgrowing of coca started in the late 1970s and expanded rapidly in the followingdecade as demand for cocaine rose sharply in the US. Peru remains the second-largest producer of coca leaf and cocaine in the world after Colombia, despiteefforts to reduce output in the 1990s. Successive governments have made effortsto reduce the number of plantations by promoting non-traditional agro-exportssuch as asparagus and speciality coffees. As a result, revenue from the cocatrade!estimated at between US$500m and US$1bn per year!fell by 2000, butproduction increased again in 2001 and 2002. The signing of the ATPDEA inOctober 2002 brought about a renewed impetus to coca eradication, and in2003 an estimated 15% of the total area under coca cultivation was destroyed.

The rich fishing grounds off the Pacific coast form the basis of the fishmeal-processing and canning industry, which is a significant foreign-exchange earner.Up to 10m tonnes of anchovy and sardine, the species used for fishmeal, are

Coca displaced many othercrops in the 1980s

Fishing production isextremely important

A variety of crops is grown

Peru 33


caught close to the shoreline each year. Catches declined sharply in 1998 owingto the effects of the El Niño global weather phenomenon, but recovered in1999-2002. The catch fell sharply again in 2003, owing to lengthy fishing bansimposed by the government to restock the overfished waters, before recoveringagain in 2004; output was up 24.1% year-on-year over the first nine months ofthe year. Most investment in the fishing industry since 1992 has been on boatsto replace the antiquated fleet, and on new high-technology plants that uselow-temperature steam-drying to produce premium-quality fishmeal. The mealis used for fish-farming and aquaculture and carries a substantialprice premium.

Mining and semi-processing

Peru is the world�s sixth-largest producer of gold and copper and the second-largest producer of silver. It also ranks highly in output of zinc and lead.Minerals are traditionally the most important source of export revenue,averaging 48.3% of total export earnings in 1998-2003. The mining sector hasalso consistently been the fastest-growing sector in recent years, following newinvestments and the start of production from new mines. Gold has been themain success story since the late 1990s, with output growing from 10 tonnes in1990 to 173.1 tonnes in 2003. Growth has been driven by the large miningconcerns at Minera Yanacocha, owned by Newmont Mining of the US and alocal company, Compañía de Minas Buenaventura, and at Pierina, owned byBarrick of Canada. The Pierina mine, inaugurated in May 1999, has the world�slowest production cost, at US$45/oz. Yanacocha, which now produces 40% ofPeru�s gold, has the largest reserves and has helped to make gold Peru�s largestsingle export earner since 1998.

Metallic mining statistics('000 tonnes unless otherwise stated; Jan-Sep)

Production volume Export earnings (US$ m)2003 2004 % change 2003 2004 % change

Copper 457.2 594.8 30.1 885.5 1,727.6 95.1Tin 26.0 26.7 2.7 121.7 219.0 80.0

Iron 2,544.0 3,160.9 24.2 70.6 94.3 33.5Gold ('000 kg) 129.3 130.2 0.7 1,514.5 1,726.6 14.0

Silver ('000 kg) 1,897.5 1,995.4 5.2 140.8 194.5 38.1Lead 204.6 200.7 -1.9 145.6 279.0 91.6Zinc 861.3 780.8 -9.3 365.7 436.0 19.2

Total (including others) - - 5.6 3,319 4,885 47.2


Peru has 15% of the world�s copper reserves and production has increasedsharply since the mid-1990s, following heavy investment in the sector. Growthin export earnings slowed after 1997, as plunging minerals prices depressedrevenue, but output has increased every year since 1998 and investment in thesector is still firm. In July 2001 the huge Antamina copper and zinc mine beganproduction, ahead of schedule. The US$2.3bn project is based in the Andes,approximately 380 km north of the capital, Lima, and is estimated to have thelargest unexploited reserves of copper and zinc in the world. The Canadian

Mining drives Peru�sexport revenue

Antamina and Las Bambas

34 Peru


consortium that won the exploitation rights in 1998 expects to produce!at alow cost!an average of 360m lb of zinc per year, plus 600m lb/year of copperfor at least 20 years.

The opening of the mine resulted in year-on-year growth of around 70% innational copper production between July 2001 and June 2002, more thanoffsetting lower output from the Southern Peru Copper Corporation (SPCC) andthe Tintaya copper mines. The opening of the Antamina mine also providedthe largest single boost to Peru�s economy over the 12-month period.

Another large mining project went to tender on August 31st 2004, when aSwiss-based firm, Xstrata Copper, won the concession to exploit the hugeLas Bambas copper reserves, located in the province of Cotabambas, with a bidof US$121m, three times the base price established by ProInversión, thegovernment"s investment promotion agency. The massive deposit, which isspread over 31,800 hectares in the remote rural Apurimac region, has provenreserves of about 40.5m tonnes of copper and potential reserves of 500mtonnes, with copper grades in excess of 1%. The winning bid included an initialpayment of US$91m and further contingent payments totalling US$30m duringthe exploration and construction phase. Annual investment over the initialthree-year exploration stage is projected at US$40m. The construction phasewill take a further three years at an estimated cost of US$2bn. Once theextractive phase commences, the government estimates that the mine willboost overall mining exports by up to 30% annually and add one percentagepoint to real annual GDP growth.

Manufacturing

Until 1990, the manufacturing industry was accustomed to protection againstexternal competition, with high tariffs ensuring that imported goods were toocostly for the majority of the population. After the election of Alberto Fujimorito the presidency in 1990, import tariffs and quotas were slashed and acomplex set of concessions to domestic manufacturers was withdrawn.Companies had to modernise plants and production techniques to survive inthe world market, but were severely undercapitalised and in no position toraise the necessary funds for upgrading machinery. Many businesses wentbankrupt or merged. Since 1998 the manufacturing sector has struggled morethan other sectors, as a result of low demand for manufactured goods in Peruand regional markets.

The production of fishmeal is an important manufacturing industry. However,overfishing in recent years has led the government to introduce periodic fishingbans to try to restock. The industry is also vulnerable to the El Niño weatherphenomenon, which drives anchovies offshore every 7-8 years. In 2003 lengthyfishing bans meant that processing of fishmeal fell sharply, leading to a 2.8% fallin primary resource processing over the year. Non-primary processing outputincreased by 3.4% in 2003, driven by the textiles sector, which has been boostedby the signing of the ATPDEA.

Protectionist measuresremoved in the 1990s

Peru 35


Two companies dominate the foods manufacturing sector: Alicorp, the result ofa merger in 1996 between Consorcio de Alimentos Fabril Pacífico andNicolini Hermanos (owned by the Romero group), and the Gloria group.Alicorp produces noodles and other food products, but also has manufacturinginterests in cotton and textiles. Gloria specialises in dairy products and hasinterests in confectionery, biscuits and pharmaceuticals.

In 1996 Backus y Johnston brewery and Compañía Nacional de Cervezamerged to form Cervecerías Unidas Backus y Johnston. The company is Peru�sleading industrial company in terms of annual sales. The producer of theCuzqueña and Arequipeña brands, Cervesur, also has a significant share of thebeer market. In 1999 a US multinational, Coca-Cola, bought 50% of the sharesof Inca Kola, Peru�s leading soft-drinks manufacturer, for an estimatedUS$200m. It also acquired 20% of the shares of Corporación Lindley, IncaKola�s main bottling company. In October 2003 a Brazilian beverages company,AmBev (now InterBev following its merger with a Belgian company, Interbrew),the largest beverage company in Latin America, acquired two bottling plants innorthern Peru from Embotelladora Rivera, the bottler of Pepsi and some otherlocally produced soft drinks. The purchase also includes access to distributionchains in the two main local markets: the capital, Lima, and the north coast.The move was hailed as a good way for AmBev to position itself to competebetter with the leading beer company, Backus & Johnston, which is controlledby Bavaria, a Colombian company.

Peru is well placed to develop a high-quality textiles industry. Locally grown,long-staple Pima cotton is highly regarded in international markets, as isTanguis, a domestic variety used primarily for sportswear. Other natural fibreswith export potential, although not in large volumes, are alpaca and vicuña!both species are native to the high Peruvian Andes and produce high-qualitywool. However, the manufacture and export of fibre and textiles has been slowto develop. ATPDEA, which came into operation in October 2002 (seeAgriculture), has helped to boost exports of Peruvian textiles from US$664m in2001 to US$819m in 2003.

Construction

Following strong growth in the mid-1990s, the construction sector was one ofthe worst-hit by the four-year economic slowdown (1998-2001), contracting byan annual average of 5.1% over the period. The Fondo Hipotecario dePromoción de la Vivienda (Mivivienda), set up in 1997 by the Fujimorigovernment to provide low-cost housing throughout the country, has set atarget to build 50,000 low-cost houses per year. According to the CámaraPeruana de Construcción (Capeco), the construction trade association, costs willbe reduced by around 20% as construction will be on state-owned sites. Thehouses cost US$6,000-8,000, with purchasers paying US$30-40 per month. Afurther aim is to package mortgages so that they can be acquired byAdministradoras Privadas de Fondos de Pensiones (AFPs), private pensionfunds. AFPs are expected to participate indirectly in the financing process so

Textiles

Construction starts to emergefrom recession

Brewing and soft drinks

Food

36 Peru


that the Mivivienda fund can become self-financing. Mivivienda is provingsuccessful, particularly in boosting the construction sector.

Financial services

Peru"s banking system is composed of 14 commercial banks and severalmunicipal and rural savings banks, together with three government-ownedentities: the Banco Central de Reserva del Perú (BCRP, the Central Bank); adeposit-taking institution, Banco de la Nación; and a development bank,Corporación Financiera de Desarrollo (Cofide). The commercial banks, alongwith five finance and seven leasing companies, are regulated by the SBS.

The banking sector grew rapidly in the mid-1990s owing to economic recovery,and the deregulation of the system, which heralded the entrance of overseasbanks. Between 1993 and 1996, Spanish and US banks, along with consortiafrom Peru and Latin America, invested in the banking system, bringingconsolidation and a degree of stability to the sector. By mid 2004, the totalnumber of banks operating in the country had fallen to 14 from 26 at end-1998.The total number of bank branches had also dropped to fewer than 800 frommore than 950 at end-1998.

The international credit squeeze that started in 1998 severely weakened Peru"sbanking sector, and by mid-1999 non-performing loans (NPLs) made up morethan 11% of total bank credit, compared with 6.1% before the debt crisis inRussia. Although the system was not at risk of collapse, the government foundit necessary to intervene with rescue packages to restore the payments chain.Since 1998, banks have pursued a conservative lending policy and have largelymanaged to restore stability to their portfolios; by the end of 2003 the NPL ratio inthe system had fallen to 5.8%.

The Bolsa de Valores de Lima (BVL), the Lima Stock Exchange, began a bull runin 1992-94 as the economy stabilised. Liberal foreign-investment and foreign-exchange regimes, exemption from capital gains tax on shares until 2001 andgood prospects of economic growth attracted foreign investment funds,resulting in a 934% increase in the Indice General de Bolsa de Valores de Lima(IGBVL), the general stockmarket index, between June 1992 and the end of 1994.After stuttering in 1995, the BVL posted further gains in 1996-97, bringing equityvaluations into line with other markets in the region.

The spectacular gains of the early 1990s were not repeated in the second half ofthe decade. From mid-1997 to 2001 the BVL was adversely affected by periodicworries about emerging markets and Peru�s political instability. At the sametime, earnings prospects for Peruvian companies were affected by slow growthand high interest rates. The IGBVL fell by 35.9% in US dollar terms betweenDecember 1999 and December 2001. Local markets have since rallied stronglyon the back of good performance from the mining and telecommunicationscompanies. In US dollar terms, the index rose by 77.5% in 2003 and by 72.5%year-on-year in January to September 2004.

Consolidation in the 1990s

The stockmarket is highlyconcentrated

Peru 37


The BVL continues to suffer from a lack of liquidity, with 70% of listed stocksbeing traded on fewer than 10% of trading days. The total market capitalisationof companies listed in the BVL was US$19.6bn at the end of November 2004,up by 22% over end-2003, and it remains a source of funds for blue-chipcompanies only because issues of less than US$5m are prohibitively expensive,and only a small number of companies in Peru have assets in excess ofUS$25m, as is required for larger issues. The market is highly concentrated asa result.

Other services

Outside some of the more affluent areas of Lima and other large cities the retailsector is underdeveloped. There is a large informal network of small shops,stalls and street-sellers, which often acquire their merchandise on the blackmarket from backstreet sweatshops or organised smugglers. Paying almost notaxes, and with minimal overheads, the informal network provides stiffcompetition for formal outlets and for many years held back the developmentof a modern retail sector. A modern retail sector is emerging, but outside largecity centres the informal market still dominates.

The tourism industry currently contributes around 7% of GDP, and employs justover 625,000 people, or around 8% of total employment. The sector collapsedin the late 1980s under the combined weight of hyperinflation, economic chaosand terrorism. Now that the terrorist threat is in the past and Peru�sinternational image has improved, tourists are returning to the country.International tourist arrivals have increased steadily in recent years, and areestimated to have topped 1m in 2004 for the first time. However, growth of theindustry has been below expectations, with tourism receipts falling in 2001,despite an increase in arrivals, owing to domestic political instability and aglobal downturn in the tourism industry. Tourism arrivals are much higher inPeru than in neighbouring Andean countries such as Colombia (555,086 arrivalsin 2002) and Ecuador (654,000), but substantially lower than Brazil (5.3m) andArgentina (3.3m).

Tourist arrivals1999 2000 2001 2002 2003

No. of arrivals (�000) 694 800 801 866 933

Source: Ministry of External Trade and Tourism.

The richness and variety of Peru�s geography, along with its world-renownedhistorical sites, make it an attractive tourist destination. A contrast betweenjungle, mountains and coastline offers a choice that encompasses adventureholidays and eco-tourism, as well as a more simple relaxing holiday. With anarea of more than 496,200 sq miles and a wide variety of climates and micro-climates and eco-systems, Peru is considered one of the select groups of eight�megadiverse� countries among the world"s 210 nations by the World ResourcesInstitute. It also has a number of internationally famous cultural and historicalsites, particularly those associated with the Inca civilisation. Peru�s inadequatehotel infrastructure is a constraint on tourism, but investment in the sector is

Retailing is still hindered bythe informal economy

Tourism attracts investment

38 Peru


increasing. The 33 hotels of the state chain, Enturperú, have been transferred toprivate ownership, and several international hotel chains have built hotels inLima, Arequipa and Cuzco, and more are under construction. To stimulateinterest, the government has introduced tax exemptions on tourist packagessold abroad.

The external sector

Trade in goods

Following the liberalisation of the economy in the 1990s, a trade deficit openedup, widening to 4.3% of GDP in 1998, owing to collapsing commodity pricesand sharp falls in agricultural and fisheries exports. However, the ensuingslump in domestic demand (1999-2001) and thus import spending, coupled withsteadily increasing export earnings, brought the deficit down once more. In2002, boosted by export earnings from Antamina, Peru recorded its first tradesurplus since 1990. The trade surplus widened in 2003, to 1.2% of GDP, on theback of continued strong growth in mining exports, supported by risingcommodities prices.

The export boom continued into 2004: over the first ten months of the year,merchandise export earnings grew by 37.5% year on year to reach US$10.1bn.Exports continued to benefit from strong international demand for Peru"s mostimportant export goods, such as copper, mainly from markets such as Chinaand the US, which also helped to push up Peruvian export prices by 18.7% yearon year in the January-October period. Within traditional exports, the miningsector was the most dynamic sector, with 48.1% year-on-year earnings growth,accounting for around 55% of total export earnings. Prices of copper, silver, goldand zinc, which remain at their highest levels in several years (copper and goldprices are at a 10-year high), led the upward trend, with copper and goldposting the highest volume increases over the year. The large Yanacocha andSouthern Copper Corporation gold and copper mines posted stellar volumeand earnings growth over the first half of the year.

Trade balance(US$ m)

1999 2000 2001 2002 2003Exports 6,087.5 6,954.9 7,025.7 7,722.9 8,985.6

Imports -6,743.0 -7,365.9 -7,221.2 -7,416.9 -8,254.5Trade balance -655.5 -411.0 -195.5 305.9 731.1


Mining exports dominate export earnings, and their share of the total willremain high as new projects come on stream. Earnings from non-traditionalexports, the most important of which are textiles, fruit and vegetables, cannedand frozen fish, and steel and metal products, more than doubled between 1994and 2003, to US$2.6bn, and increased by a further 34.9% year-on-year over thefirst ten months of 2004. The Andean Trade Promotion and Drug EradicationAct (ATPDEA) has further boosted non-traditional export earnings.

The trade surplusstrengthens in 2004

Exports

Peru 39


Exports(US$ m; fob; Jan-Oct)

2003 2004 % changeTraditional exports 5,154.1 7,162.9 39.0 Mining 3,718.4 5,508.5 48.1 Oil & derivatives 535.9 482.4 -10.0 Agricultural produce 185.8 232.1 24.9 Fishing 714.0 939.9 31.6

Non-traditional exports 2,079.3 2,804.1 34.9 Agriculture & livestock 479.8 619.2 29.0 Textiles 661.5 883.3 33.5 Fishing 167.2 227.2 35.9 Manufactured metal products & machinery 81.5 107.7 32.2 Chemicals 249.7 359.5 44.0 Base metal industries 201.1 311.6 55.0 Non-metallic minerals 61.3 77.1 25.8

Total exports incl others 7,317.9 10,064.7 37.5


After a surge in 1994-95 that threatened to cause external financing problems,an austere budget package in 1996 curtailed demand for consumer goods andslowed import growth to 1.8%. From 1998 to 2002, depressed domesticdemand!manifest in low levels of investment and private consumption!stifledimport growth. Demand started to pick up again in the second half of 2002 androse further in 2003, particularly for intermediate goods, as investment pickedup once more.

Imports(US$ m; fob; Jan-Oct)

2003 2004 % changeConsumer goods 1,525.8 1,561.4 2.3

Intermediate goods 3,594.4 4,363.0 21.4Capital goods 1,661.3 1,925.2 15.9

Total incl others 6,844.6 7,938.3 16.0


The US is Peru�s most important trading partner, with around 30% of exports.Otherwise, trade is fairly diversified. China and Japan have become importantpartners in recent years and trade with Asia is set to grow further followingPeru�s 1997 agreement with the Asia-Pacific Economic Co-operation forum(APEC). The ATPDEA, which came into force in October 2002, has furtherincreased trade with the US. Efforts at integration in the region have slightlyincreased Latin America�s share.

Invisibles and the current account

Peru has recorded deficits on both factor and non-factor services since the startof the 1980s. Rising income from tourism has prevented the non-factor servicesdeficit from widening significantly, despite increased outgoings on insuranceand freight. The deficit on factor services has fluctuated between US$2.5bn andUS$1bn since 1995, but has widened significantly since 2002 owing to increased

Trading partners

Invisibles

Imports

40 Peru


outward profit remittances. Over the first nine months of 2004 it widened toUS$2.4bn, consistent with a full-year deficit of just over US$3bn. Net transfershave steadily increased in recent years, from US$335m in 1991 to US$1.2bnin 2003.

After reaching a record US$4.6bn in 1995, equivalent to 8.6% of GDP, the current-account deficit has moderated. Concern that the deficit was reaching unsus-tainable levels and exposing the economy to potential financing problems ledthe then government to tighten monetary and fiscal policy to slow demand.However, the deficit remained at over 5% of GDP throughout the mid-1990s,before narrowing significantly in 1999 and 2000 as domestic demand slowed.Since then, steadily increasing export earnings and subdued domestic demandhave helped to keep the deficit down; in 2003 it totalled US$1.1bn, equivalent to1.8% of GDP, and narrowed further in 2004 as the export boom more thanoffset a sharp rise in outward profit remittances from overseas companies.

Current account(US$ m unless otherwise indicated; Jan-Sep)

2003 2004 % changeMerchandise exports fob 6,531.3 8,927.2 36.7Merchandise imports fob -6,110.8 -7,085.2 15.9Trade balance 420.5 1,842.0 338.1Non-factor services balance -723.0 -722.5 -0.1Factor services balance -1,508.6 -2,339.5 55.1

Net transfers 878.3 1,039.0 18.3Current-account balance -932.9 -181.0 -80.6 Current-account balance (% of GDP) -2.1 -0.4 -82.7


Capital flows and foreign debt

A fall in foreign direct investment (FDI) inflows between 1998 and 2001, amid aclimate of international investor uncertainty and domestic political problems,led to balance of payments deficits. As investor confidence increased andprivate finance returned to the country in 2002!much of it related to theCamisea natural gas project and large mining projects!the balance of paymentsreturned to surplus. With the current-account deficit narrowing sharply in thefirst three quarters of 2004, and strong growth in private-sector capital inflows,the surplus strengthened, enabling net international reserves to increaseby US$940.8m.

Balance of payments(US$ m; Jan-Sep)

2003 2004 % changeCurrent-account balance -932.9 -181.0 -80.6Capital-account balance 377.0 1,161.8 208.1 Private sector 28.2 775.5 2,652.4 Public sector 122.4 85.8 -29.9 Short-term capital 226.5 300.4 32.6

Balance of payments

Peru 41


Balance of payments(US$ m; Jan-Sep)

2003 2004 % changeNet errors & omissions 638.4 -58.4 n/aExceptional financing 11.4 18.5 62.1

Change in net international reservesa -93.9 -940.8 901.4

a - indicates increase.


Most FDI is registered with the Comisión Nacional de Inversiones y TecnologíaExtranjera (Conité), the National Commission for Overseas Investment andTechnology. Registration allows investors to benefit from tax stabilisationcontracts and assures unrestricted remittance of profits and royalties.

Peru has a liberal foreign-investment regime. There are no restrictions onforeign investment, and foreign investors receive the same treatment asnationals. Important rights granted to foreign investors include the following:

• free remittance of dividends, capital, royalties and profits, after payment oftax if applicable;

• foreign investors may make transfers through commercial banks in thecurrency of their choice without prior authorisation;

• investors may enter into tax stability contracts, which guarantee a fixedpayment rate for ten years and involve a minimum investment commitment ofUS$2m;

• no tax is payable on dividends; and

• a 10% tax is imposed on royalties.

The government is signatory to several internationally recognised guaranteebodies, including the World Bank�s Multilateral Investment Guarantee Agency(MIGA), the International Convention on the Settlement of InvestmentDisputes (ICSID) and the Overseas Private Investment Corporation (OPIC).Bilateral agreements have been signed with more than 12 countries, mainly inEurope and Asia. Tax disputes involving privatisations are arbitrated independ-ently, although Congress has debated the removal of this right.

Investment rose strongly after 1992, particularly in telecommunications (telecoms)and mining. Between 1990 and 1999 about 30% of inflows came from Spain,21% from the US and 15% from the UK. Of the investment made by Spain, morethan 80% was destined for the communications sector through Telefónica deEspaña�s investment in Telefónica del Peru. Investment from the US focusedmore on energy and mining, with almost 60% of US flows to Peru in 1990-99destined for these areas. Much went to the copper industry, especially throughthe Southern Peru Copper Corporation (SPCC). British companies invested 40%of their flows to Peru in mining. Overall, the communications sector receivedthe greatest portion of flows, a total of 26%, in 1990-99, whereas energy, miningand industry each registered 17%. Finance, which enjoyed important flows fromthe Spanish banks, Banco Bilbao Vizcaya and Banco Santander, accounted for13% of total FDI flows in 1990-99.

Foreign investment

Foreign investment regulations

42 Peru


After falling to US$810m in 2000 as companies held off investment decisionsowing to the political uncertainty engendered by the presidential election and thesubsequent political turmoil, inward direct investment has recovered, reachingUS$1.4bn in 2003. Mr Toledo pledged to prioritise investment when he becamepresident in 2001, through the privatisation and concessions programme, aswell as by providing stable conditions and a solid and fair legislative regime toattract investors. However, domestic antipathy towards privatisation and apopulist Congress led the government to abandon the privatisation programmein 2002, and the government is looking towards private investment in miningand energy projects to maintain a level of investment of over US$1bn per year.

According to the World Bank, Peru�s external debt totalled US$28.2bn at the endof 2002. Public and publicly guaranteed long-term debt amounted toUS$20.5bn, of which US$15.7bn was owed to official creditors. Of the total debt,8.3% was short-term debt, down from 22.4% at end-1997. This was owing in partto the efforts of commercial banks in Peru to restore order to their balancesheets, as well as to the government in replacing short-term debt with cheaperlong-term debt.

Peru defaulted on its external debt service between 1985 and 1990 and built uplarge arrears of principal and interest. Under Mr Fujimori, Peru resumed pay-ments to its official creditors, with whom it then reached reschedulingarrangements. In July 1996 the government announced a restructuring dealwith Peru�s Paris Club creditors!Paris Club debt amounts to around 35% of thecountry�s foreign debt. Payments were rescheduled over 20 years, with theannual servicing bill reduced by one-half, to US$450m, by 2000. The accordcovered debt contracted before 1983, representing US$7bn of the total US$9.3bnowed. In March 1997 Peru negotiated a Brady-style restructuring of its debt withcommercial bank creditors. The agreement completed the normalisation ofPeru�s relations with its international creditors. Under the Brady plan, creditorscould exchange their debt for one of the following:

• 30-year bonds at a 45% discount to face value, with floating interest rates;

• 30-year par bonds with interest payments increasing gradually from 3% peryear in the first 15 years to 5% for the final five years; or

• 20-year bonds with 25 semi-annual payments beginning eight years afterissuance or ten years of fixed interest rates followed by ten years of floating rates.

The Brady deal restructured US$10.6bn in commercial bank and supplier debt,comprising principal of US$4.4bn and interest arrears of US$6.2bn. At thesame time, US$2.6bn of eligible debt was repurchased by the governmentunder a buyback scheme.

In February 2002 the government made its first sovereign-debt issue for morethan 70 years, placing US$500m in ten-year global bonds. The issue was morethan three times oversubscribed, reflecting an improvement in the image ofPeru in international financial markets since the 1980s. The interest rate of9.48% was below that for most recent bonds issued by countries with similarrisk ratings to Peru. The issue also enabled the government to swap US$1.2bn inBrady bonds for US$930m in global bonds. Later in the year, the government

External debt

Peru 43


placed a further US$500m in global bonds, and another US$1.5bn in 2003 tohelp finance the fiscal deficit.

Foreign reserves and the exchange rate

Foreign reserves recovered in the 1990s after collapsing in 1987-88. By end-1997international reserves including gold stood at US$11.3bn, representing 13months of import cover. Reserve requirements of the banking sector form alarge part of the total: banks have to place 30% of US dollar deposits with theBanco Central de Reserva del Perú (BCRP, the Central Bank). As foreigninvestment slowed in 1998 to mid-2001, the government used reserves to coverthe country�s external financing requirement. Since then, they have increasedsteadily, from a low of US$8.5bn, at the end of the first quarter of 2001, toUS$11.2bn at the end of the third quarter of 2004, sufficient to cover 10.7months of imports.

The official exchange-rate policy is a free float, but when the currency comesunder pressure or threatens to strengthen too much and to undermine exportcompetitiveness, the government can sell or buy US dollars through the Bancode la Nación. The nuevo sol came under pressure in 1998 and early 1999 owingto the turmoil in international financial markets, leading the Central Bank tosell dollars, and despite pressure at times of political uncertainty, the CentralBank has largely succeeded in maintaining the nominal value of the currencyin 2000 to mid-2004, trading within a band of Ns3.43:US$1 and Ns3.62:US$1.Record export receipts in 2004, allied with a weakening US dollar against mostglobal currencies led to a strengthening of the nuevo sol in mid-2004; bySeptember it had reached Ns3.34:US$1, its strongest level against the US dollarsince February 1999. The Central Bank intervened on several occasions in thesecond half of 2004 to prevent the currency appreciating too strongly againstthe US dollar, and, given that the trend of strong trade surpluses is forecast tocontinue, it will maintain a policy of interventions in the provision of liquidityin order to maintain currency stability.

Foreign reserves

The exchange rate

44 Peru


Regional overview

Membership of organisations

Bolivia, Colombia, Chile, Ecuador and Peru signed the Cartagena Agreement,known as the Andean Pact, in 1969. The pact was designed to speed up theprocess of integration initiated by the 1960 Montevideo Treaty, by creating aneconomic unit that could deal on a more equal footing with the largereconomic powers in Latin America. Participation in the Andean Pact has alteredslightly over the years, with Venezuela joining in 1973 and Chile withdrawingin 1976.

In November 1990 the five Andean Pact countries signed the La Paz declaration,in which they agreed to eliminate tariffs on intra-regional imports by January1st 1992, and committed themselves to setting a common external tariff (CET).Implementation was delayed by disagreements over the CET and overexceptions to the free-trade regime. Peru suspended its membership in 1990 as aresult of disagreements about the level of protection envisaged. The CET finallycame into effect at the beginning of February 1995, but only for Ecuador,Colombia and Venezuela. It established duties of 5% for raw materials importsfrom outside the Andean Pact free-trade zone, 10-15% for semi-finished products,20% for finished products and 35% for most vehicles. Peru rejoined as a fullmember in 1997. In 1999 the Andean Community signed an accord with Brazil,introducing preferential tariffs for around 3,000 products.

The Comunidad Andida (CAN), the Andean Community, is participating innegotiations for a Free-Trade Area of the Americas (FTAA), a move originallyproposed by the US, and integration with the Mercado Común del Sur(Mercosur) the Southern Cone Customs Union, comprising Argentina, Brazil,Paraguay and Uruguay. There are also talks for future trade integration betweenCAN and the EU. The Community has been successful in fostering tradebetween its members. The value of trade between member states rose fromUS$3.6bn to US$11.6bn in 1991-2001, but progress towards a common markethas been complicated by a series of economic and political setbacks in theregion. Economic difficulties in some Andean countries have led to theincreased use of unilateral, trade-distorting tariff and non-tariff measures inVenezuela and other countries, slowing the overall movement towards furtherintra-regional liberalisation.

Mercosur is a free-trade zone and customs union with a CET of 0-25%, effectivefrom January 1st 1995. There are three associate members: Chile, which joinedin 1996; Bolivia (1997); and Peru (2003). Through associate membership, Peru isgranted duty-free access for a variety of goods from each country. Around 600goods are covered initially, which will gradually be expanded to 6,000

The Andean Community

Mercado Común del Sur(Mercosur)

Peru 45


Appendices

Sources of information

Apoyo SA, Perú Económico (monthly)

Banco Central de Reserva del Perú (BCRP), Memoria (annual)

BCRP, Nota Semanal (weekly)

Instituto Nacional de Estadística e Informática (INEI), the nationalstatistical institute

Organismo Supervisor de Inversión Privada en Telecomunicaciones (Osiptel),the telecommunications regulatory body

IMF, Direction of Trade Statistics (monthly), Washington, DC

IMF, International Financial Statistics (monthly), Washington, DC

Standard & Poor�s, Emerging Stock Market Review (monthly), New York, NY

UN Development Programme (UNDP), Human Development Report (annual),New York, NY

UN Economic Commission for Latin America and the Caribbean (ECLAC),Economic Survey of Latin America and the Caribbean (annual), New York, NY

World Bank, Global Development Finance (annual), Washington, DC

Sally Bowen, The Fujimori File: Peru and its President 1990-2000, Peru Monitor,Lima, 2000

ConsultAndes, Monthly Political Report

Macroconsult, Reporte Semanal

Orin Starn, Carlos Ivan Degregori and Robin Kirk (eds), The Peru Reader: History,Culture, Politics, Duke University Press, Durham and London, 1995

Simon Strong, Shining Path: The World�s Deadliest Revolutionary Force,Harper Collins, London, 1992

Fritz Du Bois, Eduardo Morón, José Valderrama (eds), La Reforma Incompleta.Rescatando los Noventa, Universidad del Pacífico, Instituto Peruano deEconomía, Lima, 2000

John Crabtree and Jim Thomas (eds), Fujimori�s Peru: The Political Economy,Institute of Latin American Studies, London

BCRP, http://www.bcrp.gob.pe/

ProInversión (the government investment-promotion arm),http://www.proinversion.gob.pe/

National Congress, http://www.congreso.gob.pe/

National statistical sources

International statistical sources

Select bibliography andwebsites

46 Peru


Grupo Apoyo, (a private-sector research and consultancy company),http://www.apoyo.com/

INEI, http://www.inei.gob.pe/

Ministerio de Economía y Finanzas (MEF), Ministry of Economy and Finance,http://www.mef.gob.pe/

Ministerio de Energía y Minas (MEM), Ministry of Energy and Mining,http://www.minem.gob.pe/

Ministerio de Industria, Turismo, Integración y Negociaciones Internacionales(Mitinci) Ministry of Industry, Trade, Tourism and International Commerce,http://www.mitinci.gob.pe/

Oficina Nacional de Procesos Electorales (ONPE), National Office for ElectoralProcess, http://www.onpe.gob.pe/

Organismo Supervisor de Inversión Privada en Telecomunicaciones (Osiptel),telecoms regulatory body, http://www.osiptel.gob.pe/

Radioprogramas del Perú (national radio station), http://www.rpp.com.pe/

Caretas (weekly publication containing political and economic analysis),http://www.caretas.com.pe/

El Comercio (leading national newspaper), http://www.elcomercioperu.com/

Gestión (economics-focused national newspaper), http://www.gestion.com.pe/

Reference tables

These reference tables provide the most up-to-date statistics available at the time ofpublication.

Population1999 2000 2001 2002 2003

Population (m) 25.53 25.95 26.36 26.77 27.17 Annual growth rate (%) 1.67 1.65 1.58 1.56 1.49

Source: IMF, International Financial Statistics.

Population: national source1998 1999 2000 2001 2002

Population (m) 25.1 25.5 25.9 26.3 26.7Annual growth rate (%) 1.7 1.7 1.6 1.6 1.5Urban population (% of total) 71.7 71.8 71.8 72.2 72.2

Source: Instituto Nacional de Estadística e Informática (INEI).

Peru 47


Telecommunications indicators1999 2000 2001 2002 2003

Fixed line telephonyNo. of lines ('000) 2,001 2,022 2,027 2,045 2,250No. of lines in service ('000) 1,610 1,618 1,571 1,657 1,839Lines in service per 100 population 6.3 6.2 6.0 6.2 6.8Cellular telephonySubscribers ('000) 1,046 1,340 1,793 2,307 2,930Lines per 100 population 4.1 5.2 6.8 8.6 10.8InternetNo. of subscribers n/a n/a 200,160 409,189 556,125

Source: Organismo Supervisor de Inversión Privada en Telecomunicaciones.

Transport statistics1999 2000 2001 2002 2003

RoadNo. of vehicles ('000) 1,114.2 1,162.9 1,209.0 1,252.0 1,290.5 Cars & station wagons 684.5 716.9 750.6 781.8 813.0 Light commercial vehicles 262.2 271.6 279.8 287.5 294.4% of total vehicles in Lima 67.4 66.8 66.4 65.9 65.6AirNumber of passengers ('000) 7,543.9 7,578.7 7,139.6 6,712.6 6,950.7National 5,491.4 5,282.4 4,830.6 4,402.4 4,587.7International 2,052.5 2,296.4 2,309.0 2,310.2 2,363.0Number of airplanes 125 135 143 138 157National 113 113 107 91 96International 12 22 36 47 61Seats 3,537.0 4,168.0 6,173.0 7061 9265Cargo ('000 kg) 474.7 424.6 696.4 927.5 1,192.5

Source: Ministerio de Transportes y Comunicaciones.

Electricity production1999 2000 2001 2002 2003

Electricity production (gwh) 19,050 19,923 20,786 21,982 22,923 Hydroelectric 14,541 16,176 17,615 18,040 18,534 Thermal 4,508 3,746 3,170 3,941 4,388

Source: Ministerio de Energía y Minas.

48 Peru


Central government finances(Ns m)

1999 2000 2001 2002 2003Current budget balance -118 -473 -1,350 -678 -15Revenue 25,482 27,705 27,059 28,559 31,551 Tax 22,072 22,769 23,541 24,062 27,405 Non-tax 3,410 4,935 3,518 4,498 4,146

Current expenditure 25,600 28,178 28,409 29,238 31,566 Staff 7,782 8,190 8,228 8,922 9,671 Goods & services 6,192 7,161 7,424 6,873 7,345 Transfers 7,956 8,750 8,697 9,490 10,360 Interest 3,670 4,077 4,060 3,953 4,191Capital balance -5,367 -4,724 -3,940 -3,585 -3,723Capital revenue 539 535 291 371 361Capital expenditure 5,906 5,259 4,231 3,956 4,084 Gross fixed capital formation 5,644 4,762 3,668 3,435 3,517 Others 261 497 563 521 567Overall balance -5,485 -5,197 -5,290 -4,263 -3,738 External financing -330 2,104 2,065 3,997 3,386 Domestic financing 4,496 1,666 2,092 -1,236 172 Privatisation 1,318 1,427 1,134 1,503 181


Non-financial public sector accounts(% of GDP)

1999 2000 2001 2002 2003Current income 26.3 27.6 26.3 25.8 26.5Current expenditure 24.5 26.7 25.3 25.0 25.2

Current balance 1.8 0.9 1.0 0.8 1.4Interest payments 2.4 2.5 2.3 2.2 2.2

Current balance net of interest 4.2 3.4 3.2 2.9 3.6Capital revenue 0.3 0.3 0.2 0.2 0.2Capital expenditure 5.3 4.6 3.6 3.2 3.3

Capital-account balance -5.0 -4.3 -3.4 -3.0 -3.1Overall balancea -3.2 -3.4 -2.5 -2.3 -1.8Primary balancea -0.9 -0.9 -0.2 -0.1 0.4

a Excluding privatisation receipts.


Peru 49


Money supply(Ns m unless otherwise indicated; year-end)

1999 2000 2001 2002 2003M1 22,273 21,072 21,445 22,049 21,351 % change, year on year 16.2 -5.4 1.8 2.8 -3.2

Quasi-money 37,854 38,815 39,703 42,213 41,366M2 60,127 59,887 61,148 64,262 62,717 % change, year on year 14.5 -0.4 2.1 5.1 -2.4Domestic credit 47,717 47,579 48,165 46,690 43,088Net claims on central government -2,282 -887 1,945 763 -669Claims on local government 380 433 337 205 340Claims on official entities 398 464 419 493 294Claims on private sector 49,221 47,569 45,464 45,229 43,123Net foreign assets 29,303 30,358 32,537 37,608 39,966


Interest rates(%; annual average unless otherwise indicated)

1999 2000 2001 2002 2003Discount rate (end-period) 17.8 14.0 14.0 4.8 4.3

Deposit rate 16.3 13.3 9.9 4.2 3.8Lending rate 30.8 27.9 20.4 14.7 14.2


Gross domestic product1999 2000 2001 2002 2003

GDP (Ns m)At current prices 173,881 185,426 188,313 198,657 210,747At constant (1994) prices 117,446 120,881 121,104 126,980 131,757% change, year on year 0.9 2.9 0.2 4.9 3.8GDP (US$ m)At current prices 51,393 53,131 53,699 56,493 60,586Per head (US$) 2,013 2,048 2,038 2,112 2,231Per head (Ns)At current prices 6,812 7,149 7,147 7,427 7,760At constant (1994) prices 4,601 4,660 4,597 4,747 4,852% change, year on year -0.8 1.3 -1.4 3.3 2.2


50 Peru


Gross domestic product by expenditure(Ns m; constant 1994 prices; % change in brackets unless otherwise indicated)

1999 2000 2001 2002 2003Private consumption 83,055 86,288 87,161 91,069 94,013

(-0.4) (3.9) (1.0) (4.5) (3.2)

Public consumption 11,210 11,784 11,574 11,759 12,288(3.5) (5.1) (-1.8) (1.6) (4.5)

Gross fixed investment 24,987 23,732 21,785 21,628 22,688(-11.1) (-5.0) (-8.2) (-0.7) (4.9)

Private 19,330 18,944 18,070 18,098 19,039(-15.3) (-2.0) (-4.6) (0.2) (5.2)

Public 5,657 4,788 3,714 3,530 3,649(7.2) (-15.4) (-22.4) (-5.0) (3.4)

Change in stocks -531.9 -177.6 123.0 1,095.0 1,210.0(-0.5) a (-0.1) a (0.1)a (0.9) a (0.9) a

Exports of goods & non-financial services 18,594 20,069 21,487 22,950 24,093(7.6) (7.9) (7.1) (6.8) (5.0)

Imports of goods & non-financial services 19,724 20,428 20,997 21,492 22,240(-15.2) (3.6) (2.8) (2.4) (3.5)

GDP 117,590 121,267 121,132 127,007 132,052(0.9) (3.1) (-0.1) (4.9) (4.0)

a % contribution to growth.


Gross domestic product by sector(Ns m; constant 1994 prices; % of total in bracket)

1999 2000 2001 2002 2003Agriculture 10,069 10,729 10,788 11,398 11,648

(8.6) (8.9) (8.9) (9.0) (8.8)Industry 30,619 31,453 31,753 33,861 35,036

(26.1) (26.0) (26.2) (26.7) (26.5) Mining 6,451 6,607 7,346 8,200 8,749

(5.5) (5.5) (6.1) (6.5) (6.6) Construction 6,521 6,124 5,716 6,167 6,464

(5.5) (5.1) (4.7) (4.9) (4.9) Manufacturing 17,010 18,019 18,065 18,832 19,250

(14.5) (14.9) (14.9) (14.8) (14.6) Fisheries 637 704 626 661 573

(0.5) (0.6) (0.5) (0.5) (0.4)Services 76,819 78,641 78,591 81,749 85,469

(65.4) (65.1) (64.9) (64.4) (64.7)Total 117,507 120,823 121,132 127,007 132,153


Peru 51


Prices and earnings1999 2000 2001 2002 2003

Consumer price inflation (%; av) 3.5 3.8 2.0 0.2 2.3Consumer price inflation (%; year-end) 3.7 3.7 -0.1 1.5 2.5

Wholesale price inflation (%; year-end) 5.5 3.8 -2.2 1.7 2.0Average wage (nominal Ns)a 812.5 848.0 854.7 895.8 933.8

Real wages index (1996=100) 94.9 95.4 94.3 98.7 100.6Minimum wage (nominal Ns) 345.0 398.0 410.0 410.0 424.6Real minimum wage index (1994=100) 198.6 220.5 223.1 222.6 225.4

Salaries (nominal Ns)ab 2,508.0 2,710.0 2,626.2 2,653.7 2,789.1Real salaries index (1994 =100)ab 108.4 113.0 107.7 108.5 111.2

a Based on survey data from private-sector firms of ten or more staff in Metropolitan Lima. b Includes managers and executives.

Sources: Banco Central de Reserva del Perú.

Agricultural production('000 tonnes)

1999 2000 2001 2002 2003Rice 1,955 1,892 2,029 2,124 2,145

Maize 1,059 1,241 1,063 1,037 1,097Wheat 170 189 182 186 188

Banana 1,385 1,529 1,558 1,570 1,619Onion 366 380 415 458 473Sweetcorn 341 360 363 393 401

Asparagus 175 168 184 181 187Cotton 135 154 134 127 127

Coffee 145 158 159 169 160Sugar cane 6,279 7,132 7,450 8,506 8,837Beans 70 70 61 63 59

Potato 3,066 3,274 2,680 3,299 3,143Yucca 868 882 859 887 910

Poultry 880 969 1,024 1,092 1,140Pork 124 126 150 149 151

Beef 262 267 270 277 81Eggs 161 162 168 200 200Milk 1,013 1,067 1,115 1,194 1,226


52 Peru


Minerals production('000 tonnes unless otherwise indicated)

1999 2000 2001 2002 2003Copper 393.6 400.8 557.8 647.5 625.3Tin 29.4 36.0 36.7 37.3 34.9

Iron 2,715.5 2,688.5 3,087.0 3,105.0 3,484.9Gold ('000 kg) 125.9 129.9 137.3 155.6 173.1

Silver ('000 kg) 2,137.5 2,335.2 2,445.4 2,526.2 2,611.0Lead 256.0 254.8 255.9 263.8 283.2

Zinc 745.7 754.7 919.8 1,063.4 1,171.2Crude oil ('000 barrels) 38,663.4 36,313.5 35,440.5 35,355.8 33,343.0Natural gas ('000 cu feet) 14,644.5 12,180.9 13,076.5 15,598.6 18,483.0


Manufacturing production(Index 1994=100)

1999 2000 2001 2002 2003Processing of primary productsSugar 112.7 134.0 140.9 162.6 158.8Meat products 143.5 154.2 156.8 164.6 150.5Fishmeal & fishoil 76.3 92.8 66.2 68.0 47.5Canned & frozen fish 94.6 119.4 129.9 87.1 142.5Non-ferrous metals 133.8 138.4 143.2 140.4 134.5Petroleum refining 101.8 100.6 104.1 104.2 95.7Rest of industryFood, beverages & tobacco 124.0 125.5 124.3 130.1 134.1Textiles & leather 99.2 109.2 106.5 110.0 105.4Paper 136.7 164.3 162.6 201.9 191.8Chemicals, rubber & plastics 113.6 122.1 127.2 133.4 134.5Non-metallic minerals 137.1 135.1 132.8 146.3 154.9Iron & steel 145.5 155.6 157.1 148.4 154.1Metal products, machinery & equipment 97.5 106.3 104.8 102.7 101.8Other 112.2 105.1 109.5 108.2 75.8


Peru 53


Stockmarket indicators1999 2000 2001 2002 2003

No. of BVLa listed companies 242 230 207 202 197Market capitalisationNs m 47,033 37,251 38,338 46,977 55,612US$ m 13,392 10,562 11,134 13,363 16,055Trading valueNs m 7,782 5,308 2,971 3,979 3,026US$ m 2,289 1,521 849 1,133 811Turnover ratio 18.6 12.6 7.9 9.3 6.2

Local indexIGBVL (Dec 1991=100)b 1,836 1,208 1,177 1,392 2,435 % change 49.0 -34.2 -2.6 18.3 74.9IFC global indexNo. of stocks 32.00 28.00 28.00 29.00 30.00Share of market capitalisation (%) 63.9 46.4 50.3 62.8 n/aPrice/earnings ratio 25.7 11.6 21.3 12.8 13.7Price/book-value ratio 1.5 1.1 1.4 1.2 1.8Dividend yield (%) 2.2 5.5 4.3 2.4 2.8Total return index (Dec 1992=100) 216.1 162.5 189.4 254.4 n/a % change 24.1 -24.8 16.6 34.3 n/a

a Bolsa de Valores de Lima (Lima Stock Exchange). b Indice General Bolsa de Valores de Lima (general index of the Lima Stock Exchange).

Sources: International Finance Corporation; Standard & Poor's.

Exports(US$ m; fob)

1999 2000 2001 2002 2003Traditional exports 4,141.8 4,804.4 4,730.3 5,368.6 6,267.1 Mining 3,008.0 3,220.1 3,205.3 3,809.0 4,597.1 Oil & derivatives 250.8 380.7 391.3 451.1 625.6 Agricultural produce 282.1 248.9 207.5 216.2 223.1 Fishing 600.9 954.7 926.2 892.3 821.3Non-traditional exports 1,876.4 2,043.7 2,182.8 2,256.1 2,601.7 Agricultural produce 405.7 394.0 436.7 549.8 620.8 Textiles 575.4 700.7 664.2 676.7 819.0 Fishing 190.3 176.8 197.0 163.8 204.0 Metal mechanicals 76.3 96.6 160.0 109.6 96.5 Chemicals 194.8 212.3 246.6 255.9 310.7 Base metal industries 254.5 264.8 242.5 222.4 261.1 Non-metallic minerals 51.4 46.7 57.7 68.0 73.3

Others 96.4 135.5 148.4 131.1 161.1Total merchandise exports 6,087.5 6,954.9 7,025.7 7,722.9 8,985.6


54 Peru


Traditional exports by volume('000 tonnes unless otherwise indicated)

1999 2000 2001 2002 2003Fishmeal 1,482.0 2,352.3 1,942.0 1,517.6 1,370.1Fishoil 258.7 456.4 315.5 160.6 183.2

Cotton 0.9 2.7 2.6 1.6 3.1Sugar 21.2 41.7 41.6 41.8 61.1

Coffee 145.9 140.5 160.0 167.7 150.4Copper 521.1 529.1 685.8 858.8 787.3

Tin 28.0 36.1 36.3 37.5 36.5Iron (m tonnes) 3.8 3.6 4.2 4.4 5.1Gold ('000 troy oz) 4,228.1 4,082.7 4,294.4 4,750.3 5,622.3

Refined silver (m troy oz) 32.4 36.0 38.3 37.7 39.3Leada 221.6 241.3 253.3 273.8 258.5

Zinc 669.2 792.0 920.9 1,128.0 1,183.3Crude oil & derivatives (m barrels) 17.5 15.3 20.1 19.8 24.1a Includes silver content.


Imports(US$ m; fob)

1999 2000 2001 2002 2003Consumer goods 1,467.6 1,494.2 1,634.9 1,754.1 1,851.3Intermediate goods 2,979.8 3,610.6 3,551.2 3,740.4 4,344.0Capital goods 2,117.4 2,114.0 1,921.3 1,842.3 1,983.9Total (incl others) 6,743.0 7,365.9 7,221.2 7,416.9 8,254.5Memorandum itemsImports into Tacna Free Zone 34.5 38.6 40.8 112.8 98.8Principal food importsa 566.3 481.9 530.1 534.2 544.1Wheat 157.3 150.9 179.1 175.0 185.9Maize & sorghum 100.9 79.7 81.1 92.1 99.7Rice 52.2 24.1 15.2 8.7 4.4Sugar 74.5 40.7 50.4 29.9 2.6Dairy produce 57.1 43.7 42.6 27.9 23.2Soya 104.9 124.7 145.3 183.7 206.4Meat 19.6 18.1 16.4 17.0 21.8

a Excluding donations.


External trade price and volume indices(1994=100)

1999 2000 2001 2002 2003Weighted price index of exports 95.7 99.0 94.3 97.9 104.9Weighted price index of imports 106.2 111.9 108.4 109.5 115.6Terms of trade index 90.1 88.5 87.0 89.4 90.7


Peru 55


Main trading partners(% of total)

1999 2000 2001 2002 2003Exports to:US 29.0 27.4 25.1 25.6 25.9Switzerland 9.2 7.9 4.4 7.3 7.9China 3.5 6.4 6.1 7.8 7.9Japan 4.3 5.6 6.5 4.8 4.7Chile 2.8 3.8 4.0 3.2 4.5UK 9.2 8.3 13.4 11.4 4.5Spain 3.0 2.7 3.0 3.1 3.5

Imports from:US 34.3 32.2 32.9 29.6 24.1Chile 7.3 7.7 8.7 8.6 6.1Brazil 4.3 4.8 4.2 5.1 5.5Colombia 5.1 5.1 4.4 4.9 5.5China 1.9 2.0 2.1 3.5 4.5Argentina 2.9 3.3 3.8 4.2 4.4Spain 8.1 10.0 9.7 9.0 4.0

Source: IMF, Direction of Trade Statistics.

Balance of payments, national series(US$ m unless otherwise indicated)

1999 2000 2001 2002 2003Exports of goods fob 6,088 6,955 7,026 7,723 8,986Imports of goods fob -6,743 -7,366 -7,221 -7,417 -8,255

Trade balance -655 -411 -195 306 731Exports of services 1,594 1,604 1,510 1,544 1,679Imports of services -2,256 -2,341 -2,391 -2,530 -2,609

Service balance -663 -738 -881 -986 -931Factor services -1,112 -1,410 -1,124 -1,491 -2,082 Public 584 930 580 756 1,220 Private -639 -583 -602 -617 -619Current transfers 966 999 1,042 1,043 1,221

Current-account balance -1,465 -1,559 -1,159 -1,127 -1,061 % of GDP -2.9 -2.9 -2.2 -2.0 -1.8

Public sector long-term loans 383 280 394 1,051 679Private sector 2,399 965 967 1,724 98Short-term lending -1,676 -355 189 -794 154

Capital-account balance 1,106 890 1,550 1,980 931Errors & omissions (net) 10 547 51 7 605

Official financing: 803 131 -417 -781 -419Net flow of reserves to central banka 775 190 -448 -832 -479 Exceptional financing 28 -58 31 51 59 Refinancing 0 0 0 0 0 External debt forgiveness 55 0 0 0 0 Net arrears -27 -58 -31 -51 59

a � indicates increase in net reserves.


56 Peru


External debt, World Bank series(US$ m unless otherwise indicated; debt stocks as at year-end)

1998 1999 2000 2001 2002Total external debt 30,542 29,217 28,710 27,645 28,167 Long-term debt 23,356 23,882 24,193 24,212 25,596 Short-term debt 6,281 4,601 3,959 3,047 2,335 Interest arrears on long-term debt 59 49 45 55 61 Use of IMF credit 905 735 558 387 237

Public & publicly guaranteed long-term debt 19,320 19,503 19,255 18,956 20,477 Official creditors 14,709 14,431 14,414 14,805 15,656 Bilateral 10,065 9,125 8,881 8,514 8,827 Multilateral 4,644 5,306 5,533 6,292 6,829 Private creditors 4,610 5,072 4,841 4,151 4,821 Banks 74 225 110 105 98 Bonds 4,130 3,727 3,727 3,727 4,424Total debt service 2,173 2,542 2,560 2,190 3,357 Principal 791 1,075 1,128 834 2,134 Interest 1,381 1,467 1,431 1,356 1,222 Short-term debt 362 285 227 180 68

Ratios (%)Total external debt/GDP 53.9 56.9 54.0 51.5 49.9Debt-service ratio paida 24.2 28.2 25.6 22.0 32.6Debt-service ratio duea 24.3 28.2 25.6 22.3 20.9Short-term debt/total external debt 20.6 15.7 13.8 11.0 8.3Interest paid/debt service paid 63.6 57.7 55.9 61.9 36.4

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

External debt, national series(US$ m)

1999 2000 2001 2002 2003Medium- & long-term 24,152 24,447 23,963 25,251 27,182 Banco Central de Reserva 589 349 202 73 0 Public sectora 19,500 19,205 18,967 20,715 22,768 Private sector 4,063 4,893 4,795 4,463 4,414Short-term debt 4,507 3,703 3,232 2,589 2,526 Banco Central de Reserva 10 34 23 20 12 Financial system

(excl Banco Central de Reserva) 2,061 1,744 1,321 817 733 Othersa 2,436 1,925 1,888 1,753 1,782Total foreign debt 28,659 28,150 27,195 27,840 29,708

a Includes public sector debt.


Peru 57


Foreign reserves(US$ m)

1999 2000 2001 2002 2003Foreign reserves 8,730.1 8,372.5 8,670.1 9,338.3 9,776.4Golda 270.9 254.1 261.6 386.7 462.7

Foreign reserves (incl gold) 9,001.0 8,626.6 8,931.7 9,725.0 10,239.1Commercial banks' foreign assets 1,388.6 1,298.7 1,365.7 1,218.1 1,290.6

Memorandum itemGold (m fine troy oz) 1.100 1.100 1.115 1.115 1.115

a Year-end holdings valued at 75% of fourth-quarter London price.


Exchange rates(Ns per unit of currency unless otherwise indicated; annual averages)

1999 2000 2001 2002 2003US$ 3.38 3.49 2.45 3.52 3.48

� 3.61 3.22 2.20 3.32 3.94£ 5.47 5.28 3.53 5.27 5.71ChPs 0.0066 0.0065 0.0039 0.0051 0.0050

Rmb 0.409 0.422 0.296 0.425 0.420¥ 0.030 0.032 0.020 0.028 0.030

Source: Economist Intelligence Unit, CountryData.

Editors: Martin Pickering (editor); Fiona Mackie (consulting editor)Editorial closing date: December 17th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

Peru - iuj.ac.jp · CAJAMARCA LA LIBERTADRTAD PUNO 0 km 100 200 300 400 0 miles 100 200 ’ The...

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