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42>f<> t 0 -LN.2-f SfrKz TheWofld Bnk aM OM.CAL USE ONL' Public Disclosure Authorized MICROFICHE COPY bpwt No. P-5666-PE Report No. P- 5666-PE Type: (PR) SHEPHERD, / X31912 / I7 051/ LAlCO REPORTAND RECOMMNATION OF THE PR-SIDENT OF THE Public Disclosure Authorized INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT TO THE EXECUTIVEDIf 4- TORS ,'. ON A PROPOSEEDT1OADE POLICY REFORMLOAN IN AN AMOUNTEQUIVALENT TO US$300 MILLION TO THE Public Disclosure Authorized REPUBLICOF PERU JANUARY10, 1992 Public Disclosure Authorized Thisdocnett has a resrictddbutio and may be and by recip onlyin thLeperfomance of thei:oficia s, ItsntetsmaY Mt otherw be disrelsedwithout Worl n thoriati MEN,CY EQUIVALENTS (As of December30, 1991) CurrencyUnit NuevoSol (SI.)V US$1.00 - S/.0.9S SI.1.00 = US$1.05 GOVERNMENTS FISCAL XEAR January 1 - December31 ABBREVIATIONS ALADI - Asociacid6nLatino-Ametica de Inttegract6n (Latin Ameria IntegrationAsociation) CERTEX Certiricado de Reinte TnbutWat a ta Exportacl4n(Export Tax Reimbutement Certificate) CIF Cost, Insurance and Freight D.L - DecMo Lcgslatvo (Lgisatie Decree) D.S. - Decreto Supremo (Supreme Decree) ECASA - Empresa de Comercializacidndel Arroz SA (Rice Marketing Company) ENCI - Empresa Naciontl de Comercializaa6nde Insumos(National Inputs Marketing Company) FENT - Fondo de ExportaonOs No Tradiconales (Fund for Non-Taditional Exports) F.AR - Fondo latinoeicno de Reservas (latin America Reserve Fund) FONCODES - Fondo Nacional de Compensaci6oy De ollo Soial (National Fund for Socal Compensationand Development) GATT - General Agreement on Tariffs and Trade GDP - Gross Domestic Product 17T - Deutsche Gsldhft MirTeclnisdhe Zusammenarbeit(German Company for Technical Cooperation) IFIs International Fnancial Institutions IBRD - International Bank for Reconstruction and Daelopment ICB - International CompetitiveBidding ICE - Instituto de ComermioExtior (Institute for Foreign Trade) IDB - Inter-AmericanDevelopment Bank IMF - International MoUetalyFund MICm - Ministerto de Industria, Comercio Interior, Tuismo e Integracidn (Minitry of Industry, Commerce, Tourism and Integmation) NOOs - Non-GovernmentalOrganiations PETROPERU - Petrdleos del Perd, SA (Peru Oil) RAP - Rights AccutmulationProgam SAL - Structural Adjustment Loan SUNAD - Supe utendenciaNacional de Aduanas (Customs Administration) SUNAT - SuperintendenciaNacdonal do Admhtacdon Tributaria (Tax Administration) SDR ^ Special DrawingRight SOE - Statement of Expenditure UNDP - United Nations DevelopmentProgramme UNICEF - United Nations International Chidren's Emegemy Fund VAT - ValueAdded Tax I/ On July 1, 1991,a new monetary unit, the Nuevo Sol (S/.), was introduced at a converaionfactor of St.1.00 = I/m.1.00. The so- caUed Inti MillMn(EIm.) - equivalent to one million Intis (11.1,000,O0M)- was instituted on December 16,1990, as a devie, eliminating the last sx digits of any value in Intis, to simplifyacounting and as a means of transition between the Inti and the Nuevo Sol. FOROFFICIAL USE ONLY PERU TADE POLICYREFORM LOAN Table of Contents page Loan andProgramSummary ........................................ v L The Project,the Debt Workout,and CountryStrategy. 1 The Project Context .I The Bank'sApproach in a Country with Protracted Arrears1 . I The Bank's Approach in Peru ...... .......................... 1 IL The Economy........................................ 6 The EconomyInherited ................... 6 The EconomicReforms of the FujimoriAdministration. 7 The 1991-1992Macroeconomic Stabilization Program .10 Risks and Assessmentof the StabilizationProgram .11 Monitoringthe StabilizationProgram .13 The Agendafor StructuralReforms .14 The Medium-TermOutlook. 15 m. ExternalFinancing.16 The ExternalDebt Problem . ................................ 16 The ExternalFinancing Plan for 1991and 1992.16 ExternalFiancing Beyondthe PerformancePeriod .20 IV. ExternalTrade: Performanceand Policies.21 V. Trade PolicyReform ........ ... 22 Actual and PlannedReforms .23 The ExpectedImpact of Trade PolicyReform .26 The Agendafor Trade Policy .26 |This report was prepared by Geoffrey Shepherd, based on the findings of a preappraisal mision to Peru In June, 1991, and appraisal in September. Contributors to the report were: Roberto Abusada, CarlosRodriguez, and Katerina Taigasides (consultants and preappraisal miseion members) i Valeriano ¢arcia(Senior Economist, contributing to "Part in: The Ecoaomyn on the basis of a September, 1991, mission to Peru to preappraise a structural adjustrest loan); Janet Entwistle (Country Officer, contributlig to Part I: The Project, the Debt Workout, and Country Strategy and Part IZII Esternal Fanancnlg) and Izumi Obno (Country Officer) and Cessx Burga(consultants statistical support). Angellca Silvero provided secretarial support. This documenthas a restricteddistribution and maybe used by recipientsonly in the performance of their officialduties. Its contents may not otherwisebe disclod withoutWorl Bankauthorization. -il- VL The Proposed Loan ......................................... 28 History of the Loan ......................... 28 Reforms to be Supported under the Loan ....................... 28 The Loan ...................... 29 Procurement, Disbursement, Audit, and Administration.30 Technical Assistance.31 Letter of Development Policy.32 Conditions .32 Monitornagar4 Reporting. 35 Cooperation with the IDB ................................... 36 Project Benefits ...... 36 Project Risks ..... 36 The Social Impact ...... 37 VIL Recommendation ..... 38 Annexes Annex 1 Economic Indicators ...................................... 39 Annex 2 Trade Statistics ...... 51 Annex 3 Trade Policy Reform Loan: Policy Matrix ..... 61 Annex 4 Non-Tariff Barriers ...... 65 Annex 5 Customs Action Plan ...................................... 75 Annex 6 Letter of Development Policy.79 Annex 7 List of Project Documents ............. 97 Annex 8 Status of Bank Group Operations .99 Annex 9 Technical Assistancew............ 101 Annex 10 Supplementary Data Sheet .............. 107 .-ii- Tablesand Figues Text Tabls Table 1 ProjectedFicl Accounts,1991and1992 ..........................10 Table 2 ExternalFinancng Requiement and PossibleSources of Funmcing,1991and 1992 ...................17 ADpend 'rabies and Figs Table 1.1 Peru: Balanceof PaymentsProjectons: Current AccountEcluding Intest Payments, 1990-99... 39 Table 12 Peru: Balmae of PaymentsProjections: Fmancing Requirements and PosuibleSources, 1990-99 ... 40 Table 13 Peru: NationalAccountsProjections,1990-99 ...... ................41 Table1.4 PenruProjections of KeyEconomic Indicators, 1990-99 ..... ..........42 Notesto Tables 1.1 to 1A ..............................................44 Table 1.5 Peru: Eitnal Debt Outstanding(Stocksas ofDecember1990) .... ....47 Table 1.6 Peru: MontblyEconomic Indicators, July 1990-September 1 .......... 48 Fgue 2.1 Peru: RatiosofTradeto GDP,1950-1990......................... 51 Figure 2.2 Peru: EffectiveProtection from Tariffs on Manufactures,1990-1991 ..... 52 Fmre 2.3Peru: Real ExchangeRate Index 1985-1991....................... 53 Figure2.4 Peru Exportsand Impots 1989-1991............................ 54 Fgmue2.5 Peru: BlackMarket ExchangeRate Premium,1985-1991 .............. 55 Figure 26 Peru: Production-WeightedDistnbution of Tariffs,1990 and 1991 .......6 Figure 2.7Per Export Subsidies1980-1990 .... .......................... 57 Figure2.8 Peru: ExporTaTwsCollcted,1980-1990 .......................... 8 Flge 2.9 Peru: ImportTas Coeoted, 1990-1991.......................... 59 Table 4.i Peru: Non-TariffBanrits, 1981-1990(by Numberof TariffCategories) ... 65 .v. PERU TRAPEPOLICY REFORM LOM Loan and ProgramSummary Republicof Peru Executin,Agei:y Ministryof Economyanc Fmance Amount USS300million equiva'ent Texms: Repayablein 20 years,including five yeas of grace, at the Banks standardvariable interest rate. LnObeves: The proposedloan wouldsupport the Government's mediumterm programof trade polcy reform. Lan Desription: The loan wouldrecogn!ze the majortrade reformmeasures taken betweenAugust, 1990, and September,1991, and comprising:(i) a reductionin tariff protection;(ii) the eliminationof most non-tariff barriers;(iii) the eliminationof exportsubsidies ard impo t in schemesallowing exporters to recuperateindirect taxs; (iv) the abolitionof the agencyformerly administering trade controlsand the initiationof a reformof customs. The sectoralconditinns relate largelyto the maintenanceof the current reforms,and measutesfor further reformare generallyconsidered a secondaryissue, except insofaras further action is felt necessaryto secure the current reforms. First,trade reformcan be expectedto lead Peru to a more efficnt use of its resourcesthrough specialization in productiveareas where its comparativeadvantage is greatest and tbroughthe compettive pressuresthat freelyavailable imports wil exert on domestic producers. The removalof non-tarff bariers should also enable those resourcespreviously used to acquirevarous Inport pesm to be put to better uses. S the projectwil also reae beeft throughits contributionto Perus debt workut and reintegrationinto the intemationalfinancial community. In additionto providig some freh eternal funds to Peru betweennow and the end of 1992,the workoutwill open the door to resumptionof a norma rela ip with the Bank. The workoutwill allow Peem to normalizerelations withother multi-and bilateraldonors even before the Bank itself disburses. Ihe survivalof the trade reform could be threatened by ( i) a failure in current efforts to stabilize the economy and