Americas > South America > Peru > Peru’s new president, Pedro Pablo Kuczynski, pledged to lift GDP growth to 5% by 2018.

Peru: Peru’s new president, Pedro Pablo Kuczynski, pledged to lift GDP growth to 5% by 2018.

2017/04/18

The year 2016 brought both political and economic changes in Peru, with a new government moving quickly to roll out strategic measures aimed at tackling long-standing problems and returning the country to higher levels of increase.

Following his election in June, Peru’s new president, Pedro Pablo Kuczynski, pledged to lift GDP increase to 5% by 2018.

Bridging infrastructure gaps and addressing the perennial problem of the informal economy were high on the schedule, with a series of 112 measures announced to steer the government’s policy schedule forward.

Track record

Peru’s economy was estimate to grow by close to 4% in 2016, according to the IMF, largely due to several new mining projects that came on-stream during the year, which helped boost export volumes.

The figure marks an development on 2015, at the same time as increase eased to 2.7% next a decade of averaging 6.3%.

As a major producer of copper and zinc, and an exporter of natural gas, Peru has experienced additional modest GDP increase since the end of the new commodity price cycle, with exports contracting for a third consecutive year in 2015.

However, early indications suggest a brighter outlook for 2017, with a raft of public infrastructure projects expected to help sustain increase by attracting new investment in the coming months.

Taxing problems

Top of the new government’s schedule is improving government revenues. Successive governments have sought to boost tax collection; however, endemic evasion remains a major problem, reducing GDP by an estimated 9%, according to the Institute of Economics and Business Development of the Lima Chamber of Commerce.

While previous administrations have relied heavily on commodity exports to plug the revenue gap, Kuczynski pledged instead to make tax collection additional productive by reforming the large informal sector, which is thought to account for 64% of the total labour force.

The informal economy affects both increase and the wider Peruvian society. Paulo Pantigoso, country managing partner of EY Peru, told OBG, “Inequality is not due to low tax rates or a lack of progressiveness in the system, but the fact that additional than half of the Peruvian workforce is not on a formal payroll.”

Efforts to formalise Peru’s workforce will be undertaken through a range of initiatives that include new tax incentives, increased access to credit for small and medium-sized enterprises (SMEs), and less red tape. A key goal of the policy is to encourage SMEs to legalise their operations in exchange for a tax amnesty.

The government is as well looking to add 3m jobs to the formal economy and raise the national minimum wage. Other plans include expanding health care services and providing unemployment insurance to new workers entering the formal economy.

Projects in the offing

The new government as well plans to address the country’s sizeable infrastructure deficit – estimated at $159.5bn – by tapping investment for a major project pipeline in 2017.

Approval was given in 2016 for a total of 55 projects worth $15bn, with the government looking to attract $15.9bn per year for infrastructure development.

Francisco Dumler, vice-president of Grupo Invertir and former minister of housing, believes the government should prioritise water and sanitation projects, which have an estimated shortfall of $53.4bn.

Mining remains a central pillar of the national economy; the mining and energy sectors combined are set to receive almost $20bn of government investment in 2017, with gold and copper mines a key focus.

Efforts are as well being made to attract investment to develop Peru’s gas and oil potential. A new regulatory framework is in the pipeline, and several infrastructure projects, inclunding the $7.3bn Peruvian Southern Gas Pipeline, are advancing.

The government announced in June that plans for the development of 20 other major infrastructure projects worth nearly $18bn were as well moving ahead.

Planning ahead

Revamping higher education is an extra target of the new government, with a move to implement the University Law, which was originally introduced in 2014, under way.

The legislation will enable the government to mobilise the National Superintendency of Higher Education – a supervisory authority whose responsibilities will include overseeing the establishment of new universities and supervising quality standards.

In May the National System of Evaluation, Accreditation and Certification of Educational Quality announced plans to invest $6m across 28 programmes that will be offered in public vocational institutes. Industry-led fields, such as mechanical and electrical engineering, automotive mechanics and agricultural production, were part the areas targeted for funding.

Fernando D’Alessio, director-general of the Centrum Católica Business School, told OBG, “It is significant that government spending on education is increased from 4% to at least 8% of GDP before the end of 2017, even if this means reducing public investment in other sectors.” By comparison, public and private sector spending on primary to tertiary educational institutions in OECD member nations amounts to an average of 5.2% of GDP.

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