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Peru Update: Fast-Paced Growth and the Food Price Challenge

April 30, 2008

Riding on fast-paced growth

Host of the May 16-17 Latin America-European Union summit, Peru has plenty to showcase to the roughly 60 European, Latin American, and Caribbean leaders in attendance. The country's economic growth continues to thrive.

Peru is the world's leading silver producer and ranks second in copper and zinc. Among other products, Peru is a global supplier of asparagus, fish, grapes, and organic bananas. In 2007, the GDP grew by 8.3 percent, and in the first quarter of this year, growth reached 9.3 percent year-on-year. Real GDP growth reached 11.9 percent per year in February—its strongest monthly performance since May 1995—according to the Economist Intelligence Unit. Economic expansion has been driven by domestic demand and a boom in the construction, commercial, and manufacturing sectors. Investor-friendly policies and export-led industries have capitalized on both resources and high international commodity prices.

Sound macroeconomic management is another foundation for Peru's economic growth. Tight monetary policy has helped to bring about the second-lowest inflation rate in South America for many years. Although inflation spiked recently, the April rate only reached 0.15 percent. However, consumer demand continues to escalate. In the last month the Banco Central de Reserva de Perú (BCRP, Central Bank) increased its reference interest rate—the deposit requirements for both local and foreign currency accounts and non-resident reserve requirements—from 40 percent to 120 percent in an attempt to curb inflation and short-term speculative capital flows. On May 8, the BCRP announced that the benchmark lending rate would remain unchanged at 5.5 percent, giving a break to the Central Bank's tightening monetary policy. According to the forecast, Peru's inflation rate will decelerate this year with declining international commodity prices. The prices of wheat and soybean—Peru’s main imports— have fallen 25 percent and 16 percent in two months, respectively. 

Sharing the wealth

An expanding economy is bringing increased prosperity to Lima and other cities well-connected to the global trading market. In fact, formal sector employment is expanding at 9 percent per year. However, despite President Alan García’s ambitious efforts to extend the benefits of Peru’s economic growth, much of the urban periphery and countryside is cut off from this wave of prosperity. A high nationwide rate of informal employment is one cause for concern. In greater Lima, unemployment fell to 9.3 percent in the first quarter of the year, but the rate of workers classified as underemployed stood at over 48 percent.

Widespread frustration that economic growth has yet to trickle down to the lower classes, along with anxiety over the escalation in basic food prices, led more than 1,000 women to protest outside Peru’s Congress earlier this month. Banging pots, their chants reflected the sentiments of many Peruvians affected by double-digit price increases in items such as rice and cooking oil: “The pot is empty, García!” In fact, at the end of 2007 consumer price inflation was up nearly 3 percent (to 3.9 percent) from the level recorded one year earlier.  Not coincidentally, according to pollster Ipsos Apoyo, the president’s approval rating has dropped to 26 percent—its lowest level—and his disapproval rating now stands at 70 percent.

Finance Minister Luis Carranza Ugarte sees rising food prices as the biggest challenge to developing countries today. According to Dow Jones, he claimed that Peru is better poised to manage the price increases since mining sector exports continue to grow. Yet, the health of the mining sector may be in jeopardy. The nation’s largest mining union temporarily called off a strike set to commence on May 12, but workers are ready to walk off jobs if Congress fails to promptly pass three pieces of legislation that would reform profit sharing, pensions and outsourcing. Workers are demanding better benefits and lifting the government-imposed cap of mining profits that companies can share with workers.