Thursday, December 1, 2022

Peru’s economy will grow 2.6% in 2023 and 2.9% in 2024, according to the OECD

The Gross Domestic Product (GDP) of Peru will expand by 2.6% in 2023 and 2.9% in 2024 driven, especially, by an increase in mining production and exports, as well as by the recovery of tourism, according to the prospects report of the Organization for Economic Cooperation and Development (OECD) released this Tuesday.

In its report, the agency highlights that inflation remains high, which, added to the “tightening of financial conditions”, will weigh on household consumption.

It also stresses that “high political uncertainty, low business confidence, and structurally slow budget execution at the regional and local levels will constrain investment.”

Inflation, “which has already begun to decline”, will reach the 2% target throughout 2024, while informality, with pre-pandemic levels, will increase inequalities.

The OECD also recommends that the central bank “maintain a restrictive stance to guarantee that inflation expectations are reaffirmed” and considers that the “safeguarding of fiscal sustainability will depend on maintaining the planned consolidation path.”

It also underlines that, with the slowdown in the creation of formal employment and the high prices of energy and food, fiscal support aimed at the most vulnerable is necessary.

On the other hand, it recommends a “tax reform to increase structurally low public revenues”, which “would help address pressing social and infrastructure needs.”

In the OECD’s opinion, it is also necessary to “improve fiscal progressivity and make growth more inclusive”, while increasing “electricity generation from renewable resources would help reduce dependence on fossil fuels”.

The organization also considers that, after exceeding pre-pandemic levels in 2021, economic activity, which grew by 3.5% in the first half of 2022, has lost its momentum.

Growth in the first half of the year was led by a rapid recovery in job creation, withdrawals from pension funds and a rapid increase in credit growth, leading to “buoyant domestic consumption.”

The recovery of the sectors most affected by the restrictions derived from the pandemic began to dissipate and was offset by the weakness of mining and agriculture.

The OECD indicates that “much of the drag on mining production comes from the disruption related to protests at copper mines”, while “political uncertainty has undermined business confidence and manufacturing production has contracted in the last three months”.

A lower rate of exports coupled with higher oil prices, as well as the higher import bill it caused, “is widening the current account deficit.”

Employment has recovered and is above pre-pandemic levels, but informality has increased, reaching 70% of the workforce, always according to the OECD report.

The OECD also demanded from Peru “reforms to reactivate growth and reduce inequalities,” while reiterating that “greater investment in renewable energy can help diversify the economy and boost productivity.”

In addition, he highlighted the importance of “guaranteeing adequate financing for social and infrastructure spending,” which “will require improved spending efficiency and higher tax revenues.”

“Reducing tax evasion and spending while improving the progressivity of the system will be key to inclusive growth. Expanding the coverage of social protection and the benefits of social assistance programs and the reduction of labor charges for low-income workers would curb informality ”, she recommends.

Finally, the agency considers that “improving the quality of public education and professional training would boost productivity” and reduce informality and inequalities.

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