Report No. PIC933 Project Name Peru-Pension Reform Adjustment Loan Region Latin America and the Caribbean Sector Non-sectoral Project ID PEPA8064 Implementing Agency Ministry of Finance (MEF) Date Prepared April 4, 1994. Project Appraisal Date June 27, 1994. Projected Board Date November 1994 Country Background and Adjustment Programs Peru's economic growth in the past three decades has been severely compromised due to government mismanagement. Starting with a steady decline in productivity in the late 60's, the country's economic deterioration continued in the 80's caused by large increases in government spending with little increase in social sector expenditures to show for it. Overexpansion of state-owned enterprises and administered prices and other interventionist policies also lead to a slowdown in economic growth. By 1990 per-capita income had reached levels below that of 1966. In July 1990 the newly appointed Fujimori administration implemented a program of stabilization and structural reforms. Its main objectives being to lower inflation and transform the economy into a market oriented one. The program included stringent fiscal and monetary measures, a reorganization of the tax system, and the liberalization of interest rates and foreign-exchange transactions. Structural reform also called for liberalization at both the national and sectoral level, strengthening the role of market mechanisms in the allocation of resources. The reform resulted in a drastic drop in inflation (from 7,600 percent in 1990 to about 40 percent in 1992), an increase in tax collection (from 5 percent of GDP in 1990 to 10.5 percent in 1993) and a fall of the fiscal deficit (from 6.5 percent of GDP in 1990 to 2.7 percent in 1993). Peru's significant recovery brought about a turnaround in growth (during 1993 the economy grew by 7 percent) an increase in productivity (at an annual rate of 11 percent since 1990), as well as a steady improvement in government effectiveness. As of now a significant part of the needed reforms have already been adopted, including the deregulation of the domestic market, reduction of tariffs, the initiation of a privatization and a poverty alleviation program. But further reforms necessary to develop land and water markets, to expand gains from international trade, and increase efficiency of labor and capital markets are needed. Proposed Loan; Objectives The reform program supported by the loan has the following components: (i) Maintain economic stability through tight monetary and fiscal policy and the reintegration of Peru into the world financial market, (ii) Develop a market for land and water rights, creating an efficient mechanism for titling and registering land and water ownership rights, and (iii) Unify and reduce average tariffs and eliminate non-tariff barriers, thus encouraging trade expansion and increasing productivity. The elimination of non-tariff barriers will reestablish competition in the much affected agriculture and health sectors (iv) Increase efficiency of labor and capital markets, reducing the cost of reallocating resources in the economy (v) Broadening of the tax base, which eliminates tax exemptions, enforces tax laws and increases tax collection (vi) Strengthening budgeting, accounting and control systems, which require a reform of the current budgetary and accounting procedures and the development of a unified information system, establishing a mechanism to control efficiency in public spending. Previous Bank assistance and SAL II financing The Bank has assisted the Government of Peru in preparing and implementing its stabilization and structural adjustment reform program through economic and sector work, technical assistance and loans. In 1992 alone three loans worth $1 billion were taken to the Board; the Trade Policy Reform Loan ($300 million), the Structural Adjustment Loan I ($300 million) and the Financial Sector Adjustment Loan-FSAL ($400 million). The first tranche of the FSAL, and the two other loans were fully disbursed in 1993. In FY 93, an Energy and Mining Technical Assistance Loan, Privatization Adjustment Loan, and Privatization Technical Assistance Loan were presented to the Board. The overall lending program has been accompanied by Economic and Sector Work, such as the Poverty Assessment in FY93, and other upcoming work in FY94 which include; a Public Expenditure Review, an Education Sector Review, a Country Economic Memorandum and a Private Sector Assessment. The proposed Structural Adjustment Loan (SAL II) amounts to a total of $100 million dollars, the first tranche becoming available upon effectiveness and the second upon meeting specific conditions for tranche release. Environmental Impact The SAL's environmental impact is mostly related to the land and water reforms. Secured property rights for land ownership will bring about higher accountability on the use of land by farmers in those areas. The development of a water market will provide an opportunity cost to water which creates incentives to conserve it. In the past, disregard for the true cost of water resulted in excessive consumption on farms, and undue preference for crops with large water requirements. Over- watering of land has also lead to high levels of soil salinity which has diminished the amount of available cultivable land. Poverty Category -2- Does not apply A poverty impact chapter has not been included at the Initiating Memorandum stage. An analysis of SAL II's input on poverty alleviation will be included in the final document. The proposed reforms address crucial issues for developing agriculture, strengthening government's effectiveness in the supply of public goods, and developing an environment congenial with economic growth and sustainable poverty alleviation. Contact Point: Public Information Center The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone: (202)458-5454 Fax No.: (202)522-1500 Note: This is information based on an evolving project. Certain components may not necessarily be included in the final project. - 3 -