Peru's Economy, a Hopeful Diagnosis

Before the arrival of the pandemic, Peru danced between lights and shadows in economic matters. The first decade of the 21st century witnessed steady growth, driven mainly by robust macroeconomic policy and the commodity boom.

With enviable growth figures and a soaring middle class, the Andean nation underwent a remarkable transformation. The country's wealth grew 6% on average annually between 2004 and 2014 and was the highest rate in South America. However, as the second decade progressed, the dissonances became more visible.

With the covid-19 pandemic, the differences that exist in Peru were highlighted. Outside the capital, the population faces greater challenges in basic issues such as public goods and services. In the interior, private investment is lower and this has halted the creation of jobs in the region with great potential. In the first five months of 2023, GDP shrank by 0.5% due to political uncertainty, social unrest, and the occurrence of disasters. Another limitation that the Peruvian market has had and that directly affects private investment is the informality of land tenure. The absence of complete registries weakens institutions and deprives titling processes of transparency. In addition, Peru is one of the most vulnerable countries to climate change.

GDP Evolution in Peru (2016-2022)World Bank

In order to contribute to the recovery of the Peruvian economy, the report Creating Markets in Peru: Country Diagnosis of the Private Sector by the International Finance Corporation (IFC) and the World Bank, presents recommendations to encourage private investment in the country, reduce economic gaps and promote the development of Peru with a sustainable vision.

This study delves into the challenges of the Peruvian economy and focuses on four fundamental axes to achieve the country's development: agriculture, tourism, aquaculture and digital economy. It argues that these sectors must adopt sustainable practices, which are fundamental for the World Bank and the IFC.

Manuel Reyes-Retana, IFC Regional Director for South© America Victor Idrogo / Ic—nica ( © Victor Idrogo / Ic—nica)

"The strategy for Peru and the region focuses on three major themes," says Manuel Reyes-Retana, IFC's regional director for South America. "The first is sustainability. Everything that has to do with climate change is central to our global strategy. Peru is no exception. The second is inclusion, and I'm not just talking about financial inclusion, but water, sanitation, health, education, communications, digital services, and vulnerable sectors. The third is productivity. Low productivity is in itself a reflection of shortcomings in areas such as infrastructure, telecommunications and transport," he explains.

Peru has more than 3,000 kilometers of coastline and varied ecosystems that make the country more vulnerable to climate change. The IFC-World Bank study seeks to boost private investment in more inclusive and climate-smart economic activities, which can accelerate economic recovery, but in a sustainable way, in the medium term of four to five years. "Over the past 10 years, IFC has invested around $2 billion in Peru. In the next four to five years, we estimate that we can invest between $000.1 billion and $500 billion. Unlike commercial or financial investors, our investments are countercyclical. We're not the kind of investors who back down when they perceive risk or low growth. On the contrary, what motivates our investments is impact."

The private sector in Peru has had support from IFC in different areas. From financing and advice for infrastructure development to assistance to strengthen the capacities of regional and municipal governments, as is the case of the shared value platform Moquegua Crece, an alliance with shareholders of the mining company Quellaveco, as well as the regional government of Moquegua. There are also credit lines with banking institutions to support micro, small and medium-sized enterprises, focusing on financial inclusion for women and the migrant population.

The IFC's diagnosis highlights recommendations for reform along three lines: increasing the effectiveness of subnational governments to invest, reforming land and labor markets to facilitate investment, and reforms to reduce informality, promoting access to quality jobs.

In the coming months, the International Finance Corporation will seek to boost nature-related business activities in the Amazon region, with sustainable forestry activities and ecosystem protection activities that can be financed with a broad development of the carbon credit market.