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1997 Country Reports
On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1998.

Source: Central Reserve Bank, National Institute of Statistics, Ministry of Labor and Embassy estimates.
1/1996 figures are estimates
2/Peru's GDP is the subject of considerable debate. Estimates within the Government of Peru vary widely. We have used Ministry of Economy and Finance figures here. The National Institute of Statistics is currently constructing a new GDP estimate based on 1994 as a base year.
3/Estimates for 1996 are for the first nine months of the year.
4/Lima Metropolitan Area only.
5/Figures are for money supply in national currency only. The majority of financial system liquidity consists of dollars.
6/Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1996 figures are estimates based on data available through November 1996.
7/ Excludes privatization receipts.

1. General Policy Framework

Peru is essentially a free market economy which provides significant trade and investment opportunities for U.S. companies. This is due largely to the economic reform program launched by President Alberto Fujimori in 1990 and continued through 1997. Over the past seven years, the Peruvian government has implemented a wide­ranging privatization program, strengthened and simplified its tax system, opened the country to foreign investment, and lifted exchange controls and restrictions on remittances of profits, dividends and royalties.

Macroeconomic/Fiscal Overview: The economy rebounded sharply in 1997: real GDP will probably grow about six percent after growing only 2.8 percent in 1996. In mid­1995, the government began to tighten the monetary base, slowing the economy, over concern for the current account deficit which had risen to over 7 percent of GDP in 1995. The current account deficit will drop to around 5.1 percent of GDP for 1997 as exports pick up and imports level off. Inflation too has been brought under control since the hyperinflationary period Peru experienced in 1989 and 1990. After increasing 11.8 percent in 1996, the consumer price index for 1997 is expected to rise less than eight percent, the lowest level in 20 years. The government is expected to run a primary budget surplus of 1.5 percent for 1997. Despite Peru's macroeconomic improvement, unemployment and low wages remain significant problems.

Trade Policy: Peru's economy is largely open to imports. As Peru's largest trading partner, the U.S. exported over $1.8 billion to Peru in 1997. Peru's average tariff rate has dropped consistently since it hit 80 percent in 1990. In early 1997, the government reduced the average tariff from about 16 percent to 13 percent, although, for selected agricultural products, the rate can reach as high as 25 percent. As a member of the Andean Community and of the Latin American Integration Association (ALADI), Peru grants duty-free access to many products originating in those countries. Peru is also in negotiations to establish free trade agreements with Chile and Mexico and participates as part of the Andean Community in trade talks with MERCOSUR.

Monetary Policy: The Central Bank manages the money supply and affects interest and exchange rates through open­market operations, rediscounts and reserve requirements on dollar and sol deposits. Dollars account for two thirds of total liquidity (the legacy of hyperinflation), which complicates the government's efforts to manage monetary policy. The Central Bank does not finance the fiscal deficit. Recurrent government expenditures have been in balance with revenues since late 1990, and the combined fiscal deficit (resulting from debt payment) has been financed by external sources. Over the last four years, a strong inflow of foreign capital, primarily from privatizations, has more than offset the merchandise trade deficit, and net foreign reserves have grown to more than $10 billion (they were negative in mid­1990). Peru reached agreement in July 1996 to reschedule its official debt (Paris Club) and closed a deal with its commercial creditors (Brady Plan) in March 1997.

2. Exchange Rate Policy

The exchange rate for the Peruvian new sol is determined by market forces, with some intervention by the Central Bank to stabilize movements. There are no multiple rates. The 1993 constitution guarantees free access to and disposition of foreign currency. There are no restrictions on the purchase, use or remittance of foreign exchange. Exporters conduct transactions freely on the open market and are not required to channel their foreign exchange transactions through the Central Bank.

Some industry groups have been pressuring the government to intervene to devalue the sol, but the government has thus far adhered to its laissez­faire policy. Given the fixation of most Peruvians on the dollar, a real devaluation of the sol will remain difficult to achieve.

3. Structural Policies

In the short span of six years, Peru has been converted from an economy dominated by a protectionist and interventionist state to a liberal economy dominated by the private sector and market forces. Several major state­owned businesses have been privatized in the past four years. Although the timetable for the privatization program has slipped over the past couple of years, the government has said it plans to sell the remaining state­owned enterprises by the end of 1998. Still to be sold are the remaining parts of the petroleum company (Petroperu), the remaining electrical utilities, the water and sewage utilities, and the remaining mining properties. In early 1997, the government announced that it would begin a new phase of the privatization program by selling concessions to build and/or operate public facilities such as airports, roads, and ports. U.S. companies have participated heavily in the privatization program, particularly in the mining, energy, and petroleum sectors.

Price controls, direct subsidies, and restrictions on foreign investment have been eliminated. A major revision of the tax code was enacted at the end of 1992, and the once corrupt and inefficient tax authority (SUNAT) was completely revamped, as was the customs authority. Tax collection has improved from 4 percent of GDP in 1990 to over 14 percent by late 1997. Customs collections have more than tripled since the early 1990s, despite the sharp cut in tariff rates. Although income tax collection has increased, the government still relies heavily on its 18 percent value­added tax (VAT). There are also sometimes high selective consumption taxes on certain items, such as automobiles.

4. Debt Management

Peru's long- and medium-term public external debt at the end of June 1997 totaled about $20 billion--roughly one third of GDP. Total service payments due on the debt for 1997 are estimated at $1.7 billion.

Peru cleared its arrears with the Interamerican Development Bank in September 1991. In March 1993 it cleared its $1.8 billion in arrears to the International Monetary Fund (IMF) and World Bank and negotiated an Extended Fund Facility with the IMF for 1993-95. The Paris Club rescheduled almost $6 billion of Peru's official bilateral debt in 1991. A second Paris Club rescheduling in May 1993 lowered payments for the period March 1993 to March 1996 from $1.1 billion to about $400 million. A third rescheduling was completed on July 20, 1996, under which the Club creditors agreed to reschedule approximately $1 billion in "official debt" payments coming due between 1996 and 1999 and to reschedule some debt originally rescheduled in 1991 in order to smooth out Peru's debt service profile.

Nearly one and one- half years after reaching a preliminary agreement with its commercial creditors, Peru closed out a $10.5 billion Brady Plan commercial debt restructuring in March 1997. The GOP estimates annual obligations under the deal at about $300 million. With the Brady closing and the July Paris Club rescheduling, Peru is now current with nearly all its international creditors.

5. Significant Barriers to U.S. Exports

Almost all non-tariff barriers to U.S. exports and obstacles to direct investment have been eliminated over the past seven years. Import licenses have been abolished for all products except firearms, munitions and explosives; chemical precursors (used in cocaine production); and ammonium nitrate fertilizer, which has been used as a blast enhancer for terrorist car bombs. The following imports are banned: fireworks, used clothing, used shoes, used tires, cars over five years old and trucks over eight years old. Peru became a founding member of WTO in January 1995.

A new tariff structure that went into effect in April 1997 lowered the average tariff rate from 16 to 13 percent but raised tariffs on agricultural products and imposed an additional "temporary" tariff on agricultural goods, in a move to try to promote domestic investment in the sector. Under the new system, a 12 percent tariff applies to more than 95 percent of the value of products imported into Peru; a 20 percent to most of the rest; while a few products are assessed rates (because of the additional "temporary" tariffs) of up to 25 percent. Peru grants duty-free access to a wide range of products originating in countries in the Andean Community and to some products from countries in the Latin American Integration Association (known by its Spanish acronym ALADI).

In addition to the "temporary" tariffs on agricultural goods, another set of import surcharges imposed in May 1991 remain in effect on 20 categories of agricultural products, covering five basic commodities: wheat, rice, corn, sugar and milk products. The surcharges are calculated monthly, according to prevailing international prices for each commodity. The Peruvian government defends the surcharges as necessary to protect Peruvian farmers from subsidized international competition and cushion the effect of an overvalued sol and structural adjustment. In 1993, the government agreed to discuss phasing out the surcharges by 1997 as a condition for disbursement of an Interamerican Development Bank trade-sector loan. The government began reducing the surcharge levels in April 1994. Because of high international prices during 1997, surcharges were practically non-existent.

Customs procedures have been simplified and the customs administration made more efficient in recent years, although some importers have reported valuations problems. As part of the reform of customs Peru implemented a system of preshipment inspections, through which private inspection firms evaluate all incoming shipments worth more than $5,000. The importer must pay up to 1 percent of the FOB value of the goods to cover the cost of the inspection. Some U.S. exporters have complained that the inspection system contributes to customs delays.

There are virtually no barriers to investing in Peru, and national treatment for investors is guaranteed in the 1993 constitution. However, a conflicting provision of law restricts the majority ownership of broadcast media to Peruvian citizens. There are no prohibitions on the repatriation of capital or profits.

6. Export Subsidies Policies

The Peruvian government provides no direct export subsidies. The Andean Development Corporation, of which Peru is a member, provides limited financing to exporters at rates lower than those available from Peruvian banks (but higher than those available to U.S. companies). Exporters can receive rebates of the import duties and a portion of the value­added tax on their inputs. In June 1995, the government approved a simplified drawback scheme for small exporters, allowing them to claim a flat 5­percent rebate, subject to certain restrictions. Exporters can also import, on a temporary basis and without paying duty, goods and machinery that will be used to generate exports and that will themselves be reexported within 24 months.

7. Protection of U.S. Intellectual Property

Peru passed two new laws in April 1996 designed to improve its intellectual property rights protection regime and to bring its national laws into conformity with Andean Community decisions and other international obligations on intellectual property. While the new laws are an improvement, they contain several deficiencies, and the government will need to make further changes to its laws to come into conformity with the WTO's Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) by the year 2000, when the transition period under the TRIPS agreement ends. The government is generally proactive in promoting and protecting intellectual property rights for domestic and foreign interests. While enforcement has been stepped up, piracy remains widespread. Peru has been on the "watch list" under the "Special 301" provision of the 1988 Trade Act since 1992.

Peru is a signatory to the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, the Paris Convention on Industrial Property, the Geneva Convention for the Protection of Sound Recordings and the Brussels Convention on the Distribution of Satellite Signals and is a member of the World Intellectual Property Organization. In December 1994, the Peruvian Congress ratified the WTO TRIPS agreement.

Patents and Trademarks: Peru's 1996 Industrial Property Rights law provides an effective term of protection for patents and prohibits devices that decode encrypted satellite signals, along with other improvements. In June 1997, based on an agreement reached with the U.S. government, the government of Peru resolved several apparent inconsistencies with the TRIPS agreement provisions on patent protection and most-favored nation treatment for patents in the 1996 law through the issuance of an executive decree. Peruvian law does not provide for pipeline protection for patents or protection from parallel imports. Peruvian law provides for trademark protection, but counterfeiting of trademarks and imports of pirated merchandise are widespread.

Copyrights: Peru's copyright law is generally consistent with the TRIPS agreement. However, textbooks, books on technical subjects, audio cassettes, motion picture videos, and software are widely pirated. While the government, in coordination with the private sector, has conducted numerous raids over the last few years on large-scale distributors and users of pirated goods and has stepped up other types enforcement, piracy continues to be a significant problem for legitimate owners of copyrights in Peru.

9. Worker Rights

Articles 28 and 42 of the Peruvian constitution recognize the right of workers to organize, bargain collectively and strike. Out of an estimated economically active population of 8.5 million, only about five percent belong to unions. More than half the workforce is employed in the informal sector, beyond government regulation and supervision.

a. The Right of Association: Peruvian law allows for multiple forms of unions across company or occupational lines. Workers in probational status or on short­term contracts are not eligible for union membership. Union leaders complain that increasing numbers of employers are hiring workers under temporary personal services contracts to prevent union affiliation. Public employees exercising supervisory responsibilities are excluded from the right to organize and strike, as are the police and military. The amount of time union officials may devote to union work with pay is limited to 30 days per year. Membership or non­membership in a union may not be required as a condition of employment. However, there is no provision in the law requiring employers to reinstate workers fired for union activities. Although some unions have been traditionally associated with political groups, unions are prohibited by law from engaging in explicitly political, religious or profit­making activities. The International Labor Organization (ILO) in June 1996 called on the Peruvian government to enhance freedom of association.

b. The Right to Organize and Bargain Collectively: Bargaining agreements are considered contractual agreements, valid only for the life of the contract. Unless there is a pre-existing labor contract covering an occupation or industry as a whole, unions must negotiate with each company individually. Strikes may be called only after approval by a majority of all workers (union and non-union) voting by secret ballot. Unions in essential public services, as determined by the government, must provide sufficient workers, as determined by the employer, to maintain operations during the strike. Companies may unilaterally suspend collective bargaining agreements for up to 90 days if required by force majeur or economic conditions, with 15 days notice to employees. The Peruvian Congress approved a new employment law in June 1995 that union leaders claim restricts union freedom and the freedom to bargain collectively by making it easier to fire workers. The unions filed a complaint about this new law with the ILO, and the ILO noted that the new law failed to effectively guarantee the protection of workers against acts of anti-union discrimination and to protect workers' organizations against acts of interference by employers.

c. Prohibition of Forced or Compulsory Labor: Forced or compulsory labor is prohibited, as is imprisonment for debt. There are periodic reports of forced labor in remote mountainous and jungle areas, which the government claims is located beyond its control. In response to a complaint filed with the ILO, the government in 1994 acknowledged the existence of such practices and said it had taken measures to end them.

d. Minimum Age of Employment: The minimum legal age for employment is 16. Although education through the secondary level is free and compulsory, many school-aged children must work to support their families. Much of the child labor takes place in the informal economy without government supervision of wages or conditions. A recent government study indicated that 8 percent of the workforce was between the ages of six and 14.

e. Acceptable Conditions of Work: The 1993 constitution provides for a maximum eight­hour work day, a 48-hour work week, a weekly day of rest and 30 days annual paid vacation. Workers are promised a "just and sufficient wage" (to be determined by the government in consultation with labor and business representatives) and "adequate protection against arbitrary dismissal." No labor agreement may violate or adversely affect the dignity of the worker. These and other benefits are readily sacrificed by workers in exchange for regular employment, especially in the informal sector.

f. Rights in Sectors with U.S. Investment: U.S. investment in Peru is concentrated primarily in the mining and petroleum sectors, and more recently in electrical generation. Labor conditions in those sectors compare favorably with other parts of the Peruvian economy. Workers are primarily unionized, and wages far exceed the legal minimum.

(1) Suppressed to avoid disclosing data of individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis

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