St.

Xavier’s College, Mumbai

SYBMS 2022-2023

ECONOMICS ASSIGNMENT

A CRITICAL ECONOMIC ANALYSIS OF PERU

Submitted by – GROUP F

S.No Name Division UID Roll No.

1 Priscilla Dsouza A 214007 06

2 Tanamay Banka A 214046 43

3 Rishon Dharia B 214092 85

4 Kanishk Chadha B 214149 131

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 CONTENT

TOPIC Pg.-No

1. Introduction 3
2. Abstract 3
3. History 3
4. Geography 4
5. Topography 4
6. Demography 5
7. Basic Ideological Learning 6,7
8. Economic profile- GDP 8
9. Sectoral Contribution to GDP 9
10. GDP Growth Rate 9
11. Impact of Covid on Peru’s Annual GDP Growth Rate 10
12. Balance of Trade 11
13. Foreign Exchange Rate 11
14. Inflation 12,13,14
15. Policies followed by Peruvian Government 15,16
16. Impact of Covid-19 on Peruvian Economy 16,17
17. Policies followed during and after Covid-19 17,18,19
18. Dollarization of Peruvian Economy 19
19. Amazon Rainforest in Peru 20
20. Conclusion 21
21. Recommendations 22
22. Lessons Learnt 23,24,25
23. Bibliography 26
24. Appendix 27-41

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Introduction
Over the last two decades or so, the economic transformation that is taking place in different
countries across the world, partly because of the process of globalisation, has both short as well
as long-term implications for each country, including Peru. Nations have been primarily trying to
adopt various means which will strengthen their own domestic economies. The kind of policies
adopted by a country, has varying impacts on different sectors in the economy. This research
focuses on assessing the strategies that Peru adopted to reach its present state of development.

Abstract
Peru is a country in South America that's home to a section of Amazon rainforest and Machu
Picchu, an ancient Incan city high in the Andes mountains.

The name Peru is derived from a Quechua word implying land of abundance, a reference to the
economic wealth produced by the rich and highly organized Inca civilization that ruled the
region for centuries.

History
Peru was initially ruled by the Spanish Monarch. In the early 19th century, while most South
American nations were swept by wars of independence, Peru remained a royalist stronghold.
It was until De la Serna commander-in-chief of the loyalist army, abandoned the city, and on 12
July 1821, San Martin occupied Lima and declared Peruvian independence on 28 July 1821. He
created the first Peruvian flag. Upper Peru (Bolivia) remained as a Spanish stronghold until the
army of Simón Bolívar liberated it three years later.
(Appendix 1.1)

Geography
The country’s vast mineral, agricultural, and marine resources long have served as the economic
foundation of the country, and, by the late 20th century, tourism had also become a major
element of Peru’s economic development. ( Appendix 1.2)

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A Diagrammatic representation of an Open Economy, (here Peru)

Lima Stock Exchange is the Stock Exchange of Peru, located in the capital Lima.
Here some elements are as follows:-
A = Subsidy given by the Peru Government

C = Subsidy given by Peruvian Government to Employers equivalent to the 35% of the gross
salaries of the employees which salaries are no more than PEN 1,500 (USD 429 approximately).

Topography
Peru's economy reflects its varied topography - an arid lowland coastal region, the central high
sierra of the Andes, and the dense forest of the Amazon.
Peru is the world's second-largest producer of silver and copper.

There are a few industries that affect the topography of this country-

Agriculture Forestry and Fishing- The most productive agricultural areas are the irrigated
valleys of the northern coastal region. Difficulties of geography have hindered developments,

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however, because some of the most promising deposits are located at elevations above 12,000
feet (3,600 meters) or in the Amazonian forests.

Resources and power- Gold and silver are found extensively, as are other rare metals, and
petroleum fields are located along the far north coast and the northeastern part of Amazonia. The
Lima metropolitan region, where there is a significant concentration of industry, is where the
majority of the country's electricity output and consumption are located.
Manufacturing- Despite efforts by the Peruvian government to spread out industrial activity, the
majority of industries in Peru are concentrated in the greater Lima region. Strong encouragement
has been provided to companies that produce petroleum, textiles, processed foods, steel, cement,
fertilizer, and chemicals in order to better use the nation's natural resources and achieve self-
sustaining growth. In the 1970s, several of these industries either received nationalization,
special tax breaks, or trade protectionist measures; many of them underwent privatization in the
1990s.

Demography
The current population of Peru is merely 2.41% of India’s total population. The current
population density is just 25 people per square kilometer. This is due to its fertility rate.
The labour force of Peru comprises 18,566,550 people as of 2021. It is divided into three sectors-

Distribution of workforce
Agriculture 25.8 %
Industry 17.4 %
Services 56.8 %

The Peruvian economy is an emerging, social market economy highly dependent on foreign trade
and classified as an upper middle-income economy by the World Bank. Its major industries that
contribute to the overall GDP of the country are The mining industry, the fishing industry, and
the manufacturing industry. More than 2 million Peruvians have emigrated in the last decade,
principally to the US, Spain, and Argentina.

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Demographic Indicators

Current Population of Peru (as of 2020) 32,971,854

Urbanization 79.1%

Population Growth Rate 1%

Health Expenditure 4.8% Of the GDP

Fertility Rate (as of 2020) 2.3 live births per woman

Education Expenditure 2.8% Of the GDP

Literacy Rate of

Males 96.4%

Females 89.4%

Child Labor (ages 5 to 14) 34%

Basic Ideological Learning

Peru is a presidential republic with three branches of government. The president is the highest
representative of the executive while the National Congress is Unicameral.
According to a 2007 Gallup Poll in the South American nation, 45% of Peruvians view their
country as more capitalist than socialist, while just 24% say it is more socialist than capitalist.
Peru has a multi-party system and it is difficult for a single political party to secure an absolute
majority in Congress. However, the 3 major parties in Peru follow the following ideals-
Free Peru- Leftwing to Far left, Socialist and Marxist party
Popular Force- Conservatism, Right Wing populist party
Popular Action- Reformism, Nationalist party
Since the inception of ‘structural adjustment’ policies, governments and donor agencies alike
have expressed concern about the distributional consequences of macroeconomic policies aimed
at fostering economic growth.

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Despite not having a structural adjustment program, Peru's current condition necessitates
some sort of reform. We discover that at least initially following their introduction, only a small
portion of Peru's poor are in danger of being negatively impacted by these adjustment programs.
Dismantling Peru's agricultural price support system in particular might result in a reduction in
real income for many households, both in rural and urban areas. The ability of the government to
direct interventions to the poor households that are genuinely harmed by adjustment measures
will be crucial for protecting the poor during adjustment in Peru.
The Peruvian Government opted for a policy of “unorthodox” adjustment from 1985–86 to 1990
in an attempt to encourage rapid growth and improve living standards. This led to the increase in
poverty in Lima to increase dramatically and the distribution of consumption became more
unequal.

The main takeaway from these findings is that, when it comes to tackling the dual issues of
economic stagnation and poverty in emerging nations, there are no fast-fix macroeconomic
remedies. After a change of administration in 1990, the traditional policies that were rejected in
Peru in 1985 were reinstated. With significantly greater rates of poverty than those that prevailed
in 1985, Peru today faces the challenge of recovering economic development.

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Economic Profile
GDP - The Gross Domestic Product (GDP) in Peru was worth 223.25 billion US dollars in 2021,
according to official data from the World Bank. The GDP value of Peru represents 0.17 percent
of the world economy. It is one of the fastest-growing economies in Latin America.

Peru: Gross domestic product (GDP) in current prices from 1987 to 2027
(in billion U.S. dollars)

Particulars Amount in $ Amount in $

GDP 223.25 Billion 201.71 Billion

GDP per capita 6506 5807

GDP per capita PPP 12,648.00 11,290.00

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Sectoral Contribution to GDP

The services sector is the most important and accounts for 60 percent of GDP. The biggest
segments within services are wholesale and retail trade (17 percent of total GDP); other services
(11 percent); transport and communications (10 percent); services provided to companies (8
percent) and government services (6 percent). Manufacturing creates 16 percent of the wealth
and construction and water, gas, and electricity distribution 10 percent. The agriculture and
fishing sector fuels 9 percent of the GDP and the mining sector accounts for the remaining 5
percent.

GDP Growth Rate

Peru’s economy advanced 13.3 percent in 2021, after an 11 percent contraction in 2020, as Peru
saw reduced demand for its exports of primary products, with mining and fuel exports
contracting during the year. This year, GDP grew by 3.5 percent y-o-y in the first half of 2022,
led by manufacturing, construction, and services, supported by considerably fewer restrictions
than the previous year’s first semester.

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This graph shows the GDP growth rate of Peru from 1950s to 2021.

Impact of Covid on Peru’s Annual GDP Growth Rate

Owing to the recession induced by the coronavirus disease (COVID-19) pandemic, Peru has
been one of the hardest-hit countries in the world. The GDP reduction among Peru’s trading
partners severely weakened external demand; and domestic demand plummeted in the wake of
reduced household spending and the interruption of investment projects. Compounding the

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contraction in aggregate demand, the economy suffered a major supply shock caused by the
shutdown of production resulting from the strict lockdown, which lasted for several months.

Foreign Exchange Rate

The sol is the currency of Peru. The exchange rate as of 20 September 2022 is 3.88 soles to the US dollar.
The sol currently enjoys a low inflation rate of 2.5%. The sol's exchange rate with the United States dollar
has stayed mostly between 2.80 and 3.30 to 1. Out of all the currencies of the Latin American region, the
sol is the most stable and reliable and is the least affected by the downturn in the value of the US dollar.

Balance of trade

Peru recorded a trade deficit of 149 USD Million in July of 2022, the first negative monthly
figure since May 2020, according to the BCRP. (Appendix 1.4)

source: Central Reserve Bank of Peru

Exports in Peru decreased to 4774.80 USD Million in July from 5845.10 USD Million in June of
2022. In recent years, Peru has been experiencing a surge in commodity exports.
Imports in Peru decreased to 4923.90 USD Million in July from 5086.70 USD Million in June of
2022. The major countries to which it exports and imports are follows:-

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Inflation

Cost push inflation happens when there is a decline in the supply of goods and services and
demand remains unchanged or even grows, driving prices and inflation higher.
In other words, demand remaining constant, supply decreases.

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The pressures on the cost of goods and services in the Peruvian economy are primarily brought
on by two factors:
(1) pressures on exchange rates brought on by expectations of all economic agents; and
(2) pressures on international prices brought on by the post-Covid recovery and the resulting
rise in global demand. (Appendix 1.6)

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Both pressures led to cost-push inflation in the national economy (IADB, 2021). The post-Covid
rebound and the ensuing rise in global demand have put pressure on international prices, which
lead to cost inflation in the domestic economy. Due to increasing demand brought on by the
global recovery, commodity prices have risen on worldwide markets. Prices for oil and gas, as
well as corn, soybeans, and other grains, are expected to rise as a result of the huge growth in
demand from China, the United States, and Europe.

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Inflation rates in the Peruvian Economy from 2017 to August 2022

Policies being followed by the Peruvian Government before covid-19 Pandemic

Monetary Policy

Since 2002, the Central Bank of Peru (BCP) has been aiming to reduce inflation to a range of
1.0% to 3.0%. The BCP's dedication to stable inflation—and its continuous success in achieving
this objective—has encouraged capital inflows and exchange rate stability. (Appendix 1.10)

The overnight interbank interest rate is the primary tool used by the BCP to control inflation in
order to implement the inflation targeting policy. In an effort to boost economic activity, the
Bank cut the rate from its two-year average of 4.25% to 4.00% in November 2013, and it

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 continued to do so gradually as the impact of the global commodities price shock on GDP
growth in H2 2014 and H1 2015. The BCP began its round of rate increases in September 2015,
and the rate has since February 2016, the rate has been back at 4.25%.

Fiscal Policy
(Appendix 1.9)
Since 1998, when Peru signed an agreement with the IMF and narrowly escaped bankruptcy, the
country has steadily moved toward fiscal austerity. In the past ten years, the fiscal balance has
only seen four years of deficit, and those deficits have never exceeded 1.3% of GDP. And from
44.3% of GDP in 2004 to merely 23.3% of GDP in 2015, the public debt was practically slashed
in half. The government has been able to grow its revenues and, as a result, balance the budget
thanks to the economy's generally stable and solid performance. In order to expand public
investment in infrastructure, President Pedro Pablo Kuczynski, who took office in July 2016, has
stated that Peru is likely to seek money from global financial markets, to fund these projects.

Impact of Covid-19 on Peru’s economy

The Gap between A and B can be filled by help from IMF, World Bank etc in the form of loans. (
External Financing)

The IMF approved on 28th May 2022 a successor two-year arrangement for Peru under the Flexible
Credit Line (FCL), designed for crisis prevention, of about US$5.4 billion.

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The FCL was established on March 24, 2009, as part of a major reform of the Fund’s lending
framework. It allows countries to borrow any amount of money, to make necessary corrections in the
balance of payments.

Peru got the amount because of its strong economic policies, institutional frameworks and finally
effective implementation of the same. The inflation rate, foreign exchange rate financial policies
have been under control as well.

Policies followed during and after Covid-19

The Peruvian Government was focusing on an Expansionary Fiscal Policy during the Covid-19
Pandemic, because of the decreased consumption expenditure.

Changes in Monetary Policy

In Peru, the interest rates decisions are taken by the Board of Central Reserve Bank of Peru (Banco
Central de Reserva del Perú BCRP).

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The expansionary monetary policy stance persisted during the first eight months of 2021, despite an
increase in the benchmark interest rate from 0.25% to 0.50% in August. Unconventional liquidity
injection measures, 80 percent of which are government guarantees, totaled 8.2% of GDP in mid-
June, a level significantly higher than that seen during previous crises.

These actions significantly boosted the economy, but they also changed the central bank's traditional
function, which presented potential concerns.

But since October 2021, the inflation rates started to increase ever since then. It touched 5.83% in
October 2021 and touched a humongous 8.81% in June 2022.

In September 2022, Peru's central bank made the decision to raise the policy rate to 6.75% for the
fourteenth consecutive month in order to combat the country's stubbornly high inflation. However,
the increase was smaller than anticipated by 25 basis points as the bank noted easing inflationary
pressures. The nation's annual inflation rate slowed for the second month in a row, from 8.74% in
July to 8.4% in August, but it still remained significantly higher than the desired range. The bank
predicts that as global food and energy costs moderate, inflation will continue to slow down.

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Changes in Fiscal Policy

By 2020, the non-financial public sector deficit had climbed to 8.9% of GDP, up from 1.6% in 2019.
In order to deal with the situation brought on by the pandemic, non-financial expenditures jumped
from 20.0% of GDP in 2019 to 24.7% of GDP in 2020. This gain is mostly attributable to a rise in
current spending, which was fueled by transfers to families and purchases of health-related goods
and services but was insufficient to prevent a 7.0% decline in disposable income. At the same time,
revenue fell from 19.7% of GDP in 2019 to 17.8% of GDP in 2020 as a result of the severe erosion
of tax revenue from both income and value-added taxes brought on by the recession of the economy.

In order to ease the economic pain in Peru, the Transportation Ministry is now backing tax rebates
for cargo and passenger carriers. Separately, the Agriculture Ministry proposed the creation of a fund
with 5 billion soles ($1.3 billion) to help farmers facing fertilizer shortages.

Dollarization of Peru’s Economy

Peru's economy has been heavily dollarized as a result of persistently high inflation.

Despite the fact that dollarization has somewhat diminished as inflation has decreased, recovering
from hyperinflation requires some time. Over two-thirds of deposits and credit to the private sector
were in dollars at the end of 1996. (Appendix 1.12)

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After the 1998 IMF intervention, the Peruvian financial system became heavily dollarized. Since the
2000s, the financial system has been gradually dedollarizing as a result of the improved stability in
the financial and monetary sectors. In reality, sole-denominated credit is gaining popularity, which is
a reflection of both confidence and sound fiscal and monetary policy in the nation.

Amazon Rainforest in Peru

Peru is experiencing one of its worst political crises while also witnessing the degradation of its
Amazon rainforest. Peru has the second-largest section of the Amazon rainforest behind Brazil. (
Appendix 1.13)

In 2020, Peru lost almost 170,000 hectares (420,000 acres) of Amazon rainforest, making it the
worst year ever.

The Amazon is the biggest tropical rainforest in the world, destroying it will not only cause
enormous amounts of carbon to be released into the atmosphere, complicating efforts to slow down
climate change.

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Conclusion

Peru is a developing country as well as a third-world country. Its location, physical landforms,
and population, all play an important role in the running of its economy. The structure of the
seventh-largest economy in Latin America, Peru, has changed during the previous three decades.

Peru is emerging as one of the most stable economies in Latin America because of a mix of
economic modernity, abundant natural resources, ongoing advances in economic governance,
and political stability. The recent course Peru has taken has been favourable.
The need of the hour is an economy that creates well-paying formal employment for people so
they can enjoy consumer goods and generates tax money so that high-quality public services can
be offered.
The 1990s saw the adoption of good macroeconomic policies at the monetary and fiscal levels,
which boosted investment and increased consumer confidence, resulting in a more appealing and
dynamic Peruvian economy.

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  Socioeconomic benefits are still not equally dispersed, and the nation needs improved
institutional growth. For a considerable portion of the population, vulnerabilities and
inequalities remain high.
 The growing middle class places new and changing demands on public services including
transportation, health care, and education. This is particularly difficult for a nation like
Peru, where tax collection is still a problem and public service discontent is still high.

Recommendations

 Peru must strive to become an economy that provides quality formal jobs for citizens
with the purchasing power to enjoy consumer goods and generates fiscal revenues to
provide high-quality public services.
 The middle-income trap must be broken through with several policy issues that go
beyond just income. Rule of law, educational standards, tax receipts, capacity, and the
financial sector are Peru's top priorities.
 In this vision, Peru would be a highly connected, inclusive and sustainable society,
where educated and healthy citizens trust institutions and actively engage in political and
civil life. Peru would be well integrated in the region, with innovation and
entrepreneurship that fosters a vibrant business environment along with a modern agro-
industrial sector.
 Improving total factor productivity and human capital will be key for promoting labour
productivity.

 Efforts to improve sustainability will enable citizens to enjoy their country’s well-
preserved, rich natural heritage and diverse culture, like the Amazon Rainforest.
 Since Peru has a lot of potential for processing agro-food products for export, policies
that stimulate private sector development in manufacturing and primary input processing
are particularly beneficial.
 The Peruvian government must undertake effective policy reforms, as well as regional
cooperation and integration policies, and develop a strong infrastructure base.
 To improve the country’s business climate, the government should make efforts to
develop human skills further in order to close the skill gap in the country.

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  The authorities need to reduce customs barriers, make the tax legislation more flexible,
improve the efficiency of public institutions and strengthen the rule of law in order to
keep the country attractive to investors.

Lessons we Learnt:-

Priscilla Dsouza- 06

1. Through this project I got to learn about the economy of a country that I earlier wouldn’t
have considered researching on.
2. This project increased my knowledge and understanding of the strengths and weaknesses
of the country as a whole.
3. I also learned various economic policies used to research and study the country.
4. The study of history was very interesting to me as it gave me a clearer picture of the
dynamics of the country.
5. I have understood the various sources of national income in this country and the factors
affecting it.
6. Research on this country taught me the importance of research and collation of data only
through reliable authorized sources and also to understand rather than plagiarizing
7. This assignment has also taught me the importance, and essence of teamwork.
8. I have learned and understood the meaning of many informative terms and policies.

Tanamay Banka- 43

1. This project taught me to use different features of Microsoft Word to add images in word
doc, alignment and pagination.
2. This project helped me enhance my research and presentation skills.
3. This assignment gave me an opportunity to search and read the annual budgets of
governments and analyse the same.

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 4. I learnt to work as a team and get work completed on time. I also learnt to work with
others and to express my views.
5. I learnt to use excel for collating lots of data and to use formulae like Sum product etc.
6. This project also taught me to make practical applications of the theory topics, I have
studied, therefore enhancing my knowledge.
7. This assignment also helped me in improving my oral-communication skills.
8. I got a chance to learn a lot of things from my team members and develop skills that will
help me in the years to come.
9. I also realised that a coin always has two sides, in other words, there are positives as well
as negatives accompanying one thing, in this case- a country.

I understood that we need to appreciate the positives, and try to eliminate the negatives to
succeed.

Rishon Dharia- 85
1. From this project, I’ve understood the importance a country’s climate and physical
landforms could have on its economy.
2. This helped me improve my research skills and helped me tabulate data better.
3. I got a deeper understanding of the country’s national income and GDP and how it sets
the base for the running of a country.
4. Made me realise how important the country’s social and political stance is in order for it
to run efficiently.
5. Helped me comb through the articles searched with a microscopic lens and read between
the lines to find the information needed.
6. Made me understand the importance of formatting projects and how presentation helps in
the long run
7. It helped me work better with my team members and the delegation of tasks was carried
out easily.
8. This project improved my time management skills and showed me the importance of
meeting deadlines.

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Kanishk Chadha- 131

1. This assignment gave me a thorough understanding of policy and decision-making by enabling

me to relate macroeconomic policy to the real-world dynamics that I had studied in class.
2. Through this project, I was able to better understand the problems that the national
government and central bank face.
3. This project has increased my knowledge about Peru and South American region as a whole.
4. This assignment helped me learn about the functions of central banks and foreign exchange
policies.
5. This project helped me learn how to critically evaluate the problems of Peruvian government
in terms of macroeconomic policies.
6. I was able to improve on my writing and formatting skills while working on the project.
7. I've acquired a knack for interpreting charts and other data more effectively.
8. I’ve learned how to effectively work as a team and efficiently complete the assigned tasks.

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 BIBLIOGRAPHY

1. https://www.imf.org/en/News/Articles/2022/03/07/mcs030722-peru-staff-concluding-
statement-of-the-2022-article-iv
mission#:~:text=Peru%20maintains%20strong%20policy%20buffers,the%202020%20fis
cal%20stimulus%20measures.

2. https://www.worldbank.org/en/country/peru

3. Indian Economic Development:- NCERT CLASS 12

4. World Development Indicators 2019, World Bank website: www.worldbank.org.; BP

Statistical Review of World Energy 2019, 69th Edition.

5. https://www.focus-economics.com/country-indicator/peru/inflation

6. https://tradingeconomics.com/peru/foreign-direct-investment

7. https://www.worldwildlife.org/magazine/issues/fall-2015/articles/deforestation-in-peru

8. https://www.britannica.com/place/Peru/History

9. https://www.limaeasy.com/peru-guide/peru-info/peruvian-
economy#:~:text=The%20Peruvian%20economy%20is%20historically%20based%20on
%20the,current%20-%20fish-
rich%20waters%20make%20commercial%20fishing%20possible.

10. https://www.countryreports.org/country/Peru/economy.htm

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 APPENDIX

Appendix 1.1

History of Peru

 On the declaration of its independence in 1821, Peru had a hard time switching from a
feudal society imposed by Spanish Viceroyalty to a self-governed Republic. Civil wars, a
lack of economic resources, border conflicts, and trade resulted in an empty treasury.
 However, in the mid-19th century the prices for guano skyrocketed on the world
markets, and the abuse of enormous deposits along the Peruvian coast and offshore
islands led to an economic rise.
 The 1879-1894 lost riot of the Pacific, which arose from a disagreement between Chile
and Bolivia over valuable mineral deposits in the Atacama Desert and in which Peru was
heavily involved as Bolivia's ally, left the country devastated and without its mineral-rich
southern provinces. The government initiated several administrative and economic
reforms leading to an export boom.
 Falling export prices and the Great Depression in the 1930s set the country back once
again, just as Peru began to see solid growth rates and a stable economy. In today’s time,
around 80% of Peru's population calls urban areas home as compared to in the 1930s
when almost 2/3 lived in the rural areas and only about 1/3 in the larger cities.
rd rd

 Economic nationalism almost brought Peru to its knees financially, economically, and
socially in the late 1970 which resulted in a time of political instability, a collapsed
economy, hyperinflation, social unrest, poverty, and terrorism in the late 1980s laying
Peru in ruins.
 In 1990 President Alberto Fujimori's election introduced a decade with a substantial
turnaround in the economy and notable progress in ending terrorism. His secure
economic management and promotion of foreign investments, which also included the
signing of free trade agreements, and implementing of various investment projects in
infrastructure and human development, eventually led to an impressive economic boom
in the country which laid the foundation for Peru's future success.

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  In the 2006 presidential election, Alan Garcia sought victory after a disheartening
presidential term from 1985 to 1990. Garcia made Peru one of Latin America's top
destinations for foreign investment by embracing free markets and free trade. Foreign
investment in Peru increased, public debt dropped, the economic status of the country
improved and foreign reserves went up despite the global economic and financial crisis.
 Even though the economy continued to boom during his term in office, by 2014 the
country’s economy slowed down with a decline in international demand for Peru’s
natural resources. The country was among the world’s twenty emerging market
economies and was considered among the best-performing countries in the region with a
stable economy and excellent uninterrupted growth rates under the presidency of
President Kuczynski and President Vizcarra.
 The implementation of favorable macroeconomic policies, aggressive free trade
strategies, and promoting foreign investments made the country one of the world's
thriving economies in the 2010s. This led the country to a dynamic GDP growth rate low
inflation rate, a stable currency exchange rate, and promising prospects for the coming
years. On the other end, these policies also promoted corruption, as well as social
inequity and unrest as a considerable number of Peruvians, still don't benefit from
economic growth and increasing wealth.
At least until Covid.
 In March 2020, Covid struck in Peru. President Martin Vizcarra implemented some
uncompromising and firm anti-Corona measures in Latin America declaring a Public
Health Emergency and the State of Emergency. These measures however couldn't prevent
extremely high infection and death rates, Peru's economy suffered immensely; with
foreign trade restricted, national economic activities paralyzed, and tourism non-existent,
the GDP shot up by over 11% while poverty increased by 10%. However, due to
extensive aid and economic stimulus packages, analysts are certain that Peru can
maintain its economic stability, tackle the crisis, and by the end of 2022 see promising
growth rates again.

Appendix 1.2

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Peru is considered to be a developing country while also being a third-world country. The
economy is dependent upon the export of raw materials to developed countries in the northern
hemisphere. Here, extensive destruction of transportation and agricultural systems occurs
periodically from earthquakes, landslides, and other natural disasters. Peru's economy has always
been founded on the geographical features of the nation. The many temperature zones enable
extensive agriculture, the mineral-rich Andes mountains permit mining, and the Pacific Ocean's
fish-rich waters—because of the Humboldt current—allow for commercial fishing.

From 2009 through 2013, the Peruvian economy expanded by 5.6% a year on average, because
of the low inflation and a stable currency. The sale of metals and minerals, which make up 55%
of Peru's total exports, attracted high prices on the international market, which contributed to this
rise. Growth decreased between 2014 and 2017 as a result of declining global pricing for these
resources.
Despite having a great macroeconomic performance, Peru is nonetheless subject to changes in
global pricing due to its reliance on food imports and exports of minerals and metals. The lack of

29
adequate infrastructure in all areas and the absence of proper urban planning and regulations
encouraged, among many other problems, the development of slums and the emergence of a
huge informal sector that to this day challenges the country.

Appendix 1.3

Foreign investments

In the fourth quarter of 2021, foreign direct investment in Peru increased by 1470.73 USD
Million. Peru was successful in luring new investment in recent years due to its alluring fiscal
and legal system as well as a thriving mining industry. After Chile, Brazil, and Colombia, it is
Latin America's fourth recipient of FDI. The majority of foreign direct investment (FDI) comes
from Spain, the rest of the European Union, the US, and the UK. Major investors include Chile,
Brazil, and the Netherlands. Mining, communications, industry, financial, and energy are the
industries that drew the greatest FDI.

Due to its cheap wage costs as compared to wealthy nations and its liberal dividend policy, Peru
is appealing to FDI. Peru's rich natural resources, developed local market, and proximity to the
markets of Chile, Colombia, and Mexico, which together make up the Pacific Alliance, are
further benefits of investing there. ProInversion, the nation's investment promotion organisation,
works to entice international capital, notably in free trade zones and the infrastructure sector. The
development of the Chancay mega-port by the Chinese state-owned Cosco Shipping Ports for
roughly USD 3 billion and the Amazon Waterway, a USS 95 million project involving China's
Sinohydro, are two of the most prominent investments to occur in the nation in recent years.

30
This graph shows the foreign investment in Peru across the years.

Appendix 1.4

Balance of Payments

The main reason for the weak figure was the deterioration of the terms of trade (-14% y/y), as
metal prices declined more than soft commodity prices. The trade balance surplus forecast was
reduced for full-year 2022 from USD 15.6 billion to USD 11.3 billion, owing to the decline in
export prices, particularly copper and gold. Meanwhile, imports (+20%) were driven mainly by
the year over year rise in import prices, particularly oil and foods such as wheat, corn and
soybeans.

Peru Exports By Category Value

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 Peru Exports By Category Value

Ores slag and ash $13.20B

Pearls, precious stones, metals, coins $6.68B

Edible fruits, nuts, peel of citrus fruit, melons $3.85B

Copper $2.24B

Mineral fuels, oils, distillation products $1.46B

Residues, wastes of food industry, animal fodder $1.34B

Fish, crustaceans, molluscs, aquatics invertebrates $982.22M

Coffee, tea, mate and spices $849.28M

Articles of apparel, knit or crocheted $690.96M

Edible vegetables and certain roots and tubers $676.82M

Zinc $630.35M

Vegetable, fruit, nut food preparations $614.56M

Plastics $542.51M

Animal, vegetable fats and oils, cleavage products $463.12M

Tin $356.92M

Meat, fish and seafood preparations $285.52M

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 Peru Imports By Category Value

Machinery, nuclear reactors, boilers $5.13B

Electrical, electronic equipment $3.50B

Mineral fuels, oils, distillation products $3.26B

Vehicles other than railway, tramway $2.72B

Plastics $1.92B

Cereals $1.57B

Iron and steel $1.37B

Pharmaceutical products $1.08B

Articles of iron or steel $951.76M

Optical, photo, technical, medical apparatus $884.71M

Miscellaneous chemical products $873.79M

Residues, wastes of food industry, animal fodder $712.99M

Rubbers $668.94M

Other made textile articles, sets, worn clothing $576.06M

Fertilizers $546.34M

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Appendix 1.5

Appendix 1.6

34
Appendix 1.7

Peru’s 2019 HDI of 0.777 is above the average of 0.753 for countries in the high human
development group and above the average of 0.766 for countries in Latin America and the
Caribbean.

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Appendix 1.8

Leading banks in Peru in 2019, based on value of loan portfolio

(in billion Peruvian soles)

As of December 2019, Banco de Crédito del Perú led the ranking of leading banks in Peru with a
loan portfolio amounting to more than 90 billion Peruvian soles. It was followed by Banco
BBVA Perú with 55.85 billion soles.

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Appendix 1.9

37
Appendix 1.10

Monetary Policy

Through both conventional instruments—such as lowering the benchmark interest rate from 2.25%
to an unprecedented level of 0.25% and relaxing bank reserve requirements—and non-conventional
ones, such as the provision of guarantees to the financial system's loan portfolio and the expansion of
repurchase agreement (repo) transactions, the expansionary monetary policy of 2020 was focused on
cushioning the fall in aggregate demand and ensuring the liquidity of the payment system.

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Appendix 1.11

Exchange Rate Policy

The PEN/USD currency rate is managed by the BCP under a managed floating system. The Bank
lets the market decide the value of the currency, but it nonetheless steps in to prevent significant
changes.

The stability of the exchange rate is essential to encourage business investment and consumer
confidence in a financially dollarized economy. Any change in the foreign exchange rate has the
potential to skew decisions about both production and consumption because consumers and
businesses may borrow money in USD yet purchase and sell goods in local currency. The level of
dollarization in the Peruvian financial system has been declining over time, although the BCP is still
quite concerned about sol volatility.

Changes in Exchange Rate Policy during and after Covid-19

To prevent the nominal exchange rate from declining further in 2020, the central bank intervened in
the markets (the sol depreciated from 3.2 to 3.6 soles per dollar between January and December). In
terms of macro-prudential measures, the central bank raised its foreign exchange reserves by more
than 6.5 billion dollars over the year (bringing them to 74.9 billion), all through debt issuances.
Without these debt issuances, the central bank's foreign exchange reserves would have decreased. As
a precaution, the central bank signed an agreement to access a collateralized line of credit with the
Bank for International Settlements for US$ 2 billion, requested a flexible line of credit from the IMF
for US$ 11 billion, and took part in the US Federal Reserve's dollar liquidity provision programme
in exchange for Treasury bonds.

In order to maintain price stability and prevent mismatches, the central bank increased its foreign
exchange intervention during the first half of 2021 to stop the sol's depreciation and lessen the

39
increased volatility brought on by the election process (reflected in swings not seen since the 2008
crisis).

In comparison to the same period in 2020, the sol's real value decreased at this time by 14%. Mostly
as a result of central bank sales, international reserves fell by almost $3 billion, but they still amount
to more than 30% of GDP and are a crucial line of defence for maintaining exchange rate stability.

Appendix 1.12

Dollarization in Peru

The current level of dollarization in Peru is primarily the result of an asset substitution process
rather than a currency substitution activity. In reality, local money continues to be used for
payments, whilst foreign currency is mostly used as a store of value (due to the past history of
high and persistent inflation). Since local currency continues to be the primary monetary
transmission route for aggregate demand in this situation, the dollarization of the economy has
no impact on the effectiveness of monetary policy.

The ratio of dollarization, which takes into account foreign deposits (a proxy for asset
substitution), reveals that from 1990 to 1996, the level of dollarization declined alongside
inflation.

There are still incentives to hoard foreign money, but as long as monetary policy can contain
inflation, the public's confidence in the local currency should eventually be restored, both as a
means of exchange and as a store of value.

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Appendix 1.13

Amazon Rainforest in Peru

The Monitoring of the Andean Amazon Project (MAAP) claims that in the last ten years,
deforestation in the Peruvian Amazon has reached six all-time highs.
Agriculture is now firmly entrenched as the main cause of deforestation, primarily in the middle
and southern Peruvian Amazon.
Gold mining, logging, and coca plantations are among further criminal activities that devastate
forests. The Peruvian government still places a higher priority on economic growth than on the
preservation of the Amazon rainforest.
Deforestation is mostly caused by large enterprises, such as palm oil companies, as well as
criminal gangs with a business sense and access to cheap labour. Products made as a result of
these illegal actions are exported to other countries.
The Insight Crime research believes that around 28 percent of Peru's gold production is unlawful
and that the majority of forest extraction also occurs without authorization. The current
administration also encourages illegal mining and logging.

41