OECD: Peruvian economy would be stuck at 1.7% this year

The ravages of climate change and the high level of social conflict with which the first quarter of the year was received continue to push projections for the Domestic Gross Product (GDP) fell, and this time the score of the Organization for Economic Cooperation and Development (OECD) fell to 1.7%, nine tenths below its previous report in November.

This discouraging forecast comes one day after the World Bank (WB) also updated our economy’s recovery expectations from 2.4% to 2.2%, albeit with a less severe cut.

According to the OECD, consumption and private investment have been severely limited by “political uncertainty, extreme weather events, high interest rates and inflation” experienced after the attempt coup d’état by Pedro Castillo and the subsequent protests across the country.

crisis spiral

Not only it. The OECD specified that the slow execution of budgets at the level of subnational governments could mean that the recent boost package approved by the Ministry of Economy and Finance (MEF) does not have the expected effect before the cycle, although it recognizes that there is a margin to maneuver the situation.

In this line, the agency warned of the urgent need for a “tax reform” to raise public revenue and increase collection in order to “face a pressing improvement in infrastructure and social needs.” Therefore, he recommended continuing with the announced fiscal consolidation process to ensure that the public debt is sustainable over time.

For the director of Videnza Consultores, Luis Miguel Castilla, this meager result responds to almost zero and “inertial” progress in private investment, private consumption that has lost power —associated with a precariousness of the labor market—, and the risks that the El Niño phenomenon will bring.

“There is not much that the Government can do, beyond what it is trying to do. Injecting resources through public investment is not enough, since this continues to be very low in municipal governments due to management problems,” he said.

In this sense, he referred that the fiscal policies wielded by the MEF they will not compensate for the lower growth in private spending, even if the optimism shown internally for growth of 2.5% in 2023 seeks to set the tone along with the predictions of the Central Reserve Bank of Peru (BCRP).

It should be noted that the OECD considered that the BCRP should maintain its position of restrictive monetary policies to curb inflation expectations, towards a price decongestion horizon for the beginning of 2024.

OECD accession

The former Minister of Economy also argued that this slowdown in the Peruvian economy by 2023 should not interfere with our country’s accession process to the OECD, a race that the MEF hopes to complete before 2026.

Castilla said that the drop in consumption and investment “are out of government control,” while the control reforms promoted by the international organization, which globally groups 38 countries, are medium-term.

“All countries have economic cycles and we are still in an undesirable situation, but accession is a different process that happens, rather, to improve the institutional framework, governance and quality of spending,” he asserted.

Peru delivers initial memorandum to the OECD

Inflation among OECD countries slowed to 7.4% in April. The three countries that have decreased the most were Hungary (14.5%), Sweden (4.1%) and Colombia (3.6%).

Annual inflation in Peru decreased 7.9% in May, after reaching a record 8.8% in June 2022.

Peru delivered its initial memorandum to join the OECD. “The incorporation will allow our country to enter the major leagues of economy and governance,” said the PCM.