After 22 years, the Government would fail to comply with the fiscal rule

The last time Peru failed to comply with the fiscal deficit rule, not counting the pandemic stage, was in 2000, when the economic result of the public sector exceeded 3% of GDP, above the limit set at that time. However, after 22 years, this scenario would happen again.

And, according to the Central Reserve Bank of Peru (BCRP), the fiscal deficit would be 2.5% of GDP at the end of 2023, which would not be complying with the 2.4% limit. established for this year, a scenario that had already been warned by the Fiscal Council (CF) a couple of months ago, but that the Ministry of Economy and Finance (MEF) had denied, stating that it would be fulfilled.

Julio Velarde, head of the BCRP, explained that this increase in the deficit is mainly due to the fall in current income of the central government.

“This deficit is not explained because the Government has spent more. Spending has been reducing, in 2022 it falls to 22% and until November it has fallen to 20.9%. What happens is that current income has fallen much more, while expenses fall 1.1 points, current income has fallen 2.2 points,” the banker explained.

Despite this, Velarde Flores highlighted that Peru’s fiscal deficit is “quite low” compared to other countries. Likewise, he predicts that in 2024 and 2025 this indicator will be 2.0% and 1.5%, respectively, meeting the limits set in said years.

Credibility at stake

For the former Minister of Economy Luis Miguel Castilla, everything indicates that the fiscal rule will be broken this year despite the Government’s attempts to avoid it, which is why he suggests that the head of the MEF, Alex Contreras, come out to recognize this event, since that what is at stake at this moment is the credibility of the institution.

“It is not that the credit rating is going to be reduced, that is not going to happen, because more important than the deficit is the level of debt over GDP, which is low. This loss of credibility in the word of the most important minister in the cabinet is unnecessary,” Castilla concludes.

Data

Finance. The BCRP predicts that public debt will decrease and close 2023 at 32.9% of GDP, ranking as the lowest in the region.

Strength. Julio Velarde highlighted that Peru remains in a solid fiscal position.

The word

Luis Miguel Castilla, former Minister of Economy

“The MEF has had to recognize that due to lower economic growth and a drop in revenue, it would break (the fiscal rule), instead of losing credibility, which is what is at stake.”