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Peru has so far been excluded from any international debt relief agreements which leave the country with a massive debt burden of over US$22bn and paying between 22 and 23% of the central government budget in debt service. Peru has benefited from a few debt swap arrangements with Switzerland, Germany and more recently Spain but these can hardly be viewed as the long-term solution to the external debt problem. On the other hand, the Alán García Government has essentially stated its intention to remain faithful to the neoliberal economic model, which many people in Peru feel has not delivered results.

Alán García, who was elected as Peru’s new President in 2006 was also President between 1985 and 1990. During his first presidency of the country, he adopted the populist measure of calling for limiting debt service to just 10% of government revenue. Within Latin America, he found himself isolated however when he appealed to other governments of the region to back this policy measure. It also led to the International Monetary Fund (IMF) declaring Peru as "ineligible" for credit. In reality however, García never implemented this policy and today the President has basically stated his intention not to "rock the boat", i.e. he is concerned about the country’s international credit rating and about not portraying the country as "in need of help".

In this context, the debt issue has become somewhat taboo. Laura Vargas Valcarcel of CEAS has said that "if you ask Peruvians today whether the debt issue features in their top ten worries, for most it will not. People do not seem to link the country’s debt burden to their daily lives and people also seem to think that big words on the part of the government, such as "we have secured a debt restructuring" as positive and good for Peru".

Nowadays, a very worrying debate is currently taking place in Peru with respect to the possible re-introduction of the death penalty for those convicted of child sex offences. The debate – with its supporters and opponents – is dominating the country’s media spaces, and some feel that this has been a deliberate government ploy to distract public attention from more pressing concerns such as the economic model in place in the country, the signing of the Free Trade Agreement with the United States and the government’s stated commitment to poverty reduction.

The Alán García Government has essentially stated its intention to remain faithful to the neoliberal economic model, which many people in Peru feel has not delivered results. Indeed, according to research conducted by Catholic Relief Services in Peru, for every percentage point of growth in Peru, poverty levels have declined by only 0.37 – 0.39%. Put simply, you need to grow by three percentage points to reduce poverty by one percentage point which means that the fruits of economic growth have not trickled down to the poor. Poverty levels remain constant at approximately 52% of the population living in poverty and around 24% in extreme poverty.

The García Government has requested a new two year programme with the IMF, which according to the country representative "contains only light conditionalities". Overall the Fund has been pleased with Peru’s macroeconomic management and Peru has the lowest levels of inflation in South America (at under 2%). The Fund considers Peru as debt sustainable: it has lowered key debt indicators over recent years e.g. debt as a percentage of GDP has declined to around 38% and the IMF recommendation is to reduce this further to 30%. However this hides growing levels of domestic debt within the country as well as ignores another key indicator of indebtedness: debt service as a percentage of government revenue. In Peru, external debt service swallows up almost one-quarter of the government’s central budget.

Debt Service 2006 (US$mn)

External debt service - 2,465

Domestic debt service - 924

Total - 3,389


High debt service levels – and the government’s adherence to the "status quo" – impose huge rigidities on the Peruvian general budget and imply a policy of fiscal austerity. For many, this means that any poverty reduction measures will be essentially palliative in nature and indeed many CSOs feel that the government is not at all not serious about genuine poverty reduction. For many, hopes of reaching MDG Goal 1 (halve the number of people living in poverty) by 2015 is "absurd" with the current economic model in place.

Despite apparent budgetary limitations, the government has nevertheless announced an investment shock. Prime Minister De Castillo outlined "two columns of integrated action": the first, a solid economy and a firm grip on inflation; the second a "rush" of investments in education, health and human development. One cannot happen without the other, he argued. Indeed the motto of the ruling APRA party is "social responsability with fiscal responsability".

Areas ear-marked for increased expenditures include 1000 more police officers, but many CSOs doubt how these promises will be paid for given the huge restrictions the government has placed on itself with respect to the budget. This has led some CSOs to speculate that unless the government enacts serious tax reforms (which it appears hesitant to do), such increases in spending will either not happen or will be paid for through the issuance of government bonds (provoking more domestic debt) coupled with a greater number of mining concessions (mainly to transnational companies who enjoy certain tax privileges).

Serious tax reform in the country would help the country to exit the debt-poverty trap, as well as help to make the system fairer. Jubileo Peru is well aware of the need to communicate this message about making the broader economic model much more just. This message has been slow to reach the ears of government however. Over the last 2 years, Peru has seen an increase in FDI and in fiscal income because of the commodity price boom however fiscal income has not grown due to better and fairer tax collection.
Peru also relies heavily on overseas workers remittances: US$1.4bn annually which swamps a more modest US$400mn in ODA.

The government insists that it needs to retain a healthy climate for investors, on which the country depends. It cannot afford to jeopardise the country’s international risk-rating. But the debate about what kind of investment Peru wants and needs is less open. Many believe that the kind of investment the country has seen in the past has not improved livelihoods, generated jobs or income.

Meanwhile debt service represents exactly double the amount dedicated to public investment in the country, which in turn corresponds exactly to the amount of the general national budget financed via new credits (22 and 11% respectively) i.e. new credits are financing investment in the country which is clearly unsustainable over the longer-term. In this context, tax reform becomes all the more pressing.

Many may well ask why the García Government, given these social indicators and clear budgetary constraints, does not stick its neck out on the line and put the policy of 10% of government revenues to debt service back on the political agenda. This policy may well win significant domestic support: many local groups who are part of the Jubileo Peru network insist that basic needs just aren’t being met. However, according to the President of the Banco de la Nacion, Enrique Cornejo Ramírez, this is impossible. "In order to gain ground with a policy such as that expressed in 1985, alliances need to be built both within the country and between Latin American nations", he said. "In 1985, the country put itself out on a limb only to be isolated by other Latin American Governments". Moreover, "the actors have changed, the circumstances are different and Peru is now indebted to the multilateral, not the private banks. 1985 was partly an attack against the private banks" he continued. The general feeling now of the ruling APRA party is that the room for manoeuvre with respect to debt has shrunk dramatically. Meanwhile, CEAS has placed a dollar figure of US$3.7bn annually on "unmet essential human needs". External debt service stands annually at US$2.4bn which would go some way towards meeting these minimum expenditures in human needs.

Final thoughts

Overall, a distinct air of pessimism prevails among many civil society organisations in Peru with respect to the new Alán García Government and its commitment to fight poverty and inequality. Concerns centre around the government’s stated intention to remain faithful to the neoliberal economic model and to continue to make hefty debt service repayments to international creditors. These impact negatively on the country’s ability to invest in social expenditures and indeed social investments amount to just half that of debt service repayments.

Peru is classified as a middle-income country and therefore has not benefited from any internationally agreed debt cancellation initiatives. It has benefited in just a couple of instances from debt swap arrangements with a handful of creditors. At the same time, many donors such as the UK’s DFID and the Dutch Development Cooperation Office are exiting the country in order to focus on low income sub-Saharan African countries. High debt service coupled with reduced ODA leave Peru with very little budgetary room for manoeuvre and reliance on all the wrong types of investment. This in turn has contributed to growing levels of domestic debt and public dissatisfaction. CSOs within Peru advocate comprehensive and redistributive tax reforms – and the government needs to act – but the international community needs to play its part also. Crossing the border between Peru and Bolivia and witnessing the extreme poverty and indigence prevalent in both nations, it is absurd to argue that one should benefit from debt cancellation and the other not because it is "too rich". A more just approach than the “HIPC” approach is to grant debt cancellation to all those countries that need it to reach the internationally-agreed MDGs. Hopefully, the new government will act upon the recommendations laid out in the Valencia Dongo commission report and spur the international community to reconsider its approach to Peru.

This article is product of the last Gail Hurley visit to Perú and was first published at Eurodad Debt Watch list-serv.

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