Peru is set to embark on tax reforms as part of a stimulus package that could double the rate of growth in the country’s economy, its newly-appointed finance minister told Emerging Markets.
In one of his first interviews since taking over on September 14, Alonso Segura said: “The question for us is not whether we are going to rebound or not, but the speed of convergence and at what point next year we are going to reach the rate of potential growth of 6%.”
Peru, which for years was the leader of growth in South America, hit a wall in the first half of this year, with GDP expanding by only 3.3%. The initial forecast was 6%, but has been cut repeatedly during the year. Segura said growth for the year would be closer to 3%.
The government has announced plans for a new stimulus package in the final quarter of this year to give the recovery traction but Segura said it was now considering possible labour and tax reforms.
A recovery in the mining sector and new public-private partnerships for infrastructure projects would add two points to growth, the minister said, adding that there were already signs of a rebound.
Job creation has ticked up, and sales, purchase orders and production levels were up in September, compared to August. The administration believes new stimulus measures will help positive indicators gain steam going into the first quarter of next year.
Short term measures would be aimed at pushing up consumption. A medium term package would continue the path started in the summer, when the government unveiled stimulus measures to deal with red tape and other bottlenecks slowing investment.
“We want to look into measures that will increase the competitiveness of the economy, trigger higher levels of productivity and reduce informality. We have the pieces of the puzzle — now we have to see how they fit together,” he said.
BELLIGERENT CONGRESS
Some of these pieces include potential labour and tax reforms that business groups say are necessary, but would require consensus in the country’s highly fractured and increasingly belligerent Congress.
Jose Balta, a labour lawyer, said labour reform was critical if the government wanted to ensure long-term growth. Peru has one of the highest levels of labour rigidity in the region, according to the World Economic Forum.
The country’s Exporters’ Association presented the government with a list of labour reforms, stating that strong growth was only possible if it was easier to hire and fire workers. It called for substantial reductions in some benefits, such as 30 day vacations and two annual bonuses that meant workers earn the equivalent of 14 months’ salaries.
Tax reform would focus on closing loopholes and streamlining procedures more than changing rates.
The IMF forecast that Peru would record the highest growth in South America next year at 5.1%, as well as the lowest inflation, 2.3%.