In recent weeks, MEF has been the target of harsh criticism regarding the mitigating economic policies employed to curb the abrupt external recessionary shock caused by the Covid-19 pandemic. Exacerbated further by the lockdown in several countries in the region, market uncertainty depends only on the solid injection of collaborative liquidity between governments and private banks. Even more alarming are the projections of IDEHPUCP, which from the multidimensional poverty approach, provides evidence of the great possibility of increasing poverty rates in Peru (Clausen, 2020).
As a result, MEF has implemented multi-sector policies, such as a substantial increase in the level of public spending -about 12% of the GDP-, reflected in monetary subsidies to the poor and extremely poor population under the famous S/380 subsidy. Likewise, regulations such as D.S. Nº 078-2020-EF (El Peruano, 2020) were decreed, authorizing monetary transfers to local and regional governments to purchase food packages and sanitary kits to strengthen public health in their regions. However, these economic measures raise the following questions: What is the financial background of such public spending? Does Peru have a solid fiscal buffer? If so, why was this funding not allocated before, and what should be the orientation of such expenditures?
Source: (Agencia Andina, 2020).
Contrary to popular belief, Peru has accomplished an outstanding fiscal performance, despite the terrible period of hyperinflation and the attempt to nationalize the banking system by the administration of President Garcia’s first government. Peru even maintains one of the lowest public debts as a proportion of GDP, behind Chile in Latin America and the Caribbean, according to figures from the IMF (2020). In these circumstances, Peru has a solid fiscal policy that guarantees macroeconomic stability and ensures fiscal sustainability, trying to alleviate the impact of economic fluctuations or external shocks -mainly caused by Covid-19, which has seriously affected the precarious and mostly informal labor market -about 70% of employment is casual- to a grander scale. Following this line of prudent fiscal and macro-prudential procedures. In 1999 the first fiscal law, Fiscal Prudence and Transparency Law (DL. 27245), was enacted, which imposes specific rules of behavior on the MEF. The Fiscal Stabilization Fund (FEF) was one of the first aims of this law, a fund resulting from the value of income from concessions and privatizations of the national treasury and the surplus of the Public Treasury.
Therefore, Peru does have a reasonably solid fiscal cushion: approximately USD 5,472 million or S/16,000 million. However, how did we manage to accumulate so much money if we are a developing country? As mentioned by the President of the Fiscal Council, Waldo Mendoza, “In good times, given that the economy grows or because the price of exports rises, surpluses are accumulated, and thus the FEF grows.” So, it is relevant to mention the use of this Fund and why in the last week’s several economists have confronted each other, some defending its use, but others disagreeing at all? Let us start by mentioning that the “FEF is an intangible fund that can only be used, in current or capital spending, in situations of exception, natural disasters or significant external shocks, or exogenous shocks that affect the economic livelihood and affect government revenues” (Mendoza, 2019). Considering a precarious health system, shortages of biosecurity implements such as masks for the Armed Forces, Police, and various hospitals. It is essential to make a proportional and responsible use of this fund through statistical projections and efficient operational capacity of current spending with the executing directorates, such as the government agency Peru Compras, responsible for optimizing public procurement throughout the national territory.
Source: (José Enrique González-Prada, 2020).
On the other hand, it is pertinent to emphasize that this mechanism is deposited in the Central Reserve Bank; withdrawing all or a tremendous amount of this money would generate a considerable emission of soles in the short term – an excessive monetary supply – which in the long run would result in an inflationary behavior that would further aggravate the macroeconomic structure of the country. For this reason, the BCRP’s monetary policy instruments must be perfectly aligned with the evolution of the MEF’s fiscal instruments. First, maintain inflation in the target range so that the bank reserve requirement is projected to an expansive monetary policy, given the economic deceleration. Second, the use of the FEF has to be proportionally targeted to alleviate the negative supply shock and an efficient reallocation of budget and debt instruments such as public debt securities. Finally, let us hope that the future is optimistic for everyone and not only in the economic area but also in the area of a solid health system with efficient and well-structured operating institutions, we must strengthen our health system; because if not, “you should never talk about money in front of other people“.
References:
International Monetary Fund (2020). https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/weorept.aspx?sy=2017&ey=2024&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=50&pr1.y=10&c=213%2C223%2C228%2C233%2C293%2C298%2C299&s=GGXWDN%2CGGXWDN_NGDP&grp=0&a=
El Peruano (2020), Autorizan una Transferencia de Partidas en el Presupuesto del Sector Público para el Año Fiscal 2020 a favor de Gobiernos Regionales y de Gobiernos Locales. https://www.mef.gob.pe/es/por-instrumento/decreto-supremo/22216-decreto-supremo-n-078-2020-ef/file
Mendoza, W. (2018). Macroeconomía Intermedia para América Latina. En: Las leyes fiscales en la Historia del Perú. Lima: Fondo Editorial de la Pontificia Universidad Católica del Perú
Clausen, J. (22 de abril de 2020). Covid-19 y Pobreza multidimensional en el Perú. . [Instituto de Desarrollo humano de América Latina]. Recuperado de http://blog.pucp.edu.pe/blog/idhal/2020/04/19/covid-19-y-pobreza-multidimensional-en-el-peru/?fbclid=IwAR35Ockx1lrhhGerFhhdlAGPRmG3SQmSL3kO-Mc_dgS0caquJl3U-nCAqZ4
Diez frases para recordar la Crónica de una muerte anunciada. En:Redacción Centro Gabo. https://centrogabo.org/gabo/contemos-gabo/diez-frases-para-recordar-la-cronica-de-una-muerte-anunciada