BOOSTING HUMAN CAPITAL AND PRODUCTIVITY DEVELOPMENT POLICY FINANCING WITH A DEFERRED DRAWDOWN OPTION

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The Boosting Human Capital and Productivity Development Policy Financing with a Deferred Drawdown Option (DPF-DDO) aim to support Peru efforts to foster productivity growth under a more challenging external environment. Lower export demand, including from China, worsening terms of trade, and the prospects of higher borrowing costs are affecting a large number of emerging economies. In this context, a larger portion of economic growth in Peru will have to come from further productivity gains. The proposed DPF-DDO supports measures targeting key productivity constraints by enabling the improvement of the quality of human capital, fostering competition pressures, and facilitating trade. Given the Presidential elections in mid-2016, the operation is a stand-alone DPF-DDO. Nevertheless, the reforms supported are the first installment of widely backed medium term reform program the National Competitiveness Plan 2014-18 and the National Education Project to 2021. This DPF-DDO will also help to maintain the dialogue with the next government, facilitating the implementation of the reform agenda. The proposed amount for the DPF-DDO is US$ 1.25 billion. Peru continues to have a sound macroeconomic policy framework. Throughout the period of high growth and unlike many countries, Peru saved the commodities windfall, leaving itself with significant savings to continue to afford needed investments and strong macroeconomic buffers to face more challenging times. Indeed, domestic savings increased from just above 10 percent of GDP in the early 1990s to 24 percent in 2014, with public sector savings playing a key role over the last 10 years. Growth slowed to 2.4 percent in 2014. The recovery is expected to be gradual since Peru growth potential in the following years is likely to be lower compared to that of the last decade under the assumption of a non-temporary price adjustment on the country main exports. The current account is hovering around 4 percent of GDP and remains mostly covered by FDI and portfolio investments. Foreign exchange reserves stood at 32 percent of GDP or 20 months of imports by the end of December 2015.