The World Bank Peru Fiscal Policy and Growth DPF-DDO(P180554) @#&OPS~Doctype~OPS^blank@pidcondpfcoverpage#doctemplate Program Information Document (PID) Concept Stage | Date Prepared/Updated: 06-Dec-2023 | Report No: PID018 Dec 20, 2023 Page 1 of 5 The World Bank Peru Fiscal Policy and Growth DPF-DDO(P180554) @#&OPS~Doctype~OPS^dynamics@piddpfbasicinformation#doctemplate BASIC INFORMATION A. Basic Project Data Project Beneficiary(ies) Operation ID Operation Name Peru P180554 Peru Fiscal Policy and Growth DPF-DDO Region Estimated Approval Date Practice Area (Lead) Financing Instrument LATIN AMERICA AND Macroeconomics, Trade Development Policy 30-Jul-2024 CARIBBEAN and Investment Financing (DPF) Borrower(s) Implementing Agency Republic of Peru Ministry of Economy and Finance Proposed Development Objective(s) The Program Development Objective is to support Government reforms to a) promote a more growth-friendly fiscal policy, and b) foster a greener and more competitive economy. @#&OPS~Doctype~OPS^dynamics@pidpfrprojectfinancing#doctemplate Financing (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Yes Is this project Private Capital Enabling (PCE)? Yes SUMMARY Total Financing 500.00 DETAILS Total World Bank Group Financing 500.00 World Bank Lending 500.00 @#&OPS~Doctype~OPS^dynamics@piddpfdecision#doctemplate Decision The review did authorize the preparation to continue Dec 20, 2023 Page 2 of 5 The World Bank Peru Fiscal Policy and Growth DPF-DDO(P180554) B. Introduction and Context Country Context Since 2014, Peru's growth potential has decelerated, shifting towards a new trajectory marked by stagnation in convergence and poverty reduction. The aftermath of the commodity boom posed challenges for sustained growth, with GDP growing at an annual rate of 3.5 percent between 2013 and 2019—half the pace of the preceding decade. The COVID-19 pandemic in 2020 exacerbated these difficulties, leading Peru into one of the deepest recessions in Latin America and increasing the national poverty rate by 10 percentage points to 30.1 percent. The economy rebounded in 2021 to pre-pandemic levels, and, while poverty declined to 25.9 percent in 2021, it remains above pre-pandemic levels, hampered by the lower quality of employment and higher informality. GDP growth is anticipated to decline by 0.4 percent in 2023. Climate-related constraints associated with El Niño and political uncertainty have disrupted economic activities, particularly in agriculture, fishing, and manufacturing, as well as impeding public investment execution. Additionally, tightened financial conditions have depressed private consumption and investment. Over the medium term, GDP growth is expected to converge towards a potential rate of around 2.3 percent, below pre-pandemic levels, with negative implications for future poverty reduction. Furthermore, the sluggish economic activity has led to reduced government revenues and an increase in the fiscal deficit beyond the fiscal rule. This underscores potential constraints on fiscal policy while emphasizing its pivotal role in fostering growth within the context of meeting NDC objectives. Relationship to CPF The proposed operation is aligned with the Country Partnership Framework for Peru (2023-2027). It addresses challenges identified related to promoting increased resilience against the impacts of natural disasters and other shocks through the identification and mitigation of climate change risks, as well as facilitating private investment in climate change adaptation and mitigation. Moreover, it is linked to the CPF pillar on increasing access to economic opportunities by promoting digital financial inclusion as well as fostering competition and strengthening anticartel policy. The operation is aligned with World Bank Group corporate priorities on gender and Maximizing Finance for Development. It is complemented by several World Bank Group technical assistance activities, as well as the Sustainable Growth and Finance DPF-DDO, Enabling a Green and Resilient Development DPF-DDO, and Strengthening Peru’s National Science, Technology and Innovation System IPF. C. Proposed Development Objective(s) The Program Development Objective is to support Government reforms to: a) promote a more growth-friendly fiscal policy, and b) foster a greener and more competitive economy. Key Results The prior actions supported by the proposed operation enhance Peru’s sustainable growth path. Measures for effective fiscal management and accountability, reduction in the exposure to fiscal risks, and closing the loopholes from tax avoidance and evasion should help Peru’s fiscal policy contribute to growth. Public expenditures are expected to become more efficient (through public-private partnerships) and better aligned with climate objectives. A greener and more competitive economy is expected through reforms to promote digital financial inclusion, private investment in climate mitigation and adaptation, better competition policy, and more effective public support to innovation. D. Concept Description Dec 20, 2023 Page 3 of 5 The World Bank Peru Fiscal Policy and Growth DPF-DDO(P180554) The proposed operation is aligned with the government’s programs for economic growth. Examples include the “Plan Unidos" (November 2023), “Con Punche Peru 2� (May 2023), Strategic Plan for National Development (PEDN) 2050, and the OECD Accession Core Principles for Peru. Pillar A of the operation supports a more growth-friendly fiscal policy. As Peru addresses the large infrastructure gap and achieves their ambitious NDC goals, it will have to pay close attention to fiscal policy to maintain the historically strong fiscal prudence and keep its alignment with the growth agenda. Thus, the pillar supports a stronger and independent fiscal council, better monitoring of fiscal risks, closing loopholes that result from tax avoidance and evasion, and more streamlined and transparent processes for PPP projects. The pillar also supports more climate informed public finance and budget (through climate budget tagging), and tools to mobilize finance (through sustainability linked bonds), which are expected to have positive environmental, social, and fiscal management impacts. Pillar B supports a greener and more competitive economy. Financial sector regulations in retail payments and open banking will enable greater competition and innovation amongst providers, ultimately leading to more inclusive and competitive financial sector. Development of the green finance ecosystem is expected to yield innovative and greener financial instruments, thus attracting more private investment in climate change mitigation and adaptation. The pillar also supports smarter competition policy, including more effective tools to fight anticompetitive practices and permitting more collaboration between firms to develop sustainable, innovative products and services. A stronger national innovation system should provide better resources to researchers and firms to innovate and tackle climate change challenges. Greener production is also supported, as agricultural producers and exporters should be better able to comply with international climate requirements. E. Poverty and Social Impacts, and Environmental, Forests, and Other Natural Resource Aspects Poverty and Social Impacts The proposed policy reforms are expected to support long-term economic growth and positively impact poverty reduction, household living standards, social inclusion, and climate resilience. Prior actions under Pillar A seeking to enhance fiscal resilience are expected to have indirect positive effects on household welfare and poverty reduction provided that public resources are not diverted away from pro-poor programs and investments in the provision of basic services. Similarly, reforms under Pillar B fostering a greener and more competitive economy are expected to have indirect positive effects on poverty, by reducing vulnerability and enhancing resilience. Environmental, Forests, and Other Natural Resource Aspects The supported reforms are expected to have an overall significantly positive impact on Peru’s environment, forests, and other natural resources. In the event negative environmental impacts arise, Peru has a robust system for their adequate management. Under Pillar A, fiscal reforms are expected to have a neutral impact on the environment and natural resources while more climate-informed public finance is expected to have a positive impact. Under Pillar B, reforms to the national innovation system will likely have positive effects on the environment as science, technology, and innovation activities are expected to be better aligned with environmental needs. Dec 20, 2023 Page 4 of 5 The World Bank Peru Fiscal Policy and Growth DPF-DDO(P180554) @#&OPS~Doctype~OPS^dynamics@contactpoint#doctemplate CONTACT POINT World Bank Bledi Celiku Senior Economist Daniel Francisco Barco Rondan Senior Economist Thomas Edward Haven Senior Private Sector Specialist Borrower/Client/Recipient Republic of Peru Implementing Agencies Ministry of Economy and Finance Rodolfo Baca, Director General, rbacag@mef.gob.pe FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects @#&OPS~Doctype~OPS^dynamics@approval#doctemplate APPROVAL Task Team Leader(s): Bledi Celiku, Daniel Francisco Barco Rondan, Thomas Edward Haven Approved By Practice Manager/Manager: Country Director: Pilar Maisterra 20-Dec-2023 Dec 20, 2023 Page 5 of 5