It is clear that the world economy and trade will decline this year, in a crisis worse than the global financial crisis of 2008 and 2009. Analysts and international organizations such as the OECD and the IMF already forecast so [1]. The Peruvian economy steadily grew since the second half of the 2000s, at a pace of three times the annual average of Latin American countries, partly driven by a favorable external sector: due to higher exports of goods, huge foreign direct investment, increasing tourism, and remittances from Peruvians abroad. For example, in 2019 almost 65 billion dollars entered the country from those sources, an amount equivalent to around 30% of Peruvian economy output that year. Around 47.7 billion dollars came from exports of goods, 8.9 billion dollars from foreign direct investment, 4.8 billion dollars from tourism, and 3.3 billion dollars from remittances of Peruvians abroad. Peru’s GDP that year was $ 228 billion. This year only part of that amount of $ 65 million would enter Peru.
Then, this year 2020, external factors cannot be expected to contribute to Peru’s economic growth, and as stated before only a fraction of the 65 billion dollars received in 2019 would enter Peruvian economy. So the country has to strengthen its domestic demand, as strong as possible. But with a month of inactivity of much of the national productive apparatus due to quarantine (national lockdown) imposed from march 16 that will last until April 12 (and assuming that the situation normalizes after that period, a quite optimistic assumption), overall production will decrease and people´s income (and consumption) will also decrease. If policies are not taken quickly many companies would go bankrupt, unemployment would increase and with it social unrest.
The government needs to act directly supporting the income of the population and preventing companies from going bankrupt as many of them do not receive any income or produce and have payments to do. Faced with similar problems, what are other countries doing? In countries as different as USA, Canada, Spain, Japan [2], Malaysia or Bolivia, governments are implementing enormous economic stimulus packages for amounts equal to or greater than 10% of the size of their GDP (in policies known as “helicopter money”[1]). In Peru, not only the amount of the economic stimulus is insufficient, adding up everything so far announced would amount to only 2% of GDP; but the most important thing is that it does not put the money in the hands of all the people who are losing income.
Not only the poorest families in Peru are losing income, and to this segment the government is giving an exceptional bonus of 760 soles (around 220 dollars). In total it is estimated that 3.5 million households would receive that amount (Peru total population is around 32 million). But not only those people are losing income, everybody is losing it. And companies too. Let’s take the example of a barber shop where 2 to 6 or more people working there will not have an income for at least a month. These people are not likely to get that government bonus. And small companies like this barber shop will not have money to pay the rent of the premises, nor the utilities. What has the government done to help this business? The only thing it has done is to give them business a break by exempting them to pay taxes in march and April and other minor measures with little impact.
The government, besides giving a bonus to the poorest families, will allow an amount of up to 2,400 soles to be withdrawn from each worker’s Service Time Compensation (CTS by its acronym in Spanish). But this will only reach a small part of the population that have CTS and works in companies in the formal sector (according to some calculations less than 50% of Peruvians have employment in the formal sector), and this will cause those people savings to decrease, as CTS is like a saving fund that would allow them to supplement the meager pension that many will receive when they retire. Another measure is the one-month suspension of worker’s contribution into the private pension fund (AFP by its Spanish acronym), but also this will have a limited effect since most Peruvians do not contribute to the AFPs, and will also affect their pension fund. The last measure that the government is proposing is to allow workers who have been unemployed in the last 6 months to withdraw up to 2,000 soles from its account in the AFP fund.
Lastly the government will grant a subsidy amounting to 35% of the salaries of employees who earn up to 1,500 soles per month, measure aimed at preserving employment and help companies. But that measure will be for companies in the formal sector of the economy, and subject to a series of conditions. Many companies are unlikely to meet these conditions, especially in the case of the vast majority of small and micro-businesses that are informal.
What are governments like the US or other countries mentioned doing? In countries that have unemployment insurance such as the US or Canada, for example, the government will temporarily increase the amount they receive from this insurance [3], [4], and in other countries there will be direct transfers to workers (and families) who receive a salary not so high, or to retired persons, as in Malaysia [5], or they will give money to all people of working age, as in Japan (which did something similar in 1999 and 2009) and will do it again. Besides this, governments will give loans to business at low interest rates.
In summary, what the government must do is give to every person of working age an amount of let say 700 soles, so that they can spend it on what they want (except perhaps for people who earn more than a given amount of perhaps 7,000 soles a month). That money would enter the economy in the form of consumption, thus reactivating the productive apparatus. The advantage of this system is that it is fast and does not require bureaucratic expenses such as administering the food baskets that the government is going to give to poor families through the country’s municipalities authorities (and thus also avoiding the corruption that its management of that measure may entail).
If the Peruvian government does not act more proactively, the Peruvian economy will suffer a deep recession, especially given the negative international environment. And in Peru, the government, unlike many other countries, has the possibility to do more and spend more. Peru has a low inflation rate, a low fiscal deficit, large international reserves, and a low public debt. There is a Fiscal Stabilization Fund for emergency cases like this. And even if it did not have it, we are in a moment of emergency, the world economy is in emergency, and governments all over the world are taking very dramatic economic measures.
If the Peruvian government does not take more radical measures, its economy will decrease more than what a negative external environment predicts, and will create social discontent, giving arguments to radical political sectors, just when next year there will be a presidential election. Social unrest will give radical leftist parties a shot in the arm.
[3] See for example: https://rpp.pe/economia/internacional/coronavirus-22-billones-de-dolares-senado-de-eeuu-aprueba-el-mayor-rescate-economico-de-su-historia-noticia-1254292
[1] See for example: https://www.forbes.com/sites/vineerbhansali/2020/03/17/helicopter-money-is-here/#425bf46c781e
