Central Reserve Bank of Peru: Not Enough Savings Being Made During the Economic Boom

Peru is experiencing a significant period of economic prosperity thanks to an increase in metal exports and a recovery in general economic activity. However, the Central Reserve Bank of Peru (BCR) is issuing serious warnings that the country is not taking sufficient advantage of this positive period to strengthen its fiscal accounts. On the contrary, new spending decisions approved by the Perú Congress and additional budget demands are narrowing the state's margin for savings. Authorities are concerned that the extra income generated is being used directly to finance new spending, rather than serving as a buffer against future crises. This situation points to a risky fiscal stance that could leave the country unprepared for future economic shocks.

In the recently published Inflation Report by the Central Bank, the country's fiscal deficit for this year is projected to close at 1.8 percent of Gross Domestic Product (GDP). According to BCR's projections, this fiscal deficit is expected to gradually decrease to 1.5 percent by 2027. The General Manager of Economic Studies at the Central Bank, Adrián Armas, stated that these figures include the impacts of recently approved spending packages in Congress and other potential fiscal measures. Armas emphasized that the lower deficit estimates targeted for 2027 are primarily based on macroeconomic assumptions, but the target might be missed due to increased government spending. Rising public spending beyond expectations calls into question the government's commitment to ensuring fiscal discipline.

Despite this, the main reason for this expected slow decline in the fiscal deficit is the remarkable increase in public revenues, rather than cuts in government spending. Thanks to the overall vitality of the Peruvian economy and significantly high terms of trade, the money flowing into the state treasury has reached record levels. Adrián Armas pointed out that without this notable increase in revenues, rising public spending could have driven the fiscal deficit to much more dangerous levels. However, authorities have repeatedly stated that using this revenue growth to cover expenses is not a sustainable economic model. The parallel increase in spending alongside rising revenues directly leads to a loosening of fiscal discipline and the squandering of the state's opportunity to save.

During the export boom between 2004 and 2013, which significantly enriched the country, Peru pursued a very different and robust fiscal policy. At that time, the state managed to make significant fiscal savings to build strong financial resilience against potential crises. However, today, the strategy of creating new fiscal space to take precautions against potential crises such as global pandemics or destructive climate events like El Niño is unfortunately being ignored. BCR officials argue that periods of economic boom are temporary and it is necessary to consider that this wealth may not be permanent. Failing to seize opportunities today, in contrast to positive examples from the past, could force future generations to pay heavy economic tolls.

Economic authorities reiterate the fact that the period of prosperity the country is currently experiencing will not last forever, and a comprehensive crisis plan that must be financed is essential. Transferring the state's increasing revenues smartly into fiscal funds, rather than allocating them directly to new and large expenditures, is of great importance for national security. These comprehensive warnings made by the BCR indicate that the costly decisions passed by the Perú Congress need to be reconsidered. For sustainable economic development, it is essential that periods of prosperity are used as an insurance for times of crisis. Otherwise, today's generous spending will leave the country vulnerable in the face of a large-scale natural disaster or global recession that may emerge tomorrow.