Peru’s next government: The key reform challenges it must grapple with
Peru is a Latin American macroeconomic lion. The metals exporter tends to rank among the region’s top performers, notwithstanding its stumble in 2020.
But high GDP readings mask problems bubbling under the surface that the country’s fractured and unruly congress has failed to address.
The question is whether the next government, due to take office in July, will finally grip the reform bull by the horns and, more importantly, whether political factions can row together in the right direction instead of going rogue.
And the right direction involves implementing tax, pension and labor reforms, which are all intertwined and political hot potatoes. Peru, in line with a regional trend, also needs to cut debt and rebuild savings after the COVID-19 shock.
Peru is not alone in the region in terms of attempting to bring in tax, labor and pension reforms: such moves are seen as necessary in Colombia, while Chile is struggling to push forward a pension reform bill in congress.
The issue of pensions has been thrust back into the spotlight in Peru after congress approved pension savings withdrawal proposals in late March that may result in assets under management in the private pension fund, or AFP, system shrinking by up to half. Taking into account the impact of previous legislation on pension freedom, more than 4mn people could be left with empty pension pots.
Guillermo Arthur, chairman of the International Federation of Pension Funds administrators (FIAP), warned of “irreparable damage,” while a FIAP statement used the words “populism” and “demagoguery.”
Against this backdrop, pension reform is needed now more than ever to boost adequacy and coverage. A model where the employer, employee and state all contribute, all have a stake, would tick the right boxes. To achieve this – and to boost non-contributory pensions to help protect vulnerable senior citizens – tax reform and labor reform are needed too. This would help balance a tax system where, at present, around 4% of contributors, chiefly large companies, account for around 90% of associated tax revenue.
Labor reform should be aimed at supporting higher rates of formal employment, which would have the knock-on effect of increasing taxes.
Reform should result in stronger and more stable state revenue flows to help finance better public services while maintaining the country's attractiveness among investors.
Careful planning and technical analysis are paramount to ensure smooth and effective implementation and to make sure that the required results are achieved. It is a leviathan task with no overnight fix.
The big question in relation to all of this is who will win the presidential elections. On April 11, a tight pack of candidates from across the political spectrum will stand for the nation’s top job. Peruvians, who will likely have to vote in a second round, will also choose new members of congress.
One important potential problem in terms of governance and the advance of legislation stems from the fact that Peruvians tend to vote for a candidate rather than his or her respective political party, which often results in presidents with weak support in congress. But if lawmakers can pull together, they can advance along the road of implementing measures to bolster the economy, to provide people with better pensions and better jobs and building stronger public services.
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