Peru is an upper-middle-income country with a GDP of over US$200 billion. The country was one of the hardest impacted by the Covid-19 pandemic, which also caused a backslide in terms of the social progress achieved in recent decades, and the level of extreme poverty reached over 5 per cent in 2020. Especially due to climate-related shocks and social unrest, the economy of Peru furthermore experienced a contraction in 2023.
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The implementation of tight fiscal rules in Peru has been key to reduce the debt burden on the Peruvian economy in recent years, but without integrating a human rights approach. The traditional fiscal rules on the deficit and public spending were introduced at the end of the 1990s and are still in force. The 1999 deficit rule established an annual ceiling of 1 per cent of GDP, while the spending rule limited its growth to 2 per cent in real terms. Initially, it was only the institutions of the central government that followed such rules; however, four years later these were also extended to local governments through a set of regulations regarding the stock of debt and the repayments. In 2016, a fiscal rule on external debt stock for the central government was introduced for the first time, where it cannot exceed 30 per cent of GDP.
These fiscal rules were temporarily suspended during 2020-2021 as the government was trying to tackle the impacts of the Covid-19 pandemic. This unusual flexibility to meet fiscal prudency requirements allowed the government to design and implement a huge economic package to overcome the Covid waves of infections and deaths and, at the same time, to allocate resources to revamp the economy. Before long, credit rating agencies questioned the financial stance of Peru, announcing a downgrade in its credit rating by September 2021. Peruvian officials reacted by announcing a new path of fiscal consolidation, aligned with IMF recommendations, with the objective of reaching the debt and fiscal deficit limit thresholds requirements by 2026. This change in fiscal policy caused a stabilisation in credit ratings. In conclusion, Peruvian fiscal policies are under heavy scrutiny by credit rating agencies, which could be hampering the prioritisation of public resources to close the gap in social services for its citizens.
Several civil society organisations, including LATINDADD, have stated for years that debt should only be considered sustainable when repayments do not compromise the debtor’s ability to meet priority human development spending or an acceptable level of human rights obligations. Fiscal policies must be harmonised, not collide with the fulfilment of social objectives. Credit rating agencies are very well positioned over strategic public officials to quickly disqualify social policy proposals over fiscal consolidation policy proposals.
In the fiscal year 2021, the tax revenue of Peru amounted to 17.9 per cent of GDP. This was an increase compared to 2020, but still far below the average for the Latin American and Caribbean countries, which reached an average of 21.7 per cent for 2021. Peru’s tax collection has been lower than the regional average tax to GDP ratio for the last 20 years and, whereas that average has increased by 4.6 percentage points since the year 2000, Peru’s ratio has only increased 2.7 percentage points.
Key reasons for the low levels of tax collection in Peru include structural problems related to the high level of informality in the economy. Another significant factor is the widespread use of tax benefits in numerous different sectors and under different modalities – such as exemptions, deductions, rate reductions and refunds. In 2023, the Ministry of Finance estimated that the annual tax expenditure corresponds to around two per cent of GDP.
In the report State of Tax Justice 2023, Tax Justice Network has estimated that cross-border tax abuse is costing Peru a total of US$835.5 million annually, corresponding to over 10 per cent of the country’s health expenditures. Of this loss, it is estimated that US$712.7 million stems from corporate tax abuse and the remaining US$122.8 million from offshore wealth.
In November 2023, when the Africa Group tabled a resolution in favour of negotiating a UN Framework Convention on Tax, Peru abstained. However, in March 2024, Peru made a submission to the new ad hoc UN committee that has been set up to negotiate Terms of Reference for the new UN Framework Convention on Tax. The submission stressed: “Peru considers as utmost importance the work begun in the United Nations to get an international tax cooperation system more inclusive and effective and we hope that, after the discussions, we can adopt a multilateral treaty and protocols to contribute for obtaining additional resources to finance sustainable development of our countries, which are needed to implement 17 sustainable development goals of the Agenda 2030.
LATINDADD is making efforts to put on the agenda the relationship between economic issues and human rights and development, where the State should guarantee human rights and the access to essential public services. The following work has been done to bring us closer to our ultimate goal:
LATINDADD, jointly with members in Peru in some activities, has organised workshops, debates, podcasts and TV programs to inform, discuss and reinforce the capacity of CSO workers and Peruvian people in general to include in their work not only the topics but also the recommendations to push for different approaches in the understanding of what a ‘healthy’ economy is and the importance of prioritising people’s rights.
LATINDADD has been making efforts to approach the Peruvian authorities, making them aware of all the proposals we have for the domestic resources mobilisation to improve the living conditions of the population.
Participation in the Inter-American Center of Tax Administrations (CIAT) space, particularly in the IV Meeting of the International Tax Network, where there is the opportunity to reach tax authorities directly to present research and recommendations in different sessions. A formal letter was sent to five UN delegates in the region sharing the findings of the research conducted within the project, as well as a document on the importance of Financing for Development (FfD) process for advancing the work in different thematic areas, with particular focus on tax and debt topics.
Participation, follow-up and advocacy activities in C7/G7 and C20/G20 civil society focused processes on tax and debt justice, as well as IMF and World Bank Spring and Annual Meetings. LATINDADD has played an important role in these spaces by coordinating working groups related to economic justice at the C20 and C7, as well as actively participated in direct advocacy meetings with IMF and WB staff presenting and discussing research and proposals to advance debt resolution mechanisms for low- and middle-income countries. Support has also been provided to partner CSOs in activities outside the official events during these meetings.
Dissemination of findings of the national research including short videos and infographics on social media with the aim to reach a general public. In addition, an engagement with national media focusing the launch of the reports (Illicit financial flows in Peru and their impact on the guarantee of human rights, and Debt management: Fiscal rules, rights and human development in Peru) has helped to make a public aware about the impact of illicit financial flows and debt management problems, related to losses of fiscal resources and fiscal rules constraints on spending and debt, on the lives of people.
Preparation of reports (Illicit financial flows in Peru and their impact on the guarantee of human rights, and Debt management: Fiscal rules, rights and human development in Peru) showcasing the evidence of the losses Peru is facing due to high level of illicit financial flows that reduces domestic resources, in addition to the fiscal rules that do not guarantee public spending focused essential services and therefore undermine the human rights of the population, often the most vulnerable groups.
Within this project, the following partners works to advance the objectives of the debt and tax justice movement:
The partner in this project works within broader networks and together with its members that bring together a wide range of CSO voices united in their goal to advance debt and tax justice
