peru - policies to stop hyperinflation - vol 2
TRANSCRIPT
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Report o.7460-PE
Peru
Policieso StopHyperinflation
and
nitiateEconomic ecovery
(InTwo Volumes) Volume l:AnnexesandStatisticalAppendix
December5,1988
CountryDepartmentV
LatinAmerica nd he Caribbean egional ffice
USE ONLY
U.,~~~~~~~~
Document f heWorldBank
hasa restricted istribution ndmaybeused y recipients
n the performancef theirofficial uties.tscontentsmaynot otherwise
disclosed ithoutWorldBank uthorization.
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CURRENCY
EQUIVALENTS
Currency
Unit
= Inti
(I/.)
Official
Exchange
Rate
(Effective
ecember
1,
1988)
I/.
1.00
=
US$0.002
US$
1.00
=
I/.
500
FISCAL
YEAR
January 1 to December 31
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FOR OFFICIAL
USEONLY
PREFACE
This report was prepared and drafted prior to the announcement f
two packages of economic
measures by the Peruvian Government,
first in
September
1988 and then in November 1988. A description
f these measures
as well as an update on the current state of the economy is contained in
the Addendum provided in the last section of Volume I.
This report is based on findings and analysis of Bank
economic
missions which visited Lima in October 1987, November/December 987, and
March/April 1988. Support for the Bank work with the Government was
provided by the United Nations DevelopmentProgramme (UNDP). Participation
in the missions, which varied in size and composition, as as follows:
William Tyler (Mission hief); Ricardo Lago (Deputy h.tCsion hief ani
principal
author); Ulrich Lachler
(trade and exchange rate policies);
Daniel Oks (consultant, acroeconomics); eno Malatinszky (public
enterprises); icardo Martin (projections); ernando Rezende (consultant,
taxation); Javier Escobal
(consultant, griculture); ruce Herrick
(consultant, abor
markets); Cesar Burga (projections, tatistical nnex,
and research assistance). Pedro Mercader (UNDP Lima Representative)
accompanied he work of the missions in Lima and provided valuable guidance
and overall support. Valuable comments on an earlier draft were provided
by Rudiger Dornbusch. Michel del Buono provided
a short note on the
state
of the energy sector. Brian Wesol provided research assistance in one of
the missions. Dorothy
Jenkins provided secretarial
ork throughout the
cycle
of the report. Milagros Aquino-Divino rovided secretarial
assistance in the final stage of
the report.
This report was discussed in great detail with the Government's
economic team in Lima during October/November
988 by Messrs. Tyler
and
Lago.
While there was general
agreement etween the Bank
and the
Government's
economic team
as to the diagnosisand analysis of the
situation,the Government's conomic team stressed political and social
constraints
o taking strong
policy action to forestall yperinflation nd
indicated the need for
a more gradual policy
approach.
This
document has a restricteddistribution
and may be used by recipients
only in the performance
of their officialduties. Its contents may not otherwise be disclosedwithout WorldBank authorization.
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PERU- POLICIES TO
STOP HYPERINFLATION
ND
INITIATE ECONOMIC
ECOVERY
TABLEOF CONTENTS
VOLUME
:
THEMAIN
REPORT
Page
No.
COUNTRY ATA
EXECUTIVE UMMARY i
RESUMEN
JECUTIVO
xvi
CHAPTER I. THE EVOLUTION
OF THE PERUVIAN CONOMY
.............
1
A. Background
............,
1
B. Recent History ................................
1
C.
The Diagnosis of
the Economy in 1985
and
Strategy
of the Incoming PRA Government .....
3
D. The Implementation
f the Policies,
July
1985 to December 1986
.................. 4
E. The Results in 1986: Reactivation
nd
Disinflation
................................
9
F.
Economic Policy
in 1987 ....................... 12
G. Economic Perfor.mance
n 1987: Stagnatio
i of
Production and
Intensification f
Inflationary
ressures ...................... 19
H. Economic Policy during January-August
988 ....
21
CHAPTER
II. THE ECONOMIC PROSPECTS
IN THE ABSENCE OF
MAJOR
POLICY
EFORMS . ....... .. ...........
23
A. The Diagnosis
of the Current
Crisis ...........
23
B.
The Likely Evolution of
the Economy
without
Major Corrective
easures ........... 28
CHAPTER
III. THE MAIN
ECONOMIC ISSUES
AND POLICY RECOMMENDATIONS
38
A.
Public Finance
..... ......
.............9
1.
The Tax System:
Evolution, Structure,
and Recommendations
.....................
41
2. Prices
and Tariffsof State Enterprises:
Evolutions, tructure, nd
Recommendations
.........................
47
3. Public Investment:
ecent Trends and
Recommendations
.........................
54
4. The
Central Bank's
Quasi-Fiscal eficit:
Definition, easurement, nd
Recommendations
.........................
56
B. Externial ector Policies
..
60
1. Exchange
Rate Policy:Evolution,
Structure,
and Recommendations..........
60
2. Import Restrictions:
tructure,
Assessment, and
Recommendations.........
68
3. Export Incentives: tructure,
Assessment,
and Recommendations.........
76
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ii
-
C. Other Resource Allocation Issues . .............0
1. Financial
olicy: Main
Issues and
Recommendations .
.
80
2. Price Controls: Structure nd
Recommendations.........................
85
3. Agricultural Pricing
and Subsidies:
?olicies, ssessment, nd
Recommendations......................... 87
4. Labor Market Issues and Recommendations ...
92
5. The State Enterprise
Sector ...............
96
CHAPTER IV. ECONOMIC POLICY TO STABILIZE NFLATION ND
SET THE CONDITIONS FOR MEDIUM-RUN
GROWTH .......... 99
A. The Preconditions or Stabilization............ 99
B. Resumption of Growth and the Foreign Debt
Problem .....................................
100
C. Overall Macroeconomic trategy ................ 103
D. Illustrative volution of the Economy under
Stabilization nd Structural djustment ..... 112
ADDENDUM
- AN UPDATE
ON
RECENT DEVELOPMENTS
..
.. . 120
VOLUME
II:
ANNEXES
AND STATISTICAL PPENDIX
A;NNEXES* ....
...........................................................
1
Annex 1.
Inflation nd Inflationary inance
...... 1
Annex 2. The Inflation Tax: Theoretical
Derivation and Calculation for
1980-87. .. . 4
Annex 3. The Central Bank's Quasi-Fiscal efieit..
17
Annex 4. Main Characteristics f the Peruvian
Tax System
.... .................
28
Annex 5. Misalignment
of Prices and Tariffs of
State Enterprises:
A Preliminary
Calculation
...........................
38
Annex 6. The Working of the "Mesa de
Negociacion"
f Foreign
Exchange
Certificates.......................... 41
Annex 7. The Financial System: Institutional
Characteristics.......................
42
Annex 8. Population,
ncome Distribution, nd
Labor
Market Segmentation.............
47
Annex 9. The State Enterprise Sector ............. 58
Annex 10. The Interaction
f Fiscal and
Monetary
Policy ................................
79
Annex 11 Reserve Requirements
nd their
Remuneration
..........................
92
Annex
12 Brief Background n the Agricultural
Sector ................................ 93
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STATISTICAL APPENDIX
......
...............................
...... 95
I.
POPULATION
AND EMPLOYMENT
... ...... ......................
, 5
1.1 Total Population
istribution
. . 95
1.2
Demographic
Indicators
.
.
96
1.3 Enploymentand Labor Productivity ........... 97
1.4 Un- and
Under-Employment
...................
98
II. NATIONAL ACCOUNTS
......................
.
.
99
2.1 GDP by Sectoral
Origin (Constant ntis)
..... 99
2.1(A)
Real GDP Average
Growth Rates (Percentages)..
100
2.2 Nominal GDP by
Sectoral Origin
(Current ntis) ...........................
101
2.2(A) GDP:
Percentage Distribution
................ 102
2.2(B) GDP
Deflators
.................
103
2.2(C) GDP Deflators:
Yearly
Percentage Changes .... 104
2.3 GDP
by Expenditures
Constant ntis)
........ 105
2.4 GDP by Expenditures(Current ntis) ......... 106
2.5 Domestic
Irncome.............................
107
2.5(A) (PerceLatageistribution) .............
108
2.6 Gross Capital Formation
y
Goods and Origin-..
109
2.7 Real GDP Per Capita .........................
110
2.8 Per
Capita GDP by
Departments . .11....... i
III.
BALANCEOF PAYMENTS
.............................
.... 112
3.1 Summary
Balance of
Payments .
......... 112
3.1(A) (As
a Percent of GDP)
.............
113
3.2 Merchandise
Exports
by Commodities
(Current
Dollars) .................................. 114
3.3 Merchandise
xports by Commodities
(Constant
Dollars) 115
3.4 Merchandise
i.tportsCurrent
ollars)
116
3.5
Merchandise Imports
(Constant ollars)
117
3.6 Export,
Import ar.A erms of
Trade Indexes... 118
IV. EXTERNALDEBT .................
-..**e...
.......... 119
4.1
Total External
Debt Outstanding
and
Disbursed
................................
119
4.2 ServicePayments, isbursements
nd
Outstanding
mounts of External Public.
Debt ..................................... 120
V. PUBLIC FINANCE
.........................
121
5.1 Non-Financial
ublic Sector
Operations ...... 121
5.1(A) (As a Percent
of GDP) .......................
122
5.2 Central Government
Operations ............... 123
5.2(Al (As a percent of GDP) .......................
124
5.3 Non-Financial ublic
Enterprise Operations
.. 125
5.3(A)
Non-Financial ublic Enterprise perations
.. 126
5.3(B) Non-Financial ublic
Enterprise perations
by Company ................................
127
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5.4 Current Revenue of the Central Government
by Source
.
.
128
5.4(A)
(As a Percent
of GDP)
.. 129
5.5
Current Expenditures f the Central
Government .......
130
5.5(A) (As a Percent of GDP) .............. 131
5.6 Fiscal Cost of Exemptions on
Import
Tariffs by Sectors . . 132
VI. MONETARY STATISTICS
................................
.....
133
6.1 Summary Accounts of the Consolidated
Financial ystem ..............,......
133
6.2
Summary Accounts
of the Consolidated anking..
System ...................................
134
6.3
Summary Accounts
of the Central Reserve Bank..
135
VII. PRODUCTION STATISTICS
........ ..........
136
7.1 Agricultural
Production ...................... 136
7.2 Volume Index of
Manufacturing roduction
.....
137
'VIII.RICES AND EXCHANGE RATE .................................... 138
8.1 Consumer Price Indexes for Metropolitan ima.. 138
8.2
Exchange Rates ............................... 139
8.3 Real Exchange Rate Index ..................... 140
COUNTRYMAP
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ANNEX 1
INFLATION AND INFLATIONARY INANCE
1. The purpose
of this annex is to
study the relationship
etween the
inflation
rate and the
real resources
rom inflationary inance
(seigniorage). In particular, he focus
is placed on identifying
he shape
of the trade-off
etween the inflation
ate (as a tax rate) and the amount
of real resources hat can be transferred o the government from a given
demand for
money (as a tax base).
This trade-off an
be termed as a Laffer
curve,
in analogy with the theory of taxation.
From analyzing this
trade-
off it
can be calculated he inflation rate that
maximizes revenues
from
inflationary
inance. It
is found that in the case
of Peruvian economy,
that inflation
rate is between 500
percent and 600 percent
per annum, and
the maximum revenue
from inflation
is just over 10 percent
of GDP.
2.
The demand for
money utilized here
is the simple Cagan
formulation:
M/p
= A exp (-anl)
(1)
Where M/p
= real broad money;
= inflation rate:
y = real GDP
Since in Peru
interest rates on Bank deposits are
very low compared
to
inflation and the share of deposits
in broad money is declining
rapidly, it
is assumed
for simplicity
hat the nominal return of all broad money
is
zero.
3. The government's
ea'l evenuefrom irnflation
R) is:
R
= (M/kp) 1 =
[A exp (-%l)Y
]/k (2)
Where k =
money supply multiplier.
To maximize inflationary evenues:
d
R/dfl = A [exp
(-&ll) -anl
exp (-al) ]/k
0
This can be
written as:
(A exp (-dl)y/k)
1-5U)
0
The maximum revenues re reached
at n (max)
I/a (3)
Also when n = o or f
= w ==) R (Min)
= 0
4. To infer the
value of the
parameter "a'.
the following
onvenient
expression of (1) can be used:
(M/p)/y = A exp
(-acl) or y/(M/p)= exp (fIa)/A
Since V = py/M =
income velocity of money; therefore:
V = exp (Ia)/A
(4)
Taking
logs and
then derivatives:
d log V ldH =
a
or (dV/V)/dll
a
(5)
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5. The variables
of expression (5) can be proxied by the growth rate
of velocity and the increase in inflation rom the second semester of 1987
to the first semester of 1988. Thus:
d V/V
t Av/v =
1163/bO9
=
0.44
Since: M/P (at Dec. 1987)
=
1163; Real GDP (average uly-Dec. 1987)
=
121;
and M/p (at June 1988) = 809; Real GDP (average
Jan.-May 1988) = 121
In addition:AH
=
3.62 1.38 2.24
Since: n (July to Dec. 1987) = 138 (annual rate)
I
(Jan. to June 1988) = 362 (annual rate)
Therefore the estimate of "a" is: (AV/v) /An 0.44/2.24 0.196 and,
as a result, the inflation ate that maximizes inflationary inance is:
n
(max) I/a
=
1 / 0.196
=
5.1 or 510 percent per annum
Chart 1-1
I
' I- , i l,,_
hS.d. Pr.j
irfe.8 I e'1Ir'i;. ":'r.'@ )
P
.
-1
Lil
~ fl
t..:1~~~~~~~~~~~~~~~~~y
.0
;I l;
I' 'ij}
l
gill [f { kv [ 0
(' t f l t 2 at
r.
.i V-, 1 1. i 1,,>,-I I
X.
,-
X
l ,r IT."3 jr LI. ' r1 I tX 1 ; - V- '.27 O -), i
^
' r l eDi)coP 1: °C O
*1~~~~~~~inlt3 n-1LItltl[Fl9i
~I i1ol3n rsfi1
6. To find out the numerical expression of equation (2), it is also
necessary to calculate . This can be done using expression (4) and
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-3-
substituting he values of V and
11
observe' in 1987 1/
V - 10.9 = (1/A) exp (0.196 1.15)
-=)
A = 0.11
Therefore, the expression for revenue
from inflation (equation (2)) is:21
R/y
=
0.065 x exp
(-0.19611) x
II (6)
This equation calculates the government's revenue from inflation as a
percentage of GDP. The Laffer curve implied by equation (6) is plotted in
Chart 1-1.
7. It can be seen in the figure that the maximum revenue from
inflation s about 12 percent of GDP and that this is reached at a steady
state inflation f between 5002 and 6002. For inflation rates beyond 600Y
percent the model becomes unstable and the revenue from inflation rops
exponentially owards zero. (Note that for each (revenue/GDP) oint in the
vertical axis there are two solutions (two inflation ates) in the
horizontal axis; one solution is at low inflation--along he efficient and
stable portion of the Laffer curve, and the other solution is at high
inflation--that s in the inefficient r unstable portion of the curve.
The second solution is, therefore, in the hyperinflationary ath).
1/ The value used for V, 10.9, is equal to nominal GDP (1987) divided broad
money supply (as of end of 1986); that is GDP/M_. Because this measure
of velocity is more suitable for inflationary evenue calculations than
the alternative DP/M. The inflation rate in 1987 was 115 percent.
2/ The money supply multiplier
in 1987/88 was k = 1.7.
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ANNEX
2
THE INFLATION
TAXs THEORETICALDERIVATIONAND CALCULATION
FOR 1980-87
A. Introduction
1. The purpose
of this annex is
to propose a broad measure
of the
inflation
ax and a method
to estimate it for Peru in
the 3980-87 period.
2. The textbookconventional
easurement f
the inflation tax
is
restricted to
the inflation-erosion
f non-interest earing
public debt
(e.g.,currency). However, currency is not
the only public liability
hich
can
be amortized through
inflation. The
real value of other forms of
public debt, such
as bonds, fixed int0rest loans, or
interest bearing
reserve requirement
f the commercial
anks in the Central Bank, is also
eroded by increases in
the price level. Thus,
a broader measure
of the
inflation
ax ought to focus on the inflation-amortization
f the principal
of all public
debt instruments
(monetary nd financial) ot compensated
y
interest payments.
The difference
between monetary and
financial debt
instruments, hough, is that the latter
bear an interest hich
tends to
compensate
(partially r
totally) the debt-holderfor the amortization
f
debt in
real terms induced
by inflation. Accordingly,
the inflationtax
proposed here
refers only
to that portion
of the inflation-amortization
f
debt
which is not compensated
y interest
payments. To illustrate
this,
consider the case of currency.
Since currency
is a zero-interest
liability, there is no interestcompensation or the inflation-induced eal
amortization f it and, hence,
all that real amortization
s inflation
ax.
In the case
of financial ebt, since
it bears a nominal interest rate which
compensates (partially
t least) debt-holders
or inflation-induced
apital
losses, the
inflation tax will
be smaller than the total inflation-
amortization
f
debt.
3. Estimating
the inflation tax
according to this definition requires
knowledge
of the component
f nominal interest
rates which is
a
compensation(to debt-holders)
or inflation-induced
apital
losses. That
component
is, of
course, equal
to the nominal
interest rate minus the
"benchmark" eal interest rate.l/ To simplifythe calculation rocess,it
is first
assumed that the
full amount of nominal
interest rates is
compensation
for the inflation-erosion f
debt. This obviously
implies
that the benchmark real interest
rate is zero.
In a second
calculation,
though,
it is assumed
that the benchmark
real interest rate is
5 percent.
This,
in turn, implies
that the compensation
or inflation-amortization
f
debt is
approximately
qual to the percentage ominal
interest
rate minus 5
percent (see Footnote
1).
4. In principle,
in order to
estimate accuratelythe inflation tax,
all assets
and liabilities
f the consolidated
ublic sector,and their
corresponding
nterests nd returns,
ould be
required. However, in Cae
1/
More rigorously, ((l + i)/(l + R)] - 1, where
'i" is the nominal
rate of
interest and
"R" is the
real rate of interest.
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calculation resented here, only a small number of interest rates of
financial ssets and liabilities re considered. This implies, on
occasion, imputing the same interest rates to different types of assets and
liabilities. However, the approximations re good enough to provide
reliable estimate of inflation ax proceeds.
5. Estimating
the broadly defined inflation ax requires assessing
the inflation tax base first. This task is best done by consolidating he
balance sheets of the non-financial
ublic sector and the financial
public
sector. The Consolidated Public Sector (CPS) balance sheets arrived at
provides the sought tax base for the inflation ax calculations erformed
below. It also provides the base for the inflation subsidy calculations,
the inflation subsidy being defined below as the inflation-erosion f net
financial ssets of CPS in hands
of the private sector which is not
compensated y interest payments.
6. The plan of this Annex is as follows. The first step taken to
calculate the inflation ax (IT) is to derive the CPS balance sheet; this
is done in Section B. The IT calculations re performed in
Section C.
Finally, comments on the evolution f the IT and its relationship ith the
macroeconomic nvironment re left to *Section .
B. The Consolidated Public Sector Balance Sheet
7. The balance sheets of the non-financial nd financial ublic
sectors are presented in the first sub-section. Then the CPS balance sheet
is analyzed. The last subsection shows a table with the different interest
rates imputed to different groups of assets and liabilities.
The Balance Sheets
8. The sectors (and subsectors) ere chosen considering the
presentation
f the monetary accounts of the financial ystem utilized by
the Central Reserve Bank and reported in "Nota Semanal". The sectors and
the notation employed are:
- The Non-Financial ublic Sector (NFPS), of which the Central
Government is part (the other main subsectors eing public sector
enterprises, rovincial governments nd decentralized gencies.)
- The System of Public Sector Banks (PB), (excluding
ommercial
banks and COFIDE)2/ hich is formed by the Central Reserve Bank
(CRB), the Banco Nacion (BN) and the Banca de Fomento
(BF).
2/ The Banca Asociada and the recently nationalized commercial anks were
not considered public financial institutions ecause, despite their
state property, their lending to private sector is financed through
private sector deposits and cancels out. The remainder (requirements n
the Central Bank) are already considered as a liability f the Central
Bank and, hence, form part of the base of the inflation ax in any case.
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-
The Consolidated ublic Sector (CPS), hich comprises
both PB
and NFPS.
-
The Foreign Sector (F), composed
of foreign creditors nd
debtors.
-
The Non-Financial omestic Private Sector
(SPR)
- The Financial
System
(FS), which includes
(apart from PB) the
group of Non-Public
Financial Institutions (NPB). NPB includes, in turn,
CommercialBanks (BC) (see
Footnote 2) and the Non-Banking
Financial
System
(NB)
(of which COFIDE, the Development inance
Corporation, and
"Financieras" re the most important institutions).
-
A miscellaneous tem is the specified
n the monetary accounts
as "Otros" (0).
The assets and liabilities onsidered are:
- Deposits (D)
- Foreign Currency Deposits (FCD)
-
Loans (L)
-
Net Loans (NL)
- Real Capital (K)
- Bonds
(B)
-
Reserves (R)
- Currency in Circulation (C)
9. An asset, (e.g., D) held by sector i (e.g., BC) and originating n
a
transaction ith sector (e.g., CRB) is
written as D[i,j]. In our
example this would
be D[BC,CRB] hich refers to deposits of
BC on the CRB
(these are
principally legal
and excess reserves
of BC held in CRB). Note
that in this
case D[BC,CRB]
appears as a liability
n the balance
sheet of
the CRB and as
an asset of BC. When
an asset is held
by more than one
sector
(or when it is
originated in transactions
ith more than one sector)
this is indicated
y a dash; e.g.,
DrSPR-BC,BN] efers
to deposits of SPR
and
BC at BN.
10. The other items reported in the balance sheets are:
- Net Worth (NW)
- Other Accounts
Net (OCN). A description
f OCN is provided
in
ANNEX III.
11. The simplified
alance sheets of the NFPS, the CRB, BN and BF are
reported in the following table:
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Table 2-1: THE BASIC BALANCE
SHEETS
(A
-
Assets/L
-
Liabilities)
i. A Non-Financial Public Sector L
K[NFPS,SPR-F]
L(CRB,NFPS]
D[NFPS,CRB] L*[BN,NFPS] /a
D[NFPS.BN] I L[BN,NFPS]
D[NFPS,BF] L[BC,NFPS]
D[NFPS,BC]
I L[BF,NFPS]
L[NB,NFPS]
B[BC-SPR,NFPS]
/b
NL[F,NFPS]
NW[NFPS]
il.
A Central Reserve Bark L
R[CRB,F] | NL[F,CRB]
L[CRB,BF]
I C[SPR,CRB]
L[CRB,BC]
I
D[BN,CRB] /c
L[CRB,NB]
I
D BF,CRB /c
L[CRB,BN] I D[BC,CRB]
L[CRB,GC] D[SPR,CRBJ
OCN[CRB] | FCD[FS,CRB] /d
L[CRB,O] I D[O,CRB]
| D[NFPS,CRB]
i NW[CRB]
iii. A Banco Nacion L
R[BN,F] I NL[F,BNJ
OCN[BN] D(SPR,BN]
L[BN,NFPS]
I FCD[SPR,BN]
L[BN,SPR] | D[NFPS,BN]
D[BN,CRB] /c | L[CRB,BN]
L[BN,BC] | D[BC,BN]
L[BN,BF] | L[BF,BN]
L*[BN,NFPS] /a
I
NW[BN]
iv. A Banca de Fomento L
R[BF,F]
I
NL[F,BF]
L[BF,NFPS] D[SPR,BF]
LfBF,SPR] I
FCD[SPR,BF]
D[BF,CRB]
/e I L[CRB,BF]
L[BF,BN] L[BN,BF]
LIBF,BC] D[BC,BF]
OCN[BF] D[NFPS,BF]
NW[BF]
/a With CRB resources.
/b Includes "Bono Tipo C" issued by COFIDE.
/c Includes legal reserves on FCD.
/d Excludes legal reserves on FCD of BF and BN.
/e Includes legal reserves on FCD.
The Consolidated Public Sector Balance Sheet
12. The balance
sheet of the CPS reported in Table 2-2 was obtained
consolidating
the balance sheets of NFPS, CRB, BN
and BF. Assets and
liabilities
of the CPS were grouped into different
categories, each of
which was imputed a different interest rate (see Table
2-3).
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Table
2-2z
THE CONSOLIDATEC
UBLIC SECTOR
BALANCE
SHEET
A
Consolidated
ublic
Sector
L
K[NFPS,SPR]
LF
=
NL[F,NFPS]
NL[F,CRB]
+
OCN[CRB-BF-BN]
+ NL[F,BN]
+
NL[F,BF]
R[CRB-BN-BF,F]
| NW
L[PB,BC-SPR]
L[BF,BC]
+ | C
+
L[BN,BC]
+ B[SPR-BC,NFPS]
+ L[CRB,BC]
| L[NPB,NFPS]
L[BC,NFPS]
+
L(BF,SPR]
i
+ L[NB,NFPS]
+
L[BN,SPR]
| EME
=
FCD[FS,CRB]
+
L[CRB,NB]
i EMN = D[BC,CRB]
+ D[SPR,CRB]
D[NFPS,BCJ
j
+ D(O.CRB]
FCD[SPP.,BN-BF]
D(SPR-BC,BN-BF]
Notation:
EFL are
reserve requirements
(including
xcess
reserves)
n FCD
of FS in CRB.
EMN are reserve
requirements
(including
xcess
reserves)on
deposits
of NPB and
SPR in
CRB.
LF are
net foreign
loans
to CPS.
NW stands
for total
public
sector
net worth.
C
is currency in circulation.
Imputed
Interest
Rates
13.
The data
source
for each
type of asset
was the
Central
Reserve
Bank's
publication
"Nota
Semanal"
(NS),
various numbers.
The
interest
rates
imputed
to the groups of
assets
of the
CPS balance
sheet
are
described
in
Table
2-3 (all interest
rates are
effective
rates
and are
averages
for
the period).
Most
of the
interest
rate data
was
provided
by
the
"Subgerencia
el
SectorMonetario"
of the
CRB (SGSM).
The LIBOR
intere.t
rate was
obtained
from
the IMF FinancialStatistics (IMF-FS).
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Table 2-3: IMPUTED INTEREST ATES
Asset Group
Interest Rate (Description nd Notation) Source
C institutionally ixed at zero
B[SPR,NFPS] i(b): average
return on "Bonos Tipo
C"
of COFIDE for
1984-87; does
not
account for fiscal
benefit (these
bonds are tax-deductible)
NS
L[NPB,NFPS]
i(nDb): is the interest
rate of BC for
90 days "Descuento" oans (for 1980-85)
and for 360 days loans (for 1986-87) SGSM
EMN
i(emn): until
1983 is the
passive
interest rate for saving deposits;(data n
remuneration f reserves was not available),
since 1984 it is the remuneration f
reserves
("encaje xigible") f BC SGSM
EME i(el2e): s
1
plus the LIBOR 90 days
interest
rate times 1
plus
the rate
of
devaluation f the official exchange rate IMF-FS
minus one
and NS
D[SPR,BC-BF]
i(ci): interest rate of "Cedulas
Hipotecarias"
SGMS
FCD[SPR,BN-BF] i(fcd): idem i(eme)
L(PB,BC-SPR]
i(red): rediscounting
nterest rate of
Banco Agrario until 1984
and a simple
average
of "Selectivo
grario" and
"Fomento gropecuario" oans thereafter
SGSM
D[NFPS,BC] i(dep): fixed term deposits for 90-180
days at BC
SGSM
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C. Calculation f the Inflation ax (IT)
14. The broad inflation tax is defined here as the inflation-
amortization
of the principal of monetary and financial
liabilities f the
CPS held by the domestic private
sector which is not compensated y
interest
payments. To illustrate this assume
that the only two public debt
instruments
re currency and fixed int rest short-term onds. In the case
of currency,
since it bears an institutionally ixed zero rate of interest
(i.e., there is no compensation or the inflation-amortization f the
stock), the inflation ax is equal to the whole inflation-amortization f
the stock (that is, the loss in real value of the stock of currency). On
the other hand, bond holders are compensated for the inflation-induced rop
in value of the real stock of bonds by interest payments. If the interest
rate does not suffice to compensate for the inflation-amortization f debt,
the difference between the inflation-induced mortization f principal and
the interest payments (i.e., the uncompensated nflation-amortization f
debt)
is
deemed the inflation ax
on bonds.
15.
Accordingly, mploying ominal interest rates to measure the
compensation
or the inflation-amortization f debt
(that is, assum'ng a
zero "benchmark"
eal interest rate), the IT on a given debt instrument,
measured in units of "goods" at the beginning of the period, is equal to
the product of the stock of debt and the difference between the rate of
inflation nd the nominal interest rate of that stock, all divided by one
plus the
rate of inflation. The total IT is then equal to the sum of the
ITs
on all public debt instruments.
16. Therefore, employing he notation of the CPS balance sheet derived
in paragraph 12, the total IT is:
(1) IT = (1/1+inf)*(C*inf
B[SPR,NFPS]j(inf i(b)) +
+ L[NPB,NFPS]*(inf i(npb))+ EMN*(inf i(emn))+
+
EME*(inf i(eme))+ D[SPR,BC-BF1*(inf i(ci)
+ FCD[SPR,BF-BN]*(inf
i(fcd))}
where:
inf is the rate of inflation.
17. A similarapproach can be employed to define and calculate the
inflation subsidy (IS)
which the CPS gives to the domesticprivate sector.
The IS arises
when the private sector
borrows from the CPS at interest
rates
which are below
the rate of inflation. In this case the inflation-
erosionof private
financial liabilities xceeds
the cost of holding them,
and there is an implicit subsidy
to financial debtors. More
precisely, the
IS is defined as the
inflation-amortization
f financial ssets of the CPS
in hands of the private sector which is not compensated
y interest
payments.
Following the notation of
the CPS balance sheet of Section
B the
IS can be calculated as follows:
(2) IS = (l/l+inf)*{L[PB,BC-SPR]*(inf
i(red))
+ D[NFPS,BC)*(inf i(dep))}
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11
-
18. The net inflation-induced inancial ealth transfer from the
private and the public sector is termed net inflation ax (MIT), and can be
expressed s the difference between the IT and the I:
(3) NIT = IT - IS.
19. From the conceptual point of view inflationary
axation can arise
both from: (a) inflationary isperceptions, hich make inflation igher
than originally anticipated, hereby rendering x-post real interest rates
lower than ex-ante interest rates; or (b) institutional igidities in the
determination f interest rates, which impede agents from adjusting ominal
rates to anticipated inflation. In general, assessing the relative signi-
ficance of both sources of inflationary axation (inflation isperceptions
and institutional igidities) nvolves considerable ifficulty. The main
difficulty stems from the fact that inflation xpectations re non-
observable. However, the system of fixed and artificially ow interest
rates, which have been prevailing in Peru since 1976 (and in particular
since 1985), suggests that institutional igidities ave been the principal
explanatory actor of the IT on financial ssets/liabilities.
20. From equation (1) it is clear that only public financial and
monetary liabilities eld by the domestic private sector are considered a
source of IT. Real assets (such as K[NFPS,SPR]) re excluued because,
unless their relative price changes, their nominal value moves along with
inflation. Foreign liabilities (such as LF) or assets (such as R(CRB-BN-
BF,F]) are neglected since their rate of return in domestic currency is
equal to the external real interest rate plus domestic inflation nder
purchasing power parity and, therefore, hey are perfectly indexed assets.3/
21. The account OCN[CRB-BN-BF], hich approximates umulative
operational osses of public banks (mainly the CRB, see ANNEX III), can be
viewed as a non-performing sset (that is an asset with zero nominal
return). Or else, the CPS balance sheet could have been presented
substracting his item from the right-hand side of the balance sheet in
which case the CPS net worth would have been smaller by a similar amount.
3/ Under purchasing power parity:
dev. = inf - inf*
where: dev is the rate of devaluation
inf is the domestic rate of inflation
inf* is the foreign rate of inflation.
The domestic currency nominal return on the foreign asset is equal to
the sum of the foreign interest rate and the devaluation rate:
i* + dev = i* - inf* + inf=
= r* + inf
where: i* is the foreign nominal interest rate and
r* is the foreign real interest rate.
Assuming that the external real interest rate is zero, the nominal
return on the foreign asset is equal to inflation nder purchasing
parity, i.e. the inflation-erosion f the foreign asset (prior to
devaluation).
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22. The data
employed stocks
f assets rd liabilities nd interest
rates) re reported n Table 2-4. and the estimates f the IT, IS and NIT
are in Table 2-5.
Tabt. 2-4s l130c IOF AU ALIAIRZ3
MD
DIwa 95155
ItO lost i 168 1is4 19W
1956 19t?
Stt ke (average,
ill.1.tl8)
C
219 U
582 71 :,6f 1,817 12,1W 23,1W
st(W,Sp1 1
418 1,030
2,02
8,218
LO4P
,PJ
*/
21
as 61 1" m 7" 1,804 2,68
E1 148 213 247 404
725
1,018 14,52t 20,58
eM el
180
238
68 1 06 4.o13 6,"6 5.04 6,444
o(IPl,-6P 141 25 421 I4 1,244 2,6*0 5,828 11,124
FGC6P3,I-IW
41
6a
112
2n
ON 2,512 1,171 4,274
LLft,K-5P11j me
6t# 1.21t 2,608 6,064 120,9
24,85S
47,797
D(WPNS,K S 14
21
a8
110
*U 1. 2,042
nteret
notes
and In"flatio
I(b) 33.1 6. 57. a 63.6 62.0 6.0 48.2 10.4
i(np) 68.0 71.4
6*.6 7.4
*7.8
119.6 40.0 6.5
l(_,)
8
t2.6
6.
67.4
66.6 60.0 76,4 38.8
U8.
I() 58.1
72.6 116.0 114 1U8.3 160.6 6.6 158.6
I(ci) *87.
62.2
61.6 66.0 78.5 72.1
21.7 14.8
i(fcd)
55.1
72.6 116.0 156.4 116.2 160.6
6.6 158.6
I(red)
25.3 87.5
870. 47.6 71.2 50.7 25.1
24.4
I (dep) 54.
023. 70.6
74.0
60.2 1.5
28.6 21.0
l,,letlfi /60.6
72.7 72.0 121.1 I.
118.$
61.0 114.5
1906-IV 1997-1 1927-11 1917-411 167.11
Stock.
(averarm. gill. KatIe)
C 14,100 16,216 16,216 24,637
81,616
(plR,WISl @/
1,714
1,62 1,714
1,680 2,245
LD6,WFPS) k/ 1,56
1,5U 1,988 2,?72
8,672
EO 10,764 20,60 24,062 26,246 51,76
EI IE
8,7 24 8,670 8,581
8,27 5,"7
OESPRIM6-17] 6,920
*,172
9,l11 11,250 13,482
PCOISPOIN48p 2,748
2,604 2.751 2,747 4,275
L(' ,C-1,J 28,064
88,061
$8,155 45*,68
156.87
DWPMS,K]
1,721 2,206 2,264
2,064 1,9S4
Interest ate and Jntlet_et 9/
I(b) S.t
10.7 10.6 10.7 10.9
I(npb) 6.0
U.S 6.6
6.0
7.2
I(am)
6.8 6.8 O.& 7.7 7.0
i(aea) 1.5 7.4
9.0 2.2 114.9
I(el) 6.0 5.0 5.4
5.6 5.3
l(fed) 1.S 7.4
*.0
2.2 114.9
I(red)
5.6
5.6 5.6 5.6
6.6
I (dep)
6.7 6.7 6.7 6.1
6.0
inflation
l
12.7
1U.5 16.2
22.7
24.0
I1 r
1064 elY 'ksa. Tilpe C of COPIOII for 106-Ge alee Central
GOver,mt
banda In
found for 1960.-U
Apprite.td by
L[C , IIF).
e/ EMEOVre ti.atet net
lgal rearvae on FC of SRI
and tC bacause It
slte
co eritae
legal rautrvte
on fCD of
ON
and
IF.
ndilrect *atletes of the
letter (aNlch
are
net
reported In Nate S_rnal)
suggest
that EMS
my
_av bea overettilted 1S percent In
196, 26
perent Ia
1966
and 1i percent In 1ii7.
d/ Anual
Interet rates .ape In efectIve prcentao tare.
The annual rate of Inflation (bta
the Ieant ontU of the year end the leet month of
the Previoet year) according to te coneumr Price Index of Lie.
Qu"terIy Interea raOte 1 quarterly eff* ctiV Percentage.
The quarterly rte of infltiotn (betae the leat eattf tib quarter a"d the eat
otentb f the previous quarter) accordin, to the ceatamr pIet Index of Liet.
Sourctt AlI
a*eet
eteche eare aepla avere" obtalned ftre "t Smaati
(various numbrs). ibt Intereat rate serles were provided by the
aS3|wt5g"io
del Sector .ntaterlo' of the
M
and llf' P'nanaclal
Statletite.
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Table 2-5: INFLATION
AX ESTIMATES a/
Inflation Inflation Net Inflation
Tax (IT) Subsidy (IS) Tax (NIT IT-IS)
(Intis) Z GDP) (Intis) (Z GDP) (Intis) (Z GDP)
Annual
1980 135 2.3 69 1.2 66 1.1
1981 185 1.7 122 1.1 63 0.6
1982 74 0.4 250 1.4 -175 -1.0
1983 536 1.6 893 2.7 -357 -1.1
1984 23r 0.3 1,162 1.6 -923 -1.3
1985 5,037 2.5 5,532 2.8 -495 -0.3
1986 11,783 3.2 5,868 1.6 5,914 1.6
1987
30,843 4.2 20,622
2.8 10,221
1.4
Quarterly b/
1986-IV 3,587 0.8 1,867 0.4 1,720 0.4
1987-I 6,141 1.2 3,849 0.8 2,292 0.5
1987-II 6,613 1.0 4,415 0.6 2,198 0.3
1987-III 10,925 1.4 4,974 0.6 5,951 0.7
1987-IV 7,164 0.8 9,001 1.0 -1,837 -0.2
a/ The above calculations re based on equations: (1) for the IT, (2) for
the IS and (3) for the NIT. These assume that
the benchimark eal
interest rate is zero (See Footnote 1).
b/ Since INE does not provide quarterly figures of GDP, the
annualized
quarterly
figures of GDP employed were
obtained by multiplying the
annualized quarterly level of GDP reported by the CRB (base 1970) by
the ratio between
the annual GDP figures of CRB and INE.
23.
The inflation tax and inflation subsidy calculations ere repeated
assuming a 5 percent
benchmark real interest rate (instead
of the zero
percent assumed before). This implies that the interest compensatior.or
inflationis smaller than the nominal
interest rate by approximately
5 percentage points.4/ The results are reported in
Table 2.6.
4/ More rigorously and following
he notation of Footnote 1, the
compensation for inflation is, [(1
+
i/1.05)1 1 where
i is the nominal
interest rate.
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'rable-6: INFLATION AX ESTIMATES
a/
Inflation Inflation Net Inflation
Period Tax (IT) Subsidy (IS) Tax
(NIT)
(intis) (%GDP) (intis) (ZGDP) (intis) (ZGDP)
1980 160.0 2.6 80.6 1.4 79.4 1.2
1981 222.3 2.1 145.5 1.4 76.8 0.7
1982 155.5 0.9 298.4
1.7 -142.9 -0.8
1983 679.9 2.1 983.0 3.0 -303.1 -0.9
1984 652.2 0.9 1,401.0 1.9 -748.8 -1.0
1985 6,395.6 3.2 5,781.9 2.9 613.7 0.3
1986 13,139.0 3.6 6,827.0 1.8 6,312.0 1.8
1987 31,564.0 4.3 22,095.0 3.0 9,469.0 1.3
a/ The above estimates re based on equations (1) for the IT, (2) for the
IS and (3) for the NIT, assuming that the benchmark, real interest rate
is 5 percent; i.e. in equations (1) and (2) i () should be replaced by
(1 + i ())/1.05 1 (see Footnote 4.)
D. The Inflation ax: Evolutionand Its Relationsh
with the Macroeconomic
nvironment
24. Coinciding ith the program of economic
liberalization mplemented
in 1981-84, the inflation tax and the net inflation tax followed a downward
trend (only temporarily nterrupted
n the case of the inflation ax in
1983, see Tables 2-5
and 2-6). This was mainly due to higher interest
rates on public financial liabilities inflation
ctually rose) and the
dollarization f the economy
(in 1982-85 the average return on foreign
currency
deposits was on average 37 percent higher than the rate of
inflation, see paragraph 26). Since 1985, the inflation ax rose steadily
from 0.3/0.9 percent of GDP in 1984 to 4.2/4.3 percent of GDP in 1987
(according o whether the benchmark real interest rate is 0 or 5 percent
respectively). Inflation, ogether with low nominal interest rates and a
dedollarized conomy (as measured by the share of foreign currency deposits
in total liabilities f the financial ystem), were the factors to blame
for the inflation tax increase.
25. In 1983, as the drop in the conventional ax
revenue led to a
record fiscal deficit, inflationary axation grew from 0.4/0.9 percent of
GDP
to 1.6/2.1 percent. A similar pattern was
reproduced in 1986-87. In
those circumstances nflation ressures ere the result of
high public
deficits and expansionary
financial olicies. The exchange rate was frozen
in 1985 and lagged behind
inflation ntil the fourth quarLer
of 1987, and
no major adjustments
n public sector prices and tariffs
were implemented
until
early 1988. Inflation nd the policy
of lowering ominal interest
rates, i.e., lowering the compensation or the inflation-induced rosion of
the principal of debt, propelled jump in the 1987 inflation ax level to
three times its average 1984-85 level (measured s a percent of GDP).
Between the same periods the tax revenue of the central government dropped
from 11.7 percent of GDP to 8.5 percent.
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26.
The
dollarization
f
the economy
in
1983-85
was
the
result
of
the
attempt
by
private
agents
to
escape
the inflation
ax
as well
as the
liberal
measures
which
allowed
foreign
currency
deposits
in the
financial
system.
On
the
other
hand,
although
since 1985
dedollarization
ollowed
mainly
from
the
suspension
f
convertibility
f
foreign
currency
deposits
into foreign currency, he policy of fixing the exchange rate (and the
subsequent
real
appreciation)
lso
played
a role.
This
became
particularly
obvious
after
the
official
exchange
rate
devaluations
f
the last
quarter
of
1987
have
raised
significantly
he
return
on foreign
currency
deposits.
However,
by
then,
the
low share
of
foreign
currency
deposits
in
total
financial
liabilities
ad
left
depositors
eakly
hedged
against
inflationary
axation.
27.
Inflation
as
also
induced
financial
ealth
transfers
(implicit
subsidies)
from
the
public
to the
private
sector.
A
measure
of these
is
given
by
the
inflation
ubsidy
estimated
in
Section
C. The
inflation
subsidy
rose
from 1.2/1.4
percent of GDP in 1980 to 2.7/3 percent in 1983
(according
o
whether
the benchmark
real
interest
rate
is zero
or
5
percent).
Thereafter,
it
exhibited
an oscillatory
ehavior
reaching
a
level
equivalent
to
2.8/2.9
percent
of GDP
in 1985
and
2.8/3
percent
in
1987.
28.
However,
the
on average
higher
level
of
the
inflation
ubsidy
did
not suffice
to
neutralize
the
upward
trend
in
the
inflation
ax.
As
a
consequence,
the
average
net
inflation
ax
(the
difference
etween
the
inflation
tax and
subsidy)
has risen
from
-0.41-0.8
ercent
of GDP
in
1984-85
to
1.5/1.6
percent
in
1986-87.
Between
the
same
periods
the
central
government
tax
revenue
dropped
from
11.8
percent
of
GDP to
8.8
percent. This suggests that there
has
been
strong
substitution
etween
conventional
and
inflationary
ources
of
taxation.
Since
the
inflation
ax
is a
more
regressive
ind
of tax
(from
the
income
distribution
oint
of
view),
this
substitution
s bound
to
have
had adverse
social
effects.
29.
Moreover,
to
the
extent
that the
beneficiaries
f
the
inflation
subsidy
tend to
differ
from
those
who
bear
the inflation
tax
burden,
inflation
ay
have
distributional
ffects
even
if the
net
inflation
ax
was
zero.
Since
the
recipients
of subsidized
redit
are
producers
(themost
important
eing
agricultural
roducers),
inflation
s
bound
to induce
transfers
f financial
ealth
from
cash holders
and
bank
depositors
to
poor
"campesinos" nd other beneficiaries f subsidized RB credit. Although
this could
be
justified
n
income
distribution
rounds
if the holders
of
liquid
assets
were
sufficiently
icher
than
the
beneficiaries
f subsidized
credit,
it
could
not
be justified
on
efficiency
grounds
since it
implies
taxing
savings
and
the
use
of money
(a
commodity
ith
high
productivity
that
society
can
produce
at negligible
cost).
Since,
in
addition,
there
is
evidence
that
poorer
consumers
are the
main
holders
of cash,
it
is
not
warranted
to
tax
them
in
order
to finance
the poor,
but
perhaps
not
necessarily
oorer
"campesinos".
Taxing
the rich
through
direct
conventional
taxes is
a more
desirable
venue.
A similar
reasoning
ould
be
applied
for
wealth
transfers
etween
private
agents
through
the
banking
system: low and middle income bank depositorssubsidizefirmswho are large
enough
to
be
able
to borrow
from
banks.
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30. Under the present circumstances, s further relative price
realignments
eem inevitable nd,
given that the nearly depleted level of
foreign exchange reserves cannot cushion further demand pressures, the
policy of maintaining low nominal interest rates can only enhance the risk
of inflationary
axation. Moreover, since the process
of financial
disintermediation s quite advanced and accelerating, .e., the inflation
tax base is shrinking ast, collecting a similar level of inflation revenue
would require ever increasing inflation rates.
31. Unless serious fiscal measures are undertaken the monetary effects
of the fiscal and financial imbalance ill fuel the inflationary rocess to
even more worrying levels. The socially regressive ffects of inflationary
taxation are bound to show quickly into a further deterioration f the
government's olitical strength and into greater social disintegration.
This, though, may be
the cost that society and the government s
part of it
has to bear in order to be ready to accept the fiscal and financial remedy.
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ANNEX3
THE CENTRAL BANK'S QUASI-FISCAL
EFICIT
A.
Introduction
1.
The Central Reserve
Bank's (CRB) intervention
n Peru's financial
and foreign
exchange markets has
created subsidies
to the private sector
with budgetary implications. Those
subsidies, onventionally
eferred to
as the quasi-fiscal
eficit of the CRB,
have recently become an important
source
of primary money
creation. The sources
of the quasi-fiscal
deficit
(QFD) examined here are
interest rate and
foreign exchange losses.
Interest
rate losses occur when the interest
the CRB pays on its
liabilities
(mainly reservesof the financial
ystem, since currency
in
hands of the public
pays zero interest)
s higher than
the interest it
receives on
its assets (mainly
credit to the government,
redit to the
Banca de Fomento, rediscountfacilitiesand international eserves).
Foreign
exchange losses arise
when the average
buying price of foreign
exchange
by the CRB exceeds
the average selling
price. During the 1985-87
period
foreign exchange losses
were due to the
fact that the average
exchange rate
paid to exportersand other sellers
of foreign exchange
(including hose
offering foreign exchange
to the governmentin the open
market) exceeded,
on average, the exchange
rate charged to
importers nd
financial ebtors.
2.
Interest rate losses
were
estimated
y two
methods: i) directly,
from analyzing
the movements in
the sub-account ermed
"Costo por
Regulacionde Exceso de Liquidez"of the CRB account "Otras Cuentas Netas"
(which, reportedly, easures
precisely interest
rate losses); and ii)
indirectly,
hrough measurement
of the average
return on CRB assets
and
liabilities. ikewise, foreign
exchange losses were
also estimated:
i)
directly,
through inspection
f the movements in the sub-account
ermed
"Diferencial
ambiario" of
the CRB account "Otras
Cuentas Netas";
and ii)
indirectly, omparing
average buying and
selling exchange rates.
For
reasons given below
(paragraph 8) the direct measurement
f QFD is deemed
more
reliable that' he
indirect one. The
adequacy of the direct measurement
of the QFD hinges on the
specific accounting
ethodology
employed by the
CRB of Peru.
Thus, it cannot be assured that
the same approach
will be
valid for similar
studies of other
countries. The indirect easurement
f
QFD, apart from
serving as a check
for the direct
measurement, ermits
assessing the
composition f
foreign exchange
and interest rate losses
(which
the direct measurement
does not convey). The
direct estimate
of QFD
is
performed in Section B and the indirect
estimate
in Section C. The
evolution
of QFD is analyzed
in Section D.
B. Direct Estimate to The
Quasi-Fiscal
Deficit (QFD)
Foreign
Exchange Subsidies
3.
The sub-account
Diferencial ambiario" of the
CRB account "Otras
Cuentas Netas" measures: i) foreign exchange losses due to the difference
between buying
and selling exchange
rates; and ii) accounti-g capital
losses/profits rising
from changes in
the Inti valuation of the CRB's
assets
(including old)
and liabilities enominated n foreign
currencies
due to
either changes in the inti/US$ exchange
rate or to changes
in the
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rates f other
relevant urrencies and old) gainst
he US$. However,
here the focusis only on tte former
osses ince hey
entail subsidy nd
its financing eads
o monetary xpansion.For
his reason his item should
be added
to the
public
ector eficit.
y contrast
he
latter
losses/profitsre capital
ains/lossesn the
CRB net position
n foreign
exchange nd therefore o not entail er se monetary xpansion. herefore,
the exercise hatfollows s
concer.ed ith
estimating hich
part of the
movement n the account
Diferencialambiario" eflects
osses ue to
exchange ate subsidies.
e refer enceforth o this item as "foreign
exchange ubsidies" FES)
o distinguish t
from the more general
erm
'foreign
exchange
losses".
4.
More precisely, hanges
n the sub-accountDiferencialambiario"
(CDC) easure,
part from FES, the change n value f the net foreign
exchange osition FEP) f the CRB (termed Posicion
e Cambio III" in CRB
publications)t the beginning
f the period. hus, if FEP,(t-l,t)s the
FEP of time (t-l) alued
t exchange ates f time t:
(1) CDC = FES
- [FEP(t-l,t)
FEP(t-1,t-l)]
The FEP measures
ross foreign xchange eserves including old) inus
short nd
long run foreign iabilities
f the CRB (principallyith
the
IMF, i.e.
SDR's) nd minus foreign urrency bligations
ith domestic
residents. he
main components f FEP
which are not denominatedn US$ are
gold reserves nd SDR's liabilitieso the IMF. It is assumed
or
simplicity nd in the
absence f proper nformationhat the rest of the
assets/liabilities
re stipulated
n US$. ThusFEP can be written:l/
(2) FEP'(t,t)
=
e(t)x[G*(t) g(t)
-
S*(t) x s(t) + R*(t)]
where:
e (t) is the inti/US$ xchange ate at time t.
G* (t) is
the stock f gold at time t (in
physical nits).
g (t) is the
CRB accounting rice
of gold at time t in
USs.
S*
(t) is the stock f SDR' liabilities
ith the IMF at
time t.
s
(t) is the exchange ate
of SDR's at time t in
US$.
R* (t) are othernet assets/liabilities
f the CRB (after
deducting oreign
urrency bligationsith
residents)t time t in US$.
1/ Note that stocks n Intis ear a
" '
n and
stocks n other currencies
bear a " * n
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It thus follows that the change in value between time (t-l) and time (t) of
the FEP existing at the beginning f period (t) is:
(3) FEP'(t-l,t)-FEP'(t-l,t-l) G*(t-l) x [g(t) x e(t)
-g(t-1) x e(t-1)] - S(t-1)
x
[o(t) x e(t) -
s(t-l) x e(t-l)]
+ R*(t-l) x [e(t) - ^(t-l']
=
e(t) x G*(t-l) x lg(t) - g(t-l)]
-
e(t)
x S*(t-l)x[s(t)
- s(t-l)]
+ [e(t) - e(t-l)] x [G*(t-l)
x g(t-l) - S*(t-l) x s(t-l)
+ R*(t-l)]
=
e(t) x G*(t-l) x [g(t) - g(t-l)]
-e(t)
x S*(t-1) x [s(t - s(t-l)]
+ [e(t) - e(t-l)] x FEP'(t-l,t-l)
The first term measures the revaluation f gold due to the appreciation f
gold with respect to the US dollar; the second term
measures the
revaluation f SDR's due to the appreciation f SDR's with respect to the
US dollar; and the third term
captures the revaluation f the FEP of (t-l)
due to the inti devaluation
ith respect
to the US dollar. Substituting
"changes in the FEP"
of equation (3) in equation
(1) we arrive at the
expression for FES employed for its direct estimate:
(4) FES' = CDC + e(t) x G*(t-l) x [g(t)
-
g(t-l)]
-
e(t) x
S*(t-1) x [s(t) - s(t-1)] + [e(t) - e(t-1)] x
FEP'(t-l,t-l)
5. The official benchmark exchange rate (MUC) is the accounting rate
used by
the CRB for the inti valuation
of foreign exchange
assets/liabilities. However, actual transactions ake place at a set of
premia and discounts on it. Other transactions ake place at the rate of
the Mesa de Negociacion (MN). These rates constitute he basic system of
multiple exchange ra'.es t which trade and capital transactions ake place.
In order to estimate directly FES arising from multiple exchange rates the
other items of equation (4), that is, changes in the dollar valuation of
gold and SDR's, and the revaluation f the net foreign exchange position
due to domestic devaluations, ust be estimated. Annex Table 3.1 reports
estimates for each of these items and the resulting irect estimate of FES
based on equation (4):
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Tabl- $-Is DIRECTESTIMATEF FOREIGN XCHANGEUBSIDIES
(in illon lntl.)
1986-I 1986-II 1958-I 1986-Il 1987-I 1987-II
A. Changesn the
'Diferencial
CamblarioO/ 6,012 4,878 2,870 -366 -2,045 23,011
8. Gold pprociationia
a vie theUSS b/ -618 0 0 0 3806 1040
Ce t)
x O*(t-1) (g(t) -
g(t-1))J
C. Revaluationf SDR's
liabilitiesiea via
thaUSs c/ 185 88a 687 180 722 2,498
tE(t) S*(t-1) (s(t) -(t-l))]
D. Revaluationf foreign
exchangeosition FEP)
due to devaluationsf
the official xchange
rate /
-8,a89 -1,479
0 0
211 -7,528
[(e(t) *(t-1)) FEP'(t-1,t-I)]
E. Foreign xchange
Subsidy FES) W88 2,611 2,183 -646 749 14,626
[E = A
+
8 C e D]
from
equation
4)
a/ Obtained rom the CRB account Otras uentas etss8I
Change n the CR8 accountingrice f gold, n USS, ultpliledy the
beginnlng of period tock f
gold oserves nd theend f period UC
exchange ate.
Change n the US$ value ,f SDR's nd
the end of period UC exchange
rate.
The not foreign xchangeposition
termed Posicione Cambi) ll1
In
-
CRB publications)
n US dollars ultipliedy the Increase
n he
exchange ate Intis er dollar very onth quarters in 1986-I) hen
there
as a devalustion.
he
total EP reported s equal o
the
sum of
all monthly
(quarterly) revaluation.
Source: Note omenal variousumbers) nd *Subgerenciael
Sector oneterlo'f Cha.
Financial Losses
6.
The QFD is also composed of financial,
r interest rate, losses.
As it was mentioned before these losses derive from the fact that the CRB
has an average return on its assets smaller than the average cost of its
funds. Financial losses are
measured with precision by the sub-account
"Costo por Regulacion de Exceso de Liquidez" of the CRB account "Otras
Cuentas Netas". Table 3.2 reports both estimates of financial losses (the
change in value of the sub-account Costo por Regulacion de Exceso de
Liquidez") and foreign exchange subsidies (derived in Table 3.1). Their
sum, QFD, is also reported in Annex Table 3.2 (in nominal terms, in real
terms and as a proportion of GDP).
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TABLE
.2: DIRECT STIMATES
F CFD */
(in illion ntla)
86-I 86-II 1986
86-I 86-II 1988 87-I 87-II 1987
A. Financial
Losses l/
-mlt. I7.
0 899
899 1,641
8,783
5,874
1,7683 4,337 6,100
B.
Foreign
Exchange
Subsidy /
-mil. /. 869
2,611 2,879 2,188
-646 1,688 749
14,626 16,874
C.Quai-
Fiscal
D etict
A + B
-mil. I/. 868 3,410
8,778
3,824
8,188
7,012 2,612 18,962 21,474
-U
ODP 0.2
1.7 1.9 1.0
0.8 1.8 0.3 2.6 2.8
Memorandumtem:
Nominal CDP
-nil.
1/. 199,846
881,022
760,168
Notes. a/
TheCRB sub-accountCosto orRegulacion
Exceso e Liquldozw.
Si Foreign
exchange ubsidy (FES)
obtained In Table 3.1.
Source:
Nota Seminal (various
numbers), INE, Table 3.1 nd
Subgerencla del Sector
MonetarloCR8).
C.
Indirect Estimate of
the Quasi-Fiscal Deficit
7.
In order to provide
a double check
of the previous estimates, an
additional exercise
was carried out.
In this exercise: a)
foreign exchange
subsidies were calculated
through comparing
buying and selling
exchange
rates
of the foreign exchange
transactions of the CRB; and b) financial
losses,
through comparison
of interest rates applicable
to CRB's financial
assets
and liabilities.
Foreign Exchange Subsidies
(FES)
8. Ideally,
if the volume of
purchases of foreign
exchange by the CRB
equalled the
volume of sales, FES could be calculated
by subtracting the
weighted
average exchange rate of all purchases
from the weighted
average
exchange rate of all sales, and
multiplying that difference
by the volume
of purchases
(or sales). In general,
though, the
volume of purchases
differs from the volume of sales, i.e.
the CRB either accumulates
or draws
down foreign
exchange reserves. In this
case, a convenient procedure to
calculate
FES is to select a :^eference r accounting exchange
rate. The
measurement of FES
will of course vary with the choice
made of the
reference
exchange rate.
The reference rate may
be, for example, the
average historic cost of foreign
reserves, some
sort of market average
exchange
rate or, as in the
case of the CRB, the official MUC exchange
rate.
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9. More formally,
FES can
be measured
as follows:21
(5) FES = (ep - e) x P - (es -e) x S
where: P is the volume of
purchases
S is the volume of sales
e is the reference exchange rate
ep is the purchase price of foreign exchange
es is the selling price of foreign exchange
i.e. FES arise whenever the CRB buys foreign exchange at a price
above the
reference exchange rate, or sells foreign exchange at a price belnw the
reference exchange rate. If the first
term is positive (the second term is
negative) the CRB is purchasing
(selling) foreign exchange above the
reference price, and is therefore making a loss (gain). Thus, if both the
purchase and selling
price are above the reference exchange rate there will
be FES if the first term is larger than the second one. Note that if the
volume of sales equals the volume of purchases, the previous formula
becomes the product of the volume of transactions and the difference
between the purchase and sale exchange rates.
10. The indirect estimate of FES performed here is based on equation
(5). To facilitate comparisons with the direct estimate of FES obtained in
the previous section, the accounting exchange rate used by the CRB (that
is, the KUC rate) was chosen as the reference exchange rate.
11. The indirect estimate of FES provided here measures only FES
originated: in import and export transactions and in CRB direct purchases
of foreign exchange from residents in the open market. Due to
the lack of
data any other balance of payment transaction are excluded. Hence, the
calculation here is only partial and it is conducted to identify the main
items that explain FES, but in no way
are meant to challenge the direct
estimates of the previous section. Based on equation 5, total FES were
calculated as
the difference between the sum of items a) to c) below:
a) The flow of CRB purchases of foreign exchange from exporters
was multiplied by the average spread between the purchase
price and the MUC exchange rate
(that is, the CRB accounting
exchange rate). This captures FES originated in purchases to
exporters.
b) The flow of CRB purchases of foreign exchange from residents
in the free market was multiplied
by the average spread
between the average buying price and the MUC exchange rate.
This measures FES originated in purchases to residents.
C) The flow of CRB sales of foreign exchange to importers was
multiplied by the average spread between the sale price and
the MUC exchange rate. This measures FES originated in sales
to importers. Note that the difference between a) and c;
measures FES originated in foreign trade alone.
2/ Following the presentation of the Paraguay Country Economic Memorandum
(Report No. 7031-PA, Annex III).
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12.
The indirect
estimate
of FES,
and
the corresponding
ata
employed,
are reported
in Annex
Table
3-3.
It
can be
seen that
FES in
this
calculation
iffer
considerably
rom
the
direct
estimates
f FES
performed
in the
previous
section.
This may
be due,
apart
from
the omissions
mentioned
above,
to the
lack
of proper
weighted
average
exchange
rates for
items a) to c) as well as to the lack of a reliable figureof CRB purchases
of foreign
exchange
to residents.
Table 8.8:
NDIRECT
CTIMATE
FFOREIGN
XCHANGE
UBSIDIES
86-I 8S-II
1986
86-I
86-II
1986 87-I 87-II
1987
A.
Flows f
Purchases
ndSales
million
Sf)
$.
Exports
1,493
1,527
3,020
1,210 1,299
2,609
1,254
1,306
2,659
2. Imports
782
788 1,570
1,051
1,474
2,626
1,821
1,682 2,903
3.
Purchaseo o
Residents
/
-
861
361
395 82
477
88
202
238
B. Average
xchange
ate
Premium ver
he MUC
(intis
er US$)
4. Exports
-0.03
0.13 0.06
0.32
0.96
0.64
2.77 6.73
4.76
5. Imports
0.00
0.04 0.02
0.17
1.08
0.62
2.60 4.28
3.39
8. Purchases
Residents
0.00
8.46
1.72 .46
3.8
86.8
6.40 22.80
13.80
C. Foreign
xchange
ubsidies
FES) /
7. Exports
(1x4)
-46
198
163 398
1,261
1,644
8,471
8,782 12,263
8. Imports
(2x6)
0 -33
-33
-181 -1,669
1,740
3,298
-6,771
10,089
9. Foreign
rade
(7 8) -46
186
120
212
-808
-96
173 2,011
2,184
10.Purchases
o
Residents
3 x 6)
0
1,211
1,211
1,383
300 1,863
194
4,601
4,696
11.Total ES
(9 + 10)
-46
1,376
1,331
1,676
-8 1,667
387
86,12
8,879
-as
X GDP
(0) (0.7) (0.7)
(0.4)
(0) (0.4)
(*06)
(0. 6)
(0.9)
Memorandum
tem:
Nominal DP
(million
f Intis)
199,845
381,022
760,166
a'
Corresponds
o the
CR8 accounts:
aptacion
e Excedentes
e laBancao
ntil uly
1987;
nd
*Compras
Residentes'
hereafter.
b/ FES
originated
xclusively
n trade
ransactions,
urchases
o residents
nd
redemption
f reserve
equirements
n foreign
urrency
eposits.
Source:
oteSemanal
various
umbers)
nd
"Subgerenciael
Sector
xterno'
CRB).
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Financial
Losses
13. The indirect estimate of financial osses of the CRB was obtained
subtracting otal interest paynments eceived on its assets from total
interests aid on its liabilities:
(6)
FIL = i(l) x L - i(a) x A
wheres FIL
are CRB's financial losses.
i(l) is the weighted ave'age interest rate on CRB'
liabilities.
i(a) is the weighted average interest
rate on CRB's
assets.
L is
the total stock of CRB's interest earing
liabilities.
A is the total stock of CRB's interest earing assets.
14. The CRB receives interest
on its credit to the financial nd
public sectors and on its net international eserves, nd it pays interest
on deposits
of the financial nstitutions n the CRB (primarily eserve
requirements f commercial anks). To measure interests received and paid
by the CRB the followinginterest rates were imputed.
Returns on CRB's Assets
a) On credit to the public sector (including anco Nacion): a
weighted average of the interest rate charged
to Banco
Nacion and
0.01% (which is the interest
rate on the
consolidated
entral government ebt at the
CRB).
b) On credit to the
financial system:a weighted average
of
the interest rate of credit to Banca de Fomento ("Fomento
Agropecuario"),
ith a two-thirds eight, and rediscounts
to
commercial banks and the
Banca de Fomer.to commercial
rediscounting or 1985-I) with a one-third eight.3/
3/ A proper weighted average interest rate for credit to the financial
system requires considering large number of interest rates and credit
stocks. Since these were not available, the weights were chosen (somehow
arbitrarily) aking into account that: a) in 1986-87 more than half of
the credit to the financial ystem went to the "Banco Agrario" and
approximately ne-third ent to commercial banks; b) the interest rate
on the "Fomento gropecuario" line lied somewhere in between the zero
interest rate charged to "campesinos" f the "Trapecio ndino" region
and the interest rate on other promotional redit lines of the Banco
Agrario.
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c) On net international eserves: he LIBOR 3 months interest
rate multipliedby one times the rate
of devaluation.
Interest costs on CRB's liabilities
a) On currency in circulation: ero.
b) On reserve requirements n domestic currency depositst the
remuneration f domestic currency reserves of commercial
banks (see Annex 11).
c) On reserve requirements n foreign currency deposits: the
LIBOR 3 months interest rate (minus one p.p. for 1986 and
minus 3.5 p.p. for 1987) multiplied by one times the rate of
devaluation.
15. The data employed and the indirect estimate of CRB financial
losses (FIL) are reported in Annex Table 3.4. The indirect estimate of FIL,
based on equation (6), is equal to the sum of the product of average
stocks
of liabilities nd their corresponding nterest rates (according o para.
14) minus the sum of the product of average stocks of assets and their
corresponding nterest rates.
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Table
: I DIRECT STIMATE
F FINANCIAL OSSES
Stocks of: 1986-I 1985-I 1966-I 1986-II 1987-I 1967-11
A. Average tocks f CR8
assets nd
Liabilitiesmillton ntis)
a) Assets
1.
Not Credit o Public ector 471 -862 -1,231 978 6,007 18,148
2. Credit o the Fin. ystem 3,910 6,803 7,608 10,723 16,376 28,109
3. Net Internet.eserves 9,842 16,844 19,318 16,686 12,962 6,987
b) Liabilities
4. Legal eserves f
Fin.
System n Domestic
Currency 1,426 7,898 17,811 21,366 24,363 a3,374
S. Legal eserves f Fin.
System n Foreign
Currency 8,463 8,926 5,998 4,192 3,842 4,998
B. Interest
ates
n
CR8 Assets
nd
Liabilities
effectivennual
-) Assets
6.
Loan
o Public ector 21.4% 22.6% 13.3%
9.2% 13.3%
6.3%
7. Loans o the Fin. System 95.6% 32.3% 18.2%
14.9% 14.9% 10.4%
S. Net International
Reserves 19.3% 9.3%
7.6% f.2% 8.4% 16.0%
b) Liabilities
9. Legal eserves n
Dom. Currency 101.2% 8.3% 37.8% 37.8% 37.8% 31.2%
10.Legal eserves n
Foreign urrency
19.3% 9.3% .65% 6.2%
4.1% 8.1%
C. Financialosse measured
s:
(1/2)x[(4)x(9)+(6)x(10)-(1)x(6)-(2)x(7)-(3)x(8)]/
1985-I 1986-II 1986 1986-I 986-II 1986 1987-I 987-II 1987
11. Financial
Losses
451 3,620 4,071 3,761 3,786 7,547
3,669 4,003 7,672
-mill.
I/.
-as % GDP
0.4 1.6 1.9 1.2
0.9 2.1
0.6
0.5 1.0
Note: ominal DP
-mil. /. 199,845 381,022 760,168
/ Since ll Interestates reexpressed n annual erms hesemestral evel f
financial osses
as obtained ividing et
Interestayments
y two.
Sources: ote
emanal various
umbers) or
section ; and
"SubgerencIael
Sector
onstarlolnd *Superintendencia
e Banco Seguros"
CRB)
for section .
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D. Evolution
of the Quasi-Fiscal eficit
16. The
discussion below
is based on the direct
estimate of the QFD.
This is bound to be more accurate because data on neither of the following
(required
or the indirectestimate) as available:
i) a proper
weighted
average interest rate of CRB assets and liabilities; nd ii) a weighted
average exchange rate for CRB's services and napital transactions. owever,
the indirect estimate of QFD remains useful for assessing the evolution f
several components of foreign exchange subsidies nd financial losses.
17. The size of the QFD has varied considerably long the period. It
roie from 0.2 percent of GDP in 1985-I to 1.7 percent in
1985-II, mainly as
a consequence f foreign exchange subsidies nduced by CRB purchases of
foreign exchange in the open market (at a premium over the official
exchange rate). The QFD dropped
slightly to approximately .9 percent of
GDP during
the two semesters f 1986. Foreign exchange subsidies from this
source remained important
uring 1986-I and, financial losses were more
important in 1986-II.
The downward trend of QFD was drastically
reversed in
the second half of 1987 whien, trongly impulsed y foreign exchange
subsidies, FD represented .5 percent of GDP (5.0 percent
in annualized
terms). The latter were caused by a growing spread of the average export
exchange rate over the average import exchange rate and, to a lesser
degree, by
CRB purchases of
foreign exchange
in the open market.
18. Throughout the peri3d, financial losses (the other component f
the QFD) stemmed from CRB financing f the central government and the
financial system at an interest rate which, on average, was below the cost
of its funds (that is, a weighted
average between zero, which is the cost
of currency,and the remuneration f reserves of the financial system).
Interest rate losses were particularly mportant in 1986-II and 1987-II
when they represented percent
and 0.6 percent of GDP respectively.
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ANNEX4
MAIN CHARACTERISTICSOF THE PERUVIAN
AX SYSTEM
1.
The modifications ntroduced in the past
three years reduced
the
number of taxes that composes the
Central Government revenues. Minor taxes
were either derogated or transferred o the responsibility f the local
governments.
A major reform was
introduced in income tax following
recommendations
o broaden its base and reduce exemptions. In addition,
special taxes on assets revaluation nd the
capitalization f profits
were
derogated. In turn, taxes on the holding or transfer of property
(including
ehicles and on
gambling) ere
transferred o the
municipal
sphere). A description f the main components of the present system
follows.
A. Income Taxes
Net Income Tax
2. Net income of private and public enterprises s subject to this
tax, which applies to distinct forms of corporations s defined by law
(sociedades nonimas, empresas publicas, sociedades de respornsabilidad
limitada, ooperativas). Unipersonal
omestic firms are exempt. Foreign
enterprises are subject to the tax on the part of their income generated in
Peru. Capital gains receive the same treatment pplied to other sources of
income. The usual deductions, .g., expenditures incurred on production,
interest, depreciation, arry over of previous year losses, are used to
obtain the taxable income.
3. Taxpayers ay choose among three options to estimate their monthly
obligations:
(a) fixed percentages f the tax due in previous year,
whose values are set annually by Government decree.
The percentages pplied in 1987 were 10 percent of
1985 liabilities January, nd February) and 15, 16
and 25 percent of 1986 debts for the periods March-
June, July-September nd October-December,
respectively. These percentages ave been rising
in the recent years to allow for a greater
inflation. For 1988, the two first payments were
set at 25 percent of 1986 profits, and the
Government intends to readjust this value at
shorter intervals;
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(b) duodecimos
of the estimated tax liabilities or the
same year,
based on projections
ade
at the
moment
of the first payment.
Employers are requiredto withhold duodecimos
of the expected
taxes due by
their respective employees.
8. Rates. The progressive chedule is the
following:
Income
Level (in l'IT)
Rates
(Percent)
Up to 15
8
15 to 20
10
20
to 25
12
25
to 33
16
33 to 41 20
41
to 50
25
50 to 60
31
60
to 72
38
Over
72
45
*
UIT
stands for Unidad Impositiva
ributaria.
One UIT is equal to
27,300
Intis (March1988).
9. Deductionsfrom gross income
are made in the
form of credits
against
the tax. The most important eductions--the
imits
are shown