Promises, Promises, Pension Promises

By John Mauldin


You made me promises, promises
You knew you’d never keep
Promises, promises
Why do I believe?

Naked Eyes (1983)

It’s election year in the US, so once again we see politicians promising the moon.
That’s what happens in a democracy. Regardless of party or office, all politicians make promises in order to get elected. This is their nature. Dogs bark, birds sing, politicians promise.

In the investment business, we’re taught not to make promises because they create liability. Lawyers and compliance officers review documents for “promissory” language. Instead of “This fund will give you a profit,” firms say things that generally sound like “This will give you the opportunity to profit,” thereby avoiding lawsuits and regulatory action when profit proves elusive.

With the Republican convention just concluded and the Democratic convention just ahead, with the presidential candidates making promises by the dozens, let’s imagine what a presidential promise would sound like if it had to comply with the same rules that investment advisors and brokers must adhere to. It would go something like this:

If you elect me as president, I will (insert promise), assuming of course that I can get both houses of Congress to agree, which means of course that I must persuade enough of the opposition Senators to bring my total up to 60 votes in the Senate, assuming that none of my own party votes against me. And that also assumes we can find the money to fulfill this promise, which is unlikely without some real (and unlikely) compromises.

Would-be elected officials face no such restraints, except from voters, who by the next election tend to forget what they were promised. There are exceptions, though. Some political promises don’t fade away. They come back years later and demand fulfillment. Which brings us to the topic for today’s letter: the promises made by politicians concerning public employee pensions.

Chicago residents are learning about this the hard way. They won’t be the only ones. Voters all over the US will pay for the promises their elected officials made long ago – and broke.

Property Tax Blues

Last week in “The Age of No Returns” we discussed the prospect of persistently low market returns in the coming years. Here is the GMO forecast again.

A portfolio balanced between major equity and fixed-income asset classes will be lucky to break even in the NIRP-heavy world I foresee. Poor returns will be an especially thorny problem for anyone who is contractually obligated to use portfolio returns to pay certain amounts on certain dates but hasn’t set aside funds to do it.

Defined-benefit pension plans are the primary example. Today these exist mainly for public-sector employees. Private industry long ago shifted to 401(k) and other defined-contribution plans.  

Public pension plans are rarely fully funded. They assume that future investment returns will make up the difference. What if they don’t? Retirees go back to the taxpayers whose representatives made the promises and demand they pay up.

This is happening in Chicago right now. After years of fruitless argument and litigation, authorities raised property taxes to meet pension obligations. Cook County taxpayers recently received their bills and were not amused.

Outside the assessor’s office, city homeowners told one property tax horror story after another.

“Our taxes increased fivefold,” said William Phillips of Rogers Park. “I was expecting it to go up maybe twice as much but not four to five times as much.”

“My tax bill increased almost $1,200 dollars,” said Cornes King of Chatham.

“More than tripled. The city’s piece more than tripled,” said Logan Square resident Janelle Squire.

The bills that arrived over the weekend reflect rising Cook County real estate values and, in Chicago, the city’s $588 million levy increase. Most of it is to restore police and firefighter pensions that Mayor Rahm Emanuel says his predecessors underfunded.

“A number of people across the spectrum politically, denied, deferred, and delayed the day of judgment,” said Mayor Emanuel.

“I don’t think that I’m getting the services what I’m paying for,” said King.

Unfortunately for the taxpayers, that’s not actually how the system works. Paying your taxes is not a commercial transaction. You don’t give the government money in exchange for goods and services. You must pay taxes, but the government need not give you anything in return. They allow you to go on living somewhere besides a prison cell. That’s all they have to do.  

Of course, if we’re unhappy with the way the city, county, or state is administering our taxes, we can vote for different politicians who will spend our money more in line with what the majority of us think. So, in general, we do get roads, police and fire departments, parks, and other services that are paid for by our taxes.

The problem is that, in all too many cases, politicians make promises to various government employees that include future retirement benefits, but they don’t actually spend the money to fund those promises. And those unpaid balances keep adding up until the future becomes today, which is what is happening in Illinois and other states around the country.

When the current political powers that be in Illinois decided that they couldn’t afford to pay for the promises made by past politicians, the unions and retirees (not unjustifiably) asked the courts to force the various government agencies involved to keep those promises.

And the courts determined that, under state law, retirement benefits cannot be reduced after the fact.

Thus Illinois courts have determined that retired public employees have more rights than taxpayers do. Retirees are entitled to what their elected officials promised them, no matter how impossible it may be to keep those promises. So elected officials are forced to either reduce current services such as police and fire and parks and roads, or raise taxes. Paying already contracted retirement benefits is at the top of the list of city expenditures.

Now, let’s go back to that Cook County news story:

[T]he Chicago Public Schools Board is expected to approve a $250 million property tax hike to pay for teacher pensions. The new levy was enabled last week by the Illinois General Assembly and Governor Bruce Rauner. The additional charges, hundreds of dollars more for an average city house, will appear on tax bills a year from now.

“We might have to consider selling. I don’t know if we’ll be able to afford it,” said Phillips of his Rogers Park home.

Mr. Phillips is free to sell his home, but to whom? And at what price? A home’s market value is a function of supply and demand. Prospective buyers want to know more than the building and land costs before they buy – current and future tax liabilities are part of the equation, too. Mr. Phillips will have to set a selling price that reflects the known and unknown liabilities associated with his house.

In the US today, most people who are buying homes look not so much at the total mortgage but at whether they can afford the monthly payments. For instance, I have a mortgage on my apartment. But a prospective buyer of my home would be interested not only in how much my monthly mortgage costs but also in my tax and insurance bills as well as my homeowners association dues and payments for utilities and other services. It turns out that my HOA dues and taxes are significantly higher than my mortgage payments. The total of those costs affects the price I could get for my home if I wanted to sell.

So when Mr. Phillips says he may have to sell his home, those higher taxes are going to reduce its value. He’s going to pay the higher taxes one way or another. He either stays where he is and pays them, or he sells the property at a lower price because of the taxes. Those are his choices.

 This isn’t just a Chicago problem or an Illinois problem. A significant number of public-sector pensions everywhere are in the same fix, to varying degrees. They all assume their portfolios will deliver returns well above the 2% to 4% or so that they may actually be able to get in the next decade. They can try to extract more from taxpayers, but at some point the taxpayers will simply leave. That’s what happened in Detroit.

Dubious Assumptions

Every state and local government has workers toiling away to provide public services, and their elected leaders have promised them certain retirement benefits. Some states and cities have been more generous than others. Some do a better job of managing their pension obligations. But nationally there is a big problem.

Estimates of the unfunded liabilities vary, not because of dishonesty but because the estimates necessarily involve many assumptions: life expectancies, healthcare costs, interest rates, stock market returns, tax rates, and more. Tweak any of those numbers just a little bit now, and the difference over 30–50 years or more can be dramatic.

An April 2016 Moody’s analysis pegged the total 75-year unfunded liability for all state and local pension plans at $3.5 trillion. That’s the amount not covered by current fund assets, future expected contributions, and investment returns at assumed rates ranging from 3.7% to 4.1%. Another calculation from the American Enterprise Institute comes up with $5.2 trillion, presuming that long-term bond yields average 2.6%. 

Are any of those return assumptions reasonable? Over a really long period like the next 75 years, maybe so. I see almost zero chance of hitting them in the next 10 years. Failing to hit them will put many more plans on very thin ice. Baby Boomers will keep reaching retirement out until 2030 or so. If life expectancy keeps going up, people will survive to collect benefits longer. A big crunch is inevitable.

There is a fact about pensions that very few people actually understand. The largest part of the money that a pension manager assumes they will pay out in 20 years comes from the investment returns on current assets. Depending on the rate of return your pension plan assumes, as much as 70% (or possibly more) of your future payments depends on the returns your fund manager will make on investments. If you are a government employee who is 30 years old and expecting to get a pension in 35 years, the money you are putting into your pension fund will cover less than 20% of your expected future payout. Everything, and I mean everything, about your future pension payments depends on the rate of return your pension plan gets on its investments – and on the willingness and ability of future taxpayers to continue funding your underfunded pension plan.

My friend Rob Arnott, founder of Fundamental Research, is one of the most respected financial analysts in the country. He and his very talented staff spend a great deal of their time thinking about future returns for pension and retirement funds. We were together in Las Vegas last week, and one of the topics we discussed was the problem of underfunded pensions. The average retirement plan assumes it will get annual returns north of 7%, and many assume 7.5% or as much as 8%. Rob copied me on an email he sent this week to a high-ranking politician, asking about that very issue. Let me show you his calculations on potential future returns. Remember, he is talking about the long term here, not just the next 10 years. In our conversation in Vegas, we agreed that the next 10 years will be challenging in regards to investment returns. Quoting from his letter (in which he assumes the typical 60% equities/40% bonds ratio that most pension funds use), here’s the math:

40% Bonds. Yield is 2% for the US aggregate bond market.
60% Stocks. Our base case is 5.4% for US stocks, but we think valuations are too high, so we trim this to 3.3% for the coming decade.  Here’s our logic:

The yield is 2%.
Earnings growth over the past century has been 4.5%, of which 3.1% was inflation (real growth of 1.4% … far less than most people realize).
Inflation expectations are about 2%, so perhaps we should trim this forecast by 1.1%.
This gives us a base-case of 5.4%.
Valuation multiples are stretched, with the stock market priced at 25 times the 10-year average earnings, against a historical norm of 16.8x. If we’re back to historical norms in 10 years, that costs us another 4.2%.  Since valuation multiples could (a) return to historical norms, or (b) remain at today’s lofty multiples, let’s split the difference, and trim our return expectations another 2.1%.
This gives us a likely outcome of 3.3% from stocks.

If our logic is sound, we earn 0.8% from our bonds (40% allocation x 2% return) and 2% to 3.2% from our stocks (60% x 3.3%, or 60% x 5.4%). Add up the return from stocks and the return from bonds, and we get 2.8% to 4% from our balanced portfolio.

Bottom line … US public service pensions are toast. One of three constituencies gets nailed:  the taxpayer (keeping in mind that the affluent are mobile!), the current and/or future pensioners (keep in mind that private-sector pensions are now far less generous than public pensions … there’s an inequity here!), or the public services that are on offer to our citizenry, net of sunk costs from servicing past generations. Most likely, it’ll be a blend of the three.

When Bankruptcy Is Not an Option

Our judicial system has a time-tested option for those who can’t pay their debts: bankruptcy. Individuals and businesses use it all the time. The debtor submits itself to a court, which tries to reach the fairest possible settlement with creditors. It’s messy, but it usually works for the best.

Federal bankruptcy code permits cities, school districts, and other local governments to file bankruptcy. Some have done so, and I expect many others will in the coming years. Cities like Detroit and others in California have used bankruptcy to renegotiate their pension plans and other debts.

States are a different matter. Current law doesn’t let them go bankrupt.

In theory, Congress could change the law and let states go bankrupt. For instance, there are those who agree with President Obama, as well as with Newt Gingrich and Jeb Bush, that Puerto Rico should be allowed to go bankrupt.  If the law should change and a state actually tried to file for bankruptcy, creditors would immediately file constitutional objections under the contracts clause and the 10th Amendment. Some legal scholars think those barriers can be overcome, but at minimum the argument would go to the Supreme Court and probably take years to be resolved.

But getting Congress to pass such a controversial law could be quite difficult. There are good reasons to prevent state bankruptcies. The fact that they aren’t eligible for bankruptcy allows states to borrow money at lower interest rates. Lenders assume states will always figure out some way to repay their debts. But will they? Recent history says yes. Go back some 80-odd years and the answer isn’t so clear.

In 1933, debt-plagued Arkansas unilaterally restructured and extended maturities on a series of highway and other bonds. Nowadays we call that a default. Bondholders sued, of course. The next year the state and its creditors reached a compromise refunding. Creditors exchanged their old bonds for new ones funded by a 6.5 cent per gallon gasoline tax.

In today’s dollars that would be about $1.16 per gallon, so this was a hefty tax on Arkansas drivers. I am sure they complained. That deal fell apart, and after many more twists and turns, the federal Reconstruction Finance Corporation (predecessor to the FDIC) bought the new bonds.

Back to the present: the Moody’s report cited above sees almost zero chance that the federal government will bail out an indebted state government. I agree; the other state delegations in Congress would quash any such idea. You can debate whether the Arkansas episode was a “bailout” or just a refinancing, but it is one of the few precedents we have for a state default.

That leaves us in a very murky situation with regard to state and local pensions. We know many will have a hard time meeting their obligations. Those at the state level can’t go bankrupt, nor can they expect federal help. Something will have to give in those states. Whatever the outcome is, it won’t be pretty.

And not every government below the state level can declare bankruptcy to discharge its pension obligations. Illinois and other states, including my own state of Texas, have passed laws that require cities to honor their commitments. They can change pension agreements going forward, but they are legally required to honor past agreements.

Abandon State

This leaves an important question: which states and local governments will hit the wall first? Finding the answer is not as easy as you might think.

As noted above, evaluating a pension plan’s future prospects requires all kinds of long-term assumptions. Near-term prospects are hard to judge for a different reason. States and localities all operate under different state constitutions, contract laws, labor laws, and other constraints. Two states might look the same, financially speaking, but have far different pension-system prospects for legal reasons.

Illinois, for instance, is in a jam because its state constitution doesn’t permit it to reduce pension payments. Other states have more flexibility. States also give their pension managers different degrees of authority and liability. It’s a mess. What states are most likely to raise taxes and/or cut government services?

I found one analysis that helps pinpoint the top risks, considering not just pension shortfalls but other financial obligations as well. The Governing Institute, a group for state and local leaders, reviewed three separate studies from J.P. Morgan, PricewaterhouseCoopers, and the Mercatus Center of George Mason University. JPM and PWC both point to the same four states: Connecticut, Illinois, Kentucky, and New Jersey. The Mercatus Center concurred on those four and added Massachusetts to the list.

This doesn’t mean everyone else is safe. You might live in a very sick city in an otherwise healthy state. There are cities in Texas, arguably one of the healthiest states, with significantly underfunded pension plans. In our teacher retirement programs, many school districts are underfunded. You could also be in a sick city that is in a sick state, giving you double trouble if you own property there.

Oddly, you may be at risk if you stay, while your city and state are at risk if you leave. Property tax revenue depends on property values, and property values fall if too many people want to sell. If governments raise tax rates to compensate, then even more people will leave. At some point a death spiral sets in. Detroit went through this and is only now beginning to recover. People left the City of Detroit and moved to the suburbs.

I think we’ll see many more Detroits. Make sure you don’t live in one.

For instance, more and more affluent people are leaving California because of the taxes and other high costs. Dennis Gartman wrote this note:

According to the always interesting and strong proponent of free markets and small government, the Mercatus Center at the George Mason University, California now owes a stunning $118.2 billion. However, when we add to this sum the pension fund shortfalls and other major concerns, California actually owes $757 billion. On a population of 38.8 million, that's a stunning $19.5 thousand per citizen... Children included!

California's problem is that the state is adding nearly $15 billion annually to its deficits, and as those deficits rise the state’s ability to add to its roads, its universities, its hospitals, its bridges, its all-important water supplies et al are falling rapidly.

California, according to the Investor's Business Daily, is a “massive welfare state.” According to the IBD, one/third of all US welfare recipients live in California, which, with its generous welfare benefits, has become a magnet for impoverished immigrants from around the world. A quarter of the population lives near the poverty line.

And the news from California just gets worse. This from Reason magazine:

Another year, another mess with California’s public employee pensions. The California Public Employees’ Retirement System (CalPERS) announced this week that the rate of return for its investments for the fiscal year ending on June 30 was less than one percent. It was .61 percent. As the Los Angeles Times notes, this is the worst returns it has logged since 2009, when the housing bubble burst and hit California particularly hard.

That’s a far cry from the 7½% CalPERS assumes it will get. And the newly passed $15 minimum wage in California will add almost $4 billion of annual cost for government employees as well as increase the state’s required pension payments. 

Risk-Adjusted Retirement

I wrote about the retirement problem in depth a few months ago in “ZIRP & NIRP: Killing Retirement As We Know It.” I won’t repeat that analysis here, but I’ll say this: Whatever amount you are saving for retirement is probably not enough. The pension crisis is one element of a much bigger one.

If you’re a retired teacher, firefighter, etc., you naturally want what you were promised. You probably won’t get it. That’s just simple reality. The taxpayers don’t have the money. Now is an excellent time to accept that fact and make alternate plans.

In fact, that’s good advice for pretty much everyone. Your future plans, whatever they may be, probably won’t protect you from the storm I think is coming.

I may be wrong on this. I hope I’m wrong. There’s still a chance the central banks and politicians will get their acts together and change course. There are things they can do to restore sustainable economic growth and pull us out of the mud. We’ll be dirty but not drowned.

I’ve been having this conversation with my friend Ed Easterling. He pointed out that the crunch I am expecting could come in a very different way. Let me quote a paragraph from a recent email he sent me:

Lots of folks [he left the “like you” unstated] have been worrying about a looming financial catastrophe following policies that have included Fed QE, ZIRP, etc., and near-trillion-dollar stimulus programs. Maybe, just maybe, we’ll look back in five or ten years, after no catastrophe, and applaud that such “good” actions saved the economy without negative consequences. When, in reality, the “catastrophe” will have been the loss of 20%, 30%, or more in our standards of living and wage growth. The anecdote of the Frog-In-Boiling-Water may again prove to be a truism of life….

For planning purposes, however, the prudent course is to assume the worst. How will you retire in a 0% world? In most cases, you won’t. Kicking back at 65 or 70 won’t be an option if your portfolio can’t generate income sufficient to pay your bills.

If you intend to retire in the next few years, you need to do the math that so many pension sponsors avoid. You owe yourself an honest accounting. Will your savings be enough to cover your expenses in a zero-return world? Find a good financial planner to help you run the numbers in different scenarios. If he or she starts telling you that you’ll get 9% long-term (or 7% real, inflation-adjusted) returns on your stock market portfolio, politely glance at your watch and remember an important meeting that you have to go to. Then find another financial planner.

I think it’s important that everyone have a good financial plan and financial planner, someone who will give you a realistic estimate of your financial condition and what your retirement might look like.

If, as is likely, the numbers are discouraging, now is the time to adjust your expectations. If you’re still working, you can try to increase your savings. The statistics say that’s hard for most people. The better idea may be to follow the Mauldin Plan and don’t retire.

I’m almost 67 and not ready to retire. I could probably retire if I downsized my home and lived a much simpler life. I don’t want to do those things, so I’m still “working.” I put working in quotes because if I retired I would want to be doing the same thing I am doing now. I have the advantage of enjoying my work and being in good health. Not everyone is so fortunate.

This brings us to an important point. Adjusting your portfolio is only one of the preparatory steps you should be taking. It’s necessary but not sufficient. There’s much more to do.

Your most important asset is your own earning power. By this I mean the mental and physical ability to generate income. If your portfolio returns drop to zero (or even if they go down), but you still have earning power, you have a chance to recover. So it makes sense to protect and expand your earning power.

Ideally, you want to be in an occupation that won’t cut off your earning power at some arbitrary age. Better to have some kind of work you can do for as long as you wish. It should also be work you actually enjoy. No one wants to “retire” into slavery.

The other thing you should do is protect your health. Doing so gives you a double advantage. First, good health will enable you to work longer and more energetically. Second, people in good health have lower medical expenses.

My friend Patrick Cox talks about “health span” instead of life span. The goal is not simply to live longer but to stay active and independent at an older age. That’s what I hope to do. We are on the cusp of some major breakthroughs in life-extension technologies. I truly believe that 85 will be the new 65 long before I reach 85. Thus I may actually get to age backwards, at least for a few years. It’s what I optimistically tell myself, anyway.

Even without new developments, you can do a lot to increase your health span. Get exercise, lose weight, stop smoking, watch your diet – you know the drill. The hard part is actually doing it. Most people don’t, until it’s too late.

In a low-return world, your health and your earning power may be the best option you have. Preserve them at all costs. 

Maine, New York, Montana, and Iceland

I know the original plan was to mostly stay home this summer, but sometimes you have to call an audible at the line. Maine for the annual fishing trip was always in the plan, and you have to go back through New York anyway, so staying around for a day or two to do media and meetings makes sense. Then, how many chances would I get to do serious research on the future of space exploration for my book – but to seize the opportunity I have to go to Montana for a few days; that makes sense, too. Then the chance popped up to go to Iceland and get a new perspective on the future of energy development. It takes a day to get to Iceland, and then meetings and a little looking around for a day and a half, and I’m back in Dallas. And no plans to go anywhere for another month.

A couple weeks ago, I did an interview with my good friend Grant Williams of Real Vision TV. I do a lot of interviews, but Real Vision is different. They feature video-on-demand sessions with global leaders in the fields of finance and investing – people like Jim Rogers, Jeff Gundlach, Neil Howe, William White, Hugh Hendry, and Albert Edwards – with new content appearing every day. For me, a big part of the value of Real Vision is that the interviews are conducted by Grant and his partner Raoul Pal, two guys whose views I immensely respect. Now, they’re offering my readers a 7-day free trial and a 10% discount to anyone who signs up. You can check it out right here

I have been hobbling around for the last month. I seriously pulled my right quad muscle. There’s not much I can do other than wrap it and ice it. That and allow about three months for it to recover and then another 2–3 months of therapy to restore the strength I am losing by not working out below my waist. I guess the good news is, my upper body is getting stronger. And the pain is considerably less than it was a month ago, so I am recovering. And no, I didn’t strain it working out. I just moved wrong getting out of bed and stretched the leg in a direction that it evidently didn’t want to go. Consulting with the doctors and trainers confirms that there are no miracle cures for pulled muscles other than time. Which seems to be passing faster than ever these days, so before long I should be normal.

It’s time to hit the send button, so I’ll wish you a great week and move on to the next project.

Your not planning on retiring analyst,

John Mauldin

This Is Europe’s Last Chance to Fix Its Refugee Policy

The EU’s piecemeal solutions are coming apart. Only a surge of financial and political creativity can avoid a catastrophe.

By George Soros

The refugee crisis was already leading to the slow disintegration of the European Union. Then, on June 23, it contributed to an even greater calamity — Brexit. Both of these crises have reinforced xenophobic, nationalist movements across the continent. They will try to win a series of key votes in the coming year — including national elections in France, the Netherlands, and Germany in 2017, a referendum in Hungary on EU refugee policy on Oct. 2, a rerun of the Austrian presidential election on the same day, and a constitutional referendum in Italy in October or November of this year.

Rather than uniting to resist this threat, EU member states have become increasingly unwilling to cooperate with one another. They pursue self-serving, discordant migration policies, often to the detriment of their neighbors. In these circumstances, a comprehensive and coherent European asylum policy is not possible in the short term, despite the efforts of the EU’s governing body, the European Commission. The trust needed for cooperation is lacking. It will have to be rebuilt through a long and laborious process.

This is unfortunate, because a comprehensive policy ought to remain the highest priority for European leaders; the union cannot survive without it. The refugee crisis is not a one-off event; it augurs a period of higher migration pressures for the foreseeable future, due to a variety of causes including demographic and economic imbalances between Europe and Africa, unending conflicts in the broader region, and climate change. Beggar-thy-neighbor migration policies, such as building border fences, will not only further fragment the union; they also seriously damage European economies and subvert global human rights standards.

What would a comprehensive approach look like? It would establish a guaranteed target of at least 300,000 refugees each year who would be securely resettled directly to Europe from the Middle East — a total that hopefully would be matched by countries elsewhere in the world. That target should be large enough to persuade genuine asylum-seekers not to risk their lives by crossing the Mediterranean Sea, especially if reaching Europe by irregular means would disqualify them from being considered genuine asylum-seekers.

This could serve as the basis for Europe to provide sufficient funds for major refugee-hosting countries outside Europe and establish processing centers in those countries; create a potent EU border and coast guard; set common standards for processing and integrating asylum-seekers (and for returning those who do not qualify); and renegotiate the Dublin III Regulation in order to more fairly share the asylum burden across the EU.

The current piecemeal response to the crisis, culminating in the agreement between the EU and Turkey to stem refugee flows from the Eastern Mediterranean, suffers from four fundamental flaws.

First, it is not truly European; the agreement with Turkey was negotiated and imposed on Europe by German Chancellor Angela Merkel. Second, the overall response is severely underfunded. Third, it has transformed Greece into a de facto holding pen with inadequate facilities. Finally, it is not voluntary: It is trying to impose quotas that many member states strenuously oppose and requires refugees to take up residence in countries where they are not welcome and where they do not want to go while returning to Turkey others who reached Europe by irregular means.

The agreement with Turkey was problematic even before the July 15 coup attempt that has plunged Europe’s future into even greater uncertainty. On one level, the agreement seems to be a success, since the Balkan route is largely blocked and refugee flows to Greece have fallen to a trickle. But refugee flows have surged on the more dangerous Mediterranean routes. At the same time, the very premise of the deal — that asylum-seekers can legally be returned to Turkey — is fundamentally flawed. Greek courts and asylum committees have consistently ruled that Turkey is not a “safe third country” for most Syrian asylum-seekers, a perspective likely to be reinforced after the coup attempt.

The recent reorganization of the asylum appeals committees in Greece to make them more government-friendly is liable to be challenged in the courts, as will the European Commission’s July 13 proposal to override the decisions of national courts.

Meanwhile, the EU-Turkey deal, built on the premise that refugee rights can be traded for financial and political favors, is now being used as a template more broadly. Last month, the European Commission called for making development funds contingent on the implementation of migration controls by African partners. This violates the values and principles that ought to guide the European Union, constitutes a break with decades of practice in development funding, and degrades the treatment of both migrants and refugees. The grand bargain with countries in Africa and elsewhere cannot simply be: If you stop migrants from coming to Europe, you can do anything else you want. This approach damages everyone, morally, politically, and economically. A true grand bargain would focus on development in Africa — real development that over a generation would actually address the root causes of migration that so many politicians frequently invoke in their rhetoric and just as frequently disregard in practice.

An effective alternative to the EU’s current approach would be built on seven pillars.

First, the EU and the rest of the world must take in a substantial number of refugees directly from front-line countries in a secure and orderly manner, which would be far more acceptable to the public than the current disorder. If the EU made a commitment to admit even just 300,000 refugees each year, and if that commitment were matched by countries elsewhere in the world, most genuine asylum-seekers would calculate that their odds of reaching their destination are good enough for them not to seek to reach Europe illegally, since that would disqualify them from being legally admitted. If, on top of this, conditions in front-line countries improved thanks to greater aid, there would be no refugee crisis. But the problem of economic migrants would remain.

This brings us to the second point: The EU must regain control of its borders. There is little that alienates and scares publics more than scenes of chaos. Fifteen months after the acute phase of the crisis began, confusion continues to reign in Greece and its Mediterranean waters. More than 50,000 refugees live in squalor in a series of poorly organized, impromptu camps throughout the country.

Europeans see this on their screens and wonder why the mighty European Union is incapable of supplying even basic provisions to children and women fleeing war. Meanwhile, the most advanced navies of the world appear incapable of saving those crossing the Mediterranean; the number of drownings has increased dramatically this year. The cynical explanation for all this — that the EU is intentionally allowing these conditions to persist so that they serve as a deterrent — is equally troubling.

The immediate remedy is simple: provide Greece and Italy with sufficient funds to care for asylum-seekers, order navies to make search-and-rescue missions (and not “protection” of borders) their priority, and implement the promise to relocate 60,000 asylum-seekers from Greece and Italy to other EU member states.

Third, the EU needs to develop financial tools that can provide sufficient funds for the long-term challenges it faces and not limp from episode to episode. Over the years, the EU has had to finance an ever-growing number of undertakings with a shrinking pool of resources. In 2014, member states and the European Parliament agreed to reduce and cap the overall EU budget at a modest 1.23 percent of the sum of its members’ GDPs until 2020. That was a tragic mistake. The EU cannot survive with a budget of this size.

At least 30 billion euros a year will be needed for the EU to carry out a comprehensive asylum plan. These funds are needed both inside the union — to build effective border and asylum agencies and ensure dignified reception conditions, fair asylum procedures, and opportunities for integration — as well as outside its borders — to support refugee-hosting countries and spur job creation throughout Africa and the Middle East. Robust border and asylum agencies alone could cost on the order of 15 billion euros.

Although 30 billion euros might seem like an enormous amount, it pales in comparison to the political, human, and economic costs of a protracted crisis. There is a real threat, for instance, that Europe’s Schengen system of open internal borders will collapse. The Bertelsmann Foundation has estimated that abandoning Schengen would cost the EU between 47 billion and 140 billion euros in GDP lost each year.

The current approach is based on reallocating minimal amounts from the EU budget and then asking member states to contribute to various dedicated vehicles, such as the Facility for Refugees in Turkey and the EU Regional Trust Fund for Syria, which were used, respectively, to provide financial compensation for Turkey and additional EU funding to international organizations and neighboring countries as a response to the Syrian crisis. These, however, can only be a temporary solution, as they are neither sustainable nor large enough to finance efforts that must grow in size and scope. Although these trust funds can be powerful instruments in the short term to redeploy resources and allow member states to commit more funds to a particular endeavor, they also illustrate the fundamental deficiency of the current system — namely that it remains dependent on the good will of the member states at each step.

In order to raise the necessary funds in the short term, the EU will need to engage in what I call “surge funding.” This entails raising a substantial amount of debt backed by the EU’s relatively small budget, rather than scraping together insufficient funds year after year. Today, the EU stands out for having a remarkably low amount of debt given the size of its budget; it should therefore leverage this budget like all sovereign governments in the world do.
Making large initial investments in border protection, search-and-rescue operations, asylum processing, and dignified refugee sheltering will help tip the economic, political, and social dynamics away from xenophobia and disaffection and toward constructive outcomes that benefit refugees and host countries alike.
Spending a large amount at the outset in that way will allow the EU to respond more effectively to some of the most dangerous consequences of the refugee crisis and prevent some of its worst consequences. These include anti-immigrant sentiment in its member states that has fueled support for authoritarian political parties and despondency among those seeking refuge in Europe, who now find themselves marginalized in Middle East host countries or stuck in transit in Greece. Making large initial investments in border protection, search-and-rescue operations, asylum processing, and dignified refugee sheltering will help tip the economic, political, and social dynamics away from xenophobia and disaffection and toward constructive outcomes that benefit refugees and host countries alike. In the long run, this will reduce the total amount of money Europe will have to spend to contain and recover from the refugee crisis.

To finance it, new European taxes will have to be levied sooner or later. In the meantime, needs can be partially met by mobilizing the unused credit of already existing EU financial instruments: balance-of-payments assistance, Macro-Financial Assistance, and the European Financial Stabilization Mechanism (EFSM). These instruments together have more than 50 billion euros of unused credit available. The facilities would have to be repurposed and their mandate expanded, which would meet considerable resistance. But those are not good enough reasons to avoid tapping the unused financial capacity of the European Union.

At the height of the euro crisis, member states were able to summon the political will to rapidly create a new set of instruments that vastly augmented the financial power of the EU. The EFSM, which then became the European Stability Mechanism, raised the borrowing capacity of the EU to some 500 billion euros in just a year, proving that when there is a will, there is a way. But all these instruments face three limitations: They are mostly intergovernmental and rely on member-state guarantees rather than the EU budget, which remains too small to undertake such large borrowing; they require unanimous authorization by the member states; and they are essentially designed to lend money to other member states rather than engage true spending in the name of the EU.

The only way ahead is to form “coalitions of the willing” that do not require unanimous consent.

These initiatives could inspire deeper reforms of the EU budget. I was therefore greatly encouraged last year when German Finance Minister Wolfgang Schäuble suggested a pan-European gasoline tax.

I was soon disillusioned, however, when he explicitly warned against utilizing the largely unused borrowing power of the European Union.

The very existence of the European Union is at stake. It is the height of irresponsibility and a dereliction of duty to allow the EU to disintegrate without utilizing all its financial resources.

Throughout history, governments have issued bonds in response to national emergencies. When should the EU use its largely untapped borrowing capacity if not at a moment when it is in mortal danger? Doing so would have the additional advantage of providing a much needed economic stimulus. With interest rates at historic lows, now is a particularly favorable moment to take on such debt.
Fourth, the crisis must be used to build common European mechanisms for protecting borders, determining asylum claims, and relocating refugees. Some modest progress is underway: Legislation establishing a European Border and Coast Guard was adopted this month by the European Parliament. But the Dublin III Regulation — the basis of determining which country bears responsibility for processing and hosting asylum-seekers — prevents solidarity among EU member states by putting most of the burden on the country of first entrance; it needs to be renegotiated.

A European solution is currently emerging on the ground in Greece, where the European Asylum Support Office (EASO) de facto examines asylum applications in order to assist the overwhelmed Greek authorities. A single European asylum procedure would remove the incentives for asylum shopping and rebuild trust among member states.

Fifth, once refugees have been recognized, there needs to be a mechanism for relocating them within Europe in an agreed way. It will be crucial for the EU to fundamentally rethink the implementation of its stillborn resettlement and relocation programs; a tentative step in this direction was taken last week in new proposals put forth by the European Commission. The union cannot coerce either member states or refugees to participate in these programs. They must be voluntary; a matching scheme could elicit preferences from both refugees and receiving communities so that people end up where they want to be and where they are welcome. EASO has begun to develop such a matching scheme.

These programs should be deeply anchored in communities. Mayors across Europe have shown a remarkable willingness to receive refugees but have been thwarted by national governments. Public-private sponsorship programs — wherein small groups of individuals, community organizations, and companies support newcomers, financially and otherwise, as they negotiate schools, job markets, and communities — could benefit from the untapped goodwill of citizens throughout Europe.

Canada provides a good role model (although its geographic context differs from Europe’s). In just four months, it admitted 25,000 Syrian refugees and is integrating them through public-private partnerships and local nonprofits. The government has promised to accept another 10,000 Syrians by year’s end and 44,000 refugees in total in 2016. (At the same time, it is admitting 300,000 migrants in total every year; this would be the equivalent of the EU accepting 4.5 million migrants annually.)

The process by which Canada resettles refugees has been refined through repeated use over a long period of time and passes even the hyperstringent security standards of its southern neighbor. The vetting of Syrian asylum-seekers was meticulously carried out by some 500 consular and military officials mobilized immediately after Prime Minister Justin Trudeau took office last November and made the project a top priority. Both the public and media responded positively, despite the shock of the terrorist attacks in Paris and Brussels, which occurred at the height of Canada’s Syrian refugee program. Determined leadership from the top, close coordination with receiving local communities, robust screening and resettlement procedures, and honesty in confronting inevitable problems — these were the main ingredients of success. Compare that to conditions prevailing in Europe, and you get an indication of the distance that the EU has to travel.

Sixth, the European Union, together with the international community, must support foreign refugee-hosting countries far more generously than it currently does. The required support is in part financial, so that countries such as Jordan can provide adequate schooling, housing, training, and health care to refugees, and partly in the form of trade preferences, so that these countries can provide employment both to refugees and to their own populations. It simply does not make sense for Europe to commit upwards of 200 billion euros between 2015 and 2020 to deal with the crisis on its own shores — this is the amount member states are on track to spend on refugee reception and integration — when a small fraction of that amount spent abroad would have kept the influx of migrants to manageable proportions.

Equally, the EU must be more generous in its approach to Africa and not merely offer financial aid in exchange for migration controls, as the European Commission proposed last month. This approach simply empowers African leaders to wield migration as a threat against Europe, much as Erdogan has done. Instead, it must focus on real development in Africa. This means free trade, massive investment, and a commitment to rooting out corruption.

Some leaders in Europe have called for a Marshall Plan for Africa. This is an admirable ambition. But when it comes to the details, Europe is far away from such a vision. After World War II, the United States invested 1.4 percent of its GDP to help rebuild Europe — every year for four years. An investment on the scale of the original Marshall Plan would require around 270 billion euros a year for the next four years, a number we are very far from.

The seventh and final pillar is that, given its aging population, Europe must eventually create an environment in which economic migration is welcome. Merkel opened Germany’s doors wide to refugees, but her generous act was not well thought through; it ignored the pull factor.

A sudden influx of more than a million asylum-seekers overwhelmed the capacity of the authorities, turning public opinion against migrants. Now the EU urgently needs to limit the overall inflow of newcomers, and it can do so only by discriminating against economic migrants. Hopefully, this is temporary, but while it lasts, it is both inappropriate and damaging.

The benefits brought by migration far outweigh the costs of integrating immigrants. Skilled economic immigrants improve productivity, generate growth, and raise the absorptive capacity of the recipient country. Different populations bring different skills, but the contributions come as much from the innovations they introduce as from their specific skills — in both their countries of origin and their countries of destination. There is plenty of anecdotal evidence for this, starting with the Huguenots’ contribution to the first industrial revolution by bringing both weaving and banking to England. All the evidence supports the conclusion that migrants have a high potential to contribute to innovation and development if they are given a chance to do so.

Pursuing these seven principles is essential in order to calm public fears, reduce chaotic flows of asylum-seekers, ensure that newcomers are fully integrated, establish mutually beneficial relations with countries in the Middle East and Africa, and meet Europe’s international humanitarian obligations.

The refugee crisis is not the only crisis Europe has to face, but it is the most pressing. And if significant progress could be made on the refugee issue, it would make the other issues — from the continuing Greek debt crisis to the fallout from Brexit to the challenge posed by Russia — easier to tackle. All the pieces need to fit together, and the chances of success remain slim. But as long as there is a strategy that might succeed, all the people who want the European Union to survive should rally behind it.

Turkey and NATO: What Comes Next Is Messy

With U.S. forces (and nuclear weapons*) housed at Incirlik Air Base, the relationship between Ankara and Washington is critical — and delicate.

By James Stavridis

Turkey and NATO: What Comes Next Is Messy

Perhaps the most shocking thing about the attempted coup in Turkey was that it had not already occurred. The obvious tensions between civil and military authorities have been a long-simmering witches’ brew in Turkey, dating back to the fall of the Ottoman Empire a century ago and continuing through multiple coup attempts over the past four decades.

Hundreds of senior admirals and generals were charged and jailed on suspect charges in the so-called Sledgehammer scandals of the 2000s, and the seeds of the current coup were planted when bitter military leaders watched their commanders and mentors be taken to prison in handcuffs.

 During my four years as supreme allied commander at NATO, I often visited Turkey and developed close relationships with many senior Turkish military officers — some of whom served time later in notorious Turkish prisons, including the former chief of the general staff, Gen. Ilker Basbug. I know the current chief, Hulusi Akar, as well.

Both always struck me as totally loyal to civilian leadership, and it appears at this point that the guilt for initiating the coup will fall lower in the chain of command.

The crisis will give President Recep Tayyip Erdogan all the ammunition he requires to conduct a severe crackdown on both the military and the courts. He has said he will use this to purge the military and the courts — chilling words, indeed. With nearly 300 dead as a result of the coup, the desire for vengeance will be strong. Hundreds of jurists already have been arrested — many of whom were instrumental in blocking various initiatives coming from Erdogan’s palace. More than 6,000 officials and service members have been detained, and roughly 8,000 police officers have been taken off the streets.

One particularly troubling element is the status of Incirlik Air Base in southern Turkey, where NATO reportedly has housed tactical nuclear weapons, though the United States will neither confirm or deny their presence. If true, this poses a very dangerous problem, and Washington will need Ankara’s full cooperation to ensure that all U.S. military equipment and forces are fully protected — which appears to be happening, after some moves toward isolating the base Saturday.

But the big questions remain: How will the failed coup impact Turkey in its role as a military ally in the NATO structure, and what should the United States be doing?

Clearly, there will be a strong negative impact on the ability of the Turkish military to perform its duties across the spectrum of alliance activities. Turkey has sent troops, aircraft, and ships to every NATO mission: to Afghanistan, the Balkans, Syria, Libya, and on counterpiracy missions.

Unfortunately, it is likely that the military in the wake of the coup will be laser-focused on internal controversy, endless investigations, and loyalty checks — and simply surviving as an institution. This will have a chilling effect on military readiness and performance. While some operations have resumed at the crucial Incirlik Air Base, cooperation is already frozen across many U.S. and NATO channels.

At the same time, the Turkish civilian authorities will be deeply suspicious of their military and gendarme forces following the coup, even though at this point it appears more beer-hall putsch than geopolitical earthquake. This will make Turkish civilian leaders, from Erdogan on down, less likely to be willing and capable partners in ongoing military operations outside of Turkey (e.g., the NATO missions against the Islamic State).

For the United States, there are four key actions Washington should take to try to move forward.

First, we need to stand firmly on the side of the Turkish civilian government. Despite the authoritarian impulses of the current regime, it is unquestionably democratically elected and deserves support in the face of the coup attempt. That does not mean the United States should falter in criticizing flawed human rights policies and new attempts to crack down on the media.

We need to encourage our Turkish partners to be measured, legal, and balanced as they investigate. There is clearly a danger of the post-coup investigations becoming a vehicle to cleanse jurists and military members who were not involved in the coup but are perceived as being politically difficult for the regime. This will require a delicate balance.

Second, we should send our senior military officials to Ankara to hear from their counterparts about the situation while congratulating Turkey’s leadership on doing the right thing and helping stop the coup. Additionally, our civilian leaders — from the secretary of state on down — should likewise visit and reassure the Erdogan government of our support. It is premature to judge evidence on Erdogan’s request for extradition of Fethullah Gulen, the Turkish cleric in Pennsylvania, but the United States needs to be open to requests — in the spirit of international law — as it would for any other case.

A third smart move by the United States would be to increase cooperation in intelligence sharing and targeting against Kurdish radical terrorist groups. We have cooperated in the past with the Turkish military very closely, but those relationships have become blurred given the commendable actions of the Kurdish militias in Syria against the Islamic State. Turkey needs a signal from the United States that it stands with Ankara against terrorism within its borders.

This could include, for example, additional intelligence, surveillance, and reconnaissance aircraft and better satellite imagery.

Fourth, and finally, the United States should use NATO as a mechanism to support Turkish positions.  We are at a very delicate and crucial point in the negotiations about how to deal with the problems in Syria, and how Turkey is handled within the context of NATO leadership is important.

Too often, the Turks feel as though their unique concerns and geography are not respected within the North Atlantic Council, the governing body of the alliance. Given the unfortunate confluence of the recent terrorist attack at the Istanbul airport and the coup, we need to be sensible and supportive of Turkish positions on how to deal with the Islamic State and Bashar al-Assad’s regime. This should include increasing resources to the Allied Land Command in Izmir, the largest NATO installation in Turkey.

The highly unstable geopolitics of the Levant and NATO’s expanding security needs come together at a crossroads in Turkey. It is not only a nation, but a civilization as well, one that has an acute sense of its importance and history in the region. In a host of issues — from the Islamic State to Syria; Israel to oil and gas in the eastern Mediterranean; responding to radical Islam to stability in Egypt — Turkey has an enormous ability to influence events. Washington needs to be a good friend — supportive in real ways while providing advice and incentives (like membership in the European Union), which may help circumvent any tendency to overreaction that tramples on human rights in the drive for vengeance. It’s a hard balance to strike, but one that demands the full attention of the United States in the days ahead.

James Stavridis is a retired four-star U.S. Navy admiral and NATO supreme allied commander who serves today as the dean of the Fletcher School of Law and Diplomacy at Tufts University.

* Editors’ note: The United States will neither confirm nor deny the presence of nuclear weapons in Turkey.

Photo credit: ORHAN AKKANAT/Anadolu Agency/Getty Images

IMF Executive Board Concludes 2016 Article IV Consultation with Peru


On June 20, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with Peru, and considered and endorsed the staff appraisal without a meeting. 2

As a result of prudent macroeconomic management, Peru has successfully navigated the commodity cycle and the 2008–09 global financial crisis, and still leads growth among large Latin American economies. Thus, the new government, which takes office on July 28, 2016, will inherit an economy with a solid foundation, good institutional frameworks in place, and structural reforms in train.

However, important challenges now loom, as metal prices have entered into a slump since their 2011 peak, hurting exports, investment, and fiscal revenues. Following a sharp and unexpected drop in 2014, growth picked up in 2015, reaching 3.3 percent largely owing to higher metals production and fishing, and a partial recovery in services and commerce. Despite a widening negative output gap, inflation increased by more than 1 percentage point to 4.4 percent, y-o-y, in December 2015, reflecting food supply shocks, regulatory adjustments to energy prices, and a pass-through from currency depreciation. The external current account reached a deficit of 4.4 percent in 2015 despite the sol depreciation.

Monetary and exchange rate policies remained attentive to rapidly changing conditions. The central bank has raised the policy rate since September 2015 by a full percentage point to 4.25 percent aiming at re-anchoring inflation expectations, which has added to tighter external financial conditions. The sol was allowed to depreciate 14 percent with respect to the U.S. dollar, while volatility was contained. The authorities have eased the adjustment to commodity price shocks through an expansionary fiscal policy in 2015, but with mixed results, as capital spending continues to suffer delays.

Peru is positioned to grow faster in the next two years, as mining production reaches full capacity and large infrastructure projects advance. Inflation is expected to decline. Risks to the outlook are balanced, and downside risks are mostly on the external side. Upside risks on the domestic front are a pick-up in sub-national investment and possible larger-than-projected increases in confidence and investment after the presidential election.

Executive Board Assessment

After decelerating sharply in 2014, economic activity recovered last year despite a volatile external environment. The recovery largely reflected additional mining production capacity coming on stream, although non-mining activity has also accelerated modestly more recently.

An expected increase in mining exports, together with some rebound in public investment, will impart a strong positive impetus on growth going forward, which should spillover to non-commodity sectors. Thus, despite sluggish external conditions, activity is expected to accelerate further in 2016 and 2017, while inflation continues to decline.

Risks to the outlook are balanced. External pressures have carried over from last year and comprise possibly weaker-than-projected growth in China (and, hence, softer metal prices), possible adverse spillovers from other countries in the region (though these should be relatively small), sharp asset price adjustments in advanced and emerging economies, and an even stronger dollar. The response to shocks should be through further exchange rate flexibility and easing liquidity conditions to support credit activity. Upside domestic risks include stronger-than-expected improvements in business confidence (especially if the incoming government announces decisive productivity-enhancing reforms) and a more effective execution of the existing pipeline of infrastructure projects, which could lift growth further in 2016–17 and beyond.

Monetary and exchange rate policies should remain attentive to rapidly changing conditions.

Following monetary tightening, the BCRP should now maintain a wait-and-see stance—given declining inflation and medium-term inflation expectations, the fact that it is too soon to evaluate the effect of past monetary tightening on economic activity and inflation, and the usual uncertainties surrounding the exact cyclical position of an economy. This said, a possibly steeper interest rate path in the United States than currently priced by the financial market could trigger the need for further monetary tightening in Peru. Greater exchange rate flexibility in 2015 was a welcome development with no noticeable impact on firms’ and banks’ balance sheets; the latter remain healthy and profitable. Further decline in credit de-dollarization has been achieved not least due to the measures introduced by the BCRP. Further exchange rate flexibility would support the development of hedging instruments to reduce currency risk and help accelerate the de-dollarization process. Recent measures to deepen Peru’s equity market are also welcome.

A gradual fiscal consolidation in the next few years is advisable to maintain healthy debt dynamics and to protect fiscal buffers. With the output gap closing around end 2017, there is no case for loosening fiscal policy. A gradual fiscal consolidation would be important for ensuring the sustainability of pensions, and defending against natural disasters and realization of contingent liabilities. To accommodate higher-than-projected public capital spending, it will be critical to create adequate fiscal space through containing current spending that is not complementary to capital expansion and structural reforms (including in health and education), and raising the low revenue collection through streamlining administration, reducing informality and exemptions, and protecting Peru’s tax base from possible international profit shifting by multinational corporations. Reducing bottlenecks to public investment and improving management would go a long way toward enabling full execution of budgeted spending and would support private investment.

With the end of commodity-driven growth, the agenda for growth-spurring structural reforms has become a higher priority, including for further poverty reduction. Investments in capital and labor will be needed to boost potential growth, which is otherwise estimated to be 3.5 percent in the absence of continued reforms. Long-standing challenges include reducing informality, which should be in part addressed through labor market reforms aiming at lowering the costs of hiring and firing workers, and spurring investment in non-extractive industries, including through improving competitiveness and infrastructure. Peru’s current decentralization framework should be improved, as it constrains full execution of planned capital expansion and better allocation of resources. While Peru has achieved one of the highest rates of education coverage in Latin America, the low quality of education remains a crucial challenge, and the ongoing reforms will need to continue. Efforts to raise financial inclusion are commendable, especially through the launch of the broad-based National Financial Inclusion Strategy and the private sector-led e-money platform. Free trade agreements also provide an opportunity for boosting and diversifying long-term growth.

Staff would like to relay their appreciation to the outgoing administration for the constructive dialogue and look forward to working with the new government.

Peru: Selected Economic Indicators
Social Indicators
Life expectancy at birth (years)
Infant mortality (per thousand live births)
Adult literacy rate
Poverty rate (total) 1/
Unemployment rate
(Annual percentage change; unless otherwise indicated)
Production and prices
Real GDP
Real domestic demand
Consumer Prices (end of period)
Consumer Prices (period average)
External sector
Terms of trade (deterioration -)
Real effective exchange rate (depreciation -)
Money and credit 1/ 2/
Broad money
Net credit to the private sector
(In percent of GDP; unless otherwise indicated)
Public sector
NFPS Revenue
NFPS Primary Expenditure
NFPS Primary Balance
NFPS Overall Balance
External Sector
External current account balance
Gross reserves
In millions of U.S. dollars
Percent of short-term external debt 3/
Percent of foreign currency deposits at banks
Total external debt
NFPS Gross debt (including Repaymetn Certificates)
Savings and investment
Gross domestic investment
Public sector 4/
Private sector
National savings
Public sector 5/
Private sector
Memorandum items
Nominal GDP (S/. billions)
GDP per capita (in US$)
Sources: National Authorities; UNDP Human Development Indicators; and Fund staff estimates/projections.
1/ Corresponds to depository corporations.
2/ Foreign currency stocks are valued at end-of-period exchange rates.
3/ Short-term debt is defined on a residual maturity basis, and includes amortization of medium- and long-term debt.
4/ Includes Repayment Certificates (CRPAOs).
5/ Excludes privatization receipts.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2 The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
IMF Communications Department