Peru, Pandemic Threatens to Devastate Economy

The dramatic and devastating impact of the coronavirus (Covid-19) pandemic on the global economy is already incontrovertible. What remains to be determined is just how hard this shock will hit, how long it will last, and which countries will be worst affected. Some estimates now predict that Peru’s economy will be among the hardest hit not just in Latin America but the world.
Peru Pandemic Devastate Economy

According to projections released in June by the World Bank (WB) and the International Monetary Fund (IMF), Peru is facing a more significant decline than most. The WB’s Global Economic Prospects report predicted that the country’s GDP will contract by around 12% in 2020, “despite plans for significant fiscal stimulus” - this would make Peru the third worst-affected country in the world, surpassed only by Belize and the Maldives.

The IMF was initially more optimistic, with its April forecast predicting a contraction of 4.5% for Peru this year, comparing favourably to its estimate for an average global decline of 5.2%. In late June, however, the IMF revised down its forecast for Peru, anticipating a 14% contraction in 2020, once again placing the country among the hardest hit in the world.

Peru was one of the first Latin American countries to impose quarantine controls, with a state of emergency declared by the government on 16 March, when there were just 71 confirmed cases. Yet despite the early introduction of measures to control the spread of the virus, as of 1 July Peru had registered the second-most cases of Covid-19 in South America (although this can to some extent be explained by it having carried out more tests than most).

The latest figures suggest that the country may have passed the peak of its outbreak, with quarantine restrictions lifted in 18 of Peru’s 25 regions on 1 July. However, the seven remaining regions (Arequipa, Áncash, Ica, Junín, Huánuco, San Martín, and Madre de Dios) have continued to face rising infection rates, and will remain under a stricter quarantine until at least 31 July.

President Martín Vizcarra has reminded the population that the crisis will not be fully resolved until a vaccine becomes available. In the meantime, Peruvians were asked only to go outside when necessary, to wear a face mask when outside the house, to wash their hands, and to observe social distancing of at least one metre.

Economic impact

The long duration of this quarantine period was cited by the IMF as one of the reasons for its decision to further cut Peru’s GDP forecast. Despite the raft of economic measures announced by the Vizcarra government to provide financial support to those affected by the pandemic, one of the greatest barriers both to controlling the spread of the virus and managing its economic impact, is the size of Peru’s informal economy.

A BBC report released in May estimated that 71% of Peru’s working population are either in informal employment or earn money on a day-by-day basis. For many salespeople, it is almost impossible to work while observing social distancing. The imposition of quarantine measures has seen custom all but dry up for those who made a living selling snacks on the streets or at public transport hubs, while taxi and Uber drivers have also been hit hard by the measures encouraging people to stay at home.

Although the US$26bn financial stimulus package announced by the Vizacarra government included plans cash transfers to support approximately 7m poor families across the country, there are still reports that less than half of those payments reached those for whom they were intended.

The pandemic has strained medical infrastructure to its limits in all parts of the world. In the case of Peru, where healthcare provision has long been patchy, and the reach of the state is not always felt in the country’s more isolated communities, the economic and sanitary impacts of Covid-19 have proved difficult to mitigate.

The city of Iquitos, the capital of Peru’s Amazonian Loreto region, which had already been struggling with an outbreak of dengue fever before the arrival of the coronavirus, was hit particularly hard. As the largest city in the world without road access, all supplies of personal protective equipment (PPE), oxygen, and medicine have had to be delivered by air, with the scarcity of these products driving black market prices to astronomical levels.

A report published in May by British daily, The Guardian, stated that the price of an oxygen cylinder on the black market had risen to more than US$1,000, while the central government was forced to offer to fly in doctors from other parts of the country to replace those who had to be evacuated after they contracted Covid-19 themselves.

There have also been accusations of corruption in the procurement of oxygen cylinders by the Loreto regional government, after allegations were made that private companies with links to elected officials were being paid inflated prices for medical supplies.

Healthcare shortcomings

Such accusations – and the horror that has accompanied the news that hospitals in many of Peru’s more isolated regions have neither the beds nor the supplies to treat the ever-increasing numbers of people infected with the virus – have reignited familiar criticisms of the lack of public investment in healthcare.

Spending on the public healthcare and education sectors has been relatively low since the 1990s, despite Peru having a lower debt-to-GDP ratio than most of its neighbours in Latin America. As a result, the Peruvian healthcare system was far less robust before the onset of the coronavirus pandemic than many of its regional counterparts; hospitals and local clinics, particularly in more isolated parts of the country, were operating with limited resources even before they had to deal with Covid-19.

The limitations of the healthcare system, combined with a general lack of trust in the central government in many communities and localities, has hindered efforts to diagnose and treat those infected with Covid-19 before they spread it to others around them. The situation in Peru is something of a paradox: the government did a lot right in terms of its immediate response to the pandemic, and yet it is still faced with a crisis on a greater scale than many of its neighbours.

As Peru is a commodity exporter, the slowdown of global manufacturing will have contributed to the pessimism of economic forecasts, but the extent of this pessimism is likely to have been driven largely by the fact that the Peruvian economy cannot return to normal until the health emergency is well on its way to being resolved.

The fallout from this pandemic may well create renewed interest in boosting investment in healthcare, particularly as the crisis has demonstrated that economic stimulus packages alone are a poor substitute for a robust healthcare system that is able to get the population back on its feet and working again as quickly as possible.