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Last Updated: Monday, 28 July, 2003, 07:05 GMT 08:05 UK
Taxing times for Peru's economy

By Elliott Gotkine
BBC Lima correspondent

President Alejandro Toledo
President Toledo of Peru is under pressure
According to Peru's President, Alejandro Toledo, his country's economy is the showgirl of Latin America. It grew at 5.3% last year, the highest rate in the region.

But when he delivered his state of the nation address on July 28 - Peru's Independence Day and his second anniversary as President -- Mr Toledo did not have much to sing and dance about.

The latest figures show the economy grew by just 1.8% for the year to May. A recent spate of attacks by the left wing guerrilla group, Shining Path, means the government now has to find extra cash to beef up the police and armed forces.

Together with the money needed to finance a pay rise for the country's teachers, the Peruvian state has to scrape together more than $200m (120m). And it's decided the only option is to raise taxes.

Budget woes

To be fair, Peru's accounts were in a mess even before the nation's 300,000 teachers took to the streets to demand President Toledo fulfil his election pledge to double their salaries.

They eventually settled for a $30 a month pay rise, which means most teachers now earn around $230 a month.

Faced with a gaping hole in its finances - along with the need to divert resources to combat an apparently resurgent Shining Path -- the government said it would cut spending by $100m. Even President Toledo has taken a pay cut.

But the government also decided to raise a variety of taxes, most controversially a one point increase to the country's general sales tax (IGV), to 19%.

Peru's Prime Minister, Beatriz Merino, describes the tax rise as "unfair". Even her boss, Mr Toledo, says he doesn't like it.

But after Congress rejected proposals to increase taxes on cable TV and mobile phone use, the President says he was left with no other choice.

Business concerns

But this means little to Peru's business community, which is less than impressed with the increase in IGV.

"In the framework of a slowing economy, it will undoubtedly be counter-productive," says Samuel Gleiser, the President of the Peru Chambers of Commerce.

Extra tobacco taxes could boost smuggling
"Also, it will increase the pressure on informality, tax evasion and contraband, and maybe, because of this situation, the government might not collect as much as they expected."

The tax rises - which include a selective consumption tax on cigarettes -- have especially angered British American Tobacco (BAT).

It recently bought Peru's only tobacco company, Tabacalera Nacional, for an undisclosed sum. But because of the tax rises, BAT has decided to reassess its plans for Peru.

"We made a significant investment three months ago," says Luiz Hereen, the head of BAT's operations in Peru and Ecuador.

"The only thing we asked for from the government was stability. Our volume will drop with this new tax, contraband will flow in, and all the plans that we had, in terms of new investment, are at risk, and the jobs, the 5,000 families that live from tobacco growing and cigarettes, are at risk as well."

Jobs crisis

Creating jobs in Peru is a huge issue. Officially, unemployment is just 9.3%, but in Lima alone, around a third of the working-age population is without a formal job.

Lima shoe shine operator
Much of Peru's economy is informal
Whenever you see a long queue of people in Lima, the chances are they're looking for work.

What Peru really needs is foreign investment in job-creating projects. But bureaucracy and an inefficient state have often put people off.

Worse still, last month's Shining Path kidnap of 67 workers on Peru's largest source of foreign investment - the Camisea natural gas project - means some foreign investors are now even less inclined to commit money to the country.

The other main problem is that over half the country's economy is informal.

Everyone agrees that more people need to pay tax. If they did, then perhaps President Toledo would be able to afford the teachers' pay rise, finance increased security, and maybe even be able fulfil one of his other election pledges, which was to reduce the general sales tax.

Peru rebel ambush raises fears
11 Jul 03  |  Americas
Peru's leader slashes salary
09 Jul 03  |  Americas
Peru cabinet resigns en masse
25 Jun 03  |  Americas
Country profile: Peru
01 Jul 03  |  Country profiles
Analysis: Peru's Shining Path
11 Jun 03  |  Americas


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