Chris Callahan & Joelle Fricot
Peru's strong economic performance in recent years can be attributed to a combination of solid monetary and fiscal policies. This can be seen when looking at Peru's GNI per Capita, and GDP on Figures 1 and 2.hese policies have helped to promote:
- Macroeconomic stability
- Prudent fiscal spending
- High international reserve accumulation
- External debt reduction
- Achievement of investment grade status
- Fiscal surpluses
Peru's economic performance has been tightly connected to the country's exports. Exports provide Peru with hard currency allowing them to finance imports and external debt payments. Peru`s main exports are copper, zinc, chemicals, gold, textiles, manufactures, machinery, and services. China, Brazil, EU, Chile, and the United States are all major trade partners to Peru. What is interesting to note is that even with large generated revenues from exports, there are no clear signs of self-sustained growth and a more even distribution of income.
Throughout Peru's history, mining has been an essential component in the country's development. To this day, mining continues to be a major component in Peru's economy. Over the past 12 years there has been rapid development in the Peruvian economy. Massive clusters of investments have flowed into oil and gas, agriculture, and mining.
In 2010, a mega copper project was announced by Xstrata. Construction of the Las Bambas project will be the largest
single investment in Peru to date, with a planned expenditure of $4.2B. With the upcoming investments in Peru, Copper production is expected to triple from the current 1.25M metric tons (mt) of fine copper to 3.5M mt in six to seven years.
The Peruvian Ministry of Energy and Mines stated that the mining sector has a project portfolio with 41 Billion. 28 of this 41 Billion is directed towards copper projects. This has contributed to Peru's international image as a mining friendly country.
The Mining GDP
In the past 20 years Peru's mining GDP has risen almost 260%, according to the Peruvian Mining Ministry. This has been largely caused by rising investment in the sector. The Peruvian mining sector has attracted investments worth more than US$18B in the last five years, growing at a rate higher than national GDP according to SNMPE`s President Hans Flurry. It was also noted that the mining sector accounts for 60 percent of Peru's total exports and for over 40 percent of the so-called third category income tax
Third Category income tax is the type of income tax that applies to businesses established in Peru. These businesses are taxed not only on Peruvian income, but also on offshore income. However, branches of foreign companies that are not established in Peru are only taxed by Peru's government on their Peruvian income.
Illegal Mining in Peru
The majority of the illegal mining which takes place in Peru occurs in the Madre de Dios region of the country. In Peru there are over 100,000 illegal miners and over 400,000 compatriots of the activity. Approximately 70 percent of 16 tons of Gold mined in Peru is mined and processed in Madre de Dios.
Implications for the Peruvian Economy
It is evident from production and trade data that since 2005 illegal gold mining has increased. Since then the formal amount of gold production has been declining, while simultaneous gold exports have remained constant or increased slightly. With the increasing spot rate of gold, there is no doubt that the demand has increased.
It is estimated that of the 5M ounces of gold that Peru exports worldwide, 22% comes from illegal mining activities within the country. When gold consumption in Peru is taken into account, 1/3 of all gold in the south eastern regions comes from illegal sources.
Global M&A has valued the illegal gold mining industry in Peru to be worth US $1.8B with more than the estimated US $1.2 generated by the country's cocaine exports. Profits are estimated by Global M&A to be close to US $1B. Of that US $1B, the Peruvian government is deprived of approximately US $305M annually in taxes.
There are many indicators in the demographics of those living in Madre de Dios that the industry is growing. Two of the most startling statistics are the population growth in the area, almost 80% between 1993 and 2007, as opposed to the national average of 24%, and family monthly incomes in the region rose from US $370 to US $882 from 2004 to 2010.
New Law for Illegal Miners
The government of Peru has recently adopted a new law in hopes of reining in the illegal mining in the nation, legitimizing the miners, and adding to the legitimate output of the nation ultimately bringing in more tax dollars.