During the 1990s, Peru was transformed by market-oriented economic reforms and privatizations, and met many conditions for long-term growth. From 1994 through 1997, the economy recorded robust growth driven by foreign direct investment. The economy stagnated from 1998 through 2001, the result of an "El Niño" weather phenomenon, global financial turmoil, and other factors. Growth strengthened to 3.1% in 2000. The collapse of the Fujimori government and ensuing political instability deterred investment, however, and GDP grew only .2% in 2001. Upon taking office, President Alejandro Toledo , maintained largely orthodox economic policies, and took measures to attract investment. The government brought the deficit down to 2.5% of GDP in 2001, and 2.2% of GDP for 2002. Peru's economy recovered dynamically in 2002, which saw GDP growth of 5.2%. This growth has continued into 2003, with GDP likely to expand 4.0% for the year. GDP currently is $61 billion, in a country of 27.1 million. Banking, retail services, agriculture, mining and manufacturing are key sectors. Inflation is under 2%, with a stable currency and 9.1% unemployment. The fiscal deficit is in control, and likely to meet the IMF target of 1.9% of GDP. Foreign reserves grew over $1 billion in 2002, and are near $9.8 billion. External debt equals 48.5% of GDP.

Foreign Trade and Balance of Payments
The current account deficit dropped in 2002 to about 2.1% of GDP ($1.2 billion. Minerals and metals exports recorded large gains in 2001 and 2002, mostly as a result of the opening of the Antamina copper-zinc mine. By mid-2002, most sectors of the economy were showing gains. Peruvian exports reached $7.65 billion in 2002, with imports of $7.44 billion, producing the country's first trade surplus in 11 years. U.S. Andean Trade Promotion and Drug Eradication Act (ATPDEA) benefits may propel exports above $8.4 billion in 2003. Peru's major trading partners are the U.S., EU, Japan, Colombia, Brazil, China and Venezuela. Over 25% of Peruvian exports are destined for the U.S. and 30% of Peruvian imports come from the U.S. Exports include fish, copper, zinc, gold, petroleum, coffee, and textiles and apparel. Imports include machinery, vehicles, processed food, petroleum and steel. Peru belongs to APEC and the WTO, actively participates in FTAA negotiations and seeks a free trade agreement (FTA) with the U.S. Net international reserves at the end of October 2003 stood at $9.81 billion, up from $9.6 billion at the end of 2002.

Foreign Investment
The Peruvian Government actively seeks to attract both foreign and domestic investment in all sectors of the economy. International investment was spurred by the significant progress Peru made during the 1990s toward economic, social, and political stability, but it slowed again after the government delayed privatizations and as political uncertainty increased in 2000. President Alejandro Toledo has made investment promotion a priority of his government. While Peru was previously marked by terrorism, hyperinflation, and government intervention in the economy, the Government of Peru under former President Alberto Fujimori took the steps necessary to bring those problems under control. Democratic institutions, however, and especially the judiciary, remain weak.

The Government of Peru's economic stabilization and liberalization program lowered trade barriers, eliminated restrictions on capital flows, and opened the economy to foreign investment, with the result that Peru now has one of the most open investment regimes in the world. Between 1992 and 2001, Peru attracted $10 billion in foreign direct investment in Peru, after negligible investment during the 1980s, mainly from the United Kingdom, Spain, the United States, Panama, and Chile. The basic legal structure for foreign investment in Peru is formed by the 1993 Constitution, the Private Investment Growth Law, and the November 1996 Investment Promotion Law. Although Peru does not have a bilateral investment treaty with the United States, it has signed an agreement (1993) with the Overseas Private Investment Corporation concerning OPIC-financed loans, guarantees, and investments. Peru also has committed itself to arbitration of investment disputes under the auspices of ICSID (the World Bank's International Center for the Settlement of Investment Disputes) or other international or national arbitration tribunals.

Economic Outlook
Growth in 2003 has been driven by construction, investment, domestic demand, and ATPDEA-related exports. Peru's economy is one of the better-managed in Latin America, but challenges remain. Better tax collection and growth are hiking revenues, but government expenditures are keeping pace. Peru secured its $750 million external financing requirement for 2003 with international bond issuances early in the year and raised more than $400 million via a new domestic bond program. However, the government may need $1 billion in external finance in 2004. The government faces continuing strong social pressures to reduce poverty of 54% (under $58/month) and extreme poverty of 24% (under $32/month). Unemployment and underemployment levels total 56%, and growth is insufficient to generate strong new employment. The government lacks revenues for adequate social investment. Boosting long-term growth will require improving the investment climate, reducing corruption, and completing other reforms. Over the next few years, the country is likely to attract both domestic and foreign investment in the tourism, agriculture, mining, petroleum and natural gas, and power industries.

Narcotics
Peru remains the second-largest producer of coca leaf in the world despite an unprecedented 70% reduction in the number of acres of illegal coca leaf under cultivation since 1995. Over 30,000 hectares are currently cultivated in Peru according to the CNC. Ninety percent of all coca leaf grown in Peru is diverted into the illicit narcotics trade. As a result, Peru is a major exporter of high-purity cocaine and cocaine base to markets in South America, Mexico, the United States, and Europe,

The impact of this illicit industry to the national economy is difficult to measure, but estimates range from $300-$600 million. An estimated 200,000 Peruvians are engaged in the production, refining, or distribution of the narcotic. Many economists believe that large flows of dollars into the banking system contribute to the traditional depression in the dollar exchange rate vis-à-vis the sol, and create a climate in which money-laundering can flourish. The Central Bank engages in open market activities to prevent the price of the sol from rising to levels that would otherwise hurt Peruvian exports.

In response to changes in the dynamic of the cocaine trade in the 1990s caused by market forces and interdiction efforts, drug traffickers in Peru have diversified and are now using land, sea and river routes, and likely aircraft as well, to transport cocaine paste and, increasingly, cocaine hydrochloride (HCL) around and out of the country. As part of a possible renewal of the airbridge denial interdiction program, suspended in April 2001, the embassy is working with the Government of Peru to establish a joint counter-narcotics coordination center in Pucallpa, Peru. Aerial interdiction of drug traffickers may resume if it is determined through the work of this center that such traffic exists and once adequate training and safety measures have been instituted by the U.S. and Peruvian Governments. Peru continues to arrest drug traffickers and seize drugs and precursor chemicals, destroy coca labs, disable clandestine airstrips, and prosecute officials involved in narcotics corruption.

In both 2002 and 2003, the Peruvian Government has tended to avoid action that could spark civil unrest in the major coca growing areas. Notwithstanding that preoccupation, the government eradicated 7,200 hectares of coca in 2002 and over 8,000 hectares, so far, in 2003. Until early in 2003, all eradication was done by government workers from the Ministry of the Interior supported by NAS. After that date, the Peruvian Government has worked with the U.S. Agency for International Development (USAID) to offer development assistance in coca-growing areas to farmers who eradicate their coca fields voluntarily.