Home Finance Ongoing Political Crisis Weighs Heavily on Peru’s Economy

Ongoing Political Crisis Weighs Heavily on Peru’s Economy

by internationalbanker

By Nicholas Larsen, International Banker


It was in June 2021 when rural schoolteacher José Pedro Castillo Terrones made history by winning the second round of Peru’s presidential election. With more than 8.8 million votes—or 50.13 percent of the vote share—Castillo’s left-wing Perú Libre (El Partido Político Nacional Perú Libre, or PPNPL) party defeated the right-wing candidate, Keiko Fujimori (Keiko Sofía Fujimori Higuchi), whose father, Alberto, had led the country from 1990 to 2000. But the hugely controversial ousting of Castillo from the presidency on December 7, 2022; his subsequent arrest and imprisonment; and his swift replacement with Vice President Dina Boluarte (Dina Ercilia Boluarte Zegarra) sparked nationwide demonstrations that soon turned deadly in the face of brutal police and military crackdowns. And with the upheaval continuing to this day, the ongoing damage to Peru’s economy has become too significant to ignore.

To his opponents, Castillo’s ousting and arrest were justified after he attempted to dissolve the Congress of the Republic of Peru and rule by decree just hours before a vote was to be held on a motion to dismiss him over corruption allegations that today remain under investigation. But to his supporters, Castillo was overthrown in a legislative coup d’état after repeated attempts had been made to undermine and sabotage his presidency from the beginning of his tenure by right-wing forces in Peru’s legislature, military, business elite and opposition political parties, as well as through covert support provided by external sources, including the United States and Germany.

And with evidence by late 2021 revealing that such forces were coordinating to fund strikes and protests against Castillo’s administration, as well as openly calling for him to be violently overthrown and conspiring to change the Constitution of Peru to expedite his expulsion, it is perhaps not surprising that protestors remain out in the streets to this day, indignant over his treatment. The right-wing-dominated Congress was also instrumental in delegitimising Castillo’s presidency by making no less than three attempts to impeach him; the third and final one in December 2022 was successful in removing him from power. “Since my inauguration as president, the political sector has not accepted the electoral victory that the Peruvian people gave us,” Castillo said in March 2022. “I understand the power of Congress to exercise oversight and political control, however, these mechanisms cannot be exercised by mediating the abuse of the right, proscribed in the Constitution, ignoring the popular will expressed at the polls.”

Since his ouster, protests have raged across Peru, with estimates putting the number of people killed by police and military forces by late March at 67. Human-rights organisations have filed two lawsuits against Boluarte and several of her ministers and police chiefs. One suit alleges the massacre of eight protesters in the Ayacucho Region on December 15 and the other of six protesters in the Apurímac Region in the days following Boluarte’s December 7 confirmation, along with dozens of injuries, arrests and incidents of torture by police officers.

Despite such horrific violence, however, demonstrators have remained steadfast in opposing the Boluarte government and Congress. Largely consisting of social movements, trade unions and indigenous groups, protests are expected to continue until a list of key demands is met—namely, the unconditional release of Castillo, resignation of Boluarte, dissolution of Congress, 2026 elections to be brought forward to this year or next and creation of a Constituent Assembly to change the country’s existing 1993 Constitution established under the Alberto Fujimori dictatorship.

The protesters appear to have considerable support. A late-February survey by the Institute of Peruvian Studies (IEP) revealed that Boluarte’s disapproval rating had jumped to 77 percent from the 71 percent recorded a month earlier. Disapproval of Congress had also risen from 88 percent to a mighty 90 percent. The survey additionally found that 69 percent of surveyees wanted general elections to be held this year,  47 percent favoured changes to the 1993 Constitution, and 36 percent believed the Constitution should be entirely replaced.

And with no end in sight to the protests, the impact on the Peruvian economy is now expected to be substantial. According to Peru’s minister of economy and finance, Alex Contreras, the country’s gross domestic product (GDP) was on course for growth of 3 percent last year, but the events of December saw that figure trimmed to below 2.7 percent. Peru’s GDP then shrunk by a hefty 1.12 percent in January, marking the first negative year-on-year contraction in 22 months, as the national statistics agency noted that economic activity was marred by “social conflicts which paralyzed labor, blocked roads, (and) saw markets shut” in parts of the country. Indeed, January saw tens of thousands take to the streets in the capital city, Lima, while many held a nationwide strike on January 19 to demand Boluarte’s resignation due to the violence her government had unleashed.

Along with a major cyclone that brought torrential rains to the country’s desert coast in March, the protests have been pivotal in prompting the Central Reserve Bank of Peru (Banco Central de Reserva del Perú, BCRP) to recently revise its 2023 growth estimate downward from 2.9 percent to 2.7 percent. BBVA (Banco Bilbao Vizcaya Argentaria, S.A.), meanwhile, sees the protests shaving 0.3 percent from Peru’s growth potential this year, while political uncertainty will account for a further 0.2-percent reduction. As such, the Spanish lender has lowered its 2023 growth projection from 2.5 percent to 1.9 percent, with private investment falling by 1.1 percent. And to compound matters, annual inflation in Peru remains above 8 percent, meaning that it has exceeded the central bank’s target range of 1 to 3 percent for 23 consecutive months.

The central bank has also noted that the unrest has dented business and consumer confidence, and private investment in the country’s crucial mining sector is forecast to decline by a hefty 16.7 percent this year. This may well be regarded as a “win” for the protestors, particularly the indigenous communities that have fiercely condemned the privatisation of Peru’s lithium industry on both economic and environmental grounds. On April 10, for instance, the Boluarte government announced it had granted lithium-exploration licences to a Canadian miner in the southern region of Puno, a move that was met with widespread opposition.

“As long as there is no acceptance by the people of Puno, lithium will not come out,” said Félix Suasaca, general secretary of the National Platform for People Affected by Metals, Metalloids and Other Toxic Chemical Substances, who recently argued that the government’s mining plans potentially threaten the health of 10 million people. Suasaca also insisted that local communities must benefit from any lithium exploitation. “Lithium has to be transformed, industrialized in Puno, the refinery plants have to be built in Puno…the budget must be directed to the Puno region. We are not against mining, but its industrialization must be done here. The raw minerals must be industrialized in Peru, not delivered to another country. Who are we making rich? Another country. What about Peru?”

Many have noted the uncanny parallels between the Boluarte de facto government in Peru and the former regime in neighbouring Bolivia of Jeanine Áñez (Jeanine Áñez Chávez), who similarly assumed the presidency following the 2019 right-wing coup against Bolivia’s indigenous president, Evo Morales (Juan Evo Morales Ayma). Likewise, Áñez oversaw the killing of dozens of protestors following the coup and also moved to quickly privatise Bolivia’s vast lithium reserves. But with Morales’ MAS (Movement for Socialism–Political Instrument for the Sovereignty of the Peoples) political party eventually elected back into power and Áñez imprisoned for 10 years in June 2022 for her role in staging the coup, one wonders if Boluarte and others involved in ousting Castillo will eventually face similar punishments from Peru’s judiciary.

“Let the whole world know, Peru is not being governed by the president named @DinaBoluarteZ. Peru is governed by the United States and the Joint Command of the Armed Forces. I don’t want to think that Sister Dina became just another employee of the United States,” Morales tweeted on May 1. “The Peruvian right wing attacks us and persecutes us for defending the lives of our murdered brothers who defend their democracy. We do not defend human rights out of interference, we do and will continue to do so out of conviction. The deep Peru has awakened.”

Boluarte herself has not exactly helped to ease tensions after promising to crack down on “vandals” who “want to break the rule of law” in January. “It worries me that Boluarte’s Manichean discourse will only end up polarising society more,” Gonzalo Banda, a Peruvian political analyst and columnist, told the Financial Times. “She is betting that the protests will deflate, but she has not given an inch, and there has been no political cost to her administration after more than 50 deaths.” Banda was proved right. With considerable congressional backing, Boluarte managed to beat an impeachment motion in early April presented on the grounds of “moral incapacity” over the number of protestors killed, with Congress voting 64-37 against her removal.

But whatever fate ultimately lies in store for Boluarte and Congress, there is no escaping the fact that the unrest has substantially eroded Peru’s economy and looks set to continue doing so for the foreseeable future.


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