GARCIA'S ECONOMIC PRIORITIES

UNCLAS LIMA 002534

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA/AND, EB/TPP/BTA/ANA
USTR FOR B. HARMAN
COMMERCE FOR 4331/MAC/WH/MCAMERON

E.O. 12958: N/A
TAGS: ETRD EAID ECON EAGR PE
SUBJECT: GARCIA'S ECONOMIC PRIORITIES

REF: A) Lima 2323 B) Lima 2507 C) Lima 2532


1. (SBU) Summary: During a June 20 meeting with the
Ambassador, President-elect Garcia's economic team detailed
Garcia's short term priorities, including improving water
quality and promoting agricultural exports from the Andes.
These programs should begin shortly after the July 28
inauguration, and if progressing smoothly, will help APRA
leaders in the upcoming November 30 regional elections. In
the medium term, Garcia is looking to reform key government
institutions, including the judicial system and SUNAT.
Garcia is also focused on maintaining macroeconomic growth
while encouraging new investment. End Summary.


2. (SBU) The Ambassador hosted a meeting on June 20 with
Garcia's economic advisors, including Enrique Cornejo,
principal advisor and author of the majority of APRA's
economic proposals, Luis Revolledo, Carlos Nunez,
environmental advisor Jose Salazar and Jorge Menacho.
During the meeting, Cornejo provided a detailed vision that
spanned the breadth of the economy and current GOP national
capacity, setting priorities within a strict timeline.

Garcia's Priority Programs
--------------


3. (SBU) Cornejo began the meeting by describing Garcia's
short term priorities, which are all related to poverty
reduction: building infrastructure, improving access to
water (agricultural and drinking),promoting agricultural
export capacity building in the highlands and "the South" -
a reference to the many in Southern Peru who voted for
Ollanta Humala. Garcia and his team should be able to
develop, and announce these programs during the July
inauguration. Garcia's medium term goal is institutional
reform. Cornejo also emphasized the need to maintain
macroeconomic stability and attract new investment.


4. (SBU) The Sierra Exportadora program, which seeks to
promote the production of export oriented agricultural
products in the highlands (Ref B) is an immediate Garcia
priority. Cornejo noted that the Administration would begin
a pilot of this program, which could easily be replicated
quickly in 28 other sites. The incoming government's other
agricultural priorities include improving the transport
chains, especially the road infrastructure, and
strengthening micro enterprises.


5. (SBU) The incoming Administration will also focus on the
environment, immediately launching a reforestation program
in Eastern Peru. This program will reforest 100,000
hectares while creating $500 million in exports and 50,000
jobs. Cornejo and Environmental Advisor Jose Salazar
described the need to revise the forestry concession law,
and noted their extensive work with environmental NGOs to
develop workable forestry management plans. Salazar also
noted that Garcia plans to create a $100 million fund to
finance water projects, both for agriculture and drinking
water. Donors and multilateral development banks will
provide the majority of the financing, with the GOP
providing $10 million. Salazar claimed to be well along in
securing commitments for the fund, but mentioned a desire
for U.S. Environmental Protection Agency technical
assistance for the fund's structuring and management plan.
By November 30, stressed Cornejo and the other APRA
participants, the water program needs to show some solid
results. Salazar is coordinating with APCI (the GOP's
technical cooperation agency) on the best projects to
implement in the short term.

Timeline for Priorities
--------------


6. (SBU) Cornejo acknowledged that Garcia will not have a
honeymoon period to develop his programs. He underlined
that the APRA transition team, the outgoing Toledo
Administration and foreign donors must work together to
coordinate priorities before July 28. President-elect
Garcia will announce his priority programs during his
inauguration speech. Some of these programs, particularly
those mentioned above, should already be in the
implementation stage as a result of coordination with the
outgoing government. Garcia hopes that these priority
programs, which focus on eliminating poverty and providing
access to potable water, will help win back APRA votes in
the upcoming November 30 regional elections, particularly in
the Southern Andes.

Continuing Macroeconomic Success
--------------


7. (SBU) Cornejo acknowledged that the Toledo government is
leaving Garcia a stable macroeconomic situation. Although
Toledo's management of the macro economy was good, Cornejo
pointed out that high export commodity prices played a key
role in increasing the value of exports. Peru now has to
plan for the day when world metals prices drop. Cornejo
said that Garcia wants to keep the deficit at one percent of
GDP, but noted that the Garcia team would be speaking with
the multilateral banks to explore how Peru's macroeconomic
health could be maintained with some slight adjustments to
debt ratios. Garcia also sees the need to manage public
expenditures and will mention austerity in his inauguration
speech. The new government must control public salaries in
order to have funding for poverty reduction programs.


8. (SBU) Cornejo agreed with the Ambassador on the
importance of the FTA in connectiQle to their own
national/domestic markets as well as to foreign markets.
Cornejo reiterated that the United States Government and
APRA need to work together to create a short and medium term
agenda that includes FTA implementation and other common
priorities.

Garcia's Plans for the Mining Sector
--------------


9. (SBU) We discussed the difficulties in the mining sector
with the APRA Economic Team. Cornejo acknowledged that
mining companies pay high taxes, but that municipalities
have trouble accessing the mining canon. The canon is
important to addressing poverty; the new Administration
would seek to redress the imbalance in canon distribution
that has led to complaints and a disconnect between the
companies, the people and the municipal governments.


10. (SBU) Cornejo said the government would not interfere
with the mining sector's tax stability agreements. He
emphasized the popular sentiment that these firms were not
paying taxes, or enough taxes, was wrong. But the public
rightly complains of too little benefit from the canon and
public budgets. He described a cultural problem in Peru,
where municipal governments elect to do small, easy and
symbolic projects, such as building a new municipal plaza or
office, over more needed public works. The government
instead must focus on regional projects that benefit the
public.

Institutional Reforms
--------------


11. (SBU) Cornejo concurred with the Ambassador of the
necessity to reform state institutions. Judicial reform is
paramount, but the Garcia government must maintain the
autonomy of the judiciary. Cornejo mentioned discussions
with GOP Dispute Coordinator Aurelio Loret de Mola, noting
how these disputes created difficulties for Peru and the
rule of law. Cornejo also agreed with the AID Director on
the need for alternative dispute resolution mechanisms, and
observed the recent improvements in the AID-sponsored Lima
Commercial Courts system.


12. (SBU) SUNAT, the GOP tax agency, was also singled out
for reform. Cornejo had no complaint with SUNAT employee
ethics, but observed that SUNAT's aggressive approach was
not always in the best interests of the government or
people, and had led to disputes with U.S. firms. Other
reforms included making the Vice Ministry of Fisheries,
currently under the Ministry of Production into a separate
ministry. Cornejo also talked of the need to reform
government procurement policies. The economic team
acknowledged the importance of land titling, but also agreed
with the continuing institutional challenges -- and great
expense -- faced by the GOP and USAID in its efforts to work
this issue.

Comment
--------------


13. (SBU) The possible win of a number of Humala supporters
in many of the local and regional elections, with a
resulting opposition front to the national government -- in
which Garcia already does not have a Congressional majority
-- makes November 30 critical for the poor voters who have
supported Humala. Garcia will indeed have no honeymoon, and
his July 28 speech will be compared with Toledo's ambitious
promises and Garcia's past record of poor governance. We
expect that the incoming government will move quickly to
implement poverty reduction policies in the Southern Andes.
We were impressed by Cornejo's openness in attributing what
he sees as their major challenges and APRA's positive
assessment of the macro economic situation they will
inherit. Clearly, he views the United States government as
an ally in moving Peru forward under Garcia.

STRUBLE