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Import demand likely to grow.
External accounts continue to strengthen.
According to the government, annualised exports grew 6.2% in May
over the same month in 1999. Imports, however, have still not regained momentum, as
consumer confidence is recovering more gradually and industry is only
beginning to expand investment. Annualised
imports still remain 3.6% lower than in May last year.
As a result of the improved export performance, the annualised
trade balance registered a US$ 133 million deficit but is likely to revert
to a surplus next month. The
cumulative trade balance for the first five months of this year reached a
surplus of US$ 601 million.
With the quickening pace of economic activity, raw material and
intermediate goods imports are beginning to expand. Additionally, rising oil prices will further drive up the
value of import inflows. While
last month, participants expected imports to grow at a modest 4.2%, the
growth figure has been raised for this month to 7.1%.
Exports, nevertheless, will grow at double the import expansion
pace. Thus, the trade balance
is expected to reach a healthy surplus of US$ 2.4 billion this year.
The favourable trade balance continues to drive down the current account
deficit. The annualised
current account deficit reached US$ 24.0 billion, down from US$ 32.6
billion for the same month in 1999. The
Consensus anticipates the declining trend in the current account deficit
to continue, with the imbalance reaching US$ 23.6 billion by year-end.
In addition, if foreign direct investment (FDI) continues growing
at the current pace -- in April FDI inflows totalled US$ 7.0 billion --
then flows may again finance the current account deficit for this year.
Tax reform in the making.
The Lower House has announced that it intends to begin
voting on the government's tax proposal in June. The government tax reform initiative hopes to replace the
complex system of existing indirect taxes on the federal, state and local
level with a new national value-added tax (VAT).
International companies and domestic businesses welcome the tax
reform, since implementation is considered an important step towards
lowering the costs of operating in Brazil.
However, tax reform has been on the Cardoso administration's agenda
since 1999 but has not been adopted so far, since, as a constitutional
amendment, both houses would have to approve the bill with two votes in
each chamber. In addition,
state and localities would have to be swayed to give up existing taxes on
the local level in favour of a national scheme.
Furthermore, the tax reform may not survive the likely increase in
legislative complacency, since legislators are likely to abandon any
serious reform efforts in consideration of personal and party electoral
aspirations for the October municipal elections.
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