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Brazil - Economic Briefing September 2002

IMF Approves Loan Programme

The IMF approved the 15-month, US$ 30 billion loan programme paving the way for a rebound in investors’ confidence. In order to maintain stringent fiscal discipline, the government has promised to implement various structural measures, including pension reform and financial institution privatizations. All of the main candidates have endorsed the Cardoso agenda with the IMF but commitment is sure to be tested if a persistence of currency pressures, high interest rates and rising unemployment threatens to deepen the current economic slump.

IMF targets released by government
On 4 September, the government released the official targets for the 15-month, US$ 30 billion loan programme agreed to with the International Monetary Fund (IMF). The IMF agreement, which was officially endorsed by the Fund on 6 September, provides US$ 6 billion in disbursements this year. In an effort to ensure policy continuity under a new administration, the balance of US$ 24 billion will be released next year. Brazil has committed to maintain a primary fiscal surplus of 3.75% of GDP for the next three years and permit quarterly fiscal account monitoring to ensure compliance. In addition, the government has promised to submit a pension reform bill to Congress and move ahead with the privatization of four state-owned banks before the end of this year. Finally, the federal government has to send a legislative proposal to Congress to cap state and municipal tax transfers before the end of March next year and increase taxes to compensate for the planned reduction of the current 0.38% financial transactions tax (for specific targets, please see table). While the main three contenders have committed to abide by the arrangements made with the IMF, this commitment is likely to be tested if current economic woes deepen.

Real rebounds amid temporary easing of political concerns
On 19 August, all of the major presidential candidates met with President Cardoso and committed in broad terms to adhere to the current administration’s economic policy programme as rooted in the agreement with the International Monetary Fund (IMF), including fiscal equilibrium, price stability and respect for current government contractual obligations. The IMF programme provides the Central Bank with an additional US$ 10 billion of international reserves to defend the real (for details see August 2002 edition). The candidate’s commitment along with a pledge by international banks to maintain credit lines for Brazil open for the time being helped boost the real. The currency rebounded strongly in August, appreciating 13.4% from July levels to reach 3.02 reais to the US$. The August recovery followed two consecutive months of double digit declines in nominal value, which had prompted the real to depreciate over 30% relative to its levels at the beginning of the year. Participants anticipate some further recovery in the real through the end of the year, with the currency appreciating. The real is expected to stabilize in 2003, losing only some of its value.

Inflation rears its head amidst currency weakening
The strong depreciation of the real over the past few months is beginning to pass through to domestic prices. The mid-August consumer price index (IBGE-IPCA 15), which covers monthly price increases up to the 15th of every month, increased 1.0% over July. The August figure was the highest level observed this year and was up from the 0.8% increase in the preceding month. Nevertheless, in spite of the strong monthly reading, the annual inflation rate dropped from 7.5% in July to 7.3% in August. At its current level, annual inflation is well above the 5.5% upper limit of the Central Bank’s inflation target range for this year. Participants anticipate that the Central Bank will overshoot the inflation target for the second consecutive year. Furthermore, participants expect the Central Bank to exceed next year’s central inflation target but anticipate that the annual consumer price increase will remain below the 6.5% upper limit of the target range.

Persistence of inflationary pressures may curtail further interest rate cuts
In its 21 August meeting, the Central Bank opted to maintain the benchmark SELIC rate unchanged at 18.0% for the second consecutive month. Monetary officials stated that current inflation trend warrants a more cautious policy stance but highlighted the fact that lower economic activity may help offset price increases attributable to a currency induced inflationary pass-through. Panellists have not lifted their interest rate forecasts this month, anticipating the Central Bank to lower rates once the current volatility has subsided and bringing down the benchmark interest rate by the end of the year.


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