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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. |
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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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