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Inflation edges up further amid higher fuel and utility prices
In March, consumer prices rose 1.23%, which was down from the 1.57%
increase observed in February. The March figure brought the annual
inflation rate to 16.6%, which is up from 15.9% in February. The
accumulated inflation rate for the first quarter of this year at 5.1% is
now more than half the Central Bank’s 8.5% target for this year. The
wholesale price index rose at an even more pronounced pace, which
indicates that inflation may accelerate further in the coming months. In
March, monthly wholesale prices rose 1.93%, which is up from the 1.71%
monthly increase registered in February. The March data raised the annual
wholesale price increase to 43.6% from 40.8% in February. If the recent
currency strengthening persists, the current spike in inflation could
begin to subside. Nevertheless, the Central Bank has voiced concerns that
rising fuel costs and utility rate hikes could exert renewed pressure on
prices. On 8 April, the National Electricity Agency (ANEEL, Agência
Nacional de Energia Elétrica) authorized four major power distributors to
raise electricity tariffs by up to 33.0%. The government is attempting to
delay further rate increases, as power companies are pressuring for hikes
to cover higher operating costs. Central Bank officials remain convinced
that the recent monetary policy tightening will serve to lower inflation.
However, Consensus Forecast participants expect the annual inflation rate
to overshoot the target. The prospects for higher inflation this year is
likely to force Central Bank authorities to keep the monetary reins tight,
which will serve to forestall a more pronounced economic recovery. While
the inflationary setting is expected to improve somewhat in 2004, this
month’s 8.0% forecast is still well above the Central Bank target of 5.5%.
Central
Bank keeps monetary reins tight
In its 19 March meeting, the Central Bank monetary policy committee (COPOM)
opted to maintain the benchmark SELIC rate unchanged at 26.5%. However,
given the current inflationary setting and concerns about the global
outlook, monetary officials warned that interest rates could rise again.
Moreover, despite the decision to maintain interest rates at their
existing levels, the Central Bank noted that considerable risk to the
current inflation target exists and that it would adopt an upward bias,
which allows for a rate hike if necessary before the next meeting on 23
April. A renewed rate hike would add to the 850 basis points adjustment
that officials have made to the SELIC since October last year. Despite
prospects for little improvement in the inflationary setting this year,
panellists expect the Central Bank to bring down the SELIC rate this year.
Social
Security Reform Proposal
On 16 April, President Luiz Inacio Lula da Silva won the support of
Brazil's 27 state governors for the following reforms, which should be
sent to Congress by the end of the month.
* The government will levy a monthly tax of 11 percent on retired civil
servants if their pension benefits are more than 1,058 reais a month. To
avoid a legal imbroglio with the Supreme Court, the government hopes to
enshrine the proposal in a constitutional amendment.
* Pensions for both new private-sector and state workers will be capped at
2,400 reais a month. Currently, private-sector workers' pensions are
capped at 1,561 reais a month and state workers retire with benefits equal
to their last paycheck.
* The government will also create so-called complementary retirement funds
to allow civil servants to contribute additional cash to their retirement
on a monthly basis.
* The minimum age to retire will be incrementally raised to 55 years from
48 years for women, and to 60 years from 53 years for men.
* Those state employees contributing to social security prior to 1998 will
still be able to retire at the previous minimum age, but will lose 5
percent of their pensions per year until they reach the new minimum age.
* Pensions for widows or widowers of civil servants will be equal to 70
percent of the original benefits. Currently, they are entitled their
spouse's full pension.
The changes should save the government 56 billion reais ($18 billion) over
30 years, ensuring the pension system's solvency.
Last year alone, the pension system bled 56 billion reais from government
coffers, equivalent to an annual deficit of 4.3 percent of gross domestic
product (GDP).
Tax
Reform Proposal
Taxes in Brazil are already high as a proportion of gross domestic
product, equivalent to about 33 percent of GDP. But the tax burden is
unevenly distributed, and resource allocation is often distorted, crimping
the export sector.
The government hopes to streamline the system, reducing the tax burden on
the industrial and export sectors and, in turn, discourage tax evasion.
At the same time, though, the government needs to maintain tax collection
at high levels to be able to service its hefty debt load, currently at
$250 billion.
The following are the main points of the proposal that Lula intends to
send to Congress this month:
* The government will unify the ICMS code, a value-added tax levied on
goods and services, into a single charge with five different rates.
Currently, there are 44 different rates levied in Brazil's 27 states, all
of which have their own tax codes. The ICMS is the largest tax in the
country, accounting for nearly a quarter of total annual collection.
* A temporary 0.38 percent financial tax levied on everything from
personal checks to cash withdrawals will become permanent, but will
gradually be reduced to 0.08 percent. The tax, known as the CPMF, was
created by Lula's predecessor, former President Fernando Henrique Cardoso.
* The COFINS, a 3 percent federal tax levied on company revenues, will be
charged on a value-added basis instead of a cumulative basis.
* Half of all corporate contributions to a nationwide pension fund known
as the INSS will also be levied on a value-added basis, rather than on a
payroll basis.
* A federal property tax on rural land will become a state tax. Half of
all revenues collected from the tax will be distributed among
municipalities in each state. |
