Press Release: IMF Approves 15-Month Extension, and US$6.6 Billion Augmentation of Brazil's Stand-By Credit

December 15, 2003

The Executive Board of the International Monetary Fund (IMF) has approved an extension for 15 months and an augmentation by SDR 4.5 billion (about US$6.6 billion) of Brazil's stand-by credit, originally approved on September 6, 2002 (see Press Release No. 02/40). The Board also approved the authorities' request for a shift of repurchases expectations in the credit tranches of an amount SDR 4 billion (about US$5.8 billion) into an obligations basis in each 2005 and 2006.

The Board's decision was taken simultaneously with the completion of the fifth and last scheduled review of the original program, which made SDR 5.6 billion (about US$8.2 billion) immediately available to Brazil. However, in light of improvements in Brazil's balance of payments, the authorities have indicated that they do not intend to make further drawings.

Following the Executive Board's discussion of Brazil on December 12, 2003, Horst Köhler, Managing Director and Chairman of the Board, stated:

"Brazil's performance under the Stand-By Arrangement approved on September 6, 2002 remains exemplary. All performance criteria and structural benchmarks associated with the fifth review were met.

"Supported by the commitment of significant Fund resources, Brazil has come a long way since last year's financial market volatility. The response of the new administration to financial pressures has been both ambitious and courageous, balancing fiscal and monetary policy discipline with the resolute pursuit of key social goals to relieve poverty and strengthen the social safety net. To allay concerns over debt sustainability, the government increased the primary surplus target. The central bank responded proactively to guide inflation back to the government's targets. Moreover, early in its tenure, the administration took the difficult political step of seeking approval of key structural measures—including pension and tax reform—that will deepen the foundations for sustainable and equitable growth of output and employment.

"The successful implementation of these policies has resulted in a rapid restoration of confidence, which is being clearly reflected in the performance of financial market variables. Improved market sentiment, in part reflected in those variables, is driving an emerging recovery of economic activity, and demand growth should continue to accelerate in the coming year. Ensuring that all members of Brazilian society participate in the country's vast potential will be the government's key challenge for the coming years.

"To support the government's efforts to put Brazil firmly on a path to sustained growth with improved equity, the Fund's Executive Board has approved an extension and augmentation of the Stand-By Arrangement. The Fund regards this step as an important component of the government's strategy for a smooth exit from Fund financial support. The Fund will also assist Brazil in smoothing its schedule of external commitments by shifting some Fund repurchases from an expectations to an obligations basis in 2005 and 2006. The authorities' stated intention to treat the arrangement as precautionary, given the absence of a balance of payments need, is welcome.

"Prudent monetary and fiscal policies will remain at the core of the Fund arrangement. At the same time, the program also provides support for essential spending to help achieve the government's social objectives. The maintenance of a strong primary fiscal position, along with continued further improvements in Brazil's debt structure, will be key to ensuring medium-term sustainability and promoting favorable investment decisions. The program also features important structural measures that will both support and sustain dynamic growth in Brazil in which the private sector will continue to play the major role. These include steps to reduce banking spreads, increase financial intermediation, and improve the business environment, while also undertaking the preparatory work towards increasing the flexibility of the budget. These policies will help nurture the recovery now underway in Brazil and sustain investment and economic growth into the medium term," Mr. Köhler stated.


Recent Economic Developments

Brazil's monetary and fiscal policies have remained disciplined, actual and expected inflation have declined steadily, and market forecasts put end-2004 inflation solidly within the official target range. In addition, the external adjustment remains impressive, with record trade surpluses and the current account moving into surplus.

Both the public and private sectors have regained access to international capital markets, and country risk has dropped to levels not seen since 1998. The real has appreciated by 30 percent in nominal terms from its weakest point during the crisis, and, in real terms, is now close to its January 2002 level. Important progress has also been made in moving forward the government's structural reform agenda, and this has been a key driver of market sentiment.

This strong performance has laid the foundation for a resumption of growth. Following disappointing performance earlier this year, there are now clear signs that domestic demand has begun to recover. Due to the slow start this year, output is unlikely to rise by more than 0.6 percent, but growth is forecasted at 3.5 percent in 2004, with consumption and investment both rising solidly.

Program summary

Despite the recent successes, Brazil remains vulnerable to negative shifts in market sentiment. The authorities have therefore committed to a policy program for 2004 that will continue making progress in addressing core vulnerabilities, such as the large external borrowing requirement, and relatively low net reserves, currently at about US$17 billion. The extension for 15 months of the current Stand-By credit, and the shifting of some repayments to the Fund, are also part of the authorities' strategy to reduce vulnerabilities and to exit from Fund assistance.

The program calls for a continued healthy public sector primary surplus in 2004. The budget for 2004 is consistent with a primary surplus target of 4.25 percent of GDP.

The authorities plan to continue to build on recent progress in improving the composition of the domestic debt, further reducing another important vulnerability. Details of their public debt management plan for 2004 are still being finalized , and will be published in January. The authorities' overall goals will be identical to those in 2003: to further reduce the share of debt that is indexed to the exchange rate or is at floating rates, while increasing the share of fixed rate and inflation-linked debt.

The central bank's proactive conduct of monetary policy has ensured the credibility of the inflation targeting regime over the past year. As a result, the central bank has been able to ease policy steadily over the last several months as inflation expectations have continued converging to the government's targets.

The authorities' structural reform agenda for 2004 is another element in the effort to address vulnerabilities and stimulate growth. Key priorities include increasing financial intermediation, reducing bank lending spreads, and improving the business environment. In addition, the authorities will work to implement the tax and pension reforms currently before congress.

Significant reforms are also under way to reduce bureaucratic barriers to international trade.

Enhancements to the regulatory framework are an important element of the authorities' strategy to improve the environment for private investment. They include a new regulatory model for the energy sector and the removal of tax and regulatory inefficiencies, including the conversion of the COFINS contribution to a value-added-type basis, to reduce the distortions arising from its current cascading format. Following the recent experience with streamlining export regulations, the government will undertake a study to identify measures to simplify, integrate, and reduce registration requirements for businesses.

The authorities are also continuing to introduce reforms to improve the delivery of social services, which they see as central to their policy platform. In addition to the creation of the Fome Zero (Zero Hunger) program, the government has consolidated existing social assistance under the umbrella Bolsa Familia (Family Stipend) program. The authorities believe that improvements in infrastructure spending in this area have the potential for large social returns.

Brazil is an original member of the IMF; its quota1 is SDR 3.04 billion (about US$4.4 billion). Brazil's outstanding use of IMF credit currently totals SDR 23.19 billion (about US$33.86 billion).

Brazil: Selected Economic Indicators







(in percent)

Domestic economy


Change in real GDP





Unemployment rate 1/





Inflation (IPCA, end-year)





(in billions of U.S. dollars)

External economy


Exports, f.o.b.





Imports, f.o.b.





Current account balance





Capital account balance





o/w Foreign direct investment





Gross official reserves





Current account balance (in percent of GDP)






(in percent of GDP)

Financial variables


Public sector borrowing requirement 2/





Public sector primary balance





Gross external public debt






Change in broad money (in percent)





Average overnight interest rate (in percent)






Source: Brazilian authorities and IMF staff estimates.

1/ Statistical methodology and definition changed in 2001.

2/ Harmonized public sector borrowing requirement (excluding the impact on the debt stock of exchange rate movements occurred during the reference period that will not be paid until the bond matures).

1 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing , and its allocation of SDRs.


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