Public Information Notice: IMF Concludes Article IV Consultation with Brazil

December 22, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On November 27, 2000, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brazil.1


The Brazilian economy continues to recover at a sustained pace. Real GDP grew by 3.9 percent in the first three quarters of 2000, relative to the same period in 1999, and for 2000 as a whole GDP growth is expected to average 4 percent. The recovery of economic activity has been reflected in a strong growth of employment, and a moderate reduction in the rate of unemployment as labor market participation rates increased. Inflation has remained subdued, with the 12-month rate of increase in consumer prices (IPCA) in line with the government central target of 6 percent for end-2000.

Following a strong improvement in 1999, Brazil's competitiveness-as measured by the CPI-weighted real effective exchange rate-deteriorated somewhat in 2000, reflecting mainly the strength of the U.S. dollar vis-à-vis other major currencies, and a domestic rate of inflation somewhat higher than in Brazil's main trade partners. Notwithstanding a progressive recovery of imports, Brazil's external trade performance improved in 2000, reflecting a strong growth of export volumes through the first ten months of the year.

The current account deficit declined from around US$17.3 billion in January-September 1999 to US$15.9 billion in the corresponding period of 2000, and was more than fully financed by net foreign direct investments (FDI), which reached US$21.3 billion during the first nine months of 2000, notwithstanding a slowdown in the pace of privatizations.

Brazil's strong economic performance was also reflected in improved access to foreign financing, allowing for a building up of the yield curve and improvements in liquidity of Brazilian sovereign instruments. Total sovereign debt issues in international capital markets in the year through end-November 2000 have amounted to US$11.4 billion, of which US$6.1 billion reflected exchanges to retire outstanding Brady bonds. Gross international reserves declined from US$35.7 billion at end-1999 to US$32.5 billion at end-November 2000 (equivalent to over 5 months of imports of goods and nonfactor services, and 60 percent of estimated short-term debt on a residual maturity basis), reflecting the repayment of the Fund's Supplemental Reserve Facility and the bilateral support package. Net international reserves, as measured under the program, stood at US$31.1 billion at end-November.

The fiscal performance in the first ten months of 2000 was strong at all levels of government. The primary surplus of the consolidated public sector was equivalent to about 4.1 percent of estimated period GDP, with primary surpluses of the central government, the states and municipalities, and the public enterprises equivalent to 2.4 percent of GDP, 0.7 percent of GDP, and 1.0 percent of GDP, respectively. The overall deficit (PSBR) of the public sector declined to the equivalent of 4.3 percent of estimated period GDP, compared with 10 percent of GDP in 1999 as a whole. The net public debt declined in relation to GDP in the first ten months of 2000, to 49.0 percent of estimated GDP at end-October 2000 from 49.7 percent of GDP at the end of 1999.

Important structural reforms this year included the enactment in May of the Fiscal Responsibility Law, and the recent successful privatizations of the state bank of Paraná (BANESTADO) and the former state bank of São Paulo (BANESPA). However, there was only limited progress on the remaining pieces of implementing legislation for the administrative reform, the proposed social contribution for retired civil servants, and the reform of indirect taxation.

The central bank has continued its cautious conduct of monetary policy within the inflation targeting framework. The overnight (SELIC) interbank rate was reduced from 19 percent in mid-April 2000 to 16.5 percent by mid-July. Since then, the rate has been kept unchanged, mainly in reflection of uncertainties in the international environment. The overall decline in interest rates in the course of 2000, has facilitated a pickup in various components of bank credit to the private sector in recent months.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the skillful management and satisfactory performance of the economy and felt that the proposed stance of macroeconomic policies for 2001 was broadly appropriate. The rapid and sustained recovery from the crisis of late-1998/early-1999 reflected the authorities' continued commitment to the program's policy framework, particularly the strong macroeconomic adjustment and fiscal and other structural reform efforts, together with short-term official financial support, and the constructive, voluntary involvement of the private sector. Directors noted that output is growing strongly, employment has rebounded, and consumer price inflation has remained subdued and in line with the government's target. They cautioned, however, that the economy remains vulnerable to external shocks. This makes it imperative that the authorities persevere in their fiscal consolidation and structural reform efforts.

Directors agreed with the authorities that the benefits of sustainable economic growth need to be more equitably distributed, also to facilitate continued social support for the government's economic policies. They noted with satisfaction the continued improvement in key social indicators, especially in the areas of education and health.

Looking ahead, Directors noted that, while the outlook for the external environment remains uncertain, Brazil is better placed now to withstand external shocks, given its enhanced competitiveness, its increasingly diversified export base, its diminishing dependence on imported oil, and the relatively limited reliance of the public sector on foreign financing sources. At the same time, they urged the authorities to work further to enhance the resilience of the economy, and thus reduce the still high interest rate spreads on Brazilian debt, by strengthening the public finances and pressing ahead with structural reforms. Resolute actions, especially on the fiscal policy front, should help put Brazil on a sustained trajectory of dynamic private sector-led growth.

Directors felt that the strong fiscal performance so far during the year provided comfort that the program's fiscal targets for the year would be met, and commended the authorities for maintaining in nominal terms the year-end target for the primary surplus of the consolidated public sector, notwithstanding the recent downward revision of nominal GDP.

Directors supported the proposed fiscal stance for 2001, and the objective of achieving a consolidated primary surplus of at least 3 percent of GDP in 2001. However, several Directors noted that the 2001 budget assumed favorable domestic and international developments. Directors therefore stressed that, if external conditions were to deteriorate or domestic demand were to be stronger than envisaged, the authorities should be prepared to tighten the fiscal stance so as not to unduly burden monetary policy, and ensure the targeted reduction of the net public debt in relation to GDP. Directors were reassured by the authorities' efforts in the ongoing congressional debate of the federal budget to ensure that additional spending requests are backed by additional revenue, or to insist on offsetting cuts in other proposed spending.

Directors welcomed the steps taken by the government to recognize contingent liabilities, which improve the transparency of the public accounts, but noted that the resulting increase in the public debt underscores the need for continued fiscal consolidation. They commended the authorities for enacting the Fiscal Responsibility Law, which is expected to institutionalize budgetary discipline at all levels of government, as well as promote transparency. Significant progress has also been made in reforming the social security system for private-sector workers. Directors noted, however, that further progress in pending structural fiscal reforms-including of the social security system for public-sector workers, the system of indirect taxation, the liberalization of the domestic fuel market, and management of public spending and the public debt-will be needed to improve the quality and sustainability of fiscal adjustment over the longer term. They also welcomed the authorities' initiative to develop a multi-year fiscal framework, which would bring greater predictability and help in the fiscal adjustment efforts. In this connection, Directors noted that adequate primary surpluses would be needed over the medium term to ensure a continued decline of the public debt relative to GDP.

Directors noted that the Brazilian financial system remains relatively strong, although the high intermediation costs suggested the scope for significant efficiency gains, especially in public banks. They welcomed the recent implementation of a new assessment and provisioning system for credit risk, and other efforts by the central bank to strengthen the regulatory framework for banks. Directors also noted the completion of the assessments of the Basel Core Principles for effective banking supervision and the Code of Good Practices on Transparency in Monetary and Financial Policies. They also welcomed the authorities' ongoing efforts to strengthen bank supervision, further develop domestic financial markets, and improve the legal framework for corporate governance, as well as their intention to devise and begin to implement a comprehensive strategy to address weaknesses of the federal banks, to make them more transparent, efficient, and competitive. They were also pleased by the recent successful privatization of BANESPA, and encouraged the authorities to press ahead with their privatization agenda, particularly with respect to the remaining state-owned banks, as well as the energy sector. Directors welcomed the authorities' interest in participating in the Financial Sector Assessment Program (FSAP) at the earliest convenient date.

Directors commended the authorities for their prudent conduct of monetary policy under the inflation targeting framework that was adopted in mid-1999, which has been instrumental in anchoring inflation expectations and securing inflation outcomes broadly in line with the government targets in both 1999 and 2000. They felt that, particularly in light of the external uncertainties, the cautious approach adopted by the authorities with respect to interest rates is appropriate. Directors agreed with the authorities' view that the scope for further reductions in interest rates in 2001 would be influenced not only by the external environment, but also by the government's success in preventing, through an appropriately firm fiscal policy, domestic demand and cost pressures that may be inconsistent with the targeted further decline in inflation. They noted that a further institutional strengthening of the monetary policy framework would be desirable, and welcomed the authorities' plans in this area.

Directors welcomed the fact that the exchange rate has been managed flexibly under the new regime, and that the central bank has virtually abstained from intervening in the spot market since the middle of 1999. They felt that Brazil's external competitiveness was adequate, as evidenced by the continuing strong growth of exports in volume terms.

Directors especially welcomed the continuing strong growth of foreign direct investment, an important engine of modernization and efficiency of the economy. Some Directors noted, however, that the portion of foreign direct investment flows related to the privatization program would likely abate in the medium term, and that therefore it is all the more important to continue reforms that will increase efficiency and the attractiveness of Brazil to foreign investors. Noting that foreign trade flows still remain rather small relative to the size of the Brazilian economy, Directors encouraged the authorities to promote greater openness and competition, through a progressive reduction of tariff and nontariff barriers. They also welcomed the authorities' efforts to deepen regional integration, by promoting the expansion of Mercosur and the harmonization of statistics among its current and prospective members, and the recent adoption of mutually agreed macroeconomic and fiscal targets.

Directors noted that Brazil's statistical base is generally adequate for surveillance, and welcomed the substantial progress made toward meeting the requirements of the Special Data Dissemination Standard, to which the Brazilian authorities aim to subscribe by end-2000. They welcomed, in particular, the ongoing efforts to improve the national income accounts, including the compilation of quarterly demand-side accounts, which they viewed as a near-term priority.

It is expected that the next Article IV consultation with Brazil will be held on the standard 12-month cycle.

Brazil: Selected Economic Indicators

  1996 1997 1998 1999 2000

  (in percent)
Domestic Economy          
Change in real GDP 2.7 3.3 0.2 0.8 4.0
Unemployment rate 1/ 5.4 5.7 7.6 7.6 7.4
Change in consumer prices (IPCA, year end) 9.6 5.2 1.7 8.9 6.0
  (in billions of U.S. dollars) 2/
External economy          
Exports, f.o.b. 47.7 53.0 51.1 48.0 56.8
Imports, f.o.b. 53.3 59.8 57.7 49.2 56.8
Current account balance -23.1 -30.9 -33.6 -25.0 -25.3
Capital account balance 32.3 23.0 15.9 14.5 29.9
o/w Foreign direct investment 10.0 17.1 25.9 30.0 26.1
Gross Official reserves 60.1 51.7 44.0 35.7 29.7
Current account balance (in percent of GDP) -3.0 -3.8 -4.3 -4.7 -4.2
  (in percent of GDP) 2/
Financial variables          
Public sector borrowing requirement 5.9 6.1 7.9 10.0 4.6
Primary balance of the federal government 0.4 -0.3 0.6 2.4 2.2
Net public debt 34.4 35.2 43.4 49.7 50.0
Change in broad money (in percent) 3/ 8.5 24.7 9.5 7.9 9.1
Average overnight interest rate (in percent) 27.5 25.0 29.5 26.3 17.6

Source: Brazilian authorities and IMF staff estimates.

1/ 7-day reference period.
2/ Unless otherwise noted. Reflects projections as of mid-November 2000.
3/ M2, based on IMF definition.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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