Brazil and the IMF
Press Release: IMF Completes Third Review of Stand-By Credit with Brazil; Approves US$9.3 Billion Disbursement
Country's Policy Intentions Documents
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Brazil—Letter of Intent
Mr. Horst Köhler
Dear Mr. Köhler:
1. The government has made rapid progress in pursuing its agenda for economic recovery and reform. Following a major consensus-building effort, ambitious legislation for tax and pension reform has been submitted to the Congress sooner than anticipated. Fiscal policy has focused on a reduction in public debt: the Budget Guidelines Law submitted to the Congress increases the medium-term primary surplus target to 4.25 percent of GDP. In addition, the constitutional amendment facilitating financial sector regulation—a necessary step toward formalizing Central Bank operational autonomy—has been approved.
2. Short-term macroeconomic policies remain prudent. The fiscal outturn is substantially stronger than targeted and monetary policy is firmly geared towards countering the inflationary impulse from last year's currency depreciation. Growth has remained positive and the medium-term outlook has brightened.
3. Our policy efforts have contributed to a strong strengthening of the real, dramatically lower country risk spreads, and a reduction in inflationary pressures. Rollover rates on domestic debt are now above 100 percent, yields have fallen, and the overall structure of government liabilities has improved. In addition, last month the government was able to reaccess international capital markets with a highly successful bond issuance that included collective action clauses.
4. All performance criteria for this review have been met and progress has been made in discussions aimed at bringing a new Bankruptcy Law to vote in Congress later this year. End-June structural benchmarks to submit pension and tax reforms to Congress were met ahead of schedule. The economic outlook is broadly unchanged, and we are confident of achieving the program's performance criteria.
5. We also aim to build on the progress we have made in reducing the vulnerability of the economy to external shocks. The government proposes to set a new structural benchmark for end-September that will strengthen the market for domestic public debt, increase secondary market liquidity, and diversify the investor base. Specifically, it consists of the start of operations of the new primary and secondary dealer system and the development of the sale of public debt over the internet through the Tesouro Direto program.
6. The government's program will consolidate the economic improvements that have already been seen in the first few months of this administration. We believe the increased macroeconomic stability will yield tangible gains in the welfare of the Brazilian people, especially the neediest. We will maintain the close policy dialogue with the Fund and stand ready to take additional measures, as necessary, to achieve these objectives.