Brazil and the IMF
Joint Statement of the Ministry of Finance of Brazil and the IMF Team
The following statement was issued today in Brasilia: A mission from the International Monetary Fund (IMF) has been in Brasilia since the end of January to review, in consultation with a team of Brazilian authorities led by Minister Pedro Malan, economic policies and developments under the stand-by program which was approved by the IMF Executive Board on December 2, 1998, and to discuss how the program can be adapted to the new floating exchange rate regime. Mr. Stanley Fischer, First Deputy Managing Director of the Fund, joined the staff team on February 2. Discussions have been open and fruitful.
Agreement in principle has been reached on important elements of the economic policy framework that the authorities intend to implement in the rest of 1999 and over the medium term. The Brazilian authorities reaffirmed their commitment to work with the international community in overcoming their current economic difficulties and restoring economic growth and low inflation.
The priority attached by the Brazilian government to low inflation—a key achievement of the Plan Real—was emphasized to the mission by President Cardoso in a meeting on February 3. The objective of reducing by the end of the year the annualized monthly rate of inflation to the middle single digits will be pursued through firm monetary and financial policies, strong and sustained fiscal adjustment, and an intensified structural reform effort.
The firm implementation of these policies should promote a lasting recovery of confidence, both domestically and abroad, an indispensable condition for the resumption of sustainable growth of output and employment, towards the end of 1999.
Under the new floating exchange rate regime, monetary policy will have to play a key role in the pursuit of low inflation. The Brazilian authorities intend to put in place a formal inflation targeting framework for monetary policy, drawing on the experience of other countries and the IMF. While the institutional and technical bases needed for the successful operation of an inflation targeting framework are being developed, monetary policy will focus on containing the growth of the monetary and credit aggregates to rates consistent with the inflation objectives. Interest rates will be adjusted flexibly to prevent the emergence of inflationary pressures beyond the foreseeable rise in the price of goods affected by the devaluation of the real. The authorities also intend to accelerate and broaden their ongoing efforts to strengthen and modernize the financial system—including the federal and state banks, and nonbank financial intermediaries—to ensure its robustness to systemic shocks and to promote the development of private savings over the medium term.
In order to strengthen the ability of the Central Bank to achieve these objectives, the Brazilian authorities will undertake discussion with Congress with a view to approving proposals for strengthening the Central Bank`s operational independence through: a) its primary commitment to the preservation of the purchasing power of the national currency; b) fixed term mandates for its President and the other members of the Board of Directors; c) its accountability to Congress for achieving specified goals; d) specific, time-bound limitations on the professional activities of departing members of the Board.
The Brazilian authorities are fully committed to reducing the ratio of the public debt to GDP in 2000 and 2001, with a view to achieving by the end of 2001 a level below the 46.5 percent of GDP projected in the original program. To compensate for the adverse impact of the depreciation of the exchange rate on the public debt, they intend to achieve larger primary surpluses than originally envisaged in the program – in the range of 3 – 3.5 percent of GDP in 1999. New policy initiatives are being prepared to ensure the achievement of these targets. The authorities also discussed with the mission the progress made so far in the implementation of the fiscal adjustment measures for 1999. Most ofthese measures have already been approved by Congress, and the remaining one – the increase in the financial transaction tax has been passed by the Senate and is expected to be approved by the House in March. The authorities also noted that the program target for the primary surplus of the Federal Government for 1998 has been achieved with some margin.
Discussions also covered the progress to date in a number of structural reform areas including the tax reform, the administrative reform, the social security reform and the fiscal responsibility law proposal, social policies, the labor market and privatization. In a number of these structural reform areas, the Brazilian authorities are benefiting from the financial and technical support of the World Bank and the Inter-American Development Bank, with which the Fund mission is in close contact. The authorities have indicated their firm commitment to carry forward the reform agenda outlined in the Memorandum of Economic Policies, and also their intention to intensify and broaden the privatization and divestment effort (including, importantly, in the energy and financial sectors) which they consider essential for the modernization and efficient operation of those key sectors of the economy.
The authorities and the IMF team are confident that the decisive implementation of appropriate economic and structural policies, with the support of the international financial community, will be instrumental in promoting in the course of 1999 a progressive rebuilding of confidence, a substantial improvement of the current account of the balance of payments, a gradual reflow of private capital to Brazil, and a strengthening of the exchange rate.
The Brazilian authorities have reaffirmed their intention to subscribe to the Special Data Dissemination Standard of the IMF, after the necessary technical work has been done to improve quarterly estimates of GDP and certain state and municipal fiscal data. Building on the progress made so far in liberalizing current account transactions, the authorities expressed their commitment to accept in the near future the obligations of Article VIII of the IMF Articles of Agreement.
The authorities will continue discussions with the IMF staff team in the days ahead, with a view to proposing to the IMF Management and Board as soon as possible, and in any case before the end of March, the completion of the first review of the program, which would be followed by the release of the next tranche of the arrangement.
IMF EXTERNAL RELATIONS DEPARTMENT