IMF Executive Board Concludes 2010 Article IV Consultation with Brazil

Public Information Notice (PIN) No. 10/111
August 5, 2010

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 July 14, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brazil.1


Brazil has recovered from the global crisis sooner and faster than most other economies, and has already registered a full year of strong growth. After contracting by a cumulative 4.8 percent in the fourth quarter of 2008 and the first quarter of 2009, the economy has grown at an average annualized rate of 8.9 percent over the past four quarters, largely on the strength of domestic demand. The output gap is estimated to have closed.

Brazil’s strong macroeconomic framework and the authorities’ timely policy response were critical in containing the negative effects of the global crisis and laying the groundwork for the recovery. Macroeconomic resilience was due both to the strength of the financial system and the combination of fiscal responsibility, exchange rate flexibility, and a credible commitment to inflation targeting—the pillars of the successful macroeconomic strategy that Brazil has pursued over the last decade.

The Brazilian financial sector is supporting the economic expansion. During the crisis, as the supply of new credit from private banks to the economy fell significantly, the expansion of credit by public banks played a critical role in preventing a potentially large output loss. Banking sector vulnerability indicators have improved in recent months.

Brazil continues to be the recipient of heavy capital inflows, as global investors seek to benefit from the economy’s strong growth potential and relatively high interest rates. In October 2009, the authorities imposed a 2 percent tax on purchases of domestic bonds and equities by foreigners, which appears to have had some impact in slowing inflows. Since the beginning of 2009, the stock market index has risen by two-thirds and the real has appreciated by about 25 percent against the U.S. dollar.

The authorities have taken steps to contain inflationary pressures. In recent months, the central bank has raised the policy rate by a total of 200 basis points, to 10.75 percent. It has also reversed most of the cuts in reserve requirements, and steps to support capital adequacy, implemented at the time of the crisis. In the fiscal area, the primary surplus is projected to rise from 2.1 percent of GDP in 2009 to 3.3 percent in 2010. The authorities have indicated that they will not resort to the use of fiscal adjustors in order to achieve this target. Temporary tax incentives adopted to support domestic demand during the crisis have been mostly phased out. The quasi-fiscal operations of the development bank BNDES are projected to remain high, at around 2½ percent of GDP in 2010.

Executive Board Assessment

Executive Directors welcomed the rapid recovery of the Brazilian economy over the past year, reflecting brisk growth in domestic investment, resilient consumption, and stronger-than-expected demand for commodity exports. This remarkable performance has been underpinned by the authorities’ robust policy framework, based on fiscal responsibility, exchange rate flexibility, and a credible inflation target. Directors noted that, with output converging to its potential and the unemployment rate declining to its lowest level in a decade, pressure on resources has built up and monetary policy has become more complicated in the wake of strong capital inflows. This calls for a carefully calibrated policy mix to preserve macroeconomic and financial stability. Promoting balanced growth and more equitable income distribution remains an important medium-term objective.

Directors welcomed the authorities’ commitment to withdraw the fiscal stimulus and to achieve the higher primary surplus target set for 2010, without resorting to the use of adjustors. Allowing faster consolidation should revenue collection turn out to be higher than expected would help relieve the burden of adjustment on monetary policy. Directors recommended that the authorities continue with efforts to reduce expenditure rigidities and further curtail quasi-fiscal spending in the form of loans provided by the national development bank. They also encouraged further steps to lower both gross and net debt-to-GDP ratios, including by strengthening the medium-term fiscal framework.

Directors agreed that monetary policy should remain focused on keeping inflation expectations well-anchored. They considered that the flexible exchange rate regime has served Brazil well, and took note of the staff assessment that the real effective exchange rate appears overvalued. While recognizing the need for a temporary tax on portfolio capital inflows, Directors suggested that consideration be given to a long-term response that combines a tightening of fiscal policy, a lower interest rate, and prudential measures. They noted the comfortable levels of international reserves and their instrumental role in stabilizing market confidence during the recent turmoil. Going forward, while maintaining sufficient reserves is desirable for a highly open economy like Brazil, it would be advisable to take into account sterilization costs in an environment of high prevailing domestic interest rates and at the same time be vigilant about risks of further exchange rate appreciation.

Directors noted that the financial system has provided a strong pillar supporting the economic expansion and supported the plans to reverse emergency liquidity measures. The recent acceleration in lending to the household sector and its impacts on overall demand growth warrant special attention. Some Directors encouraged a comprehensive assessment of the composition and quality of the capital of public banks. Directors welcomed the authorities’ agreement to undertake a Financial Sector Assessment Program update.

Directors endorsed the government’s development strategy, with an emphasis on increasing investment, both public and private, over the medium term, especially for infrastructure projects. They stressed that reaching Brazil’s full potential will require vigorous implementation of well-targeted structural reforms to enhance productivity and competitiveness, accompanied by measures to increase domestic savings, including reforms of public sector expenditures and of the social security and the pension systems.

Brazil: Basic Data, 2004-2010








Prel. Proj.


2004 2005 2006 2007 2008 2009 2010
(Annual percentage changes, unless otherwise indicated)

Real GDP

5.7 3.2 4.0 6.1 5.1 -0.2 7.1

Domestic demand (contribution to growth, percent)

5.1 2.8 4.8 7.1 6.9 -0.3 9.1

Private consumption (growth rate)

3.8 4.5 5.2 6.1 7.0 4.1 8.3

Public consumption (growth rate)

4.1 2.3 2.6 5.1 1.6 3.7 5.3

Gross investment (growth rate)

9.4 -0.3 6.0 11.5 10.6 -11.8 13.8

Gross fixed capital formation

9.1 3.6 9.8 13.9 13.4 -9.9 14.3

Foreign balance (contribution to growth, percent)

0.6 0.4 -0.8 -1.0 -1.8 0.1 -2.0

Exports of GNFS (contribution to growth, percent)

1.5 1.0 0.6 0.7 -0.1 -1.1 0.6

Imports of GNFS (contribution to growth, percent)

0.9 0.6 1.4 1.7 1.7 -1.2 2.6









Consumer price index (IPCA, period average)

6.6 6.9 4.2 3.6 5.7 4.9 5.4

Consumer price index (IPCA, end of period)

7.6 5.7 3.1 4.5 5.9 4.3 5.8

GDP deflator

8.0 7.2 6.2 5.9 7.4 4.8 5.3

Terms of trade

0.5 0.9 5.1 3.5 3.5 -3.2 2.7
(In percent of GDP)

Public finances








Federal government 1/








Total revenues

21.8 22.8 23.0 23.3 23.8 23.5 23.9

Total expenditures

23.2 26.2 26.1 25.5 24.2 26.9 25.1

Of which: interest

4.1 6.0 5.3 4.5 3.2 4.8 3.5

Primary balance

2.7 2.6 2.2 2.2 2.8 1.4 2.3

Consolidated public sector








Primary balance 2/

3.8 3.9 3.3 3.4 4.1 2.1 3.3

Overall balance

-2.8 -3.4 -3.5 -2.6 -1.3 -3.2 -1.6

Public sector net debt 2/

50.6 48.2 47.0 45.1 37.9 42.3 36.7
(12-month percentage changes, unless otherwise indicated)

Money and credit








Base money 3/

4.7 7.7 12.6 21.8 -17.6 11.6 14.1

Broad money (M2) 4/

16.6 19.2 18.6 18.4 18.0 15.8 8.9

Credit to the private sector

14.9 19.3 25.7 36.6 30.1 5.3 18.1
(In billions of U.S. dollars, unless otherwise indicated)

Balance of payments








Current account

11.7 14.0 13.6 1.6 -28.2 -24.3 -54.6

Merchandise trade balance

33.6 44.7 46.5 40.0 24.8 25.3 4.3


96.5 118.3 137.8 160.6 197.9 153.0 176.5


-62.8 -73.6 -91.4 -120.6 -173.1 -127.7 -172.2

Services, income, and transfers (net)

-22.0 -30.7 -32.8 -38.5 -53.0 -49.6 -58.9

Capital and financial account

-7.5 -9.5 16.3 89.1 29.3 61.3 74.7

Foreign direct investment

18.1 15.1 18.8 34.6 45.1 25.9 45.0

Portfolio investment

-5.2 4.6 4.3 37.9 3.5 50.5 32.4

Other capital (net)

-20.5 -29.1 -6.9 16.6 -19.2 -15.1 -2.7

Errors and omissions

-1.9 -0.2 0.6 -3.2 1.8 -0.3 0.0

Change in net international reserves

8.0 28.5 32.0 94.5 13.4 44.7 20.1

Current account (in percent of GDP)

1.8 1.6 1.3 0.1 -1.7 -1.5 -2.8

Outstanding external debt (in percent of GDP)

30.3 19.1 15.8 14.1 11.9 12.4 11.1

Total debt service ratio (in percent of exports of goods & services)

66.6 68.9 58.2 65.9 40.7 51.3 42.8

Gross reserves/short-term external debt (residual maturity, in percent)

68.9 73.0 100.0 231.3 237.5 339.4 347.3

Sources: Central Bank of Brazil; Ministry of Finance; and IMF staff estimates.

1/ Includes the central government, central bank, and social security system.

2/ Includes Fundo Soberano Brasileiro (FSB).

3/ End of period. Currency issued plus required and free reserves on demand deposits held at the central bank.

4/ End of period. Currency in circulation plus demand, time and savings deposits

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. An explanation of any qualifiers used in summings up can be found here:


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