IMF Executive Board Concludes 2011 Article IV Consultation with Brazil

Public Information Notice (PIN) No. 11/108
August 3, 2011

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 20, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Brazil.1


Brazil has made remarkable strides over the last decade, emerging as a leading actor on the global economic stage. A strong policy framework and sustained political commitment to reduce inflation and public debt levels has increased the resilience of the economy to external shocks. Moreover, the increased macroeconomic stability, combined with well-targeted social policies, has allowed the country to take advantage of favorable external conditions over the past decade to accelerate growth and reduce poverty and inequality to historic lows.

The economy has recovered strongly from the crisis growing last year by 7.5 percent, with the unemployment rate falling to historic lows of 6.4 percent in May this year, and output estimated to now be above potential. Activity has been moderating since the middle of last year, but buoyant domestic demand has contributed to some widening of the current account deficit to 2.3 percent of Gross Domestic Product (GDP) in 2010, notwithstanding the very favorable prices for Brazil’s key commodity exports. Moreover, strong demand and tightening labor market conditions, combined with commodity price shocks, have led to rising inflation. Indeed, inflation reached the top of the 2.5–6.5 percent inflation target band in May.

Credit has been growing fast for several years now, reflecting in part a process of financial deepening, with the credit-to-GDP ratio rising from 24 percent of GDP in 2004 to 46 percent of GDP in 2010. Bank credit to the private sector continues to grow rapidly, rising by 20 percent in April 2011. Lending by private banks, which fell sharply during the crisis, has rebounded very strongly. Meanwhile, public bank lending, which was ramped up during the crisis to offset the fall-off in private lending, also continues to expand at a rapid pace. Responding to concerns about excessive risk-taking in some market segments, the authorities late last year introduced various macro-prudential measures aimed at moderating credit growth.

Brazil remains a favored destination for international investors, reflecting in part its favorable economic prospects and high yields. Net capital inflows have been accelerating and reached US$52.6 billion through end-April, almost twice as high as over the same period in 2010. Foreign direct investment flows have increased sharply in recent months, reflecting mainly investments in large projects, while external borrowing by banks and corporates rose fast earlier in the year. To manage inflows, the authorities have used all parts of their policy tool kit. With the exchange rate appreciating to high levels, intervention has continued with purchases of about US$37 billion in the spot market in the first half of 2011. As such, Brazil’s reserves have reached US$335 billion at end-June, the sixth largest holding in the world. The authorities have also been introducing various capital flow management measures that have gradually gained some traction in moderating incentives for capital flows.

The authorities have been gradually withdrawing policy stimulus. The monetary policy target rate was raised by 200 basis points during April-July 2010. After a mid-cycle pause of several months, the policy rate has been increased again by 150 basis points since the beginning of the year, to reach 12.25 at end-June. Fiscal policy ended up providing a substantial procyclical stimulus in 2010 as the economy was already recovering. However, the authorities earlier this year announced a package of spending reductions (relative to the initial budget) equivalent to 1.2 percent of GDP and a primary surplus target of about 3 percent of GDP for 2011. Combined with plans for reducing Treasury transfers to the development bank BNDES, this should contribute to a withdrawal of fiscal stimulus in the current year.

Executive Board Assessment

Executive Directors commended the authorities for their sound macroeconomic management and strong policy framework, which increased Brazil’s resilience to external shocks, spurred economic growth, and promoted greater social equity. Directors agreed, however, that although the outlook remains broadly favorable, there are signs of overheating. Accordingly, they stressed the importance of further calibrating the policy mix to address near-term macroeconomic pressures.

Directors welcomed the authorities’ decision to phase out the fiscal stimulus introduced during the crisis. They considered that additional fiscal tightening would support disinflation and the management of capital inflows, while reducing the need for raising further Brazil’s already high interest rates. Directors supported the authorities’ decision to reduce the exceptional funding provided to the National Development Bank, in view of the rapid credit expansion.

Directors supported the tightening of monetary conditions by the central bank to contain inflation risks. They agreed that, while the pick-up of inflation reflects in part commodity price shocks, strong demand and labor market pressures have also been key factors. Directors welcomed the central bank’s commitment to tighten monetary policy as needed to meet the midpoint of the inflation target band by end-2012.

Directors agreed that overall financial soundness indicators are favorable. They stressed, however, the need for heightened vigilance against financial risks, given the pace of credit growth and continued reliance on external borrowing. Directors observed that macro-prudential policies have played a helpful role in slowing credit in some segments, but a few Directors noted that such policies may need to be applied more broadly to gain traction. Directors commended the authorities for steps taken to ensure a smooth transition to new international standards under Basel III. They also welcomed the authorities’ decision to undertake a Financial Sector Assessment Program (FSAP) update next year.

Directors took note of the authorities’ pragmatic use of the policy toolkit for managing capital inflows. Macroeconomic policies have been appropriately tightened, the exchange rate has appreciated substantially, and official foreign exchange reserves have increased. Directors considered that the authorities’ use of capital flow management measures has been appropriate. However, a number of Directors cautioned that these measures are prone to circumvention, while many Directors noted that attendant costs should also be taken into account and pointed to their distortionary effects. Many Directors recommended that further macroeconomic policy adjustment be part of the response to large capital inflows.

Directors underscored the need to tackle longstanding structural rigidities. They encouraged the authorities to implement key fiscal reforms, including increasing budget flexibility, reforming the state VAT system, and implementing the social security reform. Directors noted that measures to improve the business climate and enhance competitiveness would lower structurally high interest rates and boost long-term growth prospects.

Brazil: Selected Economic Indicators, 2005-11
            Prel. Proj
  2005 2006 2007 2008 2009 2010 2011
(Annual percentage changes, unless otherwise indicated)

Real GDP

3.2 4.0 6.1 5.2 -0.6 7.5 4.1

Domestic demand (contribution to growth, percent)

2.8 4.8 7.1 6.6 -0.7 9.6 5.7

  Private consumption (growth rate)

4.5 5.2 6.1 5.7 4.2 7.0 5.4

  Public consumption (growth rate)

2.3 2.6 5.1 3.2 3.9 3.3 4.2

  Gross investment (growth rate)

-0.3 6.1 11.5 11.2 -13.7 20.6 7.1

Gross fixed capital formation

3.6 9.8 13.9 13.6 -10.3 21.9 6.8

Foreign balance (contribution to growth, percent)

0.4 -0.8 -1.0 -1.4 0.1 -2.2 -1.4

  Exports of GNFS (contribution to growth, percent)

1.0 0.6 0.7 0.1 -1.1 1.1 0.5

  Imports of GNFS (contribution to growth, percent)

0.6 1.4 1.7 1.5 -1.2 3.4 2.0



Consumer price index (IPCA, period average)

6.9 4.2 3.6 5.7 4.9 5.0 6.6

Consumer price index (IPCA, end of period)

5.7 3.1 4.5 5.9 4.3 5.9 6.3

GDP deflator

7.2 6.1 5.9 8.3 5.7 7.3 6.2

Terms of trade

0.9 5.1 3.5 3.5 -3.0 17.7 5.4
(In percent of GDP)

Public finances


Federal government 1/


Total revenues

22.8 23.0 23.3 23.6 23.2 25.0 23.9

Total expenditures

26.2 26.1 25.5 24.0 26.6 27.2 26.0

  Of which: interest

6.0 5.3 4.5 3.2 4.7 4.0 4.2

Primary balance

2.6 2.2 2.2 2.8 1.3 1.8 2.0

Consolidated public sector


Primary balance

3.8 3.2 3.4 4.0 2.1 2.4 2.9

Overall balance

-3.5 -3.5 -2.7 -1.4 -3.1 -2.9 -2.8

Public sector net debt

48.2 47.0 45.1 38.1 42.2 40.2 39.1
(12-month percentage changes, unless otherwise indicated)

Money and credit


Base money 2/

7.7 12.6 21.8 -17.6 11.6 131.7 11.0

Broad money (M2) 3/

19.2 18.6 18.4 18.0 15.8 9.2 10.8

Credit to the private sector

19.3 25.7 36.6 30.1 5.3 21.6 15.6
(In billions of U.S. dollars, unless otherwise indicated)

Balance of payments


Current account

14.0 13.6 1.6 -28.2 -24.3 -47.4 -57.9

Merchandise trade balance

44.7 46.5 40.0 24.8 25.3 20.2 20.5


118.3 137.8 160.6 197.9 153.0 201.9 259.9


-73.6 -91.4 -120.6 -173.1 -127.7 -181.7 -239.4

Services, income, and transfers (net)

-30.7 -32.8 -38.5 -53.0 -49.6 -67.6 -78.4

Capital and financial account

-9.5 16.3 89.1 29.3 71.3 99.7 124.9

Foreign direct investment

12.5 -9.4 27.5 24.6 36.0 36.9 55.5

Portfolio investment

4.6 4.3 37.9 3.5 50.5 56.4 32.4

Other capital (net)

-26.6 21.3 23.7 1.3 -15.2 6.4 37.0

Errors and omissions

-0.2 0.6 -3.2 1.8 -0.3 -3.2 0.0

Change in net international reserves

-4.3 -30.6 -87.5 -3.0 -46.7 -49.1 -67.0

Current account (in percent of GDP)

1.6 1.3 0.1 -1.7 -1.5 -2.3 -2.4

Outstanding external debt (in percent of GDP)

19.1 15.8 14.1 11.8 12.2 12.3 11.9

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

68.9 58.2 65.9 40.7 51.3 50.4 38.5

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

73.0 100.0 231.3 235.5 314.7 303.8 353.9

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

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

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

3/ 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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