September 6, 2002
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The approval of the credit—the largest IMF credit to date in SDR terms—opens the way for an immediate drawing of up to SDR 2.28 billion (about US$3 billion). A second drawing of up to SDR 2.28 billion (about US$3 billion), would be made available upon completion of the first review, which will be scheduled before year-end 2002. The remainder of the credit would be made available in four tranches through 2003, following the completion of reviews and observance of relevant performance criteria. The current stand-by credit replaces a 15-month stand-by arrangement approved in September 14, 2001 (see Press Release No. 01/38).
Following the Board discussion on Brazil, Horst Köhler, Managing Director and Chairman, said:
"Brazil has implemented strong and consistent macroeconomic policies in recent years that have improved fundamentals. Increases in the public sector primary surplus and the strengthening of fiscal institutions, along with the successful transition to a floating exchange rate regime and inflation targeting have laid the foundation for sustainable growth with price stability.
"Despite these achievements, the uncertain international economic environment and some concerns about the course of economic policies following the upcoming presidential elections have put substantial pressure on financial variables, including the exchange rate and interest rates, and economic growth has slowed in recent months. In addition, the depreciation of the exchange rate has led to an increase in the ratio of debt to GDP.
"The authorities have responded to these developments proactively, announcing in June an increased primary surplus target for 2002-2003, and have maintained a firm monetary policy to limit the inflationary impact of the weakening real. In addition, the authorities have developed a macroeconomic framework for the medium term that underpins the new Fund-supported program covering the period through December 2003.
"The new program will contribute toward ensuring the maintenance of sound economic policies. In this regard, the commitment that the leading presidential candidates have given to the core elements of the program already appears to have helped market confidence. As the next government builds on progress achieved with this macroeconomic policy framework, Brazil could be expected to progressively regain market access.
"The program targets a public sector primary surplus of 3.75 percent of GDP in 2003, with a target of no less than this amount in the budgetary guidelines law for 2004-05. Achievement of these targets will help stabilize the public debt dynamics, and lower the debt ratio over the medium term. However, given the sensitivity of the debt dynamics to the real exchange rate, real GDP growth, and real interest rates, the fiscal targets will be reassessed during quarterly program reviews.
"Other important elements in the program are aimed at reducing inflation, paving the way for a new strengthened Central Bank legislation, and improving further Brazil's already strong financial supervision. Externally, higher trade surpluses are helping reduce Brazil's financing requirement, and the lower program floor on net international reserves gives room for maneuver in reducing exchange rate volatility.
"Broader structural reforms aimed at raising Brazil's growth in line with its considerable potential are to be mutually agreed and phased in during the program period, especially to increase tax efficiency and reduce public expenditure rigidities. The Fund looks forward to working with the incoming government to deepen these structural reforms and entrench sustained growth in Brazil," Mr. Köhler said.
ANNEX
Program Summary
Brazil's financial variables have been under intense pressure in recent weeks due to some market concerns about the policies under the new government that will take office in January 2003. The situation has arisen notwithstanding Brazil's good macroeconomic performance under the program supported by the Stand-By credit approved in September 2001, and the responsiveness of the authorities in strengthening policies following a series of external and domestic shocks.
As in many emerging markets, financial conditions deteriorated in Brazil in September-October 2001, due to an increase in global risk aversion and doubts about the pace of growth of the global economy following the events of September 11. Thanks in part to the maintenance of strong macroeconomic policies in the context of an IMF-supported program, this deterioration had been reversed by early 2002. By May, however, rising economic concern about the course of economic policy following next year's change in government led to the reemergence of market pressures. The announcement of a new IMF-supported program, and the leading presidential candidates' support for its key elements, contributed to improving market sentiment and stabilizing financial indicators.
The main objectives of the proposed new program are a) help to reduce current market uncertainties and volatility; b) facilitate an orderly transition to the new administration and c) contribute toward ensuring the maintenance of sound economic policies beyond 2002. To create conditions for reversing the recent deterioration in debt dynamics, the primary fiscal surplus would be 3.88 percent of GDP in 2002, and no less than 3.75 percent of GDP during 2003-05. A minimum consolidated public sector primary surplus of 3.75 percent of GDP would stabilize and put the debt ratio on a downward path over the medium term.
Monetary policy will continue to be set in a forward looking manner to ensure that inflation converges to the official target of 4 percent with a band of 2½ percentage points on either side for end-2003. A regular exchange of views about the evolution of the monetary policy will be maintained between IMF staff and the authorities, and there will be a procedure for consultation with IMF staff and the Executive Board in the event that inflation deviates from the band limits as specified in the Technical Memorandum of Understanding.
To allow the central bank room for maneuver in the foreign exchange market, the program set a floor of net international reserves (NIR) of US$5 billion, or US$10 billion below the floor of the previous program. As market conditions allow, the authorities will seek to reduce public sector foreign exchange exposure.
The authorities are also committed to extending their structural reform agenda and have already taken an important step on August 29 through a Provisional Measure (Presidential Decree) which has the force of law converting the cascading federal tax on gross revenue known as "Programa de Integração Social" or Social Integration Program (PIS) into a value added-type tax in a revenue neutral-manner. The new system will be effective as of December 1, 2002. Progress is also expected in long-planned pension reform issues, including the legal basis for the creation of complementary pension funds for civil servants on a defined contribution basis and defining the careers for which civil servants can be hired under the private-sector social security regime.
Brazil is an original member of the IMF; its quota2 is SDR 3.04 billion (about US$4.06 billion). Brazil's outstanding use of IMF credit currently totals SDR 10.89 billion (about US$14.53 billion).
