Brazil and the IMF
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The Executive Board of the International Monetary Fund (IMF) completed today the ninth review of Brazil's performance under an SDR 27.4 billion (about US$41.95 billion) Stand-By Arrangement originally approved in September 2002, and later augmented and extended in December 2003 (see Press Releases Nos. 02/40 and No. 03/217).
Total drawings under the Stand-By Arrangement to date have amounted to SDR 17.2 billion (about US$26.36 billion). Completion of the ninth review makes available a further amount equivalent to SDR 911 million (about US$1.4 billion). However, the Brazilian authorities have not drawn under the arrangement since September 2003. The authorities are treating the arrangement as precautionary as part of a strategy to exit from IMF financial support. On this basis, Brazil is expected to reduce its obligations to the IMF by SDR 2.9 billion (about US$4.44 billion) in 2004. A final review will be conducted before the IMF arrangement expires on March 31, 2005.
Following the Executive Board's discussion of Brazil's economic performance, Mr. Rodrigo de Rato, Managing Director and Chair, said:
"Brazil's performance under the Stand-By Arrangement has remained strong. A broad-based economic recovery is continuing, with GDP growth exceeding 6 percent over the last four quarters and all economic sectors expanding. While export growth remains impressive, the strong pick-up in domestic demand, employment, and real incomes has made the recovery more robust in the face of an uncertain external environment. The sharp rebound in investment this year, partly in response to emerging capacity constraints, is especially encouraging and bodes well for a continuation of the current economic expansion.
"Macroeconomic policy has responded with appropriate caution to inflationary pressures. The central bank has gradually tightened monetary conditions in order to maintain a downward path for inflation while avoiding an abrupt adjustment of interest rates that could derail the recovery. The government has supported this effort by taking advantage of strong revenue performance to raise the 2004 primary fiscal surplus target to 4½ percent of GDP. This, together with sound debt management, should help to further accelerate debt reduction and strengthen fiscal sustainability.
"Sustained strong revenue performance and spending restraint in 2005 should provide further opportunities for the government to reduce debt, continue to pursue tax reform, and increase spending on high-quality infrastructure projects. In consultation with IMF and World Bank staff, the government is finalizing a plan to accommodate higher infrastructure investment in priority areas such as transport, while maintaining fiscal sustainability. The law on public-private partnerships, which is currently being considered by congress, will encourage increased private sector investment in infrastructure within a sound legal and accounting framework.
"External vulnerabilities have continued to decline as a result of prudent macroeconomic policies, increasing trade openness, and corporate sector efforts to reduce external debt. Markets have reacted positively to recent developments, with the real appreciating and sovereign bond spreads declining, and the authorities have taken advantage of the benign environment to begin pre-financing their external requirements for 2005 and to purchase additional foreign exchange reserves.
"Advancing the structural reform agenda is key to strengthening Brazil's medium-term growth potential. The recent passage of the bankruptcy law is a welcome step in this direction. It will be important to complete several initiatives already in progress, and then to take advantage of the opportunity provided by the strong economy to establish a suitably ambitious reform agenda for 2005 and beyond. Priority measures will be needed to reduce budget rigidities, and strengthen the investment environment, including through broad tax reforms, and measures to reduce the costs of financial intermediation and the administrative barriers to doing business. Such policies should strengthen the foundations for medium-term growth and allow more resources to be channeled into anti-poverty programs and infrastructure investment, in order to address Brazil's pressing needs in these areas.
"The Brazilian authorities continue to treat the program as precautionary, as part of a strategy to exit from Fund financial support," Mr. de Rato said.
IMF EXTERNAL RELATIONS DEPARTMENT