## 1. Brazil’s COVID Economy in International Context ## Source details **Canonical URL:** [1. Brazil’s COVID Economy in International Context](https://www.imf.org/-/media/files/publications/cr/2021/english/1braea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1braea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1braea2021001.pdf.json) --- ### COVID-19 health situation and vaccinations - New daily cases declined to 45,000 (7-day MA) and daily deaths to 1000 following a second wave; cumulative fatalities exceed 550000 and average life expectancy at birth has fallen by 1.3 years. - Vaccination campaign started in mid-January; as of end July, 50 percent of the population and more than 90 percent of those over 60 had received at least a first dose. - The government procured sufficient doses to inoculate the adult population in 2021; the most vulnerable populations expected to be fully inoculated by the fall. - Additional indicators: - Actual fully vaccinated share as of April 30, 2021: 6.4 percent of the population (Box 5 baseline and scenarios). ### Macroeconomic performance during the pandemic - Real GDP: - Declined by 4.1 percent in 2020. - After contracting by 6.1 percent in H1 2020, the economy returned to its pre-pandemic level by Q1 2021. - Real GDP growth projected to rebound to 5.3 percent in 2021; baseline scenario real GDP growth series: 2021: 5.3; 2022: 1.9; 2023: 2.0; 2024: 2.1; 2025: 2.1; 2026: 2.1. - Sectoral dynamics: - Recovery led by industry and agriculture; services sector still struggling. - Private sector credit grew robustly; housing demand and residential construction buoyed. - Sharp decline in imports led to a positive contribution to growth from net exports. ### Fiscal support and emergency aid program - Emergency measures: - March 2020 emergency package ("war budget") and quasi-fiscal measures amounted to 17.6 percent of GDP, with almost half having a direct impact on the primary deficit. - Emergency cash transfer program injected nearly 4 percent of GDP into the economy in 2020. - Covered 67 million recipients with a monthly benefit of R$600 from April to August 2020; remainder of 2020 transfers restricted to ≈45 million recipients with monthly payment of R$300. - COVID-19 near-term support in March 2021 totaled 1.4 percent of GDP and was excluded from the expenditure rule. - Impact and multipliers: - Program prevented a sharp rise in poverty and inequality. - Estimated GDP multiplier in the range of 0.6-1.2. - Each R$100,000 in transfers generated 0.6 to 1.2 formal jobs over a six-month period. - Spending under the program created close to 1 million formal jobs in 2020 (using lower bound) and added 2.5 percentage points to the level of 2020 GDP (using the lower bound). - Demand effect largest in initial months; multiplier drops off by Q4 2020. ### Labor market dynamics - Job losses and recovery: - Of the 12 million jobs lost between February and August 2020, only 4.2 million were recovered by April 2021. - Unemployment and participation: - Unemployment remains high; labor force participation leveled off at a lower level than prior to the pandemic. - At end-March: youth unemployment rate was 31 percent; unemployment rate of afro-Brazilians and women was 18-19 percent. - Female labor force participation: 48 percent versus 67 percent for men. - Human capital: - Pipeline of skilled labor supply affected; World Bank expects a roll back of the decade-long improvement in the Human Capital Index. ### External sector developments and outlook - Current account and external balances: - Current account deficit improved from -3.5 percent of GDP in 2019 to -1.7 percent in 2020. - Staff projects a CA balance of about 0.4 percent of GDP for 2021; medium-term current account expected to widen to around 2.5 percent of GDP. - Exports expected to increase by one-third in 2021, leading to a trade surplus of 4-5 percent of GDP and a current account close to balance. - Financing and reserves: - Improvement driven mainly by a historic increase in private savings; financed by FDI inflows offset by modest portfolio outflows. - Net FDI in 2020: 3.5 percent of GDP; net portfolio outflows in 2020: -0.9 percent of GDP. - Reserves: US$334 billion at end-2020; reserves adequate (161 percent per ARA metric as of end-2020); upcoming SDR allocation will increase gross reserves by 4 percent. - External debt and NIIP: - Brazil’s NIIP was -38.3 percent of GDP at end-2020 (vs -42 percent at end-2019). - Total external debt increased from 36 to 44 percent of GDP in 2020; 89 percent long-term; inter-company loans 38 percent of total external debt. - Short-term gross external financing needs significant at around 11 percent of projected 2021 GDP. ### Inflation and monetary policy - Inflation: - Headline inflation above target since November 2020; reached 9 percent in July 2021. - Core inflation was 5.4 percent in July 2021. - Forecast (baseline inflation path): 2021: 9.3; 2022: 5.7; 2023: 4.1; 2024: 4.2; 2025: 4.0; 2026: 3.9. - Monetary policy actions: - BCB tightened policy: hiked the SELIC by 325 bps between March and August, raising it from 2 to 5.25 percent. - Target rate: 3.75 percent for 2021 and 3.5 percent for 2022, with tolerance intervals of +/- 1.5 percent. - Effective nominal interest rate projections in baseline: 2021: 6.6; 2022: 6.7; 2023: 6.8; 2024: 7.1; 2025: 7.2; 2026: 7.4. - Phillips-curve findings: - Food and beverage inflation almost entirely explained by international prices and nominal exchange rate movements. - Services inflation is persistent and strongly influenced by labor market slack. - Non-energy, non-food goods inflation strongly related to long-term inflation expectations. - Monetary guidance: - Steady monetary tightening needed to guide inflation back to target by end-2022; policy should remain data dependent and pay careful attention to inflation expectations at an 18–24-month horizon. ### Epidemiological-economic vaccination modeling (Box 5) - Model and assumptions: - Extended SEIRD model assessing vaccination impacts on mobility and deaths. - Baseline: 75 percent of vulnerable individuals vaccinated by June 9, 2021; non-vulnerable reach 75 percent by April 11, 2022; model assumes increase until 88 percent fully vaccinated. - Scenarios and results: - Accelerated scenario: speeds vaccination by 3 months for non-vulnerable population. - Result: Speedier 3-month vaccination conclusion could allow mobility to be 3 percent higher in 2022 while keeping deaths the same. - Delayed scenario: assumes a 6-month delay for non-vulnerable population. - Result: If vaccination delayed by 6 months, mobility would need to fall by 13 percent in 2022 to keep deaths the same. - Additional-deaths model outputs shown as percent through December 31st, 2022 for alternative scenarios. ### Outlook and risks - Growth and inflation outlook: - Real GDP growth projected to rebound to 5.3 percent in 2021. - Headline inflation projected to peak above 8 percent in mid-2021; headline and core inflation expected to converge to the mid-point of the range (3.5 percent) by end-2022. - Key risks: - Downside: delayed vaccine rollout or new variants; drought-induced rationing of energy and/or spike in electricity prices; reassessment of market fundamentals from fiscal framework concerns, realization of contingent liabilities, and electoral uncertainties; tightening of global financial conditions. - Upside: strong momentum in activity and waning pandemic effects. - Policy buffers and resilience: - Flexible exchange rate, sound banking system, large stock of international reserves, low share of foreign currency public debt. - External debt assessed sustainable over the medium term but sensitive to real exchange rate shocks. ### Fiscal consolidation, debt dynamics, and NFPS projections - 2020 fiscal outcomes: - NFPS primary deficit rose by 7.3 percentage points to 9.2 percent of GDP in 2020. - Gross debt reached 99 percent of GDP by end-2020 (98.9 percent reported). - NFPS headline primary balance projections (percent of GDP): - 2019: -0.9; 2020: -9.2; 2021 proj.: -1.7; 2022 proj.: -1.0; 2023 proj.: -0.3; 2024 proj.: 0.2; 2025 proj.: 0.7; 2026 proj.: 1.2. - Structural primary balance projections (percent of GDP): - 2019: -0.8; 2020: -7.7; 2021 proj.: -1.5; 2022 proj.: -0.9; 2023 proj.: -0.3; 2024 proj.: 0.2; 2025 proj.: 0.7; 2026 proj.: 1.2. - NFPS gross debt (percent of GDP) and annual changes: - 2016: 78.3; 2017: 83.6 (change 5.3); 2018: 85.6 (change 2.0); 2019: 87.7 (change 2.0); 2020: 98.9 (change 11.3); 2021 proj.: 91.6 (change -7.3); 2022 proj.: 90.9 (change -0.7); 2023 proj.: 91.7 (change 0.8); 2024 proj.: 92.0 (change 0.3); 2025 proj.: 92.1 (change 0.1); 2026 proj.: 92.0 (change -0.1). - Net interest expenditure (percent of GDP): - 2016: 6.5; 2017: 6.1; 2018: 5.4; 2019: 4.9; 2020: 4.6; 2021 proj.: 4.6; 2022–2026 proj.: 5.9, 5.9, 5.9, 5.8, 6.0 respectively. - Debt sustainability assessments: - Gross financing needs rose to close to 25 percent of GDP in 2020; projected to average close to 20 percent per year over the remainder of the forecast horizon. - Fan chart: a negative combination of macro variables at the 10th percentile would yield debt over 110 percent of GDP in 2026; optimistic scenarios could lower public debt to below 80 percent of GDP by 2026. - Stress-test scenarios highlight susceptibility: primary balance shock, growth shock, real interest rate shock, real exchange rate shock, and combined macro-fiscal shock (combined shock yields gross debt exceeding 120 percent by 2026). ### Composition of spending, budget rigidities, and subnational risks - Expenditure composition and rigidity: - Almost 93 percent of federal primary expenditures are mandatory in the 2021 budget, heavily concentrated in pensions and wages. - Discretionary spending (mostly public investment and provision of essential public services) is small and was further compressed in the 2021 budget. - Recommendations to improve budget flexibility and efficiency: - Scale back the share of mandatory outlays. - Administrative reform to reduce personnel costs by overhauling civil service career structures, aligning public compensation with the private sector, and de-indexing spending linked to the minimum wage. - IMF Country Report 20/311 suggests measures could save up to one percent of GDP per year in personnel costs. - Rolling spending reviews of large budgetary programs. - Subnational government recommendations: - Rebuild buffers, improve subnational fiscal reporting, adopt more conservative debt limits, impose credible hard-budget constraints and strict limits on federal government support, introduce subnational primary spending caps, balanced budget rules, and build up rainy-day funds. - Many states have yet to reform subnational pension systems to align with new federal provisions. ### Social protection, targeting, and consolidation of cash benefits - New, more targeted COVID-19 spending aims to boost household income, protect the most vulnerable, and bolster the recovery. - Proposals include revisiting the scope and coverage of Bolsa Familia. - Scope exists to consolidate various non-contributory cash benefit programs into a single program to reduce duplication and increase progressivity, potentially saving up to 0.7 percent of GDP. - Consolidation should aim to raise benefits and expand coverage for the most vulnerable. ### Tax reform, tax expenditures, and revenue measures - Tax expenditures: - Federal tax expenditures cost the general government over 5 percent of GDP per year; emergency amendment requires a plan to reduce tax expenditures from 4.2 to 2 percent of GDP over 8 years. - Share of federal tax expenditures by program category (percent of GDP) highlights: - Simples Nacional (SME): 1.07% - PIT exemptions and deductions: 0.93% - CIT sectoral and regional incentives: 0.49% - Basic food exemptions: 0.46% - Non-profit organizations: 0.40% - Free Trade Zones: 0.31% - Medicine exemptions: 0.20% - Financial transactions: 0.15% - Transportation vehicles: 0.20% - Key reform elements and potential revenue implications: - Federal VAT (CBS) proposal: unify PIS and COFINS into a federal VAT at a non-cumulative 12 percent rate; would eliminate about 0.3 percent of GDP in tax expenditures. - Eliminating preferential rates and credits on food and medicine could yield another ¼ percent of GDP in revenues. - Income tax reform proposals include reintroducing dividend taxation, eliminating interest on net equity deductions from the CIT, and taxing accrued capital gains in closed-end investment funds. - Proposed reduction in statutory CIT rate by 12½ percentage points to 21½ percent is expected to be net revenue losing; authorities now anticipate a net revenue loss in the order of 0.4 percent of GDP from the larger-than-initially-proposed CIT cut. - Suggested additional measures: align integrated CIT rate with top marginal PIT rate; potential dividend taxation around 15 percent with a corporate equity allowance; expand transfer pricing and thin-cap rules; cap deductible interest expenses to a percentage of EBITDA (financial institutions excluded); lower eligibility threshold for Simples Nacional to BRL 1 million; eliminate most PIT deductions and capital income exemptions; reduce payroll taxes while raising the top PIT rate to 30 percent; strengthen property and inheritance taxes; replace various indirect taxes with a uniform VAT and excises, eliminating preferential treatment or zero-rating for certain goods while expanding social transfers. ### Institutional and medium-term framework recommendations - Develop a comprehensive medium-term fiscal framework with clear targets and specific measures: - Supplement the expenditure ceiling with an explicit debt anchor and specific escape clauses narrowly defining conditions for suspending fiscal rules. - Include well-defined corrective mechanisms to resume consolidation after emergency conditions abate. - Embed scenario analysis for contingency planning. - Consider strengthening an independent fiscal council or the Independent Fiscal Institution (IFI) by enhancing legal independence, clarifying mandates, and ensuring adequate resources. ### Authorities’ views - Authorities agree baseline outlook looks favorable. - Authorities pointed to decreased debt sustainability risks and emphasized maintaining large cash deposits as a key buffer. - Emergency constitutional amendment (March 2021): - Authorized suspension of fiscal rules via a “public calamity” clause and prohibited public wage increases or new mandatory spending while the state of calamity is in effect. - Freed up surpluses from specific public funds (about 2 percent of GDP) for debt management purposes. - Requires submission to Congress of a plan to reduce tax expenditures from 4.2 to 2 percent of GDP over 8 years. - Authorities plan to move expeditiously on tax reforms; initially estimated reforms broadly revenue neutral but now expect a net revenue loss in the order of 0.4 percent of GDP from the larger CIT cut, to be compensated by structurally higher tax revenue collection across all federal taxes. - Monetary authorities: - BCB highlighted resilience of private consumption despite COVID-19 resurgence and temporary interruption in emergency aid. - BCB supports maintaining the pace of tightening and emphasized transparency and forward guidance; central bank autonomy law introduces fixed four-year mandates for governors and expands mandates (secondary to price stability). - New liquidity facilities launching in 2021Q3; introduction of voluntary deposits to increase liquidity management flexibility. ### Financial sector resilience, inclusion, and reforms - Banking system soundness: - NPLs remained low at 2.2 percent in 2020Q4; provisions for modified loans were 9.4 percent in December 2020; provisions for non-modified loans reached 4.5 percent. - Stress tests: under a severe adverse shock (output contracts by 4 percent, unemployment +6 percentage points, currency depreciates by 35 percent) NPLs rise to about 5 percent; average Tier 1 capital ratio falls from 13.8 percent to 11.8 percent. - ROA-based stress test: all banks maintain CET1 above 4.5 percent minimum without extraordinary measures. - Credit and inclusion: - Credit growth exceeded 10 percent for both households and corporates in 2020. - Instant payment system (PIX) launched November 2020 used by approximately 80 million individuals within first eight months; 17 million had not previously made electronic transactions. - Two thirds of individuals in Cadastro Positivo had their credit scores changed: ~41 percent migrated to lower risk categories, 26 percent to higher risk categories. - BCB analysis suggests Cadastro Positivo led to a 10.3 percent reduction in borrowing costs on non-payroll loans. - Structural reforms and privatizations: - Central bank autonomy approved. - New laws on sanitation, startups, natural gas, and bankruptcy introduced; privatization of Eletrobras approved. - Recent reforms attracted private investment of US$8.3 billion (0.6 percent of GDP) into transportation, energy, and water and sewage in 2020. - OECD estimates further reforms could boost annual per-capita GDP growth by 0.9 percentage points over 15 years. - FSAP implementation (Annex V): multiple microprudential, macroprudential, crisis management, and public bank reform measures underway or in progress; several legislative items pending. ### Environmental sustainability and climate-related initiatives (Box 11) - NDC updated in 2020: - Pledges to cut net greenhouse gas emissions by 37% and 43% by 2025 and 2030, respectively; indicative target of carbon neutrality by 2060 (updated to 2050 at the April 2021 Climate Summit). - BCB ‘Sustainability’ pillar and policy initiatives: - Creating a sustainable liquidity facility; including sustainability criteria for reserve investments; publishing analysis on climate effects on the banking sector; improving socio-environmental risk regulation and disclosure; fast-tracking green infrastructure bond issuance (2020); green liquidity facility proposals. - Rural credit and agriculture: - 2021/22 Plano Safra doubled funds for sustainable agriculture to BRL 5 billion. - Low Carbon Agriculture Plan (Plano ABC) consists of seven programs focused on mitigation and adaptation. ### Staff appraisal — Key findings and policy recommendations - Short-term performance: - Economic performance better than expected; targeted spending in 2021 supports recovery and raised output back to pre-pandemic levels. - Gross public debt as share of GDP expected to fall sharply in 2021, reversing more than two-thirds of the debt accumulated during the pandemic. - Fiscal recommendations: - Rebuild buffers, reduce budget rigidities, address fiscal imbalances, continue adherence to the expenditure rule, consolidate social safety net programs, pursue ambitious reduction of tax expenditures within a broad tax reform package, strengthen medium-term fiscal framework and subnational finances. - Monetary recommendations: - Continued increase in the policy rate needed to guide inflation back to target by end-2022; policy to be data dependent with clear forward guidance; limit FX intervention to disorderly market conditions. - Financial sector and structural policy recommendations: - Gradual phasing out of crisis-related financial support; continue improving quality and efficiency of financial intermediation; use new BCB liquidity facilities to support smaller banks; foster competition and inclusion via PIX and open banking; pursue supply-side reforms to boost productivity and potential growth. - Governance and integrity: - Strengthen anticorruption and AML/CFT frameworks, enhance beneficial ownership transparency, protect independence of oversight institutions, and ensure transparency in COVID spending at the state level. *Source: 1braea2021001 - IMF staff report excerpts provided in the supplied content.* ### 1. Brazil’s COVID Economy in International Context____________________________________________________ 8 ### 1. Brazil’s COVID Economy in International Context ### H3: COVID-19 health situation and vaccinations - New daily cases declined to 45,000 (7-day MA) and daily deaths to 1000 following a second wave; cumulative fatalities exceed 550000 and average life expectancy at birth has fallen by 1.3 years. - Vaccination campaign started in mid-January; as of end July, 50 percent of the population and more than 90 percent of those over 60 had received at least a first dose. - The government procured sufficient doses to inoculate the adult population in 2021; the most vulnerable populations expected to be fully inoculated by the fall. ### H3: Macroeconomic performance during the pandemic - Real GDP declined by 4.1 percent in 2020 (smaller contraction than most advanced and emerging economies; smallest among major Latin American economies). - After contracting by 6.1 percent in H1 2020, the economy returned to its pre-pandemic level by Q1 2021. - Recovery led by industry and agriculture; services sector still struggling. - Private sector credit grew robustly; housing demand and residential construction buoyed. - Sharp decline in imports led to a positive contribution to growth from net exports. ### H3: Fiscal support and emergency aid program (Box 2) - Emergency cash transfer program injected nearly 4 percent of GDP into the economy in 2020. - Covered 67 million recipients (nearly two-thirds of Brazil’s pre-pandemic workforce) with a monthly benefit of R$600 from April to August 2020; remainder of 2020 transfers restricted to ≈45 million recipients with monthly payment of R$300. - Program prevented a sharp rise in poverty and inequality. - Estimated GDP multiplier of the program: in the range of 0.6-1.2. - Each R$100,000 in transfers generated 0.6 to 1.2 formal jobs over a six-month period. - Spending under the program created close to 1 million formal jobs in 2020 (using lower bound) and added 2.5 percentage points to the level of 2020 GDP (using the lower bound of the estimated range). - Demand effect largest in initial months; multiplier drops off by Q4 2020. ### H3: Labor market dynamics - Of the 12 million jobs lost between February and August 2020, only 4.2 million were recovered by April 2021. - Unemployment remains high; labor force participation leveled off at a lower level than prior to the pandemic. - At end-March: youth unemployment rate was 31 percent; unemployment rate of afro-Brazilians and women was 18-19 percent. - Female labor force participation: 48 percent versus 67 percent for men. - Pipeline of skilled labor supply affected; World Bank expects a roll back of the decade-long improvement in the Human Capital Index. ### H3: External sector developments (Box 3 and outlook) - Current account deficit improved from -3.5 percent of GDP in 2019 to -1.7 percent in 2020. - Improvement driven mainly by a historic increase in private savings; financed by FDI inflows offset by modest portfolio outflows. - Exchange rate depreciated sharply early in the pandemic; commodity price increase since late 2020 helped strengthen the Real. - Reserves remain adequate (above the upper bound of the recommended range for the ARA metric); upcoming SDR allocation will increase gross reserves by 4 percent. - 2020 external position judged broadly in line with medium-term fundamentals and desirable policies. - Outlook: exports expected to increase by one-third in 2021, leading to a trade surplus of 4-5 percent of GDP and a current account close to balance; medium-term current account expected to widen to around 2.5 percent of GDP. ### H3: Inflation and monetary policy (Box 4) - Headline inflation above target since November 2020; reached 9 percent in July 2021. - Core inflation was 5.4 percent in July 2021. - Factors: higher fuel and commodity prices, supply disruptions, demand pressures. - Near-term inflation expectations have risen sharply but longer-horizon expectations remain anchored. - BCB tightened policy: hiked the SELIC by 325 bps between March and August, raising it from 2 to 5.25 percent. - Target rate: 3.75 percent for 2021 and 3.5 percent for 2022, with tolerance intervals of +/- 1.5 percent. - Phillips-curve findings: - Food and beverage inflation almost entirely explained by international prices and nominal exchange rate movements. - Services inflation is persistent and strongly influenced by labor market slack. - Non-energy, non-food goods inflation strongly related to long-term inflation expectations. - Forecast: headline inflation projected to return to target by end-2022; core goods inflation surprised to the upside in Q1 and Q2 2021; confidence intervals are wide. ### H3: Epidemiological-economic modeling of vaccination (Box 5) - Extended SEIRD model used to assess vaccination impacts on mobility and deaths. - Actual fully vaccinated share as of April 30, 2021: 6.4 percent of the population; model assumes increase until 88 percent fully vaccinated. - Baseline: 75 percent of vulnerable individuals vaccinated by June 9, 2021; non-vulnerable reach 75 percent by April 11, 2022. - Scenarios: - Accelerated scenario: speeds vaccination by 3 months for non-vulnerable population. - Delayed scenario: assumes a 6-month delay for non-vulnerable population. - Results: - Speedier 3-month vaccination conclusion could allow mobility to be 3 percent higher in 2022 while keeping deaths the same. - If vaccination delayed by 6 months, mobility would need to fall by 13 percent in 2022 to keep deaths the same. - Additional-deaths model outputs shown as percent through December 31st, 2022 for alternative scenarios. ### H3: Outlook and risks - Real GDP growth projected to rebound to 5.3 percent in 2021. - Headline inflation projected to peak above 8 percent in mid-2021; headline and core inflation expected to converge to the mid-point of the range (3.5 percent) by end-2022. - External outlook supported by high commodity prices and record soybean harvest in 2021. - Risks: - Downside: delayed vaccine rollout or new variants; drought-induced rationing of energy and/or spike in electricity prices; reassessment of market fundamentals from fiscal framework concerns, realization of contingent liabilities, and electoral uncertainties; tightening of global financial conditions. - Upside: strong momentum in activity and waning pandemic effects. - Policy buffers: flexible exchange rate as shock absorber; sound banking system; large stock of international reserves; low share of foreign currency public debt. - External debt assessed sustainable over the medium term but sensitive to real exchange rate shocks (Annex II). ### H3: Authorities’ views - Authorities agree baseline outlook looks favorable. - BCB highlighted resilience of private consumption despite COVID-19 resurgence and temporary interruption in emergency aid. - Ministry of Economy emphasized ongoing market-friendly structural reforms and a shift from state-driven to private sector-led growth. - Authorities attribute the strong economic recovery to measures preserving employment and income, vaccination progress, and high commodity prices. *Source: 1braea2021001 - 1. Brazil’s COVID Economy in International Context* ### 12. Unprecedented fiscal support in 2020 resulted in the largest fiscal deficit on record. In ### 12. Unprecedented fiscal support in 2020 resulted in the largest fiscal deficit on record ### Fiscal support, primary deficit, and gross debt - March 2020 emergency package ("war budget") and quasi-fiscal measures amounted to 17.6 percent of GDP, with almost half having a direct impact on the primary deficit. - Cash transfers to households represented 4 percent of GDP and were at the core of the fiscal package. - NFPS primary deficit rose by 7.3 percentage points to 9.2 percent of GDP in 2020. - Gross debt reached 99 percent of GDP by end-2020. - COVID-19 near-term support in March 2021 totaled 1.4 percent of GDP and was excluded from the expenditure rule. ### 2021 constitutional amendment and fiscal rules - Emergency constitutional amendment (March 2021) authorized suspension of fiscal rules via a “public calamity” clause and prohibited public wage increases or new mandatory spending while the state of calamity is in effect. - Automatic spending limits will be triggered if mandatory primary expenditures exceed 95 percent of total spending (a condition not expected to bind in the next 3-4 years). - The amendment requires submission to Congress of a plan to reduce tax expenditures from 4.2 to 2 percent of GDP over 8 years. ### Fiscal consolidation outlook and projections - NFPS headline primary balance projections (percent of GDP): - 2019: -0.9 - 2020: -9.2 - 2021 proj.: -1.7 - 2022 proj.: -1.0 - 2023 proj.: -0.3 - 2024 proj.: 0.2 - 2025 proj.: 0.7 - 2026 proj.: 1.2 - Structural primary balance projections (percent of GDP): - 2019: -0.8 - 2020: -7.7 - 2021 proj.: -1.5 - 2022 proj.: -0.9 - 2023 proj.: -0.3 - 2024 proj.: 0.2 - 2025 proj.: 0.7 - 2026 proj.: 1.2 - NFPS gross debt (percent of GDP) and annual changes: - 2016: 78.3 - 2017: 83.6 (change 5.3) - 2018: 85.6 (change 2.0) - 2019: 87.7 (change 2.0) - 2020: 98.9 (change 11.3) - 2021 proj.: 91.6 (change -7.3) - 2022 proj.: 90.9 (change -0.7) - 2023 proj.: 91.7 (change 0.8) - 2024 proj.: 92.0 (change 0.3) - 2025 proj.: 92.1 (change 0.1) - 2026 proj.: 92.0 (change -0.1) - Net interest expenditure (percent of GDP): - 2016: 6.5 - 2017: 6.1 - 2018: 5.4 - 2019: 4.9 - 2020: 4.6 - 2021 proj.: 4.6 - 2022–2026 proj.: 5.9, 5.9, 5.9, 5.8, 6.0 respectively. - Staff assessment: NFPS primary deficit expected to narrow from 9.2 percent in 2020 to 1.7 percent of GDP in 2021, driven by expiration of the “war budget”, reduced COVID-19 support, restraints on subnational wage increases, buoyant tax revenues, and payment of deferred taxes. - Fiscal position expected to improve by around 0.5 percent of GDP per year, reaching a small primary surplus by 2024. ### Debt sustainability and sovereign risk - With a favorable interest-growth differential and BNDES debt repayments, NFPS gross debt expected to fall by 7 percentage points to 92 percent of GDP (IMF definition) in 2021. - Over the medium term, public debt is expected to level off around 92 percent of GDP and gross financing needs will remain high (around 20 percent of GDP). - Debt-GDP path is sensitive to interest rates, growth, and the primary balance; federal government faces risks from implicit and explicit legal and subnational contingent liabilities. - Supreme Court ruling on PIS/COFINS base could reduce revenues by around 0.7 percent of GDP over the medium term. - SRDSF summary: Medium-Term Stress Signal—debt has a high probability of stabilizing by 2026 and risks of sovereign stress are viewed as moderate. - There is an 80 percent probability that debt will either stabilize or decline over the medium term. - Treasury actions: shortened maturities in 2020 and recently lengthened debt maturities as market conditions improved. - Policy recommendation: opportunistically lower debt by saving any windfalls from better revenue performance or stronger growth; drawdown of some liquid assets would further increase debt-stabilization probability. ### Composition of spending, budget rigidities, and subnational risks - Almost 93 percent of federal primary expenditures are mandatory in the 2021 budget, heavily concentrated in pensions and wages. - Discretionary spending (mostly public investment and provision of essential public services) is small and was further compressed in the 2021 budget. - Recommendations to improve budget flexibility and efficiency: - Scale back the share of mandatory outlays. - Administrative reform to reduce personnel costs by overhauling civil service career structures, aligning public compensation with the private sector, and de-indexing spending linked to the minimum wage. IMF Country Report 20/311 suggests measures could save up to one percent of GDP per year in personnel costs. - Rolling spending reviews of large budgetary programs. - Subnational government recommendations: - Rebuild buffers, improve subnational fiscal reporting (as required by the Fiscal Responsibility Law), adopt more conservative debt limits. - Impose credible hard-budget constraints and strict limits on federal government support. - Introduce subnational primary spending caps, balanced budget rules, and build up rainy-day funds. - Many states have yet to reform subnational pension systems to align with new federal provisions. ### Social protection, targeting, and consolidation of cash benefits - New, more targeted COVID-19 spending aims to boost household income, protect the most vulnerable, and bolster the recovery. - Proposals include revisiting the scope and coverage of Bolsa Familia. - Scope exists to consolidate various non-contributory cash benefit programs into a single program to reduce duplication and increase progressivity, potentially saving up to 0.7 percent of GDP. - Consolidation should aim to raise benefits and expand coverage for the most vulnerable. ### Tax reform, tax expenditures, and revenue measures - Federal tax expenditures have proliferated, costing the general government over 5 percent of GDP per year; many tax expenditures benefit the rich. - Emergency amendment requires a plan to reduce tax expenditures from 4.2 to 2 percent of GDP over 8 years. - Key reform elements and potential revenue implications: - Federal VAT (CBS) proposal: unify PIS and COFINS into a federal VAT at a non-cumulative 12 percent rate; would eliminate about 0.3 percent of GDP in tax expenditures. - Eliminating preferential rates and credits on food and medicine could yield another ¼ percent of GDP in revenues. - Income tax reform: proposed measures include reintroducing dividend taxation, eliminating interest on net equity deductions from the CIT, and taxing accrued capital gains in closed-end investment funds. - Proposed reduction in statutory CIT rate by 12½ percentage points to 21½ percent is expected to be net revenue losing; authorities now anticipate a net revenue loss in the order of 0.4 percent of GDP from the larger-than-initially-proposed CIT cut. - Increasing PIT exemption threshold by 31 percent and lowering CIT rate would be partially offset by the other measures, but the reform could go further in addressing PIT and payroll tax exemptions and scaling back costly provisions (e.g., Simples Nacional and the Manaus Free Zone) which cost up to 2¼ percent of GDP in foregone revenue. - Suggested additional tax-expenditure rationalization measures (Box 7) include: - Aligning integrated CIT rate with top marginal PIT rate; potential dividend taxation around 15 percent with a corporate equity allowance for new equity increases. - Expanding transfer pricing and thin-cap rules, e.g., capping deductible interest expenses to a percentage of EBITDA (financial institutions excluded). - Lowering eligibility threshold for Simples Nacional to BRL 1 million, excluding social security contributions from waived taxes, barring professionals, and eliminating the “presumptive profit” regime. - Eliminating most PIT deductions and capital income exemptions. - Reducing payroll taxes while raising the top PIT rate to 30 percent. - Strengthening property and inheritance taxes. - Replacing various indirect taxes with a uniform VAT and excises; eliminate preferential treatment or zero-rating for certain domestically consumed goods while expanding social transfers to compensate lower-income households. - Share of federal tax expenditures by program category (percent of GDP) highlighted categories: - Simples Nacional (SME): 1.07% - PIT exemptions and deductions: 0.93% - CIT sectoral and regional incentives: 0.49% - Basic food exemptions: 0.46% - Non-profit organizations: 0.40% - Free Trade Zones: 0.31% - Medicine exemptions: 0.20% - Financial transactions: 0.15% - Transportation vehicles: 0.20% - Education and others: remaining share. ### Institutional and medium-term framework recommendations - Develop a comprehensive medium-term fiscal framework with clear targets and specific measures, including: - Supplementing the expenditure ceiling with an explicit debt anchor and specific escape clauses that narrowly define conditions for suspending fiscal rules. - Including well-defined corrective mechanisms to resume consolidation after emergency conditions abate. - Embedding scenario analysis for contingency planning. - Consider strengthening an independent fiscal council or the Independent Fiscal Institution (IFI) by enhancing legal independence, clarifying mandates, and ensuring adequate resources. ### Authorities’ views - Authorities reiterated firm commitment to the expenditure rule and noted new triggers in the emergency amendment to contain mandatory expenditure growth at Federal and subnational levels. - They view the new “state of calamity” escape clause as enabling better contingency planning and quicker fiscal support deployment in future crises. - Authorities plan to move expeditiously on tax reforms; they initially estimated reforms would be broadly revenue neutral but now expect a net revenue loss in the order of 0.4 percent of GDP from the larger CIT cut, to be compensated by structurally higher tax revenue collection across all federal taxes. - They are committed to send Congress a plan for gradual rationalization of tax expenditures, reducing them to 2 percent of GDP. *Source: IMF staff report (excerpts provided in the supplied content).* ### 23. The authorities pointed to decreased debt sustainability risks. They see their large cash ### 1braea2021001 - 23. The authorities pointed to decreased debt sustainability risks. They see their large cash ### Debt sustainability, cash buffers, and debt management - Authorities pointed to decreased debt sustainability risks. - Large cash deposits are seen as a key buffer which they plan to maintain in the medium-term. - The 2021 emergency constitutional amendment freed up surpluses from specific public funds (about 2 percent of GDP) for debt management purposes. - Authorities are committed to lengthening the maturity and composition of debt issuances in line with the strategy presented in their latest borrowing plan. - Authorities agreed with staff that subnational finances remain under stress and supported staff’s proposed reforms. ### Difficult monetary policy trade-offs - A steady monetary tightening is needed to guide inflation back to target by end-2022. - The accommodative stance was important in facilitating a stronger-than-expected recovery in 2020. - With rising inflation and the risk of de-anchoring inflation expectations, the current pace of tightening will likely need to be maintained for the remainder of the year. - Maintaining the pace of tightening would bring the policy rate to the neutral level by end-year and is expected to help anchor inflation expectations and guide inflation back to the mid-point of the target range by end-2022. - Policy should remain data dependent: - If wage and non-tradable price pressures build—neither of which is currently evident in the data—a faster increase in the policy rate may be needed. - If inflation pressures diminish sooner, there could be scope to reduce the pace of policy rate hikes. - Careful attention should be paid to the behavior of inflation expectations at an 18–24-month horizon; policy should ensure those expectations remain solidly anchored at the mid-point of the target range. - Concerns about the path of the pandemic, fiscal risks, or uncertainties surrounding the political calendar could weigh on the exchange rate and pass-through to inflation, potentially necessitating a sharp increase in the policy rate. - In such a scenario, FX intervention should be limited to countering disorderly market conditions. - A strong commitment to the fiscal framework and assertively addressing pandemic risks would lessen the likelihood that such policies will need to be deployed. ### Central bank transparency, governance, and tools - The BCB's active communication and move toward greater transparency in the COPOM statements is commendable. - Use of forward guidance and explicit commitment to the inflation target has helped keep medium-term inflation expectations anchored. - Given uncertainty, the BCB should continue to provide clear forward guidance linked to economic outcomes and articulate the timeline and pace at which the BCB's inflation goal is expected to be reached. - Approval of de jure central bank independence, new liquidity facilities, and the introduction of voluntary deposits will strengthen the BCB’s ability to deliver on its mandate. - The Central Bank autonomy bill introduces fixed, four-year mandates for BCB governors (that are staggered relative to the presidential term), and requires Senate approval for their dismissal. - Smoothing business cycle fluctuations, promoting full employment, and promoting financial system stability and efficiency have become explicit mandates for the BCB (albeit secondary to price stability). - Future legislative changes could prioritize legal protections for central bank staff. - Launch of two new liquidity facilities will improve financial institutions’ access to liquidity, facilitating a structural reduction of required reserves and lower the deposit-loan spread. - The facilities will accept corporate bonds and commercial paper (with appropriate haircuts) as collateral. The launch is set for 2021Q3. - Introduction of voluntary deposits at the BCB as a new monetary policy tool should increase the BCB’s flexibility in managing liquidity. - Authorities emphasize separating policy tools: the policy rate to control inflation, and FXI to correct dysfunctional FX market conditions. - Authorities view approval of Central Bank autonomy as a crucial step for Brazil’s monetary policy framework. ### Fostering financial competition and inclusion - The financial system has remained resilient and real credit growth is supporting the recovery. - NPLs remained low at 2.2 percent in 2020Q4, partly due to restructuring of loans and debt moratoria. - A third of the outstanding credit portfolio were modified; 52 percent of the modified portfolio have resumed standard payments. - Provisions: - Provisions for modified loans were 9.4 percent in December 2020. - Provisions for non-modified loans reached 4.5 percent. - Despite increased provisioning, bank profitability remains high and capital buffers are adequate. - A surge in household and corporate cash deposits during the pandemic has increased liquidity buffers. - Credit growth exceeded 10 percent for both households and corporates in 2020. - The instant electronic payment system (PIX) introduced in November was used by approximately 80 million individuals within the first eight months of its launch (17 million of whom had not previously made electronic transactions). - The average transaction amount using PIX has been lower than for other electronic payment methods. - The step-wise introduction of open banking in 2021 increases sharing of customer data between financial institutions and will increase competition. - Two thirds of individuals registered in the credit database (Cadastro Positivo) had their credit scores changed: - Approximately 41 percent migrated to lower risk categories, while 26 percent migrated to higher risk categories. - BCB analysis suggests the database has led to a 10.3 percent reduction in borrowing costs on non-payroll loans. - Efforts are underway to strengthen financial education. ### Bank stress tests and systemic resilience (Box 8) - Staff’s stress tests suggest the banking system can withstand a severe adverse shock. - Under a stressed scenario—in which output contracts by 4 percent, unemployment increases by 6 percentage points, and the currency depreciates by 35 percent—NPLs would rise to about 5 percent. - The rise in NPLs would cause the average Tier 1 capital ratio to fall from 13.8 percent to 11.8 percent (still well above the regulatory minimum even when including the surcharge for domestic systemically important banks (D-SIBs) and the full capital conservation buffer). - The 11 largest banks would all remain above a 10 percent Tier 1 capital ratio. - The ROA-based stress test shows all banks can maintain CET1 capital ratios above the 4.5 percent minimum even without steps to reduce dividend payments, lower the capital conservation buffer, or exempt restructured loans from provisioning. - A scaling of the 2018 FSAP stress test using relative GDP growth suggests GDP would have to fall by more than 8 percent for the average Common Equity Tier-1 level to reach the regulatory minimum. - Banks could, if needed, draw down capital conservation buffers and their stock of High-Quality Liquid Assets, allowing the Liquidity Coverage Ratio to temporarily fall below 100 percent. - Elimination of the tax asymmetry between investments abroad and their corresponding FX hedges has reduced banks’ incentive to “over-hedge” FX risks and lessened banks’ vulnerability to currency depreciation. - Nevertheless, banks’ elevated exposure to public debt poses risks and bank-sovereign linkages should be closely monitored. ### Progress on supply-side and structural reforms - Despite the pandemic, authorities have pressed ahead with institutional reforms: - Central bank autonomy was approved. - Improvements to efficiency and inclusiveness in the financial sector were advanced. - The emergency constitutional amendment introduced new mechanisms to control mandatory spending growth. - Discussions on creation of a federal VAT and administrative reform are ongoing in Congress. - Government has submitted legislation to improve progressivity of the income tax system. - New laws on sanitation, startups, natural gas, and bankruptcy have been introduced along with steps to privatize Eletrobras. - To increase competition in tradable goods, import tariffs were reduced by 10 percent for 1,495 products, and all import tariffs below 2 percent were reduced to zero. - Recent reforms attracted private investment of US$8.3 billion (0.6 percent of GDP) into transportation, energy, and water and sewage in 2020. - The 2020 OECD Economic Survey of Brazil estimates further reforms could boost annual per-capita GDP growth by 0.9 percentage points over 15 years. - Priority reform areas recommended: - Ease the stringency and complexity of market regulations. - Reduce barriers to entry in network sectors. - Further liberalize trade by reducing tariff and non-tariff barriers. - Reduce labor market rigidities and facilitate reallocation across industries (acknowledging potential short-term costs). - Expand vocational and adult training programs. - Improve governance to reduce costs of investing and provide a more predictable environment for businesses. ### Anticorruption, AML/CFT, and governance recommendations - Strengthening anticorruption and AML/CFT frameworks will help support investment. - Commended steps: transparency and open data initiatives; government’s Anticorruption Action Plan; finalization of the AML/CFT national risk assessment and dissemination efforts. - Recommended actions: - Make asset declarations of high-level public officials accessible to the public. - Strengthen regimes to handle conflict of interest for public officials. - Criminalize illicit enrichment in line with international best practices. - Protect the independence of, and ensure a stable operating framework for, anti-corruption and AML/CFT institutions. - Avoid termination of task forces to investigate complex cases, legislative amendments that change prosecutors’ investigative powers, or reversals in legal precedents that could weaken the fight against corruption. - Enhance the availability and access to beneficial ownership information. - Bolster AML/CFT supervision of real estate agents, lawyers and accountants, and virtual assets service providers. - Ensure implementation of transparency and accountability measures to prevent misuse of COVID spending at the state level, including procurement transparency. ### Environmental sustainability and climate-related risk management - Authorities are developing policies to promote environmentally sustainable activities. - Brazil, as a key commodity producer and exporter, faces potentially more frequent disruptive weather events (e.g., droughts and floods) that may generate important adverse effects. - Electricity generation is highly reliant on hydropower and is impacted by such weather events. - Government initiatives include: - Strengthening incentives for privately led conservation activities in agriculture. - Fostering development of green public and corporate bond markets. - Improving integration of Environmental, Social, and Governance (ESG) criteria in evaluation of infrastructure projects. - The BCB has added a sustainability pillar to its BC# agenda to promote “green” financing, including a “green liquidity facility” that would accept certain climate bonds as collateral. - The BCB is among the first central banks to quantify social, environmental, and climate-related risks in the financial sector. *International Monetary Fund — Excerpt from the Brazil country report chapter provided in the source content.* ### Box 11. Climate Change Mitigation Targets and Selected Economic Policy Initiatives ### Box 11. Climate Change Mitigation Targets and Selected Economic Policy Initiatives ### Nationally Determined Contribution (NDC) under the Paris Agreement - Updated in 2020 the NDC: (i) pledges to cut net greenhouse gas emissions by 37% and 43% by 2025 and 2030, respectively; (ii) introduces an indicative target of carbon neutrality by 2060 (updated to 2050 at the April 2021 Climate Summit). ### Environment and Carbon Taxes - Environmental law includes “polluter-pays” principle applied in water-use and waste management, nature conservation and other specific policies. - Some fuels are subject to excise taxes but there is no carbon tax. ### Promotion of Green Finance (BCB ‘Sustainability’ Pillar) - Creating a sustainable liquidity facility. - Including sustainability criteria for the selection of counterparties and investments of international reserves. - Publishing analysis on the effects of climate change on the banking sector. - Structuring and expanding the collection of information on socio-environmental risks. - Improving regulation on socio-environmental risks. - Improving information disclosure by FIs, based on the recommendations of the taskforce on climate-related financial disclosures. - Improving sustainability criteria on rural credit operations (and the creation of the ‘Green Bureau’ for rural credit). - Including climate risk scenarios in new and improved stress tests. - Publishing the BCB’s Report on Social, Environmental and Climate Risks and Opportunities. - New (2020) regulation allowing fast-tracking of green infrastructure bond issuance (previously only for renewable energy projects). - In addition, the government directly supports climate mitigation and adaptation projects through its development bank (BNDES) and various environment-related funds. ### Rural Credit and Sustainable Agriculture - 2021/22 Plano Safra (subsidized rural credit program) doubled the amount of funds to be channeled to sustainable agriculture (to BRL 5 billion). - Improving sustainability criteria on rural credit operations and creation of the ‘Green Bureau’ for rural credit. ### Incentives for Use of Renewables and Conservation Activities - Tax incentives for investments in solar or wind energy as well as biofuels production. - Creation of a “decarbonization credits” market; note: “Decarbonization credits” are certificates sold by certified biofuel producers, traded in the Brazilian stock exchange. Buyers (fuel producers) can use them to meet mandatory decarbonization targets. - New framework for environmental services’ payments (including through sale of green bonds). ### Public Infrastructure and Greener Planning - Standardized appraisal of carbon/deforestation shadow costs. - Centralized guidance to private investors on environmental impact assessments and licensing. ### Changes in Land Use Practices — Low Carbon Agriculture Plan (Plano ABC) - The ABC Plan consists of seven programs, six of which refer to mitigation technologies, and a final program with actions to adapt to climate change: - Program 1: Recovery of Degraded Pastures. - Program 2: Crop-Livestock-Forest Integration (iLPF) and Agroforestry Systems (SAFs). - Program 3: Direct Planting System (SPD). - Program 4: Biological Nitrogen Fixation (FBN). - Program 5: Planted Forests. - Program 6: Animal Waste Treatment. - Program 7: Adaptation to Climate. ### Authorities’ Views on Reforms and Institutional Strengthening - The authorities concurred with staff’s emphasis on institutional reforms to boost potential growth. - The government expects that full implementation of their reform agenda would result in a real GDP level 4-8 percent higher over the next 10 years. - Under current plans, the authorities expect to reach the OECD average ranking in product market reforms in two years. - Commitments and recent actions: - Finalization of the AML/CFT national risk assessment and implementation of new regulations for the supervision of banks. - Continued strengthening of the AML/CFT framework in line with FATF standards; the AML/CFT mutual evaluation date was postponed due to the pandemic. - Enhanced transparency and monitoring measures related to the disbursement of COVID-19 emergency aid. - Stable operating framework for anti-corruption institutions, with legal mechanisms to guarantee independence, including the functional and financial independence of the Public Prosecutor's Office anchored in the Constitution. - Commitments under the Federal Government’s Anticorruption Plan include the review of the current regulation on beneficial ownership and the proposal of a new regulation to ensure transparency on the final beneficiaries of companies receiving public funds, both to be fulfilled by December 2023. - Progress in the implementation of the BEPS (Base Erosion and Profit Shifting) action plan. - Publication of public officials’ income on the transparency portal website and asset declarations available to oversight institutions; regimes to handle conflict of interest provide for dismissal and criminal sanctions. ### Staff Appraisal — Key Findings and Policy Recommendations - Short-term economic performance: - Despite a surge in COVID-19 cases earlier in the year, economic performance has been better than expected. - Targeted spending to support vulnerable households in 2021 is supporting a strong cyclical recovery which has raised output back to pre-pandemic levels. - Gross public debt as a share of GDP will fall sharply in 2021, reversing more than two-thirds of the debt accumulated during the pandemic. - Market sentiment has improved with the decline in near-term fiscal risks. - Important institutional reforms—including the central bank autonomy law and the privatization of Eletrobras—have been approved. - Risks and vulnerabilities: - A weak currency and a surge in commodity prices have fed into headline inflation and inflation expectations even as the output gap remains negative. - Labor market is lagging recovery in output; unemployment is high, especially among youths, women, and afro-Brazilians. - Cash transfers will eventually expire; without permanent strengthening of the social safety net, poverty and inequality could become more acute. - Near term fiscal risks are low, but the high level of public debt continues to pose medium-term risks. - Fiscal policy recommendations: - Focus on rebuilding buffers, reducing budget rigidities, and addressing fiscal imbalances. - Continue adherence to the expenditure rule to bring down public debt over the medium term. - Reduce budget rigidities and mandatory spending to create greater space for public investment and a stronger social safety net. - Consolidate social safety net programs to free up resources to target support better toward the poor. - Pursue an ambitious reduction of tax expenditures within a broad tax reform package to improve compliance, increase progressivity, reduce resource misallocation, and boost potential growth. - Use the ongoing tax reform discussions in Congress as opportune timing for rationalization. - Strengthen the medium-term fiscal framework and subnational finances to reduce fiscal risks and improve capacity to manage adverse shocks. - Monetary policy guidance: - A continued increase in the policy rate will be needed to guide inflation back to target by end-2022. - Policy should be data dependent, with careful attention to inflation expectations at the relevant policy horizon. - The BCB should continue to provide clear forward guidance on the likely future course of monetary policy. - If currency depreciation from pandemic concerns, fiscal risks, or political uncertainties occurs, the central bank may need to respond forcefully, potentially with a sharp increase in the policy rate to limit pass-through to inflation. - FX intervention should be limited to countering disorderly market conditions. - Financial sector and structural policies: - Gradual phasing out of crisis-related financial support is appropriate; continue improving quality and efficiency of financial intermediation. - Liquidity support from the BCB and debt moratoria helped maintain credit supply during the pandemic. - Stress tests suggest the banking system can withstand substantial shocks by using available buffers. - New BCB liquidity facilities will be useful for smaller banks and should facilitate a reduction in required reserves. - Instant electronic payment system and introduction of open banking will help increase financial inclusion and reduce credit risk. - Supply-side agenda: recent reforms should increase private investment and reduce the infrastructure gap. - To boost productivity: liberalize trade (scale back tariff and non-tariff barriers), liberalize product markets, increase labor market flexibility and reduce informality, simplify the tax system, and improve governance. - Continue strengthening anticorruption and AML/CFT frameworks, prioritize institutional independence to fight corruption and financial crimes, and improve the environment for private investment. *Box 11. Climate Change Mitigation Targets and Selected Economic Policy Initiatives (Brazil).* ### 44. It is recommended that the next Article IV consultation take place on the standard 12- ### 1braea2021001 - 44. ### COVID-19 health indicators and vaccination - Brazil recorded the third highest number of COVID-19 cases in the world and ranked second in terms of cumulative deaths. - Despite new lockdowns, social mobility declined by much less during the 2021 COVID-19 outbreak than in 2020. - The vaccination rollout is gaining momentum, with a sizable percentage of key age groups fully vaccinated. - The speed in getting a second dose has been more gradual. - Sources cited: Johns Hopkins University, Ministry of Health, Google Mobility, and IMF staff calculations. ### Real sector developments - Real GDP contracted by 4.1 percent in 2020 and is expected to rebound by 5.3 percent in 2021. - Private consumption and investment fell sharply in 2020Q2 but picked up strongly in Q3 and Q4. - The service sector was the most affected by the reduction in mobility and has not yet recovered lost ground. - Retail sales grew strongly in 2020H2 despite weak consumer confidence, before tapering off in 2021Q1. - Industrial production and manufacturing led the recovery in 2020H2, as capacity utilization returned to the historical average. - Investment grew strongly with the resumption of business confidence (and rising commodity prices). - Sources cited: Haver analytics; IBGE; and IMF staff calculations. ### External sector developments - The current account improved in 2020 with lower services and net income abroad, and a strong trade balance. - Terms of trade rose to the highest level since 2011, driven by the surge in commodity prices. - FDI and portfolio flows closed the year in line with the annual average of previous years, leaving the net IIP broadly unchanged in 2020. - Large financial FX outflows during the peak of the first COVID-19 wave abated in H2 2020. - The exchange rate has not reversed the large depreciation of H1 2020 but reserves are now close to end-2019 levels. - Sources cited: Central Bank of Brazil; Haver Analytics; and Fund staff calculations. ### Monetary sector developments - Tradable inflation has increased steadily since mid-2020, driven by commodity prices and the BRL depreciation. - Higher regulated and free prices lifted headline inflation above target since November 2020. - Real average earnings and the real minimum wage fell. - The BCB has raised the policy rate by 325 basis points but the real rate remains negative. - Lending rates have been decreasing since mid-2017 but ticked up in January. - To contain BRL volatility, the BCB has intervened in the FX market, increasing the stock of outstanding swaps. - Sources cited: Haver Analytics, IBGE, BCB, and Fund Staff calculations. ### Fiscal sector developments - The expenditure ceiling will compress primary expenditures by 3.2 percent of GDP over the next 5 years (a total reduction of 3.7 percent of GDP over 2017-26). - Foregone revenues from tax expenditures (4.2 percent of GDP) and non-tax subsidies (0.6 percent of GDP) offer a potential source of consolidation. - Over the MT, new primary savings will be partially offset by rising interest expenses, and the overall deficit will remain high. - The fiscal stance will remain contractionary into the medium-term with the positive 2020 impulse almost entirely offset in 2021 already. - Growth-interest rate differential and use of assets are expected to reduce debt in 2021 and 2022, but gross debt is set to remain around 92 percent of GDP in the medium-term. - Source cited: Ministry of Economy and IMF staff calculations. - Selected fiscal figures (from Table 3 highlights): - Primary balance (NFPS): -1.8 (2017), -1.7 (2018), -0.9 (2019), -9.2 (2020), -1.7 (2021), -1.0 (2022), -0.3 (2023), 0.2 (2024), 0.7 (2025), 1.2 (2026). - Overall balance (NFPS): -7.9 (2017), -7.1 (2018), -5.9 (2019), -13.7 (2020), -6.3 (2021), -6.9 (2022), -6.2 (2023), -5.7 (2024), -5.2 (2025), -4.8 (2026). - Gross NFPS debt: 83.6 (2017), 85.6 (2018), 87.7 (2019), 98.9 (2020), 91.6 (2021), 90.9 (2022), 91.7 (2023), 92.0 (2024), 92.1 (2025), 92.0 (2026) (Percent of GDP). - Net public sector debt: 51.4 (2017), 52.8 (2018), 54.6 (2019), 62.7 (2020), 63.9 (2021), 66.4 (2022), 69.4 (2023), 71.8 (2024), 72.6 (2025), 74.6 (2026) (Percent of GDP). - Nominal GDP (billions of reais): 6,585 (2017), 7,004 (2018), 7,407 (2019), 7,448 (2020), 8,567 (2021), 9,231 (2022), 9,798 (2023), 10,423 (2024), 11,071 (2025), 11,748 (2026). ### Financial sector developments - Credit growth increased during the pandemic, largely driven by government credit incentive programs. - NPLs have fallen due to the restructuring of loans and debt moratoria. - Bank profitability declined somewhat as increased competition reduced margins on lending and provisions were increased as a precaution. - Capital and liquidity buffers have remained well above regulatory minima. - With bank loans accelerating in 2020, corporate issuances dropped from the 2019 peak. - Unlike the exchange rate, spreads on USD bonds reverted most of the spike from early 2020, in line with other EMs. - Financial soundness indicators (selected): - Regulatory capital to risk-weighted assets: 16.4, 17.1, 18.2, 18.0, 17.1, 16.7 (years and subsectors reported across tables). - Nonperforming loans to total gross loans (total banking system): 3.3, 3.9, 3.6, 3.1, 3.1, 2.4 (multi-year series). - Liquidity assets to short-term liabilities: 190.0, 236.3, 237.5, 241.9, 242.7, 274.5 (multi-year series). - Sources cited: BCB, Capital IQ, CEIC, Bloomberg and IMF staff calculations. ### Annex I — External Sector Assessment: key findings and policy implications - Overall assessment: The external position in 2020 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - In the wake of the COVID-19 shock, the current account deficit contracted due to large currency depreciation and improvements in the service and income balances. The trend is expected to persist in 2021. - Foreign asset and liability position and trajectory: - Brazil’s NIIP was -38.3 percent of GDP at end-2020, moderately stronger than at end-2019 (-42 percent of GDP), mainly due to valuation effects associated with the currency depreciation. - At end-2020, external debt declined by about 5 percent in nominal terms compared to 2019, accounting for about 44.3 percent of GDP and 303 percent of exports, against 36 percent of GDP and 299 percent of exports in 2019. - Short-term gross external financing needs are significant, at around 11 percent of projected 2021 GDP. - Current account: - CA deficit contracted from -3.5 percent of GDP in 2019 to -1.7 in 2020. - Staff projects a CA balance of about 0.4 percent of GDP for 2021. - 2020 (% GDP) CA: –1.7; Cycl. Adj. CA: –1.8; EBA Norm: –2.4; EBA Gap: 0.6; COVID-19 Adj.: 0.1; Other Adj.: 0; Staff Gap: 0.7. - Real exchange rate: - REER depreciated sharply in 2020 (-20.6 percent) after remaining broadly stable in 2019 (-1.9 percent). - Staff CA gap implies a REER gap of -5.4 percent in 2020 (using an estimated elasticity of 0.13). - REER index (-36.5 percent) and level (-21.2 percent) methodologies point to some possible overshooting of the nominal exchange rate. - Potential policy responses: Desirable fiscal consolidation, accompanied by measures to support public and private investment, including supply side reforms to support a more competitive economy. *Sources: Central Bank of Brazil; Haver Analytics; IBGE; BCB; Johns Hopkins University; Google Mobility; Ministry of Health; and IMF staff calculations.* ### 11.4 to 0.6 percent, with a mid-point of -5.4 percent (undervaluation). ### 1braea2021001 - 11.4 to 0.6 percent, with a mid-point of -5.4 percent (undervaluation). ### Capital and Financial Accounts: Flows - Background: - Net FDI has fully financed CA deficits since 2015, averaging 3.2 percent of GDP during 2015-20, while CA deficits averaged -2.2 percent. - Net portfolio outflows averaged 0.6 percent of GDP during 2015-20. - In 2020, net FDI stood at 3.5 percent of GDP, against a CA deficit of 1.7 percent. - Net portfolio outflows in 2020 recorded a balance of -0.9 percent of GDP over the year (-1 percent of GDP in 2019). - Net FDI in 2020 was stronger than in 2019, due to divestment abroad that more than compensated lower FDI inflows. - Assessment: - Composition of capital flows expected to remain favorable over the medium-term with positive net FDI inflows outweighing negative portfolio outflows which started in 2016 following the sovereign’s downgrade below investment grade. - High degree of uncertainty about the scarring effects of COVID-19 on the global economy complicates medium-term prospects for capital flows. - Risks: a renewed spike in international risk aversion (potentially linked to a second wave of COVID-19) or a sudden tightening of global financing conditions could trigger capital market volatility. ### FX Intervention and Reserves Level - Background: - Brazil has a floating exchange rate. - To dampen exchange rate volatility associated with the COVID-19 shock, in 2020 the Central Bank sold USD 21.2bn in the spot and repo markets and increased the stock of outstanding FX swaps by USD 23.3bn (the latter does not directly affect the level of reserves given they are settled in local currency). - Reserves remain high at US$334 billion at end-2020. - Assessment: - The flexible exchange rate has been an important shock absorber. - Reserves are adequate relative to various criteria including the IMF’s reserve adequacy metric (161 percent as of end-2020) and serve as insurance against external shocks. - Policy recommendation: The authorities should retain strong external buffers, with intervention limited to addressing dysfunctional conditions in FX markets. ### Annex II. External Sector Debt Sustainability Analysis — Key Findings - Overall assessment: - External debt is assessed to be sustainable over the medium term, but subject to risks. - After a significant increase in 2020 (mainly driven by GDP contraction and exchange rate depreciation), external debt is expected to decline gradually. - The debt path remains sensitive to real exchange rate shocks. - Specific points: 1. Total external debt increased from 36 to 44 percent of GDP in 2020. - 89 percent of debt is long-term, with inter-company loans accounting for 38 percent of total external debt. - Around a quarter of total external debt is from the public sector, 60 percent of which is FX denominated. - External financing needs increased from 11.6 to 14 percent of GDP. 2. The increase in external debt and financing needs is projected to be temporary. - Debt and gross financing needs are expected to fall to 37.6 and 8.9 percent of GDP, respectively, in 2021. - Drivers: a current account surplus (supported by booming commodity prices), resuming GDP growth, a stabilizing exchange rate, and non-debt creating inflows on par with the average for previous years. - Historical-scenario note: if the current account, growth, interest rates, and real exchange rate remain at historical levels, external debt would increase to close to 60 percent of GDP by 2026. 3. Sensitivity to real exchange rate shocks: - A 30 percent real depreciation would cause external debt to reach 53 percent of GDP during the first year and stabilize at 43 percent of GDP by 2026. 4. Fiscal deterioration risk: - A significant deterioration of the fiscal position could lead to higher current account deficits, higher interest rates and a slowdown in economic activity, worsening external debt dynamics. ### Annex III. Risk Assessment Matrix — Select Risks, Likelihood, Impacts, and Policy Responses - Unexpected shift in the COVID-19 pandemic (including limited access to vaccines and longer-than-expected deployment): - Relative likelihood: Medium - Expected impact: High — Growth dips further, wiping out years of progress in poverty and inequality; possible social unrest; financial market repricing leading to capital outflows, depreciation and inflation pressures. - Policy responses: Central bank should remain accommodative and limit FX intervention to disorderly market conditions. Government should reiterate commitment to fiscal sustainability while stepping up health support as necessary. - Widespread social discontent and political instability: - Relative likelihood: High - Expected impact: High — Recovery and fiscal consolidation delayed, loss of market confidence, increase in sovereign yields, rising public debt and gross financing needs. - Policy responses: Extend and better target social assistance and unemployment support; government should provide clear forward guidance on medium term fiscal consolidation and frontload measures to comply with the constitutional spending ceiling; monetary policy should stay accommodative. - Sharp rise in global risk premia: - Relative likelihood: Medium - Expected impact: High — Financing difficulties for leveraged firms and households, bankruptcies eroding banks’ capital, spillovers to sovereign financing. - Policy responses: Central bank to provide additional stimulus and liquidity support to the financial sector; extend social assistance and unemployment support to smooth fiscal consolidation. - External risks (selected): - Accelerating de-globalization: - Relative likelihood: Medium; Expected impact: Low. - Policy response: Implement structural reforms and trade liberalization to boost potential growth. - Oversupply and volatility in the oil market: - Relative likelihood: Medium; Expected impact: Low. - Policy response: Targeted liquidity support to the energy sector could be appropriate, monetary accommodation to continue, and implement structural reforms and trade liberalization. - Intensified geopolitical tensions and security risks: - Relative likelihood: High; Expected impact: Medium. - Policy response: Outflow pressures should be tolerated or addressed with macro-policy adjustments; central bank should limit FX intervention to disorderly market conditions; consider some tightening of existing CFMs on outflows in line with the Fund’s Institutional View as part of a comprehensive package in (imminent) crisis circumstances. ### Annex IV. Public Debt Sustainability Analysis — Key Findings and Projections - Overall assessment: - Debt sustainability risks are assessed to be moderate using a wide range of analyses. - Gross debt of the non-financial public sector (NFPS) jumped to 99 percent of GDP in 2020. - Gross financing needs stand at close to 25 percent of GDP. - Mitigating factors: overwhelmingly domestic investor base, large liquid assets, substantial Central Bank holdings of Treasury debt. - Background and metrics: 1. Definitions and coverage: - NFPS gross debt includes all Treasury securities on the Central Bank’s balance sheet (following GFSM 2014). - Brazil’s debt is reported at nominal value. 2. Debt developments: - At end-2020, NFPS gross debt amounted to 98.9 percent of GDP, 11.3 percentage points higher than a year before. - Consolidated public sector net debt amounted to 62.7 percent of GDP at end-2020. - Public sector assets equaled 31.3 percent of GDP, including international reserves amounting to 19.5 percent of GDP. - A large primary deficit of 9.2 percent of GDP and an interest – growth differential of 6.4 percentage points caused the increase in gross debt. - Use of liquid assets of 3.7 percent of GDP avoided an even larger increase. - Gross interest payments of the NFPS and net interest payments of the consolidated PS stood at 6.1 and 4.1 percent, respectively. 3. Debt profile: - Federal government (FG) debt accounts for 94 percent of total NFPS debt. - Domestically issued securities account for 96 percent of total FG gross debt. - Around 27 percent of domestically issued securities are held by the BCB. - Only around 9 percent of domestic tradable securities are held by non-residents. - 37 percent of FG domestic tradable securities are linked to the SELIC rate, 36 percent are fixed rate securities, and 27 percent are linked to inflation. - Average duration of FG securities issued during several months in 2020 was as low as 2-2.5 years; short-term debt (below 12 months) accounted for one-third of all issuances in 2020. - About 27 percent of FG domestic tradable securities will mature in 2021 alone. - Foreign currency denominated NFPS debt accounted for only 6 percent of GDP at end-2020. - Baseline and projections: 4. Macroeconomic assumptions: - Real GDP growth of 5.3 percent in 2021 followed by growth of 1.9 percent in 2022. - Medium-term growth projected at 2.1 percent. - NFPS primary balance projected to move to a small surplus by 2024, with a cumulative adjustment of about 3 percentage points of GDP over 2021−26 and a large adjustment of 7.5 percentage points in 2021, unwinding most of the 2020 widening of 8.3 percentage points. - Effective nominal interest rate projected at 6.6 percent in 2021 (relative to an average of 11.4 percent over 2010-18, 8.4 percent in 2019 and 7 percent in 2020). 5. Baseline debt projection: - Gross debt to GDP falls significantly in 2021 given the reduction in the primary balance and highly favorable r-g. - Debt is expected to be broadly stable between 2022-26. - Debt stabilizing primary balance in the baseline scenario is 1.1 percent of GDP, relative to a projected surplus of 1.2 percent of GDP in 2026. - Net debt of the consolidated public sector expected to increase throughout the projection horizon because international reserves are assumed to be broadly constant in nominal terms. 6. Baseline gross financing needs projection: - Gross financing needs declined from close to 18 percent of GDP in 2015 to 14 percent in 2019. - They increased substantially in 2020 to 24 percent of GDP. - Financing needs projected to drop marginally in 2021 to 23.2 percent of GDP before averaging close to 20 percent per year over the remainder of the forecast horizon, thus breaching the high-risk threshold of 15 percent of GDP. - Caveat: this indicator overstates financing risks since amortization payments would be about 25 percent lower on average excluding the automatic rollover of BCB held bonds. - DSA assumes short term issuances will drop sharply in 2022; two-year fixed and floating rate bonds will remain an important source of financing in 2022 but then also drop in 2023 with average maturities increasing. 7. Fan chart analysis: - Baseline: debt stabilizes in 2022 but path highly sensitive to real interest rate, growth, and speed of fiscal adjustment. - A negative combination of macro variables at the 10th percentile would yield debt over 110 percent of GDP in 2026 and on a steep upward trajectory. - In the most optimistic scenarios, positive shocks could lower public debt to below 80 percent of GDP (10th percentile of positive outcomes). - The asymmetric fanchart suggests a high probability of at least stabilizing debt at around 80 percent by 2026. - Memo and selected metrics: - Average Duration Federal Government Debt: 3.57 - Average Maturity Federal Government Debt: 4.83 - Nominal GDP (billions of Reais): 7,448 *Source: IMF staff analysis in the provided chapter content.* ### 2020. With issuances exceeding financing needs in late 2020 and early 2021 this has partially reversed. ### 1braea2021001 - 2020. With issuances exceeding financing needs in late 2020 and early 2021 this has partially reversed. ### Forecast performance and realism of projections - Past forecast error: - Forecast errors for GDP growth are larger than those in surveillance countries during 2014−16, reflecting that Brazil underwent its largest recession in a century (pre-COVID) during 2015−16. - Realism of projections: - Brazil’s projected fiscal adjustment is in the tail of the historical distribution. - The level of the PB over the forecast horizon is in line with other surveillance countries’ experience. ### Contingent fiscal risks from state-owned enterprises (SOEs) - Government ownership and exclusions: - The government holds about 50 percent of Petrobras’ and Eletrobras’ shares, both of which are excluded from the debt definition. - Risk sources and current assessment: - Fiscal risks could arise from possible future capitalizations to cover losses. - Petrobras’s financial position improved substantially in recent years with net debt/EBITDA falling continuously. - If oil prices remain favorable, Petrobras is well positioned to benefit from the growth of pre-salt exploration and further sales of non-core subsidiaries. - Political interference in the day to day management of the company poses a potential risk. - The government has taken concrete steps to privatize Eletrobras and it will likely cease to be a publicly owned company in the near-term. - Overall, the fiscal risks arising from Petrobras and Eletrobras are deemed limited at this point. ### Stress test scenarios and results (selected) - Primary balance shock: - Assumes an average worsening of the primary balance of 1 percent of GDP over 2022-2026. - Debt enters an upward path, reaching close to 100 percent of GDP in 2026. - Growth shock: - Real output growth is reduced by one standard deviation (2.8 percentage points) for two consecutive periods starting in 2022. - Under this scenario, gross debt jumps to close to 105 percent of GDP by end-2022 and continues to increase at a slower pace thereafter. - Real interest rate shock: - The effective rate increases to over 10 percent by 2026. - Under this shock, gross debt enters a steep upward path towards 105 percent of GDP in 2026. - Such a scenario could result from a de-anchoring of inflation expectations, linked possibly with an additional increase in the risk premium. - Real exchange rate shock: - The nominal exchange rate depreciates by 47 percent (maximum movement over the past 10 years) in 2021 and appreciates only marginally thereafter. - The impact of the real exchange rate shock is modest, all else equal, given the low share of FX debt. - Combined macro-fiscal shock: - Combines the real growth, interest rate, exchange rate and the primary balance shocks described above. - Gross debt exceeds 120 percent by 2026, with gross financing needs consistently around 25 percent of GDP. ### Debt profile, maturities, and financing needs - Short-term issuances and average duration: - Short-term debt issuance share of domestic market issuances: - 2016: 12 percent - 2017-2019 average: 5 percent - 2020: 30 percent - Since December 2020 the share of short-term issuances has dropped again amid improved market conditions even as the total volume of issuances remains high. - Average duration of the stock of debt: - Fell back to 2011 levels. - Declined to 4 years in early 2020 and to 3.6 years in March 2021. - At 4.8 years, the average maturity of debt is somewhat lower than the OECD EM country average but broadly in line with other sovereigns with a comparable credit rating. - From a pure cost perspective, the underlying opportunity cost of shortening was low in 2020 as the steepness of the real yield curve hit a long-term high. - Central bank reverse repos: - The average maturity of the central bank’s reverse repos fell sharply in late 2020. - The BCB increased the share of overnight operations from 10 percent in January 2020 to over 70 percent in March and April 2021. - A likely motivation was to avoid competition with shorter-dated Treasury securities. ### Key baseline and alternative scenario assumptions (selected numeric series) - Baseline scenario (percent of GDP unless otherwise indicated): - Real GDP growth: 2021: 5.3; 2022: 1.9; 2023: 2.0; 2024: 2.1; 2025: 2.1; 2026: 2.1 - Inflation: 2021: 9.3; 2022: 5.7; 2023: 4.1; 2024: 4.2; 2025: 4.0; 2026: 3.9 - Primary Balance: 2021: -1.7; 2022: -1.0; 2023: -0.3; 2024: 0.2; 2025: 0.7; 2026: 1.2 - Effective interest rate: 2021: 6.6; 2022: 6.7; 2023: 6.8; 2024: 7.1; 2025: 7.2; 2026: 7.4 - Historical scenario (selected series): - Real GDP growth: 2021: 5.3; 2022: 0.3; 2023: 0.3; 2024: 0.3; 2025: 0.3; 2026: 0.3 - Primary Balance: 2021: -1.7; 2022: -1.2; 2023: -1.2; 2024: -1.2; 2025: -1.2; 2026: -1.2 - Effective interest rate: 2021: 6.6; 2022: 6.7; 2023: 7.3; 2024: 8.1; 2025: 8.4; 2026: 8.9 - Constant Primary Balance scenario (selected series): - Primary Balance remains at: -1.7 in 2021–2026 - Effective interest rate: 2021: 6.6; 2022: 6.7; 2023: 6.9; 2024: 7.1; 2025: 7.2; 2026: 7.4 ### Stress-test outputs (selected figures and outcomes) - Under the Real Interest Rate Shock: - Effective interest rate path (percent): 2021: 6.6; 2022: 6.8; 2023: 7.9; 2024: 9.3; 2025: 9.9; 2026: 10.7 - Under the Real Exchange Rate Shock: - Inflation path (percent): 2021: 9.3; 2022: 7.2; 2023: 4.1; 2024: 4.2; 2025: 4.0; 2026: 3.9 - Combined Macro-Fiscal Shock: - Real GDP growth path (percent): 2021: 5.3; 2022: -1.0; 2023: -0.9; 2024: 2.1; 2025: 2.1; 2026: 2.1 - Effective interest rate (percent): 2021: 6.6; 2022: 6.8; 2023: 7.9; 2024: 9.3; 2025: 9.9; 2026: 10.7 - Gross debt outcomes: - Gross debt exceeds 120 percent by 2026. - Gross financing needs consistently around 25 percent of GDP under the combined shock. *International Monetary Fund — BRAZIL (excerpts from public DSA and staff analysis).* ### Annex V. Implementation of Key FSAP Recommendations ### Annex V. Implementation of Key FSAP Recommendations ### Microprudential and macroprudential institutional arrangements - Recommendation: Establish a multi-agency high-level committee, with an explicit mandate for macroprudential policy and the power to issue policy recommendations on a comply-or-explain basis. (ST) - Authorities’ Actions: - The BCB has – in agreement with CVM, Previc and SUSEP – finalized a draft bill named the “Financial Stability Coordination Law”, which is now being discussed with the Ministry of Economy. - Recommendation: Strengthen the crisis management institutional arrangements for inter-agency cooperation and exchange of information, including for contingency planning. (MT) - Authorities’ Actions: - Proposal related to the “Financial Stability Coordination Law”. According to the draft bill proposed by BCB, the “Financial Stability National Committee” would have authority over macroprudential policy and crisis management (including contingency plans/crisis management). The BCB’s Contingency Plan has already been implemented. - Recommendation: Strengthen legal protection of all supervisors (BCB, SUSEP) through clear rules, including fixed term, condition of dismissal, public disclosure of reasons for dismissal and qualification criteria for appointments. Strengthen the independence of the BCB. (ST) - Authorities’ Actions: - Two bills of law that tackle BCB autonomy were under discussion in Congress. One bill has been approved by Congress and addresses the Central Bank mandate, including the criteria for the appointment and the dismissal of Governors, and sets four-year tenures (with one renewal) for the Board of Governors. Their tenures do not match the presidential term to avoid a wholesale change whenever a President is elected. - The approved law also includes several features of the second bill (which is no longer under consideration), such as aspects of operational autonomy, delegation of decisions about other monetary policy and macroprudential tools from CMN to BCB, and enhances policy transparency, such as through the publication of inflation and financial stability reports. However, it does not establish legal protection of BCB staff which had been included in the second bill. - The Bank Resolution bill – submitted to the lower house and currently being discussed by a special congressional committee – also provides for protection of public agents. As it stands, this bill includes both a provision for legal protection of public agents and for legal defense by the General Counsel on BCB expenses. - The insurance supervisor (SUSEP) Board has drafted a bill to merge SUSEP with the pension funds supervisor (Previc), addressing, among other issues, the structure of the new authority. This draft bill has not yet been approved by Congress. - Decree nº 9.727/2019 has established qualification criteria for appointments to strategic positions in the Administration. - Recommendation: Increase resources of CVM and SUSEP. (ST) - Authorities’ Actions: - The CVM budget was reduced to R$ 22 million during 2019 from R$ 30.5 million at the beginning of the year. The total discretionary budget for 2020 was R$ 27.7 million. The budget for 2021 currently amounts to R$ 26 million. - Notwithstanding the studies underway to merge and restructure SUSEP and PREVIC, budget constraints, throughout the Federal Government currently impose limits to any proposal in this regard. - (Duplicate entry in source) The CVM budget was reduced to R$ 22 million during 2019 from R$ 30.5 million at the beginning of the year. The total discretionary budget for 2020 was R$ 27.7 million and the expected budget for 2021 was R$ 31.3 million. ### Systemic risks - Recommendation: Use Pillar 2 capital requirements to handle bank-specific risk profiles to boost their resilience as needed and to mitigate risks. (ST) - Authorities’ Actions: - Structured and by Reference Add-ons are implemented in our supervisory methodology. The Structured Add-on is in its third year of application to all banks (segments from S1 to S4). - The Add-on by Reference is applied to banks allocated to Segment S1 and includes metrics for credit concentration risk and IRRBB since 2020. - Technical studies to include Banks allocated to S2 Segment in Add-on by Reference process are scheduled. ### Financial sector oversight - Recommendation: Upgrade the banking sector’s regulatory and supervisory approach to credit risk— including identification and definitions, limits, and reporting requirements—for related party exposures and transactions, large exposures, country and transfer risk and restructured loans. (MT) - Authorities’ Actions: - Completed actions: - The National Monetary Council (CMN) has issued Resolution 4,677/2018 (Basel III reform on Large Exposure Limits), establishing limits and report requirements for single client and large exposures. Rules have been applied for Prudential Segments S1 and S2 since January 2019 and for Segments S3, S4 and S5 since January 2020. - The Report on Operational Limits—DLO (Circular Letter 3,926) was adapted to include information on large exposure limits. - The CMN issued Resolution 4,693/2018 addressing credit operations between related parties. - The BCB issued Circular Letters 3,819/2017 and 3,857/2017 on reporting requirements of restructuring of financial instruments, applicable to all financial institutions since May 2018. - For Res 4,693 of Oct / 18, accounting items were created to collect information from Related Parties (data from Jan / 19), in which financial institutions will report the greatest exposure to related parties (natural person and legal entity) and other exposures with related parties (natural person and legal entity). A field was also included in the SCR (as of Jan / 19) to inform whether the contracted operation is being carried out with related parties. - Initiatives under analysis or being drafted: - Regulation on prudential treatment for transactions with related parties. - Amendment to the regulation establishing specific requirements for country and transfer risks, with specific treatment of indirect risks. - Requirement of producing concentration risks data on a regular basis. - Structured assessment of country, transfer and indirect risk. - IFRS9 implementation, which will enhance the credit risk framework definitions, including the definition of credit risk exposure. - Recommendation: Strengthen enforcement function of CVM by raising the level of sanctions and ensuring adequate resources for prosecution; strengthen cooperation allowing CVM proper oversight of ANBIMA’s SRO activities in the investment fund sector. (ST) - Authorities’ Actions: - The expansion of the scope of the agreement with ANBIMA is ongoing, to include the subject of supervision of mandate (portfolio breaches). Funds ruled by CVM instruction 555 (which represent more than 85% of industry) will be affected. A new version of this agreement was adopted in the first half of 2021. - On regulation, CVM Instruction 607 was issued to regulate the new Law that expanded the CVM’s enforcement power. That is, the new regime is totally applicable and in effect. - Recommendation: Implement (BCB, ANS and SUSEP) consistent group-wide supervision of insurance groups and conglomerates with joint rulemaking, implementation, and on-site inspections and granular data sharing. (MT) - Authorities’ Actions: - The granular data sharing depends on legal provisions and on the establishment of partnerships among the supervisors. In the BCB’s view, the creation of the “Financial Stability National Committee” would partially bridge this gap. ### Crisis management and bank resolution, safety nets - Recommendation: Revise the draft resolution law in line with the FSAP team’s recommendations and promptly enact it. (ST) - Authorities’ Actions: - The draft bill was submitted to the National Congress in December 2019. The Bill of Law 281 of 2019 is pending appreciation by the Lower Chamber. - Recommendation: Revise the ELA framework to provide for a solvency test tied to enhanced supervision, remedial plans, and possibly restructuring measures, and allow for ELA in systemic circumstances upon a MoF indemnity. (ST) - Authorities’ Actions: - The BCB does not agree that being solvent on a point-in-time basis should be the main determinant of ELA approval. The BCB prefers to retain flexibility to decide, with its discretionary power, and considers systemic impact relevant. - The recommendation of indemnity of the MoF in case of ELA in systemic circumstance will not be implemented since it may increase moral hazard risk and the current BCB capital structure is public (which means the National Treasury will have to indemnify the BCB anyway, in case of BCB balance sheet loss). - The BCB deployed Temporary Liquidity Facilities (ELA for the COVID-19 crisis) in April 2020. - Implementation of new permanent liquidity facilities is undergoing, and that project is in the BC# Agenda, with a deadline in November 2021. - Recommendation: Put in place mechanisms to ensure lending from the deposit insurance fund is not used to maintain weak or insolvent banks in operation; and transform FGC into a fully owned public institution. (ST; MT) - Authorities’ Actions: - The FGC has amended its by-laws to establish communication to the BCB prior to each assistance operation. - The process to establish the “Financial Stability National Committee” is ongoing. - The BCB has signed a MoU with the FGC to grant access to detailed information on financial institutions that are members of the FGC, in order to facilitate the Fund’s assessment and avoid the use of lending to maintain weak or insolvent banks in operation. - The recommendation to transform the FGC into a fully public-owned institution will not be implemented. ### Financial integrity - Recommendation: Complete the national AML/CFT risk assessment and introduce a risk-based approach specific to AML/CFT supervision. (ST) - Authorities’ Actions: - The coordination of the activities related to the National AML/CFT Risk Assessment is attributed to the Brazilian Intelligence Unit (Coaf). - The decree to establish the Strategic Committee for the National AML/CFT Risk Assessment was issued on March 6, 2020. ### Financial intermediation efficiency - Recommendation: Foster competition through client mobility and financial product cost transparency and comparability. (ST) - Authorities’ Actions: - The National Monetary Council issued Resolution 4,639/2018 to enhance the portability of salaries’ accounts. - The Credit Registry Law, Lei do Cadastro Positivo, in effect since 2011, was amended by Lei Complementar 166/2019, and regulated by Resolution 4,737/2019, to adopt the opt-out model instead of the opt-in model. - Resolution 4,734/2019 and Circular 3,952/2019 set rules for registering and blocking credit and debit card receivables pledged as collateral in credit operations. Blocked receivables volume cannot exceed the outstanding balance of the transaction. - The set of credit modalities eligible for portability between institutions now comprises credit granted to individual microentrepreneurs. Resolution 4,762/2019 allows credit portability for legal entities but depends on enacting a specific rule (Circular). - Different credit modalities can be the destination of ported credit, enabling portability of revolving credit operations into personal credit lines, with a fixed number of installments. ### Reform of public banks - Recommendation: Change product offering of BNDES under new strategy with focus on catalyzing private sector finance and developing the financial sector. (ST) - Authorities’ Actions: - In December 2019, BNDES launched a 2020-2022 three-year plan based on three main pillars: financial sustainability, focus on social development and divestments of the equity portfolio. - With the Long-Term Rate (TLP) in force and its market convergence from 2023 forward, and a deleveraging policy of continued prepayments of the loans from the National Treasury, the bank has been structured to seek new funding alternatives, including syndication and allowing securitization in the future. - BNDES started divestments in 2019, aiming to reduce its risk limit by 90% up to December 2022. In 2020 from January to September, BNDES has divested around R$33.7 billion in equity positions including, Petrobras (R$ 22 billion) and Vale (R$ 8.1 billion). - FAEP provisional act lapsed without approval of Congress. BNDES continues to support States and Municipalities in privatization efforts. As of September 2020, there were 74 projects being structured by BNDES: 31 federal, 30 state and 13 at municipal level. - Capital markets initiatives: - Fund Manager for the Infrastructure Bonds Special Purpose Vehicle (FDIC Debêntures de Infraestrutura) was selected in the second semester of 2019; due to interest rate curve structure in 2020, the fund is currently not active. - The Sustainable Energy Fund, launched in 2016 and implemented in 2018, with assets under management of R$500 million in infrastructure projects private bonds related to a low-carbon economy, is in its investment phase. Since launch, over 50 primary investment opportunities analyzed, resulting in subscription of 12 different project debentures. - The annual return over September 2019-September 2020 was 19.4% and the annual volatility over the same period was 3.95% per year. - The fund's annualized return, from Sep / 2018 to Dec / 2019, was 18.85% per year. - In May 2020 an RFP process for selection of FDICs for SMEs was launched as an emergency measure to support SMEs during the COVID crisis. The Bank pre-selected 12 FDICs, of which 10 will receive funds up to R$ 5 billion to offer credit for small businesses. - Recommendation: Focus Caixa on core activities, improve governance, and invite a strategic investor. - Authorities’ Actions: - Focus Caixa on core activities: - CAIXA is repositioning its credit operations, prioritizing granting loans to segments linked to microenterprises, promoting housing loans, maintaining operations in “Minha Casa Minha Vida” and expanding operations to the middle class through resources from savings and increase in the payroll loans portfolio. - Improve governance: - CAIXA continues to improve corporate governance practices, including changes in its bylaws: creation of a clause that limits its action to achieve the public interest, constitution of a management succession plan, enlargement of the number of directors and constitution of a people committee. Equity governance for operation in a Conglomerate has been improved. - Invite a strategic investor: - Since 2019, Caixa has, through its subsidiaries, entered into several strategic partnerships in insurance and card segments. Caixa’s insurance holding company (Caixa Seguridade Participações S/A) raised capital through an IPO in April 2021. - CAIXA's investment banking group was strengthened with internal reallocation of multidisciplinary professional talent to expand fixed income capital markets’ operations. - Divestment: - Aligned with its 2021 Business Plan, Caixa has focused on monetizing assets and boosting operations aimed at the capital market. CAIXAPAR, a subsidiary of CAIXA, sold all its shares in Banco Pan to BTG Pactual in May 2021. *Annex V. Implementation of Key FSAP Recommendations* ### Annex VI. Implementation of Past IMF Advice ### Annex VI. Implementation of Past IMF Advice ### IMF recommendations, rationale, and implementation status - Provide new (exceptional) fiscal support to the economy in 2021 if economic conditions are worse than the authorities expect. - Rationale: Support the most vulnerable households and economic recovery. Minimize scarring effects on output. - Implementation status: As the second Covid-19 wave hit, slowing the recovery, emergency programs for vulnerable households, formal employment, SMEs, and health response were renewed. - Reducing mandatory spending (including wage bill) and budget rigidities (spending indexation, revenue earmarking, spending floors) through structural reform. - Rationale: Lock-in medium term consolidation, ensure compliance with the expenditure ceiling, free up fiscal space for more productive spending. - Implementation status: No reforms were approved which structurally reduce mandatory spending or budget rigidities, even though the 'Emergency' amendment foresees mandatory spending freezes under fiscal stress conditions. - Strengthen the social safety net by rationalizing inefficient and regressive programs, avoiding duplication. - Rationale: Improve fairness, expand social assistance coverage without budget pressure. - Implementation status: No concrete steps were taken. Current plans focus on expanding the (well-targetted and cost-effective) Bolsa Familia program. - Reform subnational pension schemes to alight with federal government (FG) provisions, strengthen the subnational fiscal framework (lower debt limits, enhance fiscal transparency, simplify rules, limit spending growth). - Rationale: Ensure fiscal sustainability and fairness; reduce FG bail-out expectations by SNGs. - Implementation status: Some states (e.g. Acre, Alagoas, Amazonas, Ceará, Espírito Santo, Mato Grosso do Sul, Paraná, Piauí, Rio Grande do Sul) reformed their pension systems in line with FG provisions. The 'Emergency' ammendment creates new tools for SNG spending control in fiscal stress situations. - Revamp the tax system - simplify indirect taxation, increase PIT progressiveness, tax dividends. - Rationale: Promote economic efficiency and fairness. - Implementation status: Congress continues discussions on the creation of a federal VAT (subnational taxes to be included at a later stage). An income tax reform bill has been submitted. - Remove distortionary tax exemptions. - Rationale: Support fiscal sustainability and promote economic efficiency. - Implementation status: The 'Emergency' amendment foresees that the government presents a plan for reduction of tax expenditute in about 2 percent of GDP over 8 years. PIS/COFINS reform proposals in Congress would eliminate a small part of tax expenditues. - Further strengthen revenue administration to support creation of a unified VAT, enhance the taxpayer compliance framework, and simplify tax arrears collection. - Rationale: Support fiscal sustainability and promote economic efficiency. - Implementation status: Receita Federal has approved a number of institutional strategic projects for 2021-2023 with a view to implementing IMF past recommendations (Resolution No 41, June 10, 2021). - Move toward a medium-term budget framework. - Rationale: Create fiscal space, protect social programs, and increase investment. - Implementation status: No concrete steps have been taken. - Pursue privatization of SOEs. - Rationale: Promote economic efficiency, support to fiscal consolidation efforts. - Implementation status: SOEs (Petrobras, BNDES) continue to sell assets. The new sanitation framework (approved in mid-2020) allowed for privatization of several subnational SOEs. Congress recently approved privatization of Eletrobras. - Release unused earmarked resources locked in public funds. - Rationale: Aliviate financing pressures and amortize debt. - Implementation status: The 'Emergency' amendment freed up BRL 140 billion (1.7 percent of GDP) in previously earmarked government funds for use in debt management. An additional 70-100bn are likely to be freed up in the near future based on the same legislation. ### Fund relations and financial arrangements (as of June 28, 2021) - Membership Status: Joined January 14, 1946; Article VIII - General Resources Account: - Quota: 11,042.00 SDR Million 100.00 Percent Quota - Fund holdings of currency (Exchange Rate): 8124.99 SDR Million 73.58 Percent Quota - Reserve Tranche Position: 2928.18 SDR Million 26.52 Percent Quota - New Arrangement to Borrow: 126.98 SDR Million - SDR Department: - Net cumulative allocation: 2,887.08 SDR Million 100.00 Percent of Allocation - Holdings: 2940.91 SDR Million 101.86 Percent of Allocation - Outstanding Purchases and Loans: None - Financial Arrangements (historical): - Stand-by 09/06/2002–03/31/2005 Amount Approved 27,375.12 (SDR Million) Amount Drawn 17,199.64 - Of which: SRF 09/06/2002–09/05/2003 Amount Approved 7,609.69 Amount Drawn 7,609.69 - Stand-by 09/14/2001–09/05/2002 Amount Approved 12,144.40 Amount Drawn 11,385.37 - Of which: SRF 09/14/2001–09/05/2002 Amount Approved 9,950.87 Amount Drawn 9,950.87 - Stand-by 12/02/1998–09/14/2001 Amount Approved 13,024.80 Amount Drawn 9,470.75 - Of which: SRF 12/02/1998–12/01/1999 Amount Approved 9,117.36 Amount Drawn 6,512.40 - Projected Payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Charges/interest: 0.05 (2021), 0.05 (2022), 0.05 (2023), 0.05 (2024), 0.05 (2025) - Principal: 0.00 (2021), 0.00 (2022), 0.00 (2023), 0.00 (2024), 0.00 (2025) - Total: 0.05 (2021), 0.05 (2022), 0.05 (2023), 0.05 (2024), 0.05 (2025) - Safeguards Assessments: A safeguards assessment of the Banco Central do Brasil (BCB) was completed in June 2002 and updated in March 2005. - Exchange Rate Arrangement: Since January 18, 1999, Brazil’s de facto and de jure foreign exchange regime has been classified as floating. Brazil accepted the obligations of Article VIII, Sections 2(a), 3, and 4, effective November 30, 1999. - Tax on financial transactions (IOF) details: - IOF of 6.38 percent on exchange transactions carried out through credit card, debit card, and traveler's checks (including cash withdrawals) by companies to fulfill payment obligations for purchases of goods and services abroad by their customers gives rise to a multiple currency practice (MCP) subject to Fund jurisdiction under Article VIII, Sections 2(a) and 3. - In January 2008, the IOF for these exchange transactions was raised to 2.38 percent and then further increased to 6.38 percent in March 2011. - The scope of operations was expanded to other foreign exchange transactions in addition to credit cards in December 2013. *Annex VI. Implementation of Past IMF Advice — informational annex (excerpt) prepared by the Western Hemisphere Department, August 20, 2021.* ### 2020. Brazil is on the 12-month cycle. The Financial Sector Assessment Program (FSAP) took place in ### 1braea2021001 - 2020. Brazil is on the 12-month cycle. The Financial Sector Assessment Program (FSAP) took place in ### Capacity Development - The Statistics Department (STA) provided technical assistance (remotely) in August 2020 to support the Brazilian Institute of Geography and Statistics (IBGE) in dealing with COVID-19 related challenges in compiling GDP data in the Quarterly National Accounts. - The Fiscal Affairs Department (FAD) supported the Ministry of Economy to strengthen the tax administration system, enhance medium-term fiscal planning, and improve fiscal transparency. - Three FAD missions were conducted during 2020: - (i) “Strengthening Fiscal Responsibility at the Subnational Level” in February — technical advice on designing subnational fiscal rules; mission built on April 2019 mission on “Strengthening the Framework for Subnational Borrowing”. - (ii) a TADAT Performance Assessment in January. - (iii) supporting the State of São Paulo (remotely) in implementing a cost accounting system for the public sector in April 2020. - Recent FAD technical assistance (prior years) includes: - Cost Accounting (March 2018) - “Public Investment Management Assessment” (August 2017) - “Supporting Implementation of the Expenditure Rule Through Public Financial Management Reforms” (March 2017) - “Fiscal Transparency Evaluation” (June 2016) ### Resident Representation - The IMF maintains a resident representative office in Brasilia. - The Resident Representative is Ms. Joana Pereira, who assumed the post in July 2018. ### Relations with Other International Financial Institutions - World Bank: http://www.worldbank.org/en/country/brazil - Inter-American Development Bank: https://www.iadb.org/en/countries/brazil - New Development Bank: https://www.ndb.int/ ### Statistical Issues (As of July 12, 2021) - Assessment: Data provision is adequate for surveillance. - In November 2019, Brazil completed the requirements for adherence to the IMF’s SDDS Plus—the highest tier of the Data Standards Initiatives; Brazil was the first country in Latin America to adhere to the SDDS Plus. - The three outstanding SDDS Plus data categories—sectoral balance sheets, other financial corporations survey, and debt securities—must be completed within the transition period (i.e., within five years from the adherence date). - Implementing G-20 DGI recommendations: a good number implemented; further progress will focus on monetary and financial statistics, real estate price indexes, and sectoral accounts. ### Table of Common Indicators Required for Surveillance (As of June 28, 2021) — selected entries - Exchange Rates: Date of Latest Observation 6/28/2021; Date Received 6/29/2021; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest Observation May. 2021; Date Received 6/14/2021; Frequency M M M. - Reserve/Base Money: Latest Observation May. 2021; Date Received 6/14/2021; Frequency D M M. - Broad Money: Latest Observation May. 2021; Date Received 6/14/2021; Frequency M M M. - Central Bank Balance Sheet: Latest Observation May. 2021; Date Received 6/14/2021; Frequency M M M. - Consolidated Balance Sheet of the Banking System: Latest Observation May 2021; Date Received 6/14/2021; Frequency M M M. - Interest Rates: Latest Observation May 2021; Date Received 6/14/2021; Frequency M M M. - Consumer Price Index: Latest Observation May. 2021; Date Received 6/1/2021; Frequency M M M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Latest Observation Apr. 2021; Date Received 6/1/2021; Frequency M M M. - GDP/GNP: Latest Observation Q1 2021; Date Received 6/1/2021; Frequency Q Q Q. - Gross External Debt: Latest Observation Q1 2021; Date Received 6/14/2021; Frequency Q Q Q. - International Investment Position: Latest Observation Q1 2021; Date Received 6/1/2021; Frequency Q Q Q. ### Statement by Mr. Bevilaqua on Brazil (September 10, 2021) — Key findings and assessments - Macroeconomic shock and policy response: - The government launched a package of fiscal, monetary, and financial measures during Covid-19; measures were debated and approved by congress in record time. - In 2020, the Brazilian economy shrunk by less than half of what staff estimated mid-year. - The emergency safety net led to a marked reduction in poverty and inequality, the preservation of about 10 million formal jobs, and a strong recovery under way since the second half of last year. - A second wave of Covid-19 in Q1 2021 posed additional challenges; a new round of policy measures countered social and economic fallout. - Specific policy actions in response to the second wave: - A new, better targeted round of emergency aid. - Relaunch of the job retention program. - Measures to secure budgetary resources and expedite acquisition of equipment and inputs to fight Covid-19. - Some pension payments anticipated from the second to the first semester. - Import tariffs waived until the end of this year for items essential to fighting Covid-19. - Program to support micro and small businesses made permanent; 5.3 million businesses are eligible under the program. - Vaccination and health outcomes: - As of end-August, almost 65 percent of the total population was at least partially inoculated, and almost 30 percent was fully vaccinated. - Weekly average number of deaths by Covid has steadily declined by almost 80 percent since its peaks in early April. - Note: Delta (or other new) variants may pose further challenges. - Growth outlook and labor market: - Staff’s current projection of 5.3 percent GDP growth in 2021—broadly in line with the consensus market forecast. - Formal labor market: net creation of 1.85 million jobs this year through end-July. - With immunization proceeding, job creation should accelerate as labor participation increases. - Structural reforms and investment: - Notable reforms/measures: central bank independence; a new bankruptcy law; new sanitation legal framework leading to privatization of CEDAE; Investment Partnership Program with over 60 projects and expected investments of R$500 billion over the next few years; approval of legal framework for privatization of Eletrobras; a new natural gas law; ease of doing business law; trade facilitation measures affecting over US$10 billion in imports; new export processing zone law; startup and innovation law; new procurement law. - Fiscal policy assessment: - Fiscal support was forceful and responsible; conditions for “state of calamity” clause specified when 2021 package approved, with new rules constraining increases in expenditures. - Result: projected sharp decline in both fiscal deficit and public debt ratios, each projected to fall by at least 7 percentage points of GDP in 2021. - Market participants upgraded fiscal projections for coming years; for 2022 the primary fiscal deficit is now expected to be almost half of the value projected in December 2020. - Staff notes mitigating factors: projected plunge in the debt ratio, robust domestic investors’ base, sizeable liquidity buffers, and that more than one-quarter of federal government debt is held by the central bank — pointing to low rollover risk. - The expenditure ceiling remains a key anchor; authorities fully committed to it. - Fiscal reform priorities: - Removing budgetary rigidities to increase efficiency of public expenditure and enhance potential growth; constitutional changes required for major reforms. - Examples: pension reform approved in 2019; administrative reform sent to congress in 2020. - Monetary policy and inflation: - The BCB started a tightening cycle this year: policy rate increasing by 325 bps since March this year. - Annual inflation is expected to peak at about 9 percent in the third quarter, converging to the target by end-2022 as the tighter monetary stance works through. - The BCB’s de jure independence and Supreme Court confirmation will enhance credibility and transmission of monetary policy. - Floating exchange rate regime: the real effective exchange rate has depreciated by about 18 percent since the beginning of the crisis; central bank intervened only when market was dysfunctional. - Banking system and financial inclusion: - The banking system withstood the health shock well and remains sound; credit expanded with very low delinquency rates. - Innovation: instant payment scheme (Pix) widely accepted; open banking implementation proceeding with phase two starting on August 13. - Reforms to promote transparency and investment: - Bills sent to congress: tax reform (aims at enhancing efficiency, fairness, and compliance), administrative reform, and other measures for business environment (electricity, railroads, maritime transportation, PPPs, concessions). - Privatization agenda continues to open space for private infrastructure investment. - AML/CFT and anticorruption measures: - Brazil finalized its AML/CFT national risk assessment and implemented updated banking supervision regulations. - Challenges with availability and access to beneficial ownership information being tackled under the Federal Government’s Anticorruption Plan. - By end-2023, a more effective process of validation and consolidation of beneficial ownership information and stricter transparency requirements for companies receiving public funds will be implemented. - Enhanced transparency requirements and monitoring procedures adopted in the context of Covid-19 emergency aid. ### Closing remarks (summary position) - Brazil has withstood the Covid-19 shock better than many expected and is well positioned for a robust recovery due to swift, forceful, and effective policy response and continued structural reforms. - Risks remain, but continuing structural reforms and responsible economic management are emphasized as the best path to high, sustainable, and inclusive growth. *Source: 1braea2021001 - 2020. Brazil is on the 12-month cycle. The Financial Sector Assessment Program (FSAP) took place in* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1braea2021001.pdf_