## 1. A Strong Economy Has Lifted Labor Market Outcomes for Vulnerable Groups

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### Recent economic developments and growth momentum
- Real GDP growth averaged 3.2 percent during 2022-2024, outperforming IMF staff forecasts at the start of each year by an average of 2.0 percentage points.
- Annual real GDP growth: 3.2 percent in 2023; 3.4 percent in 2024.
- Private consumption expanded by 4.8 percent in 2024.
- Investment expanded by 7.3 percent in 2024.
- GDP in 2025 Q1 expanded by 5.7 percent at a quarterly seasonally-adjusted annualized rate, driven by record agricultural output.
- Late-2024 moderation: private consumption declined, investment growth lost momentum, services and industrial output slowed.
- External context: slowing growth in Brazil’s trading partners and elevated global policy uncertainty.

### Inflation, monetary policy, and labor markets
- Inflation returned to the target tolerance interval in 2023 but rebounded in 2024 due to strong demand, drought-induced food price rises, and currency depreciation.
- BCB initiated a new policy tightening cycle in September 2024; policy rates are now higher (in nominal and real terms) than at their post-pandemic peak in 2022.
- Unemployment: 6.1 percent in November 2024 (lowest level in over 20 years); overall unemployment rate 6.2 percent at end-2024—lowest since 2000.
- Poverty: declined to 27.4 percent in 2023 (from 31.6 percent in 2022).
- Extreme poverty: fell to 4.4 percent in 2023 (from 5.9 percent in 2022).

### Labor market outcomes for vulnerable groups
- Staff analysis (quarterly household-level data for Brazil, 2012-2024) using a logit regression with demographic and participation controls finds:
  - When the aggregate unemployment rate falls, the likelihood of unemployment falls across all demographic groups.
  - Youths and workers without a college degree experience a larger drop in the likelihood of unemployment relative to older workers and those with a college degree.
  - Results align with international findings that disadvantaged groups’ labor market outcomes are relatively more sensitive to economic cycles.
  - Little evidence of asymmetry: a cooling economy could reverse recent gains for disadvantaged groups.
- Policy implication: further structural reforms are necessary to secure lasting benefits for disadvantaged groups and to address remaining labor market challenges.

### Fiscal stance, composition, and risks
- Fiscal stance: broadly neutral in 2024 after 2022-2023 stimulus; estimated to be tightening in 2025.
- Federal primary deficit: narrowed to 0.4 percent of GDP in 2024 from 2.4 percent of GDP in 2023.
- Revenue increased by 1.3 percent of GDP in 2024; about half reflected economic strength and half reflected tax measures (including higher fuel taxation and a levy on exclusive funds and offshore assets).
- Precatórios settlement of 0.8 percent of GDP in December 2023 widened the primary deficit by 0.8 percent of GDP in 2023 with a corresponding narrowing in 2024; staff allocates the disbursement to early 2024 when payments reached households.
- After adjusting for precatórios and the economic cycle, staff estimates the general government structural primary balance was approximately unchanged in 2024 (broadly neutral).
- Staff assesses fiscal support during 2022-2024 added on average 0.6 percentage point to annual growth.
- As of 2025H1, fiscal policy is tightening, supported by spending restraint, with the federal government targeting a zero primary deficit.
- Fiscal package announced November 2024 expected to reduce spending by 0.2 percent of GDP in 2025; measures include:
  - 2.5 percent cap on real growth of the minimum wage;
  - gradually restricting wage bonus eligibility from those earning two minimum wages to those earning one and a half minimum wages;
  - enhanced scrutiny of eligibility for social programs.
- Majority of proposed measures approved by Congress in December 2024.
- Authorities submitted a PIT reform proposal to Congress in March 2025 that increases the PIT exemption and offsets it by taxing higher-income brackets.

### Brazil’s fiscal framework (corridor and target rules)
- Constitutional amendment (August 2023) replaced zero-growth federal real spending cap with a federal real spending corridor: floor 0.6 percent and ceiling 2.5 percent, contingent on revenue collection and distance to a primary balance target.
- Corridor formulae:
  - If primary balance in year t is within target tolerance, planned real federal spending growth in year t+2 = 0.7 × real revenue growth in t+1 (mid-year).
  - If primary balance in year t is below the target tolerance, planned real federal spending growth in year t+2 = 0.5 × real revenue growth in t+1 (mid-year).
- Target setting:
  - PLDO sets the fiscal target for year t+1 in April of year t; current-year target can be revised with a simple parliamentary majority (provision not activated).
  - April 2024 PLDO set a zero-deficit target for 2025 (revised down by 0.5 percentage point from April 2023 indicative target).
  - April 2025 PLDO reaffirmed targets for 2025 and 2026 and indicative targets for subsequent years.
- Within-year correction mechanisms include bans on new hiring, public wage increases, new mandatory spending, social assistance policies, or tax benefits if target at risk.
- Target assessment:
  - Primary balance outcome compared with target tolerance interval ±0.25 percent of GDP around the target.
  - Authorized exclusions (e.g., part of precatórios, flood calamity extraordinary spending of 0.3 percent of GDP for 2024) apply.
  - For 2024, after exclusions the relevant primary deficit for assessment was 0.1 percent of GDP; within the ±0.25 percent GDP tolerance interval, so 2024 fiscal target considered met.

### Tax and structural reforms
- VAT reform:
  - Complementary Law No. 214/2025 enacted in January 2025 establishes and regulates the dual VAT system.
  - Remaining bills on governance for joint revenue administration, excise tax regulation, and administrative process are being developed.
- PIT reform proposal aims to be revenue neutral:
  - Raises the personal income exemption threshold to R$5,000 monthly (from R$3,036).
  - Introduces a minimum income tax in five brackets up to 10 percent for individuals earning over R$50,000 monthly.
  - Introduces a new withholding tax on dividend payments.
- Other tax measures:
  - Congress approved a 15 percent minimum tax on large multinationals aligning with OECD GloBE rules, expected to modestly raise revenues from 2026.

### Exchange rate developments and FX intervention; drivers
- Real depreciated about 20 percent against the US dollar in 2024 after appreciating in 2023.
- Staff attributes about one-third of that depreciation to perceptions of increasing domestic risks; global factors accounted for much of the remainder.
- Financial outflows around year-end 2024 were larger than usual, creating temporary FX market stress and a spike in the implied onshore dollar interest rate (cupom cambial).
- BCB intervened in the spot market in December 2024, selling US$21.6 billion (about 6 percent of foreign reserves) to smooth FX market functioning, reduce excessive volatility, and prevent contagion to other asset classes.
- Foreign exchange reserves declined by about US$25 billion in 2024 to US$330 billion at end-December 2024, remaining within adequacy ranges (126 percent of the IMF ARA metric).
- SVAR decomposition (Box 3): domestic risk perceptions accounted for roughly one-third of the currency depreciation in 2024; US macro news and global risk perceptions were next largest contributors. Domestic risk factor increased after easing of fiscal targets on 4/15/2024 and announcement of fiscal package on 11/27/2024.

### Exchange rate pass-through and distributional effects on prices
- Pass-through estimates:
  - A 10 percent depreciation of the nominal effective exchange rate (NEER) reaches about 0.9 percent after 12 months for IPCA (headline).
  - The same 10 percent NEER depreciation reaches about 1.2 percent after 12 months for prices faced by lower-income households (INPC).
  - Pass-through stronger for lower-income households due to larger weights of energy and food.
- Historical/projected contributions:
  - Currency movements since April 2024 estimated to have contributed 0.5 percentage point to twelve-month headline inflation at end-2024.
  - Projected to contribute 1.1 percentage points to headline inflation by end-2025.
- Annex III local-projections (Jordà 2005): IPCA level response about 0.9 percent after twelve months and about 1.2 percent after 24 months to a 10 percent NEER depreciation; INPC peak about 1.8 percent; food prices 2.5 percent after twelve months; energy prices 4.0 percent after twelve months.

### Inflation path, labor market, and monetary reaction
- Headline inflation: peak 12.1 percent (y/y) in April 2022; low 3.2 percent in June 2023; 4.8 percent by December 2024; 5.3 percent in May 2025.
- Core inflation (BCB’s average of five measures): 5.2 percent in May 2025.
- Services inflation: 5.8 percent in May 2025.
- Output gap: estimated to have reached 1.1 percent in 2024.
- Real average wage growth: 4.3 percent (y/y) in 2024; 4.0 percent in March 2025.
- Four-year-ahead inflation forecast (Focus survey, end-May 2025): 3.8 percent.
- Monetary policy: BCB shifted from easing to holding and then to a tightening cycle in September 2024; cumulative 450 basis points of hikes to 15 percent in June 2025.
- Real interest rates: highly restrictive territory close to 10 percent compared to staff estimates of neutral short-term real rates of about 5 percent.
- Staff expects BCB policy rate to peak at 15 percent in 2025 and approach neutral in early 2028, with short-term real interest rates around 5.0 percent.

### Financial sector resilience, credit, and fintech competition
- Financial soundness indicators:
  - Liquidity coverage ratio (banks): 188.9 percent at end-2024.
  - Common Equity Tier 1 capital ratio: 14.3 percent.
  - Bank credit growth: 11.5 percent year-over-year in 2024.
  - Non-performing loans declined further amid robust economic conditions.
  - BCB’s estimated credit gap remains positive and driven mainly by strong growth of the domestic bond market.
  - Earmarked credit share: 40.0 percent in 2023 to 42.2 percent in January 2025; peak of 50 percent in 2016-17.
- Fintech competition (Box 6):
  - In 2024, fintech lending represented a quarter of the credit card market and over 10 percent of the nonpayroll personal loan market.
  - Staff analysis finds a one standard deviation increase in exposure to fintech competition results in a 2.9 percentage point reduction in lending rates and a 1.3 percentage point decrease in the net interest margin among traditional banks.
  - Implications: lower margins signal more efficient intermediation; banks’ ROE and ROA declined; no observed impact on credit volume or risk-taking.

### Outlook, baseline projections, and risks
- Baseline projections:
  - Growth: moderation from 3.4 percent in 2024 to 2.3 percent in 2025; medium-term recovery to 2.5 percent.
  - Unemployment rate: expected to rise to 7.4 percent as output gap closes in the medium term.
  - Inflation: expected near-term above target, reaching 5.2 percent by end-2025, then gradually converging to 3 percent by end-2027.
  - Fiscal: federal primary deficit modestly widens to 0.6 percent of GDP in 2025 from 0.4 percent in 2024; primary surplus of 1.4 percent of GDP in 2030 and 1.7 percent of GDP over the extended policy horizon contingent on measures.
  - Government gross debt: projected to stabilize in 2030 at around 99 percent of GDP.
  - Current account: expected to narrow to 1.9 percent of GDP in the medium term.
- Risks:
  - Downside global scenario: Brazil’s annual real GDP growth could be lower by 0.9 percentage point in 2025 and 0.5 percentage point in 2026 compared to baseline; inflation lower by about 0.2 percentage point during 2025-2026.
  - Domestic downside risk: lower-than-envisaged fiscal effort could raise policy uncertainty, public debt pressures, borrowing costs, and weaken investment and growth.
  - Other risks: extreme weather events (floods, droughts, wildfires) could dent growth, with agriculture and power generation exposed.
- Staff recommends the next Article IV consultation be held on the standard 12-month cycle.

### Debt dynamics, projections, and staff scenarios
- Public debt baseline (general government gross debt, percent of GDP selected years):
  - 2024: 87.39; 2025: 91.69; 2026: 95.59; 2027: 97.69; 2028: 98.69; 2029: 99.09; 2030: 98.99; 2034: 98.6.
- Change in public debt (percent of GDP): 2025: 3.3; 2026: 4.3; 2027: 3.9; 2028: 2.1; 2029: 1.0; 2030: 0.4; 2034: -0.1.
- Primary deficit (percent of GDP): 2024: 0.4; 2025: 0.6; 2026: 0.4; 2027: -0.3; 2028: -0.8; 2029: -1.2; 2030: -1.4; 2034: -1.7.
- Automatic debt dynamics (percent of GDP): 2024: 2.6; 2025: 5.0; 2026: 4.3; 2027: 3.1; 2028: 2.4; 2034: 1.9.
- Real interest rate and relative inflation (percent): 2024: 5.1; 2025: 6.9; 2026: 6.1; 2027: 5.2; 2034: 4.4.
- Real GDP growth (percent, memo): 2024: 3.4; 2025: 2.3; 2026: 2.1; 2027: 2.2; 2030: 2.5; 2034: 2.5.
- Staff commentary: public debt will rise over the medium term largely due to unfavorable r-g dynamics; under staff's baseline, a fiscal consolidation of around 2 percent of GDP is expected to stabilize debt at around 99 percent of GDP in 2030.

### Staff recommendations on fiscal consolidation and framework
- Recommendations:
  - Stand ready to implement further expenditure restraint in 2025 if needed to achieve targeted primary balance while protecting targeted social support and investment spending.
  - Achieve 0.25 percent of GDP surplus target in 2026 (implying structural fiscal effort of 0.8 percent of GDP), followed by improvements averaging 0.5 percentage point of GDP per year, resulting in a federal primary fiscal surplus of 2.5 percent of GDP by 2031.
  - Combine recommended fiscal path with growth-enhancing structural reforms to put gross debt on a firmly downward trend from 2028 and improve sovereign financing conditions.
- Enhancements to the fiscal framework could include:
  - consistency provisions between spending corridor and fiscal targets;
  - mechanisms to limit procyclicality (e.g., link federal spending growth to structural revenue increases);
  - an economic escape clause;
  - a medium-term fiscal anchor and pre-defined correction mechanisms.

### Revenue mobilization and spending rigidity options
- Tax expenditures estimated at 4-5 percent of GDP per year; TaxFit staff estimate for 2025:
  - Simples Nacional: 1.0 percent of GDP;
  - PIT deductions and exemptions: 0.9 percent of GDP;
  - CIT sectoral and regional incentives: 0.6 percent of GDP;
  - Non-profit organizations: 0.4 percent of GDP;
  - Manaus Free Trade Zone: 0.2 percent of GDP;
  - Other: 1.3 percent of GDP;
  - Total: 4.4 percent of GDP.
- Revenue measures recommended:
  - further curtail or phase out 1-2 percent of GDP in inefficient, regressive, and expensive tax expenditures;
  - revenue administration improvements (registered taxpayer base, compliance risk management, tax debt management, faster dispute resolution).
- Spending measures:
  - mandatory spending comprises about 90 percent of federal primary expenditure;
  - options include de-linking growth of pension and social assistance benefits from minimum wage growth, contain real minimum wage growth, cap pension spending growth, review constitutional floors on health and education spending to align with the spending corridor;
  - pension reform and spending-efficiency measures could generate fiscal savings; spending measures could raise primary balance by 1-2 percent of GDP in the medium term.

### Pensions, demographics, and policy implications
- Demographics:
  - In 2022 almost 22 million Brazilians aged 65 and over—11 percent of the population.
  - Fertility rate fell from 2.32 (2000) to 1.57 (2023).
  - Life expectancy at birth rose from 71.1 years (2000) to 76.4 years (2023).
- 2019 pension reform:
  - Stabilized RGPS deficits at around 2.5 percent of GDP through 2030.
  - Federal RPPS deficits stabilized; federal alignment set benchmark for subnational reforms.
- Long-term outlook:
  - Authorities project RGPS deficits to rise again after 2030 and reach 6 percent of GDP by 2060.
- Recommended actions:
  - further parametric pension changes: reduced replacement rates, higher contribution rates, elimination of partial PIT exemption for pensioners above 65, increased effective retirement age, close early retirement loopholes;
  - encourage convergence of subnational RPPS to RGPS parameters with acceptable transition periods;
  - automatic adjustment mechanisms for retirement age and contribution periods;
  - healthy aging policies and labor supply measures to raise participation among older workers.

### Labor force participation, gender, Bolsa Família, and policy simulations
- Estimation results (PNADC 2012Q1–2024Q2; regressions for ages 14-59):
  - Female LFP negatively associated with having young children and with having a partner; positively associated with presence of older children (7-18 years).
  - Male LFP positively associated with presence of young children, older children (to lesser extent), and having a partner.
- Bolsa Família interactions:
  - For women in Bolsa Família-recipient households the negative association between LFP and having young children or a partner is stronger.
  - For men in Bolsa Família-recipient households receipt moderates the positive association between LFP and having young children; having a partner more positively associated with male LFP.
  - Average marginal effects: Bolsa Família benefits associated on average with lower LFP for women and neutral impact for men.
- Difference-in-difference (2018-2019 vs 2023) finds the relationship between Bolsa Família and LFP became more negative for women in 2023 than pre-pandemic.
- Wage disparities:
  - Relative to male workers, hourly wage of female workers about R$3 per lower; monthly wage lower by almost R$700 (about 22 percent lower).
  - Pro-cyclicality: as aggregate unemployment falls by one percentage point, wages rise 0.6 percent more for men than for women—gender wage gap widens during booms.
- Policy options (Annex IX, TaxFit):
  - Make tax system more progressive; strengthen parental leave and childcare; smooth cliffs in benefit withdrawal (tapering) to reduce participation tax rate (PTR) spikes.
  - TaxFit tapering simulation: gradually taper benefits by R$0.5 for each R$1 of earnings above allowable earnings—could boost LFP by 0.5 percentage points, predominantly among women, and generate R$3 billion in additional revenue through stronger work incentives.
  - Aligning private sector 5-day paternity leave with 20-day public sector could cost around R$2 billion (assuming government finances additional 15 days under Empresa Cidadã).

### Ecological Transformation, emissions, and CPAT analysis
- NDC targets and legislation:
  - 53 percent reduction in total GHG emissions by 2030 relative to 2005.
  - At least 59 percent reduction by 2035 relative to 2005.
  - ETS enacted Law No. 15,042 of 12/11/2024; expected operational by 2030; cover up to 15 percent of emissions.
  - Fuels of the Future bill (Law No.14,993 of 10/08/2024) sets biodiesel in diesel to 20 percent and ethanol blend in gasoline to 35 percent by 2030; mandates a 10 percent reduction in aviation emissions by 2037.
- LULUCF and deforestation:
  - Deforestation rates declined by 54 percent in the Amazon biome and by 24 percent in the Cerrado biome over 2023–2024.
  - LULUCF emissions fell cumulatively by 0.43 Gt CO2e in 2023–2024 (0.2 Gt CO2e in 2023; 0.23 Gt CO2e in 2024).
  - Reforestation target: gradual restoration of 12 million hectares of native vegetation by 2030.
- CPAT findings:
  - CPAT simulations indicate current policies would allow Brazil to close its mitigation gap with respect to the 2030 NDC target.
  - Under current policies, Brazil can reduce total emissions by 0.45 Gt CO2e, primarily through minimizing deforestation and promoting reforestation.
  - Energy-related emissions decline relative to BAU; reductions larger closer to 2030 when ETS becomes operational.
- Key numeric figures:
  - National emissions (2022): 2 billion metric tons (Gt) CO2e; sectoral drivers: Energy 0.4 Gt; Agriculture 0.6 Gt; LULUCF 0.8 Gt.
  - Renewable sources comprised 87.1 percent of national electricity supply in 2022.
  - Biofuels accounted for 22 percent of the transport energy matrix (IEA, 2023).
  - Sovereign Sustainable Bond issuance: $2 billion raised in June 2024; 7-year maturity; annual yield 6.375 percent.
  - Planned electricity additions (National Energy Expansion Plan 2034): 13.1 GW wind; 8.5 GW solar; 9.2 GW hydropower; and 19.3 GW natural gas.
- Risks to emissions progress include droughts, higher fugitive emissions from extractive expansion, uptick in legal deforestation, and commodity price incentives.
- Complementary policies recommended: scale up climate-smart agriculture, accelerate grid/storage investments, reform land tenure and rural tax incentives, operationalize ETS by 2030, and deepen blended finance (Eco Invest Brasil).

### Financial integrity, AML/CFT, and FSAP implementation
- AML/CFT:
  - Brazil has developed policies to tackle higher ML risks; COAF (Financial Intelligence Unit) strengthened with technological tools; further FIU capacity building recommended.
  - Ensure law enforcement agencies and COAF have timely access to broader beneficial ownership information.
  - Effective implementation of strengthened counter-terrorist financing and targeted financial sanctions frameworks needed.
- FSAP recommendations and implementation highlights:
  - Complementary Law 179 of 2021 enhanced BCB autonomy objectives; IFRS9 implemented January 2025; Immediate and Term Liquidity Facilities in place; BCB policy rate 15 percent (June 2025).
  - Recommendations remain on crisis management, supervisory independence, resources for CVM and SUSEP, group-wide supervision of insurance conglomerates, and resolution framework enactment.

### Macroprudential and monetary policy transmission
- Monetary transmission:
  - Policy tightening raises market-based (non-earmarked) lending rates one-for-one within four months, implying full pass-through for that segment.
  - Overall pass-through across all credit types estimated at 70 percent; pass-through to government-directed (earmarked) lending weaker at 20 percent.
  - A 100 basis point interest rate increase reduces one-year-ahead inflation expectations by 20-30 basis points, other things equal.
  - Pass-through strengthened since COVID-19, especially to corporate loans; variation exists across credit types with unsecured consumer loans more responsive than secured loans.
- Policy guidance:
  - BCB’s pivot to tightening in September 2024 appropriate to bring inflation and expectations back to 3 percent target.
  - Maintain flexibility on pace and length of hiking cycle given global uncertainty and above-target inflation expectations.
  - Rebalance macroeconomic policy mix: fiscal consolidation and clear contingency plans would cool aggregate demand, strengthen fiscal credibility, reduce pressures on the currency and prices, and facilitate a lower path of policy interest rates.
  - Continue reducing IOF-FX and eliminate associated multiple currency practice (MCP) in line with plan to reduce IOF-FX rates to zero by 2029 (Presidential Decree 10.997/2022).

*Source: 1braea2025001-source-pdf - IMF staff report excerpt.*

### 1. A Strong Economy Has Lifted Labor Market Outcomes for Vulnerable Groups _________________ 7

### 1. A Strong Economy Has Lifted Labor Market Outcomes for Vulnerable Groups

### Recent economic developments and growth momentum
- Real GDP growth averaged 3.2 percent during 2022-2024, outperforming IMF staff forecasts at the start of each year by an average of 2.0 percentage points.
- Annual real GDP growth rose from 3.2 percent in 2023 to 3.4 percent in 2024.
- Private consumption expanded by 4.8 percent in 2024.
- Investment expanded by 7.3 percent in 2024.
- GDP in 2025 Q1 expanded by 5.7 percent at a quarterly seasonally-adjusted annualized rate, driven by record agricultural output.
- Growth showed signs of moderation in late 2024: private consumption declined and investment growth lost momentum; services and industrial output slowed in the last quarter of 2024.
- Domestic developments occurred amid slowing growth in Brazil’s trading partners and elevated global policy uncertainty.

### Inflation, monetary policy, and labor markets
- Inflation returned to the target tolerance interval in 2023 but rebounded in 2024 due to strong demand, drought-induced food price rises, and currency depreciation.
- The Central Bank of Brazil (BCB) initiated a new policy tightening cycle in September 2024; policy rates are now higher (in nominal and real terms) than at their post-pandemic peak in 2022.
- Unemployment fell to 6.1 percent in November 2024 (its lowest level in over 20 years).
- The overall unemployment rate declined to 6.2 percent at the end of 2024—its lowest rate since 2000.
- Poverty declined to 27.4 percent in 2023 (from 31.6 percent in 2022).
- Extreme poverty fell to 4.4 percent in 2023 (from 5.9 percent in 2022).

### Labor market outcomes for vulnerable groups (Box 1)
- The gap in unemployment rates between advantaged and disadvantaged demographic groups has narrowed during the expansion.
- Staff analysis (quarterly household-level data for Brazil, 2012-2024) using a logit regression controlling for demographic characteristics and participation rates finds:
  - When the aggregate unemployment rate falls, the likelihood of unemployment falls across all demographic groups.
  - Youths and workers without a college degree experience a larger drop in the likelihood of unemployment relative to older workers and those with a college degree.
  - These results align with international findings that disadvantaged groups’ labor market outcomes are relatively more sensitive to economic cycles.
  - The staff analysis finds little evidence of asymmetry: a cooling economy could reverse recent gains for disadvantaged groups.
- Policy implication: further structural reforms are necessary to secure lasting benefits for disadvantaged groups and to address remaining labor market challenges.

### Fiscal stance, composition, and risks
- Following fiscal stimulus in 2022-2023, the fiscal policy stance was broadly neutral in 2024 and estimated to be tightening in 2025.
- Federal primary deficit narrowed to 0.4 percent of GDP in 2024 from 2.4 percent of GDP in 2023, meeting the authorities’ fiscal target within the target tolerance interval after allowed deductions.
- Revenue increased by 1.3 percent of GDP in 2024; about half reflected economic strength and half reflected tax measures (including higher fuel taxation and a levy on exclusive funds and offshore assets).
- Settlement of precatórios of 0.8 percent of GDP in December 2023 widened the primary deficit by 0.8 percent of GDP in 2023 with a corresponding narrowing in 2024; staff allocates the disbursement to early 2024 when payments reached households.
- After adjusting for precatórios and the economic cycle, staff estimates the general government structural primary balance was approximately unchanged in 2024 (broadly neutral fiscal stance).
- Staff assesses fiscal support during 2022-2024 added on average 0.6 percentage point to annual growth (through contemporaneous and lagged effects).
- As of 2025H1, fiscal policy is tightening, supported by spending restraint, with the federal government targeting a zero primary deficit.
- Uncertainty regarding the future path of fiscal policy intensified in 2024: implementation challenges for the 2023 fiscal framework, downward revisions to primary balance targets in April 2024, and investor doubts pushed up long-end bond yields and risk premiums.
- The fiscal package announced in November 2024 is expected to reduce spending by 0.2 percent of GDP in 2025 and by more in later years; proposed measures include:
  - a 2.5 percent cap on real growth of the minimum wage;
  - gradually restricting wage bonus eligibility from those earning two minimum wages to those earning one and a half minimum wages;
  - enhanced scrutiny of eligibility for social programs.
- The majority of proposed measures were approved by Congress in December 2024.
- The authorities submitted a PIT reform proposal to Congress in March 2025 that increases the PIT exemption and offsets it by taxing higher-income brackets.

### Brazil’s fiscal framework (Box 2)
- The constitutional amendment approved in August 2023 replaced the zero-growth federal real spending cap with a formula establishing a federal real spending corridor: a floor of 0.6 percent and a ceiling of 2.5 percent, contingent on revenue collection and distance to a primary balance target.
- Corridor rules:
  - If the primary balance in year t is within the target tolerance interval, planned real federal spending growth in year t+2 = 0.7 × real revenue growth in t+1 (mid-year).
  - If the primary balance in year t is below the target tolerance interval, planned real federal spending growth in year t+2 = 0.5 × real revenue growth in t+1 (mid-year).
- Primary balance target setting:
  - The fiscal target for year t+1 is set in the draft Budget Guideline Law (PLDO) in April of year t; the PLDO sets indicative targets for outer years.
  - The current-year target can be revised with a simple parliamentary majority (provision not activated).
  - In April 2024, the PLDO set a zero-deficit target for 2025 (revised down by 0.5 percentage point from the April 2023 indicative target).
  - In April 2025, the PLDO reaffirmed targets for 2025 and 2026 and indicative targets for subsequent years.
  - Within-year correction mechanisms apply, including bans on new hiring, public wage increases, new mandatory spending, social assistance policies, or tax benefits if the primary balance target is at risk.
- Target assessment:
  - The primary balance outcome is compared with the target tolerance interval of ±0.25 percent of GDP around the target.
  - Certain authorized expenditures are deducted for assessment (e.g., part of precatórios payments were authorized to be excluded for 2024-2026; flood calamity extraordinary spending of 0.3 percent of GDP was excluded for 2024 assessment).
  - For 2024, after exclusions the relevant primary deficit for assessment was 0.1 percent of GDP; this was within the ±0.25 percent GDP target tolerance interval, so the 2024 fiscal target was considered met.

### Tax and structural reforms
- VAT reform progress:
  - Complementary Law No. 214/2025 enacted in January 2025 establishes and regulates the dual VAT system, a significant step to the new regime.
  - Remaining bills on governance for joint revenue administration, excise tax regulation, and administrative process are being developed.
- PIT reform proposal:
  - The proposed PIT reform aims to be revenue neutral.
  - It raises the personal income exemption threshold to R$5,000 monthly (from R$3,036).
  - Introduces a minimum income tax in five brackets up to 10 percent for individuals earning over R$50,000 monthly.
  - Introduces a new withholding tax on dividend payments.
- Other tax measures:
  - Congress approved a 15 percent minimum tax on large multinationals aligning Brazil with OECD GloBE rules, expected to modestly raise revenues from 2026.

### Exchange rate developments and FX intervention
- After appreciating in 2023, the real depreciated significantly in 2024—about 20 percent against the US dollar in 2024.
- Staff analysis attributes about one-third of that depreciation to perceptions of increasing domestic risks; global factors accounted for much of the remainder.
- Financial outflows around year-end 2024 were larger than usual (seasonal dividend remittances and large one-off balance sheet-related outflows), creating temporary FX market stress and a spike in the implied onshore dollar interest rate (cupom cambial).
- BCB intervened in the spot market in December 2024, selling US$21.6 billion (about 6 percent of foreign reserves) to smooth FX market functioning, reduce excessive volatility, and prevent contagion to other asset classes.
- Earlier in 2024, smaller amounts of FX intervention occurred through different instruments to address specific spikes (Annex II).
- As of late June 2025, the BCB had not intervened in the spot market.
- Foreign exchange reserves declined by about US$25 billion in 2024 to US$330 billion at end-December 2024, remaining within adequacy ranges (126 percent of the IMF ARA metric).

*Source: 1braea2025001-source-pdf - 1. A Strong Economy Has Lifted Labor Market Outcomes for Vulnerable Groups _________________ 7*

### Box 3. Drivers of Exchange Rate Movements

### Box 3. Drivers of Exchange Rate Movements

### SVAR decomposition of BRL/USD movements
- Method and sample
  - Daily Structural Vector Autoregression (SVAR) identified using sign restrictions applied to BRL/USD movements since 2024.
  - Sample spans 2008-2025.
- Key drivers identified (summary)
  - Domestic risk perceptions accounted for roughly one-third of the currency depreciation in 2024.
  - US macroeconomic news and global risk perceptions were the next largest contributors to depreciation.
  - The domestic risk factor correlates closely with sovereign risk––the five-year sovereign CDS for Brazil relative to the median for LA5 economies (excluding Brazil).
  - The domestic risk factor’s contribution increased following the easing of fiscal targets on 4/15/2024 and the announcement of the fiscal package on 11/27/2024.
  - Factors explaining the appreciation starting in early December include domestic monetary policy tightening and a moderation in domestic risk perceptions.
- Sign restrictions used in the SVAR (interpretation: a “+” in BRL/USD column indicates appreciation of the real)
  - Domestic Risk: BRL/USD +; 10-year BRA Bond Yield -; Ibovespa -.
  - Domestic Monetary Policy: BRL/USD +; S&P 500 +; Ibovespa -.
  - US Monetary Policy: BRL/USD -; S&P 500 -; US 10-year Treasury Yield +.
  - US News: BRL/USD -; S&P 500 +; US 10-year Treasury Yield +.
  - Global Risk: BRL/USD +; S&P 500 -; US 10-year Treasury Yield -; Ibovespa -; Terms of Trade -.
  - Terms of Trade: Ibovespa +.

### Exchange rate pass-through and distributional effects on prices
- Pass-through estimates
  - A 10 percent depreciation of the nominal effective exchange rate (NEER) reaches about 0.9 percent after 12 months for the headline consumer price index (IPCA).
  - The same 10 percent NEER depreciation reaches about 1.2 percent after 12 months for prices faced by lower-income households (INPC).
  - Stronger impact on lower-income households reflects larger weights of energy and food, which have higher imported content.
- Historical and projected contributions of NEER movements
  - Currency movements since April 2024 are estimated to have contributed 0.5 percentage point to twelve-month headline inflation at end-2024.
  - These movements are projected to contribute 1.1 percentage points to headline inflation by end-2025.
- Note on estimation
  - Exchange rate pass-through based on estimated local projections relation between change in (log) nominal effective exchange rate and change in (log) price indexes, controlling change in (log) Brent oil price. Whiskers indicate 90 percent confidence interval.

### Inflation developments, labor market, and monetary policy
- Recent inflation path and components
  - Headline inflation: peak 12.1 percent (y/y) in April 2022; low 3.2 percent in June 2023; 4.8 percent by December 2024; 5.3 percent in May 2025.
  - Core inflation (BCB’s average of five measures): 5.2 percent in May 2025.
  - Services inflation: 5.8 percent in May 2025.
  - Output gap: estimated to have reached 1.1 percent in 2024.
  - Real average wage growth: 4.3 percent (y/y) in 2024; 4.0 percent in March 2025.
  - Four-year-ahead inflation forecast (Focus survey, as of end-May 2025): 3.8 percent.
- Monetary policy stance and reaction
  - BCB shifted from easing to holding and then to a tightening cycle in September 2024.
  - Policy rate: cumulative 450 basis points of hikes to 15 percent in June 2025.
  - Real interest rates are in highly restrictive territory close to 10 percent compared to staff estimates of neutral short-term real rates of about 5 percent.
  - Staff expects the BCB policy rate to peak at 15 percent in 2025 and approach its estimated neutral level in early 2028, with short-term real interest rates around 5.0 percent.

### Financial sector resilience and credit
- Financial soundness indicators
  - Liquidity coverage ratio (banks): 188.9 percent at end-2024.
  - Common Equity Tier 1 capital ratio: 14.3 percent.
  - Bank credit growth: 11.5 percent year-over-year in 2024.
  - Non-performing loans: declined further amid robust economic conditions.
  - BCB’s estimated credit gap: remains positive and driven mainly by strong growth of the domestic bond market.
  - Earmarked credit share: 40.0 percent in 2023 to 42.2 percent in January 2025; peak of 50 percent in 2016-17.
- External exposure and resilience
  - Private sector resilient to exchange rate movements due to Brazil’s low reliance on external debt.
  - External position: current account deficit 2.8 percent of GDP in 2024 from 1.3 percent of GDP in 2023.
  - Net FDI inflows increased by 0.5 percent of GDP to 2.2 percent of GDP in 2024.

### Outlook and risks
- Baseline projections
  - Growth: moderation from 3.4 percent in 2024 to 2.3 percent in 2025; medium-term recovery to 2.5 percent.
  - Unemployment rate: expected to rise to 7.4 percent as output gap closes in the medium term.
  - Inflation: expected to remain above target near term, reaching 5.2 percent by end-2025, then gradually converging to 3 percent by end-2027.
  - Fiscal: federal primary deficit modestly widens to 0.6 percent of GDP in 2025 from 0.4 percent of GDP in 2024; primary surplus of 1.4 percent of GDP in 2030 and 1.7 percent of GDP over the extended policy horizon contingent on measures.
  - Government gross debt: projected to stabilize in 2030 at around 99 percent of GDP.
  - Current account: expected to narrow to 1.9 percent of GDP in the medium term.
- Risks
  - Downside scenario (global): in a calibrated global downside scenario, Brazil’s annual real GDP growth could be lower by 0.9 percentage point in 2025 and 0.5 percentage point in 2026 compared to the baseline, with inflation lower by about 0.2 percentage point during 2025-2026.
  - Domestic downside risk: lower-than-envisaged fiscal effort could raise policy uncertainty, public debt pressures, borrowing costs, and weaken investment and growth.
  - Other risks: extreme weather events (floods, droughts, wildfires) could dent growth, with agriculture and power generation exposed.

### Policy discussion — Completing disinflation and monetary transmission
- Policy recommendation and stance
  - The BCB’s pivot to tightening in September 2024 was appropriate to bring inflation and inflation expectations back to the 3 percent target.
  - Maintaining flexibility on the pace and length of the hiking cycle is prudent given heightened global policy uncertainty and above-target inflation expectations.
  - Conditional on underlying data and expectations anchoring, a policy rate path peaking in 2025 and returning to neutral in 2028 would be appropriate.
- Monetary transmission evidence
  - Policy tightening raises market-based (non-earmarked) lending rates one-for-one within four months, implying full pass-through (Box 4).
  - Overall pass-through across all credit types is estimated at 70 percent.
  - Pass-through to government-directed (earmarked) lending is weaker, at 20 percent.
  - A 100 basis point interest rate increase reduces one-year-ahead inflation expectations by 20-30 basis points, other things equal.
  - Pass-through has strengthened since the COVID-19 pandemic, especially to corporate loans; variation exists across credit types with unsecured consumer loans more responsive than secured loans.

*Sources: Bloomberg, Haver, Fund staff calculations.*

### Box 4. Monetary Policy Transmission to Lending Rates

### Box 4. Monetary Policy Transmission to Lending Rates

### Monetary policy, exchange rate, and lending-rate transmission
- Rebalancing the macroeconomic policy mix would facilitate a decline in inflation; primary responsibility for price stability lies with the BCB.
- Additional legislated government spending and revenue measures that demonstrate a clear path to improving the fiscal position would:
  - cool aggregate demand;
  - strengthen fiscal credibility;
  - reduce pressures on the currency and prices; and
  - conditional on inflation expectations heading back to target, facilitate a lower path of policy interest rates.
- Clear contingency plans, building on those envisaged in the fiscal framework, for how the government would respond to major changes in economic conditions would further bolster credibility.
- A resulting lower path of sovereign yields would help improve debt dynamics given the high share of floating-rate government liabilities (nearly 50 percent).
- Brazil’s flexible exchange rate continues to act as a valuable shock absorber:
  - no change in the BCB’s long-standing flexible exchange rate policy and adherence to the inflation-targeting framework;
  - flexible exchange rate regime and adequate FX reserves remain valuable shock buffers and support resilience;
  - FX intervention could be used to address episodes of higher risk premia when FX liquidity becomes shallow (as in December 2024) without substituting for necessary adjustment of macroeconomic policies.
- Staff advises the authorities to continue reducing the financial transaction tax (IOF-FX) and eliminate the associated multiple currency practice (MCP):
  - the IOF-FX gives rise to an MCP with respect to current and capital international transactions because the effective exchange rate of exchange transactions subject to the IOF-FX has exceeded the permissible margin under the Fund’s new MCP policy since the effectiveness of this policy;
  - the tax is also an exchange restriction with respect to payments and transfers for current international transactions and a CFM with respect to capital transactions;
  - the IOF-FX tax increases transaction costs for FX transactions;
  - the tax is being phased out and is expected to be eliminated in due course in line with the existing plan to reduce the rate to zero, consistent with staff advice.
- IOF-FX rate history noted in annex:
  - reduced from 6.38 percent in 2022 to 5.38 percent in January 2023, 4.38 percent in January 2024, and 3.38 percent in January 2025;
  - Presidential Decree 10.997/2022 will gradually reduce IOF-FX rates to zero by 2029 on all exchange transactions currently subject to a non-zero rate.

*Source: Fund staff calculations.*

### Authorities’ views on monetary policy
- Authorities agreed monetary policy is consistent with reducing inflation and remain firmly committed to the inflation targeting framework.
- BCB emphasized policy rate would need to stay high-for-longer given above-target inflation and inflation expectations.
- Authorities concurred with staff that monetary policy transmission is effective and reiterated commitment to exchange rate flexibility.

### Strengthening the fiscal position — recent measures and targets
- Authorities adopted measures to achieve the 2025 zero primary deficit target, including spending restraint and revenue mobilization.
- 2026 draft Budget Guidelines Law (PLDO) submitted in April:
  - reaffirms federal primary fiscal surplus target of 0.25 percent of GDP for 2026;
  - indicative target path to a surplus of 1.0 percent of GDP by 2028;
  - new indicative target of 1.25 percent of GDP for 2029.
- Authorities estimate the spending package approved in December 2024 will compress spending by 0.2 percent of GDP in 2025, with annual savings rising to 0.4 percent of GDP by 2030.
- Adopted structural measures include a new 2.5 percent cap on the real growth rate of the minimum wage (to which minimum pensions are indexed).

### Staff baseline fiscal projections and assumptions
- Staff projects:
  - federal primary deficit of 0.6 percent of GDP in 2025 (within the fiscal target tolerance interval after allowed deductions);
  - estimated overall fiscal effort of 0.5 percent of GDP in 2025 (measured by change in the general government structural primary balance) reflecting measures adopted in December 2024 and May 2025;
  - federal primary deficit of 0.4 percent of GDP in 2026, predicated on additional (currently unallocated) measures of 0.5 percent of GDP;
  - a gradual fiscal effort leading to a primary surplus of 1.7 percent of GDP in 2034.
- Assumptions and projections:
  - implementation of additional (currently unallocated) measures amounting to 1.5 percent of GDP over time;
  - moderation in spending growth guided by the fiscal rule;
  - general government gross debt projected to stabilize at around 99 percent of GDP in 2030.

### Staff recommendations to put debt on a firmly downward path
- Staff finds risks of debt distress to be moderate under the baseline, but debt trajectory is highly sensitive to shocks to borrowing costs, real GDP growth, and contingent liabilities.
- Factors providing room for consolidation:
  - predominantly domestic investor base;
  - low external debt;
  - large cash buffers of the government (14 percent of GDP);
  - BCB’s substantial holdings of government securities (21 percent of GDP), which are automatically rolled over by law.
- Staff recommends:
  - stand ready to implement further expenditure restraint in 2025 if needed to achieve targeted primary balance while protecting targeted social support and investment spending;
  - a path for the primary fiscal balance that starts with achieving the 0.25 percent of GDP surplus target in 2026 (implying structural fiscal effort of 0.8 percent of GDP), followed by improvements averaging 0.5 percentage point of GDP per year, resulting in a federal primary fiscal surplus of 2.5 percent of GDP by 2031;
  - such a fiscal path, together with growth-enhancing structural reforms, would put general government gross debt on a firmly downward trend from 2028 on, improve sovereign financing conditions, support decline in inflation expectations and policy interest rates, and increase space for productivity-raising investments.
- Staff scenarios for putting debt on a downward path:
  - Layer S1: recommended additional fiscal effort increasing the primary surplus to 2.5 percent of GDP by 2031 combined with a macroeconomic response, including slower growth and lower policy rates enabled by lower inflation;
  - Layer S2: adds to layer S1 real GDP growth gains from structural reforms (an additional 1.5 percentage points per year during 2026-30).

### Enhancing the fiscal framework
- Enhancements to the 2023 framework could include:
  - provisions to ensure consistency between the spending corridor and fiscal targets;
  - mechanisms to limit procyclicality, including linking federal spending growth to increases in structural revenue;
  - an economic escape clause;
  - a medium-term fiscal anchor.
- Enhanced framework could provide pre-defined correction mechanisms for returning to the pre-shock fiscal path after major economic shocks.

### Revenue mobilization and spending rigidity measures
- Staff calls for further mobilizing revenue and tackling spending rigidities.
- Revenue measures:
  - further curtailing or phasing out 1-2 percent of GDP in inefficient, regressive, and expensive tax expenditures is warranted;
  - total tax expenditures are estimated at 4-5 percent of GDP per year;
  - authorities recently eliminated a tax expenditure for the exhibition sector, imposed a modest income tax on the interest of exempted securities, and started to gradually phase out payroll tax exemptions, contributing a combined 0.2 percent of GDP to the primary balance by 2028;
  - revenue administration measures (enhancing the registered taxpayer base, consolidating compliance risk management reforms, improving tax debt management, reducing time to resolve tax disputes) would further contribute to revenue mobilization;
  - June measures to curtail abuse of tax offsets expected to raise collection by 0.1 percent of GDP per year in 2025 and 2026.
- Spending measures:
  - mandatory spending comprises about 90 percent of federal primary expenditure;
  - reform options to increase budget flexibility could include de-linking growth of pension and social assistance benefits from minimum wage growth, further steps to contain real minimum wage growth, capping pension spending growth, and reviewing constitutional floors on health and education spending to align their growth with the spending corridor;
  - pension reform and efforts to improve spending efficiency could also generate fiscal savings;
  - ongoing efforts to combat fraud in social program qualification are necessary;
  - spending measures could raise the primary balance by 1-2 percent of GDP in the medium term;
  - some fiscal savings could be deployed to increase spending on priority investments.

- Estimated Federal Tax Expenditures, 2025 (Percent of GDP):
  - Simples Nacional: 1.0
  - PIT deductions and exemptions: 0.9
  - CIT sectoral and regional incentives: 0.6
  - Non-profit organizations: 0.4
  - Manaus Free Trade Zone: 0.2
  - Other: 1.3
  - Total: 4.4

*Source: Fund staff calculations.*

### Tax reform: VAT and PIT
- VAT reform (landmark 2023 reform):
  - expected to significantly simplify the tax system and boost productivity while aiming for revenue neutrality;
  - removing inefficiencies (notably prior incomplete crediting of taxes paid on intermediate inputs) is estimated to lift output and productivity, foster formal employment, and make consumption taxes less regressive through a cashback system, a shift in tax burden from goods to services, and lower statutory rates;
  - minimizing the compliance gap will have the largest impact towards securing revenue neutrality;
  - full integration of operations across levels of government and effective management of the input tax credit mechanism are critical.
- PIT reform under discussion in Congress:
  - proposal features a minimum tax for high-income individuals on income including dividends, broadening the tax base and increasing progressivity if approved and implemented;
  - provision to increase the personal exemption threshold from R$3,036 per month to R$5,000 per month would reduce progressivity and mainly benefit upper-middle-income workers;
  - estimated effect: increase would exempt a further estimated 10 million taxpayers from PIT, raising the share of workers who do not pay PIT from about 75 percent to about 85 percent of all workers;
  - offsetting the revenue loss from the PIT threshold increase will require implementing compensating measures of at least 0.2 percent of GDP;
  - additional steps to bolster PIT revenues and enhance progressivity include broadening the tax base by withdrawing regressive exemptions and deductions (such as health and education expenses) and companion reforms to lower the eligibility threshold of the SIMPLES regime to discourage PIT evasion and mitigate the small enterprise trap.

### Demographics, pensions, and labor policies
- Mounting demographic pressures on the pension system due to declining fertility rates and increasing life expectancy represent a significant medium-term fiscal challenge.
- Brazil’s pension reform of 2019 stabilized pension system deficits through 2030; additional steps are warranted:
  - Healthy aging policies:
    - advance initiatives (including tackling behavioral risk factors such as physical inactivity and unhealthy diets) to improve physical and cognitive capacities of workers aged 55 and more;
    - expected benefits: enhance productivity, narrow participation gap with prime-age workers, allow higher effective retirement ages, and foster technological innovation to harness AI-related complementarity to labor for occupations typical of older, college-educated workers.
  - Pension systems reforms:
    - strengthen the general pension system (RGPS) with a combination of:
      - reduced replacement rates for both newcomers and existing pensioners;
      - higher contribution rates moving Brazil closer to the OECD average;
      - elimination of the partial PIT exemption for pensioners above 65 years old;
      - increased effective retirement age, notably by closing early retirement loopholes;
      - coordination of non-contributory regimes with other social programs to avoid duplication of benefits;
    - encourage full convergence of subnational civil servants’ regimes (RPPS) to RGPS parameters with acceptable transition periods;
    - in the medium term, retirement age and minimum contribution periods could dynamically adjust to demographic trends through automatic adjustment mechanisms;
    - multifaceted approach would ease fiscal pressures via parametric pension changes and by raising labor force participation rates among older individuals;
    - broader labor supply policies would provide further relief (see ¶41).

*Source: Fund staff calculations.*

### Box 5. Demographic Pressures and the Pension Reform of 2019

### Box 5. Demographic Pressures and the Pension Reform of 2019

### Demographic trends
- In 2022, almost 22 million Brazilians were aged 65 years and over—accounting for 11 percent of the population.
- Between 2000 and 2023:
  - Fertility rate fell from 2.32 to 1.57 children per woman.
  - Life expectancy at birth rose from 71.1 years to 76.4 years.
- The aging of the Brazilian population is expected to accelerate during the next decades, increasing the dependency ratio (fewer workers supporting more retirees) and straining the pension system.
- Sources cited: Authorities' estimates (PLDO 2026), UN World Population Prospects 2024.

### Effects of the 2019 pension reform
- Key measures implemented:
  - Establishment of a minimum retirement age for the general pension regime (RGPS).
  - Linking replacement rates to years of contribution for the RGPS.
  - Alignment of the federal public sector regime (RPPS) with the RGPS.
- Impact in the medium term:
  - The reform stabilized RGPS deficits at around 2.5 percent of GDP through 2030.
  - Federal RPPS deficits were stabilized and the federal alignment set a benchmark for future reforms, including of subnational RPPS.

### Fiscal outlook and long-term sustainability
- Despite medium-term stabilization, long-term sustainability was not fully addressed.
- Authorities project RGPS deficits to rise again after 2030 and reach 6 percent of GDP by 2060.
- The projected long-term deterioration is driven in part by unfavorable demographic trends.

### Policy implications and recommended actions
- Continue and deepen pension-related reforms, with attention to:
  - Addressing long-term sustainability beyond the medium-term stabilizing effects achieved by the 2019 reform.
  - Extending alignment measures to subnational RPPS to mirror federal RPPS stabilization.
- Monitor demographic developments closely to inform pension policy adjustments as deficits are projected to increase after 2030 and reach 6 percent of GDP by 2060.
- Use authorities' demographic and fiscal projections (PLDO 2026 and UN World Population Prospects 2024) as inputs for long-term pension policy planning.

*Box sources: Authorities' estimates (PLDO 2026), UN World Population Prospects 2024.*

### 47.      Addressing the main AML/CFT gaps identified by the FATF/GAFILAT assessment would

### Addressing the main AML/CFT gaps identified by the FATF/GAFILAT assessment would

### AML/CFT and financial-sector vulnerabilities
- Brazil has developed policies to tackle many higher money laundering (M ) risks; the BCB’s supervision has strengthened detection and prevention of ML.
- COAF (Financial Intelligence Unit) has been strengthened, including introduction of technological tools for financial intelligence analyses; further steps to increase FIU capacity should be progressively implemented.
- Continued integration and participation of the Revenue Office in the AML/CFT system is warranted.
- Brazil should ensure competent authorities, in particular law enforcement agencies and COAF, have timely access to a broader range of information on beneficial ownership.
- Continuous analysis of financial aspects of crime, with focus on cross-border and environmental crimes, and more frequent investigations into ML activities would enhance understanding of ML threats and support efforts to combat organized criminal groups.
- Effective implementation of the recently strengthened counter-terrorist financing and targeted financial sanctions frameworks would further reduce financial sector vulnerabilities.

### Fintech competition and financial intermediation (Box 6)
- Fintech lending dynamics:
  - In 2024, fintech lending represented a quarter of the credit card market and over 10 percent of the nonpayroll personal loan market.
- Staff analysis (Brazilian bank-level data 2012-2024; Bartik IV approach) finds:
  - A one standard deviation increase in exposure to fintech competition results in a 2.9 percentage point reduction in lending rates.
  - A 1.3 percentage point decrease in the net interest margin among traditional banks.
- Implications:
  - Lower margins suggest more efficient financial intermediation.
  - Banks experienced a decline in return on equity and assets due to the reduced margin.
  - No observed impact on credit volume or risk-taking behavior.

### Trade openness and industrial policy
- Trade openness:
  - Trade openness (exports + imports of goods and services relative to GDP) rose from around 22 percent of GDP in 2010 to 35 percent of GDP in 2024.
  - This remains below the LA5 average excluding Brazil (56 percent) and the world average (close to 60 percent).
- Regulatory and tariff measures:
  - Brazil’s Services Trade Restrictiveness index has declined over the past decade and is close to the world average but still above that of OECD countries.
  - In March 2025, Brazil eliminated import tariffs and modified tariff-rate quotas for several food products.
- Policy guidance:
  - Further reducing trade and investment barriers, additional trade facilitation commitments, and regulatory cooperation would yield benefits from participation in global value chains.
  - Trade policies should resolve trade tensions, promote stability and transparency, and deepen economic integration through nondiscriminatory reductions in trade barriers or by pursuing free trade agreements at the regional, plurilateral or multilateral level.
- Industrial policy guidance:
  - Nova Indústria Brasil (launched January 2024) focuses on innovation and sustainability in agriculture; health; infrastructure; decarbonization and energy transition; digitalization; and defense.
  - Subsidy, trade, and other policy measures in sectors including low carbon technology, advanced technology, and medical products should be:
    - Targeted narrowly to specific objectives in sectors with well-identified market failures,
    - Time-bound,
    - Subject to regular cost benefit assessments,
    - Not discriminatory between domestic and foreign firms.

### Ecological Transformation and climate targets
- Key legislation and programs:
  - Fuels of the Future bill (Law No.14,993 of October 2024) aims to lower transportation emissions through increased biofuel mix-ins and use of sustainable aviation fuels.
  - Law No. 15,042 (December 2024) establishes a legal framework for an emission trading system expected to become operational by 2030 and cover up to 15 percent of the nation’s emissions.
  - New Eco Invest Brasil program and the second issuance of sustainable sovereign bonds in 2024 are part of mobilizing financing for the ecological transformation.
- Nationally Determined Contribution (NDC) targets:
  - 53 percent reduction in total greenhouse gas (GHG) emissions by 2030 relative to 2005.
  - At least 59 percent reduction by 2035 relative to 2005.
  - This corresponds to a 35 percent reduction in GHG emissions compared to the business-as-usual (BAU) scenario by 2030.
  - Footnote: These relative NDC targets correspond to absolute reductions of 1.2 Gt of CO2e by 2030 and 1.05 Gt of CO2e by 2035, based on AR5 GWP values.
- Deforestation and LULUCF:
  - Stricter enforcement of the forest code allowed reducing emissions from Land Use, Land Use Change, and Forestry (LULUCF) by 0.43 Gigatons of CO2 equivalent in 2023-2024.
  - Staff analysis suggests Brazil is on track to meet its 2030 NDC target if these policies are implemented in full.

### Authorities’ views (summary)
- Authorities expect reforms to foster stronger sustainable growth and inclusion.
- They highlighted:
  - Over 70 percent of the new formal jobs created in 2024 were taken up by Bolsa Família recipients.
  - Ongoing efforts to ensure accuracy of the Cadastro Único household registry and strengthen educational attainment (programs such as Pé-de-Meia and Escola do Trabalhador 4.0).
- On AML/CFT:
  - Authorities state the Financial Intelligence Unit has extensive powers to effectively investigate suspicious transactions.
  - They are updating the national risk assessment, expected to be published early next year, to inform a national strategy.
- On ecological agenda:
  - Authorities are confident in ability to meet NDC targets, citing Eco Invest Brazil, Sustainable Taxonomy, Plano Clima, and ratification of Emission Trading System legislation.
  - Emphasized importance of reforestation and policies focused on non-LULUCF sectors to achieve emission reductions beyond 2030.

### Staff appraisal — growth, inflation, and external position
- Growth projections:
  - Growth is projected to moderate in the near term and then strengthen to 2.5 percent over the medium term.
  - Moderation reflects tight monetary policy, a scaling back of fiscal support, and heightened global policy uncertainty.
  - Economic activity expected to be supported by VAT reform and acceleration in hydrocarbon production.
- Inflation projections:
  - Inflation is expected to reach 5.2 percent by end-2025 before gradually converging to the 3 percent target by end-2027.
- External position:
  - Staff assessed the external position in 2024 as broadly in line with the level implied by medium-term fundamentals and desirable policies.

### Risks to the outlook
- Downside risks dominate amid heightened global policy uncertainty:
  - Downside: lower-than-envisaged fiscal effort, weaker investment, higher borrowing costs; slowdown in major economies, lower commodity prices, tighter global financial conditions.
  - Upside: stronger-than-expected household consumption, faster implementation of productivity-enhancing reforms and the Ecological Transformation Plan.
- Mitigating factors:
  - Sound financial system, adequate FX reserves, low reliance on FX debt, large government cash buffers, and a flexible exchange rate.

### Monetary and macroprudential policy stance
- Monetary policy:
  - Pivot to tightening cycle was appropriate to bring inflation and expectations back to the 3 percent target.
  - Maintaining flexibility on pace and length of hiking cycle is prudent amid global uncertainty.
  - Flexible exchange rate and adequate FX reserves remain valuable shock buffers.
  - FX intervention could be used to address episodes of higher risk premia when FX liquidity becomes shallow.
- IOF-FX tax:
  - The longstanding tax on certain financial transactions (IOF-FX) gives rise to an MCP with respect to international current and capital transactions and is an exchange restriction for current international transactions.
  - Authorities are not requesting approval; the tax is being phased out and is expected to be eliminated in due course in line with the existing plan to reduce the rate to zero.

### Financial sector resilience and policy recommendations
- 2024 financial sector resilience:
  - Financial institutions have ample buffers; regulatory changes are being implemented to strengthen resilience.
  - Current macroprudential policies are broadly appropriate.
- Recommendations:
  - Continue closely monitoring household credit risks and apply macroprudential measures as needed (example: cap on debt-service-to-income ratio).
  - Reforms to facilitate a reduction in household leverage are recommended.
  - Closely monitor the enhanced private payroll loan program to ensure it does not increase household leverage or hinder BCB’s efforts to control inflation.
  - Lending by public banks should continue to focus on addressing market failures, such as supporting long-term investment.
  - Granting BCB additional administrative and financial autonomy, including to cover operating expenses, would enhance its ability to attract and retain professional talent for financial innovation and sustainable finance, while ensuring accountability and cyber security.

### Fiscal policy, VAT and PIT reforms, and debt sustainability
- Fiscal outlook and targets:
  - For 2025, staff projects a federal primary deficit of 0.6 percent of GDP, within the fiscal target tolerance interval after allowed deductions.
  - 2026 PLDO reaffirms federal primary fiscal surplus target of 0.25 percent of GDP for 2026 and indicative path to a surplus of 1.0 percent of GDP by 2028.
  - New indicative target of 1.25 percent of GDP for 2029.
  - Authorities estimate public debt (authorities’ definition) would peak in 2028 under more favorable macro assumptions.
- Staff recommendations on fiscal effort and debt path:
  - Sustained and more ambitious fiscal effort recommended to put public debt on a firmly downward path, facilitate lower interest rates, and open space for priority investments.
  - Staff recommends a path for the primary fiscal balance starting with achieving the 0.25 percent of GDP surplus target in 2026, followed by steady improvements resulting in a federal primary fiscal surplus of 2.5 percent of GDP by 2031.
  - Additional measures needed: further mobilize revenue (including phasing out costly and inefficient tax expenditures) and tackle spending rigidities.
  - Targeted policies and reforms necessary to mitigate mounting demographic pressures on the pension system.
- VAT reform:
  - Implementation of the landmark 2023 VAT reform is expected to simplify the tax system and, by removing inefficiencies, lift output and productivity, foster formal employment, and make consumption taxes less regressive.
  - Securing revenue neutrality hinges on minimizing the compliance gap; full integration across government levels and effective management of the input tax credit mechanism are critical.
- PIT reform:
  - PIT reform under discussion features a minimum tax for high-income individuals on income including dividends, broadening the tax base and increasing progressivity if approved.
  - Offsetting revenue loss from the proposal’s personal exemption threshold increase will require implementing compensating measures of at least 0.2 percent of GDP.
  - Further steps to bolster PIT revenues and enhance progressivity include withdrawing regressive exemptions and deductions such as health and education expenses.

### Structural reforms and medium-term growth
- Structural reforms and expanding hydrocarbon production have lifted medium-term growth prospects; additional reforms and the Ecological Transformation Plan would further raise medium-term growth and extend gains in social inclusion.
- Priority reform areas:
  - Increase labor force participation, particularly for women.
  - Address bottlenecks to adoption of digital technologies and amplify ability to harness AI benefits.
  - Simplify regulations, reduce administrative burden on start-ups, and ease entry barriers to support competition and innovation.
  - Continue strengthening anti-corruption framework, and efficiency and independence of the judiciary to enhance the business environment.
  - Address AML/CFT gaps identified by FATF/GAFILAT to mitigate related financial sector vulnerabilities.
  - Ensure industrial policies remain narrowly targeted, time-bound, regularly assessed, and nondiscriminatory.

*Source: IMF staff report excerpt.*

### 65.      Brazil is accelerating the implementation of its Ecological Transformation Plan aiming

### Brazil is accelerating the implementation of its Ecological Transformation Plan aiming to foster productivity, investment, and job-rich growth

### Ecological transformation and climate policy
- Emission trading system approved in December 2024 is expected to stimulate growth by promoting investments in decarbonization and carbon offsetting.
- Brazil has made notable progress in reducing deforestation in recent years and is on track to meet its NDC targets.
- Brazil is among the world’s top ten GHG emitters by volume but its emissions per capita are below that of many advanced and emerging market economies.
- Brazil’s goal of zero illegal deforestation would allow the country to meet its 2030 NDC target even with emissions from other sectors rising.
- The most common extreme weather events are floods, which have more than doubled in frequency recently and result in physical and human capital losses.
- CPAT projections are tailored to current and recently enacted policies in Brazil, with reported ranges reflecting uncertainties from varying parameter values in CPAT.

### Macroeconomic outlook and real sector developments
- Growth trajectory and projections:
  - Real GDP growth (annual): 2022: 3.0; 2023: 3.2; 2024: 3.4; 2025: 2.3; 2026: 2.1; 2027: 2.2; 2028: 2.3; 2029: 2.4; 2030: 2.5.
  - Growth is expected to moderate in 2025 before converging to 2.5 percent over the medium term.
- Real sector highlights:
  - Poverty rates across most age groups, including young children, reached the lowest levels since 2012.
  - Despite progress in some regions, inequality at national level remains unchanged in 2023.
  - Following a sluggish 2023, real investment growth picked up in 2024.
  - Overall industrial production showed signs of slowdown in late 2024 and early 2025; broad and core retail sales also showed slowing trends.

### Inflation, wages, and monetary policy
- Consumer prices (IPCA, end of period, percent) projections: 2022: 5.8; 2023: 4.6; 2024: 4.8; 2025: 5.2; 2026: 3.8; 2027: 3.0; 2028: 2.9; 2029: 2.9; 2030: 2.9.
- Inflation picked up in 2024 and exceeded the target tolerance interval.
- Increase in inflation reflected increases in food and transport prices.
- Wages and earnings continued to grow in real terms, exceeding their pre-pandemic levels.
- Services inflation remained elevated and industrial goods inflation accelerated in the recent period.
- Tradables inflation has accelerated since 2024.
- Monetary policy embarked on a new tightening cycle in September 2024.

### External sector, FX, and FX intervention (Annex II)
- Current account and financial flows:
  - The current account deficit widened in 2024, driven by rising imports on the back of strong economic activity and improved terms of trade.
  - FDI inflows remained strong in 2024 while net portfolio investment inflows declined.
  - NIIP improved, partly due to positive valuation effects.
- Exchange rate and reserves:
  - The nominal exchange rate depreciation against the US dollar reached around 22 percent by December 2024 at a twelve-month rate.
  - Spot interventions in December 2024 amounted to around USD 21.6 billion, equivalent to about 6 percent of foreign reserves.
  - Other 2024 FX interventions included: FX swaps of US$1 billion (April) and US$1.5 billion (August); a spot intervention of US$1.5 billion (August); and repo lines of US$15 billion in November and December.
  - The currency’s rebound in 2025 reflected domestic monetary policy tightening and a moderation in domestic risk perceptions.
- Historical intervention context:
  - During March–June 2020, the BCB increased the outstanding stock of FX swaps by US$18 billion and undertook US$19 billion in spot intervention.
  - In early 2021 the stock of FX swaps rose by a further US$18 billion.

### Financial sector and soundness indicators
- Credit and indebtedness:
  - Credit to the private sector accelerated in 2024 amid strong economic activity.
  - Household debt service to income ratio remains elevated.
  - Corporate bankruptcy declined from the peak but remains higher than pre-pandemic levels.
- Banking sector performance and buffers:
  - NPL ratios started to decline in mid-2023.
  - Banking sector profitability has been stable, with additional income offset by higher noninterest expense.
  - The financial system has adequate capital and remains highly liquid.
- Key financial soundness figures (selected):
  - Regulatory capital to risk-weighted assets: 2018: 19.5; 2019: 19.4; 2020: 19.1; 2021: 18.4; 2022: 17.5; 2023: 17.9; 2024: 17.1.
  - Non-performing loans to total gross loans: 2018: 2.6; 2019: 2.7; 2020: 1.9; 2021: 2.1; 2022: 2.6; 2023: 2.8; 2024: 2.7.
  - Return on assets: 2018: 2.2; 2019: 2.0; 2020: 1.9; 2021: 2.4; 2022: 2.1; 2023: 1.6; 2024: 1.8.
  - Liquidity coverage ratio: 2018: 216.7; 2019: 221.5; 2020: 229.0; 2021: 173.9; 2022: 169.8; 2023: 184.6; 2024: 188.9.

### Fiscal developments and debt outlook
- Revenue and expenditure:
  - Revenue growth was strong in 2024; the dip in primary expenditure growth at end-2024 reflects base effects from the payment of precatórios at end-2023.
  - New tax measures and robust economic growth raised revenues.
- Fiscal balances and public debt:
  - Fiscal balances rose in 2024 and are expected to rise further over the medium term.
  - General government expenditure-to-GDP ratio is expected to decline gradually over the medium term in line with the fiscal rule, with the revenue ratio rising further.
  - Unfavorable interest rate-growth differentials are expected to add to debt in coming years.
  - Public sector net debt (percent of GDP, selected): 2022: 56.1; 2023: 60.4; 2024: 61.5; 2025: 65.7; 2026: 70.2; 2027: 72.6; 2028: 74.0; 2029: 74.7; 2030: 74.3.
  - General government gross debt, Authorities' definition (percent of GDP): 2022: 71.7; 2023: 73.8; 2024: 76.5; 2025: 80.9; 2026: 84.5; 2027: 86.4; 2028: 87.4; 2029: 87.8.

### Growth outperformance (Annex I)
- Brazil’s real GDP growth averaged 3.2 percent during 2022–24, outperforming IMF staff forecasts at the start of each year by an average of 2.0 percentage points.
- Drivers of upside surprises included strong consumption supported by fiscal stimulus, stronger-than-expected government and private consumption, fixed capital formation surprises in 2022 and 2024, and real exports outperforming in 2022–23 due to record agricultural and hydrocarbon supply.
- The surprising strength in aggregate demand was associated with inflation somewhat above expected levels, except in 2023 when the real appreciated and food price pressures eased.

### Policy recommendation
- IMF staff recommends that the next Article IV consultation for Brazil be held on the standard 12-month cycle.

*Source: INTERNATIONAL MONETARY FUND (excerpts from the provided content).*

### 4.      Unusually high financial outflows in late 2024 and excessive market volatility

### 4.      Unusually high financial outflows in late 2024 and excessive market volatility

### Financial outflows and market volatility
- Net financial outflows in December 2024: US$29.2 billion.
- December 2024 outflows compared with prior Decembers: more than double the average of US$12.7 billion during the month of December in the previous three years (2021-23).
- Drivers noted: dividend payments and stock buybacks partly contributed to the high outflows.
- Market impact in December:
  - Temporary stress in the onshore spot market.
  - Three-month cupom cambial spread increased by around 45 basis points compared with its level at the end of November and by around 115 basis points compared with its level at the end of June.
  - Bid-ask spreads in fixed income rose sharply.

### BCB (Banco Central do Brasil) intervention and rationale for FX intervention
- The BCB intervened in the spot market in December 2024 to smooth FX market functioning and prevent contagion to other asset classes (including fixed income).
- FX intervention rationale:
  - Brazil’s FX market is generally liquid and deep (one of the highest daily FX turnovers among Emerging Markets per BIS Triennial Survey) with generally narrow and stable spot BRL/USD bid-ask spreads.
  - Transactions are dominated by listed derivatives rather than the spot market; the spot market can become shallow temporarily during large shocks (as in December 2024).
  - In such episodes FX intervention can be appropriate to address market frictions and potential negative spillovers across other assets.

### Exchange rate flexibility and policy guidance
- Allowing Brazil’s currency to move in response to shifts in fundamentals is assessed as appropriate.
- FX intervention is considered appropriate to address market dysfunction and potential negative spillovers, but should not substitute for warranted macroeconomic adjustment when increasing spreads are driven by domestic fiscal policy uncertainty.

### Exchange rate pass-through to inflation (Annex III)
- Method: Local projections following Jordà (2005), estimated using monthly data for January 2005–April 2025.
- Key pass-through estimates (responses to a 10 percent NEER depreciation):
  - IPCA level: about 0.9 percent after twelve months and about 1.2 percent after 24 months.
  - Converted to twelve-month inflation rates: pass-through peaks after 15 months at 1 percentage point for headline IPCA inflation.
  - INPC (consumer basket for families with income between 1 and 5 minimum wages): peak response about 1.8 percent after a 10 percent depreciation.
  - Food prices: 2.5 percent after twelve months.
  - Energy prices: 4.0 percent after twelve months.
  - Transportation fuel: pass-through much stronger after 2016 (reflecting the 2016 shift from state-controlled pricing by Petrobras to a price parity system).
- Dynamic characteristics:
  - Core inflation and services inflation respond more slowly, with responses peaking at about 18 months and 24 months, respectively.
  - Pass-through is stronger for lower-income households due to larger weights of energy and food.
- Robustness and state dependence:
  - Results robust to excluding outliers and to dropping the first five or last five years of the sample.
  - Controlling for monthly growth of the IBC-Br index increases the point estimate.
  - Pass-through is stronger when initial inflation or inflation uncertainty is above the sample median; state-dependent estimates follow the approach of Carrière-Swallow et al (2023).

### External sector assessment: key metrics and trends (Annex IV)
- Overall assessment: On a preliminary basis, the external position in 2024 was broadly in line with the level implied by medium-term fundamentals and desirable policies.
- Current Account (CA):
  - CA deficit in 2024: 2.8 percent of GDP.
  - CA deficit expected to converge to 1.9 percent of GDP over the medium term as oil exports increase and net public savings improve.
  - Cyclically adjusted CA balance in 2024: –2.9 percent of GDP.
  - EBA norm: –1.9 percent of GDP.
  - IMF staff CA gap estimate: range –1.5 to –0.5 percent of GDP, midpoint –1.0 percent.
  - EBA-identified policy gaps estimated at –1.5 percent of GDP; staff gap reported as –1.0 percent of GDP.
- Net International Investment Position (NIIP) and external liabilities:
  - NIIP in 2024: –34.6 percent of GDP (up from –50.3 percent of GDP in 2023 and an average of –38 percent of GDP during 2018–22).
  - 2024 composition: gross foreign assets 47.2 percent of GDP; reserve assets 15.2 percent of GDP; gross foreign liabilities 81.8 percent of GDP; debt liabilities 33.1 percent of GDP.
  - External debt at end-2024: 33.1 percent of GDP and 212 percent of exports (down from about 33.4 percent of GDP and 213 percent of exports in 2023).
  - Projection: NIIP projected to stabilize around –45 percent of GDP over the medium term.
- Capital flows:
  - Net FDI flows averaged 2.8 percent of GDP during 2015–22 and were 2.2 percent of GDP in 2024.
  - Portfolio investment registered net inflows of 0.1 percent of GDP in 2024.
- Reserves and FX intervention:
  - International reserves declined by $ 25 billion to $330 billion at the end of 2024.
  - Reserve adequacy metric: 126 percent at the end of 2024.
  - Assessment: Flexible exchange rate remains an important shock absorber; reserves are adequate; FX interventions were two-sided in recent years and can be used to address episodes of higher risk premia when FX liquidity becomes shallow.

### Selected risks and policy responses (Annex V highlights)
- Fiscal risks:
  - Risk: Slower-than-envisaged fiscal consolidation. Likelihood: High. Impact: Medium.
  - Policy response: Accelerate efforts to strengthen fiscal position, enhance fiscal framework, broaden tax base, tackle spending rigidities, protect vulnerable groups; monetary policy to remain guided by incoming data and inflation expectations.
- Natural disasters:
  - Likelihood: Medium. Impact: Medium.
  - Policy response: Targeted support, reconstruction funds, diversify energy sources, strengthen grids/storage, invest in safer infrastructure, strengthen early warning systems.
- Trade and investment shocks / geoeconomic fragmentation:
  - Likelihood: High for trade policy shocks and deepening geoeconomic fragmentation. Impact: Medium.
  - Policy response: Data-dependent monetary policy, targeted fiscal support with pre-defined return to fiscal path, enhanced fiscal framework, accelerate structural reforms, upgrade skills and education.
- Commodity price volatility:
  - Likelihood: Medium. Impact: Low.
  - Policy response: Allow higher oil prices to pass through with targeted support for the poor; monetary policy to remain data-dependent.
- Financial conditions and systemic instability:
  - Likelihood: Medium. Impact: Medium.
  - Policy response: Continue reforms (including resolution legislation), monitor financial sector resilience; authorities’ stress tests suggest banking system resilience.
- Cyberthreats:
  - Likelihood: High. Impact: High.
  - Policy response: Monitor risks, perform regular cybersecurity tests, strengthen cybersecurity frameworks and laws.
- Upside scenarios:
  - Faster-than-expected implementation of structural reforms (including the Ecological Transformation Plan) could raise medium-term growth (Likelihood: Medium; Impact: High). Complementary policies in human capital, vocational training, and social protection suggested.
  - Global growth acceleration (Likelihood: Low; Impact: Medium). Policy response: Data-dependent monetary policy and fiscal policy acting in tandem to stabilize aggregate demand and strengthen fiscal credibility.

*Source: INTERNATIONAL MONETARY FUND.*

### Annex VI. Monetary Policy Reaction Function Estimates

### Annex VI. Monetary Policy Reaction Function Estimates

### Policy reaction function and data
- Estimated policy reaction function:
  it = α + βInflation gapt + γOutput gapt + θDt + ηit-1
  - it is the nominal policy rate in month t.
  - Inflation gapt is the gap between different inflation indicators considered and the inflation target.
  - Output gapt is the output gap estimate of the BCB.
  - Dt is a dummy variable that captures the peak of the COVID-19 crisis (March 2020–February 2021).
  - it-1 is the lagged interest rate to capture smoothing.
- Baseline sample: monthly data from June 2016 to April 2025.
- Four inflation measures considered: headline IPCA inflation; core inflation (BCB’s average of five underlying measures); expectations of inflation in twelve months; expectations of inflation in eighteen months (Focus survey).

### Key estimation findings
- General findings:
  - The policy rate has responded strongly to current inflation and even more strongly to expectations of future inflation.
  - The long-run response of the policy rate to the inflation gap—derived as β/(1- η)—is well above one in all specifications, satisfying the Taylor Principle.
  - The policy response is significantly stronger for expectations of future inflation than for measures of current inflation, consistent with a forward-looking inflation-targeting approach.
  - The response to the output gap is positive and statistically significant in the specification with current headline inflation, but is insignificant or imprecisely estimated in specifications using inflation expectations—suggesting output primarily helps forecast future inflation.
  - Results are robust to including controls (US policy rate, exchange rate, oil prices) and to IV estimation using four lags of the inflation gap; IV estimates make the coefficients for twelve- and eighteen-month-ahead inflation expectations somewhat stronger.
  - The strong response to eighteen-month-ahead inflation expectations aligns with the six-quarter-ahead “current relevant monetary policy horizon” cited in BCB publications.

- Dynamic-simulation finding:
  - Simulations based on the eighteen-month-ahead specification indicate that the increase in the policy rate since January 2021 is closely explained by the rise in expected inflation, confirming that BCB decisions since 2021 have proactively responded to the inflation outlook.

### Estimated coefficients (Table 1)
- Variables: coefficients reported with Newey-West standard errors in parentheses. Significance: *** p<0.01, ** p<0.05, * p<0.1.

- Headline specification:
  - Inflation gap: 0.11*** (0.01)
  - Output gap: 0.08*** (0.03)
  - Policy rate (t-1): 0.95*** (0.01)
  - Pandemic dummy: -0.06 (0.12)
  - Constant: 0.42*** (0.09)
  - Observations: 107
  - Adjusted R-squared: 0.992

- Core specification:
  - Inflation gap: 0.15*** (0.03)
  - Output gap: 0.08* (0.05)
  - Policy rate (t-1): 0.91*** (0.02)
  - Pandemic dummy: -0.20 (0.17)
  - Constant: 0.84*** (0.15)
  - Observations: 107
  - Adjusted R-squared: 0.991

- 12-month-ahead expectations specification:
  - Inflation gap: 0.39*** (0.05)
  - Output gap: -0.01 (0.03)
  - Policy rate (t-1): 0.92*** (0.01)
  - Pandemic dummy: -0.39*** (0.12)
  - Constant: 0.54*** (0.12)
  - Observations: 107
  - Adjusted R-squared: 0.992

- 18-month-ahead expectations specification:
  - Inflation gap: 0.69*** (0.09)
  - Output gap: -0.06* (0.04)
  - Policy rate (t-1): 0.90*** (0.01)
  - Pandemic dummy: -0.51*** (0.13)
  - Constant: 0.56*** (0.13)
  - Observations: 107
  - Adjusted R-squared: 0.992

### Additional analytical notes
- Sample choice rationale: June 2016 marks the start of BCB Governor Goldfajn’s term; earlier periods show structural breaks in monetary policy response.
- Comparative historical finding: Estimations for January 2005–May 2016 produce lower (but still significant) response coefficients—about half as large for twelve- and eighteen-month-ahead expectations—consistent with prior research that policy responsiveness was more modest before mid-2016.

*Source: Annex VI. Monetary Policy Reaction Function Estimates, IMF staff.*

### 5. Debt consolidation across sectors:

### 5. Debt consolidation across sectors:

### Public debt coverage and recording
- Gross debt covers the General Government (GG) following the GFSM 2014 manual.
- GG gross debt includes all Treasury securities on the BCB balance sheet.
- The authorities’ definition of GG gross debt includes the stock of Treasury securities used for monetary policy purposes by the BCB (those pledged as security in reverse repo operations) but excludes the rest of the government securities held by the BCB.
- Valuation and recording notes included in the source: Nominal value, Face value, Market value definitions; use of stock of arrears as proxy for accounts payable; IPSGSs (Insurance, Pension, and Standardized Guarantee Schemes) referenced for government employee pension liabilities; accrual vs cash basis distinctions.

### Debt composition and refinancing risks
- Commentary: Debt composition is favorable with small amounts of FX and foreign law debt, limited reliance on foreigners for local currency debt, and a large stock securities held by the BCB that pose neglible refinancing risks.
- Debt projections are highly sensitive to changes in interest rates given the high share of short-term and variable coupon debt.
- Liquid assets: large availability of liquid assets (14 percent of GDP in cash buffers) could help lower the terminal level of debt in the long run.
- Central bank holdings: substantial Central Bank holdings of federal securities that pose negligible refinancing risks (these securities must be rolled over by law).

### Baseline scenario (selected series, Percent of GDP unless indicated otherwise)
- Public debt:
  - 2024: 87.39
  - 2025: 91.69
  - 2026: 95.59
  - 2027: 97.69
  - 2028: 98.69
  - 2029: 99.09
  - 2030: 98.99
  - 2031: 98.99
  - 2032: 98.99
  - 2033: 98.89
  - 2034: 98.6
- Change in public debt:
  - 2025: 3.3
  - 2026: 4.3
  - 2027: 3.9
  - 2028: 2.1
  - 2029: 1.0
  - 2030: 0.4
  - 2031: -0.1
  - 2032: -0.1
  - 2033: 0.0
  - 2034: -0.1
- Contribution of identified flows:
  - 2025: 0.7
  - 2026: 4.5
  - 2027: 4.0
  - 2028: 2.0
  - 2029: 0.9
  - 2030: 0.4
  - 2031: -0.1
  - 2032: -0.1
  - 2033: 0.0
  - 2034: -0.1
- Primary deficit:
  - 2024: 0.4
  - 2025: 0.6
  - 2026: 0.4
  - 2027: -0.3
  - 2028: -0.8
  - 2029: -1.2
  - 2030: -1.4
  - 2031: -1.5
  - 2032: -1.6
  - 2033: -1.7
  - 2034: -1.7
- Automatic debt dynamics:
  - 2024: 2.6
  - 2025: 5.0
  - 2026: 4.3
  - 2027: 3.1
  - 2028: 2.4
  - 2029: 2.2
  - 2030: 2.0
  - 2031: 1.9
  - 2032: 2.1
  - 2033: 2.0
  - 2034: 1.9
- Real interest rate and relative inflation:
  - 2024: 5.1
  - 2025: 6.9
  - 2026: 6.1
  - 2027: 5.2
  - 2028: 4.6
  - 2029: 4.5
  - 2030: 4.4
  - 2031: 4.3
  - 2032: 4.5
  - 2033: 4.4
  - 2034: 4.4
- Real growth rate:
  - 2024: -2.8
  - 2025: -2.0
  - 2026: -1.9
  - 2027: -2.1
  - 2028: -2.2
  - 2029: -2.3
  - 2030: -2.4
  - 2031: n.a.
  - 2032: -2.4
  - 2033: -2.4
  - 2034: -2.4
- Other identified flows:
  - 2024: -2.3
  - 2025: -1.1
  - 2026: -0.7
  - 2027: -0.8
  - 2028: -0.7
  - 2029: -0.6
  - 2030: -0.7
  - 2031: -0.5
  - 2032: -0.4
  - 2033: -0.4
  - 2034: -0.4
- (minus) Interest Revenues:
  - 2024: -2.3
  - 2025: -2.3
  - 2026: -2.1
  - 2027: -1.9
  - 2028: -1.7
  - 2029: -1.7
  - 2030: -1.7
  - 2031: -1.6
  - 2032: -1.6
  - 2033: -1.5
  - 2034: -1.5
- Other transactions:
  - 2024: 0.0
  - 2025: 1.1
  - 2026: 1.4
  - 2027: 1.1
  - 2028: 1.1
  - 2029: 1.1
  - 2030: 1.0
  - 2031: 1.1
  - 2032: 1.1
  - 2033: 1.1
  - 2034: 1.1
- Contribution of residual:
  - 2024: 2.6
  - 2025: -0.2
  - 2026: -0.1
  - 2027–2034: 0.0 (each year)
- Gross financing needs:
  - 2024: 16.4
  - 2025: 14.2
  - 2026: 15.3
  - 2027: 15.5
  - 2028: 16.5
  - 2029: 17.7
  - 2030: 19.2
  - 2031: 17.1
  - 2032: 12.5
  - 2033: 20.7
  - 2034: 16.7
- Debt service (of which):
  - 2024: 18.3
  - 2025: 15.9
  - 2026: 17.0
  - 2027: 17.7
  - 2028: 19.1
  - 2029: 20.6
  - 2030: 22.3
  - 2031: 20.2
  - 2032: 15.7
  - 2033: 23.9
  - 2034: 19.9
- Local currency component:
  - 2024: 18.1
  - 2025: 12.3
  - 2026: 12.6
  - 2027: 14.6
  - 2028: 15.3
  - 2029: 17.9
  - 2030: 16.7
  - 2031: 15.2
  - 2032: 10.7
  - 2033: 18.3
  - 2034: 14.8
- Foreign currency component:
  - 2024: 0.2
  - 2025: 0.8
  - 2026: 0.5
  - 2027: 0.5
  - 2028: 0.5
  - 2029: 0.4
  - 2030: 0.5
  - 2031: 0.3
  - 2032: 0.3
  - 2033: 0.3
  - 2034: 0.3

Memo:
- Real GDP growth (percent): 3.4 (2024), 2.3 (2025), 2.1 (2026), 2.2 (2027), 2.3 (2028), 2.4 (2029), 2.5 (2030), 2.5 (2031), 2.5 (2032), 2.5 (2033), 2.5 (2034)
- Inflation (GDP deflator; percent): 3.8 (2024), 3.8 (2025), 3.6 (2026), 3.5 (2027), 3.5 (2028), 3.5 (2029), 3.5 (2030), 3.5 (2031), 3.5 (2032), 3.5 (2033), 3.5 (2034)
- Nominal GDP growth (percent): 7.3 (2024), 6.2 (2025), 5.8 (2026), 5.8 (2027), 5.9 (2028), 6.0 (2029), 6.1 (2030), 6.1 (2031), 6.1 (2032), 6.0 (2033), 6.1 (2034)
- Effective interest rate (percent): 10.3 (2024), 12.2 (2025), 10.6 (2026), 9.2 (2027), 8.5 (2028), 8.3 (2029), 8.2 (2030), 8.1 (2031), 8.2 (2032), 8.1 (2033), 8.2 (2034)

Staff commentary:
- Public debt will rise over the medium term largely due to unfavorable r-g dynamics.
- Under staff's baseline, a fiscal consolidation of around 2 percent of GDP is expected to stabilize debt at around 99 percent of GDP in 2030.

### Medium-term risk assessment (selected indicators and signals)
- Debt fanchart module:
  - Fanchart width56.90.8 (percent of GDP)
  - Probability of debt non-stabilization (percent)63.40.5
  - Terminal debt-to-GDP x69.91.5
  - Debt fanchart index (DFI)2.9
  - Risk signal: 3/High
- Gross financing needs (GFN) module:
  - Average baseline GFN16.45.6 (percent of GDP)
  - Initial Banks' claims on the gen. govt (pct bank assets)23.37.6
  - Chg. In banks' claims in stress (pct banks' assets)0.90.3
  - GFN financeability index (GFI)13.5
  - Risk signal: 4/Moderate
- Medium-term index (combined):
  - Debt fanchart index 2.9
  - GFN financeability index 13.5
  - Final assessment: Prob. of missed crisis, 2025-2030, if stress not predicted: 54.5 pct.
  - Final assessment: Prob. of false alarms, 2025-2030, if stress predicted: 6.8 pct.
- Commentary: Of the two medium-term tools, the Debt Fanchart Module is pointing to high level of risk, while the GFN financeability module suggests lower, but still moderate, level of risk.

### Triggered modules and long-term rollover risk
- Triggered tests indicate rollover risk is moderate over the long-term.
- In the event of abnormally large amortization, staff factored in the country's capabilities to engage in proactive debt management.
- Refinancing risks are mitigated by:
  - Overwhelmingly domestic investor base.
  - Large liquid assets held by the treasury (14 percent of GDP in cash buffers).
  - Substantial Central Bank holdings of federal securities that pose negligible refinancing risks.
- Historical scenario simulation caveat: historical scenario may reflect elevated deficit episodes (including COVID-19) and may not be representative.

### Demographics and long-run fiscal pressures (pensions and health)
- Pensions: permanent adjustment needed in the pension system to keep pension assets positive for:
  - 30 years: 3.1%
  - 50 years: 6.5%
  - Until 2100: 9.5%
- Commentary: Over the longer run, Brazil should continue with reforms to tackle risks arising from population aging, which will widen the deficits of the social security regimes and pressure healthcare spending.

### Key policy-relevant conclusions and implications
- Fiscal consolidation:
  - Under the baseline, a fiscal consolidation of around 2 percent of GDP is expected to stabilize public debt near 99 percent of GDP by 2030.
- Interest-rate sensitivity:
  - High share of short-term and variable coupon debt makes debt projections highly sensitive to interest-rate changes; monitoring and managing interest-rate exposures is critical.
- Liquidity and rollover management:
  - Large cash buffers (14 percent of GDP) and central bank-held securities that have negligible refinancing risk are important mitigants to financing stress.
  - Proactive debt management capacity is a key buffer against scenarios with large amortization peaks.
- Structural reforms:
  - Reforms addressing pension and healthcare pressures from population aging are necessary to contain long-run public financing needs.

*Source: IMF.*

### 6.      The estimation results (Table 1) indicate that factors associated with lower LFP among

### 1braea2025001-source-pdf - 6.      The estimation results (Table 1) indicate that factors associated with lower LFP among

### Estimation results: household factors and labor force participation (LFP)
- Female LFP is negatively associated with:
  - having young children in the household (negative coefficient, Table 1, column 1)
  - having a partner in the household (negative coefficient, Table 1, column 1)
- Female LFP is positively associated with:
  - presence of older children (aged 7-18 years) in the household (positive coefficient)
- Male LFP associations:
  - presence of young children and (to a lesser extent) older children associated with greater LFP (Table 1, column 3)
  - presence of a partner associated with greater LFP (Table 1, column 3)
- Policy implication highlighted: the negative association between young children and female LFP suggests importance of improving access to quality and affordable childcare.
- Sample inclusion note: only individuals of age 14-59 were included in the regressions in this exercise.

### Interaction with Bolsa Família transfers
- For women in Bolsa Família-recipient households (Table 1, column 2):
  - the negative association between LFP and having young children or a partner is stronger.
- For men in Bolsa Família-recipient households:
  - receipt of Bolsa Família transfers moderates the positive association between LFP and having young children (less positive)
  - the association between having a partner and male LFP is estimated to be more positive, mirroring the negative effect for women
- Presence of older children: the positive association between LFP and having older children is stronger for both men and women in Bolsa Família-recipient households.
- Average marginal effects (Table 1): Bolsa Família benefits are associated on average—holding all other variables at their observed values—with lower LFP for women and a neutral impact on LFP for men.

### Change after pandemic-era expansion of social transfers (difference-in-difference)
- Method: compare difference in LFP between Bolsa Família beneficiaries and non-beneficiaries in 2023 with same difference before the pandemic (using data for 2018-2019).
- Regression specification used includes an interaction term 푦2023 × 퐵퐹 and controls; coefficient of interest is 훽.
- Findings (Table 2): negative coefficient estimates for the interaction between year 2023 and receipt of Bolsa Família benefits.
  - Interpretation: the average (marginal) relationship between Bolsa Família and LFP was more negative for women (and, for men, less positive) in 2023 than during the 2018-2019 period.
- Caveat: an overall assessment of Bolsa Família in terms of economic wellbeing needs to include medium-term effects on human capital and other outcomes beyond short-period LFP response.

### Wage disparities and implications for female LFP
- Data and period: PNADC quarterly dataset, covering the 2012Q1 to 2024Q2 period.
- Findings controlling for education, industry, job position, age, race:
  - relative to male workers, the hourly wage of female workers is about R$3 per lower (Table 3, column 3)
  - the monthly wage for female workers is lower by almost R$700 (about 22 percent lower) (Table 3, column 2)
- Pro-cyclicality of the gender wage gap:
  - as the aggregate unemployment rate falls by one percentage point, wages rise by 0.6 percent more for men than for women, indicating the gender wage gap widens during an economic boom.
- Policy implication: Effective implementation of the 2023 Pay Equity Law could help promote female LFP.

### Annex IX: Fiscal and social policy options to raise female LFP (TaxFit results and recommendations)
- Key approaches identified:
  - make the tax system more progressive and strengthen the social safety net through enhanced parental leave and childcare services
  - smooth cliffs in benefits payments when taking up work (tapering) to reduce participation tax rate spikes
- TaxFit model description:
  - microsimulation computing taxes and benefits (income taxes, social security contributions, social assistance, care, family, in-work-benefits)
  - eligibility determined by gross earnings and family characteristics
  - when paired with microdata, estimates fiscal costs of policy reforms and can incorporate behavioral responses using elasticities of labor supply
- Progressivity and female LFP:
  - a more progressive tax system that reduces the net marginal tax rate at the lower end would incentivize women to take up work, work more hours, and shift to formal employment.
  - policy options include increasing PIT exemption threshold while raising tax on high-income individuals, reducing standard payroll tax while compensating with a more progressive personal income schedule, eliminating regressive PIT deductions and exemptions, and lowering the threshold for the SIMPLES regime.

### Parental leave, childcare, and gendered employment effects
- Brazil’s current situation:
  - private sector paternity leave is 5-day; public sector is 20-day.
  - Brazil’s female LFP has been found to drop by around 37 percent upon giving birth relative to pre-birth employment level (Kleven and others 2024).
- Fiscal cost estimate (TaxFit-based staff estimates):
  - aligning private sector 5-day paternity leave with 20-day public one could cost a moderate R$2 billion (or less in the context of Empresa Cidadã), assuming government finances the additional 15 days.
- Childcare: increasing awareness, availability, accessibility, and quality of daycare services facilitates caregivers’ return to work, disproportionately affecting women.

### Bolsa Família exit tapering simulations and expected impacts
- Current Bolsa Família design:
  - benefit is maintained, halved or terminated as family income increases; households can continue receiving half of benefits for up to one year when per-person income rises above the poverty line, provided it is below half of the minimum wage.
  - duration of these benefits was reduced to one year from two years in May 2025; the income eligibility threshold was previously set to half of the minimum wage.
- Problem: halving or terminating benefits leads to sharp PTR spikes (participation tax rate), which can discourage work effort.
  - three PTR spikes in baseline scenario correspond to: (1) initial halving of Bolsa Família once household total earnings pass 67 percent of the minimum wage, (2) discontinuation of Salário Família once earnings pass 133 percent of the minimum wage, (3) complete discontinuation of Bolsa Família once household earnings pass 50 percent of the minimum wage per-person (at 200 percent of the minimum wage).
- Reform simulated: gradually taper benefits by R$0.5 for each R$1 of earnings above allowable earnings under current regulations.
  - Simulation methodology: predict potential formal earnings for Bolsa Família recipients using a two-stage Heckman selection model; compute PTRs under baseline and reform; apply earned income elasticities (ranging from 0 to 0.8, varying by gender and earnings) to estimate LFP change; assume earnings are reported to CadÚnico as required by law.
- Simulation results (TaxFit): the indicative tapering reform could:
  - boost LFP by 0.5 percentage points, predominantly amongst women
  - generate R$3 billion in additional revenue through stronger work incentives

### Brazil emissions and context included in same document
- National emissions (2022):
  - total of 2 billion metric tons (Gt) of CO2 equivalent (CO2e) in 2022
  - sectoral drivers in 2022: 0.4 Gt from Energy, 0.6 Gt from Agriculture, 0.8 Gt from Land Use, Land Use Change, and Forestry (LULUCF)
  - approximately half of energy-related emissions originate in the transportation sector
  - renewable sources comprised 87.1 percent of the national electricity supply in 2022
  - biofuels accounted for 22 percent of the transport energy matrix (IEA, 2023); Brazil was the world’s second-largest biofuel producer as of 2022
- Historical changes:
  - between 2004 and 2012, LULUCF emissions declined by 2.4 Gt CO2e; annual deforestation rates fell by approximately 84 percent in the Legal Amazon, 69 percent in the Cerrado, and 75 percent in the Atlantic Forest
  - between 2012 and 2022, a partial rebound added 0.6 Gt CO2e to emissions from LULUCF
  - between 2012 and 2022: agricultural emissions increased by 0.08 Gt CO2e, energy-related emissions declined by 0.05 Gt CO2e

*Source: PNADC; IMF staff estimates; Annex IX and Annex X of the provided IMF chapter text.*

### 5.      Brazil increased its emissions-reduction pledges with the 2023 and 2024 NDC updates.

### 5.      Brazil increased its emissions-reduction pledges with the 2023 and 2024 NDC updates.

### NDC updates and headline targets
- 2023 NDC update reinstated the original absolute emissions target of 1.2 Gt CO2e by 2030 and pledged to eliminate illegal deforestation by 2030.
- 2024 NDC update introduced a new target range for 2035, between 0.85 and 1.05 Gt CO2e.
- These targets correspond to a 53 percent reduction in emissions below 2005 levels by 2030 and a reduction of 59–6  percent by 20 5. Brazil’s N C includes the goal of net-zero GHG emissions by 2050.

### National planning and institutional instruments
- In 2023, authorities committed to developing a new, comprehensive national plan (Plano Clima) to guide NDC implementation.
  - Plano Clima will incorporate a National Adaptation Strategy and a National Mitigation Strategy supported by detailed thematic and sectoral plans.
  - These plans are expected to be finalized by COP30 in November 2025.
- Ministry of Finance’s Ecological Transformation Plan aims to:
  - Foster productivity growth by enhancing Brazil’s carbon market.
  - Foster diffusion of decarbonization technologies across sectors.
  - Promote resilience-building projects and catalyze necessary financing.

### Key policy and financing actions implemented
- Emission Trading System (ETS)
  - Approved by Congress and enacted into law in December 2024 (Law No. 15,042 of 12/11/2024).
  - Expected to become operational by 2030 and cover up to 15 percent of the nation’s emissions.
  - Will cover large GHG emitters in all sectors apart from agriculture.
- Sovereign Sustainable Bond issuances
  - Second issuance raised $2 billion in June 2024.
  - Bonds: 7-year maturity and an annual yield of 6.375 percent.
  - Proceeds directed toward projects and social initiatives via the Climate Fund.
  - First issuance took place in November 2023.
- Eco Invest Brasil program (launched February 2024)
  - Aims to address barriers: high financing costs, exchange rate volatility, limited access to long-term FX hedging.
  - Includes blended finance provisions, dedicated credit lines for firms exposed to currency mismatch risk, and measures to deepen long-term FX derivatives market with IADB assistance.
- Sustainable Taxonomy
  - Led by the Ministry of Finance with participation of public entities including the BCB.
  - Expected to be operational by mid-2025 to define qualification criteria for climate-related financing instruments.

### Energy and fuel policy developments
- Fuels of the Future bill (Law No.14,993 of 10/08/2024)
  - Sets biofuel blending targets: biodiesel in diesel to 20 percent and ethanol blend in gasoline to 35 percent by 2030, subject to technical feasibility.
  - Mandates a 10 percent reduction in emissions from domestic aviation by 2037.
- Planned renewable electricity investments (ANEEL targets)
  - Additions aimed: 13.1 GW of wind, 8.5 GW of solar, and 9.2 GW of hydropower.
  - These investments could expand installed capacity by nearly 15 percent relative to current levels.

### Progress on LULUCF and deforestation (2023–2024)
- Policy actions
  - Updated Action Plan for Deforestation Prevention and Control in the Legal Amazon (PPCDAm) in early 2023 to achieve zero illegal deforestation via stronger enforcement of the Forest Code.
- Observed changes in deforestation
  - Deforestation rates declined by 54 percent in the Amazon biome and by 24 percent in the Cerrado biome over 2023–2024.
  - 43 percent decline referenced in figure caption (context: Legal Amazon and LULUCF).
- Staff estimates of LULUCF emissions reductions
  - LULUCF emissions fell by a cumulative 0.43 Gt CO2e in 2023-2024.
  - Estimated decline of 0.2 Gt CO2e in 2023 and 0.23 Gt CO2e in 2024.
  - Estimates based on regression model using historical LULUCF emissions and deforestation increments by biome, leveraging INPE monitoring data.
  - Correlation between deforestation rate and LULUCF emissions reported as Corr=0.91.

### Quantitative assessment to 2030 (CPAT analysis)
- Model and calibration
  - Uses the Climate Policy Assessment Tool (CPAT), developed jointly by the IMF and the World Bank.
  - CPAT provides estimates by main emitting sectors: power, industry, transport, buildings, agriculture, and waste, and evaluates pricing and non-pricing mitigation policies.
  - CPAT scenario assumptions incorporate existing mitigation policies in Brazil, including:
    - National Energy Expansion Plan 2034 investments: 13.1 GW wind, 8.5 GW solar, 9.2 GW hydro, 19.3 GW natural gas.
    - Preliminary impact of the upcoming ETS.
    - Biofuel blending mandates: bioethanol 27 percent and biodiesel 15 percent from 2026 onwards.
    - Forestry assumptions: zero illegal deforestation and gradual restoration of 12 million hectares of native vegetation by 2030.
    - Extractive industries: planned 16 percent increase in oil and gas production between 2021 and 2029 per Petrobras business plan assumed for 2025-2029.
- Main findings
  - Reduction in LULUCF emissions under current policies plays a central role in achieving Brazil’s emission-reduction targets.
  - Roe et al. (2021) suggests Brazil can decrease forestry emissions by approximately 1 Gt CO2e annually on average up to 2050 using options costing less than $100 per ton reduced.
  - CPAT simulations indicate current policies would allow Brazil to close its mitigation gap with respect to the 2030 NDC target.
    - Under current policies, Brazil can reduce total emissions by 0.45 Gt CO2e, primarily through minimizing deforestation and promoting reforestation.
    - Energy-related emissions under these policies decline below the BAU scenario; the reduction compared with BAU is larger closer to 2030 when the ETS becomes operational.
    - Achieving zero illegal deforestation would lead to net negative emissions from LULUCF as planned reforestation surpasses legal deforestation.
- Scenario uncertainty and sensitivity (methodological notes)
  - For energy, industrial processes, and product usage: income and price elasticities are increased by one standard deviation compared to the baseline; GDP growth is raised by 50 percent, and international prices are reduced by 50 percent relative to the baseline in the high-emissions scenario; reversed for the lower end.
  - Confidence intervals included around regression coefficients for reductions due to autonomous technological advancements and abatement cost curve parameters for LULUCF.

### Risks to the baseline projection
- Identified risks that could raise emissions above the baseline:
  - Intensification of droughts reducing hydropower capacity, increasing reliance on fossil fuels.
  - Higher fugitive emissions and expanding oil extraction could increase emissions from the extractive sector.
  - An uptick in legal deforestation as enforcement displaces informal land users or concessions are granted.
  - Higher global beef and soybean prices could increase deforestation incentives for small, informal farmers.

### Complementary measures and policy recommendations to safeguard progress
- Agriculture sector
  - Scale up climate-smart practices.
  - Introduce feebate schemes linking financial incentives to emissions intensity to promote sustainable production while limiting fiscal costs.
- Energy sector
  - Accelerate investments in grid infrastructure, energy storage, and decentralized generation to accommodate planned renewables expansion and reduce fossil fuel reliance.
- Land use and fiscal policy
  - Reform land tenure, rural tax policies, and subsidies that currently incentivize deforestation.
- Carbon market and finance
  - Operationalize ETS by 2030 and use Sustainable Taxonomy to strengthen climate-related financing.
  - Continue blended finance and FX risk mitigation efforts (Eco Invest Brasil) to attract foreign capital into private sustainable projects.

### Key numeric figures and targets (selected)
- NDC targets: 1.2 Gt CO2e by 2030; 0.85–1.05 Gt CO2e by 2035.
- Emissions reductions relative to 2005: 53 percent by 2030; 59–6  percent by 20 5 (text as provided).
- Net-zero GHG emissions goal by 2050.
- ETS: enacted Law No. 15,042 of 12/11/2024; operational by 2030; cover up to 15 percent of emissions.
- Sovereign Sustainable Bond: $2 billion raised in June 2024; 7-year maturity; annual yield 6.375 percent.
- Biofuel mandates (Law No.14,993 of 10/08/2024): biodiesel 20 percent in diesel by 2030; ethanol 35 percent in gasoline by 2030; aviation emissions −10 percent by 2037.
- Planned electricity additions: 13.1 GW wind; 8.5 GW solar; 9.2 GW hydropower; 19.3 GW natural gas (National Energy Expansion Plan 2034).
- LULUCF emissions reductions: cumulative 0.43 Gt CO2e in 2023–2024 (0.2 Gt CO2e in 2023; 0.23 Gt CO2e in 2024).
- Reforestation target: gradual restoration of 12 million hectares of native vegetation by 2030.
- Extractive industry plan: planned 16 percent increase in oil and gas production between 2021 and 2029 assumed for 2025-2029.
- CPAT estimated total emissions reduction under current policies: 0.45 Gt CO2e (relative to BAU).

*Source: IMF staff assessment and CPAT analysis as presented in the provided chapter excerpt.*

### Annex XII. Past IMF Recommendations and Implementation

### Annex XII. Past IMF Recommendations and Implementation

### Fiscal Policy
- Past IMF recommendation: Implement a sustained and more ambitious fiscal effort that puts public debt on a firmly downward path and opens space for priority investments.
- Implementation status:
  - The 2026 draft Budget Guidelines Law reaffirmed the federal primary fiscal surplus target of 0.25 percent of GDP for 2026 and the indicative target path to a surplus of 1.25 percent of GDP by 2029.
  - Pursue spending reforms that tackle budget rigidities remains a priority.
  - The spending package adopted in December 2024 will yield annual savings rising to 0.4 percent of GDP by 2030.
  - The new 2.5 percent cap on the real growth rate of the minimum wage is a step in the right direction.
  - Scrutiny of eligibility to social programs will generate savings in the near-term.
  - Advance planned revenue-neutral indirect tax reform that streamlines tax regime and reduces the cost of tax compliance.
  - Enaction of Complementary Law No. 214/2025, which establishes and regulates the dual VAT system. Passage of the remaining bills specifying the governance structure for joint revenue administration, excise tax regulation, and administrative process is ongoing.

### Monetary and Exchange Rate Policies
- Past IMF recommendation: Ensure flexibility on the pace and length of the easing cycle given continued labor market resilience and inflation expectations above target-consistent levels.
- Implementation status:
  - The BCB’s pivot to a tightening cycle in September 2024 was appropriate and consistent with bringing inflation and inflation expectations back to the 3 percent target.
- Note: 1/ See Annex XI for an update on implementation of the 2018 FSAP recommendations.

### Financial Sector Policy
- Past IMF recommendation: Address household debt vulnerabilities and protect consumers.
- Implementation status:
  - The government’s Desenrola program has aimed at restructuring existing household debt owed to different creditors through a digital application for indebted households.
  - The authorities introduced a new private payroll loan program aiming to reduce credit costs.

### Structural and Climate Policies
- Past IMF recommendation: Pursue supply-side reforms to boost potential growth, including tackling spending rigidities to make room for public investment.
- Implementation status and developments:
  - Recent advances in competition in Brazil’s fintech sector, supported by enabling regulations, has reduced lending rates and improved financial intermediation efficiency, which bodes well for reducing firms’ cost of capital.
  - Mobilize financing for the Ecological Transformation Plan.
    - The second Eco Invest Brazil auction took place in April 2025, mobilizing funds to finance projects for restoring degraded lands and converting them into sustainable productive systems.
    - Authorities successfully completed the second issuance of sustainability bonds in June 2024 and intend to continue their engagement in this market moving forward.

*Annex XII. Past IMF Recommendations and Implementation*

### Annex XIII. Implementation of Key FSAP Recommendations

### Annex XIII. 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 power to issue policy recommendations on a comply-or-explain basis.
  - Time: ST
  - Authorities’ actions: The BCB, CVM, Previc and SUSEP finalized the “Financial Stability Coordination law”. The draft bill is now being discussed with the Ministry of Finance.
- Recommendation: Strengthen crisis management institutional arrangements for inter-agency cooperation and exchange of information, including contingency planning.
  - Time: MT
  - Authorities’ actions: The “Financial Stability Coordination law” draft bill proposes creation of a “Financial Stability National Committee” with authority over macroprudential policy and crisis management (including contingency plans/crisis management). The BCB’s contingency planning 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 independence of the BCB.
  - Time: ST
  - Authorities’ actions:
    - Complementary Law 179 of 2021 enacted objectives of the BCB, its autonomy and procedures to appoint and remove Board members; defines price stability as the primary objective and sets four-year terms (with one possible renewal).
    - Most Board member terms do not coincide with the presidential term; removal admissible for proven and recurring underperformance with approval by an absolute majority of the Senate.
    - Law provides some operational autonomy and delegation from CMN to BCB, and enhances policy transparency (publication of inflation and financial stability reports), but does not establish legal protection for BCB’s staff nor effective financial and administrative independence to the BCB.
    - Bank Resolution bill (submitted to the lower house) provides for protection of public agents and includes provision for legal defense by the General Counsel, to be covered by the BCB.
    - Proposal of Constitutional Amendment (PEC 65/2023) aims to establish financial and administrative independence to the BCB; bill rapporteur is senator Plínio Valerio (PSDB-AM).
    - Decree nº 9.727/2019 and Decree nº 10.829/2021 established qualification criteria for appointments to strategic positions in the Administration, including supervisory institutions.
- Recommendation: Increase resources of CVM and SUSEP.
  - Time: ST
  - Authorities’ actions:
    - SUSEP: the 2025 budget provides for a significant increase in its discretionary resources, approved by Congress, reversing the reduction observed in 2024; a public service examination launched to fill technical positions; appointments expected later in 2025.
    - CVM: in fiscal year 2024, CVM received authorization from the Ministry of Management and Innovation in Public Services (MGI) and held a public selection process for 60 new Capital Market Federal Examiners; the new employees took office in early 2025. CVM plans to hire more examiners subject to budget approval.

### Systemic Risks
- Recommendation: Use Pillar 2 capital requirements to handle bank-specific risk profiles to boost resilience and mitigate risks.
  - Time: ST
  - Authorities’ actions: Structured and by-reference add-ons are implemented in the BCB’s supervisory methodology. The Structured Add-on is fully implemented (segments from S1 to S4). The Add-on by Reference is applied to financial institutions allocated to Segments S1 and S2 and includes metrics for credit concentration risk and Interest Rate Risk of Banking Book (IRRBB). Financial institutions identified as having exposures not adequately considered in Pillar 1 have reported add-on regularly to the BCB.

### Financial Sector Oversight
- Recommendation: Upgrade the regulatory and supervisory approach to credit risk for related party exposures, large exposures, country and transfer risk and restructured loans.
  - Time: MT
  - Authorities’ actions (completed measures):
    - CMN Resolution 4,677/2018 (Basel III reform on Large Exposure Limits): establishes limits and report requirements for single client and large exposures; applied for Prudential Segments S1 and S2 since January 2019 and for Segments S3, S4 and S5 since January 2020. Report on Operational Limits—DLO (Circular Letter 3,926) includes information on large exposure limits.
    - CMN Resolution 4.693/2018 addressing credit operations between related parties: accounting items created as of January 2019 to collect information from Related Parties; credit information system includes field to inform whether contracted operation is with related parties.
    - CMN amended regulation on risk management (Resolution 4.557/2017) to include specific requirements for country and transfer risks, with treatment of indirect risks.
  - Authorities’ actions (under analysis or drafting):
    - (i) Regulation on prudential treatment of transactions with related parties.
    - (ii) Requirement of producing concentration risks data on a regular basis.
    - (iii) Structured assessment of country, transfer and indirect risk.
    - (iv) IFRS9 regulation implemented since January 2025.
- Recommendation: Strengthen enforcement function of CVM by raising sanctions and ensuring adequate resources for prosecution; strengthen cooperation allowing CVM proper oversight of ANBIMA’s SRO activities in the investment fund sector.
  - Time: ST
  - Authorities’ actions:
    - Technical Cooperation Agreement for the Use of Self-Regulation in the Brazilian Investment Fund Industry between CVM and ANBIMA was reviewed and updated on December 19, 2024.
    - On January 24, 2025, the 1st Addendum included FIDCs and FICFIDCs in the Agreement; as of January 2025, the Agreement covers over 90% of Brazil's fund industry, including more than 28,000 Investment Funds.
    - CVM Resolution No. 175, dated December 23, 2022, included Regulatory Annexes covering all existing types of investment funds in Brazil.
- Recommendation: Implement consistent group‑wide supervision of insurance groups and conglomerates (BCB, ANS and SUSEP) with joint rulemaking, implementation, on-site inspections and granular data sharing.
  - Time: MT
  - Authorities’ actions: Granular data sharing depends on legal provisions and partnerships among supervisors. The proposed “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 FSAP team’s recommendations and promptly enact it.
  - Time: ST
  - Authorities’ actions: Draft bill submitted to Congress in December 2019. Bill of Law 281 of 2019 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.
  - Time: ST
  - Authorities’ actions:
    - The BCB does not plan to adopt this recommendation. BCB does not agree that being solvent on a point-in-time basis should be the main determinant of ELA approval and prefers to retain discretionary flexibility. Recommendation of MoF indemnity for ELA in systemic circumstances will not be implemented because it may increase moral hazard and the National Treasury will have to indemnify the BCB under the current arrangement.
    - In April 2020, the BCB successfully deployed Temporary Liquidity Facilities (ELA for the COVID-19 crisis) without incurring balance sheet losses.
    - New permanent liquidity facilities introduced in November 2021: the Immediate Liquidity Facility (LLI) and the Term Liquidity Facility (LLT).
    - As of Q  202 , the   T has included CCBs (“Cédula de Crédito Bancário”) in its collateral framework, alongside corporate bonds and commercial paper as eligible asset classes. The LLT serves as both a backstop liquidity facility and an ELA mechanism. Regulation focuses on mitigating stigma, ensuring operational preparedness, and managing central bank risk effectively.
- Recommendation: Put in place mechanisms to ensure lending from the deposit insurance fund is not used to maintain weak or insolvent banks in operation; transform FGC into a fully owned public institution.
  - Time: ST; MT
  - Authorities’ actions:
    - FGC amended its by-laws to establish communication to the BCB prior to each assistance operation.
    - BCB signed a MoU with the FGC to grant access to detailed information on financial institutions that are FGC members; Administration Committee of the MoU is a permanent forum for information sharing and collaboration to facilitate FGC assessment and avoid use of lending to maintain weak or insolvent banks in operation.
    - 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.
  - Time: ST
  - Authorities’ actions:
    - Coordination attributed to the Brazilian Intelligence Unit (Coaf). Decree to establish the Strategic Committee for the National AML/CFT Risk Assessment issued in March 2020.
    - The risk assessment was completed and published in 2021.

### Financial Intermediation Efficiency
- Recommendation: Foster competition through client mobility and financial product cost transparency and comparability.
  - Time: ST
  - Authorities’ actions and measures:
    - Resolution CMN 5,058/2022 grants customers the right to have their salary deposited in their preferred institution; salaries can be transferred to deposit or payment accounts and customers can directly request salary portability.
    - Credit Registry Law amended by Complementary Law 166/2019 and regulated by Resolution CMN 4,737/2019 to adopt an opt-out model.
    - Resolution CMN 4,734/2019 and Resolution BCB 264/2022 set rules for registering and blocking credit and debit card receivables used as collateral.
    - 2022: credit portability regulations revised and consolidated under Resolution CMN 5,057/2022.
    - Resolution CMN 4,762/2019 expanded scope of credit modalities eligible for portability to include credit granted to individual microentrepreneurs and legal entities and converting revolving credit into personal credit lines with a fixed number of installments.
    - December 2023: BCB amended Resolution BCB 96/2021 with Resolution BCB 365/2023 to enhance transparency in payment accounts, including credit cards.
    - Open Finance model regulated by Joint Resolution CMN-BCB No. 1/2020 and General Data Protection Law (No. 13,709/2018) enhances client mobility and transparency of costs. Next steps considered by BCB include expansion of data scope (insurance and pension funds), Automatic Pix, credit/wage/investments portability via Open Finance, and a credit marketplace.

### Reform of Public Banks
- Recommendation: Change product offering of BNDES to focus on catalyzing private sector finance and developing the financial sector.
  - Time: ST
  - Authorities’ actions:
    - In 2024, BNDES maintained agenda to revitalize industry, promote inclusive, green, digital, innovative, and creative economy; diversify funding sources (development bond (LCD), sustainable funds), enlarge market-based instruments, promote decarbonization, foster domestic credit and capital markets, improve access to international funding, and seek partnerships with multilateral development institutions.
    - BNDES strategic plan envisages reduction of risks on infrastructure investment and support for credit cooperatives, microcredit, and better financial solutions for SMEs including through capital markets.
- Recommendation: Focus Caixa on core activities, improve governance, and invite a strategic investor.
  - Time: ST
  - Authorities’ actions:
    - CAIXA prioritizes loans to micro companies, payroll-deducted loans, and housing sector financing, strengthening its role in the “Minha Casa Minha Vida” program.
    - CAIXA is advancing corporate governance practices emphasizing integrity, transparency, accountability, equity and sustainability; gender diversity is a priority.
    - Through subsidiaries CAIXA entered strategic partnerships in insurance and card segments. Caixa Seguridade Participações S/A raised capital through an IPO in April 2021 and a follow-on in March 2025.
    - CAIXA's investment banking group strengthened via internal reallocation to expand fixed income capital markets operations and create a full investment bank product structure.
    - With dissolution of CAIXAPAR in 2021, CAIXA incorporated its equity holdings and spun off payment processing, asset management, and lottery operations into specialized subsidiaries.

### Key macro-financial and policy figures and milestones cited
- Complementary Law 179 of 2021 (BCB objectives and autonomy).
- Decree nº 9.727/2019; Decree nº 10.829/2021 (qualification criteria).
- Agreement coverage: over 90% of Brazil's fund industry; more than 28,000 Investment Funds (as of January 2025).
- 60 new Capital Market Federal Examiners hired (public selection in fiscal year 2024; new employees took office in early 2025).
- IFRS9 regulation implemented since January 2025.
- Temporary Liquidity Facilities deployed in April 2020; Immediate Liquidity Facility (LLI) and Term Liquidity Facility (LLT) introduced in November 2021.
- BCB policy rate increased to 15 percent (June 2025).
- Economic outcomes referenced: addition of 1.7 million formal sector jobs in 2024; headline inflation ended 2024 at 4.8 percent (upper limit of target range 4.5 percent referenced).
- Staff medium-term growth projection revised from 2.0 percent to 2.5 percent.
- BNDES financing target: BRL 300 billion by 2026.
- Fiscal measure: 2.5 percent cap on real growth of the minimum wage (November 2024 package).
- Open Finance regulation: Joint Resolution CMN-BCB No. 1/2020; General Data Protection Law No. 13,709/2018.
- Presidential Decree 10.997/2022 (gradually reduce IOF-FX rates to zero by 2029) referenced elsewhere in source document.

*Source: Annex XIII. Implementation of Key FSAP Recommendations (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1braea2025001-source-pdf.pdf_