## 1. A Recovery with Strong Consumption and Fiscal Support

## Source details

**Canonical URL:** [1. A Recovery with Strong Consumption and Fiscal Support](https://www.imf.org/-/media/files/publications/cr/2026/english/1braea2026001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2026/english/1braea2026001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2026/english/1braea2026001.pdf.json)

---

### Recent developments and growth dynamics
- Growth and composition:
  - Per-capita income in 2025 exceeded its pre-pandemic path.
  - Growth slowed from 3.6 percent (annualized) in the first half of 2025 to 0.3 percent in the second half of 2025.
  - Private consumption growth: 5.1 percent in 2024 → 2.1 percent in 2025.
  - Gross fixed capital investment: 6.9 percent in 2024 → 1.5 percent in 2025.
  - Agriculture (notably soy) contributed almost 1 percentage point to 2025 real GDP growth.
  - Output grew less than staff’s estimate of potential for much of 2025; deceleration bottomed out in 2025Q3 with a rebound in 2026Q1.

### A recovery powered by consumption and fiscal support (Box 1)
- Consumption and investment:
  - Private consumption repeatedly exceeded IMF staff forecasts since 2021 and underpinned the post‑pandemic expansion.
  - Investment expanded but remains below its prepandemic path.
  - Net exports exceeded their prepandemic path driven by strong exports (notably hydrocarbons) and imports remaining below prepandemic path.
- Fiscal support since the pandemic:
  - Government consumption and total primary government spending including transfers exceeded forecasts, reflecting rising spending by states and municipalities partly financed by federal transfers.
  - Staff assesses fiscal support since the pandemic has added about 2 percent to the level of real GDP by 2025.
  - The support contributed to output rising above potential, implying a procyclical boost.

### Labor market, poverty, and social inclusion
- Labor market and social outcomes:
  - Seasonally-adjusted unemployment rate: 5.3 percent in December 2025 (record low) → 5.5 percent in April 2026.
  - Number of employed people grew by 1.2 percent during 2025 (vs. 2.9 percent in 2024).
  - Share of workers with formal employment contract at highest level in ten years (excluding COVID-19 crisis).
  - Poverty fell to 23.1 percent in 2024; Brazil exited the United Nations Hunger Map in 2025.
  - Tight labor market plus reinforced social safety nets (notably increased Bolsa Família transfers) supported income gains among lower‑income households.

### Inflation, exchange rate, and pass-through
- Inflation:
  - Twelve-month inflation: peaked at 5.5 percent in April 2025 → low of 3.8 percent in February 2026 → rebounded to 4.7 percent in May 2026.
  - Medium-term inflation expectations eased over 2025 but picked up modestly in March 2026 and remain about 0.5 percentage point above the 3 percent target.
- Exchange rate and pass-through:
  - Since end-2024, Brazil’s real appreciated by 26 percent against the US dollar (as of mid-May) and by 18 percent in nominal effective terms.
  - Staff analysis: global factors account for around twice as much of this appreciation against the dollar as local factors do.
  - Staff estimates currency movements since end-2024 have reduced twelve-month headline consumer price (IPCA) inflation by 1.0 percentage point as of May.

### Drivers of exchange rate movements (SVAR summary)
- Daily SVAR decomposition since December 2024:
  - Global shocks account for more than twice as much of the recent appreciation as domestic shocks.
  - Largest global contributions: US monetary policy and global risk sentiment (roughly two‑thirds of the global contribution), plus terms‑of‑trade improvements (higher oil and soybean prices) and market perceptions of weaker US macro news.
  - Domestic contribution: about 72 percent reflects improvement in domestic risk perceptions; remainder reflects perceived domestic monetary policy shocks, with BCB tightening contributing to appreciation already in late 2024.

### Monetary policy and interest rates
- BCB policy moves in 2026:
  - March 2026 cut: 25 basis points.
  - April 2026 cut: 25 basis points.
  - June 2026 cut: 25 basis points.
  - Policy rate reached 14.25 percent after these cuts.
- Market expectations and staff neutral rate:
  - Market analysts expect rates to ease to 14 percent by year-end—about 200 basis points higher than expected before the war.
  - Staff’s estimate of the medium-term neutral rate: 8 percent.

### Financial sector and credit conditions
- Credit and banking indicators:
  - Credit growth eased amid restrictive monetary stance; high-risk household and corporate credit growth slowed.
  - Corporate debt market financing remains strong, contributing to a positive credit gap.
  - Corporate bankruptcy and household indebtedness have risen amid high rates; credit risks covered by adequate provisioning.
  - Banks reported liquidity coverage at 199 percent and a Common Equity Tier 1 capital ratio of 15.5 percent at end-2025.
- Deposit insurance incident:
  - November (implied end-2025) liquidation of a mid-sized bank: over 90 percent of its deposits insured by the Credit Guarantee Fund (FGC), equivalent to 0.4 percent of GDP and about 40 percent of FGC’s cash reserves.
  - Incident was isolated; FGC required mandatory advances from banks to restore capital and process largely completed.

### Fiscal stance, deficits, and policy measures
- Fiscal trends and constraints:
  - Public debt (general government, gross) projected to reach about 98 percent of GDP in 2026—a nearly 14 percentage point of GDP increase over the last four years.
  - Constraints: rising mandatory primary spending, extensive tax expenditures, and a high interest bill that have constrained productive investments.
- Recent fiscal performance:
  - General government primary fiscal deficit narrowed by 0.2 percentage point of GDP in 2025.
  - Staff estimates the general government structural primary deficit narrowed by 1.1 percent of GDP in 2025 (after adjustments).
  - For 2026, staff estimates oil-related fiscal windfalls largely used on fuel price measures, with structural primary deficit widening by about 0.5 percent of GDP.
- Policy measures supporting activity in 2026:
  - Fuel price measures introduced March 2026: time-bound (most initially two months; some extended until December 2026 and subject to review every two months).
  - Measures focus on fuel used in freight (PIS and Cofins exemptions and diesel subsidies), subsidies on gasoline and cooking gas, and tax exemption on aviation fuel.

### Temporary financing and tax measures (0.4 percent of GDP for 2026)
- Financing of 0.4 percent of GDP fiscal cost for 2026:
  - Temporary 12 percent ad valorem tax on the value of crude oil exports.
  - Oil-related fiscal revenue windfalls.
- PIT reform (enacted 2025, effective January 2026):
  - Raised PIT exemption threshold: R$3,036 → R$5,000 monthly.
  - Revenue loss about 0.2 percent of GDP offset by:
    - Introducing a minimum income tax across five brackets reaching up to 10 percent for individuals earning over R$50,000 monthly.
    - A new withholding tax on dividends.
  - Reform is revenue‑neutral but expected to be expansionary, shifting disposable income toward upper‑middle‑income workers with higher marginal propensity to spend.

### External sector, tariffs, and trade developments
- Current account and tariffs:
  - Current account deficit: 2.9 percent of GDP in 2025 (narrowed slightly).
  - US tariffs on most imports from Brazil increased to 50 percent in August 2025 → effective tariff rate of 29.1 percent; later reductions led to an effective tariff rate of 12.2 percent in February 2026.
  - Exports to the US accounted for less than 2 percent of GDP before the tariff hikes.
  - In June 2026 the United States proposed: a 25 percent tariff on Brazilian exports and a separate 12.5 percent tariff with exemptions for some products.
  - Note: China absorbed about three-quarters of Brazil’s soybean exports; increased soybean exports to China offset US tariff impacts.
- Capital flows and reserves:
  - FDI remained strong at 3.4 percent of GDP in 2025.
  - Portfolio investment recorded outflows in early 2025 but rebounded in late 2025 and early 2026.
  - Foreign exchange reserves grew by about US$29 billion in 2025 to US$358 billion at end-2025 (121 percent of the IMF ARA metric).

### Outlook: growth, inflation, fiscal balance, and current account
- Growth projections:
  - Staff projects growth: 2.3 percent in 2025 → 2.4 percent in 2026 → strengthen to 2.5 percent over the medium term.
  - Net oil exporter status from the Middle East war expected to support growth by about 0.4 percentage point in 2026 compared to pre-war projections (effect fades in 2027).
  - Commodity price futures (as of May 15) used in baseline: average oil price (US$ a barrel) of $68 in 2025, $89 in 2026, and $79 in 2027.
- Inflation and monetary policy outlook:
  - Headline inflation expected to pick up during 2026 and reach 5.6 percent by end-2026.
  - Expected to converge to the 3 percent target by mid-2028.
  - BCB policy rate expected to gradually decline, reaching the estimated neutral nominal rate of 8.0 percent in the first half of 2028.
- Fiscal and debt projections:
  - Federal primary balance: broadly unchanged in 2026; projected to rise from a deficit of 0.4 percent of GDP in 2026 to a surplus of 1.1 percent of GDP in 2031 (contingent on measures).
  - General government overall fiscal deficit projected to widen to 8.2 percent of GDP in 2026 before narrowing to 5.7 percent of GDP in 2031.
  - General government gross debt projected to rise from 98 percent of GDP in 2026 and stabilize by 2035 at 106 percent of GDP (IMF staff definition).
  - Authorities’ definition projects stabilization by 2035 at 95 percent of GDP under their macro framework.
- Current account:
  - Expected to narrow from 2.9 percent of GDP in 2025 to 2.5 percent of GDP in 2026 and to 1.7 percent of GDP over the medium term.

### Risks, buffers, and scenarios
- Risks:
  - Growth risks tilted to the downside; inflation risks tilted to the upside.
  - Upside risks: stronger domestic demand, more supportive fiscal policies, faster reform implementation, developments in biofuel and rare earths.
  - Downside risks: geopolitical escalation raising energy prices, tighter global financial conditions, global trade tensions, fertilizer supply disruptions, lower fiscal effort, policy uncertainty, extreme weather (including El Niño).
  - Under the April 2026 WEO severe downside scenario: annual real GDP growth in Brazil could be lower in 2026 by 0.4 percentage point and inflation could be 1.1 percentage points higher in 2026.
- Buffers and resilience:
  - Sound financial system, adequate FX reserves, low reliance on FX debt, large government cash buffers, flexible exchange rate.

### Policy recommendations: managing oil windfalls and public debt path
- Save oil-related revenue windfalls in 2026—staff recommends this implies a rise in the primary fiscal balance by about 0.5 percentage point of GDP.
- Recommended federal primary fiscal balance path (staff):
  - Reach midpoint of the 0.5 percent of GDP surplus target tolerance interval (without deductions) in 2027.
  - Further improvements averaging 0.5 percentage point of GDP per year, reaching 1.5 percent of GDP in 2029.
  - Reach a surplus of 2.5 percent of GDP by 2031.
  - Total recommended fiscal adjustment: 3 percentage points of GDP over five years (2026–2031).
- Staff scenarios:
  - S1: additional fiscal effort to reach 2.5 percent of GDP by 2031 plus macro responses (slower near-term growth; lower inflation and policy rates).
  - S2: S1 plus structural reforms delivering additional real GDP growth gains (an additional 1.5 percentage points per year during 2026–30).
- Fiscal framework enhancements:
  - Limit exceptions to well‑defined escape clauses.
  - Establish a binding fiscal anchor placing debt on a downward path.
  - Link federal spending growth to structural revenues; fully exclude volatile non‑recurring commodity revenues.
  - Harden subnational budget constraints.
  - Consider greater use of market insurance to hedge commodity price swings.
  - Staff estimates an adequate long-term anchor could be general government gross debt of about 85 percent of GDP under the recommended scenario.

### Tackling spending rigidities and tax expenditures
- Spending rigidities:
  - Discretionary federal spending: 1.6 percent of GDP in 2025 (8.5 percent of federal primary spending); effective discretionary spending after non‑discretionary items: 0.3 percent of GDP.
  - Public pension expenditure about 13 percent of GDP; parametric adjustments recommended.
  - Recommended measures: de-link minimum pension and social assistance growth from minimum wage; curb real minimum wage growth; eliminate constitutional floors on health and education; contain non-indexed expansions in personnel, pensions, and social expenditures; unify social assistance programs.
  - These measures could raise the primary balance by 2 percent of GDP over the medium term.
- Tax expenditures:
  - Federal tax expenditures grew to 4–5 percent of GDP in recent years (from 2 percent in early 2000s).
  - 2025 actions: phased out 0.1 percent of GDP in exhibition sector; payroll tax exemption phaseout with annual savings to reach 0.2 percent of GDP by 2028; legislation to trim tax expenditures by one‑tenth with annual savings of 0.1 percent of GDP.
  - Tax‑incentivized bonds: fiscal cost nearly 0.3 percent of GDP in 2025; limited evidence of productive investment impact—suggest careful cost‑benefit analysis and possible gradual phaseout.

### Reinforcing financial supervision and macroprudential measures
- Supervision and resolution:
  - BCB’s regulatory and supervisory framework advanced; staff shortages and limited budgetary autonomy reduced onsite inspections and constrained analytical depth.
  - Legal protections for BCB staff have improved since 2018 but further strengthening warranted.
  - Modernized resolution regime pending legislation before Congress since 2019.
- Macroprudential toolkit and borrower-based measures:
  - Countercyclical capital buffer set at zero; authorities advancing toward a PN-CCyB framework.
  - DSTI reached record highs in 2025; staff indicates a DSTI cap of 40 percent on new loans in 2025 could have prevented further household debt service burden increases—recommend gradual introduction with standardized income and debt‑service definitions across lenders.
- Novo Desenrola Brasil debt‑renegotiation program:
  - Launched in May (2026); allows workers earning up to five minimum wages to use up to 20 percent of FGTS to repay delinquent high‑cost debt; includes renegotiation of overdue educational loans, SME business loans, and some rural credit.
  - Additional steps recommended to limit moral hazard: introduce DSTI cap, enhance consumer protections, promote financial education.
- Crypto and capital markets:
  - BCB brought crypto‑asset service providers under supervision; further legal and regulatory framework, customer asset protections, risk‑based capital requirements, and stablecoin oversight recommended.
  - Incentivized debentures issuance: 2.1 percent of GDP in 2025 with foregone tax revenue near 0.3 percent of GDP; staff recommends cost‑benefit analyses on gradual phaseout and stricter use-of-proceeds standards.

### Structural reforms, productivity, and trade
- Reforms and growth potential:
  - VAT reform approved December 2023 with full implementation expected by 2033; staff revised medium‑term growth projection from 2.0 percent to 2.5 percent (2024 Article IV) reflecting VAT reform and hydrocarbon output.
  - Closing gaps in business regulation, governance, external sector could raise annual growth by 1 percentage point for five years; female labor force participation and AI adoption could add further gains—cumulative potential to raise medium‑term growth from 2.5 percent to over 4 percent.
- Trade and commodity concentration:
  - As of 2025 exports: China >30 percent; US 12 percent; EU 11 percent.
  - Export composition (2025): agricultural products >40 percent; oil 16 percent; iron ore 10 percent; manufactured goods <30 percent.
  - Brazil’s soybean exports: about 54 percent of global soybean exports in 2025; China absorbed about three‑quarters of Brazil’s soybean exports; soybeans ~1.7 percent of GDP in exports to China.
  - Recommendations: build buffers during commodity upswings, maintain exchange rate flexibility, pursue trade agreements (EU–Mercosur entered into force in May), and continue diversification of export destinations.

### Data, reserves, and external assessment highlights
- Reserves and external metrics:
  - Gross reserves: US$358.2 billion at end-2025.
  - Reserves adequacy: 121 percent of IMF ARA metric at end-2025.
  - NIIP: -49.4 percent of GDP in 2025 (down from -38.2 percent in 2024).
  - External debt (end-2025): 35.9 percent of GDP.
- External position:
  - External position in 2025 assessed as moderately weaker than implied by medium‑term fundamentals and desirable policies.
  - Staff CA gap midpoint: -1.5 percent of GDP in 2025; REER gap midpoint implied 11.2 percent (2025).

### Key short and medium-term numeric projections (selected)
- GDP growth (annual percent change): 2025: 2.3; 2026: 2.4; medium term: 2.5.
- Consumer prices (IPCA, end of period): 2025: 4.3; 2026: 5.6; 2027: 3.2; converge to 3.1 percent by 2028–2031.
- SELIC policy rate, end of period: 2025: 15.0; 2026: 14.0; 2028 onward: 8.0.
- General government gross debt (alternative definition, percent of GDP): 2025: 93.3; 2026: 97.8; 2030: 104.8; 2035: 106.3.
- General government overall balance (percent of GDP): 2026: -8.2 (projected).
- Current account (percent of GDP): 2025: -2.9; 2026: -2.5; medium term: -1.7.
- Foreign exchange reserves (eop, US$ billions): 2025: 358.2; projected stable through 2031 at US$358.2.

### Staff appraisal (summary)
- Growth: gradual rise to 2.5 percent over the medium term, aided by VAT reform and hydrocarbon output; near‑term support from oil windfalls.
- Inflation: headline inflation to reach 5.6 percent by end‑2026 and converge to the 3 percent target by mid‑2028.
- External and fiscal: external position moderately weaker than fundamentals; public debt rising due to unfavorable r‑g dynamics and spending rigidities.
- Recommendations (priorities):
  - Save oil-related windfalls in 2026 and implement a multi-year fiscal consolidation totaling 3 percentage points of GDP by 2031.
  - Enhance fiscal framework (binding anchor, limit exceptions, exclude volatile commodity revenues).
  - Continue monetary policy flexibility while preserving credibility; remove MCP arising from IOF‑FX.
  - Reinforce banking and securities supervision, complete resolution framework, and strengthen macroprudential and consumer protection measures.
  - Advance structural reforms to boost productivity, diversify exports, and improve spending efficiency.

*Source: IMF staff report — "1. A Recovery with Strong Consumption and Fiscal Support" (excerpts).*

### 1. A Recovery with Strong Consumption and Fiscal Support ______________________________________ 7

### 1. A Recovery with Strong Consumption and Fiscal Support

### Recent developments and growth dynamics
- Brazil has shown "remarkable resilience" after multiple shocks; per-capita income in 2025 exceeded its pre-pandemic path.
- Growth slowed in 2025 reflecting monetary restraint and withdrawal of fiscal support:
  - Growth slowed from 3.6 percent in the first half of 2025 (at an annualized rate) to 0.3 percent in the second half of 2025.
  - Private consumption growth slowed to 2.1 percent in 2025, from 5.1 percent in 2024.
  - Gross fixed capital investment slowed to 1.5 percent in 2025, from 6.9 percent in 2024.
  - Agriculture (strong harvests, especially soy) contributed almost 1 percentage point to 2025 real GDP growth.
- Output grew by less than staff’s estimate of potential for much of 2025, narrowing the positive output gap; the deceleration bottomed out in 2025Q3 and data show a rebound in 2026Q1.

### Box 1 — A recovery powered by consumption and fiscal support
- Private consumption has repeatedly exceeded IMF staff forecasts since 2021 and underpinned the post-pandemic expansion.
- Investment expanded but remains below its prepandemic path; net exports exceeded their prepandemic path driven by strong exports (notably hydrocarbons) and imports remaining below prepandemic path.
- Sustained fiscal support since the pandemic:
  - Government consumption and total primary government spending including transfers exceeded forecasts, reflecting rising spending by states and municipalities partly financed by federal transfers.
  - Staff assesses fiscal support since the pandemic has added about 2 percent to the level of real GDP by 2025.
  - The support contributed to output rising above potential, implying a procyclical boost.

### Labor market, poverty, and social inclusion
- Labor market remained tight; poverty and inequality continued to decline:
  - Seasonally-adjusted unemployment rate fell to 5.3 percent in December 2025 (a record low), then increased modestly to 5.5 percent in April 2026.
  - Number of employed people grew by 1.2 percent during 2025, compared with 2.9 percent during 2024.
  - Share of workers with formal employment contract is at its highest level in ten years, excluding the COVID-19 crisis.
  - Poverty fell to 23.1 percent in 2024; Brazil exited the United Nations Hunger Map in 2025.
  - Tight labor market and reinforced social safety net programs (notably increased Bolsa Família transfers) supported gains in social inclusion and strong income gains among lower-income households.

### Inflation, exchange rate, and pass-through
- Inflation developments:
  - Twelve-month inflation peaked at 5.5 percent in April 2025, declined to a low of 3.8 percent in February 2026 (inside the BCB’s target tolerance interval of 3 percent ± 1.5 percentage points), then rebounded to 4.7 percent in May 2026 due to higher food prices and energy price increases related to the war in the Middle East.
  - Medium-term inflation expectations eased over 2025 but picked up modestly in March 2026 and remain about 0.5 percentage point above the 3 percent target.
- Exchange rate movements and pass-through:
  - Since end-2024, Brazil’s real appreciated by 26 percent against the US dollar (as of mid-May) and by 18 percent in nominal effective terms.
  - Staff analysis indicates global factors account for around twice as much of this appreciation against the dollar as local factors do.
  - Staff estimates currency movements since end-2024 have reduced twelve-month headline consumer price (IPCA) inflation by 1.0 percentage point as of May.

### Understanding exchange rate drivers (summary of staff SVAR analysis)
- A daily Structural Vector Autoregression (SVAR) decomposition since December 2024 finds:
  - Global shocks account for more than twice as much of the recent appreciation as domestic shocks.
  - The largest global contributions are from US monetary policy and global risk sentiment (roughly two-thirds of the global contribution), with additional support from terms-of-trade improvements (higher oil and soybean prices) and market perceptions of weaker US macro news.
  - Domestic contribution is meaningful: about 72 percent of the domestic contribution reflects an improvement in domestic risk perceptions; the remainder reflects perceived domestic monetary policy shocks, with BCB tightening contributing to appreciation already in late 2024.

### Monetary policy and interest rates
- The Central Bank of Brazil (BCB) cut interest rates three times in the first half of 2026:
  - March 2026 cut: 25 basis points (smaller than initially expected).
  - April 2026 cut: 25 basis points.
  - June 2026 cut: 25 basis points.
  - Policy rate reached 14.25 percent after these cuts.
- Market expectations and staff neutral rate:
  - Market analysts surveyed by the central bank expect rates to ease to 14 percent by year-end—about 200 basis points higher than expected before the war.
  - This market expectation is well above staff’s estimate of the medium-term neutral rate of 8 percent.

### Financial sector and credit conditions
- Credit and banking sector indicators:
  - Credit growth has eased amid a restrictive monetary stance; growth in total credit to households in high-risk categories and in bank credit to companies has slowed.
  - Corporate debt market financing remains strong, contributing to a positive credit gap.
  - Corporate bankruptcy and household indebtedness have risen amid high rates; credit risks are covered by adequate provisioning.
  - Banks reported liquidity coverage at 199 percent and a Common Equity Tier 1 capital ratio of 15.5 percent at end-2025.
- Banking incident and deposit insurance:
  - In November (year implied end-2025), the BCB liquidated a mid-sized bank; over 90 percent of its deposits were insured by the Credit Guarantee Fund (FGC), equivalent to 0.4 percent of GDP and about 40 percent of FGC’s cash reserves.
  - The incident was isolated; the FGC required mandatory advances from banks to restore its capital position and this process is largely completed.

### Fiscal stance, deficits, and policy measures
- Fiscal trends and risks:
  - Public debt has been on an upward path and is projected to reach about 98 percent of GDP in 2026—(general government, gross)—a nearly 14 percentage point of GDP increase over the last four years.
  - Longstanding constraints: rising mandatory primary spending, extensive tax expenditures, and a high interest bill have constrained productive investments.
- Recent fiscal performance and stance:
  - General government primary fiscal deficit narrowed by 0.2 percentage point of GDP in 2025.
  - Staff estimates the general government structural primary deficit narrowed by 1.1 percent of GDP in 2025 (after adjusting for moderation in economic activity and one-off items).
  - For 2026, staff estimates oil-related fiscal windfalls are largely used on fuel price measures, contributing to a supportive fiscal stance with the structural primary deficit widening by about 0.5 percent of GDP.
- Policy measures supporting activity in 2026 include fuel price measures introduced in March 2026:
  - Measures are time-bound (most initially limited to two months, some extended until December 2026 and subject to review every two months).
  - Focus on fuel used in freight transportation via federal tax (PIS and Cofins) exemptions and subsidies on diesel prices (recently extended until December 2026), plus subsidies on gasoline and cooking gas and a tax exemption on aviation fuel.

### Structural reforms and remaining constraints
- Authorities are implementing reforms aimed at enhancing efficiency and productivity:
  - The value added tax (VAT) reform was approved in December 2023, with full implementation expected by 2033.
  - Recent reduction in tax expenditures, approval of the EU-Mercosur trade agreement, and continued efforts to accelerate Brazil’s ecological transformation are noted as positive.
- Persistent constraints on potential growth:
  - Elevated borrowing costs, tax system complexities and bottlenecks, infrastructure gaps, and rigid legal frameworks continue to constrain business investment and potential growth.

### Political calendar
- Brazil will hold general elections on October 4, 2026 (president, members of the National Congress, and state governors).
- If no presidential candidate secures an absolute majority in the first round, a second-round presidential vote is to be held on October 25, 2026.

*Source: IMF staff report — "1. A Recovery with Strong Consumption and Fiscal Support" (excerpts).*

### 0.4 percent of GDP for 2026, is expected to be financed by a temporary 12 percent ad valorem

### 1braea2026001 - 0.4 percent of GDP for 2026, is expected to be financed by a temporary 12 percent ad valorem

### Fiscal measures, revenue and PIT reform
- Temporary measures to finance a 0.4 percent of GDP fiscal cost for 2026:
  - A temporary 12 percent ad valorem tax on the value of crude oil exports.
  - Oil-related fiscal revenue windfalls.
- Personal income tax (PIT) reform (enacted in 2025, effective January 2026):
  - Raised the PIT exemption threshold from R$3,036 to R$5,000 monthly.
  - Resulting revenue loss of about 0.2 percent of GDP is offset by:
    - Introducing a minimum income tax across five brackets, reaching up to 10 percent for individuals earning over R$50,000 monthly.
    - A new withholding tax on dividends.
  - Reform is revenue-neutral but expected to be expansionary, shifting disposable income from high-income earners to upper-middle-income workers with a higher marginal propensity to spend.

### External sector developments, tariffs, and trade
- Current account and tariffs:
  - Current account deficit narrowed slightly to 2.9 percent of GDP in 2025.
  - US tariffs on most imports from Brazil increased to 50 percent in August 2025, resulting in an effective tariff rate of 29.1 percent.
  - US tariff reductions: declined in November 2025 for numerous agricultural products and fell further in February 2026, resulting in a current effective tariff rate of 12.2 percent.
  - Brazil’s exports to the United States initially contracted after August 2025 tariff hikes but gradually recovered since November 2025.
  - Exports to the US accounted for less than 2 percent of GDP before the tariff hikes.
  - In June 2026 the United States proposed:
    - A 25 percent tariff on Brazilian exports.
    - A separate 12.5 percent tariff on Brazil and other economies, with exemptions for a number of products (such as coffee, beef, energy products and aircraft parts).
  - Brazil accounted for 11 percent of Brazil’s exports to the US in 2025. (Note in source: "Brazil's limited reliance on the US market (accounting for 11 percent of Brazil’s exports in 2025)")
- Trade composition and offsets:
  - Increased soybean exports to China played a central role in offsetting US tariff impacts.
  - Overall goods trade surplus narrowed, broadly offset by smaller services trade and income account deficits.
- Capital flows and reserves:
  - FDI remained strong at 3.4 percent of GDP in 2025.
  - Portfolio investment recorded outflows in early 2025 but rebounded in late 2025 and early 2026.
  - Foreign exchange reserves grew by about US$29 billion in 2025 to US$358 billion at end-2025, remaining in line with adequacy ranges (121 percent of the IMF ARA metric).

### Outlook: growth, inflation, fiscal balance, and current account
- Growth:
  - Staff projects growth to rise slightly from 2.3 percent in 2025 to 2.4 percent in 2026.
  - Growth expected to strengthen to 2.5 percent over the medium term.
  - Strong Q1 2026 driven by robust private consumption, supportive fiscal policies, and a strong harvest.
  - Expected moderation in H2 2026 and into 2027 due to:
    - Restrictive monetary conditions weighing on household and corporate debt servicing costs.
    - Expected withdrawal of fiscal policy support in 2027.
    - Elevated external uncertainty and slower global growth.
  - Net oil exporter status from the Middle East war is expected to support growth by about 0.4 percentage point in 2026 compared to pre-war projections, with effect fading in 2027.
  - Staff’s baseline forecast uses commodity price futures as of May 15: average price of oil in US dollars a barrel of $68 in 2025, $89 in 2026, and $79 in 2027.
- Inflation and monetary policy:
  - Headline inflation expected to pick up during 2026 and reach 5.6 percent by end-2026.
  - Headline inflation expected to converge to the 3 percent target by mid-2028.
  - BCB policy rate expected to gradually decline, reaching the estimated neutral nominal rate of 8.0 percent in the first half of 2028.
- Fiscal balance and government debt:
  - Staff projects the federal primary balance broadly unchanged in 2026 and to rise gradually from a deficit of 0.4 percent of GDP in 2026 to a surplus of 1.1 percent of GDP in 2031, contingent on implementation of measures.
  - General government overall fiscal deficit projected to widen to 8.2 percent of GDP in 2026 before narrowing to 5.7 percent of GDP in 2031.
  - General government gross debt projected to rise from 98 percent of GDP in 2026 and stabilize by 2035 at 106 percent of GDP.
  - IMF staff definition of public sector debt corresponds to general government gross debt; authorities’ definition projects stabilization by 2035 at 95 percent of GDP under authorities’ macro framework.
- Current account:
  - Current account deficit expected to narrow from 2.9 percent of GDP in 2025 to 2.5 percent of GDP in 2026.
  - Over the medium term, expected to narrow to 1.7 percent of GDP reflecting closing output gap, smaller services deficit, and expansion in agricultural and hydrocarbon exports.

### Risks and buffers
- Risks to growth and inflation:
  - Risks to growth tilted to the downside; risks to inflation tilted to the upside.
  - Upside risks:
    - Stronger-than-expected domestic demand with a still tight labor market.
    - More supportive fiscal policies in response to the war.
    - Faster implementation of productivity-enhancing reforms and the Ecological Transformation Plan.
    - Developments in biofuel and rare earths sectors.
  - Downside risks:
    - Escalation of geopolitical tensions raising global energy prices and tightening global financial conditions, lowering growth and increasing inflation.
    - Further escalation of global trade tensions weighing on FDI and trade.
    - Agricultural sector exposure to disruptions in the global supply of fertilizers.
    - Under the April 2026 WEO severe downside scenario, staff assesses annual real GDP growth in Brazil could be lower in 2026 by 0.4 percentage point and inflation could be 1.1 percentage points higher in 2026.
    - Domestic risks include lower-than-envisaged fiscal effort, increasing policy uncertainty, pressure on public debt and inflation, higher interest rates, weaker investment, and extreme weather events (including El Niño) affecting agriculture and power generation.
- Buffers and resilience:
  - Sound financial system.
  - Adequate FX reserves.
  - Low reliance on FX debt.
  - Large government cash buffers.
  - Flexible exchange rate.

### Policy discussions: managing oil windfall and public debt path
- PLDO and fiscal anchors:
  - 2027 draft Budget Guidelines Law (PLDO) reaffirms federal primary surplus target of 0.25 percent of GDP for 2026, sets a surplus target of 0.5 percent of GDP for 2027, and announces indicative target path to a surplus of 1.5 percent of GDP by 2030.
  - Authorities plan to achieve targets through additional revenue mobilization and spending controls, including activation of automatic adjustment mechanism introduced in 2024, which caps real personnel expenditure growth at 0.6 percent from 2027 to 2030.
  - Authorities estimate achieving fiscal targets (within target tolerance interval, after allowed deductions) would place public debt (authorities’ definition) on a downward path after 2029.
- Staff baseline fiscal forecast and assumptions:
  - Staff forecasts a federal primary deficit of 0.4 percent of GDP for 2026 (within the target tolerance interval of 0.25 ±0.25 percent of GDP after allowed deductions of 0.5 percent of GDP).
  - Fiscal revenue windfalls from higher oil prices estimated at about 0.5 percent of GDP in 2026 at the federal level are expected to be largely offset by increased social spending and transfers to subnational governments.
  - At the general government level, staff expects about 0.1 percentage point of GDP of the oil-related revenue windfall to be saved in 2026.
  - For subsequent years, staff projects gradual fiscal effort with federal primary balance rising from –0.2 percent of GDP in 2027 to 1.5 percent of GDP by 2035, assuming federal spending growth moderates in line with the fiscal rule and includes (currently unallocated) measures totaling 1.3 percent of GDP.
  - With this path and subnational primary balances near zero, general government gross debt reaches 105 percent of GDP in 2031 and stabilizes at 106 percent of GDP by 2035.
  - In a passive scenario with no additional (unallocated) measures, the primary balance path remains in deficit and the public debt-to-GDP ratio continues to rise.

### Sectoral note: Soybean exports and spillovers (Box 3)
- Brazil’s soybean position and exposure:
  - As of 2025, Brazil accounted for about 54 percent of global soybean exports; the US accounted for about 30 percent.
  - China absorbed about three-quarters of Brazil’s soybean exports; soybeans account for roughly one-third of Brazil’s total exports to China, some 1.7 percent of GDP.
  - Brazil’s soybean farmland has increased more than threefold since the 1990s and yields per acre roughly doubled since the 1990s.
- Spillovers from US–China trade tensions:
  - Brazil’s soybean exports to China responded countercyclically to US–China trade tensions, rising during escalations and moderating when tensions eased.
  - During 2018 tensions, Brazil’s share of China’s soybean imports increased from about 50 percent to around 75 percent.
  - In 2025, amid renewed trade tensions, Brazil’s soybean exports to China accounted for 76 percent of China’s total soybean imports as Chinese purchases from the United States declined.
  - Further diversification of export destinations would strengthen resilience to trade tension spillovers.

*Source: IMF staff estimates and content from the provided IMF chapter.*

### 0.6 percent of GDP.

### 0.6 percent of GDP.

### Exceptions to fiscal rules and primary balance trajectory
- Congress approved increases in government expenditures that can be deducted for the purpose of evaluating compliance with the primary balance targets, with the allowed deductions reaching up to 0.7 percent of GDP in 2027.
- Some of the allowed deductions are not related to unexpected developments.
- The increased deductions reduced the path of future primary balances compliant with the targets and increased the long-term debt path, as published in the December 2025 National Treasury Fiscal Outlook Report.
- In the April 2026 PLDO, the authorities specified fewer allowed deductions than initially projected, which raised the primary balance path and reduced the debt path.
- Overall, the April 2026 PLDO forecasts the primary balance to remain below the midpoint of the target tolerance interval by an average of 0.4 percentage point of GDP during 2027-2030.

### Debt sustainability assessment and fiscal risks
- Staff finds risks of debt distress for the general government to be moderate under the baseline forecast (Annex III).
- Government cash buffers and central bank holdings mitigate risks:
  - Large cash buffers of the government: 14.4 percent of GDP as of April.
  - BCB’s substantial holdings of government securities: 22.4 percent of GDP as of April, which are automatically rolled over by law.
- Limited FX and foreign-law debt provide additional mitigation.
- The debt trajectory remains highly sensitive to shocks to borrowing costs, real GDP growth, and the materialization of contingent liabilities.
- The rise in debt, despite primary surpluses over the medium term, reflects Brazil’s unfavorable interest rate-growth differential; staff estimates the differential is above that of peer economies in the region due to persistently high borrowing costs.

### Staff recommended fiscal path and scenarios
- For 2026, staff recommends saving oil-related revenue windfalls, implying a rise in the primary fiscal balance by about 0.5 percentage point of GDP.
- Recommended path for the federal primary fiscal balance:
  - Reach the midpoint of the 0.5 percent of GDP surplus target tolerance interval (without deductions) in 2027.
  - Further improvements averaging 0.5 percentage point of GDP per year, reaching 1.5 percent of GDP in 2029.
  - Reach a surplus of 2.5 percent of GDP by 2031.
- Staff’s scenario layering:
  - S1: Recommended additional fiscal effort increasing the primary surplus to 2.5 percent of GDP by 2031 combined with macroeconomic responses (slower near-term growth; lower inflation and policy rates).
  - S2: S1 plus structural reforms delivering additional real GDP growth gains (an additional 1.5 percentage points per year during 2026-30).
- Securing the total recommended adjustment of 3 percentage points of GDP over five years (2026-2031) calls for enhancing the fiscal framework, tackling spending rigidities, and phasing out costly and inefficient tax expenditures.

### Enhancing the fiscal framework (policy recommendations)
- Limit exceptions to well-defined economic escape clauses to manage shocks and bring all primary spending within the fiscal target.
- Establish a binding fiscal anchor that places debt on a firmly downward path over the medium term.
- Link federal spending growth to structural revenues; fully exclude volatile non-recurring commodity revenues to reinforce countercyclicality and sustainability.
- Harden subnational budget constraints.
- Considering fiscal buffers, staff estimates an adequate long-term anchor could be a general government gross debt level of about 85 percent of GDP (consistent with staff’s recommended scenario).
- An enhanced framework could include predefined triggers and correction mechanisms for returning to the pre-shock debt path.
- Greater use of market insurance to hedge against swings in commodity prices is suggested given government oil-related revenue fluctuating in the 2–3 percent of GDP range in recent years and set to increase.

### Measures responding to the war in the Middle East and energy-related support
- Initial measures were timely, clearly communicated, and accompanied by offsetting steps and oil-related revenue windfalls.
- The tripling of coverage of cooking gas subsidies (Gas do Povo) to about one-quarter of the population provides targeted relief with a modest increase in fiscal cost.
- Recent expansions in electricity subsidies are targeted but weaken price signals relative to direct income support.
- Diesel price measures have helped contain freight costs but are less efficient at supporting the most vulnerable and are relatively costly.
- Policy guidance:
  - Ensure measures remain fiscally neutral and timebound to preserve fiscal room.
  - For more persistent energy price increases (staff’s severe downside scenario), consider one-off transfers via social safety net programs targeted to the most vulnerable rather than extending costly price measures.
  - Compensate these efforts by fiscal measures or windfall revenues that preserve progress toward staff’s total recommended adjustment of 3 percentage points of GDP over five years.
  - Prefer financing via a pre-defined excess profits tax on energy companies rather than the new temporary export tax on crude oil to improve tax predictability.
  - In the event of faster-than-expected declines in energy prices, taper fiscal support measures.

### Tackling spending rigidities and raising the primary balance
- Discretionary federal spending in the budget accounts for only 1.6 percent of GDP, or 8.5 percent of federal primary spending in 2025—about half the level seen in the late 2000s.
- After accounting for items that have become effectively non-discretionary and basic administrative costs, discretionary spending is merely 0.3 percent of GDP.
- Recommended spending reforms:
  - De-link growth of minimum pension and social assistance benefits from the minimum wage.
  - Further curb the growth rate of the real minimum wage.
  - Eliminate the constitutional floors on health and education spending.
  - Contain non-indexed expansions in personnel, pensions, and social expenditures.
- The cap on personnel expenditure real growth of 0.6 percent between 2027 and 2030 implies a declining share in GDP and is welcomed.
- Brazil’s public pension expenditure (old-age, disability, and survivors) is about 13 percent of GDP; parametric adjustments are needed to reign in the pension system deficit.
- Unifying social assistance programs could enhance coverage and targeting while eliminating program overlaps.
- Overall, these measures could contribute to raising the primary balance by 2 percent of GDP over the medium term.

### Spending efficiency and public investment
- Progress to date includes: creation of the Secretariat for Monitoring and Evaluation of Public Policies and Economic Affair (SMA) in 2023; introduction of the Medium-Term Budget Framework (MOMP) in 2025; modernization of procurement through the 2021 law; enhanced transparency of parliamentary amendments.
- Staff estimates closing efficiency gaps in health and education spending and in public investment by 2040 could each boost the level of GDP by 5 percent.
- Recommendations:
  - Institutionalize spending reviews and policy evaluations and integrate them into budget preparation.
  - Align the MOMP with the fiscal framework underpinning binding fiscal targets and spending reviews.
  - Emphasize rigorous preparatory phases of procurement and adopt robust procurement strategies.
  - Strengthen governance of parliamentary amendments via clearer attribution of responsibility, strengthened conflict-of-interest frameworks, enhanced ex-post expenditure verification with measurable indicators, and effective remedial action on irregularities.
- Fiscal savings from addressing spending rigidities and inefficiencies could be redeployed to priority investments to foster productivity while maintaining the overall effort to improve the fiscal position.

### Phasing out tax expenditures
- Federal tax expenditures have grown from 2 percent of GDP annually in the early 2000s to 4-5 percent of GDP in recent years.
- Recent steps:
  - In 2025, the government phased out 0.1 percent of GDP in tax expenditure in the exhibition sector and began phasing out payroll tax exemptions, with annual savings expected to reach 0.2 percent of GDP by 2028.
  - Legislation passed in late 2025 to trim tax expenditures by one-tenth and strengthen oversight, with annual savings of 0.1 percent of GDP (exceptions limit the revenue gain to about three-quarters of total tax expenditures).
  - Legislation in late 2025 to limit PIS/COFINS tax credit offsets to those related to taxpayers’ economic activities, anticipated to generate about 0.1 percent of GDP annually.
- Further gains could come from eliminating regressive exemptions on health and education expenses and lowering the eligibility threshold for the SIMPLES tax regime.
- Staff analysis finds tax-incentivized bonds have a fiscal cost of nearly 0.3 percent of GDP in 2025 and mainly benefit large corporates; evidence of impact on productive investment is limited, suggesting careful cost-benefit analysis and possible gradual phaseout.

### Parliamentary amendments: transparency and governance (Box 5)
- Parliamentary amendments (emendas parlamentares) are additions, modifications, or cancellations of budget appropriations by Congress; individual amendments (RP6 or “emendas PIX”) and state caucus amendments (RP7) are mandatory and must be executed since 2015 and 2019, respectively; commission amendments (RP8) are discretionary.
- Amendments represent about one-quarter of discretionary spending and have expanded from below 10 percent a decade ago.
- Challenges and risks:
  - Amendments are allocated across fragmented projects and jurisdictions without systematic reference to a structured national database of high-quality public investment projects.
  - Limited ex-ante constraints, weak traceability, broad discretion, and limited oversight of “emendas PIX” may pose corruption risks.
  - CGU audits have identified irregularities in execution, including risks of misappropriation, misalignment with public policy priorities, and diversion of funds.
- Progress and reforms:
  - 2022 ruling by the Supreme Federal Court (STF) on unconstitutionality of rapporteur amendments strengthened governance.
  - Increased fiscal transparency, expanded public reporting, and CGU audits have improved oversight.
  - Remaining needs include clearer attribution of responsibility across amendments’ lifecycle, strengthened conflict-of-interest frameworks, enhanced ex-post verification with measurable indicators, and effective remedial action on irregularities.

*Sources: National Treasury Fiscal Outlook Report (RPF); and draft Budget Guidelines Law (PLDO).*

### 25.      Enhancing progressivity of the tax system while bolstering revenues is warranted.

### Enhancing progressivity of the tax system while bolstering revenues is warranted.

### Tax system progressivity and recent reforms
- Brazil’s tax system remains regressive due to heavy reliance on consumption taxes and reductions in corporate tax liabilities (Plomo et al. 2025).
- 2025 revenue‑neutral PIT reform:
  - introduced a minimum tax on high incomes and a new tax on dividends, broadening the tax base and increasing progressivity.
  - increased the personal exemption threshold, which mostly benefits upper-middle-income workers and limits the reform’s overall progressivity.
- 2023 VAT reform (phased implementation starting in 2026):
  - expected to significantly simplify the tax system and boost productivity over the medium term.
  - efforts aimed at revenue neutrality (Cebreiro et al., 2025).
  - includes a cashback mechanism for low-income households designed to mitigate regressivity of consumption taxes.
  - staff analysis (Cebreiro and Kolerus, 2026) suggests expanding the cashback, while removing concessions to preserve revenue, could raise the disposable income of low-income households by up to 25 percent.

### Authorities’ fiscal stance and use of oil-related revenues (paragraph 26)
- Authorities reaffirmed commitment to fiscal targets and protection of the most vulnerable.
- Fiscal actions and projections:
  - blocked discretionary expenditure of 0.2 percent of GDP to comply with the 2026 spending limit.
  - plan to use part of the oil-related windfall to finance fuel price measures extended until the end of the year with reassessment every two months.
  - continue to project a federal primary deficit of 0.4 percent of GDP in 2026, in line with staff’s projections.
  - assessed the targeted primary balance path for 2027-30 as sufficient for achieving stabilization of the public debt ratio by 2029.
- Policy priorities acknowledged by authorities:
  - assessing how increased role of volatile oil-related revenues could be reflected in fiscal planning.
  - further analysis of options to address oil-price related windfall profits.
  - concurrence with the need to cut tax expenditures and address mandatory spending pressures.

### Monetary policy, inflation outlook, and interaction with fiscal policy (paragraphs 27–29 and Box 7)
- Monetary policy stance and recent actions:
  - Maintaining flexibility in pace and timing of future monetary policy steps is warranted amid heightened uncertainty.
  - BCB’s decision to loosen interest rates in the first half of 2026 was judged appropriate and consistent with bringing inflation and inflation expectations back to the 3 percent target.
  - By opting for quarter-point cuts, the BCB retained flexibility to respond to evolving international conditions.
- Rationale for slower normalization:
  - A slower normalization than expected before the war is appropriate to contain inflationary pressures from the oil price shock.
  - The BCB’s aggressive response to rising inflation in 2024 reinforced its inflation‑fighting credentials; monetary policy remains firmly contractionary.
  - Staff expects interest rates to remain well above neutral throughout 2027.
  - In staff’s severe downside scenario—where inflation rises by 1.1 percentage points and 1.2 percentage points in 2026 and 2027, respectively, relative to the baseline forecast—monetary policy would be expected to tighten further, necessitating higher interest rates.
- Fiscal policy complementarity (QPM staff analysis; Box 7):
  - Implementing the additional staff‑recommended fiscal policy adjustment would allow for an additional 0.7 percentage point reduction in interest rates by end‑2028 compared to staff’s baseline.
  - Model simulations suggest the recommended fiscal adjustment would:
    - reduce inflation by an additional 0.2-0.4 percentage point by 2028 relative to baseline.
    - allow for a 0.4-0.7 percentage point reduction in interest rates relative to baseline.
  - The recommended fiscal adjustment raises the fiscal effort (change in the structural primary balance) by an additional 0.6 percentage point of GDP relative to baseline over 2026-2028.
  - Total structural adjustment is 1.8 percent of GDP, compared with 1.2 percent of GDP in the baseline.
  - Interest payments fall by 0.8 percentage points of GDP and government debt falls by 1.5 percentage points of GDP after two years, relative to staff’s baseline forecast.
  - The size of the interest rate cut depends on credibility; when the model’s risk premium is debt-dependent, the policy rate declines by 0.3 percentage point more than when it is not debt-dependent, and inflation declines by a further 0.15 percentage point reflecting exchange rate appreciation.

### Beliefs about monetary policy and sovereign risk (Boxes 6 and 8)
- Box 6 (expectations analysis):
  - Early 2023: inflation expectations de-anchored; perceived implicit target rose and perceived monetary policy response to inflation weakened.
  - Late 2024: BCB’s tightening pivot was seen as shifting to a more aggressive anti-inflation policy rule; evidence of a credible long-run anchor and increased intolerance for inflation deviations.
- Box 8 (local currency sovereign risk):
  - Staff constructs sovereign–supra spread to measure local currency sovereign risk.
  - The sovereign–supra spread spiked during 2014–2016 and increased in 2024; it eased after fiscal measures in December 2024 but remains above its level at the start of 2024.
  - A 100 basis point monetary policy rate cut—other things equal—reduces the risk premium at the five-year constant maturity by about 5 basis points.
  - About 50 percent of Brazil’s government debt consists of floating-rate liabilities and about 20 percent needs to be rolled over each year.

### Exchange rate policy and IOF-FX (paragraphs 30–31)
- Exchange rate and FX policy:
  - Flexible exchange rate continues as a shock absorber and remains consistent with the inflation-targeting framework.
  - FX intervention can be used to address destabilizing premia from arbitrage frictions without substituting for macroeconomic policy adjustment.
  - Recent efforts to reduce the high stock of FX swaps are welcome; further reductions as market conditions permit are warranted.
- IOF-FX and staff recommendation:
  - Staff highly recommends reducing the financial tax on certain exchange transactions and eliminating the associated multiple currency practice (MCP) and exchange restriction.
  - Authorities broadened the scope of and raised the rate on the IOF from May 23, 2025 to June 26, 2025, and again from July 16, 2025 onward.
  - The IOF-FX gives rise to an MCP with respect to current and capital international transactions and is an exchange restriction for payments and transfers for current international transactions as well as a capital flow management measure (CFM) for capital transactions.
  - Applicable IOF-FX rate history as presented:
    - 6.38 percent in 2022
    - 5.38 percent in January 2023
    - 4.38 percent in January 2024
    - 3.38 percent in January 2025
    - increased to 3.5 percent from May 23, 2025 until June 26, 2025 and from July 16, 2025 onward.
  - From May 23, 2025 until June 26, 2025 and from July 16, 2025 onward, the number of exchange transactions subject to the IOF-FX tax with rates up to 1.10 percent was decreased and additional current and capital international transactions became subject to the IOF-FX at 3.5 percent.
  - Certain FX operations remain assessed as CFMs but do not give rise to an MCP: application of the IOF-FX tax on transfers of funds abroad for investment purposes by Brazilian residents at 1.1 percent and on other FX operations related to capital inflows (including FDI) at 0.38 percent.
  - The authorities are not requesting IMF approval and staff does not recommend approval.

### Financial sector resilience (paragraph 33)
- Overall sector health:
  - Banking sector is profitable, well-capitalized, and liquid.
  - The 2026 FSAP adverse scenario (synchronized global slowdown, sharp GDP contraction, sovereign debt distress, elevated interest rates from a fiscal confidence shock) would cause a number of banks to fall below regulatory capital requirements; these banks are not systemic and the aggregate capital shortfall is small (0.1 percent of total system assets).
  - Continued monitoring of profit retention and resilience of systemic banks is encouraged.
  - Planned phase-out of deferred tax assets will improve capital quality but might temporarily impact some banks' resilience.
- Corp sector and liquidity tests:
  - Corporate sector stress tests indicate firms’ debt-servicing capacity is vulnerable to stagflation shocks; these findings are incorporated into bank stress tests.
  - Bank liquidity tests confirmed overall stability, with isolated stress in worst-case scenarios.
  - Banks and investment funds have strong interconnectedness, increasing contagion risk.
  - Insurance sector can withstand severe market shocks.
  - Physical climate risks generate uneven but limited impacts on banks; losses are partly covered via insurance reliant on a diversified but bilaterally dependent reinsurance market.

*Source: IMF staff report content as provided in the supplied PDF content unit.*

### 34.      Reinforcing banking and securities markets supervision—including by addressing

### 34.      Reinforcing banking and securities markets supervision—including by addressing

### Reinforcing supervision, staffing, legal protections, and resolution framework
- The BCB’s regulatory and supervisory framework for banks is advanced, including through extensive use of technology and sophisticated analytics.
- FSAP concluded that BCB staff shortages and limited budgetary autonomy have reduced onsite inspections and constrained analytical depth.
- Legal protection and independence of BCB staff have improved since 2018, although strengthening them further is needed to ensure continued timely and thorough supervision.
- A modernized resolution regime remains a work in progress with legislation before Congress since 2019; completing the framework would give the authorities a full range of tools to address potential distress in the banking sector.
- Growth in equity and bond markets highlights the need for robust regulation and more resources for the Securities and Exchange Commission of Brazil.
- The BCB has prioritized addressing rising cybersecurity risks and established a regulatory framework broadly aligned with international standards; FSAP notes further steps including:
  - enhanced cyber risk oversight of Financial Market Infrastructures (FMIs);
  - assessment of workforce needs;
  - improved standards for incident reporting and testing.

### Provisions, tax alignment, and deferred tax assets (DTAs)
- Brazilian banks provision for credit risk losses based on BCB prudential rates, but these provisions are tax-deductible only upon recognizing and writing off a loss, creating deferred tax assets (DTAs).
- From 2025, Law 14,467 aligns tax deductibility with accounting recognition, reducing new DTAs.
- Existing DTA stock at end-2025 can be amortized over 7 or 10 years, as per bank choice.

### Macroprudential toolkit, DSTI, and borrower-based measures
- Macroprudential policies are appropriately calibrated, with the countercyclical capital buffer set at zero.
- FSAP highlights substantial progress since 2018: more explicit BCB mandate, enhanced interagency cooperation, structured and comprehensive risk analysis, and expanded scope of surveillance activities.
- Further expansion to monitor new markets (including crypto and structured debt) is important as the financial sector evolves.
- Authorities are advancing towards a positive-neutral countercyclical capital buffer (PN-CCyB) framework.
- As the DSTI reached record highs in 2025, staff analysis indicates:
  - A DSTI cap of 40 percent on new loans granted in 2025 could have prevented the further increase in household debt service burdens.
- Recommendation: gradual introduction beginning with a flexible limit while standardizing definitions of verifiable income and debt servicing across lenders (including non-banks) and financial products.
- Recommendation: consumer protection improvements, including additional safeguards against predatory lending and increased lender responsibilities.

### Novo Desenrola Brasil household debt renegotiation program and moral hazard concerns
- The government is implementing a new debt renegotiation program, Novo Desenrola Brasil, to improve household financial health.
- As with the earlier Desenrola Brasil program during July 2023–May 2024, the new program, launched in May, assists households in default to renegotiate delinquent debts.
- Workers earning up to five minimum wages can now use up to 20 percent of their Fundo de Garantia do Tempo de Serviço (FGTS, mandatory workers’ severance fund) balance to repay delinquent high-cost debt.
- The Novo Desenrola Brasil program also includes renegotiation of overdue educational loans, business loans to small and medium-sized enterprises, and some rural credit.
- Additional steps are needed to prevent risks of moral hazard and future debt buildup: introducing a DSTI cap, enhancing consumer protections, and promoting financial education are recommended.

### Crypto regulation and supervision
- Cross-border crypto asset flows—especially stablecoins pegged to the US dollar—have risen since 2017, though not currently affecting financial stability.
- The BCB has brought crypto-asset service providers (CASPs) under supervision to strengthen monitoring of crypto flows and mitigate FX-related risks.
- Recommended next steps:
  - finalize legal and regulatory frameworks for CASPs;
  - ensure customer asset protection;
  - implement risk-based capital requirements;
  - improve guidance on market integrity and investor protection;
  - regulate issuance and give special attention to stablecoin activity, including robust oversight of cross-border payment schemes and cooperation with global issuers.
- The BCB has published statistics on crypto asset transactions between residents and non-residents since 2019; data collection on cross-border flows has been strengthened through enhanced reporting requirements, notably the separate identification of stablecoin and non-backed crypto transactions.
- As the market grows, further development of the monitoring framework for interlinkages with the banking and payments sectors is essential.

### Capital markets, incentivized debentures, and infrastructure financing
- Infrastructure investment is increasing, with a shift from the National Development Bank (BNDES) to private financing, but still falls short of development needs.
- Incentivized debentures (Debêntures Incentivadas) have helped develop capital markets for long-term finance but fiscal costs are sizeable and rising and investment impacts limited.
- Box 9 key figures and findings:
  - Issuance of incentivized bonds and other tax-free debt instruments amounted to 2.1 percent of GDP in 2025.
  - Foregone tax revenue estimated at nearly 0.3 percent of GDP in 2025.
  - Many incentivized bonds are tied to inflation and compete with government-issued inflation-linked bonds; average yield fell below that of government bonds in late 2025.
  - Staff analysis finds firms keep 50 percent of the incentivized bond proceeds in the first five years after issuance, with associated interest income also growing; bonds have been disproportionately issued by a broadly unchanged number of large firms, with relatively limited use by small- and medium-sized enterprises.
- Recommendations to enhance efficiency:
  - conduct cost-benefit analyses on phasing out incentives gradually;
  - review eligible sectors and establish stricter standards for use of proceeds;
  - assess pension fund investment rules, portability, and withdrawal regulations to mobilize long-term capital; streamline oversight.

### Authorities’ views
- Authorities agreed with the systemic risk assessment and broadly supported FSAP’s recommendations.
- They noted shared concerns over rising household and corporate indebtedness and welcomed FSAP’s finding that banks and insurers are able to absorb potential losses under adverse scenarios.
- Authorities agreed elevated household indebtedness warrants further work on macroprudential measures and prudential safeguards.
- They recognized the urgent need to address staffing shortages and strengthen staff protections, and remain committed to advancing legislation for a modernized bank resolution framework.
- They noted ongoing efforts on crypto-asset supervision and recent steps to strengthen financial regulation and supervision.

### Fostering productivity, investment, and trade: medium-term growth and reforms
- IMF staff revised up medium-term growth projections from 2.0 percent to 2.5 percent at the time of the 2024 Article IV Consultations on account of the landmark 2023 VAT reform and acceleration in hydrocarbon output.
- Staff estimates based on Budina and others (2023) suggest:
  - closing relevant gaps in “first-generation reform areas” (business regulation, governance, and the external sector) could raise annual growth by a further one percentage point per year on average for five years;
  - an additional medium-term growth gain of nearly one percentage point could come from reforms to facilitate female labor force participation;
  - steps to foster AI adoption, including expanding necessary training, could also contribute.
- Overall, these reforms could raise medium-term growth from the currently projected 2.5 percent to over 4 percent.

### Ecological Transformation, green finance, and Nova Indústria Brasil
- Continued implementation of the Ecological Transformation Plan would further reinforce resilience by mobilizing financing for decarbonization technologies, renewable energy, sustainable agriculture, and R&D through Eco Invest Brasil and issuance of sustainable sovereign bonds.
- Brazil achieved one of the cleanest electricity mixes worldwide and the authorities’ support for the energy transition (including increasing biofuel mix-ins and sustainable aviation fuels) is welcomed.
- Deforestation significantly declined in recent years; Brazil’s Sustainable Taxonomy became operational in 2025.
- Nova Indústria Brasil policy launched in January 2024 targets six priority areas: sustainable and digital agroindustry, health, infrastructure, industrial digitalization, green transition, and defense and aerospace; tools include public financing, subsidized credit and grants, tax incentives, and public procurement policies.
- Recommendation: target policies narrowly to sectors with well-identified market failures, be time-bound, subject to regular cost-benefit assessments, avoid discriminating between domestic and foreign firms, and be consistent with trade commitments.

### Trade composition, integration, and resilience
- Trading partners and export composition as of 2025:
  - China: more than 30 percent of exports;
  - US: 12 percent;
  - EU: 11 percent.
- Export composition as of 2025:
  - Agricultural products: account for more than 40 percent of total exports, with soybeans dominant;
  - Oil exports: 16 percent;
  - Iron ore: 10 percent;
  - Manufactured goods: declined to below 30 percent.
- Brazil’s current effective tariff rate is broadly in line with the average for other EMDEs, though there is room to further liberalize compared to regional peers; non-tariff barriers remain high.
- The EU–Mercosur Free Trade Agreement entered into force in May; staff analysis suggests it could boost Brazil’s agricultural exports to Europe while increasing imports from the EU across a broad range of manufactured goods.
- Brazil signed a trade agreement with the European Free Trade Association in September and an earlier agreement with Singapore; both are awaiting congressional approval.
- Recommendations: continue strengthening trade relationships via bilateral and plurilateral agreements and engage constructively at the World Trade Organization to boost global value chain participation and enhance resilience.

### Managing commodity concentration and macroeconomic policy
- Rising commodity export concentration increases exposure to volatile global prices and terms-of-trade shocks, amplifying Brazil’s business cycle fluctuations.
- Policy recommendations to manage shocks:
  - strengthen the fiscal framework, anchoring fiscal effort in structural terms (net of fluctuations in commodity-related revenues) to limit pro-cyclicality and build buffers during commodity upswings;
  - maintain exchange rate flexibility to facilitate macroeconomic adjustment to terms-of-trade shocks.

### Strengthening the business environment and reducing Custo Brasil
- Further steps to reduce costs of doing business would support investment and productivity; Custo Brasil initiative has identified structural, legal, and operational bottlenecks.
- Identified bottlenecks include bureaucratic and regulatory hurdles, a complex tax system, logistical and infrastructure challenges, and rigid legal frameworks.
- Government initiatives: improve logistics efficiency, increase access to electricity on more competitive terms, simplify the tax system, expand internet connectivity, open the market of natural gas, and increase firms’ access to credit.
- A proposed constitutional amendment under discussion in Congress would reduce the workweek from 44 to 40 hours and guarantee two days of rest per week, with no change in pay; recommended to retain flexibility over which days are worked, allow phased reduction in hours, and intensify efforts to facilitate labor force participation and strengthen productivity to limit potential trade-offs (including higher unit labor costs and informality).
- Further recommendations: promote cost efficiency and competition, lower barriers to entry for firms, and bolster competition authorities to enhance business investment and productivity growth.

*International Monetary Fund — BRAZIL (excerpts of section covering supervision, macroprudential policy, household debt programs, crypto regulation, capital markets, ecological transformation, trade, and business environment)*

### 47.      Continued efforts to improve enforcement of the anti-corruption framework and

### 47.      Continued efforts to improve enforcement of the anti-corruption framework and 

### Anti‑corruption, judicial integrity, and AML/CFT
- Recent progress:
  - Establishment of the Judicial Integrity and Transparency Observatory.
  - Expansion of the Office of the Comptroller General of Brazil’s audit activities.
  - Improved AML/CFT framework with a licensing regime for CASPs and regulations to create a beneficial ownership register held and managed by the Revenue Authority (RFB).
- Remaining vulnerabilities and recommended actions:
  - Investigations into fraud involving social security benefits and financial sector oversight highlight vulnerabilities in critical sectors.
  - Continued attention to integrity and accountability frameworks for senior officials, including the judiciary, is important to mitigate remaining risks.
  - Strengthening integrity frameworks for senior officials in regulatory roles would reduce risks of undue influence and regulatory capture.
  - Publication of asset declarations of senior officials and criminalization of illicit enrichment would further support efforts to combat corruption.
- AML/CFT implementation priorities:
  - Ensure effective implementation of the “Travel Rule” and beneficial ownership reporting requirements.
  - Re-integrate CASPs into the suspicious transaction reporting portal and enhance COAF’s human and IT resources to bolster financial intelligence production.
  - Strengthen the role of the RFB in support of the overall AML/CFT system to mitigate economic risks from ML/TF and other financial crimes.
  - The imminent increase in FIU resources will more than double the current staffing and improvements to FIU’s IT systems are expected to bolster quality strategic and operational analysis.

### Authorities’ views
- Reform agenda focus:
  - Expand and diversify the logistics network, promote a balanced mix of transport modes, increase connectivity to strengthen the digital economy and enhance competitiveness.
  - Continue industrial policy to support innovation, industrial modernization, and the green transition.
  - Implement the Plano Brasileiro de Inteligência Artificial, including development of AI infrastructure and AI for business innovation and public services.
  - Actively pursue trade agreements to strengthen economic resilience and diversify external partnerships (including agreements under ratification or negotiation with Singapore, EFTA, and Canada).
  - Confidence in the effectiveness of the new CASP licensing regime and beneficial ownership registry, and recognition of the need to continue strengthening AML/CFT systems.

### Staff appraisal — growth, inflation, and external position
- Growth projections and drivers:
  - Growth is projected to rise gradually to 2.5 percent over the medium term.
  - Favorable terms of trade—stemming from Brazil’s status as a net oil exporter—are likely to outweigh negative effects due to the war in the Middle East, supporting growth in 2026.
  - Growth is forecast to ease slightly in 2027 as still-restrictive monetary conditions and reduced fiscal support moderate activity and terms-of-trade gains partially unwind.
  - Growth is forecast to gradually recover to its estimated potential rate of 2.5 percent, supported by normalization of monetary policy, implementation of the efficiency-enhancing VAT reform, and increased hydrocarbon production.
- Inflation and external position:
  - Headline inflation is expected to reach 5.6 percent by end-2026, before converging to the 3 percent target by mid-2028.
  - Staff assessed the external position in 2025 as moderately weaker than the level implied by medium-term fundamentals and desirable policies.

### Risks to the outlook
- Upside risks:
  - Stronger-than-expected domestic demand amid a still tight labor market; more supportive fiscal policies; faster implementation of productivity-enhancing reforms.
- Downside risks:
  - Tightening of global financial conditions; disruptions to global fertilizer supply if the war in the Middle East continues.
  - Domestic risk from a lower-than-envisaged fiscal effort, which could increase policy uncertainty, pressures on public debt and inflation, higher borrowing costs, and weaker investment.
- Resilience factors:
  - Brazil's net oil exporter status, clean electricity mix, adequate FX reserves, low reliance on FX debt, large government cash buffers, well-established inflation targeting framework, and a flexible exchange rate.

### Fiscal policy recommendations and targets
- Immediate recommendation:
  - Save oil-related fiscal revenue windfalls in 2026, implying a rise in the primary fiscal balance by about 0.5 percentage point of GDP.
- Medium-term recommended fiscal path:
  - Reach the midpoint of the 0.5 percent of GDP surplus target tolerance interval (without deductions) in 2027.
  - Followed by further improvements averaging 0.5 percentage point of GDP per year, reaching 1.5 percent of GDP in 2029 and a surplus of 2.5 percent of GDP by 2031.
  - Total recommended fiscal adjustment of 3 percentage points of GDP to put public debt on a firmly downward path and build buffers.
- Fiscal framework and expenditure reforms:
  - Enhance the fiscal framework with comprehensive spending limits and a binding medium-term debt anchor.
  - Limit exceptions to well-defined economic escape clauses; bring all other primary spending within the fiscal target.
  - Link federal spending growth to structural revenues, excluding volatile, non-recurring commodity revenues.
  - Harden subnational budget constraints.
  - Spending reforms to curb indexation and open fiscal room include: de-linking growth of minimum pension and social assistance benefits from the minimum wage; further curbing growth rate of the real minimum wage; eliminating constitutional floors on health and education spending.
  - Phase out expensive, ineffective, and regressive tax expenditures.
  - Avoid bolstering revenues using regulatory taxes—such as the IOF or import tariffs—that risk distorting economic decisions.

### Monetary and exchange rate policy
- Monetary policy stance:
  - A slower normalization of monetary policy than expected before the war is appropriate to contain inflationary pressures from the oil price shock.
  - Flexibility in the pace and timing of future monetary policy steps is warranted amid heightened uncertainty.
  - The BCB’s decision to loosen interest rates in the first half of 2026 was appropriate and consistent with bringing inflation and inflation expectations back to the 3 percent target.
- Exchange regime and restrictions:
  - The flexible exchange rate regime and adequate FX reserves remain valuable shock buffers.
  - Recent efforts to reduce the stock of FX swaps are welcome and should continue as market conditions allow.
  - Brazil maintains an MCP, which is also an exchange restriction, arising from the IOF-FX tax. The authorities are not requesting approval and staff does not recommend it. Staff highly recommends the removal of the MCP and the exchange restriction.
- Fiscal–monetary interaction:
  - A stronger fiscal stance would help reduce inflation and pave the way to lower interest rates; staff’s recommended fiscal adjustment would allow for additional reductions in interest rates by end‑2028 compared to staff’s baseline.

### Financial sector resilience and priorities
- Overall assessment:
  - The financial sector remains resilient with systemic risks contained.
- Recommended actions to enhance resilience:
  - Reinforce banking and securities markets supervision, including addressing BCB staffing shortages and strengthening staff legal protections.
  - Complete the bank resolution framework.
  - Continue macroprudential policy as appropriate; government is implementing Novo Desenrola Brasil to address rising household debt service burdens.
  - Additional steps to mitigate moral hazard and future debt buildup: introduce a DSTI cap, enhance consumer protections, and promote financial education.
  - Crypto regulation: decisive steps taken; next steps include clearer legal foundations and a stronger oversight framework.
  - Enhance efficiency of capital market financing for infrastructure by conducting cost‑benefit analyses on phasing out incentivized debentures gradually, reviewing eligible sectors, and establishing stricter standards for use of proceeds.

### Structural reforms, inclusion, and trade
- Structural reform priorities and benefits:
  - Recent structural reforms have lifted Brazil’s medium-term growth prospects; continued reform momentum could deliver further gains.
  - Closing gaps in business regulation, governance, and the external sector would further support growth.
  - Reforms to encourage female labor force participation and measures to foster AI adoption—such as expanding relevant training and skills development—could yield additional gains.
  - Continued implementation of the Ecological Transformation Plan would reinforce resilience.
  - Industrial policies to advance green and technological upgrading should be narrowly targeted, time-bound, subject to cost-benefit assessment, avoid discrimination between domestic and foreign firms, and be consistent with trade commitments.
  - Further steps to reduce costs of doing business would support investment and productivity.
- Trade integration:
  - Further trade integration could strengthen resilience; recent ratification of the EU–Mercosur Free Trade Agreement is significant.
  - Continue to strengthen trade relationships through bilateral and plurilateral agreements and engage constructively at the World Trade Organization to boost global value chain participation and enhance resilience.
  - Rising commodity export concentration and exposure to volatile global prices underscores the importance of robust and credible macroeconomic policy frameworks.

*International Monetary Fund — BRAZIL (Content unit 47–58, PDF chapter)*

### 59.      Staff recommends that the next Article IV consultation for Brazil be held on the

### 1braea2026001 - 59.      Staff recommends that the next Article IV consultation for Brazil be held on the standard 12-month cycle.

### Recommendation
- Staff recommends that the next Article IV consultation for Brazil be held on the standard 12-month cycle.

### Social and Demographic Indicators (selected)
- Area (thousands of sq. km.): 8,510
- Agricultural land (percent of land area): 30.2
- Population (2025, est.) Total (millions): 213.4
- Annual rate of growth (percent): 0.4
- Density (per sq. km.): 25.1
- Life expectancy at birth (years): 76.6
- Infant mortality (per thousand live births): 12.3
- Access to safe water (2022): 88.0
- Physicians per 1000 people (2024): 2.8
- Hospital beds per 1000 people (2026) 1/: 2.5
- Adult illiteracy rate (2024): 5.3
- Net enrollment rates, percent in Primary education: 99.5
- Net enrollment rates, percent in Secondary education: 93.5
- Poverty rate (in percent, 2024) 2/: 3.1
- Palma ratio (2024) 3/: 3.3
- Gini coefficient (post taxes and transfers, 2024): 50.4
- Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil.

### Key Macroeconomic Projections (selected annual percent changes and levels)
- GDP at constant prices (annual percentage change): 2023: 3.2; 2024: 3.4; 2025: 2.3; 2026: 2.4; 2027: 2.2; 2028: 2.4; 2029: 2.5; 2030: 2.5; 2031: 2.5
- Consumption (annual percentage change): 2023: 3.4; 2024: 4.5; 2025: 1.5; 2026: 1.9; 2027: 1.8; 2028: 1.9; 2029: 2.2; 2030: 2.3; 2031: 2.3
- Investment (GFCF) (annual percentage change): 2023: -3.0; 2024: 6.9; 2025: 2.9; 2026: 4.1; 2027: 0.7; 2028: 1.9; 2029: 2.1; 2030: 2.1; 2031: 2.1
- Consumer prices (IPCA, end of period): 2023: 4.6; 2024: 4.8; 2025: 4.3; 2026: 5.6; 2027: 3.2; 2028: 3.1; 2029: 3.1; 2030: 3.1; 2031: 3.1
- GDP deflator (annual percentage change): 2023: 5.2; 2024: 4.1; 2025: 5.7; 2026: 4.0; 2027: 5.1; 2028: 3.6; 2029: 3.6; 2030: 3.6; 2031: 3.6
- Gross domestic investment (Percent of GDP) Total: 2025: 17.1; 2026: 17.4; 2027: 17.1; 2028: 17.0; 2029: 17.0; 2030: 16.9; 2031: 16.8
  - Private sector (Percent of GDP): 2023: 12.0; 2024: 12.8; 2025: 13.7; 2026: 13.6; 2027: 13.5; 2028: 13.4; 2029: 13.4; 2030: 13.3; 2031: 13.2
  - Public sector (Percent of GDP): 2023: 3.8; 2024: 4.2; 2025: 3.4; 2026: 3.8; 2027: 3.6; 2028: 3.6; 2029: 3.6; 2030: 3.6; 2031: 3.6
- Gross national saving (Percent of GDP) Total: 2023: 14.5; 2024: 14.0; 2025: 14.1; 2026: 14.9; 2027: 14.7; 2028: 14.9; 2029: 15.1; 2030: 15.1; 2031: 15.1
  - Private sector: 2023: 21.8; 2024: 19.6; 2025: 21.2; 2026: 22.5; 2027: 21.3; 2028: 20.4; 2029: 20.5; 2030: 20.3; 2031: 20.3
  - Public sector: 2023: -7.3; 2024: -5.6; 2025: -7.1; 2026: -7.6; 2027: -6.5; 2028: -5.5; 2029: -5.4; 2030: -5.2; 2031: -5.2

### Public Finances (selected)
- Central government primary balance (national representation, incl. BCB) 4/: 2023: -2.4; 2024: -0.4; 2025: -0.5; 2026: -0.4; 2027: -0.2; 2028: 0.4; 2029: 0.7; 2030: 1.0; 2031: 1.1
- Consolidated public sector General government NLB primary balance: 2023: -2.2; 2024: -0.3; 2025: -0.1; 2026: -0.3; 2027: -0.2; 2028: 0.4; 2029: 0.7; 2030: 1.0; 2031: 1.1
- General government NLB (overall balance, percent of GDP): 2023: -7.7; 2024: -6.3; 2025: -7.4; 2026: -8.2; 2027: -7.0; 2028: -6.0; 2029: -5.9; 2030: -5.7; 2031: -5.7
- Net public sector debt (percent of GDP): 2023: 60.4; 2024: 61.3; 2025: 65.2; 2026: 72.3; 2027: 75.0; 2028: 77.4; 2029: 79.3; 2030: 80.1; 2031: 80.4
- General government gross debt, Authorities’ definition (percent of GDP): 2023: 73.8; 2024: 76.3; 2025: 78.6; 2026: 86.6; 2027: 88.7; 2028: 90.8; 2029: 92.5; 2030: 93.5; 2031: 94.1
- General government gross debt (alternative definition, percent of GDP): 2023: 84.0; 2024: 87.0; 2025: 93.3; 2026: 97.8; 2027: 100.0; 2028: 102.0; 2029: 103.7; 2030: 104.8; 2031: 105.3
- Central government total primary expenditure (percent of GDP): 2023: 23.6; 2024: 23.1; 2025: 23.3; 2026: 24.4; 2027: 23.9; 2028: 23.6; 2029: 23.3; 2030: 23.2; 2031: 23.2
- Central government total primary revenue (percent of GDP): 2023: 21.5; 2024: 22.7; 2025: 22.8; 2026: 24.0; 2027: 23.7; 2028: 24.0; 2029: 24.0; 2030: 24.2; 2031: 24.2
- Overall balance (national representation, includes BCB): 2023: -8.8; 2024: -8.4; 2025: -8.3; 2026: -9.7; 2027: -8.1; 2028: -6.4; 2029: -6.2; 2030: -6.2

### External Sector and Balance of Payments (selected)
- Current account (US$ billions): 2023: -27.0; 2024: -65.3; 2025: -66.7; 2026: -66.2; 2027: -67.9; 2028: -63.4; 2029: -57.9; 2030: -59.0; 2031: -59.7
- Current account (percent of GDP): 2023: -1.2; 2024: -3.0; 2025: -2.9; 2026: -2.5; 2027: -2.4; 2028: -2.1; 2029: -1.9; 2030: -1.8; 2031: -1.7
- Trade balance (US$ billions): 2023: 92.3; 2024: 65.8; 2025: 59.7; 2026: 75.4; 2027: 85.5; 2028: 90.6; 2029: 97.8; 2030: 103.9; 2031: 110.7
- Exports (fob, US$ billions): 2023: 343.8; 2024: 339.9; 2025: 350.5; 2026: 391.3; 2027: 403.2; 2028: 413.5; 2029: 428.2; 2030: 443.3; 2031: 459.3
- Imports (fob, US$ billions): 2023: 251.5; 2024: 274.0; 2025: 290.8; 2026: 316.0; 2027: 317.7; 2028: 322.9; 2029: 330.4; 2030: 339.3; 2031: 348.6
- Gross reserves (eop, US$ billions): 2023: 355.0; 2024: 329.7; 2025: 358.2; 2026: 358.2; 2027: 358.2; 2028: 358.2; 2029: 358.2; 2030: 358.2; 2031: 358.2
- Nominal exchange rate (R$/US$, annual average): 2023: 5.0; 2024: 5.4; 2025: 5.6; 2026: 5.1; 2027: 5.1; 2028: 5.2; 2029: 5.3; 2030: 5.3; 2031: 5.3
- REER (annual average in percent; appreciation +): 2023: 4.9; 2024: -4.1; 2025: -2.5

### External Debt and Vulnerabilities (selected)
- Total external debt (US$ billions): 2023: 731.5; 2024: 717.9; 2025: 819.5; 2026: 839.6; 2027: 860.6; 2028: 875.5; 2029: 884.6; 2030: 891.9; 2031: 897.9
- Total external debt (percent of GDP): 2023: 33.4; 2024: 32.8; 2025: 35.9; 2026: 31.5; 2027: 30.2; 2028: 29.5; 2029: 28.3; 2030: 27.1; 2031: 25.9
- Medium- and long-term external debt (US$ billions): 2023: 651.0; 2024: 633.7; 2025: 706.9; 2026: 724.3; 2027: 742.4; 2028: 755.3; 2029: 763.1; 2030: 769.4; 2031: 774.6
- Short-term external debt (US$ billions): 2023: 80.5; 2024: 84.3; 2025: 112.5; 2026: 115.3; 2027: 118.2; 2028: 120.2; 2029: 121.5; 2030: 122.5; 2031: 123.3
- Medium- and long-term external debt service (US$ billions): 2023: 112.3; 2024: 112.3; 2025: 110.5; 2026: 115.7; 2027: 145.2; 2028: 148.7; 2029: 153.3; 2030: 156.8; 2031: 158.7
- Gross reserves in months of prospective GNFS imports: 2023: 11.3; 2024: 10.0; 2025: 10.9; 2026: 10.1; 2027: 10.0; 2028: 9.9; 2029: 9.7; 2030: 9.5; 2031: 9.2
- Gross reserves (percent of external short-term debt, maturity basis): 2023: 441.1; 2024: 391.2; 2025: 318.4; 2026: 310.7; 2027: 303.2; 2028: 298.0; 2029: 294.9; 2030: 292.5; 2031: 290.6

### Financial Sector Indicators (selected)
- SELIC policy rate, end of period: 2023: 11.8; 2024: 12.3; 2025: 15.0; 2026: 14.0; 2027: 9.3; 2028: 8.0; 2029: 8.0; 2030: 8.0; 2031: 8.0
- Unemployment rate: 2023: 8.0; 2024: 6.9; 2025: 6.0; 2026: 6.2; 2027: 6.8; 2028: 7.2; 2029: 7.4; 2030: 7.4; 2031: 7.4
- Financial soundness (selected ratios, 2025): Regulatory capital to risk-weighted assets: 17.5; Regulatory Tier 1 capital to risk-weighted assets: 15.3; Tier 1 capital to assets: 8.8; Non-performing loans to total gross loans (2025): 2.6; Return on assets (2025): 2.1; Return on equity (2025): 15.3; Liquidity coverage ratio (2025): 169.8; Liquid assets to short-term liabilities (2025): 194.5

### Fiscal Sub-sectors (selected)
- General government revenue (percent of GDP): 2023: 37.6; 2024: 39.4; 2025: 39.5; 2026: 40.7
- General government total expenditure (percent of GDP): 2023: 45.3; 2024: 45.7; 2025: 46.9; 2026: 48.9
- States: Revenue (percent of GDP) 2023: 12.4; 2024: 13.0; 2025: 12.9; 2026: 12.9; Net lending and borrowing (States) 2023: -0.9; 2024: -0.5; 2025: -0.8; 2026: -1.0
- Municipalities: Revenue (percent of GDP) 2023: 10.4; 2024: 10.9; 2025: 11.1; 2026: 11.2; Net lending and borrowing (Municipalities) 2023: 0.1; 2024: -0.1; 2025: 0.6; 2026: 0.0

*Source: IMF staff tables and figures as presented in the provided content unit.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall Assessment
- The external position in 2025 was moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- The CA deficit narrowed slightly to 2.9 percent of GDP and is projected to decline further to 1.7 percent of GDP over the medium term, supported by rising oil exports and public saving.
- Risks to Brazil’s external position over the medium term relate to geopolitical tensions and trade disruptions, volatility in global commodity markets, and insufficient progress on fiscal adjustment and structural reforms to boost competitiveness.

### Potential Policy Responses
- Raise national saving, which would also increase scope for priority investments.
- Sustained and more ambitious fiscal consolidation to help increase net public saving.
- Target industrial policies to where externalities or market failures prevent effective market solutions, while minimizing trade and investment distortions.
- Continue to promote transparent and predictable trade policy frameworks; recent progress in deepening integration through trade agreements is welcome.

### Foreign Asset and Liability Position and Trajectory
- Background:
  - Brazil’s NIIP fell to –49.4 percent of GDP in 2025, from –38.2 percent of GDP in 2024 and an average of –41.5 percent of the GDP during 2020–23.
  - The NIIP decrease in 2025 reflected a 1.9 percentage points of GDP rise in gross foreign assets from 2024 alongside a much larger, 13 percentage points of GDP increase in gross foreign liabilities, driven by continued strong FDI inflows, a pickup in portfolio inflows, and valuation effects from currency appreciation.
  - FDI accounts for about 70 percent of total liabilities.
  - At the end of 2025, external debt rose to 35.9 percent of GDP and 202.4 percent of exports, from about 32.8 percent of GDP and 184.6 percent of exports in 2024.
- Assessment:
  - The NIIP has remained negative since the series was first published in 2001.
  - Over the medium term, gross external financing needs are expected to remain moderate, at about 10 percent of GDP annually.
  - The NIIP is projected to stabilize around –44 percent of GDP, as continued CA deficits are broadly offset by robust nominal GDP growth.
- Acy 2025 (% GDP):
  - NIIP: -49.4
  - Gross Assets: 47.1
  - Reserve Assets: 15.7
  - Gross Liab.: 96.5
  - Debt Liab.: 35.9

### Current Account
- Background:
  - During 2020-2023, the CA deficit averaged 1.8 percent of GDP.
  - It widened to 3 percent in 2024 and lowered to 2.9 percent in 2025.
  - A narrowing goods trade balance (from 3.0 to 2.6 percent of GDP) was offset by a smaller service deficit (–2.2 percent of GDP from –2.5 percent of GDP in 2024) and a reduced primary income deficit (–3.6 percent of GDP from –3.7 percent of GDP in 2024).
  - From a saving-investment perspective, national saving has declined slightly, with an increase in private saving more than offset by a deterioration in public saving.
  - Investment also edged down, driven by the private sector, leaving the overall deficit slightly smaller.
  - The CA deficit is expected to narrow to 1.7 percent of GDP over the medium term, supported by rising oil exports and public saving.
- Assessment:
  - In 2025, the cyclically adjusted CA balance was –2.9 percent of GDP and EBA estimates suggest a cyclically-adjusted CA norm of –1.4 percent of GDP.
  - IMF staff estimates the CA gap to be in the range of -1.9 to -1.0 percent of GDP, with a midpoint of –1.5 percent.
  - EBA-identified policy gaps explain most of the CA gap and are estimated at –1.2 percent of GDP, mainly reflecting a larger overall fiscal deficit in Brazil compared to trading partners, as well as a small positive credit gap in Brazil compared with a generally negative credit gap among trading partners.
- 2025 (% GDP):
  - CA: -2.9
  - Cycl. Adj. CA: -2.9
  - EBA Norm: -1.4
  - EBA Gap: -1.5
  - Staff Adj.: 0
  - Staff Gap: -1.5

### Real Exchange Rate
- Background:
  - The REER appreciated by 10 percent in 2025 at a 12-month rate as of end-2025, following a sharp 17 percent depreciation in 2024.
  - The average REER in 2025 depreciated by 2.5 percent compared to 2024.
  - The nominal exchange rate against the US dollar strengthened by 11 percent on a 12-month basis by December 2025.
  - In early 2026, despite the war in Middle East, the exchange rate has appreciated further, both against the US dollar and in REER terms. As of March 2026, the REER was 5.5 percent above the 2025 average.
- Assessment:
  - The IMF staff’s CA gap estimate implies a REER gap of 11.2 percent in 2025 (applying an estimated elasticity of 0.13).
  - The REER index model suggests a REER gap of –30.4 percent and the REER level model suggests a gap of –21.3 percent.
  - Consistent with the CA gap, the staff assesses the REER gap to be in the range of 7.8 to 14.7 percent, with a midpoint of 11.2 percent.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Brazil continues to attract sizable capital flows.
  - Net FDI flows have consistently financed the CA deficit, averaging 2.8 percent of GDP during 2015–24 and remaining a sizable 2.1 percent of GDP in 2025.
  - Portfolio investment rebounded strongly in the second half of 2025, although net annual flows registered a modest outflow of 0.4 percent of GDP.
- Assessment:
  - The composition of capital flows is expected to maintain a favorable risk profile over the medium term, with sustained net FDI inflows outweighing relatively small and volatile net portfolio flows, and with foreign liabilities increasingly dominated by FDI liabilities.
  - However, tighter global financial conditions and the risk of limited progress on domestic reforms pose downside risks to these capital flows.
  - The IOF-FX tax applicable to capital transactions, assessed to be a capital flow management measure under the Institutional View, should be phased out.

### FX Intervention and Reserves Level
- Background:
  - Brazil has a floating exchange rate.
  - During 2020-22 and 2024, the authorities intervened in the FX markets (including spot, repo, and FX swap markets) to ensure smooth market functioning and reduce excessive volatility.
  - In 2025, the authorities largely refrained from spot FX intervention, while unwinding the FX swap stock accumulated from previous interventions.
  - International reserves increased by US$ 28.5 billion to US$ 358 billion at the end of 2025, largely reflecting valuation effects.
- Assessment:
  - The flexible exchange rate has continued to serve as an important shock absorber.
  - Reserves remain adequate, including according to the IMF’s reserve adequacy metric, which stood at 121 percent at the end of 2025, providing insurance against external shocks.
  - FX intervention could be used to address episodes of higher risk premia when FX liquidity becomes shallow, without substituting for warranted adjustment of macroeconomic policies.

*Source: Annex I. External Sector Assessment*

### 5. Debt consolidation across sectors:

### 5. Debt consolidation across sectors:

### Debt recording and consolidation perimeter
- 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.
- Reporting items and concepts identified in the source:
  - CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector.
  - Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable.
  - IPSGSs: Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities.
  - Non-cash basis includes accrual recording, commitment basis, due for payment, etc.
  - Nominal value definition: amount the debtor owes; reflects value at creation and subsequent economic flows (transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes).
  - Face value: undiscounted amount of principal to be paid at (or before) maturity.
  - Market value: value as if acquired in market transactions on the balance sheet reporting date; only traded debt securities have observed market values.

### Public debt structure indicators and composition (General Government unless noted)
- Commentary findings:
  - 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 of securities held by the BCB that pose neglible refinancing risks.
  - Investment funds (pensions) held about 21 (23) percent of federal debt. This structure is similar to the one observed in 2015 (20 and 21 percent, respectively).
  - Debt projections are highly sensitive to changes in interest rates given the relatively high share of short-term and variable coupon debt.
- Residual maturity: 6. years (as reported in figure caption).
- Visualization notes (figures referenced): Debt by Currency, Debt by Instruments, Public Debt by Holder, Public Debt by Governing Law, Public Debt by Maturity.

### Baseline medium- and long-term projections (Figures and table values preserved)
- Public debt trajectory (Percent of GDP):
  - Actual 2025: 93.3
  - 2026: 97.8
  - 2027: 100.0
  - 2028: 102.0
  - 2029: 103.7
  - 2030: 104.8
  - 2031: 105.4
  - 2032: 105.6
  - 2033: 106.0
  - 2034: 106.2
  - 2035: 106.3
  - 2036: 106.3
- Change in public debt (Percent of GDP):
  - 2026: 6.3
  - 2027: 4.5
  - 2028: 2.2
  - 2029: 2.1
  - 2030: 1.7
  - 2031: 1.1
  - 2032: 0.6
  - 2033: 0.3
  - 2034: 0.4
  - 2035: 0.2
  - 2036: 0.1
  - beyond: 0.0
- Contribution of identified flows (Percent of GDP):
  - 2026: 3.8
  - 2027: 4.5
  - 2028: 2.1
  - 2029: 2.0
  - 2030: 1.6
  - 2031: 1.0
  - 2032: 0.6
  - 2033: 0.3
  - 2034: 0.4
  - 2035: 0.2
  - 2036: 0.1
  - beyond: 0.0
- Primary balance (Percent of GDP):
  - 2025 actual: 0.1
  - 2026: 0.3
  - 2027: 0.2
  - 2028: -0.4
  - 2029: -0.7
  - 2030: -1.0
  - 2031: -1.1
  - 2032: -1.2
  - 2033: -1.3
  - 2034: -1.3
  - 2035: -1.5
  - 2036: -1.5
- Noninterest revenues and expenditures (indices as printed):
  - Noninterest revenues: 37 38 38 38 38 39 39 39 39 39 39 39
  - Noninterest expenditures: 37 39 38 38 38 38 38 37 37 37 37 37
- Automatic debt dynamics (Percent of GDP): 3.5 4.3 2.3 3.0 2.8 2.9 2.7 2.7 2.5 2.4 2.4 2.4
- Real interest rate and relative inflation (percent): 5.4 6.5 4.4 5.3 5.3 5.4 5.3 5.2 5.1 5.0 5.0 5.0
- Real interest rate (percent): 5.3 6.4 4.3 5.3 5.3 5.4 5.2 5.2 5.2 5.0 4.9 4.9
- Relative inflation (percent): 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.1 0.1
- Real growth rate (percent): -1.9 -2.2 -2.1 -2.3 -2.5 -2.5 -2.6 n.a. -2.6 -2.6 -2.6 -2.6 -2.6
- Other identified flows (Percent of GDP): 0.1 -0.1 -0.3 -0.6 -0.5 -0.8 -1.0 -1.2 -0.8 -0.8 -0.8 -0.9
- Contingent liabilities: 0.0 across the projection years shown.
- (minus) Interest Revenues (Percent of GDP): -2.6 -2.4 -2.1 -2.0 -2.0 -2.0 -1.9 -1.9 -1.9 -2.0 -2.0 -2.0
- Other transactions (Percent of GDP): 2.7 2.3 1.8 1.4 1.4 1.1 0.9 0.8 1.1 1.1 1.1 1.1
- Contribution of residual: 2.5 then 0.0 across projection years.
- Gross financing needs (Percent of GDP): 26.1 14.5 17.1 11.6 21.1 20.2 19.1 19.5 17.4 14.0 19.3 18.3
  - of which: debt service: 28.6 16.6 19.1 14.0 23.7 23.2 22.1 22.6 20.6 17.3 22.7 21.8
  - Local currency: 27.9 12.4 16.1 10.1 21.0 19.2 17.0 17.5 15.8 13.0 17.2 17.6
  - Foreign currency: 0.7 0.5 0.5 0.5 0.5 0.5 0.4 0.3 0.3 0.3 0.3 0.4
- Memo:
  - Real GDP growth (percent): 2.3 2.4 2.2 2.4 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5
  - Inflation (GDP deflator; percent): 5.7 4.0 5.1 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6
  - Nominal GDP growth (percent): 8.1 6.5 7.4 6.0 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2
  - Effective interest rate (percent): 12.3 11.3 9.8 9.2 9.1 9.1 8.9 8.8 8.7 8.5 8.5 8.5
- Staff commentary:
  - Public debt will rise over the medium- and long- term largely due to unfavorable interest rate-growth differential (r-g) dynamics.
  - Under staff's baseline, a primary balance of 1.6 percent of GDP is expected to stabilize debt at the level of 2030 about 105 percent of GDP.
  - Note 1/: Negative values in the projections primarily reflect the use of interest rate revenues from the TSA account to finance debt.

### Realism of baseline assumptions and forecast track record
- Commentary highlights:
  - The composition of debt-creating flows shows the impact of higher real interest rates compared to the lower rates prevailing during the pandemic.
  - The 3-year adjustment in the cyclically primary balance is within historical norms.
- Historical and comparator analysis:
  - Comparator group: Emerging Markets, Non-Commodity Exporter, Surveillance.
  - Projections made in the October and April WEO vintage (note 1/).
  - Laubach (2009) rule referenced: assumes bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio.
- Distribution and percentile findings:
  - 3-year debt reduction above 75th percentile: 5.9 ppts of GDP; percentile rank 23.6.
  - 3-year adjustment above 75th percentile (2 ppts of GDP); percentile rank 65.
- Fiscal adjustment and growth multipliers visualization: baseline vs multipliers (0.5, 1, 1.5) shown for 2021–2028 period.

### Medium-term risk assessment (Figure 6)
- Debt fanchart and indices (values preserved):
  - Debt fanchart module Value: 49.8; Contribution 0.7 (percent of GDP).
  - Probability of debt non-stabilization (percent): 82.2; Contribution 0.7.
  - Terminal debt-to-GDP x institutions index: 74.4; Contribution 1.6.
  - Debt fanchart index (DFI): 3.0 — Risk signal: High (note 3/).
- Gross Financing Needs (GFN) module:
  - Average baseline GFN (percent of GDP): 17.3; Contribution 5.9.
  - Initial Banks' claims on the gen. govt (pct bank assets): 26.5; Contribution 8.6.
  - Change in banks' claims in stress (pct banks' assets): 0.5; Contribution 0.2.
  - GFN financeability index (GFI): 14.7 — Risk signal: Moderate (note 4/).
- Medium-term index and final assessment:
  - Medium-term index: combined contributions produce Risk signal: 5/.
  - Final assessment probabilities:
    - Prob. of missed crisis, 2026-2031, if stress not predicted: 54.5 pct.
    - Prob. of false alarms, 2026-2031, if stress predicted: 3.4 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 a moderate level of risk.
  - The large availability of liquid assets (14 percent of GDP in cash buffers as of April), not included in the module, could help lower the terminal level of debt in the long run.
  - Negligible refinancing risks for central bank held securities (which must be rolled over by law) further mitigate GFN risks.

### Triggered modules and long-term rollover risk (Figure 7)
- Long-Term Risk Assessment: Large Amortization
  - Commentary: Over the long-term, Brazil's rollover risk is moderate.
  - 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:
    - Large domestic investor base.
    - Large liquid assets held by the treasury.
    - Substantial Central Bank holdings of federal securities that pose negligible refinancing risks.
  - Historical scenario simulation caveat: might not be representative as it reflects historically elevated deficit, including the impact of the COVID-19 pandemic.

### Demographics and long-term fiscal pressures: Pensions and Health (Figures 8–9)
- Pensions:
  - Permanent adjustment needed in the pension system to keep pension assets positive for:
    - 30 years: 3.1% (pp of GDP per year)
    - 50 years: 6.5%
    - Until 2100: 9.5%
  - Staff 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.
  - Pension financing needs and total benefits paid are projected to rise across 2026–2054 in the figures.
- Health:
  - Commentary: Over the longer run, Brazil should continue with reforms to tackle risks arising from population aging which will pressure healthcare spending.
  - Health demographic scenarios (Baseline, Demographics, Demographics + ECG) show increases in GFN-to-GDP and Total Public Debt-to-GDP ratios over the long run.

### Annex IV — Spending efficiency: Doing More with Less
- Key messages:
  - Strengthening spending management and governance is central to improving spending efficiency.
  - Main components of institutional frameworks that underpin efficient public spending:
    - Fiscal governance (low levels of corruption, strong rule of law, supported by transparency, audit, and accountability processes).
    - Robust policy evaluation (spending reviews, ex-post policy assessment).
    - Fiscal frameworks to guide macro-fiscal policymaking (fiscal rules, medium-term budgeting).
    - Strong operational processes in public investment management and procurement.
  - Brazil faces the challenge of navigating long standing spending needs while improving its fiscal position.
    - More than 90 percent of federal primary expenditure is mandatory, implying significant budgetary rigidity.
    - Mandatory expenditures reflect social spending priorities in transfers and pensions, education, and health; their size and projected growth complicate achieving the targeted fiscal path.
    - Mandatory spending crowds out growth-enhancing capital investment; rapid and sustained rise in emendas parlamentares spending (see Box 5 in the main text).
  - Recent policy efforts such as the fiscal rule capping real spending growth seek to help contain spending, but legal, social, and economic limits constrain restraint.
  - Closing spending efficiency gaps in human capital and physical capital spending by 2040 could boost output by 5 percent each (staff estimates using October 2025 IMF Fiscal Monitor methodology).
- Evidence on efficiency gaps:
  - Figures show infrastructure, education, and health efficiency gaps over time; efficiency gaps range from 0 (fully efficient) to 1 (fully inefficient) and are estimated using stochastic frontier analysis.
  - Brazil's efficiency gap in health and infrastructure has kept pace with LA5 peers and outperformed emerging market comparators; education gap remains.

*Source: IMF.*

### 4.      Brazil has made notable progress in strengthening the institutional

### 1braea2026001 - 4.      Brazil has made notable progress in strengthening the institutional

### Progress in policy evaluation and spending management
- Establishment of CMAP (Public Policy Monitoring and Evaluation Council) in 2019 to formalize policy evaluation at senior government level.
- Establishment of the SMA in 2023 as a fully staffed unit to support CMAP and undertake regular evaluation exercises.
- SMA evaluations undertaken include targeted evaluations of social security and Proagro spending.
- Potential saving measures identified in SMA evaluations were costed and published within Annex IV of the 2025 draft PLDO and were estimated to yield just under 0.1 percent of GDP. Examples included:
  - increasing medical testing for those receiving temporary disability assistance;
  - reducing the maximum insurance limit for Proagro.
- SMA developed a standardized methodology for policy evaluation (MAPP) and is enlisting civil servants from other ministries to embed and expand a culture of policy evaluation.

### Medium-term budgeting and procurement modernization
- Medium-term fiscal framework (MFMP) established in 2023 sets a binding primary balance target for the reference year in the PLDO.
- Medium-term budget framework (MOMP) established in 2025 sets out indicative expenditure forecasts in the Annual Budget Bill (PLOA):
  - In 2025, forecasts covered one year in the future;
  - forecasts will be extended to three years in 2026.
- Procurement reform: Lei 14.133 (2021) modernized procurement covering 6 percent of GDP of spending in 2021 across health, education, and infrastructure by:
  - introducing more robust preparatory phases (preliminary studies);
  - enabling competitive dialogue;
  - improving risk management;
  - widespread digitalization.
- Establishment of the National Public Procurement Website (PNCP) improved governance and transparency.

### Transparency and accountability around emendas parlamentares
- Supreme Court (STF) ruling in 2022 found rapporteur amendments (emendas relator) unconstitutional; governance and accountability for emendas strengthened subsequently.
- Increased fiscal transparency via CGU audits (including risk-based audits), Portal da Transparencia, Painel Emendas, and Transfergov.br to provide open data on:
  - parliamentarians’ requests for emendas, intended beneficiary, and location;
  - proposals, agreements, and workplans for emendas spending;
  - budgetary execution of emendas spending.
- Citizens can raise concerns and submit evidence on emendas-financed projects via the Fala Brasil platform.
- CGU audits have identified irregularities in execution of emendas, notably with the rapid expansion and fragmentation of “emendas PIX” (special transfers under emendas individuais), including deficiencies in compliance with transparency and traceability requirements and risks of misappropriation and misallocation of public funds. STF has noted that harmful practices persist alongside shortcomings in execution.

### Remaining gaps and areas for further strengthening
- Spending reviews and policy evaluation:
  - Spending reviews are not institutionalized, are disconnected from budget timelines, and have a relatively narrow scope.
  - Implementation of efficiency-enhancing policy measures identified in evaluations is not mandatory.
  - Challenges exist in monitoring and reporting on implementation of evaluation outcomes.
  - Ex-ante policy evaluation is not currently conducted but could improve decision making; linking ex-ante evaluation to new policy proposals above a specified cost threshold is warranted.
  - Sectoral spending reviews and evaluations could be targeted to areas with documented high spending inefficiency (example: education).
- Integration of MOMP with fiscal framework and spending reviews:
  - MOMP is currently a baseline exercise run by line ministries without formal guidance on methodologies or macroeconomic parameters from the Ministry of Finance or Ministry of Planning and Budget.
  - Expenditure ceilings are for now based on the previous year’s spending limit, limiting assessment of cost pressures and embedding budgetary rigidities.
  - MOMP is not integrated with the fiscal framework and the annual budget and is non-binding relative to the fiscal framework.
  - Integrating MOMP with spending reviews and policy evaluation (including binding, consistent expenditure ceilings) could:
    - inform expenditure ceilings with spending review targets;
    - enable spending reviews to deliver reductions or reallocations needed to fit within ceilings;
    - strengthen the fiscal position while improving spending efficiency.
- Procurement implementation and processes:
  - Training exists for the new procurement system, but greater focus is needed on the preparatory phase to address weaknesses such as weak preliminary studies, copied or outdated specifications, and generic risk matrices for legal compliance.
  - Use of procurement strategies and greater integration of inventory management with procurement planning would improve identification of needs and reduce waste, particularly in health.
- Accountability for emendas:
  - Ensure Portal da Transparencia, Painel de Emendas, and Transfergov.br data are complete, integrated, and high quality to enable evaluation of effects at the subnational level.
  - Implement more structured ex-post verification (measurable performance indicators and standardized reporting on project completion and outcomes).
  - Clarify attribution of responsibility across the lifecycle of emendas (allocation, approval, execution), complemented by conflict-of-interest and asset declaration frameworks to identify individual accountability and strengthen deterrence.
  - Ensure CGU audit findings are supported by clear referral pathways and follow-up protocols with other accountability bodies such as the Federal Court of Accounts (TCU) so irregularities trigger remedial, disciplinary, or judicial action.

### Coordination across levels of government
- Federal government expenditure as a share of GDP has declined, while rising state and municipal expenditures have raised overall general government spending.
- Emendas expenditure is intended to fund subnational projects and a large share of procurement is undertaken at state and municipal levels; thus, closer coordination across levels of government is required to boost spending efficiency.

### Annex V — Quarterly Projection Model (QPM): methodology and calibration
- Model structure and interpretation:
  - QPM distinguishes equilibrium levels (“trends”) driven by long-term fundamentals and deviations (“gaps”) interpreted as business cycle fluctuations.
  - Semi-structural model flexible to replicate central data features while incorporating country-specific aspects.
- Model components summarized (aggregate demand, aggregate supply/Phillips curve, relative price trends, UIP, monetary policy rule, fiscal block and debt dynamics).
- Fiscal block provides stock-flow analysis for public debt trajectory and government total and primary deficits as shares of GDP; includes fiscal impulse and debt accumulation equations.
- Fiscal reaction function for the cyclically adjusted primary deficit (Structural Deficit) includes:
  - target structural deficit (StrDef_ttar) representing desired long-run fiscal stance;
  - automatic fiscal adjustment when debt deviates from a reference level (Debt_Dev_t > 0 requires smaller structural deficit to generate primary surpluses that stabilize debt);
  - forward-looking behavior responding to expected debt trajectory.
- Risk premium in the UIP condition reacts to the debt-to-GDP ratio; changes in the premium may affect the neutral interest rate and the nominal exchange rate.
- Calibration and steady states:
  - Parameters calibrated using expert judgment, peer countries, and desk estimates.
  - Calibration of monetary policy reaction function draws on 2025 Article IV Staff Report, Annex VI, and BCB’s small-scale semi-structural model documentation (BCB, 2024).
  - Model steady states incorporate IMF staff estimates:
    - potential GDP growth of 2.5 percent;
    - inflation target of 3.0 percent;
    - neutral rate of interest of 5.0 percent.

### Annex VI — Market-based measure of Brazil’s local-currency sovereign risk (Sovereign–Supra Spread)
- Purpose:
  - Decompose local-currency sovereign yield into (i) a credit-risk-free supranational bond (supra) yield and (ii) a sovereign–supra spread measuring local-currency sovereign risk.
  - Construct a daily supra yield curve from transaction prices of AAA-rated supras denominated in reais and compute the spread between sovereign yield and supra yield at constant maturity.
  - Rationale: sovereign CDS contracts are written on external (mostly USD) debt and may not fully capture local-currency sovereign risk due to selective/“soft” default possibilities, interaction with exchange-rate movements, and market segmentation.
- Estimation approach:
  - Credit-risk-free supra yield curve estimated from coupon bond transaction data using the Nelson–Siegel parametric form:
    - y_t^τ = β0,t + β1,t (1−e^(−τλ_t)/ (τλ_t) ) + β2,t (1−e^(−τλ_t)/(τλ_t) − e^(−τλ_t) )
  - For each day, coefficients β0,t, β1,t, β2,t, λ_t are estimated by non-linear least squares minimizing sum of squared pricing errors weighted by inverse modified duration.
  - Numerical-stability enhancements:
    - β0 + β1 anchored to effective overnight Selic rate (zero-maturity yield equals policy rate);
    - previous day’s coefficient estimates used as initial values for current day’s numerical routine.

*Prepared from content of the provided IMF chapter/section.*

### 3.      Daily transactions of AAA-rated supras for 2013–26 are sourced from LSEG

### 3.      Daily transactions of AAA-rated supras for 2013–26 are sourced from LSEG Datastream

### Data and sample construction
- Daily transactions of AAA-rated supras for 2013–26 are sourced from LSEG Datastream.
- Exclusions from the raw transaction sample:
  - Illiquid observations with stale prices/yields.
  - Wide bid–ask spreads (above 75 bps).
  - Short remaining maturities (less than 183 days).
  - Other outliers.
- The cleaned sample typically contains 20–80 active bonds per day, with a marked decline in the early sample and during the pandemic.
- Daily estimates of the local-currency sovereign yield curve, USD CDS spread curve, and the effective Selic rate are taken from LSEG Workspace.
- Other daily and monthly variables are sourced from Haver.

### Sovereign–supra co-movement and fiscal event tracking
- The estimated supra yield closely co-moves with the sovereign yield, indicating common macro-financial drivers (monthly local currency supra yield vs sovereign yield at the five-year constant-maturity).
- The sovereign–supra spread tracks key fiscal events:
  - Notable movements include the rise and fall in perceived risks during the 2014-2016 crisis.
  - Perceived risk rises following the April 2024 downward adjustment of primary balance targets and the November 2024 fiscal package announcement, and then declines subsequently, suggesting an easing in fiscal risk perceptions.
- The sovereign–supra spread and CDS have generally co-moved but can diverge; e.g., during the pandemic the CDS increased while the spread behaved differently, possibly reflecting factors not solely related to perceived LC sovereign credit risk.

### Term-structure model, identification, and estimation
- Purpose: decompose the supra yield into expected short rates and the term premium to infer future financing costs implied by the current term structure.
- Modeling assumptions and representation:
  - Term-structure models typically abstract from default risk; the constructed credit-risk-free supra yield is used for decomposition.
  - Observation equation and state evolution (as presented):
    - yt,τ = bτ Xt + ΣY ut,  
    - Xt − μ = Φ (Xt−1 − μ) + ΣX et,
    - where Xt = (rt, X2,t, X3,t) includes an observable current short rate and two latent factors.
  - No-arbitrage condition under the risk-neutral measure: Pt,τ = EtQ (e−rt Pt+1,τ−1), where Pt,τ is the price of a zero-coupon bond with maturity τ.
  - Tight parameterization of bτ with a single time-invariant coefficient γ:
    - bτ = (1, 1 − (1−γ)τ (1−γ)τ, −γτ−1 + 1−γτ (1−γ)τ).
- Numerical estimation using monthly data for 2013-26 in four steps:
  1. Regress Yt = (yt,3m, yt,1y, yt,2y, ..., yt,10y)′ on B = (b3m, bt,1y, bt,2y, ..., bt,10y)′ to get Xt for each γ in a grid.
  2. Choose the γ that minimizes the sum of squared errors.
  3. Regress Xt on its lag to estimate Φ.
  4. Compute expected short-rate components and the term premium.

### Key quantitative findings and market implications
- Estimated local-currency risk premium averaged 140 basis points over the last 12 months.
- Estimated term premium averaged 90 basis points over the last 12 months.
- Model-implied path for the Selic rate:
  - Bottoms out at around 9 percent by 2030.
  - Market participants expect the Selic rate and the five-year supra yield to decline to about 9 percent over the medium term.
  - The ten-year supra yield reaches about 10 percent in the model-implied path.
- Market-implied medium-term financing costs:
  - Assuming the sovereign risk premium remains around current levels, market perceptions imply medium-term financing costs of 10.5–11.5 percent.
- Interpretation:
  - Markets expect interest rates to fall significantly (relatively moderate expected short rates), but long-term yields remain elevated due to risk and term premia, which increase with maturity.

### Trade landscape: trade openness, composition, vulnerabilities, and policy implications (Annex VII)
- Trade liberalization and openness
  - Brazil underwent multiple waves of trade liberalization, with the most pronounced phases in the early 1990s and early 2000s.
  - After the Global Financial Crisis, tariff rates largely stabilized and gains in trade openness plateaued.
  - Brazil’s average tariff rate is comparable to that of a typical EMDE but remains higher than that of many regional peers and well above levels observed in advanced economies.
- Changing trading patterns and partner concentration (shares)
  - China’s share of Brazil’s exports rose from about 3 percent in the early 1990s to nearly 30 percent in 2025.
  - United States export share declined from around 25 percent to 11 percent.
  - EU export share fell from roughly 30 percent to 12 percent.
  - Mercosur’s share decreased to about 8 percent from a peak of about 19 percent in the late 1990s.
  - Imports: China accounts for roughly one-quarter of Brazil’s imports, followed by the EU (18 percent), the United States (16 percent), and Mercosur (8 percent).
- Export and import composition
  - Exports: agricultural products now account for more than 40 percent of total exports.
    - Soybeans comprise about one-quarter of agricultural exports.
    - Oil accounts for 16 percent.
    - Iron ore accounts for 10 percent.
  - Manufactured goods account for roughly 30 percent of exports.
  - Imports: manufactured goods account for more than 80 percent of total imports.
  - Export product concentration has risen (Herfindahl–Hirschman Index) and contrasts with other BRICS where exports have diversified toward manufacturing.
  - Brazil’s export concentration is below that of other major Latin American economies.
  - Brazil is less integrated into global value chains—both downstream and upstream—than emerging market economies in East Asia and Emerging Europe.
- Vulnerability to commodity price shocks and policy priorities
  - Greater reliance on commodities is associated with more volatile terms of trade.
  - Brazil’s output historically moves closely with the terms of trade, with downturns coinciding with commodity price declines (e.g., 2015).
  - Priorities include:
    - Building buffers during commodity price upswings.
    - Preserving space for support in downturns.
    - Maintaining exchange rate flexibility to facilitate adjustment to external shocks.
- EU–Mercosur agreement: scope and estimated impacts
  - Agreement coverage and tariff phase-out:
    - Covers around 2 percent of EU trade and 13-17 percent of Mercosur trade.
    - Mercosur to phase out tariffs on 91 percent of EU goods over 15 years.
    - EU to eliminate tariffs on 95 percent of Mercosur goods within 12 years, with some agricultural products protected through EU tariff rate quotas.
  - Agreement includes substantive and legally enforceable commitments across technical and agricultural regulations, services, intellectual property, subsidies, transparency, and government procurement, and establishes recourse to state-to-state dispute settlement.
  - Staff estimates and simulations:
    - Product-level estimates using trade elasticity point to particularly strong export growth concentrated in animal products, foodstuffs, vegetable products, and wood products.
    - Imports from the EU are expected to rise across a broad range of sectors, reflecting increased demand for manufactured goods and capital equipment.
    - Using a structural gravity model, tariff reductions alone could increase Brazil’s exports to the EU by up to 14 percent, with the largest gains in agriculture and manufactured agricultural products.
    - Agricultural estimates may represent an upper bound because they do not account for EU tariff rate quotas on beef, poultry, sugar and bio-ethanol or potential bilateral safeguards.
    - Incorporating both tariff changes and non-tariff provisions points to greater trade gains, most pronounced in agriculture and services; tariff reductions are the primary driver in manufacturing; mining and energy sectors are largely unaffected.
    - General equilibrium analysis based on Rotunno and Ruta (2026) suggests the agreement with the EU could increase long-run aggregate trade by 10 percentage points, and real income by 0.22 percentage relative to a no-agreement scenario.
- Methodological note (structural gravity estimation)
  - Staff estimates a structural gravity model using the Poisson Pseudo Maximum Likelihood (PPML) estimator with high-dimensional fixed effects.
  - Covered broad sectors: agriculture, manufacturing, mining and energy, and services.
  - Findings:
    - The coefficient on tariffs as trade costs is negative and highly significant for agriculture and manufacturing, but not for mining and energy or services.
    - The coefficient of RTA depth (number of legally enforceable provisions) is positive and significant for all broad sectors except mining and energy.
  - Counterfactual simulation for the EU–Mercosur agreement assumes:
    1. Tariffs are reduced to zero.
    2. RTA depth is set to the average of the EU’s other recent agreements as proxied by the World Bank’s Deep Trade Agreements (DTA) database.
  - Impact of simultaneous tariff reductions and deeper RTA coverage compounds multiplicatively, following the expression shown in the methodological note.

*Prepared by IMF staff as presented in the chapter excerpt.*

### Annex VIII. Data Issues

### Annex VIII. Data Issues

### Data Adequacy Assessment (Table 1)
- Overall data adequacy assessment: A (The data provided to the Fund are adequate for surveillance.)
- Overall questionnaire assessment: A
- Median Rating by sector (heatmap summary): 
  - National Accounts: A
  - Prices: A
  - Government Finance Statistics: A
  - External Sector Statistics: A
  - Monetary and Financial Statistics: A
  - Intersectoral Consistency: A
- Detailed questionnaire results — selected data quality characteristics (sectoral ratings preserved as presented):
  - Coverage: A A | B A | A
  - Granularity (note: top cell = government operations; bottom cell = public debt; likewise for Monetary and Financial Statistics top = MFS, bottom = Financial Soundness indicators): A (various cells shown as A)
  - Consistency: B A | A
  - Frequency and Timeliness: A A | A A | A

### Rationale and Key Data Issues
- General appraisal:
  - "Data is generally timely, comprehensive, and accurate for surveillance across all sectors."
  - Shortcomings exist in some areas of fiscal data that would facilitate surveillance if addressed.
- Specific data issues and metrics:
  - Fiscal statistics are not fully consistent according to a recent IMF TA report (IMF, 2025).
  - There was a discrepancy of about 0.25 percent of GDP in financing in 2025 when measured above and below the line in the fiscal data compiled broadly consistent with GFSM 2014.
  - This 0.25 percent of GDP discrepancy is "significantly lower than the average of 1.4 percent during 2019-2021."
  - Possible causes of discrepancies: differences in coverage of institutional units, scope of instruments, moments of recording, and valuation methods (including use of accrual and cash) in the compilation.
  - Treatment of materialized precatórios: treated as expenditures and not directly reflected in the Treasury’s debt statistics, complicating assessment of Brazil’s public debt stock.
  - National accounts limitation: breakdown for gross fixed capital formation is available at annual frequency but not at quarterly frequency.

### Changes since the last Article IV consultation
- Methodological revision:
  - A methodological revision to the cash-based recording of interest in GFS has been completed, with historical series revised back to 2006 for central government and 2010 for general government.
- Authorities’ ongoing work:
  - Authorities are working towards the TA recommendations.

### Corrective actions and capacity development priorities
- IMF technical assistance provided on Government Finance Statistics (GFS) and Public Sector Debt Statistics in 2024.
- Authorities implementing a proposed five-year work plan to strengthen alignment of Brazil’s GFS with the GFSM 2014 framework.
  - Main focus in 2025: revising the sectorization of the general government.
- Continued priority: improve data quality and methodological compilation of GFS for better alignment with best international standards and practices (including alignment with GFSM 2014).

### Use of data in Article IV consultations and other gaps
- Use of data and/or estimates in lieu of official statistics: "Staff do not use data and/or estimates lieu of official statistics."
- Other data gaps: "Not applicable for Brazil."

### Data Standards Initiatives (Table 2)
- Brazil adheres to the Special Data Dissemination Standard (SDDS) Plus since November 2019 and publishes the data on its National Summary Data Page.
- The latest SDDS Plus Annual Observance Report is available on the Dissemination Standards Bulletin Board.

### Table of Common Indicators Required for Surveillance (Table 3, as of May 29, 2026) — selected entries and metadata
- Data Provision to the Fund / Date of Latest Observation / Date Received / Frequency of Data / Frequency of Reporting / Expected Frequency / Announced Frequency / Expected Timeliness / Announced Timeliness
  - Exchange Rates: 2026-05 / 2026-05 / D / D / D / ... / ... / ...
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: 2026-04 / 2026-05 / M / M / M / ... / 1W / ...
  - Reserve/Base Money: 2026-05 / 2026-05 / D / W / M / M / 2W / 2W
  - Broad Money: 2026-04 / 2026-05 / M / M / M / M / 1M / 4W
  - Central Bank Balance Sheet: 2026-04 / 2026-05 / M / M / M / M / 2W / 2W
  - Consolidated Balance Sheet of the Banking System: 2026-04 / 2026-05 / M / M / M / M / 1M / 4W
  - Total assets of other depository corporations2: 2026-04 / 2026-05 / M / M / M / M / 1M / 4W
  - Total credit from other depository corporations2: 2026-04 / 2026-05 / M / M / M / M / 1M / 4W
  - Interest Rates3: 2026-05 / 2026-05 / D / D / D / ... / ... / ...
  - Consumer Price Index: 2026-04 / 2026-05 / M / M / M / M / 1M / NLT 15D
  - Revenue, Expenditure, Balance and Composition of Financing4 — General Government5: 2026-04 / 2026-05 / Q/M10 / Q/M10 / A / ... / 2Q / ...
  - Revenue, Expenditure, Balance and Composition of Financing4 — Central Government: 2026-04 / 2026-05 / M / M / M / M / 1M / 1M
  - Stocks of Central Government and Central Government-Guaranteed Debt6: 2026-04 / 2026-05 / M / M / Q / M / 1Q / 1M
  - Total stock of General Government Debt5: 2026-04 / 2026-05 / M / M / Q / M / 4M / 1M
  - External Current Account Balance: 2026-04 / 2026-05 / M / M / Q / M / 1Q / NLT 4W
  - Exports and Imports of Goods and Services: 2026-04 / 2026-05 / M / M / M / M / 8W / NLT 3W
  - GDP/GNP: Q1 2025 / 2026-05 / Q / Q / Q / Q / 1Q / 70D
  - Gross External Debt: Q1 2025 / 2026-04 / Q / Q / Q / Q / 1Q / NLT 90D
  - International Investment Position: Q1 2025 / 2026-04 / Q / Q / Q / Q / 1Q / 3M

- Explanatory notes included in the table (preserve original numbering and phrasing):
  - 1 Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.
  - 2 Other depository corporations include all deposit-taking corporations (except for the central bank) and money market funds.
  - 3 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - 4 Foreign, domestic bank, and domestic non-bank financing.
  - 5 The general government consists of the central government (budgetary funds, extra-budgetary funds, and social security funds) and state and local governments. The total stock of general government debt is required for SDDS Plus countries and encouraged for SDDS and e-GDDS countries.
  - 6 Including currency and maturity composition.
  - 7 Frequency and timeliness: (“D”) daily; (“W”) weekly or with a lag of no more than one week after the reference date; (“M”) monthly or with lag of no more than one month after the reference date; (“Q”) quarterly or with lag of no more than one quarter after the reference date; (“A”) annual; (“SA”) semi-annual; (“I”) irregular; (“NA”) not available or not applicable; and (“NLT”) not later than.
  - 8 Encouraged frequency of data and timeliness of reporting under the e-GDDS and required frequency of data and timeliness of reporting under the SDDS and SDDS Plus. Any flexibility options or transition plans used under the SDDS or SDDS Plus are not reflected. For those countries that do not participate in the IMF Data Standards Initiatives, the required frequency and timeliness under the SDDS are shown for New Zealand, and the encouraged frequency and timeliness under the e-GDDS are shown for Eritrea, Nauru, South Sudan, and Turkmenistan. Indicators that are not in the IMF Data Standards Initiatives are shown as "...".
  - 9 Based on the information from the Summary of Observance for SDDS and SDDS Plus participants, and the Summary of Dissemination Practices for e-GDDS participants, available from the IMF Dissemination Standards Bulletin Board. For those countries that do not participate in the Data Standards Initiatives, as well as those that do have a National Data Summary Page, the entries are shown as “...”.
  - 10 The fiscal balance and composition of financing are provided monthly, whereas revenue and expenditure data are available on a quarterly basis.

*Source: Annex VIII. Data Issues (Brazil), International Monetary Fund.*/

### Annex IX. Past IMF Recommendations and Implementation Status

### Annex IX. Past IMF Recommendations and Implementation Status

### Monetary Policy
- Recommendation: Ensure flexibility on the pace and length of the hiking cycle given heightened global policy uncertainty and inflation expectations above target-consistent levels.  
- Implementation status and key developments:
  - "The BCB’s aggressive response to rising inflation has reinforced its already strong inflation‑fighting credentials and monetary policy remains firmly contractionary."
  - "The BCB’s decision to lower interest rates in early 2026 was appropriate."
  - The Central Bank of Brazil (BCB) began easing monetary policy in the first quarter of 2026, cutting rates by 25 bps in March, April, and June, bringing the policy rate to 14.25%.
  - BCB signaled data-dependent calibration of the magnitude of the monetary policy cycle to ensure convergence of inflation to the target and to anchor inflation expectations.

### Fiscal Policy
- Recommendation: Implement a sustained and more ambitious fiscal effort by further mobilizing revenue—including the phasing out of costly and inefficient tax expenditures—and tackling spending rigidities.  
- Implementation status and key developments:
  - "Increasing exceptions to the fiscal rules have reduced the primary balance path consistent with meeting the targets."
  - In late 2025, Congress approved a law to trim tax expenditures by one-tenth and strengthen oversight, with annual savings of 0.1 percent of GDP.
  - Authorities activated the cap on personnel expenditure growth of 0.6 percent between 2027 and 2030.
  - Authorities blocked 0.2 percent of GDP in discretionary spending to compensate for higher-than-projected mandatory spending on social programs.
  - Temporary fuel tax exemptions and subsidies to mitigate the global shock are more than fully financed by windfall revenues and reassessed every two months; several measures already discontinued.
  - Recommendation: Advance the landmark revenue-neutral Value Added Tax (VAT) reform.
    - Implementation: "Brazil’s VAT reform has shifted from legislation to implementation, with CBS/IBS pilot testing, creation and operationalization of the IBS Management Committee, and publication of key CBS/IBS regulations and digital tax-platform tools."
  - Recommendation: Enhance tax system progressivity via personal income tax (PIT) reform, while bolstering revenues.
    - Implementation: The revenue-neutral PIT reform taking effect in 2026 features a minimum tax for high-income individuals on income including dividends, broadening the tax base and increasing progressivity; concurrently, the increase in the personal exemption threshold reduces progressivity, mainly benefiting upper-middle-income workers.
  - Authorities continue to prioritize spending efficiency through a dedicated secretariat for policy evaluation, a medium-term budget framework, and enhanced transparency of parliamentary amendments.

### Financial Sector Policy
- Recommendation: Consider moving to a positive-neutral countercyclical capital buffer (CCyB).  
- Implementation status and key developments:
  - "The authorities are advancing towards a positive-neutral countercyclical capital buffer (PN-CCyB) framework, which would further enhance Brazil’s macroprudential instruments."
  - FSAP assessment highlights:
    - Banking sector resilient with strong capital and liquidity buffers; under severe adverse macro-financial scenarios, capital adequacy ratios remain above prudential thresholds.
    - Aggregate capital shortfall under stress amounts to 0.1 percent of financial system assets.
    - Median Liquidity Coverage Ratio is 205 percent.
    - Liquidity stress tests show resilience to a severe outflow scenario, with stress limited to a few banks accounting for only a small fraction of system assets.
  - Prudential and supervisory frameworks are well aligned with Basel III reforms; macroprudential framework and cybersecurity supervision strengthened since 2018.
  - Authorities disagree with the recommendation to discontinue the open bank assistance function of the deposit insurance scheme (FGC), citing its complementary role to BCB’s Emergency Liquidity Assistance framework.

### Structural Policy
- Recommendation: Encourage labor force participation, reduce informality and enhance human capital.  
- Implementation status and key developments:
  - Operationalized the National Care Plan to expand childcare and care-worker training.
  - Expanded Cadastro Único-based productive inclusion, scaled up apprenticeships, and expanded vocational and care-economy training.
- Recommendation: Further strengthen competition and business environment.
  - Implementation: EU–Mercosur Free Trade Agreement ratified and entered into force in May; VAT reform advancing; ongoing measures to reduce business costs (Custo Brasil), expand and diversify logistics network, streamline regulation, and improve governance.
- Recommendation: Advance ecological transformation.
  - Implementation: Brazil approved the Climate Plan; instituted the Brazilian Sustainable Taxonomy; created the extraordinary secretariat for carbon market; rolled out the national bioeconomy development plan; launched Tropical Forests Forever Facility; and issued sovereign sustainable bond.

### Selected Macroeconomic and Policy Outcomes (as reported)
- GDP and external sector:
  - The current account deficit narrowed to 2.9 percent of GDP.
  - Foreign direct investment financed 3.4 percent of GDP.
- Labor market and social indicators:
  - Labor market described as "particularly strong" with the lowest unemployment level in the historical series and increasing formalization.
  - Rising income and solid social policies helped reduce poverty and inequality; Brazil left the United Nations Hunger Map and achieved "very high human development status" per UNDP.
- Inflation and energy shock:
  - Inflation declined in 2025 but was temporarily interrupted by a global energy price shock caused by the war in the Middle East; BCB emphasized anchoring inflation expectations.
- Exchange rate and special tax:
  - Brazil maintains a multiple currency practice (MCP) related to the IOF-FX tax at 3.5 percent, applicable since reforms adopted in 2025 to specified exchange transactions.
- Fund relations and capacity development highlights:
  - Last Article IV consultation concluded July 14, 2025.
  - FSAP updated in 2026.
  - Capacity development examples:
    - STA: remote technical assistance on nonfinancial public sector GFS (November 2020) and Balance of Payments/IIP issues (February 2021); improving sectorization and data quality (August 2024).
    - Monetary and Capital Markets Department: technical assistance on debt management (May 2023).
    - FAD: leadership and change management workshop for senior managers of the Federal Revenue Service (March 2026), including customs compliance strategy assistance.

*Source: Annex IX. Past IMF Recommendations and Implementation Status, staff report excerpts.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1braea2026001.pdf_