IMF Executive Board Concludes 2023 Article IV Consultation with Brazil

July 31, 2023

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Brazil.

In the first months of 2023, growth was supported by very strong agricultural output, while manufacturing and services were subdued. Slowing private consumption and falling investment point towards further growth moderation in the remainder of the year. Headline inflation has rapidly declined from last year’s peak, but core inflation remains elevated, and inflation expectations are above target. Tightening financial conditions have been partially offset by a structural broadening of credit in some sectors.

Growth is projected to moderate from 2.9 percent in 2022 to 2.1 percent in 2023, and then reach staff’s estimated potential rate over the medium term. Headline inflation is expected to reach 5.4 percent by end-2023 and converge to target by mid-2025, while core inflation is projected to come down more gradually. The current account is expected to narrow to about 2.3 percent of GDP this year and remain broadly stable over the medium term.

Strong buffers support resilience in the face of prevailing downside risks. On the external front, downside risks include an abrupt global slowdown, a sharp tightening of global financial conditions, and commodity price volatility. On the domestic front, risk mainly stem from renewed fiscal uncertainty and more persistent inflation. More ambitious fiscal consolidation; approval and implementation of the indirect tax reform; and green growth opportunities bring upside risks. Recent progress in the legislative agenda—with the tax reform, new fiscal framework, and the strengthening of the administrative review of tax disputes making strides—sends a positive signal. A sound financial system, adequate FX reserves, large public sector cash buffers, and a flexible exchange rate regime support resilience.

Executive Board Assessment[2]

Executive Directors noted that after a rapid recovery from the pandemic, supported by ample buffers and proactive policies, Brazil’s economic activity is converging towards potential levels. Directors noted the downside risks related to the uncertain external environment, but many emphasized that the balance of risks has shifted, with domestic risks now tilted to the upside. In this context, they encouraged the authorities to continue with their fiscal consolidation and price stabilization efforts, while sustaining their structural reforms agenda to promote a sustainable, inclusive, and green economy.

Directors welcomed the authorities' commitment to improve the fiscal position to maintain debt sustainability and support monetary policy’s disinflation effort. They encouraged the authorities to aim for an ambitious fiscal effort to put debt on a clear declining path, supported by an enhanced fiscal framework, a broader tax base, and spending reforms. Directors welcomed the proposed indirect tax reform and plans to reform direct taxes and streamline tax expenditures, noting that additional revenue mobilization will help secure fiscal sustainability and create space for priority spending. Some Directors noted that the Debt Sustainability Assessment might have been overly pessimistic in recent years.

Directors commended the central bank’s proactive monetary policy response consistent with the inflation targeting framework. Noting the slow decline in core inflation and still above target inflation expectations, they considered the current monetary stance appropriate and called for continued forward looking and data-dependent monetary policy. Directors also welcomed the recent decision to adopt a continuous inflation target that should improve monetary policy effectiveness and commended improvements to BCB autonomy. They emphasized that a flexible exchange rate regime and adequate FX reserves remain important shock absorbers going forward.

Directors noted that the financial sector remains resilient, with adequately capitalized, profitable, and liquid banks. They welcomed steps to address household debt vulnerabilities and promote financial literacy. Directors commended the successful initiatives on the instant payment system Pix and Open Finance environment, as well as the plans for the Digital Real, while underscoring the importance of being mindful of potential financial stability risks related to digitalization. They also emphasized the need for carefully managing a bigger role for public banks to mitigate risks for fiscal sustainability and monetary policy transmission.

Directors commended the authorities’ structural reform priorities focused on raising productivity, reducing informality, and promoting green growth. They emphasized the need for continued efforts to foster innovation, trade integration, and competitiveness, upgrade investment and skills, and promote greater female labor force participation. Continuing efforts to strengthen the effectiveness of the anti-corruption and AML/CFT frameworks is also important. Noting Brazil’s prominent role in the international efforts to cope with climate change challenges, Directors welcomed plans to strengthen climate resilience, halt illegal deforestation, and decarbonize the economy.

Table 1. Brazil: Selected Economic Indicators, 2021-28

I. Social and Demographic Indicators

Area (thousands of sq. km.)

8,510

Health

Agricultural land (percent of land area)

30.2

Physicians per 1000 people (2022)

2.6

Hospital beds per 1000 people (2022)

2.0

Population

Access to safe water (2021)

84.2

Total (million) (2022)

203.1

Annual rate of growth (percent, 2022)

0.7

Education

Density (per sq. km. est., 2022)

23.9

Adult illiteracy rate (2019)

6.4

Unemployment rate (2022)

7.9

Net enrollment rates, percent in:

Primary education (2019)

98

Population characteristics (2021)

Secondary education (2019)

85

Life expectancy at birth (years)

77

Infant mortality (per thousand live births)

11

Poverty rate (in percent, 2021) 1/

29.4

Income distribution (2017)

Ratio between average income of top 10

12.4

GDP, local currency (2022)

R$9,915 billion

percent of earners over bottom 40 percent

GDP, dollars (2022)

US$1,920 billion

Gini coefficient (2020)

48.9

GDP per capita (2022)

US$9,455

Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil.

Proj

2021

2022

2023

2024

2025

2026

2027

2028

(Percentage change)

National accounts and prices

GDP at current prices

16.9

11.4

5.9

7.0

5.5

5.4

5.6

GDP at constant prices

5.0

2.9

2.1

1.2

1.7

1.9

2.0

Consumption

3.6

3.7

0.8

0.4

1.1

1.5

1.9

Investment (GFCF)

16.5

0.9

0.5

0.6

1.2

1.4

1.4

Consumer prices (IPCA, average)

8.3

9.3

5.1

4.6

3.0

3.0

3.0

Consumer prices (IPCA, end of period)

10.1

5.8

5.4

3.9

3.0

3.0

3.0

GDP deflator

11.4

8.3

3.8

5.7

3.7

3.5

3.5

Gross domestic investment

Private sector

17.1

15.4

15.1

14.5

14.5

14.4

14.4

Public sector

2.4

2.7

2.8

3.2

3.2

3.2

3.1

Gross national savings

Private sector

19.7

18.4

21.9

20.9

19.7

18.9

18.3

Public sector

-3.1

-3.2

-6.4

-5.7

-4.5

-3.8

-3.1

Public sector finances

Central government primary balance 2/

-0.4

0.5

-1.3

-0.8

-0.3

0.3

0.9

NFPS primary balance

0.7

1.3

-1.3

-0.8

-0.3

0.3

0.9

NFPS cyclically adjusted primary balance (in percent of potential GDP)

0.8

1.0

-1.7

-0.9

-0.3

0.3

0.9

NFPS overall balance

-4.3

-4.6

-7.9

-7.4

-6.2

-5.4

-4.8

Net public sector debt

55.8

57.1

60.1

63.5

66.2

68.3

69.3

General Government gross debt, Authorities’ definition

78.3

72.9

77.1

79.3

81.3

82.7

83.4

NFPS gross debt

90.7

85.9

89.2

91.2

93.3

94.8

95.6

Of which: Foreign currency linked

5.1

4.2

4.2

4.2

4.2

4.3

4.3

Money and credit

Base money 3/

2.7

16.6

5.9

7.0

5.5

5.4

5.6

5.6

Broad money 4/

8.7

10.6

6.9

6.7

5.4

5.6

5.5

5.6

Bank loans to the private sector

17.6

14.6

8.0

8.0

8.0

8.0

8.0

8.0

Balance of payments

(Billions of U.S. dollars, unless otherwise specified)

Trade balance

36.4

44.2

50.1

47.0

47.8

49.0

50.1

50.2

Exports

284.0

340.3

338.5

343.3

349.4

357.4

366.5

379.0

Imports

247.6

296.2

288.4

296.3

301.6

308.4

316.4

328.8

Current account

-46.4

-56.9

-48.0

-56.1

-58.6

-60.0

-61.4

-64.2

Capital account and financial account

50.4

64.4

48.0

56.1

58.6

60.0

61.4

64.2

Foreign direct investment (net inflows)

30.2

60.8

54.2

53.2

52.4

53.3

54.3

55.3

Terms of trade (percentage change)

14.4

-7.1

-6.1

-6.4

-3.5

-1.9

-0.6

-1.1

Merchandise exports (in US$, annual percentage change)

34.8

19.8

-0.5

1.4

1.8

2.3

2.6

3.4

Merchandise imports (in US$, annual percentage change)

38.9

19.6

-2.6

2.7

1.8

2.2

2.6

3.9

Total external debt (in percent of GDP)

40.6

35.5

34.1

33.1

32.9

32.6

32.0

31.1

Memorandum items:

Output Gap

-0.2

0.9

1.0

0.2

0.0

0.0

0.0

0.0

Current account (in percent of GDP)

-2.8

-3.0

-2.3

-2.5

-2.5

-2.4

-2.4

-2.3

Unemployment rate 5/

13.2

9.3

9.5

9.4

9.4

9.4

9.4

9.4

Gross official reserves

362

325

346

346

346

346

346

346

REER (annual average in percent; appreciation +)

-3.2

12.1

...

...

...

...

...

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Sources: Central Bank of Brazil, Ministry of Finance, IBGE, IPEA, and Fund staff estimates.

1/ Computed by IBGE using World Bank's threshold for upper-middle income countries (U$5.5/day).

2/ Includes the federal government, the central bank, and the social security system (INSS).

3/ Currency issued, required deposits held at the Central Bank plus other Central Bank liabilities to other depository corporations

4/ Currency outside depository corporations, transferable deposits, other deposits and securities other than shares

5/ Unemployment rate for 2021 and 2022 shows the average of March, June, September, and December.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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