IMF Staff Completes 2024 Article IV Visit to Brazil

IMF News, May 28, 2024

Source details

Press Release No. 24/183; May 28, 2024.
IMF team led by Ana Corbacho and Daniel Leigh conducted discussions with Brazilian authorities and other stakeholders during May 15-27, 2024.
End-of-mission press release conveys preliminary findings of IMF staff; views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
IMF staff express condolences for the tragic loss of life and widespread damage caused by flooding in Rio Grande do Sul.

Near-term and medium-term growth projections and recent performance:
- Growth in 2023: 2.9 percent.
- Growth projected for 2024: 2.1 percent.
- Growth projected for 2025: 2.4 percent.
- Growth expected to strengthen over the medium term to 2.5 percent — an upward revision of 0.5 percentage point compared with estimates in the 2023 Article IV Staff Report.
- IMF staff expects growth to moderate in the near term before strengthening to 2.5 percent over the medium term—an upward revision from 2.0 percent at the time of the 2023 Article IV Consultation.
Inflation trajectory:
- Inflation expected to reach 3.7 percent by end-2024.
- Inflation expected to converge to the 3 percent target in the first half of 2026.
- Inflation has declined to within the target interval over the past two years.

Current account and financing:
- The current account deficit narrowed in 2023 on the back of a strong trade surplus and was financed by robust FDI.
External resilience factors:
- A sound financial system, adequate FX reserves, low reliance on FX debt, large government cash buffers, and a flexible exchange rate support Brazil’s resilience.

The careful pace of monetary easing since August 2023 has been appropriate and consistent with the inflation targeting framework.
Staff recommendation:
- Given strong labor market conditions and inflation expectations above the 3 percent target, maintaining flexibility on the pace and length of the easing cycle is prudent.
Additional considerations:
- As disinflation proceeds, with inflation projected to remain within the target interval, maintaining flexibility on the pace and length of the easing cycle is prudent given a tight labor market and above-target inflation expectations.

Authorities’ stance:
- The authorities’ continued commitment to improve Brazil’s fiscal position is welcome.
IMF staff recommendations to strengthen fiscal position and support debt sustainability:
- Sustain a more ambitious fiscal effort.
- Use both revenue and spending measures.
- Enhance the fiscal framework in line with recommendations at the time of the 2023 Article IV Consultation.
- Eliminate inefficient tax expenditures.
- Broaden the tax base.
- Tackle spending rigidities to open space for policy priorities and responding to shocks.
Fiscal reform and VAT:
- Implementation of the landmark VAT reform is expected to significantly raise productivity, support formal job creation, and improve equity of the tax system.
- Implementation of the VAT reform is expected to strengthen productivity, create formal jobs, and improve equity.

Systemic health:
- Banks are highly liquid and adequately capitalized; the financial system remains resilient and systemic risks are contained.
Policy recommendations:
- Steps to address households’ debt burden and reduce credit costs are welcome.
- Lending by public banks to specific sectors could be warranted in the presence of well-established market failures, subject to minimizing distortions to the private credit market.
Financial innovation:
- The Central Bank of Brazil’s (BCB) financial innovation agenda has promoted financial inclusion, efficiency, and competition.
- Pix instant payment system continues to expand, making Brazil a global leader in transactions per capita.
- The BCB’s Drex central bank digital currency initiative is at the frontier while privacy and security challenges are being addressed.

Sustainable and inclusive growth agenda:
- Authorities have advanced an ambitious sustainable and inclusive growth agenda.
- Implementation of the Ecological Transformation Plan is accelerating, with a government commitment to halt illegal deforestation by 2030.
- Important progress on establishing Brazil’s Sustainable Taxonomy; a new carbon market framework; and the issuance of the first Global ESG sustainable government bond.
Growth drivers and opportunities:
- The upward revision in medium-term growth reflects the implementation of the efficiency-enhancing VAT reform and an acceleration in hydrocarbon production.
- Investment in green growth opportunities could further boost economic potential.
Climate finance:
- Given sizable climate financing gaps, IMF staff welcome progress in designing instruments to attract longer-term green financing.

Improved risk balance:
- The balance of risks to the growth outlook has improved since the 2023 Article IV Consultation.
Remaining uncertainties:
- Estimates of the adverse macroeconomic and fiscal effects of the flood calamity in Rio Grande do Sul are still uncertain.

The mission leaders thanked the authorities and private sector representatives for their support, hospitality, and constructive dialogue.

Press Release No. 24/183 — IMF Staff Completes 2024 Article IV Visit to Brazil