Press Release: IMF Approves US$30.4 Billion Stand-By Credit for Brazil

IMF News, September 6, 2002

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IMF approved a stand-by credit totaling US$30.4 billion.
Immediate drawing: up to SDR 2.28 billion (about US$3 billion).
Second drawing: up to SDR 2.28 billion (about US$3 billion) upon completion of the first review (to be scheduled before year-end 2002).
Remainder of the credit to be made available in four tranches through 2003, following completion of reviews and observance of relevant performance criteria.
The current stand-by credit replaces a 15-month stand-by arrangement approved on September 14, 2001 (Press Release No. 01/38).

Brazil implemented strong and consistent macroeconomic policies in recent years that improved fundamentals, including increases in the public sector primary surplus, strengthened fiscal institutions, transition to a floating exchange rate regime, and inflation targeting.
Recent pressures: uncertain international environment, concerns about economic policies ahead of the upcoming presidential elections, depreciation of the exchange rate, increased ratio of debt to GDP, slower economic growth in recent months.
Authorities’ response: announced in June an increased primary surplus target for 2002-2003 and maintained a firm monetary policy.
The new Fund-supported program underpins a medium-term macroeconomic framework covering the period through December 2003 and is expected to help Brazil progressively regain market access as the next government builds on progress.

Program fiscal targets:
- Primary fiscal surplus of 3.88 percent of GDP in 2002.
- Public sector primary surplus target of 3.75 percent of GDP in 2003.
- Minimum consolidated public sector primary surplus of 3.75 percent of GDP during 2003-05.
Commitment in budgetary guidelines law for 2004-05: no less than 3.75 percent of GDP.
Fiscal targets will be reassessed during quarterly program reviews due to sensitivity of debt dynamics to the real exchange rate, real GDP growth, and real interest rates.
Achievement of these targets expected to stabilize public debt dynamics and lower the debt ratio over the medium term.

Monetary policy will continue to be set in a forward-looking manner to ensure inflation converges to the official target of 4 percent with a band of 2½ percentage points on either side for end-2003.
A regular exchange of views about the evolution of monetary policy will be maintained between IMF staff and the authorities.
Procedure for consultation with IMF staff and the Executive Board if inflation deviates from the band limits as specified in the Technical Memorandum of Understanding.

Program floor on net international reserves (NIR): US$5 billion.
The NIR floor is US$10 billion below the floor of the previous program, to give room for maneuver in reducing exchange rate volatility.
Authorities will seek to reduce public sector foreign exchange exposure as market conditions allow.
Higher trade surpluses are helping reduce Brazil's financing requirement.

Authorities committed to extending structural reform agenda; reforms to be mutually agreed and phased in during the program period.
Fiscal/tax measures:
- Provisional Measure of August 29 converting the cascading federal tax on gross revenue known as "Programa de Integração Social" or Social Integration Program (PIS) into a value added-type tax in a revenue neutral-manner; effective as of December 1, 2002.
- Broader reforms aimed at increasing tax efficiency and reducing public expenditure rigidities.
Pension and public employment reforms:
- Progress expected on pension reform issues, including legal basis for creation of complementary pension funds for civil servants on a defined contribution basis and defining the careers for which civil servants can be hired under the private-sector social security regime.
Strengthening of financial supervision and paving the way for strengthened Central Bank legislation are among other important program elements.

Financial variables under intense pressure in recent weeks due to market concerns about policies under the new government to take office in January 2003.
Earlier 2001 pressures (September-October 2001) linked to global risk aversion following September 11; conditions had reversed by early 2002 before reemergence of pressures by May 2002.
Announcement of new IMF-supported program and leading presidential candidates’ support for key elements helped improve market sentiment and stabilize financial indicators.
Main objectives of the proposed new program:
- Help reduce current market uncertainties and volatility.
- Facilitate an orderly transition to the new administration.
- Contribute toward ensuring the maintenance of sound economic policies beyond 2002.

Brazil is an original member of the IMF; its quota is SDR 3.04 billion (about US$4.06 billion).
Brazil's outstanding use of IMF credit currently totals SDR 10.89 billion (about US$14.53 billion).

Press Release No. 02/40, September 6, 2002 — International Monetary Fund