Press Release No. <a name="P16_75"></a>04/201

The Executive Board of the International Monetary Fund (IMF) has completed the eighth review of Brazil's performance under an SDR 27.4 billion (about US$40 billion) Stand By Arrangement (see Press Releases No. 03/217 and No. 02/40).

Completion of the eighth review enables the release of a further amount equivalent to SDR 911 million (about US$1.3 billion) to Brazil. However, the Brazilian authorities have once more indicated that they do not intend to make any further drawings since they are treating the current arrangement as precautionary and as a part of a strategy to exit from IMF financial support. Another two reviews are scheduled—for end-2004 and early-2005—before the program expires on March 31, 2005. Total drawings under the Stand-By have amounted to SDR 17.2 billion (about US$25 billion).

Following the Executive Board's discussion of Brazil's economic performance, Ms. Anne Krueger, First Deputy Managing Director and Acting Chair, made the following statement:

"Brazil's performance under the Stand-By Arrangement has remained strong. The economic recovery has broadened and gathered momentum. While export performance remains an important source of growth, private consumption and investment have become the main drivers. Credit is expanding, particularly to households, and real wages and employment have continued to pick up. Strong policies have helped Brazil weather volatile market conditions, and the depreciation of the real in April and May has now been reversed. Export performance has been remarkable and there is encouraging evidence of a structural improvement in the trade balance. The Brazilian authorities continue to treat the program as precautionary, as part of a strategy to exit from Fund financial support.

"The implementation of macroeconomic policies has continued to be impressive. The central bank has been appropriately cautious in its conduct of monetary policy, in light of an increase in inflation and inflation expectations. This should help guide inflation back toward government targets. Decisions to leave the 2005 inflation target unchanged and narrow the 2006 target band should help to lower inflation in an environment of sustained growth. Fiscal policy remains prudent, ensuring that the debt-to-GDP ratio should stay on a downward path. The government continues to see increasing high quality public investments as a key budget priority. In cooperation with the Fund, it is conducting a pilot program on public investment to assess the best approach to providing greater room for public investment in the budget, while maintaining fiscal sustainability. The government is also taking steps to encourage increased private sector involvement through public-private partnerships, concessions, and improvements in the regulatory environment.

"Growth over the medium term will depend greatly on the government's ability to extend and deepen its structural reform agenda, building on recent progress and taking advantage of the current window of opportunity provided by the favorable economic environment. Greater budget flexibility would facilitate increased fiscal resources for public investment, targeted social transfer programs, and other government priorities. Measures to reduce tax distortions, deepen financial intermediation, and reduce obstacles to trade would also increase long-term growth potential. Increasing labor market flexibility would benefit productivity and growth, and lessen incentives to operate in the informal sector. Such policies would pave the way for a reduction in poverty and an expansion of economic opportunities for all Brazilians," Ms. Krueger.

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