Press Release: IMF Approves SDR 13 Billion Stand-By Credit for Brazil; Activates NAB

IMF News, December 2, 1998

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Press Release: IMF Approves SDR 13 Billion Stand-By Credit for Brazil; Activates NAB

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Bibliographic details

• Authors: Arrangement Proposed Calls Under
• Published: December 2, 1998

IMF approval and financing package

• IMF approved a three-year stand-by credit equivalent to SDR 13,025 million (about US$18.1 billion).
• The stand-by credit equals 600 percent of Brazil’s IMF quota of SDR 2,170.8 million (about US$3.0 billion).
• To help finance Brazil’s drawings during the first year, the IMF approved the first activation of the New Arrangements to Borrow (NAB).
• Allocation of the SDR 13,025 million:
  • SDR 9,117 million (about US$12.7 billion), or 70 percent, under the Supplemental Reserve Facility (SRF).
  • Remainder through IMF’s regular lending facilities.
• Availability through end-1999:
  • Equivalent of SDR 11,288 million (about US$15.7 billion) will be made available.
  • Of this, SDR 3,799 million (about US$5.3 billion) is available immediately.
• Further SRF disbursements subject to implementation of key fiscal measures and IMF Executive Board reviews:
  • SDR 3,256 million (about US$4.5 billion) by end-February 1999 (could be brought forward).
  • Two SRF disbursements of SDR 1,302 million (about US$1.8 billion) each, subject to reviews scheduled by May 31, 1999 and August 31, 1999 (each could be brought forward to as early as March 1, 1999 and June 1, 1999, respectively).
• Quarterly disbursements for remaining support starting after February 28, 1999:
  • First quarterly amount: SDR 543 million (about US$755 million), followed by the rest through the remainder of the program.
• IMF will finance SDR 9,117 million of the total by borrowing the equivalent amount under the NAB (effective November 17, 1998).
• NAB first call: SDR 2.9 billion (as noted in the NAB statement that the first call immediately following approval is for SDR 2.9 billion).
• Table totals for NAB participants:
  • Total proposed calls: 31,200,000,000 (credit arrangements) and 9,117,360,000 (total proposed calls).

Background and macroeconomic context

• Real Plan (since July 1994) achieved sustained reduction of inflation and significant growth of real GDP per capita.
• Public finances deteriorated as inflation tax disappeared:
  • Primary balance of the consolidated public sector: surplus of 5.3 percent of GDP in 1994 → deficit of about one percent of GDP by 1997.
  • External current account balance: near equilibrium in 1994 → deficit equivalent to 4.1 percent of GDP by 1997.
• External pressures intensified after the Russian devaluation in mid-August 1998; government responses included sharply raising interest rates and emergency fiscal measures.
• Authorities announced a front-loaded three-year fiscal adjustment program to stabilize public debt-to-GDP by the year 2000.

Program objectives and macroeconomic scenario

• Program aims:
  • Resume sustained growth in real per capita income beginning in 2000, following a likely decline in 1999.
  • Continue low inflation.
  • Gradual improvement of the current account deficit to a sustainable level over the medium term.
• Main policy elements:
  • A strong and front-loaded fiscal adjustment effort, with most adjustment expected in the first half of 1999.
  • Maintenance of the current exchange rate regime.
  • A firm monetary policy stance to support the exchange rate and safeguard net international reserves.
  • Wide-ranging structural reforms.
• Macroeconomic scenario assumptions:
  • Confidence gradually rebuilt as measures are implemented and foreign financing access improves.
  • Interest rates assumed to remain relatively high, albeit declining, through the first half of 1999 and to decline further thereafter.
  • Real GDP growth expected to recover to 3 percent and 4 percent respectively in 2000 and 2001.

Fiscal adjustment details

• Targets for primary surpluses of the consolidated public sector:
  • 2.6 percent of GDP in 1999.
  • 2.8 percent of GDP in 2000.
  • 3 percent of GDP in 2001.
• Public Sector Borrowing Requirements (PSBR) projected:
  • About 4.7 percent of GDP in 1999.
  • About 3 percent of GDP in 2000.
  • 2 percent of GDP in 2001.
• Federal measures to achieve targeted improvement:
  • Overall savings to the budget on the order of 3.4 percent of GDP in 1999.
  • Revenue measures: increases in the financial transactions tax and in social security contributions by public employees.
  • Expenditure measures: substantial cuts in discretionary current and capital spending; savings from implementation of recently approved constitutional reforms of the civil service and social security.
  • Government endeavored to safeguard social programs in allocation of expenditure cuts.
• All levels of government expected to contribute to the fiscal adjustment effort.

Structural reforms agenda

• Reforms aimed at longstanding weaknesses in:
  • Budget process.
  • Tax system and tax administration.
  • Public administration.
  • Social security.
  • Efficiency of public expenditure, especially in the social area.
• Fiscal Responsibility Act to be submitted to Congress shortly as a centerpiece of budget-process reforms.
• Administrative reform follow-up:
  • Enabling laws and regulations already submitted to Congress; expected to begin producing effects during 1999.
• Comprehensive reform of the system of indirect taxation announced.
• Social security reform:
  • Congress recently approved a constitutional amendment on social security reform.
  • Complementary legislation to be introduced early next year to deepen reform.
• Privatization program (continuing in 1999) to include companies in the electrical sector (power generation and distribution), some remaining state banks, and some water, gas, and sewage public utilities.
• Social spending priorities:
  • Priority to primary education and basic health care.
  • Promote more efficient use and financing of health and education, particularly at higher levels.
  • Better targeting of social expenditures for the poor.

Additional financing commitments

• World Bank President indicated readiness to recommend up to US$4.5 billion in support of Brazil’s program.
• Inter American Development Bank (IADB) President recommended an IADB support package of US$4.5 billion.
• Bilateral support coordinated with the Bank for International Settlements (BIS) from industrial countries totaling approximately US$14.5 billion, available over the next 12 months.
• First disbursement of bilateral support will be proportional to Brazil’s first drawing from the SRF resources under the credit.

NAB activation — statement highlights

• NAB came into effect on November 17, 1998; this is the first activation.
• NAB designed to supplement IMF resources to forestall or cope with impairment of the international monetary system or exceptional situations.
• NAB participants agreed to finance IMF payments to Brazil under the SRF, which could amount to a total of SDR 9.1 billion.
• The first NAB call following approval is for SDR 2.9 billion.

Key statistics and selected indicators (from Table 2 and text)

• Stand-by credit and related amounts:
  • SDR 13,025 million (about US$18.1 billion) — total stand-by credit.
  • SDR 9,117 million (about US$12.7 billion) — SRF portion.
  • SDR 11,288 million (about US$15.7 billion) — available through end-1999.
  • SDR 3,799 million (about US$5.3 billion) — available immediately.
  • SDR 3,256 million (about US$4.5 billion) — SRF tranche by end-February 1999.
  • SDR 1,302 million (about US$1.8 billion) — each of two further SRF disbursements.
  • SDR 543 million (about US$755 million) — quarterly disbursement after February 28, 1999.
• Historical and projected macro indicators (selected):
  • Change in real GDP: 1995 = 4.2; 1996 = 2.8; 1997 = 3.2; 1998 = 0.5; 1999 = -1.0 (in percent).
  • Unemployment rate *: 1995 = 4.7; 1996 = 5.4; 1997 = 5.7; 1998 = 7.6; 1999 = ... .
  • Change in consumer prices (IGP-DI; 12-months): 1995 = 17.8; 1996 = 9.3; 1997 = 7.5; 1998 = 1.5; 1999 = 2.0 (in percent).
  • Exports, f.o.b. (in billions of U.S. dollars): 1995 = 46.5; 1996 = 47.7; 1997 = 53.0; 1998 = 53.8; 1999 = 57.6.
  • Imports, f.o.b. (in billions of U.S. dollars): 1995 = 50.0; 1996 = 53.3; 1997 = 61.4; 1998 = 58.8; 1999 = 54.8.
  • Current account balance (in billions of U.S. dollars): 1995 = -18.0; 1996 = -23.0; 1997 = -33.3; 1998 = -32.9; 1999 = -26.0.
  • Capital account balance (in billions of U.S. dollars): 1995 = 31.5; 1996 = 32.0; 1997 = 25.4; 1998 = 19.7; 1999 = 33.0.
  • o/w Foreign direct investment (in billions of U.S. dollars): 1995 = 3.9; 1996 = 9.4; 1997 = 16.9; 1998 = 23.9; 1999 = 18.8.
  • Gross official reserves (in billions of U.S. dollars): 1995 = 51.5; 1996 = 60.1; 1997 = 51.7; 1998 = 41.6 **.
  • Current account balance (in percent of GDP): 1995 = -2.6; 1996 = -3.0; 1997 = -4.1; 1998 = -4.2; 1999 = -3.6.
  • Public sector borrowing requirement (in percent of GDP): 1995 = 7.2; 1996 = 5.9; 1997 = 6.1; 1998 = 8.1; 1999 = (not listed in table).
  • Primary balance of the federal government (in percent of GDP): 1995 = 0.6; 1996 = 0.4; 1997 = -0.3; 1998 = 1.8.
  • Net public debt (in percent of GDP): 1995 = 30.5; 1996 = 33.3; 1997 = 34.5; 1998 = 43.3; 1999 = 46.7.
  • Change in broad money (in percent): 1995 = 29.0; 1996 = 13.3; 1997 = 13.7; 1998 = 6.8; 1999 = 5.0.
  • Average overnight interest rate (in percent): 1995 = 53.1; 1996 = 27.4; 1997 = 24.8; 1998 = 29.7; 1999 = 21.9.
• Brazil’s outstanding use of IMF credit at the time: SDR 7.8 million (about US$11 million).

Contacts listed in the release: Melinda Cilento (Canberra) Tel: 61-2 6263-2847; Greg Taylor (Washington, DC) Tel: 1-202 623-8874.

Press Release No. 98/59, December 2, 1998.

References

• Brazil and the IMF
• Press Releases
• PRESS CENTER
• see Press Release No. 97/59
• see Press Release No. 98/57
• https://www.imf.org/en/home