## Public Information Notice: IMF Concludes 2003 Article IV Consultation with Brazil

_IMF News, March 24, 2003_

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## Bibliographic details
- Published: March 24, 2003

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### Background: 2002 macroeconomic developments
- External environment and concerns about policy continuity after the change in government led to:
  - Sharp decline in external capital flows, depreciation of the real, and drop in rollover rates on domestic debt.
- Trade and current account:
  - Trade balance rose to US$13.1 billion, five-times the level recorded the previous year.
  - Current account deficit fell to US$7.8 billion, from more than US$23 billion in 2001.
- Output and inflation:
  - Real GDP growth for 2002: 1.5 percent.
  - Consumer price inflation for the year: 12.5 percent, driven largely by tradable goods prices and administered prices.
- Capital flows and reserves:
  - Foreign direct investment in 2002: about US$16.6 billion (US$6 billion below the previous year's total).
  - Net foreign portfolio flows dropped by about US$4 billion from their previous year's level.
  - Net international reserves (as defined under the Stand-By Arrangement): US$14.2 billion at end-year (US$9.2 billion above the program floor).
  - Gross international reserves: US$37.8 billion.
- Financial market volatility in 2002:
  - Between April and October: currency depreciated by 60 percent; sovereign risk spreads reached 2,400 basis points.
  - By mid-March (2003): exchange rate had recovered more than 10 percent of its value relative to last October and risk spreads had fallen by more than half.
- Fiscal and monetary developments:
  - 12-month accumulated primary surplus of the consolidated public sector: 3.9 percent of GDP in December (in line with the program target).
  - Net public debt: 56 percent of GDP at end-December 2002 (from 52.6 percent of GDP at end-2001), reflecting primarily the depreciation of the real.
  - Central bank policy: tightened aggressively—overnight interest rate raised by 700 basis points during the fourth quarter of 2002 and an additional 150 basis points so far in 2003.
  - Inflation expectations for 2003 remain above 12 percent, compared to the central bank's operational target of 8.5 percent for the year.
- Structural reform progress in 2002:
  - Legislation approved initiating conversion of domestic turnover taxes into a value added type tax.
  - Measures introduced to improve bank supervision.
  - Delays on pension reform and the new central bank law, owing in part to election-related congressional recesses.

### Executive Board Assessment: vulnerabilities, responses, and priorities
- Overall view:
  - Brazil has made considerable progress in addressing economic imbalances and improving social indicators, while maintaining disciplined fiscal and monetary policies.
  - Events in 2002 demonstrated Brazil's vulnerability to shifts in investor sentiment; sources of vulnerability include the size and structure of the public debt, the external borrowing requirement, and slow economic growth.
- Commendations and market impact:
  - Directors commended the new government's decisive actions and commitment to policy discipline and structural reforms, noting improvement in market sentiment, declining risk spreads, and a strengthening currency.
- Fiscal stance and medium-term objectives:
  - Welcomed decision to raise the primary fiscal surplus target for 2003 to 4¼ percent of GDP.
  - Encouraged operationalizing medium-term surplus targets to keep public debt on a sustainable path; attainment would provide greater insurance against shocks and could lower risk spreads and interest rates, speed output growth, and further reduce the debt ratio.
- Pension, tax, and budget reforms:
  - Commended efforts to build consensus for pension and tax reform, noting agreement with all 27 state governors.
  - Pension reform viewed as key to maintaining medium-term primary surpluses and narrowing differences between public and private systems, with attention to compatibility with short- and medium-term fiscal objectives.
  - Noted rigid budget structure limits fiscal policy responsiveness and shifts adjustment burden onto investment spending; welcomed commitment to increase budget flexibility and limit earmarking in the context of a broad tax reform to be submitted to Congress in June 2003.
  - Agreed that tax reform objective should be to streamline and simplify the tax system to reduce distortions and administrative costs and make the system more transparent and equitable.
  - Welcomed intention to continue reducing the degree of indexation of the public debt stock to the exchange rate and to interest rates, as market conditions allow.
- Monetary and inflation policy:
  - Observed depreciation-led increase in traded goods prices spilled over into nontraded goods' prices; inflation expectations risked becoming entrenched.
  - Supported authorities' policy response and advised vigilance and readiness to act as needed.
  - Welcomed authorities' commitment to formalize the operational autonomy of the central bank.
- Structural reforms to boost growth and reduce poverty:
  - Sustained structural reform implementation, complementing sound fiscal and monetary policies, is important for growth and poverty reduction.
  - Important reforms include tax and pension reforms, measures to improve governance, transparency, the investment climate, and to boost trade.
  - Welcomed intention to seek reductions in trade barriers at bilateral, regional and multilateral levels to boost medium-term investment and growth and reduce external vulnerabilities.
  - Noted that addressing the poorest' needs requires economic growth plus more effective targeting of social spending; commended authorities' initiatives in this area.
  - Welcomed moves to reduce very high banking spreads through reforms of the bankruptcy law and encouraged continued labor market reforms.
  - Observed significant progress in establishing a comprehensive anti-money laundering institutional framework and commitment to ratify and implement main anti-terrorism and anti-money laundering agreements.

### Policy recommendations and expected follow-up
- Fiscal policy:
  - Maintain primary surpluses over the medium term at levels sufficient to keep public debt on a sustainable path.
  - Set ambitious medium-term fiscal targets to provide insurance against shocks.
  - Increase budget flexibility and limit earmarking through broad tax reform.
  - Streamline and simplify the tax system to reduce distortions, administrative costs, and improve equity and transparency.
- Monetary policy and central bank governance:
  - Remain vigilant on inflation and be prepared to tighten policy if needed.
  - Formalize the operational autonomy of the central bank.
- Structural reforms:
  - Implement pension reform compatible with short- and medium-term fiscal objectives.
  - Improve governance, transparency, and the investment climate.
  - Pursue reductions in trade barriers to increase outward orientation.
  - Target social spending more effectively to assist the poorest.
  - Continue reforms to reduce banking spreads (including bankruptcy law reform) and press on with labor market reforms.
  - Ratify and implement key anti-terrorism and anti-money laundering agreements.

### Brazil: Selected Economic Indicators (as reported)
- Domestic economy (in percent)
  - Change in real GDP: 1998: 0.1; 1999: 0.8; 2000: 4.4; 2001: 1.4; 2002: 1.5
  - Unemployment rate: 1998: 7.6; 1999: 7.1; 2000: 6.2; 2001: 7. 1; 2002: (not listed)
  - Inflation (IPCA, end-year): 1998: 1.7; 1999: 8.9; 2000: 6.0; 2001: 7.7; 2002: 12.5
- External economy (in billions of U.S. dollars)
  - Exports, f.o.b.: 1998: 51.1; 1999: 48.0; 2000: 55.1; 2001: 58.2; 2002: 60.4
  - Imports, f.o.b.: 1998: 57.7; 1999: 49.2; 2000: 55.8; 2001: 55.6; 2002: 47.2
  - Current account balance: 1998: -33.4; 1999: -25. 3; 2000: -24.2; 2001: -23.2; 2002: -7.8
  - Capital account balance: 1998: 29.7; 1999: 17.3; 2000: 19.3; 2001: 27.9; 2002: 12.0
  - o/w Foreign direct investment: 1998: 28.9; 1999: 28.6; 2000: 32.8; 2001: 22.5; 2002: 16.6
  - Gross official reserves: 1998: 44.6; 1999: 36.3; 2000: 33.0; 2001: 35.9; 2002: 37.8
  - Current account balance (in percent of GDP): 1998: -4.2; 1999: -4.7; 2000: -4.0; 2001: -4.5; 2002: -1.7
- Financial variables (in percent of GDP or percent)
  - Public sector borrowing requirement 1/: ... ; 1999: 5.8; 2000: 3.6; 2001: 4.6
  - Public sector primary balance: -- ; 1999: 3.2; 2000: 3.5; 2001: 3.9
  - Gross external public debt: 1998: 12.4; 1999: 17.1; 2000: 15.9; 2001: 17.7; 2002: 24.7
  - Change in broad money (in percent): 1998: 9.8; 1999: 14.6; 2000: 11.3; 2001: 13.1; 2002: 24.0
  - Average overnight interest rate (in percent): 1998: 31.2; 1999: 25.6; 2000: 17.4; 2001: 19.1; 2002: (not listed)
- Source of indicators: Brazilian authorities and IMF staff estimates.
- Footnote 1/: Harmonized public sector borrowing requirement (excluding the impact on the debt stock of exchange rate movements occurred during the reference period that will not be paid until the bond matures).

*Public Information Notice: IMF Concludes 2003 Article IV Consultation with Brazil — March 24, 2003. Executive Board concluded the Article IV consultation on March 14, 2003.*

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## References

- [Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)
- [Public Information Notices](https://www.imf.org/en/news/searchnews)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn0338_