## Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation with Brazil

_IMF News, August 3, 2011_

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## Bibliographic details
- Published: August 3, 2011

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### Background and recent developments
- Brazil grew by 7.5 percent in 2010, with output estimated to now be above potential.
- Unemployment rate fell to 6.4 percent in May 2011.
- Current account deficit widened to 2.3 percent of Gross Domestic Product (GDP) in 2010.
- Inflation reached the top of the 2.5–6.5 percent inflation target band in May 2011.
- Credit-to-GDP ratio rose from 24 percent of GDP in 2004 to 46 percent of GDP in 2010.
- Bank credit to the private sector rose by 20 percent in April 2011.
- Net capital inflows reached US$52.6 billion through end-April 2011.
- Foreign exchange intervention: purchases of about US$37 billion in the spot market in the first half of 2011.
- International reserves reached US$335 billion at end-June 2011.
- Monetary policy: policy rate raised by 200 basis points during April–July 2010; increased by 150 basis points since the beginning of 2011 to reach 12.25 at end-June 2011.
- Fiscal measures: a package of spending reductions equivalent to 1.2 percent of GDP and a primary surplus target of about 3 percent of GDP for 2011; plans to reduce Treasury transfers to the development bank BNDES.

### Executive Board assessment — macroeconomic policy stance and risks
- Commendation:
  - Directors commended the authorities for sound macroeconomic management and strong policy framework that increased resilience, spurred growth, and promoted greater social equity.
- Near-term risks and overheating:
  - Directors agreed there are signs of overheating and stressed the importance of further calibrating the policy mix to address near-term macroeconomic pressures.
- Fiscal policy:
  - Directors welcomed phasing out crisis-era fiscal stimulus.
  - Additional fiscal tightening was recommended to support disinflation, manage capital inflows, and reduce the need for raising already high interest rates.
  - Support for reducing exceptional funding to the National Development Bank (BNDES) in view of rapid credit expansion.
- Monetary policy:
  - Directors supported tightening of monetary conditions to contain inflation risks.
  - Acknowledged inflation pickup reflects commodity price shocks, strong demand, and labor market pressures.
  - Welcomed the central bank’s commitment to tighten monetary policy as needed to meet the midpoint of the inflation target band by end-2012.
- Financial sector and macro-prudential policy:
  - Overall financial soundness indicators considered favorable.
  - Need for heightened vigilance against financial risks given rapid credit growth and continued reliance on external borrowing.
  - Macro-prudential measures have helped slow credit in some segments; some Directors noted they may need broader application.
  - Commended steps toward Basel III implementation and welcomed a Financial Sector Assessment Program (FSAP) update next year.
- Capital flows and exchange rate management:
  - Directors noted pragmatic use of the policy toolkit: macroeconomic tightening, substantial exchange rate appreciation, and reserve accumulation.
  - Considered use of capital flow management measures appropriate, but cautioned about circumvention and distortionary effects.
  - Many Directors recommended further macroeconomic policy adjustment as part of the response to large capital inflows.
- Structural reforms:
  - Directors underscored the need to tackle longstanding structural rigidities.
  - Encouraged fiscal reforms including increasing budget flexibility, reforming the state VAT system, and implementing social security reform.
  - Noted that improving the business climate and enhancing competitiveness would lower structurally high interest rates and boost long-term growth prospects.

### Key statistics (selected from "Brazil: Selected Economic Indicators, 2005–11")
- Real GDP (annual percentage changes):
  - 2005: 3.2
  - 2006: 4.0
  - 2007: 6.1
  - 2008: 5.2
  - 2009: -0.6
  - 2010: 7.5
  - 2011 (Prel., Proj): 4.1
- Domestic demand (contribution to growth, percent):
  - 2005: 2.8
  - 2006: 4.8
  - 2007: 7.1
  - 2008: 6.6
  - 2009: -0.7
  - 2010: 9.6
  - 2011: 5.7
- Consumer price index (IPCA, period average):
  - 2005: 6.9
  - 2006: 4.9
  - 2007: 5.0
- Consumer price index (IPCA, end of period):
  - 2005: 3.1
  - 2006: 5.9
  - 2007: 4.3
  - 2008: 6.3
- Federal government (in percent of GDP):
  - Total revenues (2005–2011): 22.8, 23.0, 23.3, 23.6, 23.2, 25.0, 23.9
  - Total expenditures (2005–2011): 26.2, 26.1, 25.5, 24.0, 26.6, 27.2, 26.0
  - Public sector net debt (2005–2011): 48.2, 47.0, 45.1, 38.1, 42.2, 40.2, 39.1
- Money and credit (12-month percentage changes):
  - Base money (2005–2011): 7.7, 12.6, 21.8, -17.6, 11.6, 131.7, 11.0
  - Broad money (M2) (2005–2011): 19.2, 18.6, 18.4, 18.0, 15.8, 9.2, 10.8
  - Credit to the private sector (2005–2011): 19.3, 25.7, 36.6, 30.1, 21.6, 15.6
- Balance of payments (in billions of U.S. dollars):
  - Current account (2005–2011): 14.0, 1.6, -28.2, -24.3, -47.4, -57.9
  - Exports (2005–2011): 118.3, 137.8, 160.6, 197.9, 153.0, 201.9, 259.9
  - Imports (2005–2011): -73.6, -91.4, -120.6, -173.1, -127.7, -181.7, -239.4
  - Foreign direct investment (2005–2011): 12.5, -9.4, 27.5, 24.6, 36.0, 36.9, 55.5
- Reserves and external metrics:
  - Change in net international reserves (2005–2010): -4.3, -30.6, -87.5, -46.7, -49.1, -67.0
  - Current account (in percent of GDP, 2005–2009): -1.7, -1.5, -2.3, -2.4
  - Outstanding external debt (in percent of GDP, 2005–2010): 19.1, 14.1, 11.8, 12.2, 12.3, 11.9
  - Gross reserves/short-term external debt (residual maturity, in percent, 2005–2010): 73.0, 100.0, 231.3, 235.5, 314.7, 303.8, 353.9

*Public Information Notice (PIN) No. 11/108 — July 20, 2011; Executive Board discussion concluded July 20, 2011. Sources: Central Bank of Brazil; Ministry of Finance; and IMF staff estimates.*

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