Public Information Notice: IMF Concludes Article IV Consultation with Brazil
IMF News, August 23, 1999
Source details
- Canonical URL
- Public Information Notice: IMF Concludes Article IV Consultation with Brazil
Other formats
Bibliographic details
- Published: August 23, 1999
Overview
- The IMF Executive Board on July 28, 1999 concluded the Article IV consultation and the third review of the Stand-By credit with Brazil.
- PIN issued with consent of the country after Executive Board discussion; summarizes main features of the Board's discussion.
Economic developments (first half of 1999)
- Real GDP:
- Stagnated in 1998; began to recover in 1999.
- Seasonally adjusted annualized growth rates: 3.2 percent (Q1 1999) and 3.8 percent (Q2 1999) relative to preceding quarters.
- GDP is now expected to decline by 1 percent or less in 1999.
- Exchange rate and inflation:
- Real was floated on January 15, 1999; initial overshooting corrected relatively quickly.
- Pass-through of depreciation to prices modest so far; consumer price inflation in the first seven months of 1999 remained around 5 percent.
- External trade and current account:
- External trade deficit declined to US$618 million in the first half of 1999 (from US$1.8 billion in H1 1998 and US$6.6 billion for 1998 as a whole).
- Current account deficit in H1 1999 declined to under US$12.3 billion (from US$13.4 billion in H1 1998 and US$33.6 billion for 1998).
- Improvement limited by a significant terms of trade loss (recovery in oil prices and weakness in major commodity export prices).
- Capital account and reserves:
- Capital outflows early in 1999 reversed from March onward; renewed access to international capital markets and continued strong foreign direct investment.
- Deficit in overall balance of payments contained to around US$11 billion in H1 1999, about US$4 billion less than projected under the revised program.
- Net international reserves (excluding IMF program drawings and BIS facility): US$24.4 billion at end-July 1999.
- Gross international reserves: about US$42.2 billion (nearly 9 months of imports of goods and nonfactor services; over 180 percent of short-term external debt) at end-July 1999.
- Monetary and credit conditions:
- Firm monetary policy stance after early-year unsettled period.
- Overnight interbank (SELIC) interest rate raised to 45 percent in early March; reduced gradually thereafter as inflation remained relatively low and exchange rate firmed.
- M2 (IMF definition) rose about 6 percent in the 12 months to May 1999.
- Bank credit rose about 3 percent in the 12 months through June 1999.
Fiscal position and public debt
- Nonfinancial public sector (NFPS) performance:
- Consolidated primary surplus of NFPS for first 5 months of 1999: R$11.0 billion (compare R$3.7 billion in same period of 1998; virtual equilibrium in 1998 as a whole).
- Public sector borrowing requirement (PSBR): R$72.4 billion in 1998 (8.0 percent of GDP); R$65.1 billion in first 5 months of 1999 (mainly reflecting depreciation of the real).
- Net public sector debt: R$388.7 billion (42.6 percent of GDP) at end-1998; increased to R$484.2 billion at end-January 1999 (depreciation effect); declined slightly to R$483.1 billion by end-May 1999.
- Risks and fiscal priorities noted by Directors:
- Pending court challenges to revenue measures and the finances of states and municipalities are possible fiscal risks.
- Directors urged close monitoring of fiscal developments and readiness to take further measures to meet targets.
- Target: public sector primary surplus of 3.1 percent of GDP (strict adherence urged).
- Federal budget for 2000 (to be presented to Congress in August) should be consistent with targeted improvement to 3.25 percent of GDP and based on prudent revenue assumptions for federal, subnational governments, and public enterprises.
- Some Directors considered a more ambitious fiscal target appropriate given higher-than-expected activity.
- Importance of maintaining an adequate, well-targeted, cost-effective social safety net emphasized.
Structural reforms and privatization
- Fiscal sustainability depends on progress in structural fiscal reforms, especially social security and tax systems, and administrative reform.
- Directors strongly urged intensified efforts to achieve early and substantial progress.
- Encouragement to persevere in broad-based privatization program to reduce public debt and promote efficiency and modernization.
Monetary policy framework and exchange rate
- Directors commended prudent monetary policy and adoption of a formal inflation targeting framework as a new anchor for inflation expectations under a floating exchange rate.
- Announced inflation targets through 2001 described as relatively conservative; essential to achieve them to reinforce credibility.
- Central Bank vigilance urged as demand recovers; further interest rate reductions should be approached carefully, with readiness to raise rates if expected inflation turns up.
- Some Directors favored a narrower band for the inflation target.
- Flexible exchange rate management with limited central bank intervention welcomed; reserves to be used only to counter disorderly market conditions.
- Encouraged further reduction of external and foreign exchange-indexed debt share and lengthening average maturity and share of fixed-rate public debt.
Financial sector and supervision
- Brazil's financial system withstood devaluation and high interest rates in 1998 and early 1999 relatively well.
- Directors commended efforts to strengthen regulatory framework and bank supervision and to reduce role of public banks; further progress expected.
Trade liberalization and Article VIII timetable
- Directors encouraged further liberalization of the trade regime.
- Timetable for Brazil's acceptance of obligations under Article VIII, Sections 2, 3, and 4 extended to November 1999 to allow comprehensive IMF analysis; Directors urged strict adherence to revised timetable.
Statistical infrastructure
- Statistical infrastructure generally adequate for surveillance; financial market statistics well developed.
- Weaknesses identified, especially in national accounts, should be addressed.
- Authorities intend to take steps to subscribe to the Special Data Dissemination Standard; Directors urged rapid completion.
Executive Board key assessments and recommendations
- Performance since March 1999 program revision significantly better than projected.
- Real GDP expected to decline by 1 percent or less for 1999 (versus almost 4 percent decline projected in revised March program).
- Consumer price inflation expected to be contained at around 8 percent for 1999.
- Policy recommendations and priorities:
- Continue fiscal consolidation and accelerate structural reforms (social security, tax, administrative).
- Ensure 2000 federal budget supports targeted public sector primary surplus of 3.25 percent of GDP.
- Maintain prudent monetary policy under new inflation-targeting framework; be ready to tighten if inflation expectations rise.
- Continue efforts to lengthen public debt maturity profile and increase fixed-rate share; reduce external and FX-indexed debt share.
- Strengthen bank supervision and regulatory framework; reduce role of public banks.
- Liberalize trade regime further and adhere to Article VIII timetable.
- Improve national accounts and other statistical weaknesses; subscribe to the Special Data Dissemination Standard promptly.
Selected economic indicators (as reported)
- Domestic Economy (in percent)
- Change in real GDP: 1995: 4.2; 1996: 2.8; 1997: 3.7; 1998: 0.1; 1999 Proj.: -1.0
- Unemployment rate1: 1995: 4.6; 1996: 5.4; 1997: 5.7; 1998: 7.6
- Change in consumer prices (IPCA; year end): 1995: 22.4; 1996: 9.6; 1997: 5.2; 1998: 1.7; 1999 Proj.: 8.0
- External economy (in billions of U.S. dollars)2
- Exports, f.o.b.: 1995: 46.5; 1996: 47.7; 1997: 53.0; 1998: 51.1; 1999 Proj.: 52.0
- Imports, f.o.b.: 1995: 50.0; 1996: 53.3; 1997: 61.4; 1998: 57.7; 1999 Proj.: 49.0
- Current account balance: 1995: -18.0; 1996: -23.0; 1997: -33.3; 1998: -33.6; 1999 Proj.: -22.2
- Capital account balance: 1995: 31.5; 1996: 32.0; 1997: 25.4; 1998: 16.2; 1999 Proj.: 14.2
- o/w Foreign direct investment: 1995: 3.9; 1996: 9.4; 1997: 16.9; 1998: 26.1; 1999 Proj.: 19.8
- Gross official reserves: 1995: 51.5; 1996: 60.1; 1997: 51.7; 1998: 44.0; 1999 Proj.: ...
- Current account balance (in percent of GDP): 1995: -2.6; 1996: -3.0; 1997: -4.1; 1998: -4.3; 1999 Proj.: -4.0
- Financial variables (in percent of GDP)
- Public sector borrowing requirement: 1995: 7.2; 1996: 5.9; 1997: 6.1; 1998: 9.0; 1999 Proj.:
- Primary balance of the federal government: 1995: 0.6; 1996: 0.4; 1997: -0.3; 1998: 2.4
- Net public debt: 1995: 30.5; 1996: 33.3; 1997: 34.5; 1998: 42.6; 1999 Proj.: 51.0
- Change in broad money (in percent)3: 1995: 26.2; 1996: 13.0; 1997: 14.9; 1998: 11.1
- Average overnight interest rate (in percent): 1995: 53.1; 1996: 27.4; 1997: 24.8; 1998: 28.8
Public Information Notice: IMF Concludes Article IV Consultation with Brazil, August 23, 1999.