{
  "title": "Brazil: Staff Concluding Statement of the 2016 Article IV Mission",
  "publication": "IMF News, September 29, 2016",
  "sourceUrl": "https://www.imf.org/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission",
  "canonical": "https://www.imf.org/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission",
  "overlayPath": "/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission/index.md",
  "summary": "Brazil is in a deep recession with multiple causes: policy failures on long-standing structural problems; declining terms of trade; tight financing conditions; steep increases in electricity tariffs; a corruption scandal; and a political crisis leading to heightened uncertainty.",
  "publishDate": "2016-09-29",
  "sections": [
    {
      "heading": "I. Context and Recent Developments",
      "content": "- Brazil is in a deep recession with multiple causes: policy failures on long-standing structural problems; declining terms of trade; tight financing conditions; steep increases in electricity tariffs; a corruption scandal; and a political crisis leading to heightened uncertainty.\n- The recession has caused a large contraction of output, a massive toll on employment, and slowed progress on reducing social inequalities.\n- Inflation has exceeded the top end of the target band since 2015, with disinflation proceeding slowly despite a large output gap.\n- Fiscal sustainability is at risk:\n  - Fiscal position, including at the subnational level, is at its worst level in over two decades.\n  - Decline in potential growth and persistently high real interest rates have worsened debt dynamics.\n- Government policy actions and reforms:\n  - Proposed cap on the growth in federal noninterest spending at the rate of consumer-price inflation in the previous year.\n  - Announced plans for social security reform.\n  - Regulatory reforms to support concessions and privatization program; strengthened governance for state-owned enterprises.\n  - Major public enterprises and banks, notably Petrobras and BNDES, placed under new management.\n  - Markets have responded positively to decreasing uncertainty and improved sentiment toward emerging economies."
    },
    {
      "heading": "II. Outlook",
      "content": "- Growth projections:\n  - Output growth projected at -3.3 percent in 2016.\n  - Output growth projected at about ½ percent in 2017.\n  - Projection contingent on approval of the fiscal spending cap and social security reform in a reasonable timeframe and meeting proposed fiscal targets for 2016 and 2017.\n- Recovery dynamics:\n  - Investment projected to recover if uncertainty continues to decline, supporting gradual return to positive sequential growth beginning in late 2016.\n  - Recovery impeded by excess corporate leverage, high unemployment, and weak household balance sheets.\n  - Inflation expected to gradually converge toward the midpoint of the target band.\n- Risks to the outlook:\n  - Downside risks dominate: failure to deliver core fiscal consolidation; reforms watered down or stalled in Congress; re-intensification of political uncertainties; protracted slow growth externally (especially China); further commodity price declines; tighter external financial conditions.\n  - Upside risks: recent policy pronouncements boosting confidence and asset prices; faster-than-expected approval of spending cap and social security reform could reduce risk premia and trigger stronger investment and growth (including via M&A activity)."
    },
    {
      "heading": "III. Policy Recommendations — Fiscal",
      "content": "- Core recommendation:\n  - Controlling the growth of fiscal spending is imperative; approval and steadfast implementation of the spending cap could be a game changer for long-term public spending trajectory and permit stabilization and eventual reduction of public debt as a share of GDP.\n- Address structural drivers of public expenditure growth — key areas:\n  - Social security:\n    - Move expeditiously on broad-based reform covering retirement age rules, replacement rates, access to benefits, duplication of benefits, annual growth of payments, and regimes for public sector employees at all levels.\n    - Include provisions to protect the most vulnerable given high inequality.\n  - Subnational governments:\n    - Contain upward expenditure trajectories in many states through adoption of a rule similar to the federal proposal.\n    - Enact enabling legislation for states to make difficult expenditure adjustments; increase transparency in expenditure reporting.\n  - Fiscal framework:\n    - Strengthen the medium-term fiscal framework; reduce budgetary rigidities (including tax earmarking); increase flexibility in composition of spending.\n    - Recommended consolidation of Petrobras and Eletrobras into non-financial public sector statistics (without including them in fiscal targets calculation) to improve transparency and fiscal risk management.\n  - Minimum wage and indexation:\n    - Revise the formula for minimum wage revisions and the link between social benefits and the minimum wage to address medium-term fiscal pressures; revise the minimum wage formula to better reflect productivity improvements.\n  - Spending efficiency:\n    - The spending cap will require government agencies to make better use of resources to prevent declines in service quality.\n\n- Fiscal consolidation timing and composition:\n  - Consolidation based solely on the spending cap would take several years to stabilize public debt and carries risks: public sector debt as a ratio of GDP would continue to grow for a number of years before peaking and declining gradually; overall deficit would remain high for an extended period, crowding out private agents.\n  - Merit in a more frontloaded consolidation:\n    - Possible objective: reach a primary balance of around 3½ percent of GDP over the next 5 years, which would stabilize debt by 2021.\n    - Consider a combination of expenditure and revenue measures; measures could be designed to take effect once economic growth has firmed up to mitigate short-run output costs."
    },
    {
      "heading": "IV. Policy Recommendations — Monetary, Exchange Rate, Financial Sector",
      "content": "- Monetary policy:\n  - Should remain tight until inflation expectations converge more clearly toward the center of the target band.\n  - Current monetary policy settings considered broadly appropriate given inflation expectations.\n  - Tangible progress on public finance sustainability would allow more room for monetary easing to support recovery.\n- Exchange rate and FX intervention:\n  - Exchange rate should remain the first line of defense against shocks.\n  - Foreign exchange intervention should be limited to episodes of clear market disruption and high volatility; reserve buffers should be preserved.\n  - Support continuation of central bank policy of reducing the net notional value of FX swaps; use of reverse FX swaps is a useful supplementary tool.\n- Banking sector resilience and safety nets:\n  - Banking system largely sound but profitability and asset quality affected by recession.\n  - Mission welcomes moderation in growth of credit by public banks; plans to reduce direct financing of large corporations with market access; intentions of largest public banks to strengthen capital positions.\n  - Recommendations:\n    - Improve financial safety nets: strengthen procedures for use of the deposit insurance fund; enhance central bank emergency liquidity assistance; modernize the resolution regime.\n    - Put in place frameworks for identifying, preparing for, and responding to future risks involving all financial regulators.\n    - Strengthen private insolvency frameworks to expedite bankruptcy and reduce default losses for banks."
    },
    {
      "heading": "V. Policy Recommendations — Structural Reforms and Governance",
      "content": "- Structural reforms to hasten and strengthen recovery:\n  - Infrastructure bottlenecks:\n    - Implement announced enhancements and regulatory reforms to make concessions program more attractive while maintaining governance and program design standards.\n  - Opening of the economy:\n    - Reduce tariffs and nontariff barriers, revise domestic content requirements, and pursue free-trade negotiations outside Mercosur to boost competition, efficiency, and growth.\n  - Efficient allocation of savings:\n    - Review credit earmarking rules and other distortions to channel national savings to their most productive uses.\n  - Labor reform:\n    - Facilitate productive employment and reduce incentives for informality to promote job creation, investment, and growth.\n  - Tax reform:\n    - Simplify the State Tax on the Circulation of Goods and Services (ICMS).\n    - Consolidate PIS/CONFIS and IPI and replace them with a true federal VAT to reduce cost of doing business.\n- Transparency, anti-corruption and anti-money laundering:\n  - Effective implementation of these measures would enhance predictability for businesses and perceptions of fairness.\n  - Government commitments cited:\n    - Make public procurement data open by default.\n    - Implement recent legislation on conflict of interest.\n    - Strengthen whistleblowing mechanisms.\n\nIMF Staff Concluding Statement, September 29, 2016.\n\n---\n\n\n References\n\n- Brazil and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission"
    }
  ],
  "bullets": [
    "[Markdown version](/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission/index.md)",
    "[Structured JSON version](/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission/index.json)",
    "[Bundle manifest](/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission/bundle-manifest.json)",
    "Published: September 29, 2016",
    "Brazil is in a deep recession with multiple causes: policy failures on long-standing structural problems; declining terms of trade; tight financing conditions; steep increases in electricity tariffs; a corruption scandal; and a political crisis leading to heightened uncertainty.",
    "The recession has caused a large contraction of output, a massive toll on employment, and slowed progress on reducing social inequalities.",
    "Inflation has exceeded the top end of the target band since 2015, with disinflation proceeding slowly despite a large output gap.",
    "Fiscal sustainability is at risk:",
    "Government policy actions and reforms:",
    "Growth projections:",
    "Recovery dynamics:",
    "Risks to the outlook:",
    "Core recommendation:",
    "Address structural drivers of public expenditure growth — key areas:",
    "Fiscal consolidation timing and composition:",
    "Monetary policy:",
    "Exchange rate and FX intervention:",
    "Banking sector resilience and safety nets:",
    "Structural reforms to hasten and strengthen recovery:",
    "Transparency, anti-corruption and anti-money laundering:",
    "[Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
  ],
  "alternates": {
    "markdown": "/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission/index.md",
    "json": "/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission/index.json",
    "bundleManifest": "/en/news/articles/2016/09/29/ms092916-brazil-staff-concluding-statement-of-the-2016-article-iv-mission/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-25T20:12:48.910Z"
}