Brazil: International Monetary Fund Courted to Insure Country's Foreign Liabilities

NotiSur - South American Political and Economic Affairs, August 31, 2001 | Go to article overview

Brazil: International Monetary Fund Courted to Insure Country's Foreign Liabilities


By Matthew Flynn

[The author writes for the International Weekly Edition of the Gazeta Mercantil, a Sao Paulo-based financial newspaper.]

Because of the continuing economic crisis in Argentina, rationing of electric energy, and a worsening foreign-exchange rate, Brazil has sought the assistance of the International Monetary Fund (IMF) to help cover its foreign obligations. The latest accord, announced Aug. 8, renews the current agreement with the IMF, which was to expire Dec. 1, and provides Brazil with US$15 billion in new IMF funds.

"Brazil is a country with an enormous capacity to overcome its problems," said Finance Minister Pedro Malan. "We beat hyperinflation, we survived the Asian crisis, the Mexican crisis, the Russian crisis, and exchange-rate volatility just as we will overcome the energy crisis and the Argentine crisis."

While the latest injection of funds should ease Brazil's external vulnerabilities in the short term, ongoing foreign and domestic crises combined with increased belt-tightening will adversely affect economic growth and lagging social indicators. Even the US$8 billion that the IMF just agreed to lend Argentina is no guarantee that times will improve (see other article in this edition).

Brazil will get US$4.6 billion right away

Although the latest accord with the IMF will not be signed until September, some US$4.6 billion of the US$15 billion total will be available to Brazil immediately. To withdraw the remaining funds, the government will have to post a primary public-sector surplus (revenues minus expenditures excluding debt payments) equal to 3.35% of GDP in 2001 and 3.5% of GDP in 2002.

While that will not be difficult this year--the 12-month primary surplus has already topped 3.9% of GDP--economists believe next year's goal may be hard to meet with a slower- growing economy and presidential elections.

On the positive side, Brazil received permission to lower its international-reserves floor from US$25 billion to US$20 billion, which will give it more firepower to defend its beleaguered currency, the real. The currency has lost more than 30% of its value against the dollar this year.

Together with US$3 billion in reserves expected to remain after its foreign-debt payments this year, the Central Bank will have US$8 billion at its disposal to intervene in the foreign-exchange markets.

Regarding inflation, the IMF's 4% goal for the consumer price index (Indice de Precos ao Consumidor Amplo, IPCA) this year remains intact, but the IMF has said it will accept up to 5.8% plus a two-percentage-point leeway. The IPCA for twelve months had already hit 7.35% by the end of June.

The new accord will expire on Dec. 1, 2002, the same day that President Cardoso will end his term, leading some political analysts to consider the agreement a "blindagem eleitoral" or financial armor for next year's election.

IMF agreement involves sacrifices

Finance Minister Malan, responding to criticism of the latest accord from some lawmakers, insisted that the country had not ceded any of its sovereignty as a result of any conditions attached to the agreement.

"It is an insane, mistaken point of view of those who do not participate in the [economic decision-making] process to say that Brazil is submissive to the IMF," said Malan.

Opposition politicians and economists are particularly critical of the degree of fiscal belt-tightening required by the IMF. With the federal government committed under the accord to a primary surplus equivalent to 3.5% of GDP in 2002, Planning Minister Martus Tavares says the budget will have to be cut by an extra US$4.04 billion next year.

The combination of economic difficulties in Argentina, the worldwide recession, energy rationing, and high interest rates have put the brakes on Brazil's economy.

The latest growth figures released from the Instituto Brasileiro de Geografia e Estatistica (IBGE) surprised government officials and economists. …

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