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Structural Reforms can Help Unlock Brazil’s Growth Potential

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
July 2006
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Brazil’s economic performance has continued to be favorable, with higher real GDP growth and lower inflation projected for 2006, according to the IMF’s recent economic review. Brazil’s external position has strengthened further: favorable global market conditions have boosted trade and current account surpluses, and positive financial market sentiment, ample global liquidity, and high domestic interest rates have boosted capital inflows.

These favorable external conditions have allowed the central bank to build up international reserves and reduce external debt to its lowest ratio to exports in more than 25 years—in particular, through the early repayment of all outstanding obligations to the IMF and repayments to Paris Club creditors, as well as through buybacks of private external debt. And the authorities have been able to deepen Brazil’s domestic financial markets and enhance their integration with global markets.

The IMF Executive Board welcomed Brazil’s strong economic performance, the decline in unemployment, and its significant progress in alleviating poverty and inequality, including through active social policies. Near-term prospects are favorable, but the recent rise in global risk aversion toward emerging markets highlights the importance of maintaining prudent policies and continuing to reduce vulnerabilities.

Unlocking Brazil’s growth potential, in the view of Directors, is the country’s most important challenge. Meeting this challenge will require consolidating macroeconomic stability by solidifying the institutional underpinnings of policies, improving the efficiency of the public sector, and further strengthening the public sector balance sheet. In this regard, Directors stressed the need to reduce budget rigidities and phase out tax distortions and inefficiencies.

Directors also saw a need for broader structural reforms to improve financial intermediation, open the economy, and strengthen the business environment. Such a combination of policies would provide conditions conducive to productivity growth and investment, setting the stage for continued progress in tackling high poverty and income inequality.

Brazil
20032004Prel.

2005
Proj.

2006
(annual percent change)
Real GDP0.54.92.33.5
Consumer prices (end of period)9.37.65.74.5
(percent of GDP)
Current account0.81.91.81.1
Total revenues23.124.025.325.3
Total expenditures27.125.529.128.2
Data: Central Bank of Brazil, Ministry of Finance, and IMF staff estimates.
Data: Central Bank of Brazil, Ministry of Finance, and IMF staff estimates.

For more information, please refer to IMF Public Information Notices Nos. 06/16 (Hong Kong SAR) and 06/69 (Brazil) on the IMF’s website (www.imf.org).

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