“Brazil may now borrow a further SDR 3.6 billion ($4.9 billion), which would bring its total borrowings from the IMF under the program to SDR 7.1 billion ($9.6 billion). The authorities also expect to draw $4.9 billion under a facility arranged by the Bank for International Settlements and a loan from the government of Japan. External financing prospects have further improved as a result of recent or expected disbursements under special programs from the World Bank and the Inter-American Development Bank and the commitment made by Brazil’s major private bank creditors to maintain their exposure to Brazil,” Fischer stated.
Brazil’s economic program was revised following the devaluation in mid-January 1999. The two pillars of the revised program are strengthened fiscal adjustment, and the replacement of the exchange rate as the nominal anchor of the system by a monetary policy targeted at inflation. The informal inflation-targeting framework to be followed during the next few months will have the goal of preventing the first-round price-level effects of the devaluation from generating sustained inflation. A more formal inflation targeting framework will be adopted later in the year once the necessary groundwork has been put in place.
Fiscal policy aims to reduce the ratio of net public debt to GDP to below 45 percent by the end of 2000, 2 percentage points lower than originally targeted. To this end, the revised program embodies more ambitious targets for the public sector’s primary balance. In addition, real interest rates are likely to be significantly lower in 1999 than was expected before the devaluation. More than half of the projected increase in the primary balance is at the federal government level. Virtually all the program’s revenue measures are either already in place or have been passed by the Brazilian congress and will be implemented in the next months as planned.
The original program’s comprehensive structural reform agenda—in such areas as social security, civil service reform, tax policy, budgetary procedures, and fiscal transparency—has been enhanced. The government is also proceeding with its substantial privatization program.
Although real GDP is now projected to decline in 1999 by more than previously expected, economic activity should begin to pick up in the course of the year on the strength of the expected increase in exports and the decline in interest rates. The balance of payments should also improve, as capital inflows recover and Brazil capitalizes on its improved competitiveness. The government intends to cushion the impact of the decline in activity on the poor and vulnerable by safeguarding well-targeted social programs from budget cuts.
Fischer commended the Brazilian authorities for the recent strengthening of policies and welcomed both the commitment of the commercial banks to maintain their exposures to Brazil and the improvement of market sentiment. He emphasized that the firm implementation of the economic program remains the key to its success.