Brazil’s program would be supported by the three-year Stand-By Arrangement approved by the Executive Board on December 2, 1998, in an amount totaling SDR 13.0 billion ($18.1 billion), which is part of a package of international financial support totaling about $41 billion [see IMF Survey, December 14, 1998, page 385]. Brazil drew SDR 3.4 billion (about $4.6 billion) from the IMF loan in December and would be able to draw a further SDR 3.6 billion (about $4.9 billion) upon the Board’s approval.
The key elements of the new program are a strengthened fiscal adjustment and, in light of the floating of the exchange rate, the adoption of a new nominal anchor for monetary policy. The additional fiscal improvement and a firm monetary policy are expected to contain the impact of the depreciation of the real on prices in the first half of 1999, and to facilitate a decline of the annualized monthly rate of inflation to single digits by the end of the year. Although real GDP is now expected to decline by 3½—4 percent in 1999, it is expected that the program will lay the basis for a sustained recovery in 2000 and beyond, as confidence recovers and external financing constraints are eased.
The current account of the balance of payments is expected to improve substantially, with the deficit being nearly halved in 1999, compared with 1998, and continuing to decline in subsequent years, reflecting in particular the favorable impact of the depreciation of the exchange rate on the trade account. Capital inflows are expected to recover progressively during the year, turning the overall balance of payments into surplus during the second half of 1999.
Notwithstanding the increase in the public debt resulting from the depreciation of the real, the Brazilian government is committed to ensuring by the end of the program period a steady decline of the public debt relative to GDP to a level below that targeted in the original program (46.5 percent of GDP). For this purpose, the targets for the primary surplus of the public sector have been increased by the equivalent of about 0.5 percent of GDP a year, compared with the original program, to a range of 3—3.5 percent of GDP a year during 1999—2001.
The additional fiscal adjustment will be achieved through a range of revenue-raising measures and expenditure cuts, most of which have already been announced by the government. The adjustment effort will be concentrated at the federal level; the states and local governments are expected to contribute to it through the implementation of their debt-restructuring agreements with the federal government and by complying with the requirements of the administrative reform laws. The government is committed to protecting the more vulnerable segments of society by minimizing the impact of the needed budget cuts on programs targeted to the poor and has sought financial support from the World Bank and the Inter-American Development Bank [IDB] for this purpose.
The central bank intends to move as soon as feasible to an inflation-targeting framework for monetary policy and is taking steps to put in place the necessary technical underpinnings. At the same time, steps are being taken to strengthen the operational autonomy of the central bank in pursuing its anti-inflation mandate. While an inflation-targeting framework is put in place, the central bank will keep the growth of its net domestic assets within rates consistent with the target path of inflation and the projected paths of real GDP and the overall balance of payments. The increased focus by the central bank on inflation and the monetary aggregates will require appropriate flexibility in the management of interest rates. With the decisions on interest rates announced on March 3, the central bank has demonstrated its commitment to such flexibility. Interest rates are expected to decline in the course of the year, as inflation abates, to levels significantly lower in real terms than those prevailing before the floating of the real, thus facilitating the targeted decline in the public debt relative to GDP.
The government has reaffirmed its commitment to the wide-ranging program of structural reforms in, among others, the areas of social security, taxation, fiscal transparency, and the financial sector, in most of which significant progress has already been made. It also intends to accelerate and broaden its privatization program.
The revised Brazilian program is expected to continue to receive financial support from the international community, including industrial countries, the World Bank, the IDB, and, of course, the private sector. The Brazilian authorities intend to seek, starting this week, voluntary commitments by their creditor banks to support Brazil. This effort is integral to the success of the program and will be a key factor in the consideration of the program by the Executive Board of the IMF in late March or early April.