Brazil: 2018 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Brazil

International Monetary Fund. Western Hemisphere Dept.

doi:10.5089/9781484372449.002.A001

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Brazil: 2018 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Brazil

Author: International Monetary Fund. Western Hemisphere Dept.

Publication Date:: 03 Aug 2018

eISBN:: 9781484372449

Language:: English

Keywords:: ISCR; CR; debt; spending ceiling; spending; exchange rate; monetary policy; central bank; current account; minimum wage; Corruption; Global

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2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Brazil

Abstract

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Brazil

The Recovery is Underway, But Risks Remain

1. The economic recovery is proceeding at a moderate pace. In 2015–16, Brazil suffered its most severe recession which led to a cumulative real GDP contraction of 8.2 percent. Growth resumed in 2017 with GDP growing at 1 percent. Conditional on favorable external conditions, growth is expected to accelerate to 1.8 and 2.5 percent in 2018 and 2019, respectively, driven by private consumption and investment. In line with the empirical evidence on the effects of severe crises, these projections assume that the 2015-16 recession had a permanent effect on potential GDP, involving a 9 percent drop relative to the long-run trend. The output gap is estimated to be about -3.5 percent and projected to close in 2022.

2. The social implications of the recent economic contraction remain worrisome. The 2015–16 recession led to a sharp increase in unemployment, from 7 to 13 percent, and in the number of people living in poverty. The unemployment rate has begun to decline, but only moderately and mostly in the informal sector (Box 1). The number of discouraged workers is very high. Jobless rates are significantly higher among the young, women, and Afro-Brazilians. The labor market reform that came into effect in November 2017 has reduced litigation and increased flexibility in employment contracts and wage setting. However, the effects on employment have been weak so far because of legal uncertainty surrounding the interpretation of the law by the courts and the slow pace of economic growth.

3. The fiscal deficit has declined, but public debt is growing and deeper reforms are lagging. The primary fiscal deficit declined to 1.7 percent of GDP in 2017, below the authorities’ target, reflecting under-execution of discretionary expenditures. The cyclically adjusted stance was contractionary and net interest payments declined, owing to lower policy rates and bond spreads. Nonetheless, public debt reached 84 percent of GDP in 2017. More importantly, the much-needed pension reform has stalled, leading Fitch and S&P to downgrade Brazil’s sovereign debt to BB-.

4. Inflation has declined to record lows prompting a large reduction in the policy rate. During 2017, inflation decreased from 6.3 to 2.9 percent, just below the target range, owing largely to slack in the economy and a notable fall in food prices due to an exceptional harvest. Since the beginning of the easing cycle in September 2016, the Central Bank has lowered the policy rate by 775 bps to the record low level of 6.5 percent. Inflation is projected to increase towards the 4.25 midpoint of the inflation target in 2019, as the food price shock dissipates and the output gap narrows.

Box 1.

Labor Markets and Informality

Since 2017, most employment growth has been in the informal sector. During the recession all sectors experienced job destruction. However, during the recovery, job creation has been concentrated in the informal sector, while the formal sector has lagged. This is unusual since historically the business cycle has been tightly connected to formal job creation. This suggests that the deep recession left considerable uncertainty and reluctance to hire in the formal sector.

The increase of informality is a concern for various reasons. First, it may jeopardize the reduction in income inequality that was achieved between 2004 and 2014 thanks to a significant decline in informality, from 60 to 45 percent of total employment. Moreover, informal employment weakens the tax base and is associated with lower productivity growth, a perennial problem in Brazil. Finally, informal employment lacks adequate social protection and affects disproportionally the most vulnerable groups in the population, especially women, the young, and poorly-educated workers in northern and northeastern regions.

5. Nonfinancial corporates and households’ balance sheets have marginally improved. Household debt as a share of disposable income and the debt service-to-income ratio have declined slightly supported by lower lending rates and higher income. Corporate leverage ratio has also declined, but remains high. Nonfinancial corporates’ liquidity and profitability have improved, but they are still below pre-recession levels. Corporate bankruptcy applications have edged down.

6. Banks weathered the recession well. Despite considerable losses on their loan portfolio, banks remained resilient. High interest margins and fees helped to preserve their profitability and bank capital, while liquidity remained adequate. The economic recovery led to a decline in delinquency ratios which boosted profits. Capital ratios are well above regulatory minima.

7. Credit growth turned slightly positive in recent months, supported by looser financial conditions. Financial conditions eased in 2017. Intermediation spreads have declined slightly and a recent large reduction in reserve requirements has lowered bank funding costs. Non-earmarked credit to households is growing at a moderate pace. Public banks are reducing lending after the big expansion following the financial crisis, partly due to the gradual phasing out of interest rate subsidies and lower funding available to BNDES, but private banks and capital markets are taking up the slack.

8. The current account improved as imports contracted. The current account deficit shrank from 4.2 percent of GDP in 2014 to 0.5 in 2017 as imports contracted with the collapse of private investment. As the recovery gains strength, the rebound in investment will offset the effects of fiscal consolidation and lead to a deterioration of the current account to about -2 percent of GDP over the medium term.¹

9. IMF’s past policy advice has been implemented selectively (Appendix III). Past policy advice stressed the importance of fiscal consolidation to ensure debt sustainability. Pension reform—key measure underlying consolidation—and other measures to contain the deficit, including addressing budget rigidities and the automatic link between benefit payments and minimum wage, have been postponed. The stance of monetary policy was maintained accommodative and the exchange rate flexible as recommended in the 2017 staff report. Some key progress was made on structural reforms, including a labor reform, strengthening the AML framework, and measures to increase the efficiency in the energy sector and in the public banks.

10. The outlook is subject to considerable downward risks, some of which are linked to domestic factors. The key domestic risk is that fiscal reforms are delayed. The outcome of the October elections is uncertain, with polls showing a high degree of polarization. The new government may not have the political will or support to pursue fiscal consolidation, especially pension reform. In such circumstances, investors could lose confidence in debt sustainability, leading to an exchange rate depreciation, an increase in sovereign yields, a tightening of financial conditions, and, possibly, to a recession. These effects may manifest ahead of the elections if the political campaign appears to reward candidates that oppose fiscal reforms. Furthermore, the nation-wide trucker strike that took place at the end of May is a risk for the 2018 growth outlook.

11. External risks may arise from tighter global financial conditions and negative trade shocks (Appendix I). Despite Brazil’s strong external position and relatively low external rollover needs, a sudden increase in global risk aversion may put pressures on the exchange rate and raise sovereign spreads. The rapid depreciation of some emerging market currencies, including the real over the last few weeks, is a reminder that external conditions can change abruptly. Brazil is also vulnerable to retreat from cross-border integration and, in particular, trade and commodity price shocks arising from U.S. trade policy or a slowdown in China, which accounts for almost 20 percent of Brazil’s exports. However, the effect could be attenuated by positive trade diversion effects, for example by replacing U.S. exports of soybeans to China. Unfavorable economic developments in Brazil may spill over to other countries in the region through trade and financial channels.

Policy Discussions

Discussions focused on policies to secure a strong and durable recovery, ensure fiscal sustainability, improve the resilience and efficiency of the financial sector, and remove structural impediments to growth. Given the debt dynamics, fiscal consolidation should be strengthened while protecting spending aimed at addressing the social consequences of the crisis. Since inflation is below target and expectations are anchored, monetary policy should remain accommodative to facilitate a durable recovery. The exchange rate should remain flexible to absorb external shocks. Deeper structural reforms are needed to support productivity growth.

A. Accelerating Fiscal Consolidation

12. In staff’s baseline, the fiscal outlook carries risks. Even if federal government expenditure is reduced by about 0.5 percent of GDP per year starting in 2019, as mandated by the constitutional expenditure ceiling, gross public debt will increase to peak above 90 percent of GDP in 2023. Such high levels of debt pose serious risks to the economy, especially in the context of a tightening of global financial conditions. Against this backdrop, a widening of the primary deficit, as implied by the 2018 budget, should be avoided.

13. The authorities should reduce the primary deficit faster than in the baseline scenario. Staff recommends continuing with fiscal consolidation in 2018, including by advancing the various measures originally contemplated in the draft budget but rejected by congress (Box 2). The adjustment should aim at start reducing public debt as share of GDP by 2023. The federal government primary surplus should reach 1 percent of GDP in 2023 (0.5 percent of GDP higher than in the baseline) and at least 2.5 percent of GDP in 2026. Achieving that surplus requires a cumulative fiscal adjustment of about 4.5 percent of GDP (the primary deficit was 1.8 percent of GDP in 2017) but only half of the adjustment is structural. The consolidation could be achieved by containing expenditure in line with the constitutional ceiling together with some revenue measures. Containing expenditure requires:

a comprehensive pension reform to stabilize pension spending in percent of GDP should aim at increasing retirement ages, delinking the minimum pension from the minimum wage, and moderating the generosity of pensions, particularly for government employees,
reducing personnel spending by about 1 percent of GDP (containing wages and hiring, and better aligning compensation with the private sector) (Box 3),
identifying additional expenditure measures and efficiency gains of about 0.5-1 percent of GDP (including better targeting of social benefits such as abono salarial),
and protecting effective social programs, including Bolsa Familia, and public investment.

On the revenue side, consideration should be given to:

remove distortionary tax exemptions which cost about 4 percent of GDP annually,
simplify the tax system (moving toward a single broad-based VAT with full refund for VAT on intermediate goods),
harmonize the fragmented federal and state tax regimes, and
in the medium-term, review the personal and corporate income tax system toward simplification, including by reducing incentives for individuals to incorporate as businesses for tax purposes.

Box 2.

Fiscal Measures

Most of the proposed measures in the 2018 draft budget law stalled in Congress. The government originally proposed measures equivalent to about 0.5 percent of GDP in 2018 to continue fiscal consolidation. However, most measures were not taken onboard by congress in the approved 2018 budget, accounting for the fiscal expansion projected for 2018.

Eletrobras privatization (12.2 billion in extraordinary revenue; included in budget but at risk). The 2018 budget includes proceeds from hydroelectric contracts as extraordinary revenue. However, opposition to privatization is mounting, including through legal challenges. Recognizing these risks, the government has included contingency in the budget which blocks discretionary expenditure if these proceeds do not materialize.
Discretionary cuts (included in budget). The 2018 budget includes further reductions to discretionary expenditure, including in Minha Casa Minha Vida (1.2 billion), and the allocation for emergencias de defesa civil (1.2 billion).
Tax increase for closed-end funds (fiscal savings 6 billion; included in budget, but diluted). The government proposed to tax closed-end investment funds annually, instead of waiting until redemption or liquidation. Congress has restricted this measure only to new funds and annual receipts are now expected to be negligible in the short term.
Delay wage increases for the civil service (fiscal savings of 4.4 billion; not included in budget). The government proposed to delay previously agreed wage increases from 2018 and 2019 by one year (to take place on 2019 and 2020 respectively). However, the final approval of the budget took place in February, after the 2018 salary adjustment was granted. This measure has therefore no impact on 2018.
Increase pension contributions for civil servants (fiscal savings of 2.5 billion; not included in budget). Increases the contribution rate for the civil servant pension regime (RPPS) from 11 to 14 percent of wages, for workers with wages above the maximum RPPS pension. This decision was challenged in court, under the argument that it imposes a disproportional effort on public employees.
End of payroll tax exemptions (fiscal savings of 5.8 billion; not included in budget). Since 2011, employers across many industries can substitute the employer portion of payroll taxes (20 percent of covered wages) with a tax on revenues (typically 2.5 percent). To avoid distortions in social security financing, the treasury covers the difference between the two. A draft law curtailing these exemptions has not been approved by congress.
Pension reform (fiscal savings of 1.9 billion, not included in budget). The original pension proposal aimed to deliver savings starting in 2018. However, the pension bill has stalled in congress, and attempts to limit reforms to introducing a minimum retirement age did not succeed.

14. The fiscal framework should be strengthened. To facilitate fiscal adjustment, raise the credibility of fiscal policies, and improve fiscal policy planning the authorities should also move forward on several fronts:

Addressing major budget rigidities, including revenue earmarking, high mandatory expenditure (over 80 percent of federal spending cannot be modified without legal changes), and the indexation of key spending items.
Limiting minimum wage increases to cost of living adjustments. Minimum wage growth above productivity has lowered income inequality but it is now undermining job creation and lowering potential growth. The minimum wage formula is up for review in 2019. Future minimum wage increases—which affect the growth of pensions and other benefits—should be limited to cost of living adjustments, with due consideration of the trade-off between employment creation and income inequality.
Strengthening revenue administration, including revamping the administrative and judicial tax appeal system, granting powers to the revenue administration to recover arrears, and allowing for installment payments.
Reviewing the fiscal rules while maintaining an ambitious consolidation path. The current fiscal framework includes a number of rules that complicate fiscal policy (Appendix V). The fiscal framework should be revamped to introduce simple, flexible, and enforceable rules consistent with debt sustainability.
Introducing a medium-term budget framework, including publishing a medium-term fiscal policy statement, and improving reporting standards for all levels of government.

Box 3.

Rightsizing the Government Wage Bill

The wage bill is high relative to peers. At 13 percent of GDP, compensation of employees is substantially above the levels observed in advanced economies (10 percent of GDP), emerging economies (9 percent of GDP), and Latin America (8 percent of GDP). The wage bill is procyclical, and its considerable size limits other productive government spending, including investment. Nearly 75 percent of the wage bill corresponds to state and municipal governments. This reflects the division of responsibilities: about 55 percent of employees in state and local governments are in health, education, and security, compared to 35 percent in the federal government.

The level of pay is the main factor explaining the relatively high wage bill. Government employment is in line with those observed in other emerging markets and developing countries (below 9 percent of working-age population). In contrast, government workers command substantially high pay premium relative to those in the private sector when compared with other countries. The public wage markup is up to 50 percent, especially for individuals with low levels of education. Since most government employees are covered by a special pension regime (more generous than for the private sector), the markup would be even higher from the perspective of their lifetime pay. Furthermore, most government workers are in the top two quintiles of the earnings distribution (80 percent of federal workers and 55 percent of subnational workers).

Containing the wage bill is essential to ensure fiscal sustainability. Meeting the expenditure ceiling requires a break in the wage bill from historical trends: on average, the federal wage bill increased by about 4 percent per year in real terms in 2000-16. In subnational governments, personnel expenditure increased by 1 percentage point of GDP in the past six years. Containing subnational wage bills is needed to maintain personnel expenditure below the 60 percent of net revenue (mandated by the Fiscal Responsibility Law).

To achieve fiscal savings in the near term, real wages would have to fall and the employment to population ratio would have to come down. This requires substantial adjustments to remuneration and hiring practices. For example, achieving total savings of 0.5 percentage points of GDP would require freezing remuneration in nominal terms (i.e., no negotiated wage increase, but maintaining seniority increases) and halting new hiring for the next five years.

In the medium term, it is critical to address inefficient idiosyncrasies in the compensation structure. The multitude of careers and wage grids introduce disparities in earnings for similar positions across different entities. Automatic seniority increases of up to 3 percent per year are inconsistent with a low-inflation environment. Workers in clerical and administrative often earn higher wages than entry level professionals with greater job responsibility, largely reflecting differences in tenure.

Efforts to enhance subnational remuneration transparency should continue. In the federal government, timely and detailed payroll data is publicly available from the Transparency Portal. Expanding such initiative to all subnational governments remains a priority.

15. Subnational finances need to be bolstered. Three states (Minas Gerais, Rio de Janeiro, and Rio Grande do Sul) have debt above 200 percent of current revenues, the limit established by the Fiscal Responsibility Law. Of these, Rio de Janeiro is following a fiscal recovery program with the federal government. To contribute to the fiscal adjustment, the most important priority for subnational governments is to reduce personnel costs and reform pensions (which together account for about 57 percent of current state expenditure).

B. Maintaining an Accommodative Monetary Stance

16. The current accommodative monetary stance is appropriate given low inflation and anchored expectations. With the Selic rate at the historically low level of 6.5 percent, the ex-ante real rate has declined to 2.3 percent, below the estimated range of the natural rate (4–6 percent).² The current accommodative monetary policy stance is appropriate given that inflation is hovering slightly below the target range and the output gap is large. Inflation expectations are anchored around the 4.25 percent target for 2019. Looking ahead, monetary policy should stand ready to offset the contractionary effects of fiscal consolidation, especially if fiscal tightening is accelerated in line with staff’s advice. If, on the other hand, the fiscal stance turns expansionary in 2019, monetary policy should tighten to offset possible inflationary effects.

17. The flexible exchange rate regime is an important cornerstone of the policy framework. The exchange rate depreciation during the 2015–16 crisis supported a swift reduction of the current account deficit. Monetary policy should respond to exchange rate fluctuations only to offset possible second-round effects on inflation, while intervention in the foreign exchange market should be limited to episodes of excessive market volatility. International reserves at the current level provide an important buffer against large external shocks.

C. Preserving External Balance

18. Brazil’s external position is broadly consistent with medium-term fundamentals and desirable policies. At slightly less than 35 percent of GDP, net foreign liabilities are moderate and the level of foreign reserves, at US$374 billion or about 160 percent of the ARA metric, remains high (Appendix II). External rollover needs for private and public debt are low, at about 8 percent of GDP per year. Furthermore, Brazil benefits from a large and steady flow of foreign direct investment, which more than finances the current account deficit (Box 4). Public debt is predominantly denominated in local currency, and FX debt in the private sector is mostly hedged. In 2017, the external position was broadly consistent with medium-term fundamentals and desirable policies according to the External Balance Assessment (EBA) and real effective exchange rate (REER) methodologies.

Box 4.

FDI Inflows to Brazil

Over the past decade, Brazil has attracted substantially larger net FDI inflows than other EMs. Net inflows are driven by strong inward FDI and are large even if excluding debt instruments, mainly intercompany loans. FDI inflows are mostly directed to the service sector. This suggests that foreigner investors are primary interested in Brazil’s large domestic market rather than on its export industry.

The presence of China in FDI to Brazil has increased considerably. A recent BCB (2018)¹ report analyzes the source of FDI inflows based on the residency of the ultimate investor that has effective control of the project, rather than using the residency of direct investors. The study shows a sizeable increase in the share of China from around one to 10 percent of equity FDI inflows during 2015-17.²

¹ Banco Central do Brasil, 2018, “Relatório de Investimento Direto no País.”² A recent study by the Ministry of Planning, Development and Management also reported sizeable FDI projects related to Chinese firms (Bimonthly Newsletter on Chinese Investment in Brazil - n° 4).

19. Looking ahead, competitiveness should be improved. Since 2005 real wages have grown faster than labor productivity, increasing unit labor costs (ULC) and weakening external competitiveness (Box 5). The ULC-based REER is indeed significantly more appreciated than in the early 2000s. To preserve external balance, it is thus important to limit future wage growth. By allowing more flexible contracts and wage negotiations, the 2017 labor market reform should improve efficiency and limit pressure in the private sector. Furthermore, authorities should contain public wages, which have grown relatively faster than private sector wages, potentially affecting reservation wages for the formal sector.

Box 5.

Real Wages, Labor Productivity, and External Competitiveness

Over the last ten years, real unit labor costs have increased significantly. Since 2004 economy-wide real wages have risen faster than labor productivity, leading to a considerable increase in real unit labor costs. Industry wages, which are available for a longer time sample, show a similar upward trend but also reveal that unit labor costs remain below the levels of the late 1990s.

Wage growth has been especially strong in the public sector. A decomposition of wages by employment categories reveals that public wages have grown considerably faster than in the private sector. The public wage premium has increased even during the 2015–16 crisis when wage pressures in the private sector tapered off.

The nominal depreciation since 2011 has partly offset the effect of wage growth, reducing the appreciation of the real exchange rate. Between 2004 and 2011, the ULC-based real effective exchange rate increased sharply by about 80 percent, fueled by a nominal exchange rate appreciation and rising labor costs. Subsequently, the nominal depreciation especially at the time of the 2015 crisis, has led to a significant downward correction of the real exchange rate. The ULC-based REER is now about 30 percent above the values prevailing in the early 2000s and in line with the historical average since 1995.

D. Making the Financial System More Efficient

20. Banks are broadly resilient. Despite large losses during the 2015–16 recession, the recent FSAP found the banks to be well capitalized, profitable, and liquid, in large part thanks to high interest margins and fees. The FSAP systemic risk analysis suggests that bank solvency and liquidity are broadly resilient to further severe macro-financial shocks. Four banks (public and private) would fail the solvency stress test, but with a small capital shortfall.³ Some banks are also exposed to concentration, exchange rate, and market risk. Pillar 2 capital requirements could help mitigate identified risks in banks, supporting the need to build additional capital buffers for banks that failed the stress test.

21. Despite improvement, corporates remain vulnerable to shocks. Macro-financial shocks could increase debt-at-risk in the corporate sector—while firms use natural and financial hedging against their FX exposures, profitability and interest rate shocks could double the amount of debt at risk, especially in the manufacturing and energy sectors.

22. The recent FSAP has called for further action to strengthen the prudential, safety net, and macroprudential frameworks (Appendix IV). To strengthen the underpinnings of the BCB as the bank supervisor, the BCB’s independence and legal protection of staff should be ingrained in law. The regulatory and supervisory approach should be upgraded to better deal with related party exposures and transactions, large exposures, country and transfer risk, and restructured loans. The existing resolution regime is inadequate and a new framework in line with the FSAP recommendations should be introduced promptly. The process for dealing with weak banks and emergency liquidity assistance (ELA) should be tightened to ensure that such assistance is not provided to insolvent banks. The deposit guarantee fund should be brought into the public sector to help prevent conflict of interest, retain the mandate for financial stability in the public sector, and improve the exchange of confidential information. The increasing complexity of the financial system and gaps in systemic risk oversight call for closer coordination among supervisory agencies—the creation of high-level multi-agency committees with mandates for macroprudential policy and crisis management should be a priority.

23. Raising the efficiency of financial intermediation would boost productivity. Intermediation costs in Brazil exceed peer countries, with operating costs, and credit losses being the main determinants. Across Brazilian banks concentration at the credit-product level and vertical integration and the share of earmarked credit also play a role (Box 6). To lower delinquency costs, the authorities should improve collateral enforcement and the judicial system. Proposed laws on corporate bankruptcy, electronic collateral registration and positive credit registry will help reduce banks’ costs. A new regulation on Fintech will ease market entry and foster bank competition. A recently signed memorandum of understanding between the BCB and the competition authority, CADE, to collaborate on improving efficiency of the financial markets and legal initiatives on competition matters, will facilitate the authorities’ efforts to improve bank competition. Despite these improvements, further actions are needed to facilitate client mobility, for example by improving the transparency and comparability of financial products. Besides phasing out the subsidized interest rate of BNDES in line with the recent TLP reform, the authorities should further limit state intervention in credit markets given that about half of credit is controlled by the state through earmarked loans that are directed to preferred borrowers at subsidized rates. These interventions have created an uneven playing field between private and public banks, increased the cost of free-market financial intermediation, involved high fiscal or parafiscal costs, weakened monetary transmission, and hampered capital market development.

Box 6.

Determinants of Financial Intermediation (in)Efficiency

Net interest margins (NIM) are particularly high in Brazil. The NIMs of Brazilian banks are one of the highest among 15 peer emerging market economies. Among the top five banks, the lending-funding spreads of state-owned banks (who have high shares of directed lending) are significantly lower than those from private banks. The credit card market is the market with the highest spreads.

Operating costs, loan losses, and bank concentration at the product level play an important role in explaining high NIMs in Brazil. An accounting decomposition of NIMs suggests that operating costs are the main factor behind Brazil’s high NIMs, followed by loan loss provisions. In addition to these two factors, the FSAP finds that market structure—in particular, concentration at the product level—is strongly correlated with net interest spreads. The banking sector is concentrated and vertically integrated, as the 5 largest banks account for 82 percent of credit. Caixa focuses on housing (75 percent of the market share) and low-income population and does not represent strong competition to the private banks in other product segments; Banco do Brazil focuses on agriculture (60 percent of the market share) mostly in areas not served by private banks. Other significant factors behind high NIMs are bank size—typically larger banks have wider spreads–and the volume of earmarked-credit provision—among private banks, the higher the share of earmarked credit in their lending portfolio the higher interest rates in free-market loans, which suggests that banks cross-subsidize their activities in regulated credit segments by raising rates in non-regulated sectors.

Earmarked credit has introduced inefficiencies outside the credit market. In the aftermath of the global financial crisis, earmarked credit was expanded as a countercyclical measure, reducing interest expenditure for firms. However, there is little or no evidence for positive effects of earmarked credit on investment and productivity. Moreover, earmarked credit has hampered capital market development and created an uneven playing field between public and private banks and impeded monetary policy transmission. The BCB’s analysis shows that the impact of the monetary policy rate tightening on loans is lower for firms that receive earmarked credits: for firms that receive non-earmarked credit a one percent increase in policy rate reduces the growth rate of loans by three percent whereas for firms that have access to earmarked credit by 2 percent (Bonomo and Martins, 2016). In Brazil, inefficient capital allocation has been an important drag on productivity growth (Dutz et al, 2018). Finally, the ability to provide large loans at below market rates creates room for corruption and inefficient allocation of resources.

E. Boosting Potential Growth

24. Brazil has suffered from a prolonged period of stagnant productivity. Since the early 1980s, GDP has grown on average by about 2.6 percent per year, well below other major emerging markets. This relatively weak growth performance is largely explained by a lack of productivity growth compounded by low investment. The current level of TFP is indeed close to the one prevailing in the early 1980s. Raising productivity is especially important at this juncture to offset the ageing demographic trend that will weigh down on potential growth. The recent labor market reform and reduction in credit subsidies (TLP) are important steps in the right direction, but much more is needed.

25. Authorities should accelerate the reform agenda, starting with banking sector reforms. Banking sector reforms that limit state intervention in credit markets would have large positive effects on productivity and broad public support (Box 7). Furthermore, some reforms could be carried out by provisional measures. For example, Caixa Economica Federal should refocus on its core mandate of providing mortgage credit and improve risk management and efficiency to boost its capital. Inviting a strategic investor could provide stronger corporate governance and know-how. BNDES should also scale down its lending portfolio by selectively assuming risks to mobilize private finance.

26. Trade liberalization should continue. Since the early 2000s, Brazil experienced several reversals in the path towards a more open and market-based economy. For example, the growing current account deficits following the 1990s trade liberalization halted trade reforms. Furthermore, non-tariff barriers, especially anti-dumping measures, increased considerably after the global financial crisis. Brazil’s structural trade indicators now lag significantly other G20 countries and the literature suggests that trade openness can raise productivity significantly over the medium term. The 2015-16 crisis led also to a considerable increase in state-directed credit. The prospect of OECD accession can foster trade integration and avoid further backpaddling on structural reforms.

Box 7.

Structural Reform Priorities for Brazil

This box identifies some key structural reform priorities for Brazil. Like many emerging markets, Brazil faces a long list of possible structural reforms. To prioritize the reform agenda, we propose to identify those reforms that have both high economic payouts and broad public support.

We assess the economic benefits of reforms following the literature. We estimate the impact of reforms on the one-year-ahead TFP growth using panel regressions over a sample of advanced and emerging countries. By multiplying the estimated coefficients with the structural gaps between Brazil and the average level in advanced economies, we can compute the impacts that various reforms would have on TFP growth in Brazil.

We measure the extent of public support for reforms by analyzing survey data. In 2016, Latin Barometer surveyed people’s views about which factors are most important for the development of Brazil. By matching the survey responses to structural reforms, we assess the strength of public support for specific reforms.

Banking sector reforms should be given priority. As illustrated in the chart, they have the strongest economic impact and the highest level of public support. Structural indicators for the banking sector reveal that Brazil fares considerably worse than other countries because of the high level of state intervention in credit markets. Reforms should thus aim to foster a stronger and more efficient private credit market. Bank reforms are also relatively easy to legislate since various measures can be undertaken by the government without congressional approval.

27. Investment in infrastructure should be revived. Brazil’s infrastructure gap against peers and competitors, and relative to the country’s development level, remains large and will become more binding as the recovery gains momentum. Under the new PPP framework launched at end-2016, several projects have been auctioned, mainly in the areas of oil and gas exploration, power generation and airport concessions. Investment in transport infrastructure would help alleviate bottlenecks, lower transaction costs, and facilitate growth. PPPs must be mindful of fiscal risks.

F. Responding to Shocks

28. The high level of public debt exposes Brazil to confidence shocks. Pronouncements against fiscal consolidation during the political campaign may spook investors. This concern is particularly acute if global risk aversion increases, for example because of faster than expected monetary tightening in the U.S. or financial distress in emerging markets. A downside scenario without fiscal consolidation would involve an exchange rate depreciation, an increase in interest rates, and possibly a recession. As described in the debt sustainability analysis, public debt would increase to almost 120 percent of GDP by 2023.

29. Authorities should respond to confidence shocks by adopting additional fiscal measures. This is essential to show a resolute commitment to debt sustainability. The exchange rate should be allowed to absorb the shocks. However, in case of disorderly market conditions, foreign exchange intervention might be warranted. Furthermore, monetary authorities may have to increase policy rates to offset the second-round effects on inflation arising from the exchange rate depreciation. A resumption of counter-cyclical lending through public banks should be avoided given the distortive effects in the credit market and possible contingent liabilities for public finances.

30. Negative trade shocks may require additional monetary accommodation. Trade restrictions imposed by the U.S. or a sharp economic slowdown in China could hurt Brazilian exports. To offset the contractionary effects on output, monetary authorities should respond by reducing policy rates, provided inflation expectations remain anchored around the target. Fiscal policy should instead stay on the path of consolidation since the high level of debt does not provide room for fiscal stimulus. To support the export sector, authorities should foster trade integration by negotiating new agreements both at the regional and global level.

G. Strengthening Governance

31. The effective implementation of anti-money laundering and anti-corruption measures remains critically important to help secure strong and inclusive growth. Past legal and policy changes (partially in response to previous FATF assessments), such as the introduction of plea bargains and leniency agreements, supported by some strong and independent law enforcement and judicial authorities, have led to an increasing number of anti-money laundering and corruption cases (Box 8). Authorities should continue pursuing significant corruption and money laundering cases, and work with the legislature to adopt relevant pending reforms to further strengthen the anti-money laundering and anti-corruption framework. This includes strengthening whistleblower mechanisms, provisional measures and confiscation, and in line with recent jurisprudence, continuing to prevent the abuse of appeal provisions and statutes of limitations in legal proceedings.

32. Preventive actions to stem the flow of money laundering and corruption cases on the longer term remain key. Authorities can base new initiatives on existing achievements, to enhance the effectiveness of the system in line with international standards. Notably, the existing Transparency Portal has been updated, and additional data would further increase its usefulness. The tax authorities have started to collect beneficial ownership data, and these data should be also available to other government entities that need this information for anti-money laundering and anti-corruption purposes. Authorities are planning to undertake the national anti-money laundering risk assessment, which should be finalized expeditiously to increase the effectiveness of risk understanding and risk mitigation. Financial supervisors are at various stages of introducing risk-based supervision specific for anti-money laundering. Supervision can be further refined, notably by applying risk matrixes independent of prudential classifications.

33. Other additional measures are also considered. Authorities are in the process of implementing departmental integrity programs and are considering measures to move away from a rule-based to a risk-based approach for preventing corruption, including for procurement. To support this shift, authorities should consider taking measures to protect government employees by law from criminal and civil liability when acting in good faith. Finally, to avoid increasingly negative public statements by the Financial Action Task Force, authorities should continue working with the legislature to expeditiously address existing shortcomings related to terrorist financing.

Box 8.

Setting a High Bar Against Corruption

The fight against corruption is ongoing, driven by some strong and independent law enforcement and judicial authorities. In the lava jato case under the jurisdiction of the state of Paraná alone, judicial authorities have instigated 1,765 court proceedings, issued 240 arrest warrants, and charged 309 defendants in 74 separate prosecutions with money laundering, corruption, and forms of organized crime (as of May 14, 2018). Although this investigation is gaining a lot of the public attention, other corruption cases have also been pursued which include cases independent of the lava jato (in Rio de Janeiro, in Sao Paulo and by the federal police), lava jato spin-offs (such as cases involving Odebrecht and JBS), and numerous standalone corruption cases, such as Greenfield (involving pension funds), Panatenaico (inflation of public work bids), Zelotes (tax appeals board case) and Câmbio, desliga (money laundering). While no consolidated data on the total number of corruption cases and related judicial actions are kept for all of Brazil, the list of cases itself is very high.

Despite much international attention attracted by Brazil’s investigation efforts, the level of corruption in Brazil may be comparable to other countries in Latin America. As a comparison of recent FATF and GAFILAT detailed assessment reports on the implementation of AML/CFT regimes and the risks facing countries in the region shows, corruption is considered as one of the main proceeds generating offenses for money laundering across the region (i.e., corruption as a predicate offense for money laundering). Within the region, corruption cases have spilled-over across borders, with many involving senior politicians and business people (such as the Odebrecht case). The relative high number of money laundering and related corruption investigations and prosecutions in Brazil may be an indication of competence, independence and impartiality of the authorities in addressing corruption, and not necessarily an indicator that corruption is more widespread in Brazil than elsewhere in the region.

Changing societal norms that enable corruption requires continuing and intensifying current efforts for years to come. Lava jato alone will not have a lasting positive impact on Brazil’s corruption risks unless the fight against corruption is intensified and further expanded. Authorities will need to continue to enable strong and independent law enforcement and judicial authorities that can investigate and prosecute corruption cases at all levels of society. At the same time, to reduce corruption risks in the long term, repression alone will be insufficient to support lasting changes, and other reforms will be necessary. A lesson learned from earlier corruption drives is that authorities must continue to improve the effectiveness of the criminal justice system, and implement preventive actions to reduce money laundering and corruption risks on the longer term. Measures such as those elaborated in this staff report would go a long way in containing the risk of corruption, by preventing corruption and by ensuring that all those who are found guilty of corruption are also punished.

Authorities’ Views

34. The authorities envisage a sustained economic recovery. They concur that the weak economic data during the first months of 2018 suggest that growth will be moderate this year. However, the authorities believe that the 2015-16 crisis did not have as large permanent effects on potential output as assumed by the staff. Moreover, recent and ongoing structural reforms initiatives (labor market, education, immigration, competition in the oil and gas sector, among others) should boost productivity and potential growth. The authorities believe that the risks that inflation undershoots its target this year have fallen as a result of the recent exchange rate depreciation.

35. The authorities see faster fiscal consolidation than implied by the expenditure ceiling depending on revenue performance. The authorities recognize that a rethinking of the size of the government, beginning with the pension reform, is critical to meet the expenditure ceiling in the medium term. They reminded that discretionary expenditure under the control of the treasury—about 10 percent of federal expenditure—has been greatly contained. They noted that wage increases reflect previous binding agreements. The authorities have also optimized social benefits eligibility, where possible. But with the elections and the constraints to Congressional calendar this year, substantial savings in mandatory spending items will need to be taken by the next government. Nevertheless, the authorities point that any revenue, in addition to what is currently budgeted, will not be used for new spending because of the expenditure ceiling, and thus will help reduce public debt. They also expect that debt service would remain contained reflecting structurally lower interest rates. The authorities see scope for revenue-neutral tax reform, aiming at simplifying and harmonizing the tax system, starting with PIS/COFINS reforms. They reassured staff that the state of Rio de Janeiro is already implementing corrective measures under the fiscal recovery plan.

36. The authorities agreed on the importance of continuing to strengthen the fiscal framework. They point to progress in enhancing budget transparency and monitoring, including at the subnational government level. They also indicate that steps are being taken toward medium-term budgeting. For example, this was the first year where a more detailed multiannual budget guidance was produced. The authorities consider crucial to ensure that the fiscal rules are consistent and lead to fiscal consolidation. They agree that in the medium term it is critical to address widespread rigidities imposed by earmarking and mandatory outlays, including for the subnational governments. They see the expenditure ceiling as essential for instilling fiscal discipline in the years ahead and revisiting these budget rigidities.

37. The Central Bank maintains prudent monetary and exchange rate policy, consistent with its inflation targeting regime. Monetary policy decisions continue to be based on inflation projections, expectations and the balance of risks. Exchange rate movements do not pose financial stability concerns and affect monetary policy only through their second-round effects on inflation and inflation expectations. The currency will continue to float freely, the central bank has no exchange rate target. In case of disorderly market conditions, the authorities stand ready to intervene by relying on the large level of foreign reserves in the spot market or through swaps. Authorities pointed out that recent reforms to reduce public subsidies in credit markets are enhancing monetary transmission and will help increase the efficiency of the system. They also emphasized that fiscal reforms are essential to maintain low inflation and reduce neutral interest rates in the medium and long term.

38. The authorities argued that proposed legislation on the financial sector will boost its resiliency and address most of the FSAP recommendations. Legislation granting central bank independence and legal protection to its staff, strengthening bank resolution framework, and creating a committee responsible for macroprudential policy and crisis management are under way. The authorities pointed out that the central bank already has an indemnity with respect to general losses, including those which could stem from ELA. The authorities do not plan to transform the FGC (Fundo Garantidor de Credito) into a public institution because the FGC, as a private entity, works well to ensure the efficiency and stability of the financial system. The central bank is already working on new regulation on supervision of related party and large exposures, in line with FSAP recommendations. The authorities have also taken steps to enhance account portability. They disagreed with staff’s recommendation regarding supervision of country and transfer risks arguing that the current monitoring tools already in place ensure timely identification of those risks and swift supervisory actions. The central bank also noted that the current supervisory processes ensure close monitoring of restructured loans and the extent of inappropriate forbearance. Moreover, the central bank is already taking steps to improve the Pillar 2 capital requirements’ framework to address bank-specific risk profiles which will boost their resilience.

39. The authorities concurred with the need for further structural reforms. Important financial sector reforms were implemented in the recent past, including a reduction of public subsidies with the introduction of the TLP and the gradual scaling down of BNDES. The authorities foresee further refocusing of BNDES, shifting operations towards co-financing and projects to provide market access and facilitate long-term financing. They noted that Caixa is already moving away from non-core activities, and improving governance. Also under BC+ agenda, several steps have been taken to enhance efficiency and to reduce the cost of credit. In this regard, the authorities have taken steps to improve lending guarantees, enhance and disseminate information in the system and foster additional competition. They also emphasized the importance to increase recovery values and lower operational costs. On labor markets, the 2017 reform has reduced litigation very significantly, but employment gains have been slow to materialize given the gradual economic recovery. The authorities have also reiterated their commitment to foster trade integration and reduce distortions in the tax system.

40. The authorities agreed that transparency and anti-corruption measures are an important part of the effort to improve long-term prospects for Brazil. They noted their efforts to pursue significant corruption and money laundering cases and implement reforms to increase the effectiveness of the criminal justice system, and pointed at relevant recent supreme court jurisprudence. They stressed their commitment to continued strengthening of governance and transparency, including through the expeditious undertaking of the national risk assessment. They noted the strong progress in the implementation of the beneficial ownership requirements for both financial institutions and relative to the recording of the formation of corporate vehicles, since 2009, and also underlined improvements in information sharing provisions. The authorities remain committed to continue to work on enhancements so as to improve the effectiveness of these provisions.

Staff Appraisal

Placing Brazil on a path of strong, balanced, and durable growth requires an earnest pursuit of fiscal consolidation, ambitious structural reforms, and a strengthening of the banking sector’s underpinnings. This will require strong leadership and resolve.

41. Fiscal consolidation should accelerate. To secure sustainability and rebuild buffers, primary balance should be strengthened at a faster pace than planned to achieve a decline in public debt by 2023. In this context, a widening of the primary deficit in the 2018 budget relative to the 2017 outturn is unwarranted, especially given the adverse debt dynamics and tightening global financial conditions.

42. Pension reform is imperative. A comprehensive reform should aim at increasing the retirement age, delinking the minimum pension from the minimum wage, and moderating the undue generosity of pensions for some segments of the populations, notably public employees. Such reform will improve equity and subnational government finances.

43. Additional measures are needed to reduce the deficit, while protecting public investment and social expenditures that have been effective. The 2019 revision of the minimum wage adjustment formula provides an opportunity to contain mandatory spending. Moreover, reforms of public sector employment and compensation are needed to make the wage bill sustainable, reduce labor market distortions, and alleviate income inequality. Spending efficiency should be increased to create fiscal space, even as expenditures for social programs that have proven to be effective, including Bolsa Familia, and public investment are protected and, if possible, increased. Tax measures aimed at improving efficiency and bolstering revenues should be prioritized.

44. The monetary stance is appropriate. With inflation below target, reflecting the large output gap, and inflation expectations well-anchored, monetary policy should remain accommodative. Enhancing central bank independence would further improve the inflation-targeting framework.

45. The flexible exchange rate regime is an important cornerstone of the policy framework. Intervention in the foreign exchange market should be limited solely to addressing acute market volatility. International reserves at the current level provide an important buffer against external shocks. Monetary policy should respond to movements in the exchange rate only insofar as there are clear risks for inflation expectations. Staff assesses that Brazil’s external position in 2017 was broadly consistent with medium-term fundamentals and desirable policies.

46. The underpinnings of the banking sector should be strengthened. Independence of the BCB and legal protection of its staff would strengthen micro-prudential and safety net frameworks. The regulatory and supervisory approach should be upgraded to address gaps identified by the FSAP. Creating multi-agency committees with mandates for macroprudential policy and crisis management should be established and operationalized. A new financial resolution regime in line with the FSAP recommendations should be put in place promptly. The process for providing emergency liquidity assistance should be tightened and the deposit guarantee fund should be brought into the public sector.

47. Advancing the structural reform agenda requires setting clear priorities. Brazil faces a long list of structural reforms that can boost productivity, but prioritization is key. Staff underscores the importance of measures to improve financial intermediation, enhance trade integration, and tackle corruption.

48. Ongoing efforts to combat corruption are of the highest importance. It is vital for Brazil to strengthen AML supervision and governance, and further implement pending transparency, anticorruption and AML measures.

49. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.

Table 1.

Brazil: Selected Economic Indicators, 2016–23

Sources: Central Bank of Brazil; Ministry of Finance; IBGE; IPEA; and Fund staff estimates.

^¹/Computed by IBGE using the World Bank threshold for upper-middle income countries of U$5.5/day. This number is not comparable to the estimates provided by IPEA in previous years due to methodological differences.

^²/Includes the federal government, the central bank, and the social security system (INSS). Based on the 2017 draft budget, recent annoucements by the authorities, and staff projections.

^³/Currency issued plus required and free reserves on demand deposits held at the central bank.

^⁴/Base money plus demand, time and saving deposits.

Table 2.

Brazil: Balance of Payments, 2016–23

(In billions of U.S. dollars, unless otherwise indicated)

Sources: Central Bank of Brazil; and Fund staff estimates and projections.

^¹/Historical numbers include valuation changes.

Table 2.

Brazil: Balance of Payments, 2016–23

(In billions of U.S. dollars, unless otherwise indicated)

							Proj.
					2016	2017	2018	2019	2020	2021	2022	2023
Current Account					−23.5	−9.8	−24.4	−30.5	−35.1	−39.3	−43.8	−46.9
	Trade balance				45.0	64.0	59.4	55.4	55.6	57.8	60.3	62.6
		Exports (fob)			184.5	217.2	234.1	242.8	253.5	265.7	277.8	289.5
		Imports (fob)			139.4	153.2	174.7	187.4	197.9	207.9	217.4	226.9
	Income, net				−38.1	−39.9	−39.9	−35.4	−36.0	−39.0	−42.2	−44.3
Capital and Financial Account					16.7	6.5	24.4	30.5	35.1	39.3	43.8	46.9
	Capital account				0.3	0.4	0.4	0.4	0.4	0.4	0.4	0.4
	Financial account ¹/				16.4	6.1	24.0	30.1	34.7	39.0	43.5	46.5
			Direct investment, net		65.4	64.1	60.0	55.1	50.7	48.8	48.1	48.7
				Assets	12.8	6.3	7.7	8.9	9.8	10.8	11.8	12.8
				Liabilities	78.2	70.3	67.8	64.0	60.5	59.5	59.9	61.5
			Portfolio investment, net		−19.2	−13.4	−7.4	−3.2	−2.4	−1.7	−1.1	−0.3
			Financial Derivatives, net		1.0	−0.7	−0.8	−0.8	−0.8	−0.9	−0.9	−1.0
			Other investment, net		−21.5	−38.7	−27.9	−21.0	−12.8	−7.2	−2.7	−0.9
			Change in Reserve Assets, net		−9.2	−15.0	0.0	0.0	0.0	0.0	0.0	0.0
Errors and Omissions					6.9	3.3	0.0	0.0	0.0	0.0	0.0	0.0
Memorandum Items:
	Gross reserves (eop) ¹/
		In billions of U.S. dollars			365.0	374.0	374.0	374.0	374.0	374.0	374.0	374.0
	Net international reserves (eop)
		In billions of U.S. dollars			365.0	374.0	374.0	374.0	374.0	374.0	374.0	374.0
		In percent of short-term debt (residual maturity)			265.5	271.5	270.8	270.4	270.4	272.4	275.1	278.5
	Current account (in percent of GDP)				−1.3	−0.5	−1.2	−1.4	−1.5	−1.6	−1.7	−1.8
	Trade balance (in percent of GDP)				2.5	3.1	2.8	2.5	2.4	2.4	2.4	2.4
		Merchandise exports (in percent of GDP)			10.3	10.6	11.2	11.0	11.0	11.0	11.0	11.0
		Merchandise imports (in percent of GDP)			7.8	7.5	8.4	8.5	8.6	8.6	8.6	8.6
	Export volume (yoy change, in percent)				3.7	10.9	4.6	4.5	4.9	4.4	4.5	4.3
	Import volume (yoy change, in percent)				−8.2	3.8	10.5	8.0	5.7	4.4	4.8	4.6
	Export price index (yoy change, in percent)				−6.2	4.2	3.0	−0.7	−0.4	0.5	0.2	0.1
	Import price index (yoy change, in percent)				−8.9	5.0	4.4	0.1	0.4	1.0	0.3	0.1
	Terms of trade (yoy change, in percent)				3.0	−0.8	−1.3	−0.8	−0.8	−0.4	−0.1	0.0
	Oil price (Brent blend; US$ per barrel)				42.8	52.8	62.3	58.2	55.6	54.1	53.6	53.6
	Nominal exchange rate (R$/US$, annual average)				3.49	3.19	…	…	…	…	…	…
	REER (annual average in percent; appreciation +)				6.8	9.6	…	…	…	…	…	…
	GDP in billions of U.S. dollars				1,794	2,055	2,088	2,198	2,301	2,409	2,523	2,642

Sources: Central Bank of Brazil; and Fund staff estimates and projections.

^¹/Historical numbers include valuation changes.

Table 2.

Brazil: Balance of Payments, 2016–23

(In billions of U.S. dollars, unless otherwise indicated)

							Proj.
					2016	2017	2018	2019	2020	2021	2022	2023
Current Account					−23.5	−9.8	−24.4	−30.5	−35.1	−39.3	−43.8	−46.9
	Trade balance				45.0	64.0	59.4	55.4	55.6	57.8	60.3	62.6
		Exports (fob)			184.5	217.2	234.1	242.8	253.5	265.7	277.8	289.5
		Imports (fob)			139.4	153.2	174.7	187.4	197.9	207.9	217.4	226.9
	Income, net				−38.1	−39.9	−39.9	−35.4	−36.0	−39.0	−42.2	−44.3
Capital and Financial Account					16.7	6.5	24.4	30.5	35.1	39.3	43.8	46.9
	Capital account				0.3	0.4	0.4	0.4	0.4	0.4	0.4	0.4
	Financial account ¹/				16.4	6.1	24.0	30.1	34.7	39.0	43.5	46.5
			Direct investment, net		65.4	64.1	60.0	55.1	50.7	48.8	48.1	48.7
				Assets	12.8	6.3	7.7	8.9	9.8	10.8	11.8	12.8
				Liabilities	78.2	70.3	67.8	64.0	60.5	59.5	59.9	61.5
			Portfolio investment, net		−19.2	−13.4	−7.4	−3.2	−2.4	−1.7	−1.1	−0.3
			Financial Derivatives, net		1.0	−0.7	−0.8	−0.8	−0.8	−0.9	−0.9	−1.0
			Other investment, net		−21.5	−38.7	−27.9	−21.0	−12.8	−7.2	−2.7	−0.9
			Change in Reserve Assets, net		−9.2	−15.0	0.0	0.0	0.0	0.0	0.0	0.0
Errors and Omissions					6.9	3.3	0.0	0.0	0.0	0.0	0.0	0.0
Memorandum Items:
	Gross reserves (eop) ¹/
		In billions of U.S. dollars			365.0	374.0	374.0	374.0	374.0	374.0	374.0	374.0
	Net international reserves (eop)
		In billions of U.S. dollars			365.0	374.0	374.0	374.0	374.0	374.0	374.0	374.0
		In percent of short-term debt (residual maturity)			265.5	271.5	270.8	270.4	270.4	272.4	275.1	278.5
	Current account (in percent of GDP)				−1.3	−0.5	−1.2	−1.4	−1.5	−1.6	−1.7	−1.8
	Trade balance (in percent of GDP)				2.5	3.1	2.8	2.5	2.4	2.4	2.4	2.4
		Merchandise exports (in percent of GDP)			10.3	10.6	11.2	11.0	11.0	11.0	11.0	11.0
		Merchandise imports (in percent of GDP)			7.8	7.5	8.4	8.5	8.6	8.6	8.6	8.6
	Export volume (yoy change, in percent)				3.7	10.9	4.6	4.5	4.9	4.4	4.5	4.3
	Import volume (yoy change, in percent)				−8.2	3.8	10.5	8.0	5.7	4.4	4.8	4.6
	Export price index (yoy change, in percent)				−6.2	4.2	3.0	−0.7	−0.4	0.5	0.2	0.1
	Import price index (yoy change, in percent)				−8.9	5.0	4.4	0.1	0.4	1.0	0.3	0.1
	Terms of trade (yoy change, in percent)				3.0	−0.8	−1.3	−0.8	−0.8	−0.4	−0.1	0.0
	Oil price (Brent blend; US$ per barrel)				42.8	52.8	62.3	58.2	55.6	54.1	53.6	53.6
	Nominal exchange rate (R$/US$, annual average)				3.49	3.19	…	…	…	…	…	…
	REER (annual average in percent; appreciation +)				6.8	9.6	…	…	…	…	…	…
	GDP in billions of U.S. dollars				1,794	2,055	2,088	2,198	2,301	2,409	2,523	2,642

Sources: Central Bank of Brazil; and Fund staff estimates and projections.

^¹/Historical numbers include valuation changes.

Table 3.

Brazil: Main Fiscal Indicators, 2016–23

(Percent of GDP, unless otherwise indicated)

Sources: Central Bank of Brazil; Ministry of Finance; Ministry of Planning and the Budget; and Fund staff estimates.

^¹/Comprises the central administration and the social security system.

^²/Total primary expenditure is the sum of current (on trend) plus capital (on trend) expenditures, minus unallocated cuts to meet the ceiling.

^³/Excluding Petrobras and Eletrobras.

^⁴/Structural primary balance adjusts for output gap and one-off measures.

^⁵/The ceiling excludes from total primary expenditures of the federal government in constitutional fund for Brasilia DF, extraordinary credit;; electoral lawsuits, complement to Fundeb, and equity increases in public companies.

^⁶/Policy lending to BNDES and others.

^⁷/Includes assets, which mainly comprise international reserves, financial assets of public enterprises, and assets of the federal labor fund (FAT).

Table 3.

Brazil: Main Fiscal Indicators, 2016–23

(Percent of GDP, unless otherwise indicated)

						Proj.
				2016	2017	2018	2019	2020	2021	2022	2023
FEDERAL GOVERNMENT¹/
Net nonfinancial revenue				17.4	17.6	17.3	17.0	17.2	17.7	17.8	17.8
	Revenue administered by SRF			13.1	12.7	12.5	12.7	12.9	13.0	13.1	13.1
		PIT		2.6	2.6	2.6	2.6	2.7	2.7	2.7	2.7
		CIT		4.0	3.7	3.7	3.7	3.8	3.8	3.8	3.8
		Indirect taxes		5.4	5.9	5.8	5.8	5.9	5.9	5.9	5.9
		Trade taxes		0.5	0.5	0.5	0.5	0.5	0.5	0.5	0.5
		Other		0.6	0.0	0.0	0.0	0.1	0.1	0.1	0.1
	Social security contributions			5.7	5.7	5.7	5.8	5.8	5.9	5.9	5.9
	Other revenue			2.2	2.6	2.5	2.0	2.0	2.4	2.4	2.4
	Transfers to subnational governments (-)			−3.6	−3.5	−3.4	−3.5	−3.5	−3.6	−3.6	−3.6
Total primary expenditure²/				20.0	19.5	19.7	18.9	18.5	18.3	17.8	17.4
	Current expenditures			18.9	18.5	18.7	18.8	18.8	18.9	18.9	18.9
		Personnel		4.1	4.3	4.3	4.2	4.1	4.0	3.9	3.8
		Pension benefits		8.1	8.5	8.8	9.2	9.5	9.8	10.0	10.3
		Other		6.7	5.7	5.6	5.4	5.3	5.1	5.0	4.9
	Capital expenditures			1.0	1.0	1.0	0.9	0.9	0.9	0.9	0.8
	Unallocated spending cuts			…	…	0.0	−0.8	−1.2	−1.5	−1.9	−2.4
			of which reform of urban civil pensions (RGPS)	…	…	−0.1	−0.3	−0.4	−0.6	−0.7	−0.7
Fund surpluses and statistical discrepancy				0.0	0.1
Primary balance				−2.6	−1.8	−2.4	−1.9	−1.3	−0.6	0.0	0.4
Borrowing requirement				7.6	7.1	7.2	7.0	6.8	6.5	5.9	5.6
STATES AND MUNICIPALITIES
States
	Nonfinancial revenue			10.6	10.6	10.5	10.5	10.4	10.3	10.1	9.9
		Own revenues		8.1	8.1	8.1	8.0	7.9	7.8	7.7	7.7
			Indirect taxes	6.5	6.5	6.5	6.4	6.3	6.2	6.1	6.1
			Other	1.6	1.6	1.6	1.6	1.6	1.6	1.6	1.6
		Transfers from the federal government		2.5	2.5	2.5	2.5	2.5	2.5	2.4	2.3
	Total primary expenditure			10.4	10.4	10.6	10.5	10.5	10.4	10.2	10.0
		Current expenditures		9.7	9.7	9.9	9.9	9.8	9.8	9.7	9.5
			Personnel	4.9	4.9	4.9	4.9	4.9	4.8	4.7	4.6
			Other	4.8	4.8	5.0	4.9	5.0	5.0	5.0	4.9
		Capital expenditures and other		0.7	0.7	0.7	0.7	0.6	0.6	0.5	0.5
Primary balance of municipalities				0.0	0.0	0.0	0.1	0.2	0.2	0.2	0.2
Primary balance of states and municipalities				0.1	0.1	0.0	0.0	0.2	0.2	0.2	0.2
Borrowing requirement				1.3	0.7	1.0	1.0	1.0	1.0	1.0	1.1
PUBLIC ENTERPRISES³/
Federal enterprises
	Nonfinancial revenue			0.7	0.7	0.7	0.7	0.7	0.7	0.7	0.7
	Expenditures			0.8	0.8	0.8	0.8	0.8	0.8	0.8	0.8
		Personnel		0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2
		Other current expenditures		0.4	0.4	0.4	0.4	0.4	0.4	0.4	0.4
		Capital expenditures		0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
State and municipal enterprises
Primary balance				0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Primary balance of state and municipal enterprises				0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Borrowing requirement				0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
NON FINANCIAL PUBLIC SECTOR (NFPS)
Primary balance				−2.5	−1.7	−2.4	−1.9	−1.1	−0.4	0.1	0.6
Primary balance (Authorities’ target)				−2.7	−2.6	−2.4	−2.2	−1.7	−0.7	…	…
Overall balance				−9.0	−7.9	−8.3	−8.1	−7.8	−7.6	−7.1	−6.8
Structural primary balance ⁴/				−1.2	−0.5	−1.5	−1.2	−0.8	−0.7	−0.2	0.3
Structural primary balance including policy lending				0.4	0.3	0.3	−1.3	−0.8	−0.7	−0.3	0.2
Memorandum items
	Spending ceiling (billions of reais) ⁵/			…	1,309	1,349	1,396	1,454	1,515	1,576	1,641
	Loans to public financial institutions ⁶/			−1.6	−0.8	−1.9	0.0	0.0	0.0	0.0	0.0
	NFPS net interest expenditure			6.5	6.2	5.8	6.2	6.7	7.1	7.2	7.3
	Net public sector debt ⁷/			46.2	51.6	56.2	59.9	62.9	65.7	67.7	68.9
	Gross NFPS debt			78.4	84.0	88.2	90.4	92.4	94.2	95.1	95.6
	General government debt, Authorities’ definition			69.9	…	…	…	…	…	…	…
	Nominal GDP (billions of reais)			6,258	6,559	6,880	7,394	7,928	8,493	9,096	9,743

Sources: Central Bank of Brazil; Ministry of Finance; Ministry of Planning and the Budget; and Fund staff estimates.

^¹/Comprises the central administration and the social security system.

^²/Total primary expenditure is the sum of current (on trend) plus capital (on trend) expenditures, minus unallocated cuts to meet the ceiling.

^³/Excluding Petrobras and Eletrobras.

^⁴/Structural primary balance adjusts for output gap and one-off measures.

^⁶/Policy lending to BNDES and others.

^⁷/Includes assets, which mainly comprise international reserves, financial assets of public enterprises, and assets of the federal labor fund (FAT).

Table 3.

Brazil: Main Fiscal Indicators, 2016–23

(Percent of GDP, unless otherwise indicated)

						Proj.
				2016	2017	2018	2019	2020	2021	2022	2023
FEDERAL GOVERNMENT¹/
Net nonfinancial revenue				17.4	17.6	17.3	17.0	17.2	17.7	17.8	17.8
	Revenue administered by SRF			13.1	12.7	12.5	12.7	12.9	13.0	13.1	13.1
		PIT		2.6	2.6	2.6	2.6	2.7	2.7	2.7	2.7
		CIT		4.0	3.7	3.7	3.7	3.8	3.8	3.8	3.8
		Indirect taxes		5.4	5.9	5.8	5.8	5.9	5.9	5.9	5.9
		Trade taxes		0.5	0.5	0.5	0.5	0.5	0.5	0.5	0.5
		Other		0.6	0.0	0.0	0.0	0.1	0.1	0.1	0.1
	Social security contributions			5.7	5.7	5.7	5.8	5.8	5.9	5.9	5.9
	Other revenue			2.2	2.6	2.5	2.0	2.0	2.4	2.4	2.4
	Transfers to subnational governments (-)			−3.6	−3.5	−3.4	−3.5	−3.5	−3.6	−3.6	−3.6
Total primary expenditure²/				20.0	19.5	19.7	18.9	18.5	18.3	17.8	17.4
	Current expenditures			18.9	18.5	18.7	18.8	18.8	18.9	18.9	18.9
		Personnel		4.1	4.3	4.3	4.2	4.1	4.0	3.9	3.8
		Pension benefits		8.1	8.5	8.8	9.2	9.5	9.8	10.0	10.3
		Other		6.7	5.7	5.6	5.4	5.3	5.1	5.0	4.9
	Capital expenditures			1.0	1.0	1.0	0.9	0.9	0.9	0.9	0.8
	Unallocated spending cuts			…	…	0.0	−0.8	−1.2	−1.5	−1.9	−2.4
			of which reform of urban civil pensions (RGPS)	…	…	−0.1	−0.3	−0.4	−0.6	−0.7	−0.7
Fund surpluses and statistical discrepancy				0.0	0.1
Primary balance				−2.6	−1.8	−2.4	−1.9	−1.3	−0.6	0.0	0.4
Borrowing requirement				7.6	7.1	7.2	7.0	6.8	6.5	5.9	5.6
STATES AND MUNICIPALITIES
States
	Nonfinancial revenue			10.6	10.6	10.5	10.5	10.4	10.3	10.1	9.9
		Own revenues		8.1	8.1	8.1	8.0	7.9	7.8	7.7	7.7
			Indirect taxes	6.5	6.5	6.5	6.4	6.3	6.2	6.1	6.1
			Other	1.6	1.6	1.6	1.6	1.6	1.6	1.6	1.6
		Transfers from the federal government		2.5	2.5	2.5	2.5	2.5	2.5	2.4	2.3
	Total primary expenditure			10.4	10.4	10.6	10.5	10.5	10.4	10.2	10.0
		Current expenditures		9.7	9.7	9.9	9.9	9.8	9.8	9.7	9.5
			Personnel	4.9	4.9	4.9	4.9	4.9	4.8	4.7	4.6
			Other	4.8	4.8	5.0	4.9	5.0	5.0	5.0	4.9
		Capital expenditures and other		0.7	0.7	0.7	0.7	0.6	0.6	0.5	0.5
Primary balance of municipalities				0.0	0.0	0.0	0.1	0.2	0.2	0.2	0.2
Primary balance of states and municipalities				0.1	0.1	0.0	0.0	0.2	0.2	0.2	0.2
Borrowing requirement				1.3	0.7	1.0	1.0	1.0	1.0	1.0	1.1
PUBLIC ENTERPRISES³/
Federal enterprises
	Nonfinancial revenue			0.7	0.7	0.7	0.7	0.7	0.7	0.7	0.7
	Expenditures			0.8	0.8	0.8	0.8	0.8	0.8	0.8	0.8
		Personnel		0.2	0.2	0.2	0.2	0.2	0.2	0.2	0.2
		Other current expenditures		0.4	0.4	0.4	0.4	0.4	0.4	0.4	0.4
		Capital expenditures		0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
State and municipal enterprises
Primary balance				0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Primary balance of state and municipal enterprises				0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Borrowing requirement				0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
NON FINANCIAL PUBLIC SECTOR (NFPS)
Primary balance				−2.5	−1.7	−2.4	−1.9	−1.1	−0.4	0.1	0.6
Primary balance (Authorities’ target)				−2.7	−2.6	−2.4	−2.2	−1.7	−0.7	…	…
Overall balance				−9.0	−7.9	−8.3	−8.1	−7.8	−7.6	−7.1	−6.8
Structural primary balance ⁴/				−1.2	−0.5	−1.5	−1.2	−0.8	−0.7	−0.2	0.3
Structural primary balance including policy lending				0.4	0.3	0.3	−1.3	−0.8	−0.7	−0.3	0.2
Memorandum items
	Spending ceiling (billions of reais) ⁵/			…	1,309	1,349	1,396	1,454	1,515	1,576	1,641
	Loans to public financial institutions ⁶/			−1.6	−0.8	−1.9	0.0	0.0	0.0	0.0	0.0
	NFPS net interest expenditure			6.5	6.2	5.8	6.2	6.7	7.1	7.2	7.3
	Net public sector debt ⁷/			46.2	51.6	56.2	59.9	62.9	65.7	67.7	68.9
	Gross NFPS debt			78.4	84.0	88.2	90.4	92.4	94.2	95.1	95.6
	General government debt, Authorities’ definition			69.9	…	…	…	…	…	…	…
	Nominal GDP (billions of reais)			6,258	6,559	6,880	7,394	7,928	8,493	9,096	9,743

Sources: Central Bank of Brazil; Ministry of Finance; Ministry of Planning and the Budget; and Fund staff estimates.

^¹/Comprises the central administration and the social security system.

^²/Total primary expenditure is the sum of current (on trend) plus capital (on trend) expenditures, minus unallocated cuts to meet the ceiling.

^³/Excluding Petrobras and Eletrobras.

^⁴/Structural primary balance adjusts for output gap and one-off measures.

^⁶/Policy lending to BNDES and others.

^⁷/Includes assets, which mainly comprise international reserves, financial assets of public enterprises, and assets of the federal labor fund (FAT).

Table 4.

Brazil: Depository Corporations and Monetary Aggregates, 2014–17

(Billions of reais, end-of-period)

Sources: Central Bank of Brazil; and Fund staff estimates.

^¹/Includes the Central Bank of Brazil, commercial banks, multiple banks, financial (money market) investment funds, Banco do Brasil, Federal Savings Bank, state savings bank, investment banks, National Bank for Economic and Social Development (BNDES), state development banks, finance and investment companies, housing credit companies, and mortgage companies.

^²/M2 includes the liabilities to other financial corporations, state and municipal governments, nonfinancial public enterprises, other nonfinanical corporations, and other resident sectors.

^³/Authorities’ definition. M3 comprises M2 plus shares in financial investment funds and the net position of the securities used in their purchase agreements transactions with money holding sectors.

^⁴/Authorities’ definition. M4 comprises M3 plus federal, state, and municipal liquid securities held by the public.

Table 4.

Brazil: Depository Corporations and Monetary Aggregates, 2014–17

(Billions of reais, end-of-period)

			2014	2015	2016	2017
			I. Central Bank
Net foreign assets			954.9	1,381.5	1,179.8	1,225.0
	Net international reserves		965.8	1,392.2	1,179.0	1,213.5
	Other foreign assets (net)		−11.0	−10.8	0.9	11.6
Net domestic assets			−406.4	−787.0	−537.3	−520.6
	Net claims on public sector		415.4	242.6	467.8	566.4
	Net credit to other depository corporations		−764.3	−882.9	−1,003.5	−1,011.0
	Other items (net)		57.5	146.8	1.7	76.0
Base money			548.5	594.4	642.5	704.4
	Currency issued		220.9	225.5	232.1	250.4
	Liabilities to other depository corporations		325.7	368.4	409.2	453.7
		Reserve deposits	42.7	29.8	38.1	46.4
	Liabilities to other sectors		1.9	0.6	1.2	0.4
			II. Depository Corporations ¹/
Net foreign assets			730.7	1,089.3	968.2	971.6
	Net international reserves		965.8	1,392.2	1,179.0	1,213.5
	Other foreign assets (net)		−235.2	−302.9	−210.8	−241.9
Net domestic assets			3,666.1	3,733.8	4,452.5	4,700.8
	Net claims on public sector		1,488.8	1,628.1	2,310.1	2,823.1
	Credit to other financial corporations		496.1	526.0	526.7	336.6
	Credit to private sector		3,815.8	4,007.0	3,897.6	4,665.5
		Of which: loans to private sector	2,807.8	2,909.0	2,824.4	2,824.8
	Other items (net)		2,311.7	2,685.4	2,515.7	3,345.4
		Capital	857.9	855.3	761.9	888.6
		Other liabilities excluded from broad money	1,453.9	1,830.2	1,753.8	2,456.8
Broad money (M2)²/			4,396.7	4,823.2	5,420.6	5,672.4
	Currency in circulation		178.3	185.3	192.0	203.9
	Demand deposits		183.9	160.9	169.8	178.1
	Quasi-money liabilities		4,034.6	4,477.0	5,058.9	5,290.4
			(Percent of GDP)
Base money			9.5	9.9	10.3	10.7
Broad money (M2)			76.1	80.4	86.6	86.5
M3 ³/			74.7	79.4	84.4	…
M4 ⁴/			86.4	92.6	98.2	…
Financial sector credit to the private sector			66.0	66.8	62.3	71.1
	Of which: bank loans to private sector		48.6	48.5	45.1	43.1
Memorandum item:
	GDP (in billions of reais)		5,779	5,996	6,258	6,559

Sources: Central Bank of Brazil; and Fund staff estimates.

^²/M2 includes the liabilities to other financial corporations, state and municipal governments, nonfinancial public enterprises, other nonfinanical corporations, and other resident sectors.

^⁴/Authorities’ definition. M4 comprises M3 plus federal, state, and municipal liquid securities held by the public.

Table 4.

Brazil: Depository Corporations and Monetary Aggregates, 2014–17

(Billions of reais, end-of-period)

			2014	2015	2016	2017
			I. Central Bank
Net foreign assets			954.9	1,381.5	1,179.8	1,225.0
	Net international reserves		965.8	1,392.2	1,179.0	1,213.5
	Other foreign assets (net)		−11.0	−10.8	0.9	11.6
Net domestic assets			−406.4	−787.0	−537.3	−520.6
	Net claims on public sector		415.4	242.6	467.8	566.4
	Net credit to other depository corporations		−764.3	−882.9	−1,003.5	−1,011.0
	Other items (net)		57.5	146.8	1.7	76.0
Base money			548.5	594.4	642.5	704.4
	Currency issued		220.9	225.5	232.1	250.4
	Liabilities to other depository corporations		325.7	368.4	409.2	453.7
		Reserve deposits	42.7	29.8	38.1	46.4
	Liabilities to other sectors		1.9	0.6	1.2	0.4
			II. Depository Corporations ¹/
Net foreign assets			730.7	1,089.3	968.2	971.6
	Net international reserves		965.8	1,392.2	1,179.0	1,213.5
	Other foreign assets (net)		−235.2	−302.9	−210.8	−241.9
Net domestic assets			3,666.1	3,733.8	4,452.5	4,700.8
	Net claims on public sector		1,488.8	1,628.1	2,310.1	2,823.1
	Credit to other financial corporations		496.1	526.0	526.7	336.6
	Credit to private sector		3,815.8	4,007.0	3,897.6	4,665.5
		Of which: loans to private sector	2,807.8	2,909.0	2,824.4	2,824.8
	Other items (net)		2,311.7	2,685.4	2,515.7	3,345.4
		Capital	857.9	855.3	761.9	888.6
		Other liabilities excluded from broad money	1,453.9	1,830.2	1,753.8	2,456.8
Broad money (M2)²/			4,396.7	4,823.2	5,420.6	5,672.4
	Currency in circulation		178.3	185.3	192.0	203.9
	Demand deposits		183.9	160.9	169.8	178.1
	Quasi-money liabilities		4,034.6	4,477.0	5,058.9	5,290.4
			(Percent of GDP)
Base money			9.5	9.9	10.3	10.7
Broad money (M2)			76.1	80.4	86.6	86.5
M3 ³/			74.7	79.4	84.4	…
M4 ⁴/			86.4	92.6	98.2	…
Financial sector credit to the private sector			66.0	66.8	62.3	71.1
	Of which: bank loans to private sector		48.6	48.5	45.1	43.1
Memorandum item:
	GDP (in billions of reais)		5,779	5,996	6,258	6,559

Sources: Central Bank of Brazil; and Fund staff estimates.

^²/M2 includes the liabilities to other financial corporations, state and municipal governments, nonfinancial public enterprises, other nonfinanical corporations, and other resident sectors.

^⁴/Authorities’ definition. M4 comprises M3 plus federal, state, and municipal liquid securities held by the public.

Table 5.

Brazil: Medium-Term Macroeconomic Framework, 2016–23

Sources: Central Bank of Brazil; and Fund staff estimates and projections.

^¹/Includes assets, which mainly comprise international reserves, outstanding liabilities of public financial institutions to the Treasury, financial assets of public enterprises, and assets of the federal labor fund (FAT).

^²/Gross non financial public sector debt consolidates debt of public enterprises with that of general government. Unlike the authorities’ definition, gross general government debt comprises treasury bills at the central bank’s balance sheet not used under repurchase agreements.

^³/Includes intercompany debt.

^⁴/Historical numbers include valuation changes.

Table 5.

Brazil: Medium-Term Macroeconomic Framework, 2016–23

					Proj.
			2016	2017	2018	2019	2020	2021	2022	2023
MACROECONOMIC FRAMEWORK			(Percent of GDP, unless otherwise specified)
GDP growth at constant prices (percent)			−3.5	1.0	1.8	2.5	2.3	2.2	2.2	2.2
Consumer prices (IPCA, end of period, percent)			6.3	2.9	3.5	4.1	4.0	4.0	4.0	4.0
Gross domestic investment			15.4	15.5	16.2	16.9	17.8	18.7	19.3	19.5
	Private sector		13.6	13.8	14.5	15.3	16.3	17.2	17.9	18.2
	Public sector		1.8	1.7	1.7	1.6	1.5	1.4	1.4	1.3
Gross domestic savings			14.1	15.0	14.9	15.4	16.2	16.9	17.4	17.6
	Private sector		21.2	21.0	21.6	21.5	22.1	22.5	22.7	22.7
	Public sector		−7.1	−6.0	−6.7	−6.1	−5.9	−5.6	−5.4	−5.1
External current account balance			−1.3	−0.5	−1.2	−1.4	−1.5	−1.6	−1.7	−1.8
Central government primary balance			−2.5	−1.7	−2.4	−1.8	−1.1	−0.4	0.2	0.7
Consolidated non-financial public sector
	Primary balance		−2.5	−1.7	−2.4	−1.8	−1.1	−0.4	0.2	0.7
	Overall balance		−9.3	−9.7	−9.1	−8.7	−7.4	−7.0	−6.1	−5.6
Public sector net debt ¹/			46.2	51.6	56.2	59.9	62.9	65.7	67.7	68.9
General government gross debt, Authorities’ definition			70.0	74.0	…	…	…	…	…	…
NFPS gross debt ²/			78.4	84.0	88.2	90.4	92.4	94.2	95.1	95.6
EXTERNAL DEBT³/ ⁴/			(Billions of U.S. dollars)
Total external debt			666.5	668.3	669.2	668.7	664.3	657.8	649.7	640.6
	Medium- and long-term		617.9	620.7	622.2	622.1	618.0	611.8	604.1	595.4
		Nonfinancial public sector	183.3	179.3	177.0	175.7	174.5	173.2	171.9	170.5
		Public sector banks	65.3	63.9	63.0	62.6	62.1	61.7	61.2

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About

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Abstract

The Recovery is Underway, But Risks Remain

Policy Discussions

A. Accelerating Fiscal Consolidation

B. Maintaining an Accommodative Monetary Stance

C. Preserving External Balance

D. Making the Financial System More Efficient

E. Boosting Potential Growth

F. Responding to Shocks

G. Strengthening Governance

Authorities’ Views

Staff Appraisal