Brazil: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Brazil

International Monetary Fund. Western Hemisphere Dept.

doi:10.5089/9798400282898.002.A001

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Brazil: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Brazil

Author: International Monetary Fund. Western Hemisphere Dept.

Publication Date:: 11 Jul 2024

eISBN:: 9798400282898

Language:: English

Keywords:: potential GDP; headline inflation; inflation expectation; fund staff calculation; short-term debt; Global

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1. Brazil’s economy has been remarkably resilient during the disinflation process of the last two years. During 2022 and 2023, real GDP rose by a cumulative 5.9 percent–– surpassing the projection in the October 2022 World Economic Outlook (WEO) by over 2 percentage points. The stronger growth, despite tight monetary policy to reduce inflation, reflected supportive demand conditions––including higher government spending and robust private consumption. It also reflected a supply-side expansion, including record agricultural and hydrocarbon output (Annex I). Economic activity in Brazil has recovered faster toward its pre-pandemic path than in regional peers or the world economy. Inflation was lower than expected and returned to the target tolerance interval in March 2023. Growth is expected to moderate this year amid still restrictive interest rates aimed at completing the convergence of inflation to target; a lower fiscal deficit; the flood calamity in Rio Grande do Sul, and slower agricultural output.

Economic Resilience amid Disinflation

1. Brazil’s economy has been remarkably resilient during the disinflation process of the last two years. During 2022 and 2023, real GDP rose by a cumulative 5.9 percent–– surpassing the projection in the October 2022 World Economic Outlook (WEO) by over 2 percentage points. The stronger growth, despite tight monetary policy to reduce inflation, reflected supportive demand conditions––including higher government spending and robust private consumption. It also reflected a supply-side expansion, including record agricultural and hydrocarbon output (Annex I). Economic activity in Brazil has recovered faster toward its pre-pandemic path than in regional peers or the world economy. Inflation was lower than expected and returned to the target tolerance interval in March 2023. Growth is expected to moderate this year amid still restrictive interest rates aimed at completing the convergence of inflation to target; a lower fiscal deficit; the flood calamity in Rio Grande do Sul, and slower agricultural output.

2. At the same time, some long-standing challenges persist. The general government gross debt-to-GDP ratio, which declined in 2021–22 to below its pre-pandemic level, increased in 2023 on the back of a fiscal expansion and is set to rise further in the near term before stabilizing over the longer policy horizon. Net interest payments reached nearly 6 percent of GDP in 2023, above regional peers, constraining space for priority investments. Estimates of potential growth, though rising in recent years, remain below the average of the Group of Twenty (G20) emerging market economies, slowing efforts to converge toward higher living standards.

3. The authorities have advanced their ambitious sustainable and inclusive growth agenda, while ensuring sound macroeconomic management.^¹ The transformation toward a green economy is accelerating, with deforestation in the Amazon cut by half in 2023 alongside a government commitment to halt illegal deforestation by 2030; important progress on establishing Brazil’s Sustainable Taxonomy; a new carbon market framework; and the issuance of the first Global ESG sustainable government bond. The expansion of social protection policies, including the Bolsa Família conditional cash transfer program targeted to the poor, and the new targeted Desenrola program to restructure lower-income household debt are supporting poverty alleviation and financial inclusion. Recent initiatives in the financial sector, including the highly successful instant payment system Pix, have placed Brazil at the forefront of financial innovation and increased financial inclusion, efficiency, and competition. On the fiscal front, milestones included approving a landmark VAT reform in 2023. Finally, on the inflation targeting framework, the decision in June 2023 by the National Monetary Council to adopt a continuous 3 percent inflation target from 2025 onwards has reduced uncertainty and enhanced monetary policy effectiveness. These steps strengthen Brazil’s path toward rising economic wellbeing alongside environmental and macroeconomic sustainability.

Recent Developments

4. Economic activity remained strong in 2023 and early 2024. Real GDP growth, at 2.9 percent in 2023, was significantly higher than projected at the start of the year, on the back of record agricultural and hydrocarbon output, and resilient services. Private consumption grew by 3.1 percent on account of a tight labor market, real income gains, and a sizable fiscal stimulus. Growth in the first quarter of 2024 remained robust at 2.5 percent on a year-over-year basis, driven by robust private consumption in the context of a strong labor market. In addition, after declining by 3.0 percent in 2023, investment grew by 2.7 percent on a year-over-year basis. The unemployment rate reached 7.5 percent in the moving quarter through April––the lowest rate over the same period since 2014, with joblessness falling across all major demographic groups, especially the young and those with incomplete high school education. Formal employment surpassed its pre-pandemic level in January 2021.

5. The trade balance rose significantly in 2023, driven by strong exports in agriculture and crude oil. The current account deficit narrowed from 2.5 percent of GDP in 2022 to 1.4 percent of GDP in 2023 on the back of the larger trade surplus. The current account deficit was entirely financed by robust net Foreign Direct Investment (FDI) inflows (1.7 percent of GDP) and portfolio inflows (0.3 percent of GDP). Staff analysis (Annex II) suggests that progress in trade liberalization (including lowering import tax rates and reducing non-tariff barriers), financial market development, and regulatory reform over the past decade were key structural drivers that attracted FDI. The Brazilian real appreciated against the US dollar by an average of 3.4 percent in 2023 from the 2022 average, on the back of the improved economic outlook, while the real effective exchange rate (REER) appreciated by 4.6 percent. As of May, the Brazilian real had depreciated by about 4.5 percent against the US dollar since December 2023, amid a global market re-assessment of the timing of US monetary policy easing and heightened geopolitical uncertainty. Staff assessed the external position in 2023 as broadly in line with the level implied by medium-term fundamentals and desirable policies (Annex III). In the first few months of 2024, the trade surplus remained high, on the back of strong exports in commodities and only marginally higher imports compared with 2023.

6. Price pressures have eased significantly. In May, headline inflation was 3.9 percent year-over-year, within the target tolerance interval (3.0 percent ±1.5 percentage points). Underlying (core) inflation measures were at similar levels. The level of real wages has recovered to near its pre-pandemic path. Staff analysis suggests that the fall in headline inflation since its peak of 12.1 percent (year-over-year) in April 2022 largely reflects the unwinding of earlier relative price increases––notably for energy––and the fading of the related pass-through into underlying inflation (Annex IV). An important pass-through channel has been the fall in near-term inflation expectations (Figure 2), supported by BCB’s decisive monetary policy action and clear communication. So far, the positive output gap has contributed only modestly to inflation.

7. With inflation on a clearly declining path, the BCB started lowering rates in August 2023 and introduced forward guidance. After 50 basis point rate cuts for six meetings, the BCB reduced rates by 25 basis points to 10.50 percent in May and kept rates unchanged in June. The BCB adjusted its initial guidance of cuts of 50 basis points per meeting in March and removed explicit signaling of a rate cut in May to gain more flexibility on the pace and the length of the easing cycle. The adoption of a continuous target of 3 percent from 2025 onwards allayed market concerns around the evolution of the inflation target and strengthened monetary policy effectiveness. However, medium-term inflation expectations have remained at about 50 basis points above target, possibly reflecting uncertainties over the fiscal consolidation path as well as the composition of the BCB Board of Governors after the terms of three out of nine members expire in December 2024 (in line with the Central Bank Autonomy Law of 2021).

8. Credit growth has decelerated reflecting the still restrictive monetary policy stance, while the overall credit gap remains positive. Bank credit growth declined to 9 percent year-over-year in April, down from 18 percent in mid-2022. The BCB’s estimated credit gap remains positive and driven mainly by continued deepening of domestic capital markets. New bank loan origination has started to rise in the context of the easing cycle. New loans to households are concentrated in credit cards, although their growth is constrained by tighter lending standards. The market share of earmarked credit increased slightly in 2023 to about 41.6 percent, while remaining well below the 50 percent level reached in 2016–17.

9. Financial markets have weathered well external stress events. The National Treasury adapted smoothly to periods of volatility in the local yield curve––largely caused by spillovers from the US rates markets––aided by its high level of cash buffers that provide flexibility around issuance plans. External market access remained comfortable. In early 2024, the Treasury took further advantage of market conditions to carry out its largest foreign currency bond issuance, with a volume of US$4.5 billion and spreads close to the minimum of the last six years.

10. Fiscal policy eased significantly in 2023 but is tightening in 2024. The federal primary balance declined from a surplus of 0.5 percent of GDP in 2022 to a deficit of 2.4 percent of GDP in 2023, despite a positive output gap and strong commodity revenues, implying a procyclical fiscal impulse. Higher social benefits (1.2 percent of GDP), in line with the new administration’s priorities, and extensions of temporary pandemic-related tax cuts pushed up the deficit. The higher fiscal deficit also included the welcome settlement of precatórios of 0.8 percent of GDP owed by the central government, covering those recently come due as well as delayed payments from 2022–24. Over half of these payments relate to public wages, social security, and social assistance, directly benefiting households, and are expected to lift consumption in 2024. Abstracting from one-off payments and accounting for the economic and commodity cycle, staff estimates the structural primary balance declined by 1.5 percent of potential GDP in 2023. In 2024, fiscal policy is tightening, supported by revenue measures, with the authorities targeting a zero federal primary deficit. For 2025–26, the 2025 draft Budget Guidelines Law (LDO) submitted to Congress in April lowered fiscal targets for 2025–26 (see below).

11. The implementation of the 2023 VAT reform is advancing with four complementary laws under congressional discussion. The complementary laws specify: (i) the characteristics of the new dual federal (CBS) and subnational (IBS) VAT system; (ii) the governance structure for the joint revenue administration of the CBS and IBS; (iii) the excise tax regulation; and (iv) administrative processes. These were presented to Congress in April, with approval expected by December.

12. The authorities have made significant progress on Brazil’s climate agenda, as part of the Ecological Transformation Plan:^²

With strong law enforcement, supported by additional funding to the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) under the Ministry of the Environment, and other climate initiatives, deforestation in the Amazon biome fell by half in 2023, implying an estimated reduction in emissions of half a gigaton. This progress was somewhat offset by increased deforestation in the Cerrado biome where legal deforestation thresholds are higher.
The Emissions Trading System (ETS), expected to be approved before August, establishes a mandatory carbon market framework, with a cap-and-trade system that targets emitters releasing more than 25,000 tons of CO2 equivalent annually, corresponding to around 5,000 companies above the cap, and that would be linked to the voluntary carbon market.^³
Within the voluntary carbon market, the Forest Law approved in May 2023 enables carbon credits and other environmental services in conservation areas, expanding the current credit opportunities, and complementing the mandatory carbon market framework.
The successful issuance of Brazil’s first green and social sovereign bond in November 2023 was a step toward creating a yield curve for green bonds and is expected to be followed by a second issuance later this year. To transition to a low-carbon economy and boost climate finance, the Ministry of Finance, together with the IADB and supported by the BCB, launched in February ECO Invest Brasil, a capital mobilization and FX hedging program.
The BCB sustainability agenda has advanced with the rollout of disclosure requirements of quantitative emission targets expected to start in 2025.
Brazil’s Sustainable Taxonomy, a classification scheme to recognize green corporations and projects, led by the Ministry of Finance with participation of a wide range of public entities, including the BCB, is expected to be operational by mid-2025. It will play a crucial role to define qualification criteria for various climate related instruments.

Outlook and Risks

13. Growth is projected to moderate in the near term as inflation converges to target, and then strengthen to 2.5 percent over the medium term—an upward revision from 2.0 percent at the time of the 2023 Article IV Consultation.

Growth. Staff projects a moderation in growth from 2.9 percent in 2023 to 2.1 percent in 2024, reflecting declining but still restrictive monetary policy rates aimed at completing the convergence of inflation to target, a lower fiscal deficit, the normalization of agricultural output from record levels, and the effects of the flood calamity. The projection in 2024 includes a positive 0.3 percentage point contribution from the payment of precatórios in late 2023. Growth is then expected to strengthen to 2.5 percent over the medium term, an upward revision of 0.5 percentage point compared with projections in the 2023 Article IV Staff Report. The improvement in growth over the medium term would be supported by fading restrictive cyclical factors (with real interest rates gradually declining to neutral levels) and supportive structural factors, notably the implementation of the efficiency-enhancing VAT reform and the acceleration in hydrocarbon production (see below). The positive estimated gap between actual and potential output is projected to gradually narrow to zero.
Inflation and Monetary Policy Stance. Headline inflation is expected to decline further to 3.7 percent by end-2024 and reach the 3 percent inflation target in the first half of 2026. The BCB policy rate is expected to approach its estimated neutral level in 2026, with short-term real interest rates in the 4.5 to 5.0 percent range.
Fiscal Balance and Government Debt. Staff expects the federal primary deficit to narrow from 2.4 percent of GDP in 2023 to 0.6 percent of GDP in 2024 and 0.7 percent of GDP in 2025 before gradually rising to a surplus of 1 percent of GDP in 2029 and 1.5 percent of GDP over the extended policy horizon, contingent on the implementation of measures. General government gross debt is projected to stabilize at around 95 percent of GDP over the extended policy horizon.^⁴
Current Account. The current account deficit is expected to widen to 1.8 percent of GDP in 2024 and remain around 1.5 percent of GDP over the medium term. The decline in medium-term current account deficits of 0.5 percentage points, compared with previous projections, reflects the stronger trade balance driven by structural factors such as increased oil exports, and upward revisions in nominal GDP. Current account deficits are projected to be financed by FDI inflows, including in the expanding hydrocarbon sector (see Annex II).

14. The balance of risks to the growth outlook has improved since the 2023 Article IV Consultation but remains somewhat tilted to the downside, while uncertainty remains. Downside risks to growth have subsided since the 2023 Article IV consultation, amid resilient economic activity, falling inflation, and the approval of the landmark VAT reform. There is also scope for further positive growth surprises (see Risk Assessment Matrix in Annex V).

Downside Risks. On the external front, downside risks include a slower-than-expected decline in core inflation in major advanced economies that leads financial markets to revise up their interest rate expectations and puts pressure on the borrowing costs and currencies of emerging market economies. An abrupt global slowdown, in particular in Brazil’s major trading partners such as China and the US, could weaken exports and growth. Monetary policy miscalibration in major central banks and commodity price volatility also pose downside external risks. On the domestic front, supply disruptions from the 2024 flood calamity could be more severe than currently expected. Estimates of the impact are still uncertain, including for growth and the fiscal balance. In addition, a lower-than-envisaged fiscal effort could reduce policy credibility and increase policy uncertainty, resulting in higher borrowing costs and weaker investment. It would also increase risks of de-anchoring inflation expectations.
Upside Risks. In the near term, domestic upside risks to growth include stronger-than-expected household consumption in the context of a still-tight labor market and higher real household income, although this could entail positive inflation surprises and a tighter monetary stance. On the structural side, a faster-than-expected implementation of reforms entails upside risks. Investment in green growth opportunities could further boost economic potential. With a relatively high share of jobs susceptible to artificial intelligence (AI) compared to other economies in the region, Brazil’s growth also stands to benefit from the rollout of AI and enhancements to worker productivity, although AI integration could also lead to job obsolescence in some professions (Box 1). External upside risks include greater-than-envisaged fiscal support in major economies in the context of elections in 2024 (see IMF April 2024 WEO).
Buffers and Resilience Factors. A sound financial system, adequate FX reserves, low reliance on FX debt, large government cash buffers, and a flexible exchange rate continue to support Brazil’s resilience.

Authorities’ Views

15. The authorities broadly shared staff’s views on the near-term outlook and welcomed the upward medium-term growth revision. They noted that drivers of Brazil’s growth resilience have included robust consumption in the context of a tight labor market with rising real incomes, minimum wage increases, and lower household debt vulnerabilities supported by the Desenrola program. They agreed with staff’s assessment on the balance of risks in the near term but emphasized that the macroeconomic effects of the floods in Rio Grande do Sul remain uncertain with the possibility that reconstruction efforts could raise economic activity in the second half of 2024. The authorities agreed with staff’s assessment of the drivers of medium-term growth that supported an upward revision. They viewed the Ecological Transformation Plan as contributing to stronger, greener, and more sustainable and inclusive growth. The BCB concurred that inflation had declined with the fading of earlier relative price shocks as well as the proactive and decisive monetary policy action and communication. They agreed with staff on their analysis of possible factors leading to above-target inflation expectations but saw uncertainty as likely to fade in the context of the still restrictive policy rates and the expected reduction in the fiscal deficit. The authorities agreed with staff that the 2023 external position was broadly in line with the level implied by fundamentals and desirable policies and that higher hydrocarbon output entailed a structural improvement over the medium term.

^{Box 1.}

Potential Impact of Artificial Intelligence on Brazil’s Productivity and Output

AI stands at the forefront of a transformative wave, although its economic and social consequences are not yet fully understood. IMF staff analysis assesses AI’s influence on productivity and the labor market based on the concept of AI exposure (Felten, Raj, and Seamans 2021, 2023) and AI complementarity (Pizzinelli and others 2023).

Approximately 45 percent of jobs in Brazil are estimated to be exposed to AI. Brazil’s overall exposure to AI is greater than other emerging market economies (based on estimates by Cazzaniga and others 2024). AI is expected to enhance productivity in over one-third of these exposed jobs (about 15 percent of all jobs). Women are better positioned to experience productivity gains than men. The share of women in Brazil in occupations susceptible to AI is more than 20 percentage points larger than that of men; this difference reflects their average higher educational attainment and presence in professional and clerical occupations with high exposure and complementarity to AI. For about 30 percent of all jobs, AI integration could automate tasks, potentially reducing labor demand and wages and even leading to job obsolescence.

A model-based analysis is used to gauge AI’s potential impact on productivity and output. In the model, AI affects productivity through three critical channels: (i) labor displacement; (ii) AI complementarity with skills; and (iii) productivity gains. First, AI adoption may shift tasks from humans to AI-driven systems, enhancing the efficiency of task completion. Second, AI integration could benefit tasks that are highly complementary to AI. Third, AI adoption may lead to broad-based productivity gains, boosting investment and increasing overall labor demand.

For Brazil, AI adoption is estimated to raise output by about 5 percent based on the model analysis, although the impact of AI remains highly uncertain. The economy would adjust to the new steady state through a combination of capital deepening and higher total factor productivity (TFP), driven by the substitution of tasks from labor to capital and under the assumption that capital is more effective at executing tasks, following Moll, Rachel, and Restrepo (2022). However, when an additional productivity impact is also considered, with AI supporting performance of workers and capital in all tasks, output expands by nearly 8 percent and TFP increases by almost 4 percent. These gains happen primarily in the first decade of transition. Incomes for all workers increase, with greater gains estimated for initially high-income workers, implying greater income inequality. In the near term, the rollout of AI could also boost business investments into innovative tools and refining production processes. At the same time, the economic impact of AI, as well as its timing, remains uncertain. Existing studies come with a range of estimates; e.g., for the United States, Briggs and Kodnani (2023) find large effects on productivity, while Acemoglu (2024) finds smaller effects.

Policy Discussions

A. Guiding Inflation and Expectations Back to Target

16. The pace of policy rate reductions since August 2023 has been appropriate and consistent with the inflation targeting framework. The 325-basis point reduction in nominal policy rates so far to 10.50 percent in May is estimated to have reduced real policy rates while appropriately keeping them in restrictive territory. The BCB initial guidance of cuts of 50 basis points per meeting effectively steered market expectations, including through turbulence in global bond markets. Medium-term inflation expectations have remained at about 50 basis points above target, possibly reflecting uncertainties over the fiscal consolidation path as well as the composition of the BCB Board of Governors after the terms of three out of nine members expire in December 2024 (in line with the Central Bank Autonomy Law of 2021).

17. As disinflation proceeds, with inflation projected to remain within the target tolerance interval, maintaining flexibility on the pace and length of the easing cycle is prudent given continued labor market resilience and inflation expectations above target-consistent levels. The BCB’s policy stance and clear commitment to the 3 percent target bodes well for the further decline in inflation expectations, conditional on continued credibility of both fiscal and monetary policy frameworks. Contingent on underlying inflation data and inflation expectations anchoring around the 3 percent target, a path for the policy rate that approaches its neutral level in 2026 would be prudent.

18. Monetary transmission has been effective and broadly in line with previous tightening episodes, notwithstanding structural transformation in the financial sector. Staff estimates using a Bayesian VAR model show no clear evidence of a change in monetary policy transmission to output and the CPI compared to past tightening episodes. Moreover, Phillips curve estimates suggest that the relationship between the output gap and inflation has remained largely unchanged compared with the pre-pandemic period (Annex IV). As discussed at the time of the 2023 Article IV Consultation, the decision in June 2023 by the National Monetary Council to adopt of a continuous 3 percent target from 2025 onwards has reduced uncertainty and strengthened monetary policy effectiveness.

19. The flexible exchange rate regime and adequate FX reserves remain valuable shock buffers. Brazil continues to retain a comfortable net creditor status on external debt that acts as an insurance against a tightening of the global financial cycle. Given continued risks from an abrupt tightening of global financial conditions and narrowing interest rate differentials with advanced economies, maintaining exchange rate flexibility is instrumental to absorb shocks. FX intervention could be used to address episodes of higher risk premia when FX liquidity becomes shallow but should not substitute for warranted adjustment of macroeconomic policies. With around US$350 billion in FX reserves, reserve adequacy remains well within adequate ranges (130 percent of the IMF ARA metric as of end-2023), with a notable improvement in 2023 largely due to the wind down of the FX repo stock, interest earnings, and price changes. There was also no spot intervention in 2023.

20. When market conditions are conducive, reducing the stock of outstanding FX swaps would create additional policy room for maneuver. The presence of the BCB in the onshore non-deliverable market through FX swaps has been stable at around US$100 billion over the last few years, with the objective of ensuring smooth functioning in both spot and derivatives markets. While there is no well-established limit for FX swaps interventions, reducing the stock of outstanding FX swaps when market conditions are conducive can increase policy space for ensuring smooth market functioning in the event of future shocks.

21. Staff advised the authorities to continue reducing the financial transaction tax (IOF-FX) to zero as planned. The longstanding tax on certain financial transactions (Imposto sobre Operagoes Financeiras, IOF) gives rise to a multiple currency practice (MCP), which is also an exchange restriction as the effective exchange rate of exchange transactions subject to the IOF-FX exceeds the permissible margin from February 1, 2024, under the Fund’s new MCP policy.^⁵ The IOF tax increased transaction costs for FX transactions, with limited impact on FX liquidity. The gradual reduction path of the IOF-FX tax beginning in 2022 to ultimately a zero rate by 2029 will eliminate the MCP and exchange restriction, and is predetermined and well communicated, with limited economic impact.

Authorities’ Views

22. The authorities agreed that monetary policy is consistent with reducing inflation to target. The BCB remains firmly committed to the inflation targeting framework and agreed with staff that maintaining flexibility on the pace and length of the easing cycle is appropriate at the current stage of the disinflation process. They underscored the importance, as inflation converges to target, of closely monitoring a range of metrics of underlying inflation and inflation expectations, and of calibrating policies to incoming data. They reiterated their commitment to exchange rate flexibility. The BCB highlighted that their strategy on FX swaps considered spot and forward market conditions in tandem to reduce the cost of carry, while a positive stock of swaps was needed to preserve market functioning. They agreed that the IOF-FX tax increased transaction costs of FX transactions and confirmed that the gradual reduction path that began in 2022 aiming to bring the IOF-FX tax to zero in 2029 is predetermined and well communicated, with little economic impact.

B. Safeguarding Financial Stability while Promoting Financial Inclusion and Innovation

23. The financial system remains resilient and systemic risks are contained. Banks are highly liquid, with liquidity coverage ratios well above the regulatory minimum reaching 185 percent at end-2023. Banks are also adequately capitalized, with a CET1 capital ratio of 14.8 percent at end-2023. Asset quality and profitability improved in the second half of 2023 as household balance sheets and economic conditions strengthened. Provisions remain well above expected losses. The authorities’ latest stress tests continue to underscore the banking sector’s resilience to credit, market, fiscal deterioration, liquidity shocks, and climate shocks. Risks from the growing non-bank financial institutions (NBFI) are contained: stress tests indicate that the step-in risk stemming from investment funds has halved since 2022 and the BCB is taking welcome steps to strengthen oversight of NBFIs, including a new prudential framework for conglomerates composed of payment institutions that specifies the methodologies for calculating regulatory capital and capital requirements. The risk of an adverse bank-sovereign nexus is mostly alleviated by banks’ appropriate interest-rate risk management and BCB prudential measures.

24. Credit risks related to micro and small enterprises warrant close monitoring. After the bankruptcy of a large retailer in January 2023, risk materialization among large companies has come down, in part helped by improvements in the domestic capital market. Problem assets in micro and small enterprises have stabilized amid economic recovery but remained at high levels at end-2023 in the context of still restrictive monetary policy rates. Looking ahead, debt servicing capacity for all corporates is expected to improve with real interest rates gradually declining and robust economic activity. The authorities are also reallocating existing budgetary resources to a package of credit support measures for micro and small enterprises.

25. The authorities have taken welcome steps to address households’ debt burden. The household debt service-to-income (DSTI) ratio eased to 26.5 percent in March after peaking at 28.4 percent in June last year. Non-performing loans (NPLs) have declined with banks adopting more conservative standards in granting credit cards and non-payroll deducted credits. Housing prices have been resilient to higher interest rates, and NPLs on mortgage loans remain low (under 2 percent). The strengthening in household balance sheets reflects favorable employment and income dynamics as well as policy initiatives, most notably the Desenrola program that helped over 15 million people renegotiate about R$50 billion (about 0.5 percent of GDP) in overdue debt (Box 2). The current macroprudential stance is broadly appropriate. Given the high credit cost of consumer loans, the authorities should closely monitor household DSTI and NPLs and consider applying a DSTI limit when necessary, complementing existing supervisory and prudential measures.

^{Box 2.}

Measures to Improve Household Financial Health

Household financial health has emerged as a concern in Brazil amid the rapid expansion of access to credit. As of end-2023, more than 40 percent of consumers in Brazil had defaulted on some form of debt, such as credit cards, utility bills, or other loans. The overall DSTI ratio declined after peaking at 28 percent in June 2023, but remains above its pre-pandemic level. High household debt can lower consumption and stunt growth (see IMF, April 2022, WEO, Chapter 2).

There are a few contributing factors to household financing burdens. First, the cost of credit is high––the interest rate spread in Brazil is higher than that in regional peer economies. Second, financial literacy is relatively low, especially among new credit cardholders who tend to be less informed about the terms of their credit card debt. And third, many households have very little wealth and rely on credit during economic downturns––for example, the debt-to-income ratio rose by 8 percentage points during the pandemic.

The government has taken welcome measures to improve household financial health, notably via its flagship program Desenrola Brasil. This program, implemented from July 2023 to May 2024, aimed to assist households in default to regain access to credit. In the first stage of the program, creditors participated in an auction and those that offered the largest discounts in debts became eligible for the program. In the second stage, low-income borrowers were able to consolidate and settle their debts on the Desenrola platform or through post offices. Borrowers could pay upfront or refinance with a new bank loan of up to 60 months. Refinancing of up to R$5,000 per borrower was guaranteed by the government, with a total budget envelope of R$8 billion (less than 0.1 percent of GDP).

The innovative design of the Desenrola program enabled the achievement of its goal with minimal fiscal risks. The program was well targeted: only borrowers with a monthly income equivalent of up to two minimum wages were eligible. The program also incentivized buy-in from private sector creditors. More than 600 financial and non-financial sector creditors participated in the auction and offered discounts averaging 83 percent, higher than the rates offered in private debt renegotiations. Although the program ended in May 2024, it provides the infrastructure for potential future debt renegotiation between consumers and private creditors. The platform also promotes financial education to prevent future indebtedness.

Additional steps have included launching a comprehensive financial literacy campaign, improving transparency rules for credit card lending, and establishing a limit on credit card charges. The authorities have put in place a limit on credit card interest and fee charges of 100 percent of the original amount. Such a cap could curb excessive interest rate costs for households for which the limit is binding, but possible negative implications for the quantity and quality of credit need to be carefully assessed.

26. The authorities’ ongoing reform efforts aimed at lowering credit costs, based on a sound diagnosis, are welcome. Although recent financial innovation has reduced transaction costs and facilitated competition, interest rate spreads remain above 20 percent. A large part of the spread is attributable to structural challenges in the credit market, including inefficient collateral enforcement, low debt recovery ratios, and margins of financial institutions. The government is aware of these challenges and established a new secretariat for economic reforms in 2023 to advance regulatory reforms, including to increase financial market competition and improve the recovery of delinquent loans. Sustaining these reform efforts would reduce costs and distortions and enhance the efficiency of credit allocation to support competition and productivity across economic sectors.

27. Lending by public banks to specific sectors can be warranted in the presence of well-established market failures, subject to minimizing distortions to the private credit market. Since a set of reforms in 2017, the funding cost to public banks has transitioned from a subsidized rate (TJLP) to a rate that reflects the cost of government funding (TLP). At present, public banks are well-capitalized, profitable, and liquid, and have been paying dividends and pre-paying (mainly the Brazilian National Development Bank, BNDES) liabilities to the government. The government plans to invest in specific sectors through the BNDES. Continued careful management of a bigger role for public banks is needed to mitigate any potential risks to the fiscal position, monetary policy transmission, and market efficiency. Ongoing initiatives to issue loan guarantees and on-lending to private banks to resolve well-established market failures are appropriate.

28. The BCB remains at the forefront of financial innovation amid internal resource constraints. The expanding financial innovation agenda has promoted financial inclusion, efficiency, and competition.^⁶ Most notably, the adoption of the instant payment system Pix has continued to exceed expectations and has made Brazil a global leader in terms of transactions per capita. However, the development of new Pix functionalities, such as automatic payments and cross-border payments, has been delayed in the context of BCB resource constraints, notably on the staffing side. Building on past reforms on BCB autonomy, providing the BCB with additional flexibility to cover operating expenses would allow it to attract and retain the professional talent necessary for contributing to financial innovations in the context of an evolving financial ecosystem and sustainable finance initiatives, while ensuring effective accountability mechanisms and cyber security.

29. The BCB is working on overcoming privacy and governance challenges to realize the potential of the flagship CBDC initiative Drex to “tokenize the economy.” Drex aims to underpin an interoperable public blockchain infrastructure that facilitates innovative financial services within a regulated environment. From its early stages, Drex is expected to demonstrate the benefits of “tokenizing the economy” by easing access to credit for borrowers that hold tokenizable collateral (for example, government bonds) and encouraging new entrants of financial service providers. A number of technological and legal challenges remain to be addressed before Drex becomes operational. Most notably, the latest Drex pilots have highlighted the technical difficulty of offering scalable token-based financial services while ensuring compliance with Brazil’s data protection and bank secrecy laws. The BCB is also looking at the rules and mechanisms that govern smart contracts and discussing user cases with the market.

Authorities’ Views

30. The authorities concurred that the financial sector remains resilient and that systemic risks are contained. They expected credit risks in the household sector to improve and agreed that risks in micro and small enterprises warrant close monitoring. The authorities did not currently see a need for a limit on the debt service-to-income ratio. They pointed out that supervisory action, timely monitoring and, when needed, the set of macroprudential measures used in past credit cycles had proven effective at containing risks. That said, the authorities considered that limits on debt-service-to-income were in their toolkit and could be used in the future if needed. The authorities were not concerned about risks from non-bank financial institutions or the sovereign-bank nexus, citing robust prudential measures and contagion analysis results. They noted that most of the loans of the largest public bank (BNDES) are at market rates and fill gaps in private financing of infrastructure and long-term projects. They highlighted ongoing reform efforts to reduce credit costs, including by strengthening the legal framework for bankruptcy, guarantees, capital markets and resolution. They underscored the importance of covering operating BCB expenses in a way that would allow the BCB to continue contributing to financial innovations and sustainable finance initiatives, while ensuring effective accountability mechanisms and cyber security. They aimed to launch the Drex platform in 2025 but noted the need to address privacy issues before opening the platform to the public.

C. Securing Fiscal Sustainability and Revamping Taxation

31. The authorities’ commitment to continue improving the fiscal position is welcome. In the 2025 draft Budget Guidelines Law (LDO) submitted to Congress in April, the government reaffirmed its commitment to the zero primary deficit target for 2024 while lowering the targets for 2025–26 (Box 3), within a narrow (±0.25 percentage point of GDP) tolerance band. The indicative target path was also extended to 2028, allowing for a welcome broader medium-term perspective. For 2025, the draft LDO proposed a zero federal primary deficit target, excluding 0.3 percent of GDP of precatórios. For subsequent years, the LDO proposed an indicative target path that rises to a surplus of 1.0 percent of GDP by 2028.^⁷ The authorities envisage additional adjustment over the longer term to a primary fiscal surplus of 1.7 percent of GDP.^⁸ Based on more favorable macroeconomic assumptions than staff, notably on interest rates, the authorities estimate that the revised fiscal targets would stabilize public debt (authorities’ definition) by 2028 followed by a gradual decline in subsequent years. The authorities intend to rely on a more balanced mix of additional revenues and expenditure rationalization and have recently introduced limitations on tax credits for federal PIS/COFINS taxes to compensate for extension of payroll exemptions ahead of the 2025 Budget to be submitted to congress in August. The authorities’ intention to pursue a strategy entailing both expenditure and revenue measures is welcome. Staff estimates that meeting the authorities’ targets would require additional measures amounting to 0.7 percent of GDP in 2025 and 1.3 percent of GDP by 2028. The authorities’ intention to continue enhancing fiscal data quality is welcome (Annex VI).

^{Box 3.}

Recent Revisions to Brazil’s Fiscal Framework

Spending corridor established in 2023. The constitutional amendment approved in August 2023 replaced the cap of zero growth in federal real spending that had been in force since 2016 with a corridor for federal real spending growth with a floor of 0.6 percent and a ceiling of 2.5 percent, contingent on revenue collection and the distance to a primary balance target. Concretely:

If the primary balance in year t is within the band, planned real federal spending growth in year t+2 = 0.7 x real revenue growth in t+1 (mid-year).
If the primary balance in year t is outside the band, planned real federal spending growth in year t+2 = 0.5 x real revenue growth in year t+1 (mid-year).

With the removal of the 2016 spending cap, education and health spending floors (provisioned by ordinary laws) became binding again. The 2023 amendment also established a new floor on public investment of 0.6 percent of GDP. Up to 70 percent of the overperformance of the primary balance relative to target can be used towards higher capital spending, with a limit of 0.25 percent of previous year’s GDP.

Spending base adjustments. In late 2023, payments of precatórios were taken out of the base of the spending corridor for 2025 and 2026.^¹ The recent declaration of a state of calamity in Rio Grande do Sul allows for registering any flood-related emergency support under extraordinary credits in 2024, which are also excluded from the base of the spending corridor. For 2024, expenditures of R$15bn, which were provisioned for the second half of 2024 under the condition that the projected revenue growth would materialize, were advanced to May.

Revised indicative federal primary balance path. The spending corridor established in 2023 was complemented by an indicative primary balance path improving from a deficit of 0.5 percent in 2023 to a surplus of 1 percent of GDP in 2026, within a tolerance band of +/-0.25 percent of GDP.

The 2025 draft LDO proposed a zero-deficit target for 2025 (revised down by 0.5 percentage point of GDP), that will be binding for the preparation of the 2025 Budget, and indicative targets for the federal primary balance with surpluses of 0.25 percent of GDP for 2026 (down from 1.0 percent of GDP), and 0.5 percent of GDP and 1.0 percent of GDP for 2027 and 2028, respectively.

As before, the target can in principle be revised throughout the year with a simple parliamentary majority. Within-year correction mechanisms continue to apply, including bans on new hiring, increases in public wages, new mandatory spending, social assistance policies, or tax benefits if the primary balance target is assessed to be at risk within the year.

^1/ For further details on the fiscal rule, see IMF, 2023, Brazil: Selected Issues, Country Report No. 2023/289.

32. Staff’s baseline scenario is consistent with a more gradual fiscal improvement.

For 2024, staff projects a federal primary deficit of 0.6 percent of GDP, narrowing from a deficit of 2.4 percent of GDP in 2023. Abstracting from one-off factors, the structural primary balance is projected to improve by about 0.7 percentage point of potential GDP. Identifying additional measures at this stage of the budget cycle may be challenging to meet the 2024 zero-deficit target. Approved tax measures are expected to increase revenue by 1.1 percent of GDP in 2024. At the same time, the contribution from tax debt renegotiations and other efforts are falling short of initial estimates and spending demands are increasing, including in social security spending due to a higher minimum wage and an expansion in the number of beneficiaries. Planned emergency spending for Rio Grande do Sul is estimated at 0.2 percent of GDP, with an additional 0.2 percent of GDP in (below the line) reprofiling of state debt owed to the federal government.
For 2025, staff projects a federal primary deficit of 0.7 percent of GDP, predicated on additional (currently unallocated) measures of 0.3 percent of GDP. For subsequent years, staff’s baseline scenario foresees a gradual fiscal effort leading to a primary surplus of 1.5 percent of GDP in 2033. The projection assumes an increase in commodity-related revenues associated with the expanding hydrocarbon sector,^⁹ a moderation in spending growth guided by the fiscal rule, and the implementation of additional (currently unallocated) measures amounting to 1.6 percent of GDP drawing on the authorities’ intention to broaden the tax base, including by tackling tax expenditures, and streamline expenditures, including by improving spending efficiency.^¹⁰ With this baseline path for the primary fiscal balance, general government gross debt is projected to stabilize at around 95 percent of GDP in 2032 (Annex VII).

33. Staff recommends a sustained and more ambitious fiscal effort that puts public debt on a firmly downward path and opens space for priority investments. Staff’s debt sustainability assessment finds risks of debt distress to be moderate under the baseline scenario, but the debt trajectory remains highly sensitive to shocks to borrowing costs and real GDP growth and the materialization of contingent liabilities (Annex VII). The overwhelmingly domestic investor base, low external debt, and large cash buffers by the public sector mitigate risks and provide room for fiscal consolidation to proceed gradually over the medium term. Staff’s assessment suggests that Brazil has some fiscal space to respond to temporary shocks. Guided by a buffer analysis around optimal debt anchors, staff recommends a path for the primary fiscal balance that starts with achieving the zero-deficit target in 2025, followed by improvements of 0.5 percentage point of GDP per year, resulting in a primary fiscal surplus of 2.5 percent of GDP by 2030.^¹¹ Such fiscal path would put general government gross debt on a firmly downward trend, improve sovereign financing conditions, strengthen the anchoring of inflation expectations around the 3 percent target, and increase space for productivity-enhancing investments, including for resilient infrastructure. Building on the 2023 fiscal rule and in line with recommendations of the 2023 Article IV Consultation, an enhanced fiscal framework with a medium-term debt anchor, stricter provisions that ensure consistency between the spending corridor and fiscal targets, and mechanisms to limit procyclicality would support credibility and sustainability.

34. The adjustment could include further steps toward generating revenues, building on the authorities’ achievements. Focusing on the elimination of inefficient tax expenditures, estimated at 4–5 percent of GDP, and broadening the tax base by closing loopholes is appropriate.^¹² Reforming the PIT, including the taxation of dividends, could generate additional revenues and increase progressivity. Any increases in the personal exemptions threshold for the PIT, currently exempting about 80 percent of the population, should be cautiously weighed against increasing marginal PIT rates for higher-income brackets and phasing out or capping deductions for health and education to generate additional revenues on balance. A concomitant reform of SIMPLES would discourage PIT avoidance through incorporation.

Federal Tax Expenditures by Program Category

(Percent of GDP)

Source: IMF, 2023, Brazil: Selected Issues, Country Report No. 2023/289.

Federal Tax Expenditures by Program Category

(Percent of GDP)

	2023
Simples Nacional (SME)	1.1
PIT deductions and exemptions	1.0
CIT sectoral and regional incentives	0.5
Non-profit organizations	0.4
Basic food exemption	0.4
Manaus Free Trade Zone	0.3
Medicine and medical equipment	0.2
Other tax expenditures	0.4
Total	4.3

Source: IMF, 2023, Brazil: Selected Issues, Country Report No. 2023/289.

Federal Tax Expenditures by Program Category

(Percent of GDP)

	2023
Simples Nacional (SME)	1.1
PIT deductions and exemptions	1.0
CIT sectoral and regional incentives	0.5
Non-profit organizations	0.4
Basic food exemption	0.4
Manaus Free Trade Zone	0.3
Medicine and medical equipment	0.2
Other tax expenditures	0.4
Total	4.3

Source: IMF, 2023, Brazil: Selected Issues, Country Report No. 2023/289.

35. Tackling spending rigidities remains a priority. Spending reforms are needed to control continued spending pressures that, if left unchecked, will make compliance with the spending rule difficult in the coming years. Spending reviews of pension and social programs are underway, aiming to create space for new initiatives. Using part of the identified space to reduce the overall spending envelope would support achieving the authorities’ fiscal consolidation path. Staff welcomes considerations on de-indexing spending items from minimum wage increases and reforming the education and health floors that came back into force in 2024. To restrain increases in mandatory spending, priorities include public administration reform to reduce wage premia between (federal) public and private sectors and review career paths; pension reform to align special regimes to the reformed general system (RGPS) and ensure longer-term sustainability; and seeking efficiencies in social programs while ensuring continued targeted support for vulnerable households.^¹³ Savings from such reforms would accrue over the medium term, strengthening the case to start implementation in the near term.

36. The VAT reform is expected to boost productivity and improve equity of the tax system, and efforts are rightly directed toward ensuring its effective implementation. The reform tackles deep efficiency problems in Brazil’s indirect tax regime. It merges five taxes over three levels of government into a dual VAT and an excise tax (Box 4). By removing inefficiencies, notably the incomplete crediting of taxes paid on intermediate inputs, staff estimates that the reform will lift output by 6–11 percent, depending on assumptions about informality (which would dampen the output impact) and considering full implementation (Annex VIII). The reform would also foster formal job creation. The reform is expected to make consumption taxes less regressive through the introduction of a cashback system, a shift in the tax burden from goods to services, and lower statutory rates. To amplify equity gains, the cash back system could be expanded, and the planned exemptions and reduced rates limited, also generating fiscal savings. To ensure smooth implementation during the transition phase (2026–2033), governance and operational challenges would need to be addressed, including by integrating management of CBS-IBS; fully refunding excess credits on a timely basis; and harmonizing revenue administrations to leverage synergies across levels of government and enable the implementation of a single, risk-based compliance strategy.

37. The authorities’ goal of ensuring that the VAT reform is revenue neutral is welcome and requires efforts to mitigate downside revenue risks. Revenue losses could arise due to: (i) lower statutory rates^¹⁴ in sectors that currently face higher tax burdens than others (for example, manufacturing, communications, and IT); (ii) frictions in increasing statutory rates, for instance due special tax regimes in lower-taxed sectors (notably services); (iii) challenges in bringing the informal sector into the tax base; and (iv) the reduction in revenues currently raised from intermediate inputs absent a complete shift in the tax base from producers to consumers (Annex VIII). During the transition, a yearly correction mechanism to ensure revenue neutrality allows for some space to raise the reference rate for all three levels of government. Resources were committed by the federal government for the capitalization of five funds for compensating states for possible revenue losses given expected changes in revenue collection across regions (0.7 percent of GDP), the continuation of certain tax benefits that have already been granted by states (1.5 percent of GDP), and the recognition of accumulated legacy tax credits under the old system,^¹⁵ none of which are considered under staff’s baseline. With significantly better compliance due to simplification, stringent e-invoicing, and harmonized systems, the authorities expect the tax gap (the difference between actual and potential tax collection) to decline from the current estimated level of 22 percent for the federal PIS/COFINS taxes to around 10 percent. Remaining revenue gaps could be mitigated through temporarily limiting exemptions and reduced rates. Over the longer term, gains from stronger GDP would further mitigate risks of revenue losses.

Authorities’ Views

38. The authorities reaffirmed their commitment to improve Brazil’s fiscal position. They viewed the zero-deficit target for 2024, with the tolerance margin of 0.25 percent of GDP, as achievable on the back of strong revenue performance. Automatic spending freezes could be activated if needed to compensate for higher-than-expected expenses on social security, while emergency related spending for Rio Grande do Sul would be outside the spending ceiling of the fiscal rule, in line with the declaration of calamity. The authorities noted the recent Supreme Court ruling that reinforced the Fiscal Responsibility Law principle requiring that tax breaks and structural increases in spending be offset by structural measures, including in initiatives proposed by Congress. They saw the revised primary balance path for 2025–28 as sufficient for achieving a stabilization of public debt by 2028. They acknowledged that following the successful implementation of revenue measures, which recovered the tax base lost after the 2022 tax cuts, efforts on the spending side could increase the flexibility of spending to facilitate fiscal adjustment. Spending reviews would contribute to opening fiscal space while a revenue-neutral direct tax reform to improve equity could be considered in the coming years. They saw the VAT reform as on track, with the upcoming passage of necessary bylaws, for effective implementation from 2026 onwards. The authorities noted that the reform includes a mechanism to adjust the reference rate during the transition period to compensate for any risks to revenue neutrality from informality and service sectors.

^{Box 4.}

VAT Reform: Revamping Indirect Taxation

Brazil’s taxation of goods and services is highly complex. With five different taxes across three levels of government, rates can vary among the federal government, 26 states, and 5,568 municipalities, reflecting approximately 10 general tax rates and more than 300 differentiated rates and exemptions.

The complexity of the current system gives rise to widespread distortions. Compliance and litigation costs are among the largest worldwide, imposing a substantial burden on businesses. Cascading taxes due to overlapping bases and incomplete credits for intermediate inputs distort the allocation of factors of production in the economy. They also exacerbate differential treatment across sectors and firms, reflected, for instance, in a very high overall tax burden for the manufacturing sector compared with services and agriculture. Moreover, double taxation with overlaps in origin and destination principles for interstate transactions leads to geographic misallocations. Finally, opportunities for tax avoidance and evasion give rise to substantial legal uncertainty (also reflected in the large stocks of judicial claims), as well as significant compliance gaps translating into high statutory tax rates.

By gradually replacing the existing consumption taxes with a dual VAT by 2033, the reform would significantly reduce these distortions. The dual VAT will feature a federal component (CBS) and a subnational component (IBS), while a new excise (IS) would strictly focus on goods harmful to the environment and health. Implementation plans foresee phasing out federal taxes on goods and services by end-2027. Taxes of states and municipalities will gradually merge into the IBS from 2028 to 2033 with regional compensation funds staying in place for a transition period of 50 years. The tax regime for small enterprises (SIMPLES) will remain in place, but businesses can opt-in to VAT taxation benefiting from tax credits while maintaining their preferred rates, preparing for a gradual adjustment of SIMPLES terms and conditions over the longer horizon. One of the most important achievements of the reform is that both federal and subnational VAT components are applied on the same tax base anchored in the constitution since December 2023. After an initial freeze, states and municipalities would have some discretion in setting their IBS rate.

D. Fostering Stronger and More Inclusive Growth

Securing Stronger Growth

39. Brazil’s potential growth is estimated to have increased in recent years. Staff estimates suggest that potential growth declined significantly during the 2014–2016 downturn.^¹⁶ Since 2017, it has increased in the context of supply-side reforms, in contrast to the decline estimated for peer economies. The increase in Brazil’s potential growth since 2017 is estimated to have been driven by rising TFP, reflecting catch-up toward the technological frontier and increasing trade integration, with contributions from capital and labor accumulation remaining broadly constant. Firm-level analysis provides further evidence of an increase in worker productivity since the 2017 major labor reform (Annex IX). Moreover, the decline since 2017 in labor litigation cases and costs associated with the reform is expected to continue supporting productivity through lower litigation costs, particularly for labor- and trade-intensive firms, and lower barriers for firm growth.

40. Potential growth is expected to rise further over the medium and long term, reflecting structural factors:

VAT Reform. Assuming full implementation, the landmark reform could raise annual growth by 0.3–0.5 percentage points on average during the transition to the new steady state, depending on the role of informality (Annex VIII). The complete crediting of taxes currently paid on intermediate inputs is expected to boost investment by corporates, improve the economy’s resource allocation, particularly in the manufacturing sector, and increase formal sector activities. Removing additional distortions, including from complexities in the tax code, very high litigation costs, and interstate double taxation, could further lift potential growth. However, legal uncertainty is likely to remain in the early phases of the reform, possibly offsetting some of the positive effects in the near term.
Hydrocarbon Production. Oil and gas output is expected to significantly increase in the coming years. Estimates by Rystad Energy are for a 56 percent rise in oil output between 2023 and 2031, making Brazil the world’s fourth largest oil producer (after the United States, Saudi Arabia, and Russia). Staff estimates that this expansion could contribute 0.2 percentage points to annual GDP growth during 2024–2031. Oil output is projected to decline thereafter, although the extended forecast is inherently uncertain.

41. Continuing reforms to close structural gaps could yield significant additional gains compared to the baseline. Staff analysis suggests that closing gaps with LA5 peer economies in areas of major “first-generation” reforms related to the external sector, business regulation, and governance could increase annual growth in Brazil by about 0.3 percentage point per year for five years for each reform area, compared with the baseline projection. If implemented at the same time, this set of first-generation reforms could raise output in Brazil by an estimated 5 percent, implying an extra 1 percentage point in annual growth per year.^¹⁷ Such an increase would support the authorities’ debt reduction objectives through higher fiscal revenues and lower sovereign borrowing costs.

Advancing trade integration and simplifying business regulations would support a more competitive economy. Brazil’s trade policy regime has relatively high tariff and non-tariff barriers.^¹⁸ Continuing progress with regional and intra-regional integration plans, including by reducing tariff and non-tariff barriers and pursuing deep commitments in trade facilitation and regulatory cooperation, could support greater participation in global value chains and increase productivity. Accompanying such integration with labor-market policies (such as job search assistance and training, income support, and social insurance programs) would improve labor mobility and mitigate adjustment costs. Simplifying regulations, reducing the administrative burden on start-ups, and easing entry barriers would further support competition and economic activity.
Further strengthening the anti-corruption framework as well as efficiency and independence of the judiciary would enhance the business environment. Brazil has strengthened its anti-corruption framework, including for investigating and sanctioning foreign bribery, but challenges remain in implementing and enforcing the framework.^¹⁹ The authorities have also strengthened environmental governance. Publication of asset declarations of high-level public officials, criminalization of illicit enrichment, and strengthening the conflict-of-interest system would support these efforts.
Addressing AML/CFT gaps identified by the FATF/GAFILAT assessment would mitigate related financial sector vulnerabilities. Brazil has developed policies to tackle many of its higher money laundering (ML) risks and the BCB’s supervision has strengthened detection and prevention of ML. Closing the remaining gaps would require strengthening the Financial Intelligence Unit (COAF) capacity and integrating the Federal Revenue Office into the AML/CFT regime, broadening the availability of beneficial ownership and financial information, and reconsidering the extent of court order requirements for access. Building on the existing robust understanding of ML threats from economic crimes, continuous analysis of the financial aspects of economic crimes, with a focus on cross-border illicit financial outflows and the use of ML investigations, would support the authorities’ ongoing efforts to weaken organized criminal groups. Effective implementation of recently strengthened terrorist financing and targeted financial sanctions frameworks would reduce financial sector vulnerabilities.

42. Intensifying ongoing efforts to boost labor force participation and facilitate skill upgrading would mitigate the expected drag from population aging on potential growth. Brazil’s working-age population is estimated to have peaked in 2021 at 70 percent of the total population and is expected to decline by more than 1 percentage point by 2030, which would reduce output growth through a lower employment contribution. Though Brazil fares better than regional and EMDE peers, the gap between male and female labor force participation has not returned to its pre-pandemic low. Progress in narrowing gender gaps in labor force participation and wages and addressing the misallocation of women’s talents and abilities––including by increasing daycare services and by implementing pay transparency measures––would further enhance economic potential. Addressing bottlenecks to the adoption of digital technologies would further support worker productivity, including by amplifying their ability to harness the benefits of AI. Enhancing skill levels, including through increases in public education attainment, building on programs such as Pé-de-Meia, is also warranted. Ensuring that adjustments to minimum wages are commensurate with productivity growth will minimize tradeoffs between inequality and job creation.

43. The authorities envisage increasing public investment, while preserving debt sustainability, as part of the Growth Acceleration Plan. More public investment is warranted to improve infrastructure including roads, rail, and waterways. ^²⁰ Federal capital expenditure amounted to 0.7 percent of GDP in 2023. At the same time, increasing investment would require creating space through tackling spending rigidities, as outlined in staff’s recommended scenario. Meanwhile, incorporating well-prioritized investment plans in a medium-term budget framework and improving coordination across levels of government will support public investment efficiency and sustainability. Continued timely and comprehensive fiscal reporting on public-private partnerships (PPPs), state-owned enterprises (SOEs), and public bank lending will support the monitoring of fiscal risks. The new industrial policy, Nova Indústria Brasil, could help to fill the infrastructure gap. It outlines a shift in sectoral focus to innovation and sustainability in agriculture; health; infrastructure; decarbonization and energy transition; digitalization; and defense. It is important to ensure that trade and investment measures are targeted to specific objectives where clearly identifiable externalities or market failures are well established and other policy options are unavailable; be consistent with World Trade Organization obligations; and avoid favoring domestic producers over imports, including for preventing retaliatory responses by trading partners and further fragmentation of global supply chains.

44. The global energy transition offers opportunities for Brazil to raise sustainable growth. Brazil has an exceptionally clean energy mix, with renewables accounting for 90 percent of total electricity production and projected to rise further.^²¹ The recently approved energy transition acceleration program (Paten) will further promote the development of renewable fuels, including aviation biokerosene, biodiesel, and low-carbon hydrogen, and incentivize sustainable energy production parks through favorable negotiations on tax debts.^²² These initiatives could facilitate Brazil’s transition to a low-carbon economy, encourage foreign investment in sustainable projects such as hydrogen, and increase medium-term growth.

^{Box 5.}

Financing the Ecological Transformation Plan

Despite impressive progress, climate financing gaps remain sizable. The World Economic Forum estimates Brazil’s gap to finance the climate transition by 2030 at about R$1 trillion (nearly 10 percent of GDP, WEF 2023). Moreover, climate investments, such as in renewable energy and climate-proof infrastructure, require long-term funding. To help fill in this gap, innovative structural instruments are being developed, including the Sustainable Taxonomy and new carbon market framework. Securing financing is particularly challenging for emerging markets that face higher borrowing costs than many advanced economies. Moreover, hedging FX exposure is expensive and underdeveloped for longer-term projects.

The government’s new Eco Invest program aims to mobilize international climate financing. The program will offer four credit lines, which include: (i) a blended finance facility with longer-maturity credit; (ii) a long-term FX liquidity facility that provides contingent funding for projects with inflation-indexed revenues that face temporary cash flow shortfalls due to FX depreciation while servicing FX debt; (iii) an FX derivatives program that provides de-risking to local financing institutions that supply long-term FX hedging solutions to local investors; and (iv) financing for project structuring.

One goal of Eco Invest is to increase the supply of long-term FX hedging at more favorable conditions in cooperation with the Inter-America Development Bank (IDB). The FX derivatives line will focus on hedging operations between 10 and 25 years. Currently, liquidity in the FX derivative market for tenors beyond 10 years is relatively limited. The lack of liquidity at longer tenors in the FX derivatives market can pose barriers for attracting long-term investment in Brazil, as investors are unable to hedge their FX risks. The IDB will provide up to $3.4 billion (0.2 percent of GDP) for the acquisition of FX derivatives, taking advantage of its AAA rating that will allow the IDB to sign derivative contracts with international banks at preferential terms. The presence of an AAA counterparty in the long-term FX market will likely increase the number of international banks willing to price these derivatives despite the limited market depth. The BCB will act as an intermediary and pass through preferential terms to local banks, which will have to post collateral to the BCB depending on the valuation of the derivatives. In addition, local banks will assume any credit risks related to the transactions with end investors.

Mandatory and voluntary carbon markets could further help address the financing gap, with necessary safeguards in place. The proposed cap-and-trade system for larger emitters would take about five years to become operational and its potential market value could reach, by some estimates, about R$100 billion (nearly 1 percent of GDP) by 2030, generating around 0.3 percent of GDP of additional fiscal revenues annually. The more sectors (such as agriculture) and greenhouse gases are covered, the more cost-efficient the market and the larger the revenue potential will be. Complementing the mandatory market, voluntary carbon markets could generate additional market value. Securitizing or linking carbon credits to the above liquidity lines and other financing instruments is currently under consideration. Current flows are small but have the potential to grow significantly if accompanied by strong safeguards and robust rules and monitoring to ensure additionality and minimize reputational risks. The 2023 Forestry Law, for instance, allows companies with forestry concessions to generate carbon credits for forest preservation. Credits could be sold in Brazil’s voluntary carbon market while mandatory participation of local communities in proceeds ensures communities’ support and ownership. While offsetting carbon is not allowed by all major emission trading schemes, nor counted towards nationally determined contributions, domestically used credits, as in the case in Brazil, in particular if the focus is on emissions avoidance, could pave a way towards new, innovative forms of climate finance.

45. The authorities have made significant progress towards mobilizing financing for the Ecological Transformation Plan (Box 5). A second ESG bond issuance is scheduled for late 2024, with about 40 percent of funds earmarked for green projects. This step is complemented by a broad mixture of funding activities, such as an expansion of earmarked credit for low-carbon agriculture, and a redirection of tax-advantaged infrastructure bond issuance towards social and environmental infrastructure. The authorities are working closely with multilateral banks and international donors and secured a record financial contribution to the Amazon Fund in 2023. Private sector (and SOE) green bond issuances have been very active, with an important share of climate projects being privately financed, notably for renewable energy. The BCB’s sustainability agenda has further advanced, including preparations for a green liquidity line, which would be launched upon finalizing the Sustainable Taxonomy.

Ensuring Growth Reaches All

46. Inequality in Brazil has been on a gradual declining path but continues to be high. The share of income of the bottom 10 percent of the population has improved from 0.8 percent of total income in 1995 to 1.2 percent in 2022, while that of the bottom 20 percent of the population has improved from 2.4 percent to 3.6 percent over the same timeframe (World Bank World Development Indicators database). Based on Gini index estimates from the Brazilian Institute of Geography and Statistics (IBGE), there has been a modest decline in inequality from an index level of 0.54 in 2012 to 0.52 in 2022. Within Brazil, there is variation with the highest inequality in the Northeast region and the lowest in the South region.

47. Social transfer programs have contributed to reducing poverty, while requiring substantial fiscal spending. Social transfer programs have on average been targeted toward more vulnerable households. The share of households below the poverty and extreme poverty line reporting receiving social transfers (excluding unemployment insurance) is significantly greater than the share of recipients above the poverty line. Social transfer programs have also played a significant role in reducing poverty rates (Box 6), in particular during the COVID-19 pandemic. At the same time, pandemic-related social protection spending amounted to 4.4 percent of GDP during the pandemic (above the average in advanced economies—2 percent of GDP, and emerging market economies—2.2 percent of GDP).^²³ General government social assistance spending reached 5.5 percent of GDP in 2020, up from 1.3 percent of GDP before the pandemic (2016–2019 average), and was 2.5 percent of GDP in 2023 (Table 7).

^{Box 6.}

Social Vulnerabilities and Social Protection

Social transfers have been associated with lower poverty in Brazil. Before the pandemic (2012–19), the poverty (extreme poverty) rate measured based on income including social transfers was about 33 (6) percent, compared with a higher poverty (extreme poverty) rate based on income percent excluding social transfers of 35 (9) percent. During the pandemic, the authorities expanded social transfer programs, with a further associated drop in poverty rates. For 2020, poverty and extreme poverty rates were reduced by, respectively, about a fifth and a half, after accounting for transfers.

Informal workers and low-income households are among the most vulnerable to economic shocks. Very low-income households were hit the hardest by rising energy and food prices during the global supply shocks of 2020. Although inflation facing the most vulnerable households in 2023 eased in both absolute and relative terms, cumulative inflation across 2020–2023 was the highest for the poorest households. Staff analysis based on household survey data suggests that the poor, the less educated, and informal workers are also more likely to experience more labor income volatility, with a higher fraction of workers in those groups experiencing large labor income losses compared to other demographic groups.^1/ In addition, unemployment rates have been higher among female, younger, and less educated workers, implying differences in job prospects and labor market frictions among different demographic groups.

Young children face highest extreme poverty incidence among different age demographics in Brazil (Figure 1). Children under 15 have historically been the most vulnerable group, with almost 10 percent living in extreme poverty, compared to the population average of about 6 percent. In contrast, supported by pension benefits, extreme poverty among people aged 60 or older is much lower, standing at about 2.3 percent in 2022.

48. Increasing the effectiveness of social transfer programs and the progressivity of the tax system, building on ongoing initiatives, would help further reduce inequality and poverty, while supporting fiscal sustainability.^²⁴ The authorities’ continued monitoring of adherence to conditionality of social transfer programs and ensuring data quality of the single registry (Cadastro Único) remain essential for effective targeting. Steps to enhance efficiency and progressivity include increasing coordination across social protection programs and social transfers to avoid duplication of benefits in some households and deficiencies in others (such as child and youth benefits from Bolsa Família, Salário Família, and child-related income-tax deductions). Efforts to resume updating the Cadastro Único at regular intervals and address the backlog from the pandemic are welcome. Further improvements to cross-check data on enrollments and beneficiaries across programs could support the identification of overlaps and improve coverage. These initiatives could be complemented by reforms to make the PIT more efficient and progressive, including by eliminating regressive and inefficient tax expenditures.

Authorities’ Views

49. Highlighting the considerable progress made over the last year, the authorities expect their reform agenda to foster even stronger sustainable growth and inclusion. They concurred with staff on the need for policies to boost female labor force participation and highlighted that the law on equal pay passed in 2023 would contribute to narrowing gender wage gaps. They emphasized their continued commitment to investing in education, with initiatives to strengthen educational attainment such as the Pé-de-Meia program. They highlighted steps taken to address inequality and increase the effectiveness of the social programs, including the introduction of benefits for young children under the Bolsa Família program and ongoing efforts to ensure the accuracy of the Cadastro Único household registry. They confirmed their commitment to ensuring that the new industrial policy (Nova Indústria Brasil) be in line with WTO obligations. Regarding the AML/CFT framework, they emphasized that the Financial Intelligence Unit has extensive powers to effectively investigate suspicious transactions. On climate finance, they emphasized progress made in launching innovative liquidity and FX hedging lines, as well as in the establishment of a sustainable taxonomy that would ensure a common ground for investors and policymakers. They concurred with the need for adequate safeguards for carbon markets to ensure additionality and mitigate reputational risks and affirmed that the framework would contain such provisions.

Staff Appraisal

50. Growth is projected to moderate to 2.1 percent in 2024 before strengthening to 2.5 percent over the medium term. The moderation reflects a still restrictive monetary policy aimed at completing the convergence of inflation to target, a lower fiscal deficit, the flood calamity in Rio Grande do Sul, and a normalization of agricultural output from record levels. Inflation is expected to reach 3.7 percent by end-2024 and the 3 percent inflation target in the first half of 2026. Staff’s assessment suggests that the external position in 2023 was broadly in line with the level implied by medium-term fundamentals and desirable policies. Staff’s upward revision in its estimate of medium-term growth reflects supportive structural factors, such as the efficiency-enhancing VAT reform and an acceleration in hydrocarbon production.

51. The balance of risks to the growth outlook has improved but remains somewhat titled to the downside, while uncertainty remains. Upside risks to growth include stronger-than-expected household consumption, a faster implementation of reforms, and investment in green growth opportunities. Downside risks stem from the flood calamity and uncertainty over fiscal measures, which could reduce policy credibility and result in higher borrowing costs. On the external front, downside risks include commodity price volatility, a slower-than-expected decline in global core inflation, as well as an abrupt slowdown in major trading partners. A sound financial system, adequate FX reserves, low reliance on FX debt, large government cash buffers, and a flexible exchange rate continue to support Brazil’s resilience.

52. The careful pace of monetary easing has been appropriate and consistent with the inflation targeting framework. As disinflation proceeds, with inflation projected to remain within the target tolerance interval, maintaining flexibility on the pace and length of the easing cycle is prudent given resilient labor markets and expectations above target-levels. The BCB’s policy stance and clear commitment to the 3 percent target bode well for the further decline in inflation expectations, conditional on continued credibility of both fiscal and monetary policy frameworks. The flexible exchange rate regime and adequate FX reserves remain valuable shock buffers. FX intervention could be used to address episodes of higher risk premia when FX liquidity becomes shallow without substituting for adjustment of macroeconomic policies when needed. The longstanding tax on certain financial transactions (IOF-FX) gives rise to an MCP under the Fund’s new MCP policy, as well as to an exchange restriction. The authorities are not requesting an approval as the tax is being phased out and is expected to be eliminated in due course in line with the authorities’ already announced plan to reduce the rate to zero, consistent with staff advice.

53. The financial system remains resilient, systemic risks are contained, and banks are highly liquid and adequately capitalized. Risks from non-bank financial institutions are contained, and the BCB is taking welcome steps to strengthen their oversight. Credit risks related to micro and small enterprises warrant close monitoring. The authorities have taken welcome steps to address households’ debt burden and lower overall credit costs. Given the high cost of consumer loans, the authorities could consider applying a debt-service-to-income limit when necessary. Continued careful management of a bigger role for public banks is needed to mitigate any potential risks to the fiscal position, monetary policy transmission, and market efficiency.

54. The BCB remains at the forefront of financial innovation amid resource constraints. The financial innovation agenda has promoted financial inclusion, efficiency, and competition. The adoption of the instant payment system Pix continues to expand, making Brazil a global leader in transactions per capita. The BCB is also at the frontier of CBDCs with its flagship initiative Drex, while privacy and security challenges are being addressed. Building on past reforms on BCB autonomy, providing flexibility to cover operating expenses would allow the BCB to attract and retain the needed professional talent to continue contributing to and supervising technological innovations.

55. The authorities’ commitment to continue improving the fiscal position is welcome. The draft 2025 LDO reaffirmed the 2024 federal primary zero-deficit target and proposed a zero-deficit target for 2025, which is appropriate. The authorities envisage raising the primary balance further to a surplus of 1.0 percent of GDP by 2028. Based on more favorable macroeconomic assumptions than staff, notably on interest rates, the authorities estimate that public debt (authorities’ definition) would stabilize by 2028, followed by a gradual decline thereafter. The authorities’ intention to pursue a strategy entailing both expenditure and revenue measures is welcome.

56. Staff recommends a sustained and more ambitious fiscal effort that puts debt on a firmly downward path and opens space for priority investments. Staff’s assessment of general government gross debt sustainability finds risks of debt distress to be moderate under the baseline scenario, but the debt trajectory remains highly sensitive to shocks and the materialization of contingent liabilities. The overwhelmingly domestic investor base, low external debt, and large cash buffers by the public sector mitigate risks and provide room for medium-term fiscal consolidation to proceed gradually. Staff recommends a path that achieves the zero federal primary deficit target in 2025, followed by a gradual improvement to a primary surplus of 2.5 percent of GDP by 2030, putting debt on a firmly downward trend and opening space for priority investments. Building on the fiscal rule, an enhanced fiscal framework with a strong medium-term fiscal anchor would reinforce credibility and sustainability. Eliminating inefficient tax expenditures and broadening the tax base by closing loopholes would support the adjustment. Reforming the PIT, including the taxation of dividends, could generate additional revenues and increase progressivity. Reforms to control spending pressures and tackle budget rigidities remain a priority.

57. The implementation of VAT reform is expected to boost productivity, create formal jobs, and improve the equity of the tax system. By removing inefficiencies, notably the incomplete crediting of taxes on intermediate inputs, staff estimates that the reform could lift output by 6–11 percent during the transition, assuming full implementation. The authorities’ goal of revenue neutrality is welcome. If risks of revenue losses materialize, additional measures would be needed to secure fiscal sustainability.

58. Brazil’s potential growth is estimated to have increased in recent years and continuing reforms to close structural gaps and foster inclusion could yield significant additional gains. Advancing trade integration and simplifying business regulations would support a more competitive economy. Industrial policies should remain narrowly targeted to specific objectives where externalities or market failures prevent effective market solutions, avoid increasing barriers to trade and investment, and not favor domestic producers over imports. Further strengthening the anti-corruption framework as well as the efficiency and independence of the judiciary would enhance the business environment. Addressing AML/CFT gaps identified by the FATF/GAFILAT assessment would address related financial sector vulnerabilities. Intensifying ongoing efforts to boost labor force participation and facilitate skill upgrading would mitigate the expected drag from population aging on potential growth. Increasing public investment to expand the economy’s productive capacity is warranted, supported by efforts to create space by tackling spending rigidities. Further enhancing the effectiveness of social transfer programs and the progressivity of tax system would help advance the fight against poverty and inequality.

59. Implementation of the Ecological Transformation Plan is accelerating, with positive implications for sustainable growth. The authorities’ commitment to halt illegal deforestation by 2030; progress on establishing Brazil’s Sustainable Taxonomy; the new carbon market framework; and the issuance of the first Global ESG sustainable government bond are commendable. Given sizable climate financing gaps, progress in designing instruments to attract longer-term green financing is welcome. These initiatives are expected to facilitate the transition to a low-carbon economy, encourage investment in sustainable projects, and boost economic output.

60. Staff recommends that the next Article IV consultation for Brazil be held on the standard 12-month cycle.

^{Table 1.}

Brazil: Selected Economic Indicators 2022–29

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

^{^1/}Includes inpatient beds and complementary beds.

^{^2/}Computed by IBGE using World Bank’s threshold for upper-middle income countries (U$5.5/day).

^{^3/}Share of income of the top 10% divided by share of income of the bottom 40%.

^{^4/}Includes federal government, Central Bank, and the social security system (INSS). The 2023 primary balance excludes pandemic-related funds from PIS/PASEP, as per BCB definition.

^{^5/}Currency issued, required deposits held at the Central Bank plus other Central Bank liabilities to other depository corporations.

^{^6/}Currency outside depository corporations, transferable deposits, other deposits and securities other than shares.

^{^7/}Unemployment rate for 2022 and 2023 shows the average of March, June, September, and December.

^{Table 1.}

Brazil: Selected Economic Indicators 2022–29

I. Social and Demographic Indicators
Area (thousands of sq. km.)		8,510	Health
Agricultural land (percent of land area)		30.2		Physicians per 1000 people (2023)		2.6
				Hospital beds per 1000 people (2023) ^1/		2.4
Population (2023)				Access to safe water (2022)		88.0
	Total (millions)	216.3
	Annual rate of growth (percent)	0.7	Education (2023)
	Density (per sq. km.)	25.4		Adult illiteracy rate		5.4
	Unemployment rate (Q1, 2024)	7.9		Net enrollment rates, percent in:
					Primary education	99.4
Population characteristics (2022)					Secondary education	92.2
	Life expectancy at birth (years)	75.5
	Infant mortality (per thousand live births)	12.6	Poverty rate (in percent, 2022) ^2/			31.6
Income distribution (2022)			GDP, local currency (2023)			R$10,856 billion
Palma ratio ^3/		3.6	GDP, dollars (2023)			US$2,174 billion
Gini coefficient (post taxes and transfers)		51.8	GDP per capita (2023)			US$10,050
Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil.

II. Economic Indicators
				Proj.
		2022	2023	2024	2025	2026	2027	2028	2029
National accounts and prices		(Annual percentage change)
GDP at current prices		11.8	7.7	7.2	6.0	5.9	6.0	6.1	6.1
GDP at constant prices		3.0	2.9	2.1	2.4	2.4	2.4	2.5	2.5
	Consumption	3.7	2.8	2.0	2.2	2.1	2.1	2.3	2.3
	Investment (GFCF)	1.1	-3.0	0.8	0.9	1.3	1.4	1.6	1.7
Consumer prices (IPCA, average)		9.3	4.6	4.0	3.2	3.1	3.0	3.0	3.0
Consumer prices (IPCA, end of period)		5.8	4.6	3.7	3.2	3.0	3.0	3.0	3.0
GDP deflator		8.5	4.7	5.0	3.6	3.5	3.5	3.5	3.5
Gross domestic investment		(Percent of GDP)
	Private sector	14.3	12.4	12.2	11.9	11.7	11.6	11.5	11.4
	Public sector	3.7	3.7	3.7	3.8	3.8	3.8	3.8	3.8
Gross national saving
	Private sector	19.2	21.9	20.5	20.3	19.3	18.8	18.3	17.8
	Public sector	-3.6	-7.2	-6.4	-6.3	-5.5	-5.1	-4.6	-4.2
Public sector finances
Central government primary balance (national representation, incl. BCB) ^4/		0.5	-2.4	-0.6	-0.7	-0.4	0.1	0.6	1.0
General government NLB primary balance		1.3	-2.0	-0.7	-0.8	-0.4	0.1	0.6	1.0
General government NLB structural primary balance (in percent of potential GDP)		-0.7	-2.2	-1.5	-1.0	-0.5	0.1	0.6	1.0
General government NLB		-4.0	-7.6	-6.8	-6.8	-5.9	-5.5	-5.1	-4.7
Net public sector debt		56.1	60.9	61.4	65.9	68.3	70.0	71.1	71.8
General government gross debt, Authorities’ definition		71.7	74.4	77.1	80.5	82.1	83.4	84.0	84.3
General government gross debt		83.9	84.7	87.5	91.2	93.1	94.5	95.1	95.4
	Of which: Foreign currency linked	4.0	3.6	3.6	3.7	3.7	3.8	3.8	3.8
Money and credit		(Annual percentage change)
Base money ^5/		16.6	20.4	7.2	6.0	5.9	6.0	6.1	6.1
Broad money ^6/		10.6	15.5	7.3	5.9	6.0	6.0	6.1	6.1
Bank loans to the private sector		14.6	6.9	8.0	8.0	8.0	8.0	8.0	8.0
Balance of payments		(Billions of U.S. dollars, unless otherwise specified)
Trade balance		44.2	80.6	78.2	80.4	83.4	90.0	95.4	100.9
	Exports	340.3	344.4	345.6	350.4	357.1	369.3	380.1	391.7
	Imports	296.2	263.8	267.4	270.0	273.8	279.3	284.7	290.8
Current account		-48.3	-30.8	-40.0	-40.8	-42.9	-44.7	-45.5	-47.4
Capital account and financial account		47.0	29.7	40.0	40.8	42.9	44.7	45.5	47.4
	Foreign direct investment (net inflows)	41.3	36.0	37.2	38.7	40.3	41.8	43.4	45.1
Terms of trade (percentage change)		-7.1	2.4	-3.4	-2.0	-2.0	-1.0	-0.7	-0.8
Merchandise exports (in US$, annual percentage change)		19.8	1.2	0.3	1.4	1.9	3.4	2.9	3.0
Merchandise imports (in US$, annual percentage change)		19.6	-10.9	1.4	0.9	1.4	2.0	1.9	2.1
Total external debt (in percent of GDP)		34.9	33.7	32.6	32.3	31.0	29.7	28.6	27.5
Memorandum items:		(Percent, unless otherwise specified)
Output Gap		0.1	0.6	0.4	0.3	0.2	0.1	0.0	0.0
Current account (in percent of GDP)		-2.5	-1.4	-1.8	-1.7	-1.7	-1.7	-1.6	-1.6
Unemployment rate ^7/		9.3	8.0	7.6	7.4	7.4	7.4	7.5	7.5
Gross official reserves (in US$ billions)		325	355	355	355	355	355	355	355
REER (annual average in percent; appreciation +)		12.1	4.6	...	...	...	...	...	...

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

^{^1/}Includes inpatient beds and complementary beds.

^{^2/}Computed by IBGE using World Bank’s threshold for upper-middle income countries (U$5.5/day).

^{^3/}Share of income of the top 10% divided by share of income of the bottom 40%.

^{^4/}Includes federal government, Central Bank, and the social security system (INSS). The 2023 primary balance excludes pandemic-related funds from PIS/PASEP, as per BCB definition.

^{^5/}Currency issued, required deposits held at the Central Bank plus other Central Bank liabilities to other depository corporations.

^{^6/}Currency outside depository corporations, transferable deposits, other deposits and securities other than shares.

^{^7/}Unemployment rate for 2022 and 2023 shows the average of March, June, September, and December.

^{Table 1.}

Brazil: Selected Economic Indicators 2022–29

I. Social and Demographic Indicators
Area (thousands of sq. km.)		8,510	Health
Agricultural land (percent of land area)		30.2		Physicians per 1000 people (2023)		2.6
				Hospital beds per 1000 people (2023) ^1/		2.4
Population (2023)				Access to safe water (2022)		88.0
	Total (millions)	216.3
	Annual rate of growth (percent)	0.7	Education (2023)
	Density (per sq. km.)	25.4		Adult illiteracy rate		5.4
	Unemployment rate (Q1, 2024)	7.9		Net enrollment rates, percent in:
					Primary education	99.4
Population characteristics (2022)					Secondary education	92.2
	Life expectancy at birth (years)	75.5
	Infant mortality (per thousand live births)	12.6	Poverty rate (in percent, 2022) ^2/			31.6
Income distribution (2022)			GDP, local currency (2023)			R$10,856 billion
Palma ratio ^3/		3.6	GDP, dollars (2023)			US$2,174 billion
Gini coefficient (post taxes and transfers)		51.8	GDP per capita (2023)			US$10,050
Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil.

II. Economic Indicators
				Proj.
		2022	2023	2024	2025	2026	2027	2028	2029
National accounts and prices		(Annual percentage change)
GDP at current prices		11.8	7.7	7.2	6.0	5.9	6.0	6.1	6.1
GDP at constant prices		3.0	2.9	2.1	2.4	2.4	2.4	2.5	2.5
	Consumption	3.7	2.8	2.0	2.2	2.1	2.1	2.3	2.3
	Investment (GFCF)	1.1	-3.0	0.8	0.9	1.3	1.4	1.6	1.7
Consumer prices (IPCA, average)		9.3	4.6	4.0	3.2	3.1	3.0	3.0	3.0
Consumer prices (IPCA, end of period)		5.8	4.6	3.7	3.2	3.0	3.0	3.0	3.0
GDP deflator		8.5	4.7	5.0	3.6	3.5	3.5	3.5	3.5
Gross domestic investment		(Percent of GDP)
	Private sector	14.3	12.4	12.2	11.9	11.7	11.6	11.5	11.4
	Public sector	3.7	3.7	3.7	3.8	3.8	3.8	3.8	3.8
Gross national saving
	Private sector	19.2	21.9	20.5	20.3	19.3	18.8	18.3	17.8
	Public sector	-3.6	-7.2	-6.4	-6.3	-5.5	-5.1	-4.6	-4.2
Public sector finances
Central government primary balance (national representation, incl. BCB) ^4/		0.5	-2.4	-0.6	-0.7	-0.4	0.1	0.6	1.0
General government NLB primary balance		1.3	-2.0	-0.7	-0.8	-0.4	0.1	0.6	1.0
General government NLB structural primary balance (in percent of potential GDP)		-0.7	-2.2	-1.5	-1.0	-0.5	0.1	0.6	1.0
General government NLB		-4.0	-7.6	-6.8	-6.8	-5.9	-5.5	-5.1	-4.7
Net public sector debt		56.1	60.9	61.4	65.9	68.3	70.0	71.1	71.8
General government gross debt, Authorities’ definition		71.7	74.4	77.1	80.5	82.1	83.4	84.0	84.3
General government gross debt		83.9	84.7	87.5	91.2	93.1	94.5	95.1	95.4
	Of which: Foreign currency linked	4.0	3.6	3.6	3.7	3.7	3.8	3.8	3.8
Money and credit		(Annual percentage change)
Base money ^5/		16.6	20.4	7.2	6.0	5.9	6.0	6.1	6.1
Broad money ^6/		10.6	15.5	7.3	5.9	6.0	6.0	6.1	6.1
Bank loans to the private sector		14.6	6.9	8.0	8.0	8.0	8.0	8.0	8.0
Balance of payments		(Billions of U.S. dollars, unless otherwise specified)
Trade balance		44.2	80.6	78.2	80.4	83.4	90.0	95.4	100.9
	Exports	340.3	344.4	345.6	350.4	357.1	369.3	380.1	391.7
	Imports	296.2	263.8	267.4	270.0	273.8	279.3	284.7	290.8
Current account		-48.3	-30.8	-40.0	-40.8	-42.9	-44.7	-45.5	-47.4
Capital account and financial account		47.0	29.7	40.0	40.8	42.9	44.7	45.5	47.4
	Foreign direct investment (net inflows)	41.3	36.0	37.2	38.7	40.3	41.8	43.4	45.1
Terms of trade (percentage change)		-7.1	2.4	-3.4	-2.0	-2.0	-1.0	-0.7	-0.8
Merchandise exports (in US$, annual percentage change)		19.8	1.2	0.3	1.4	1.9	3.4	2.9	3.0
Merchandise imports (in US$, annual percentage change)		19.6	-10.9	1.4	0.9	1.4	2.0	1.9	2.1
Total external debt (in percent of GDP)		34.9	33.7	32.6	32.3	31.0	29.7	28.6	27.5
Memorandum items:		(Percent, unless otherwise specified)
Output Gap		0.1	0.6	0.4	0.3	0.2	0.1	0.0	0.0
Current account (in percent of GDP)		-2.5	-1.4	-1.8	-1.7	-1.7	-1.7	-1.6	-1.6
Unemployment rate ^7/		9.3	8.0	7.6	7.4	7.4	7.4	7.5	7.5
Gross official reserves (in US$ billions)		325	355	355	355	355	355	355	355
REER (annual average in percent; appreciation +)		12.1	4.6	...	...	...	...	...	...

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

^{^1/}Includes inpatient beds and complementary beds.

^{^2/}Computed by IBGE using World Bank’s threshold for upper-middle income countries (U$5.5/day).

^{^3/}Share of income of the top 10% divided by share of income of the bottom 40%.

^{^4/}Includes federal government, Central Bank, and the social security system (INSS). The 2023 primary balance excludes pandemic-related funds from PIS/PASEP, as per BCB definition.

^{^5/}Currency issued, required deposits held at the Central Bank plus other Central Bank liabilities to other depository corporations.

^{^6/}Currency outside depository corporations, transferable deposits, other deposits and securities other than shares.

^{^7/}Unemployment rate for 2022 and 2023 shows the average of March, June, September, and December.

^{Table 2.}

Brazil: Balance of Payments, 2022–29

(In billions of US 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, 2022–29

(In billions of US dollars, unless otherwise indicated)

							Proj.
					2022	2023	2024	2025	2026	2027	2028	20291
Current Account					-48.3	-30.8	-40.0	-40.8	-42.9	-44.7	-45.5	-47.4
	Trade balance				44.2	80.6	78.2	80.4	83.4	90.0	95.4	100.9
		Exports (fob)			340.3	344.4	345.6	350.4	357.1	369.3	380.1	391.7
		Imports (fob)			296.2	263.8	267.4	270.0	273.8	279.3	284.7	290.8
	Income, net				-52.8	-73.8	-78.0	-79.6	-83.0	-90.1	-94.6	-100.2
Capital and Financial Account					47.0	29.7	40.0	40.8	42.9	44.7	45.5	47.4
	Capital account				0.2	0.3	0.3	0.3	0.3	0.3	0.3	0.3
	Financial account ^1/				46.8	29.3	39.7	40.4	42.5	44.4	45.2	47.1
			Direct investment, net		41.3	36.0	37.2	38.7	40.3	41.8	43.4	45.1
				Assets	33.4	28.3	29.3	30.4	31.6	32.8	34.1	35.4
				Liabilities	74.6	64.2	66.5	69.1	71.9	74.6	77.5	80.4
			Portfolio investment, net		-2.9	7.3	-3.4	-3.3	-4.2	-4.9	-5.1	-5.0
			Financial Derivatives, net		2.0	8.0	0.8	1.3	2.7	3.1	3.3	2.3
			Other investment, net		-0.9	-0.6	5.0	3.7	3.8	4.4	3.6	4.8
			Change in Reserve Assets, net		7.3	-21.4	0.0	0.0	0.0	0.0	0.0	0.0
Errors and Omissions					1.2	1.2	0.0	0.0	0.0	0.0	0.0	0.0
Memorandum Items:
	Gross reserves (eop) ^1/
		In billions of U.S. dollars			324.7	355.0	355.0	355.0	355.0	355.0	355.0	355.0
	Current account (in percent of GDP)				-2.5	-1.4	-1.8	-1.7	-1.7	-1.7	-1.6	-1.6
	Trade balance (in percent of GDP)				2.3	3.7	3.4	3.4	3.3	3.3	3.4	3.4
		Merchandise exports (in percent of GDP)			17.4	15.8	15.2	14.8	14.2	13.7	13.4	13.0
		Merchandise imports (in percent of GDP)			15.2	12.1	11.8	11.4	10.9	10.4	10.0	9.7
	Export volume (yoy change, in percent)				6.1	9.5	2.6	3.5	4.0	4.3	3.2	3.2
	Import volume (yoy change, in percent)				0.4	1.0	0.6	1.3	1.8	2.3	1.9	1.9
	Export price index (yoy change, in percent)				13.7	-6.5	-1.8	-1.7	-1.6	-0.5	0.1	0.2
	Import price index (yoy change, in percent)				22.4	-8.8	1.6	0.4	0.4	0.5	0.8	1.1
	Terms of trade (yoy change, in percent)				-7.1	2.4	-3.4	-2.0	-2.0	-1.0	-0.7	-0.8
	Oil price (Brent blend; US$ per barrel)				96.4	80.6	81.3	76.4	72.9	70.4	68.6	67.4
	REER (annual average in percent; appreciation +)				12.1	4.6	...	...	...	...	...	...
	GDP in billions of U.S. dollars				1,952	2,174	2,272	2,365	2,520	2,689	2,840	3,005

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

^{^1/}Historical numbers include valuation changes.

^{Table 2.}

Brazil: Balance of Payments, 2022–29

(In billions of US dollars, unless otherwise indicated)

							Proj.
					2022	2023	2024	2025	2026	2027	2028	20291
Current Account					-48.3	-30.8	-40.0	-40.8	-42.9	-44.7	-45.5	-47.4
	Trade balance				44.2	80.6	78.2	80.4	83.4	90.0	95.4	100.9
		Exports (fob)			340.3	344.4	345.6	350.4	357.1	369.3	380.1	391.7
		Imports (fob)			296.2	263.8	267.4	270.0	273.8	279.3	284.7	290.8
	Income, net				-52.8	-73.8	-78.0	-79.6	-83.0	-90.1	-94.6	-100.2
Capital and Financial Account					47.0	29.7	40.0	40.8	42.9	44.7	45.5	47.4
	Capital account				0.2	0.3	0.3	0.3	0.3	0.3	0.3	0.3
	Financial account ^1/				46.8	29.3	39.7	40.4	42.5	44.4	45.2	47.1
			Direct investment, net		41.3	36.0	37.2	38.7	40.3	41.8	43.4	45.1
				Assets	33.4	28.3	29.3	30.4	31.6	32.8	34.1	35.4
				Liabilities	74.6	64.2	66.5	69.1	71.9	74.6	77.5	80.4
			Portfolio investment, net		-2.9	7.3	-3.4	-3.3	-4.2	-4.9	-5.1	-5.0
			Financial Derivatives, net		2.0	8.0	0.8	1.3	2.7	3.1	3.3	2.3
			Other investment, net		-0.9	-0.6	5.0	3.7	3.8	4.4	3.6	4.8
			Change in Reserve Assets, net		7.3	-21.4	0.0	0.0	0.0	0.0	0.0	0.0
Errors and Omissions					1.2	1.2	0.0	0.0	0.0	0.0	0.0	0.0
Memorandum Items:
	Gross reserves (eop) ^1/
		In billions of U.S. dollars			324.7	355.0	355.0	355.0	355.0	355.0	355.0	355.0
	Current account (in percent of GDP)				-2.5	-1.4	-1.8	-1.7	-1.7	-1.7	-1.6	-1.6
	Trade balance (in percent of GDP)				2.3	3.7	3.4	3.4	3.3	3.3	3.4	3.4
		Merchandise exports (in percent of GDP)			17.4	15.8	15.2	14.8	14.2	13.7	13.4	13.0
		Merchandise imports (in percent of GDP)			15.2	12.1	11.8	11.4	10.9	10.4	10.0	9.7
	Export volume (yoy change, in percent)				6.1	9.5	2.6	3.5	4.0	4.3	3.2	3.2
	Import volume (yoy change, in percent)				0.4	1.0	0.6	1.3	1.8	2.3	1.9	1.9
	Export price index (yoy change, in percent)				13.7	-6.5	-1.8	-1.7	-1.6	-0.5	0.1	0.2
	Import price index (yoy change, in percent)				22.4	-8.8	1.6	0.4	0.4	0.5	0.8	1.1
	Terms of trade (yoy change, in percent)				-7.1	2.4	-3.4	-2.0	-2.0	-1.0	-0.7	-0.8
	Oil price (Brent blend; US$ per barrel)				96.4	80.6	81.3	76.4	72.9	70.4	68.6	67.4
	REER (annual average in percent; appreciation +)				12.1	4.6	...	...	...	...	...	...
	GDP in billions of U.S. dollars				1,952	2,174	2,272	2,365	2,520	2,689	2,840	3,005

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

^{^1/}Historical numbers include valuation changes.

^{Table 3.}

Brazil: Main Fiscal Aggregates, Federal Government National Representation, 2022–29

(In percent of GDP, unless otherwise indicated)

Sources: Central Bank of Brazil; Ministry of Finance; Ministry of Planning; 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/}Unlike the authorities’ definition, gross general government debt comprises treasury bills at the central bank’s balance sheet not used under repurchase agreements.

^{Table 3.}

Brazil: Main Fiscal Aggregates, Federal Government National Representation, 2022–29

(In percent of GDP, unless otherwise indicated)

					Proj.
			2022	2023	2024	2025	2026	2027	2028	2029
Nonfinancial revenue			23.0	21.7	23.0	22.9	23.1	23.3	23.6	23.8
	Revenue administered by SRF		13.8	13.3	14.5	14.3	14.3	14.2	14.0	14.0
		PIT	2.9	3.0	3.2	3.2	3.2	3.2	3.2	3.1
		CIT	5.3	4.7	5.2	5.1	5.1	5.1	5.1	5.0
		Indirect taxes	4.7	4.6	5.0	5.1	5.1	5.0	4.9	4.9
		Trade taxes	0.6	0.5	0.6	0.6	0.6	0.6	0.6	0.6
		Other	0.3	0.4	0.4	0.3	0.3	0.3	0.3	0.3
	Social security contributions		5.3	5.5	5.6	5.6	5.6	5.6	5.6	5.6
	Other revenue		3.8	2.9	2.9	2.9	3.0	3.1	3.1	3.2
		Of which: royalties and dividends from resource extraction	1.9	1.3	1.3	1.4	1.5	1.6	1.7	1.8
	Unallocated measures		0.0	0.0	0.0	0.1	0.2	0.5	0.8	1.0
Total primary expenditure			22.5	23.8	23.6	23.6	23.6	23.2	23.0	22.8
	Current expenditures		22.0	23.0	22.9	22.9	22.9	22.6	22.3	22.2
		Personnel	3.4	3.4	3.2	3.2	3.2	3.1	3.0	3.0
		Pension benefits	7.9	8.3	8.1	8.1	8.1	8.1	8.1	8.1
		Transfer to subnational governments	4.5	4.2	4.5	4.5	4.5	4.5	4.4	4.4
		Other	6.2	7.2	7.1	7.0	7.0	6.8	6.7	6.6
	Capital expenditures		0.4	0.7	0.7	0.7	0.7	0.7	0.6	0.6
Fund surpluses and statistical discrepancy			0.1	-0.3	0.0	0.0	0.0	0.0	0.0	0.0
Primary balance			0.5	-2.4	-0.6	-0.7	-0.4	0.1	0.6	1.0
Overall balance			-4.5	-8.1	-6.3	-6.1	-5.4	-4.8	-4.4	-4.0
Memorandum items
Federal net interest expenditure			5.0	5.7	5.7	5.4	5.0	4.9	5.0	5.0
Public sector net debt ^1/			56.1	60.9	61.4	65.9	68.3	70.0	71.1	71.8
General government gross debt, Authorities’ definition			71.7	74.4	77.1	80.5	82.1	83.4	84.0	84.3
General government gross debt ^2/			83.9	84.7	87.5	91.2	93.1	94.5	95.1	95.4
Nominal GDP (billions of reais)			10,080	10,856	11,637	12,337	13,066	13,845	14,688	15,577

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

^{^2/}Unlike the authorities’ definition, gross general government debt comprises treasury bills at the central bank’s balance sheet not used under repurchase agreements.

^{Table 3.}

Brazil: Main Fiscal Aggregates, Federal Government National Representation, 2022–29

(In percent of GDP, unless otherwise indicated)

					Proj.
			2022	2023	2024	2025	2026	2027	2028	2029
Nonfinancial revenue			23.0	21.7	23.0	22.9	23.1	23.3	23.6	23.8
	Revenue administered by SRF		13.8	13.3	14.5	14.3	14.3	14.2	14.0	14.0
		PIT	2.9	3.0	3.2	3.2	3.2	3.2	3.2	3.1
		CIT	5.3	4.7	5.2	5.1	5.1	5.1	5.1	5.0
		Indirect taxes	4.7	4.6	5.0	5.1	5.1	5.0	4.9	4.9
		Trade taxes	0.6	0.5	0.6	0.6	0.6	0.6	0.6	0.6
		Other	0.3	0.4	0.4	0.3	0.3	0.3	0.3	0.3
	Social security contributions		5.3	5.5	5.6	5.6	5.6	5.6	5.6	5.6
	Other revenue		3.8	2.9	2.9	2.9	3.0	3.1	3.1	3.2
		Of which: royalties and dividends from resource extraction	1.9	1.3	1.3	1.4	1.5	1.6	1.7	1.8
	Unallocated measures		0.0	0.0	0.0	0.1	0.2	0.5	0.8	1.0
Total primary expenditure			22.5	23.8	23.6	23.6	23.6	23.2	23.0	22.8
	Current expenditures		22.0	23.0	22.9	22.9	22.9	22.6	22.3	22.2
		Personnel	3.4	3.4	3.2	3.2	3.2	3.1	3.0	3.0
		Pension benefits	7.9	8.3	8.1	8.1	8.1	8.1	8.1	8.1
		Transfer to subnational governments	4.5	4.2	4.5	4.5	4.5	4.5	4.4	4.4
		Other	6.2	7.2	7.1	7.0	7.0	6.8	6.7	6.6
	Capital expenditures		0.4	0.7	0.7	0.7	0.7	0.7	0.6	0.6
Fund surpluses and statistical discrepancy			0.1	-0.3	0.0	0.0	0.0	0.0	0.0	0.0
Primary balance			0.5	-2.4	-0.6	-0.7	-0.4	0.1	0.6	1.0
Overall balance			-4.5	-8.1	-6.3	-6.1	-5.4	-4.8	-4.4

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Economic Resilience amid Disinflation

Recent Developments

Outlook and Risks

Authorities’ Views

Policy Discussions

A. Guiding Inflation and Expectations Back to Target

Authorities’ Views

B. Safeguarding Financial Stability while Promoting Financial Inclusion and Innovation

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C. Securing Fiscal Sustainability and Revamping Taxation

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D. Fostering Stronger and More Inclusive Growth

Securing Stronger Growth

Ensuring Growth Reaches All

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