The Executive
Board of the International Monetary Fund (IMF) has approved
an extension for 15 months and an augmentation by SDR 4.5 billion
(about US$ 6.6 billion) of Brazil's stand-by credit, originally
approved on September 6, 2002. The Board also approved the authorities'
request for a shift of repurchases expectations in the credit
tranches of an amount SDR 4 billion (about US$ 5.8 billion)
into an obligations basis in each 2005 and 2006.
The Board's
decision was taken simultaneously with the completion of the
fifth and last scheduled review of the original program, which
made SDR 5.6 billion (about US$ 8.2 billion) immediately available
to Brazil. However, in light of improvements in Brazil's balance
of payments, the authorities have indicated that they do not
intend to make further drawings.
Following
the Executive Board's discussion of Brazil on December 12, 2003,
Horst Köhler, Managing Director and Chairman of the Board,
stated:
"Brazil's
performance under the Stand-By Arrangement approved on September
6, 2002 remains exemplary. All performance criteria and structural
benchmarks associated with the fifth review were met.
"Supported
by the commitment of significant Fund resources, Brazil has
come a long way since last year's financial market volatility.
The response of the new administration to financial pressures
has been both ambitious and courageous, balancing fiscal and
monetary policy discipline with the resolute pursuit of key
social goals to relieve poverty and strengthen the social safety
net.
"To
allay concerns over debt sustainability, the government increased
the primary surplus target. The central bank responded proactively
to guide inflation back to the government's targets. Moreover,
early in its tenure, the administration took the difficult political
step of seeking approval of key structural measures—including
pension and tax reform—that will deepen the foundations
for sustainable and equitable growth of output and employment.
"The
successful implementation of these policies has resulted in a
rapid restoration of confidence, which is being clearly reflected
in the performance of financial market variables. Improved market
sentiment, in part reflected in those variables, is driving an
emerging recovery of economic activity, and demand growth should
continue to accelerate in the coming year. Ensuring that all members
of Brazilian society participate in the country's vast potential
will be the government's key challenge for the coming years.
"To
support the government's efforts to put Brazil firmly on a path
to sustained growth with improved equity, the Fund's Executive
Board has approved an extension and augmentation of the Stand-By
Arrangement. The Fund regards this step as an important component
of the government's strategy for a smooth exit from Fund financial
support.
"The
Fund will also assist Brazil in smoothing its schedule of external
commitments by shifting some Fund repurchases from an expectations
to an obligations basis in 2005 and 2006. The authorities' stated
intention to treat the arrangement as precautionary, given the
absence of a balance of payments need, is welcome.
"Prudent
monetary and fiscal policies will remain at the core of the Fund
arrangement. At the same time, the program also provides support
for essential spending to help achieve the government's social
objectives. The maintenance of a strong primary fiscal position,
along with continued further improvements in Brazil's debt structure,
will be key to ensuring medium-term sustainability and promoting
favorable investment decisions.
"The
program also features important structural measures that will
both support and sustain dynamic growth in Brazil in which the
private sector will continue to play the major role. These include
steps to reduce banking spreads, increase financial intermediation,
and improve the business environment, while also undertaking
the preparatory work towards increasing the flexibility of the
budget. These policies will help nurture the recovery now underway
in Brazil and sustain investment and economic growth into the
medium term," Mr. Köhler stated.
Recent
Economic Developments
Brazil's
monetary and fiscal policies have remained disciplined, actual
and expected inflation have declined steadily, and market forecasts
put end-2004 inflation solidly within the official target range.
In addition, the external adjustment remains impressive, with
record trade surpluses and the current account moving into surplus.
Both
the public and private sectors have regained access to international
capital markets, and country risk has dropped to levels not seen
since 1998. The real has appreciated by 30 percent in nominal
terms from its weakest point during the crisis, and, in real terms,
is now close to its January 2002 level. Important progress has
also been made in moving forward the government's structural reform
agenda, and this has been a key driver of market sentiment.
This strong
performance has laid the foundation for a resumption of growth.
Following disappointing performance earlier this year, there
are now clear signs that domestic demand has begun to recover.
Due to the slow start this year, output is unlikely to rise
by more than 0.6 percent, but growth is forecasted at 3.5 percent
in 2004, with consumption and investment both rising solidly.
Program
summary
Despite
the recent successes, Brazil remains vulnerable to negative
shifts in market sentiment. The authorities have therefore committed
to a policy program for 2004 that will continue making progress
in addressing core vulnerabilities, such as the large external
borrowing requirement, and relatively low net reserves, currently
at about US$17 billion.
The extension
for 15 months of the current Stand-By credit, and the shifting
of some repayments to the Fund, are also part of the authorities'
strategy to reduce vulnerabilities and to exit from Fund assistance.
The program
calls for a continued healthy public sector primary surplus
in 2004. The budget for 2004 is consistent with a primary surplus
target of 4.25 percent of GDP.
The authorities
plan to continue to build on recent progress in improving the
composition of the domestic debt, further reducing another important
vulnerability. Details of their public debt management plan
for 2004 are still being finalized , and will be published in
January.
The authorities'
overall goals will be identical to those in 2003: to further
reduce the share of debt that is indexed to the exchange rate
or is at floating rates, while increasing the share of fixed
rate and inflation-linked debt.
The central
bank's proactive conduct of monetary policy has ensured the
credibility of the inflation targeting regime over the past
year. As a result, the central bank has been able to ease policy
steadily over the last several months as inflation expectations
have continued converging to the government's targets.
The authorities'
structural reform agenda for 2004 is another element in the
effort to address vulnerabilities and stimulate growth. Key
priorities include increasing financial intermediation, reducing
bank lending spreads, and improving the business environment.
In addition, the authorities will work to implement the tax
and pension reforms currently before congress.
Significant
reforms are also under way to reduce bureaucratic barriers to
international trade.
Enhancements
to the regulatory framework are an important element of the
authorities' strategy to improve the environment for private
investment. They include a new regulatory model for the energy
sector and the removal of tax and regulatory inefficiencies,
including the conversion of the COFINS contribution to a value-added-type
basis, to reduce the distortions arising from its current cascading
format.
Following
the recent experience with streamlining export regulations,
the government will undertake a study to identify measures to
simplify, integrate, and reduce registration requirements for
businesses.
The authorities
are also continuing to introduce reforms to improve the delivery
of social services, which they see as central to their policy
platform. In addition to the creation of the Fome Zero
(Zero Hunger) program, the government has consolidated existing
social assistance under the umbrella Bolsa Família
(Family Stipend) program. The authorities believe that
improvements in infrastructure spending in this area have the
potential for large social returns.
Brazil
is an original member of the IMF; its quota is SDR 3.04 billion
(about US$ 4.4 billion). Brazil's outstanding use of IMF credit
currently totals SDR 23.19 billion (about US$ 33.86 billion).
