At the government level, President Fernando Henrique Cardoso (FHC)—considered Plano Real's mentor—celebrated while counting on the plan's achievements to take him to a victorious bid to a second-term mandate in next year's elections.

Nevertheless, some of the government's officials, including minister of finance Pedro Malan, were reluctant to join in the celebrations of Plano Real's third anniversary, expressing caution as to the future of the plan. Despite the general optimism of the population and of FHC's allies and adversaries alike, there is a consensus that Plano Real is about to enter a delicate phase, which will be decisive for its consolidation. With inflation in decline and at its lowest level in 40 years, the plan still has major challenges ahead, namely the reduction of the budget deficit and the continuity of stability with sustained growth.

Just to give an idea, the public sector debt is expected to reach 5% of gross domestic product (GDP) at year's end. Translated into numbers, those 5% represent approximately a $40 billion deficit incurred by the executive branch; the 27 states and 5.525 municipalities; the Social Security system and the public enterprises owned by federal, state and city governments. As there are limits to the extent for both borrowing and increasing revenue, administrative and fiscal reforms must take place in order to solve these problems. According to minister Malan, if only the Social Security reform had been approved in 1996 the country would have saved $1 billion this year.

The visible result of the debt is the deterioration of infrastructure as well as of vital public services, such as health, education and law enforcement. Recently, major Brazilian cities witnessed a bloody strike led by Polícia Militar (uniformed state-owned police force), whose demands for higher salaries could not be met by state governments—themselves on the verge of bankruptcy. The population, often overburdened by taxes hikes to make up for the public deficit, were left to fend for themselves against the resulting upsurge in crime.

However, the stalemate continues as the proposed constitutional reforms introduced to Congress two years ago have yet to be approved. And with election season about to begin, it is even more unlikely that they will be voted on before 1999 since expenditure reduction proposals are unrealistic in election times. No politician in his right frame of mind would risk his (or her) political ambitions by getting involved in controversial measures that might upset their electoral bases.

So far the receipts brought in by the ongoing privatization process have somehow helped the government compensate for the deficit, but Brazilian economists unanimously agree that, without the reforms and the consequent reduction of public spending, privatization is only a partial solution to the problem. If the government doesn't create mechanisms to avoid new debts , the sell-off of its patrimony will be only enough to pay interests, leaving the principal unchangeable.

Another point of concern is the trade deficit, expected to reach $12 billion this year according to the latest estimates. The balance of payments—which records the trade flows of imports and exports of goods, services and capital—registered a $2.1 billion deficit in the first six months of '97, while during the same period of 1996 it registered an $8.2 billion surplus. The latest figures reflect the increasing deficit in current transactions (the negative result from the sum of the services and trade balances) which reached $15.6 billion in the first six months of this year against $7.7 billion during the same period in 1996.

That means the inflow of foreign capital, albeit strong, was not enough to cover the deficit, forcing the government to use $2.147 billion from the country's reserves to finance its overseas transactions in the period. Analysts estimate that the current account deficit will reach $36 billion by the end of the year compared to $17 and $24 billion in 1995 and 1996 respectively.

On the other hand, Banco Central's (Central Bank) recent announcement that foreign reserves had reached $60.3 billion in July—an increase of $2.8 billion from June—shows that investors are confident that the trade balance will not cause a currency crisis in the short-term.

Looser monetary policies and a devaluation of the real (which some believe is 20% overvalued) have been suggested as a way to stop the balance of payments' increasing deficit. Proponents of such measures contend that, by modifying the current exchange rate policy, an increase in exports would follow as the price of Brazilian goods would again become attractive to overseas markets. Unfazed by the pressures, government officials have refused to adopt such alternatives, betting that Brazilian companies themselves will find solutions to become competitive by ways of modernization, productivity and cost reduction.

The deindexation of the economy, together with the exchange rate policy adopted by Plano Real's management team, are considered by far the most important measures that led to inflation reduction. Before the plan, the perverse indexation mechanism tied salaries and price indexes readjustments in such a vicious circle that inflation kept feeding itself until it reached a record high of 7000% in June of 1994. On top of the deindexation process and the adoption of a strong currency, the government also put in place high interest rates that slowed consumption, while removing tariff barriers to imports.

Although not heterodox like previous plans which imposed price freezes and confiscation of bank deposits, the measures adopted by Plano Real have also had a significant impact on Brazilian society: On the up side, it increased the low-income population buying power and reduced poverty. Statistics show that in 1996 25.1% of the population had been classified as poor compared to 33.4% in 1994, and 27.8% in 1995. On the down side, it put a strain on the middle class budget due to the combination of high prices of goods and services and lack of salary adjustments in the past three years.

However, price indexes have been showing a downward pattern. The Finance Ministry predicts an annual inflation of 5% in 1998, while economists are even more optimistic, predicting a 4% rate for next year.

With inflation under control, the question now is whether it's possible to maintain a long-term sustainable growth in investment, employment and productivity of the economy. According to studies conducted by the Applied Economics Research Institute (IPEA), an entity linked to the Ministry of Planning,, the answer is yes.

The Institute, usually very conservative in its estimates, has recently published a 424 page book titled O Brazil na Virada do Milênio (Brazil at the turn of the Millennium) in which it shows that in the year 2006 Brazil will have approximately 178.5 million inhabitants and a gross national product at $1.3 trillion. GDP growth should be 7% annually, unemployment rates will be very low and inflation should be at a rate of 4%. Furthermore, the expected increase in productivity and resulting growth of the economy should make for a 52% gain in wages in real terms.

IPEA stresses that economic projections are always subject to mistakes. However, if the necessary fine-tuning of Plano Real is done, and if the Brazilian economy is not affected by unexpected international crises, then the plan will have achieved its consolidation goal.

Despite the plunge of Brazilian stocks last July, the stock market has been by far the country's best investment in the past six years or so. In 1991 the Ibovespa (index used by financial specialists to measure the average yield of shares) was around 1200 points. In mid-August it reached 12500 points. During this 6-year period, the Ibovespa had gains of 930% in real terms compared to the 420% yielded by CDB's and the 123% profitability of savings accounts.

The upsurge in foreign investments, the privatization of state-owned companies and controlled inflation are credited for the spectacular stock market profits. In 1991, for instance, Telebrás (state-owned telecommunications giant) shares were valued at $6.6 per block of a thousand shares. Today they are trading at $116.
 

Marta Alvim is a Brazilian journalist, freelance translator and interpreter. You can reach her at mltdalvim@yahoo.com