ECONOMY-BRAZIL: Despite Grim Forecasts, GDP Grows 0.82 Percent

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Feb 9 2000 (IPS) - Brazil’s Gross Domestic Product (GDP) grew 0.82 percent last year, refuting projections of economic disaster issued after the January 1999 crash of the local currency, the real.

A four percent fall in GDP was predicted, as well as at least 15 percent inflation and an unemployment rate of 10 percent or higher. But the cost of living only rose nine percent, and unemployment averaged 7.6 percent for the year.

The recovery staged by the industrial sector in the last quarter, when it grew 2.55 percent over the July-September period, also contributed to the 0.82 percent rise in GDP, which even outstripped corrected projections issued in late 1999, which expected a 0.5 percent increase.

But it was agriculture that acted as the mainstay of the economy throughout the entire year by growing 8.99 percent, while services grew 1.07 percent and industry shrunk by 1.66 percent, according to figures released Tuesday by the Brazilian Institute of Geography and Statistics (IBGE), a government planning agency.

Last year was marked by the devaluation of the real. On Jan 13, the Central Bank, under pressure from the financial market and the increasing flight of capital, widened by nine percent the tight mini-band in which the real traded against the dollar.

The fallout of the Asian and Russian meltdowns of the two previous years hurt the Brazilian economy, which faced a growing current accounts deficit and a rapidly rising public sector debt.

But widening the exchange rate band failed to stem the bleeding of reserves, over 20 billion dollars of which had already been lost in just a few months, and a few days later the government allowed the real to float freely.

The new exchange policy dealt a death blow to the “Plan Real” economic stabilisation plan implemented in 1994, and led to a 44 percent depreciation of the real against the dollar in early March. After a period of fluctuations, the real held steady around the end of the year, having lost around 34 percent of its value.

The projections of a major recession and inflation were based on the experiences of the financial crises that hit Mexico in late 1994 and Asia in 1997.

But Brazil began to restore confidence in the middle of the year, drawing fresh capital and more than meeting the fiscal targets agreed with the International Monetary Fund (IMF), without suffering an unmanageable rise in inflation.

The primary fiscal surplus amounted to 32.8 billion reals (18.5 billion dollars) in November, 15 percent higher than the target agreed with the IMF.

In order to shore up the Central Bank’s reserves and ward off excessive devaluation of the real, in late 1998 the government of Fernando Henrique Cardoso and the IMF negotiated a 41 billion- dollar rescue package, which included contributions from wealthy countries, the World Bank and the Inter-American Development Bank.

Brazil thus became a containing wall against the international crisis that broke out in southeast Asia in 1997 and spread to Russia and the developing world.

The trade balance, however, posted a 1.199 billion dollar deficit in 1999 instead of the 10.8 billion dollar surplus forecast in the wake of the devaluation.

While the Cardoso administration and the IMF predict four percent growth this year, neither the market nor most economic analysts agree.

Roberto Olinto, the coordinator of GDP measurement in the IBGE, warned the projection was overly optimistic, and said it was not backed by present trends. In order to achieve over three percent growth, “extraordinary factors, such as a large rise in exports,” would be needed, he said.

The National Confederation of Industry also warned against excessive optimism, calling in its latest report for “rigour in the economic fundamentals, in order not to affect long-term stability and growth.”

The government also aims to limit inflation to six percent, give or take two points, and to achieve a five billion dollar trade surplus and a slight rise in the primary fiscal surplus.