ECONOMY-BRAZIL: Staying the Course, Without Renewing IMF Loan

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Mar 28 2005 (IPS) - Brazilian Finance Minister Antonio Palocci announced Monday that Brazil would not renew a standby loan with the International Monetary Fund, and would continue forward with the economic policy followed so far, which is based on fiscal austerity.

“The fundamentals of the economy are more favourable now” than at the January 2003 start of the administration of leftist President Luiz Inácio Lula da Silva, which is what made this decision possible, Palocci told a news briefing.

He added that “this is better for Brazil and better for the IMF.”

Besides last year’s 5.2 percent economic growth, the economy is less vulnerable to international turmoil today, said the minister, who pointed out that exports totalled more than 100 billion dollars in the past 12 months while the country’s current account actually posted a surplus once again.

Last year, Brazil’s trade surplus amounted to nearly 33.7 billion dollars while the foreign debt shrank by nearly 13.6 billion dollars, to 201.4 billion dollars in December, according to Central Bank figures.

At the same time, the country’s foreign reserves grew significantly in the past few months, with the Central Bank purchasing foreign exchange, whose abundance in the market triggered an overvaluation of the local currency, the real.

By February the total international reserves had already expanded to more than 59 billion dollars, with net reserves (excluding IMF loans) standing at 31.4 billion.

Brazil “has earned the right to walk on its own two feet” and does not need help in practising fiscal austerity, said President Lula, who underlined that the IMF was informed of the decision with “serenity”.

The announcement that the standby credit arrangement will not be renewed when it expires on Mar. 31 drew mixed reactions in Brazil.

While the opposition forces on both the left and the right say there will be no changes in economic policy, Luiz Marinho, the president of the Central Unico dos Trabalhadores (CUT) trade union confederation – which has close ties to Lula’s governing Workers Party – expressed the hope that there would be a shift, to bring economic policy more in line with Lula’s “historic commitments” to the country’s social movements.

According to Marinho, without the formal link with the IMF, an opportunity opens up for debate on how to sustain economic growth, promote more productive investment, generate jobs and increase wages, while leaving behind economic policies tied to combating inflation merely through increases in the interest rate.

But Palocci’s explanations as to why the six-and-a-half-year period during which Brazil resorted to IMF aid and oversight was coming to an end did not encourage expectations of a change in direction.

The government will continue its efforts to keep the primary budget surplus above 4.25 percent of GDP, which it did last year. What that means is that public spending and investment, excluding debt servicing payments, will remain at least 25 billion dollars lower than what is brought in through taxes.

These savings are to ensure the government’s capacity to meet its debt payments. And if the surplus is maintained in the long term, it would reduce the debt in terms of proportion of gross domestic product (GDP). Last December, Brazil’s foreign debt was equivalent to 51.8 percent of GDP, after several years in which that proportion reached nearly 60 percent.

But that indicator, which is important when it comes to determining the country risk rating, is likely to grow this year, due to the Central Bank’s increase in the basic interest rate from 16 percent in September to the current 19.25 percent, with a tendency towards a further rise due to the inflationary pressures generated by high international prices of oil, steel and farm commodities.

This year, the Central Bank increased the basic interest rate Many economists even project the possibility of a more stringent fiscal adjustment to curb inflation, for which the official target of 5.1 percent this year is seen as impossible to meet.

The Central Bank’s persistence in attempting to fulfil that goal makes a further increase in interest rates inevitable, which discourages productive investment, subsequently creating an obstacle to economic growth, say economic analysts.

Brazil sought assistance from the IMF in 1998, after the crisis sparked by Russia’s financial meltdown, which led to heavy capital flight from Brazil.

The loan agreement signed in November of that year made 41.5 billion dollars available to Brazil, while setting targets for inflation and the primary budget surplus.

With the January 1999 devaluation of the real, the strict fiscal austerity followed by the central, state and municipal governments, and a major rise in interest rates, the country successfully weathered the storm.

But turbulence reappeared in the months preceding the election of Lula in October 2002, caused by the financial market’s fears of a leftist PT government.

Lula’s pledges as a candidate to honour Brazil’s commitments and contracts and to maintain his predecessor’s economic policy intact failed to prevent capital flight, devaluation of the real and a rise in inflation.

As a result, the new government renewed the accord with the IMF, raised interest rates and the primary budget surplus, which led to economic stagnation in 2003, when GDP grew just 0.5 percent.

But last year’s strong economic performance made it possible for Brazil to refrain from drawing on the entire IMF loan available until now, and to decide not to renew it.