ECONOMY-BRAZIL: Intermediaries Take the Biggest Bite

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Oct 15 1999 (IPS) - The Central Bank has begun to combat the high interest rates consumers are burdened with in Brazil, where analysts say economic activity is hampered by the high costs charged by intermediaries.

“Nothing justifies an interest rate of 150 percent a year in personal credit,” said President Fernando Henrique Cardoso, announcing measures designed to slash interest rates in commerce and the financial system.

Interest rates paid by consumers exceed 240 percent in some cases, according to the National Association of Executives in Finances, Administration and Accounting (ANEFAC) – more than 10 times higher than the Central Bank’s basic rate of 19 percent.

On the initiative of Central Bank president Arminio Fraga, the government decided to tackle the high interests rates paid by consumers, after several years during which Cardoso has argued that interest rates are set by the market.

Economists blame the high interest rates on the government, which must channel enormous sums into financing its short-term debt, and which withholds 65 percent of at sight deposits in banks.

The financial market was disappointed at the announced measures, having hoped for a reduction of the bank reserve requirement to 55 percent. Without that reduction, any drop in interest rates will be small and short-term, say financial analysts.

The Central Bank’s main decision was to reduce the Tax on Financial Operations involving personal loans from six to 1.5 percent, the rate currently paid by businesses.

The Central Bank also eliminated the withholding of 10 percent of term deposits, thus releasing the equivalent of around five billion dollars, while it adopted mechanisms to combat bad debt, which accounts for a full one-third of all loans.

The aim is to eliminate the three-digit interest rates charged consumers, said Fraga, who ackowledged however that the government’s goal was modest, and a far cry from the ideal of lowering the interest rates to below 10 percent.

According to Central Bank calculations, banks obtain profits of 31 percent on the “special check,” a credit for balance due on clients’ accounts. “That is not reasonable,” said Fraga, who added however that only competition and transparency could correct the distortion.

He admitted that the high costs charged by middlemen hampered economic growth.

The same phenomenon is seen in other sectors as well. While a farmer earns three reals (1.55 dollars) per crate of tomatos, consumers pay 15 times that, pointed out economist Ladislau Dowbor, who recommended that the process of how prices are set in the production chain be investigated.

Research into prices has concentrated nearly exclusively on monitoring inflation, while neglecting to investigate where the majority of the “social surplus” ends up, said Dowbor.

Economist Joao Pedro Stédile, meanwhile, the leader of the Movimento dos Sem Terra (MST – Landless Movement) fighting for faster and more effective agrarian reform, said the problem arose from the domination of the market by large companies, especially transnational corporations.

One example is Italy’s Parmalat, which according to Stédile pays just 17 cents of a dollar per litre to the farms controlled by the MST, and sells it at 52 cents in supermarkets.

But in Italy, where the sale price is similar, the company pays dairy farmers 48 cents per litre – a difference that can only be explained by monopolistic practices, said Stédile.

Companies, meanwhile, argue that the difference is due to the high taxes they pay, added to the cost of transportation and inputs.

Such conditions mean the Brazilian economy’s financing rate is equivalent to 28.5 percent of the gross domestic product, compared to over 100 percent in industrialised nations.