News Brief No. 99/77

News Brief: IMF Completes Brazil Review and Approves Next Credit Tranche

November 29, 1999

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review under the Stand-By credit for Brazil. As a result, Brazil will be able to draw up to the equivalent of SDR 3,419.01 million (about US$4,694 million) from the IMF.

In commenting on the Executive Board's discussion of the review, Stanley Fischer, First Deputy Managing Director, made the following statement:

"Executive Directors noted with satisfaction that developments in the Brazilian economy since the completion of the third review at the end of July 1999 had been mostly in line with expectations, and that Brazil had continued to make significant progress with macroeconomic adjustment and structural reform efforts. In particular, Directors welcomed the fiscal improvement to date in 1999. They also welcomed the fact that economic growth is now projected to be slightly positive in 1999 (compared with a decline of 1 percent projected in July) and unemployment has continued to decline gradually. Directors noted with satisfaction the fact that, despite the recession in the region and the large loss in Brazil's terms of trade, the external current account would show a significant improvement in 1999, and was expected to strengthen further in 2000. Directors expressed some concern, however, about the recent increase in inflation.

"Directors supported Brazil's economic policy framework for 2000, which aims at promoting a sustainable economic recovery and a decline of inflation in consumer prices to around 6 percent during the year. Directors welcomed, in particular, the authorities' commitment to increase further the primary surplus of the consolidated public sector to 3.25 percent of GDP, and the efforts in the budget for 2000 to broaden the tax base and rationalize expenditure choices, while safeguarding and improving the targeting of social expenditures. Noting some risks for the fiscal outlook for 2000, Directors welcomed the Brazilian authorities' commitment to keep fiscal developments under close review, and, if necessary, take timely measures to ensure compliance with the program targets.

"Directors noted with satisfaction the progress made so far in structural fiscal reforms, in particular the recent approval of the proposed reform of the social security system for private sector workers. They urged the authorities to continue and strengthen their reform efforts, especially as regards the revision of the energy pricing mechanism, the pension system for government employees, the reform of the tax system, and the approval of the fiscal responsibility law.

"Directors expressed their satisfaction with the operation of the inflation targeting framework during its initial period of implementation. They expressed the view that interest rate policy needs to remain cautious in the next few months, particularly in light of the significant uncertainties currently affecting the external environment, and the pickup in inflation in recent weeks. Looking ahead to 2000, Directors felt that in a more favorable external environment and with clear further progress in fiscal adjustment and structural reforms, there should be scope for a gradual further reduction in interest rates in the course of the year. Directors stressed, however, that the central bank needs to keep a flexible posture in its conduct of monetary policy, and give priority to ensuring the fulfillment of the inflation target. Directors welcomed the inclusion in the monetary framework of the program of consultation clauses with the IMF in the event of significant deviations of inflation from its target path. Directors also welcomed the authorities' intentions to reduce the stock of dollar-indexed debt over the course of 2000, and to limit their interventions to smoothing operations in the foreign exchange markets, relying rather on an active interest rate policy within the inflation targeting framework.

"Directors welcomed Brazil's acceptance on November 16, 1999 of the obligations under Article VIII, Sections 2, 3, and 4 of the Articles of Agreement, and the authorities' commitment to eliminate, as of February 1, 2000, the only remaining restriction on current payments subject to approval under this Article. Directors also noted with satisfaction Brazil's commitment to subscribe to the Special Data Dissemination Standard (SDDS) by the end of 2000," Fischer said.