News Brief No. 02/3

News Brief: IMF Completes First Review of Stand-by Arrangement with Brazil

January 23, 2002

The Executive Board of the International Monetary Fund (IMF) completed today the first review of Brazil's performance under the SDR 12.14 billion (about US$15.2 billion) stand-by arrangement approved on September 14, 2001 (see Press Release No. 01/38). So far Brazil has drawn SDR 3.7 billion (about US$4.6 billion) from the IMF under this arrangement. Completion of the review allows Brazil to draw, if needed, an additional amount of SDR 358.6 million (about US$448 million).

Following the Executive Board Meeting on Brazil, Horst Köhler Managing Director of the IMF and Chairman, said:

"The maintenance of strong macroeconomic policies and the support of the Fund have enabled Brazil to withstand a series of external and domestic shocks in 2001, including an energy shortage. Financial market variables have recovered significantly from the lows reached in the wake of the terrorist attacks of September 11. Although domestic demand growth slowed in 2001, external sector performance has been solid, due in part to the significant real depreciation of the real. Nevertheless, the external environment remains volatile, and Brazil has a large external financing requirement. The authorities will need to maintain the cautious and proactive policy stance that they have exhibited in recent years.

"Indications are that fiscal policy performed better than programmed last year, and the 2002 budget appropriately calls for the maintenance of a strong public sector primary surplus. The good fiscal track record and the strengthened institutional framework, particularly the Fiscal Responsibility Law, give confidence that the surplus target will be achieved. The share of public debt that is indexed to the exchange rate increased the sensitivity of fiscal indicators to exchange rate movements, and the authorities' commitment to seek to reduce the stock of these instruments as markets allow is therefore welcome.

"Given the one-off shocks experienced in 2001, the failure to achieve the end-year inflation target was almost inevitable, and the authorities stand ready to adjust policies to ensure that the target is met in 2002. Consensus expectations point toward a significant decline of inflation in 2002. The authorities have appropriately rebalanced the mix of monetary policy instruments, and have ended interventions in the spot foreign exchange market.

"While progress was achieved on the structural reform agenda in 2001, it will be important, in the limited time remaining in the congressional calendar, to sustain efforts to obtain approval of remaining legislation," Köhler said.