Press Release No. 05/64

Press Release: IMF Executive Board Completes Final Review Under Brazil's Stand-By Arrangement

March 22, 2005

The Executive Board of the International Monetary Fund (IMF) has completed the 10^th and final review of Brazil's performance under an SDR 27.4 billion (about US$41.75 billion) Stand-By Arrangement that was approved in September 2002 and later augmented and extended in December 2003 (see Press Releases No. 02/40 and No. 03/217).

Total drawings under the Stand-By Arrangement have amounted to SDR 17.2 billion (about US$26.23 billion). Completion of the 10^th review makes available an amount equivalent to SDR 910 million (about US$1.39 billion) in addition to the SDR 9.3 billion (about US$14.13 billion) that was previously made available under the arrangement but was not drawn. Brazil has not drawn under the arrangement since September 2003, and the authorities have indicated that they will not make any drawings before the arrangement expires on March 31, 2005.

Following the Executive Board's discussion of Brazil's economic performance, on March 21, 2005, Ms. Anne O. Krueger, First Deputy Managing Director and Acting Chair, said:

"Brazil's performance under the Stand-By Arrangement has continued to be strong, and all performance criteria for the tenth and final review have been met. The impressive track record of program implementation, together with the continued pursuit of sound macroeconomic policies and steady progress with structural reforms are clearly paying off. GDP growth reached 5.2 percent in 2004-the highest in ten years. Domestic demand rebounded during 2004, helped by the strengthening labor market and reforms to facilitate access to credit. With capacity utilization close to peak levels and rising business confidence, private investment has surged by around 11 percent over the past year. The recovery has also been aided by a very strong export performance, which has led to a record current account surplus of almost 2 percent of GDP.

"Monetary policy has continued to be appropriately cautious. In light of the supply-side shocks faced by Brazil over the past year, the reduction of inflation to within the target band in 2004 was a substantial achievement. The central bank's steady tightening of monetary policy in recent months has been prudent in the face of sticky inflation expectations and persistently high core inflation, and should ensure that inflation stays on a downward path, while keeping the recovery on course.

"Sustained high primary surpluses have allowed the government to steadily reduce its debt burden. Continued strong revenue performance and containment of nonpriority current spending in 2005 would provide room for further debt reduction and increased spending on high-quality infrastructure projects. The progress being made under the pilot project to strengthen mechanisms for selecting, implementing and monitoring public investment is encouraging.

"Brazil's vulnerabilities have continued to decline as a result of these strong policies. The structure of public debt has steadily improved, with the share of exchange-rate linked debt falling considerably. Brazil's banking system has strengthened substantially in recent years and the system coped well with the failure of a mid-sized bank in late 2004. Reflecting recent developments, financial market sentiment is very positive: sovereign spreads have fallen to record lows, the real has appreciated in recent months, and strong capital flows have allowed the central bank to rebuild international reserves. Moreover, the government has already funded about three quarters of its US$6 billion external issuance requirements for 2005.

"Looking forward, continued progress on the structural reform agenda will be key to further enhancing Brazil's growth potential and reducing poverty and inequality. Substantial structural advances in recent months include the enactment of bankruptcy, private partnership and judicial reform laws and a streamlining of foreign exchange regulations. The government's agenda for 2005 includes important tax reforms and further measures to strengthen the business environment. The current context provides a favorable opportunity to advance other priority reforms, including measures to further promote financial intermediation, increase budget flexibility, address remaining imbalances in the pensions system, and reduce labor market informality and administrative barriers to doing business," Ms. Krueger stated.

Brazil is an original member of the IMF; its quota is SDR 3.04 billion (about US$4.63 billion), and its outstanding use of IMF credit currently totals SDR 16.1 billion (about US$24.58 billion)