IMF Executive Board Concludes 2020 Article IV Consultation with Brazil
December 2, 2020
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Brazil.
COVID-19 has upended lives and livelihoods in Brazil, as it has in most countries around the world. Over 5.5 million Brazilians have been infected and more than 160 thousand have died from the disease. Economic activity contracted by 7 percent in the first half of 2020, the unemployment rate rose to 14.4 percent in September, and 11 million workers left the labor force. Households in the lowest income deciles were the most affected by the loss of labor income while women suffered a bigger decline in hours worked than men. Non-financial corporate profitability fell, and leverage surged amid reduced cash flows and high uncertainty. With the sharp contraction in domestic demand, inflation turned negative in April and May but gradually rose to 2.4 percent y-o-y in August, still below the lower band of the headline inflation target.
The government’s response to the crisis was swift and sizable. The authorities implemented emergency cash-transfer and employment-retention programs, increased health spending, provided financial support to subnational governments, and extended government-backed credit lines to small businesses. In all, fiscal and quasi-fiscal measures amounted to 18 percent of GDP, raising the primary deficit to about 12 percent of GDP in 2020 from 1 percent in 2019. The Central Bank cut the policy rate by 225 bps in quick succession to 2 percent and announced extensive liquidity and capital relief measures. The policy response averted a deeper economic downturn, stabilized financial markets, and cushioned income loss for the poorest. Retail and industrial activity returned to pre-COVID levels in the third quarter, but the services’ sector remains depressed, with a negative impact on employment.
The economy is projected to shrink by 5.8 percent in 2020, followed by a partial recovery to 2.8 percent in 2021. The lingering effects of the health crisis and the expected withdrawal of fiscal support will restrain consumption while investment will be hampered by idle capacity and high uncertainty. Inflation is expected to stay below target until 2023, given significant slack in the economy. The current account deficit is projected to narrow to -0.3 percent of GDP in 2020 from 2.8 percent of GDP in 2019 before gradually increasing over the medium-term as imports and profit distribution recover. With a sharp increase in the primary fiscal deficit, gross public debt is set to rise to 100 percent of GDP and remain high over the medium-term. The record low SELIC has helped reduce government borrowing costs but the local currency yield curve has steepened considerably, highlighting market concerns over fiscal risks. Overall, risks around the baseline are exceptionally large and multifaceted but high international reserves, a resilient banking system, and a low share of public FX debt are important mitigating factors.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They noted that good policies had positioned the Brazilian economy to take off in 2020, but the pandemic had a severe impact on the economy. Directors commended the authorities’ strong policy response, which averted a deeper economic downturn, stabilized financial markets, and cushioned the effects on the poor and vulnerable. They stressed that policies should focus on limiting the scarring effects of the pandemic, ensuring medium-term debt sustainability, and pressing ahead with reforms to foster a robust and inclusive recovery.
Directors welcomed the authorities’ commitment to preserve the constitutional spending ceiling as a fiscal anchor to support market confidence. At the same time, in the event that economic conditions turn out significantly worse than expected, most Directors emphasized that the authorities should be prepared to provide additional targeted support, and welcomed the authorities’ willingness to consider this possibility. A number of Directors also cautioned against an abrupt withdrawal of fiscal support.
Directors stressed that swiftly implementing structural fiscal reforms that lock in medium-term consolidation will be essential to mitigate the risk of undesirable debt dynamics. They recommended reducing mandatory spending and budget rigidities, strengthening the social safety net, reforming the subnational pension schemes and strengthening the subnational fiscal framework, and revamping the tax system.
Directors agreed that monetary policy should remain supportive next year amid the substantial withdrawal of fiscal stimulus, with some Directors noting the scope to loosen monetary policy further, including through forward guidance, if inflation and inflation expectations remain below target. Some Directors cautioned about potential tradeoffs from further interest rate cuts given the unprecedentedly low level of the policy interest rate. In this context, careful monitoring of the implications for financial stability and capital flows of further rate cuts is warranted. Directors noted that approval of formal central bank independence would further strengthen the integrity of the monetary framework. They emphasized that the flexible exchange rate and sizable foreign reserves remain important shock absorbers, and intervention in the FX market should remain limited to addressing excess volatility.
Directors noted that the Brazilian banking system remains resilient but cautioned that continued close surveillance is warranted. They encouraged using the flexibility of the regulatory framework to weather the impact of the pandemic without diluting prudential standards. Continued progress in implementing the 2018 FSAP recommendations will be important.
Directors urged the authorities to press ahead with structural reforms to raise potential growth and improve living standards. They highlighted reforms to make the Brazilian economy more competitive, open to business and trade, and attractive to investment. They welcomed progress with the agenda to lower financial intermediation costs and stressed the need to pass comprehensive tax reform, accelerate the pace of new concessions and privatizations, and finalize trade agreements. Directors also emphasized the importance of labor market reforms, as well as education and re-skilling, to facilitate job reallocation. Directors underscored that preventing legal and institutional setbacks to combating corruption and effectively implementing anti-money laundering is important, as are measures to ensure the integrity of public procurement. A number of Directors also highlighted the importance of policies for a green recovery.
It is expected that the next Article IV consultation with Brazil will be held on the standard 12-month cycle.
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Table 1. Brazil: Selected Economic Indicators |
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I. Social and Demographic Indicators |
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Area (thousands of sq. km) |
8,510 |
Health |
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Agricultural land (percent of land area) |
30.2 |
Physician per 1000 people (2018) |
2.2 |
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Population |
Hospital beds per 1000 people (2018) |
2.2 |
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Total (million) (est., 2019) |
210.1 |
Access to safe water (2018) |
83.6 |
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Annual rate of growth (percent, 2018) |
0.8 |
Education |
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Density (per sq. km.) (2019) |
25.3 |
Adult illiteracy rate (2019) |
6.6 |
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Unemployment rate (2019) |
11.9 |
Net enrollment rates, percent in: |
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Population characteristics (2018) |
Primary education (2019) |
98 |
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Life expectancy at birth (years) |
76 |
Secondary education (2019) |
85 |
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Infant mortality (per thousand live births) |
12 |
Poverty rate (in percent, 2018) 1/ |
25.3 |
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Income distribution (2017) |
GDP, local currency (2019) |
R$7,257 billion |
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Ratio between average income of top 10 |
12.4 |
GDP, dollars (2019) |
US$1,839 billion |
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percent of earners over bottom 40 percent |
GDP per capita (2019) |
US$8,751 |
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Gini coefficient (2018) |
53.9 |
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Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil. |
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II. Economic Indicators |
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Proj. |
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National accounts and prices |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
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GDP at current prices |
5.0 |
4.6 |
5.3 |
-2.6 |
6.3 |
6.5 |
6.3 |
6.2 |
6.2 |
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GDP at constant prices |
1.3 |
1.3 |
1.1 |
-5.8 |
2.8 |
2.3 |
2.2 |
2.2 |
2.2 |
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Consumption |
1.4 |
1.7 |
1.3 |
-5.6 |
2.7 |
1.5 |
1.5 |
1.6 |
1.4 |
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Investment |
2.4 |
3.1 |
3.6 |
-10.8 |
6.6 |
5.0 |
5.6 |
6.1 |
6.2 |
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Consumer prices (IPCA, end of period) |
2.9 |
3.7 |
4.3 |
2.0 |
2.9 |
3.2 |
3.3 |
3.3 |
3.3 |
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Gross domestic investment |
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Private sector |
12.3 |
12.7 |
13.1 |
12.7 |
12.9 |
13.1 |
13.5 |
14.0 |
14.5 |
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Public sector |
2.3 |
2.1 |
2.0 |
2.0 |
2.0 |
2.1 |
2.1 |
2.0 |
2.0 |
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Gross national savings |
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Private sector |
20.4 |
18.6 |
17.2 |
29.6 |
18.7 |
17.3 |
17.4 |
17.7 |
17.9 |
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Public sector |
-6.5 |
-6.0 |
-4.9 |
-15.2 |
-5.0 |
-3.9 |
-4.2 |
-4.6 |
-4.7 |
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Public sector finances |
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Central government primary balance 2/ |
-1.9 |
-1.7 |
-1.3 |
-11.3 |
-2.7 |
-1.7 |
-1.2 |
-0.7 |
-0.1 |
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Consolidated public sector |
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NFPS primary balance |
-1.8 |
-1.7 |
-1.0 |
-11.6 |
-2.7 |
-1.7 |
-1.2 |
-0.7 |
-0.1 |
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NFPS cyclically adjusted primary balance (in percent of potential GDP) |
-0.6 |
-0.7 |
0.0 |
-9.8 |
-1.8 |
-1.2 |
-1.0 |
-0.6 |
-0.1 |
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NFPS overall balance |
-7.9 |
-7.2 |
-6.0 |
-16.3 |
-6.1 |
-5.1 |
-5.4 |
-5.8 |
-5.8 |
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Net public sector debt |
51.4 |
53.6 |
55.7 |
66.8 |
71.3 |
74.4 |
77.0 |
79.4 |
81.3 |
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General Government gross debt, Authorities’ definition |
73.7 |
76.5 |
75.8 |
96.6 |
96.7 |
97.4 |
97.7 |
98.3 |
98.5 |
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NFPS gross debt |
83.7 |
87.1 |
89.5 |
101.1 |
99.3 |
100.3 |
100.9 |
101.8 |
102.3 |
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Of which: Foreign currency linked |
3.6 |
4.1 |
4.3 |
4.7 |
4.7 |
4.6 |
4.5 |
4.4 |
4.4 |
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Money and credit |
(Annual percentage change) |
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Base money 3/ |
9.6 |
1.6 |
3.3 |
9.9 |
6.3 |
6.5 |
6.3 |
6.2 |
6.2 |
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Broad money 4/ |
4.6 |
8.1 |
9.1 |
12.6 |
6.3 |
8.3 |
8.1 |
8.0 |
8.0 |
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Financial sector credit to the private sector |
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Bank loans to the private sector |
0.0 |
7.7 |
5.5 |
10.0 |
12.0 |
9.0 |
9.0 |
8.0 |
8.0 |
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Balance of payments |
(Billions of U.S. dollars, unless otherwise specified) |
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Trade balance |
64.0 |
53.0 |
40.5 |
51.9 |
53.3 |
56.7 |
57.9 |
57.7 |
58.9 |
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Exports |
218.1 |
239.5 |
225.8 |
210.3 |
229.1 |
236.5 |
240.2 |
249.6 |
260.5 |
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Imports |
154.1 |
186.5 |
185.3 |
158.3 |
175.8 |
179.7 |
182.3 |
191.9 |
201.7 |
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Imports of oil |
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Current account |
-15.0 |
-41.5 |
-50.9 |
-3.9 |
-18.1 |
-29.0 |
-40.2 |
-51.8 |
-61.1 |
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Capital account and financial account |
10.3 |
42.9 |
53.8 |
3.9 |
18.1 |
29.0 |
40.2 |
51.8 |
61.1 |
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Foreign direct investment (net inflows) |
47.5 |
76.1 |
50.7 |
66.2 |
44.2 |
51.6 |
57.8 |
63.3 |
69.0 |
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Terms of trade (percentage change) |
5.8 |
-2.2 |
0.6 |
4.5 |
0.9 |
-1.0 |
-0.9 |
-1.3 |
-1.2 |
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Merchandise exports (in US$, annual percentage change) |
18.3 |
9.8 |
-5.7 |
-6.9 |
9.0 |
3.2 |
1.6 |
3.9 |
4.4 |
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Merchandise imports (in US$, annual percentage change) |
10.3 |
21.0 |
-0.6 |
-14.6 |
11.0 |
2.2 |
1.4 |
5.2 |
5.1 |
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Total external debt (in percent of GDP) |
32.3 |
35.3 |
36.7 |
48.7 |
46.6 |
43.0 |
41.0 |
39.0 |
37.6 |
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Memorandum items: |
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Current account (in percent of GDP) |
-0.7 |
-2.2 |
-2.8 |
-0.3 |
-1.3 |
-1.9 |
-2.4 |
-2.9 |
-3.2 |
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Unemployment rate |
12.8 |
12.3 |
11.9 |
13.4 |
14.1 |
13.3 |
12.5 |
11.6 |
10.8 |
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Gross official reserves |
374 |
375 |
357 |
357 |
357 |
357 |
357 |
357 |
357 |
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REER (annual average in percent; appreciation +) |
8.5 |
-13.3 |
-1.2 |
... |
... |
... |
... |
... |
... |
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Sources: Central Bank of Brazil; Ministry of Finance; IBGE; IPEA; and Fund staff estimates. |
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1/ Computed by IBGE using the World Bank threshold for upper-middle income countries of U$5.5/day. This number is not comparable to the estimates provided by IPEA in previous years due to methodological differences. |
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2/ Includes the federal government, the central bank, and the social security system (INSS). Based on the 2017 draft budget, recent announcements by the authorities, and staff projections. |
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3/ Currency issued, required deposits held at the Central Bank plus other Central Bank liabilities to other depository corporations |
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4/ Currency outside depository corporations, transferable deposits, other deposits and securities other than shares |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
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