IMF Executive Board Concludes 2021 Article IV Consultation with Brazil

September 22, 2021

Washington, DC: On September 10, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Brazil.

Economic performance has been better than expected, in part due to the authorities’ forceful policy response. GDP regained its pre-pandemic level in 2021Q1 and momentum continues to be favorable, supported by booming terms of trade and robust private sector credit growth.

Tragically, the COVID-19 pandemic has claimed the lives of more than 550,000 Brazilians. Renewed lockdowns following a severe second COVID-19 wave early this year and the rollout of vaccination have helped bring down infections since April, with new daily COVID-19 cases and deaths falling significantly from their peaks. The government has procured sufficient doses to inoculate the adult population in 2021, with the most vulnerable population expected to be fully inoculated by the end of the year.

Real GDP is projected to grow by 5.3 percent in 2021. An improving labor market and high levels of household savings will support consumption and, as vaccinations continue, pent-up demand will return for in-person services. Depleted inventories will be rebuilt and the upswing in commodity prices will support new investment. Inflation is expected to fall steadily from recent peaks toward the mid-point of the target range by end-2022. After jumping to 99 percent of GDP in 2020, public debt is expected to drop sharply to 92 percent of GDP in 2021 and remain around that level over the medium-term. Uncertainty around the outlook is exceptionally high but risks to growth are viewed as being broadly balanced.

Key challenges remain. Currency depreciation and a surge in commodity prices have fed into headline inflation and inflation expectations even as the output gap remains negative. The labor market is lagging the recovery in output, and the unemployment rate is high, especially among youths, women, and afro-Brazilians. Emergency cash transfers will eventually expire and, in the absence of a permanent strengthening of the social safety net, poverty and inequality could become more acute. Near term fiscal risks are low, but the high level of public debt continues to pose medium-term risks . Restoring high and sustained growth, increasing employment, raising productivity, improving living standards, and reducing vulnerabilities will require policy efforts to eliminate bottlenecks and foster private sector-led investment.

Executive Board Assessment [2]

Executive Directors commended the Brazilian authorities for their decisive policy response to the COVID-19 shock, which significantly reduced the severity of the 2020 recession and cushioned its impact on the poor and vulnerable while setting the stage for a strong recovery in 2021. Directors welcomed the momentum of institutional reforms, despite the pandemic, to create the foundations for a more competitive economy. However, the pandemic has exacerbated long-standing challenges to higher growth and socio-economic inclusion. Further policy efforts are needed to bolster market confidence, foster private-sector-led investment, and strengthen the medium-term outlook.

Directors agreed that fiscal policy should focus on rebuilding buffers and reducing budget rigidities to create space for public investment and a stronger social safety net. The expenditure ceiling has played an important role in maintaining market confidence and continued adherence to the rule is necessary to reduce public debt. Comprehensive tax reform should aim to increase progressivity, simplify the system, and improve resource allocation. The tax reform should include a bold plan to scale back tax expenditures to frontload the benefits to equity and efficiency. Directors encouraged the authorities to adopt a more robust medium-term fiscal framework and strengthen subnational finances. These measures would help enhance fiscal credibility, reduce fiscal risks, and improve the capacity of the government to manage adverse shocks.

Directors supported the ongoing steady tightening of monetary policy to address rising inflation and keep inflation expectations well-anchored. Given the uncertainty around the outlook, policy would need to continue being data dependent, complemented with proactive communication and clear forward guidance. Directors welcomed the authorities’ commitment to a flexible exchange rate and to limit intervention to countering disorderly market conditions.

Directors noted that the banking system has been resilient and has supported the recovery. They agreed that a gradual phasing out of crisis-related financial support is appropriate and endorsed the authorities’ efforts to enhance financial inclusion and promote competition in the banking system.

Directors welcomed the ambitious supply-side reform agenda aimed at boosting productivity, potential growth, and living standards. Concerted action is needed to liberalize foreign trade and product markets, increase formal labor market flexibility, and improve governance. Strengthening the effectiveness and predictability of the anti-corruption and AML/CFT frameworks remains critical. Steps are also needed to further improve the environment for private sector investment.

Directors welcomed initiatives to foster environmentally sustainable activities in response to climate-related risks. Many Directors encouraged closer collaboration between the authorities and staff to analyze climate-related risks in macroeconomic assessments and evaluations of financial stability.


Table 1. Brazil: Selected Economic Indicators

I. Social and Demographic Indicators

Area (thousands of sq. km)

8,510

Health

Agricultural land (percent of land area)

30.2

Physician per 1000 people (2018)

2.2

Population

Hospital beds per 1000 people (2018)

2.2

Total (million) (est., 2019)

210.1

Access to safe water (2018)

83.6

Annual rate of growth (percent, 2018)

0.8

Education

Density (per sq. km.) (2019)

25.3

Adult illiteracy rate (2019)

6.6

Unemployment rate (2019)

11.9

Net enrollment rates, percent in:

Population characteristics (2018)

Primary education (2019)

98

Life expectancy at birth (years)

76

Secondary education (2019)

85

Infant mortality (per thousand live births)

12

Poverty rate (in percent, 2018) 1/

25.3

Income distribution (2017)

GDP, local currency (2020)

R$7,448 billion

Ratio between average income of top 10 percent of earners over bottom 40 percent

12.4

GDP, dollars (2020)

US$1,445 billion

GDP per capita (2020)

US$6,875

Gini coefficient (2018)

53.9

Main export products: airplanes, metallurgical products, soybeans, automobiles, electronic products, iron ore, coffee, and oil.

II. Economic Indicators

Proj.

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

(Percentage change)

National accounts and prices

GDP at current prices

5.0

6.4

5.8

0.6

15.0

7.8

6.1

6.4

6.2

6.1

GDP at constant prices

1.3

1.8

1.4

-4.1

5.3

1.9

2.0

2.1

2.1

2.1

Consumption

1.4

2.0

1.6

-5.3

3.5

1.6

1.5

1.5

1.5

1.4

Investment (GFCF)

-2.6

5.2

3.4

-0.8

11.8

4.1

5.0

5.2

4.0

4.0

Consumer prices (IPCA, end of period)

2.9

3.7

4.3

4.5

5.8

3.7

3.3

3.0

3.0

3.0

(Percent of GDP)

Gross domestic investment

Private sector

12.3

13.0

13.3

12.7

14.5

14.6

15.1

15.8

16.2

16.6

Public sector

2.3

2.1

2.1

2.7

2.0

2.3

2.3

2.2

2.2

2.2

Gross national savings

Private sector

20.1

18.6

17.2

26.6

22.1

21.5

20.6

20.1

19.7

19.6

Public sector

-6.5

-5.9

-4.7

-11.6

-5.2

-5.6

-5.0

-4.5

-4.0

-3.6

Public sector finances

Central government primary balance 2/

-1.9

-1.8

-1.3

-10.0

-1.9

-0.8

-0.3

0.2

0.7

1.2

NFPS primary balance

-1.8

-1.7

-0.9

-9.2

-1.7

-1.0

-0.3

0.2

0.7

1.2

NFPS cyclically adjusted primary balance (in percent of potential GDP)

-0.9

-1.1

-0.5

-7.7

-1.5

-0.9

-0.3

0.2

0.7

1.2

NFPS overall balance

-7.9

-7.1

-5.9

-13.4

-6.3

-6.9

-6.2

-5.7

-5.2

-4.8

Net public sector debt

51.4

52.8

54.6

62.7

63.9

66.4

69.4

71.8

72.6

74.6

General Government gross debt, Authorities’ definition

73.7

75.3

74.3

88.8

82.6

81.8

83.2

84.0

83.6

84.5

NFPS gross debt

83.6

85.6

87.7

98.9

91.6

90.9

91.7

92.0

92.1

92.0

Of which: Foreign currency linked

3.6

4.1

4.2

5.8

5.2

5.0

4.9

4.9

4.8

4.7

Money and credit

(Annual percentage change)

Base money 3/

9.6

1.6

3.3

8.0

15.0

7.8

6.1

6.4

6.2

6.1

Broad money 4/

4.6

8.1

8.6

18.6

13.9

10.1

8.1

7.9

8.0

7.8

Bank loans to the private sector

0.0

7.7

5.9

16.4

10.0

9.0

9.0

8.0

8.0

8.0

(Billions of U.S. dollars, unless otherwise specified)

Balance of payments

Trade balance

57.3

43.4

26.5

32.4

76.1

63.4

55.9

49.7

50.0

50.8

Exports

218.0

239.5

225.8

210.7

281.2

280.4

279.9

283.6

294.0

304.4

Imports

160.7

196.1

199.3

178.3

205.2

217.0

224.1

234.0

244.0

253.6

Current account

-22.0

-51.5

-65.0

-25.9

7.1

-19.1

-38.3

-54.1

-64.5

-74.2

Capital account and financial account

17.5

52.8

64.7

22.8

-7.1

19.1

38.3

54.1

64.5

74.2

Foreign direct investment (net inflows)

47.5

76.1

46.4

48.1

57.9

64.8

69.5

72.8

75.9

74.3

Terms of trade (percentage change)

15.6

-2.2

0.6

-7.0

15.1

-3.9

-1.6

-1.3

-1.1

-0.9

Merchandise exports (in US$, annual percentage change)

18.3

9.9

-5.7

-6.7

33.5

-0.3

-0.2

1.3

3.6

7.3

Merchandise imports (in US$, annual percentage change)

15.0

22.1

1.6

-10.5

15.0

5.8

3.2

4.4

4.3

8.4

Total external debt (in percent of GDP)

32.3

34.7

36.0

44.3

37.7

31.8

29.3

27.5

26.3

25.8

Memorandum items:

Output Gap

-2.9

-1.9

-1.3

-4.0

-0.7

-0.4

-0.2

0.0

0.0

0.0

Current account (in percent of GDP)

-1.1

-2.7

-3.5

-1.8

0.4

-1.0

-1.8

-2.3

-2.6

-2.8

Unemployment rate

12.7

12.3

11.9

13.5

13.7

12.9

11.7

10.9

10.2

9.8

Gross official reserves

374

375

357

356

353

353

353

353

353

353

REER (annual average in percent; appreciation +)

8.5

-10.4

-1.8

-20.6

...

...

...

...

...

...

Sources: Central Bank of Brazil; Ministry of Finance; IBGE; IPEA; and Fund staff estimates.

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.

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.

3/ Currency issued, required deposits held at the Central Bank plus other Central Bank liabilities to other depository corporations

4/ Currency outside depository corporations, transferable deposits, other deposits and securities other than shares


[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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