Press Release No. 23/154

IMF Staff Completes 2023 Article IV Visit to Brazil

May 16, 2023

• Growth is moderating but is expected to rebound next year and beyond. Growth is projected to moderate this year to 1.2 percent, from 2.9 percent in 2022. We then expect growth to improve to 1.4 percent in 2024 and 2 percent over the medium term.
• We strongly support the authorities’ commitment to improve Brazil’s fiscal position. Enhancing the fiscal framework, broadening the tax base, and tackling spending rigidities would support sustainability and credibility, while providing flexibility, including for new spending priorities.
• Bringing inflation down is critical to protect vulnerable households, who are hurt the most by high inflation. The monetary policy stance is consistent with reducing inflation to target, in line with the inflation targeting framework that has served Brazil well.
• The authorities are embarking on an ambitious agenda to steer a sustainable, inclusive, and green economy. Opportunities for greener growth are considerable, including for leveraging Brazil’s competitive advantage in renewable energies.

Washington, DC: An International Monetary Fund (IMF) team, led by Ana Corbacho, conducted discussions for the 2023 Article IV Consultation with the Brazilian authorities and consulted with other stakeholders during May 2-16, 2023. At the conclusion of the visit, Ms. Corbacho issued the following statement:

“Growth is moderating but is expected to rebound next year and over the medium term. Growth is projected to moderate this year to 1.2 percent, from 2.9 percent in 2022. We then expect growth to improve to 1.4 percent in 2024 and 2 percent over the medium term. Headline inflation has rapidly declined from last year’s peak, but core inflation remains elevated, while inflation expectations have edged up. Headline inflation is expected to converge to the target by mid-2025. The outlook is subject to downside risks. However, strong buffers, including a sound financial system, large cash buffers by the public sector, and adequate international reserves, support resilience.

“We strongly support the authorities’ commitment to improve Brazil’s fiscal position. Acknowledging the need to preserve debt sustainability, the authorities aim to achieve a primary fiscal surplus of 1 percent of GDP by 2026. Staff recommends a more ambitious fiscal effort that continues beyond 2026 to put debt on a firmly declining path, while protecting social and investment spending, supported by an enhanced fiscal framework, further broadening of the tax base, and reforms that tackle spending rigidities. The approval of the authorities’ indirect tax reform plan would significantly streamline the tax regime and could boost potential output.

“Bringing inflation down is critical to protect vulnerable households, who are hurt the most by high inflation. The monetary policy stance is consistent with reducing inflation to target, in line with the inflation targeting framework that has served Brazil well. To increase clarity around flexibility when shocks hit the economy and reduce uncertainty, consideration could be given to setting a fixed medium-term target in line with regional peers. In contrast, considering targets on an annual basis is a less efficient way to gain flexibility. Adequate FX reserves and the flexible exchange rate remain important shock buffers.

“The banking system is sound, the financial sector remains resilient and systemic risks are contained. Targeted policy measures and financial literacy initiatives to address pockets of household debt vulnerabilities and protect consumers are welcome. A bigger role for public banks should be managed carefully to mitigate risks for fiscal sustainability and monetary policy transmission.

“The Central Bank of Brazil is at the forefront of financial innovation. Notable initiatives include the highly successful instant payment system, Pix, launched in late 2020, and the Open Finance environment introduced in 2021.These initiatives have increased financial inclusion, efficiency, and competition. Plans for the Digital Real are expected to underpin a public blockchain infrastructure that fosters financial innovation within a regulated environment.

The authorities are embarking on an ambitious agenda to steer a sustainable, inclusive, and green economy. Opportunities for greener growth are considerable, including for leveraging Brazil’scompetitive advantage in renewable energies. We support the authorities’ plans to strengthen climate resilience, halt illegal deforestation, and decarbonize the economy.

“The team would like to thank the authorities and private sector representatives for their support, hospitality, and constructive dialogue.”