Press Release No. 24/268

IMF Executive Board Concludes 2024 Article IV Consultation with Brazil

July 11, 2024

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

Over the past two years, Brazil’s economy has shown remarkable resilience as inflation has declined to within the target tolerance interval. Real GDP growth in 2023, at 2.9 percent, was significantly higher than projected at the start of the year, on the back of record agricultural and hydrocarbon output, and resilient services. Consumption was strong, amid a tight labor market and a sizeable fiscal stimulus. Economic activity in early 2024 remained robust.

Growth is projected to moderate to 2.1 percent in 2024, reflecting still restrictive monetary policy, a lower fiscal deficit, the flood calamity in Rio Grande do Sul, and the normalization of agricultural output. Growth is projected to strengthen to 2.5 percent over the medium term, an upward revision of 0.5 percentage point since the 2023 Article IV Consultation, supported by efficiency gains from the VAT reform and growing hydrocarbon output. Investment in green growth opportunities could further lift economic potential. Headline inflation is expected to return to the 3 percent target in the first half of 2026.

The balance of risks to the growth outlook has improved since the 2023 Article IV Consultation but remains somewhat tilted to the downside, while uncertainty remains. Downside risks stem, on the external front, from possible monetary policy miscalibration in major economies, commodity price volatility, and global financial instability. On the domestic front, supply disruptions from the 2024 flood calamity could be more severe than expected. Uncertainty over fiscal measures could reduce policy credibility, resulting in higher borrowing costs and increased risks of inflation expectations de-anchoring. Upside risks stem from stronger-than-expected household consumption, faster-than-expected implementation of productivity-enhancing reforms, and investment in green growth opportunities. A sound financial system, adequate FX reserves, low reliance on FX debt, large government cash buffers, and a flexible exchange rate continue to support Brazil’s resilience.

Executive Board Assessment[2]

Executive Directors welcomed the Brazilian economy’s remarkable resilience during the disinflation process, as well as the expected convergence to stronger potential growth over the medium term. They also commended the authorities’ progress in advancing their ambitious agenda for sustainable and inclusive growth. Looking ahead, they encouraged the authorities to ensure the continued convergence of inflation to target, secure fiscal sustainability, and continue to pursue structural reforms to tackle long‑standing challenges.

Directors commended the authorities’ commitment to continue improving the fiscal position supported by expenditure and revenue measures. They welcomed the VAT reform, which is expected to boost productivity, create formal employment, and improve taxation equity. Many Directors recommended a sustained and more ambitious fiscal effort that puts public debt on a firmly downward path and opens space for priority investments. Broadening the tax base, rationalizing inefficient tax expenditures, tackling budget rigidities, and enhancing the efficiency of social transfer programs would support this effort. An enhanced fiscal framework with a strong medium‑term fiscal anchor would reinforce credibility and sustainability.

Directors welcomed the authorities’ decisive efforts to bring down inflation. They commended the careful pace of monetary policy easing, which is consistent with the inflation targeting framework, and stressed that maintaining flexibility on the pace and length of the easing cycle will remain important. They noted that the Central Bank of Brazil’s (BCB) policies and commitment to the 3‑percent inflation target bode well for the further decline in inflation expectations. The continued credibility of both fiscal and monetary policy frameworks will be important in this regard. Directors noted that the flexible exchange rate regime and adequate FX reserves remain valuable shock buffers. They positively noted the ongoing implementation of the plan to gradually reduce the financial transaction tax on certain foreign exchange transactions to zero, which would eliminate a multiple currency practice.

Directors concurred that the financial system remains resilient, systemic risks are contained, and banks are highly liquid and adequately capitalized. They welcomed steps to strengthen the oversight of non‑bank financial institutions, address households’ debt burden, and lower credit costs. Directors emphasized that careful management of a bigger role for public banks is warranted to mitigate potential risks to the fiscal position, monetary policy transmission, and market efficiency. They welcomed the authorities’ financial innovation agenda, which has promoted financial inclusion, efficiency, and competition. They concurred that providing the BCB with flexibility to cover operating expenses would support continued progress with technological innovations.

Directors welcomed the progress in implementing Brazil’s Ecological Transformation Plan. They commended the authorities on their commitment to halt illegal deforestation and welcomed the new carbon market framework and progress in designing instruments to attract longer‑term green financing, and more generally welcomed Brazil’s pioneering role in this area. These initiatives are expected to facilitate the transition to a low‑carbon economy, encourage investment in sustainable projects, and boost economic output. Directors also emphasized that continued efforts to advance trade integration, strengthen the anti‑corruption and AML/CFT frameworks, and facilitate skills upgrading would yield significant gains in potential growth. Directors welcomed Brazil’s leadership role during their G20 Presidency.