Press Release No. 01/38

The International Monetary Fund (IMF) today approved Brazil's request for a 15-month stand-by credit of SDR 12.14 billion (about US$15.58 billion) in support of the government's economic and financial program through December 2002. Of the stand-by credit, the equivalent of SDR 9.95 billion (about US$12.77 billion) would be made available under the Supplemental Reserve Facility (SRF)¹.

The approval of the credit opens the way for an immediate drawing of up to SDR 3.68 billion (about US$4.72 billion). A second drawing of up to SDR 358.6 million (about US$460.2 million), would be made available upon completion of the first review, scheduled for year-end 2001. The remainder of the credit would be made available in four tranches through 2002, following the completion of reviews and observance of relevant performance criteria. The current stand-by credit replaces a three-year stand-by arrangement approved in December 2, 1998 (see Press Release 98/59).

Following the Board discussion on Brazil, Ms. Anne Krueger, First Deputy Managing Director, and Acting Chair, said:

"Brazil made substantial progress under the three-year Stand-By Arrangement approved in December 1998, recovering from the crisis in 1998 by significantly strengthening its fiscal accounts and successfully managing the transition to a floating exchange rate regime. These policies allowed a rapid resumption of economic growth without generating price pressures. Despite these achievements, the uncertain international economic environment and a domestic energy crisis have put substantial pressure on financial variables, including the exchange rate and interest rates, and economic activity has slowed in recent months. The authorities have responded to these developments in a commendably proactive manner, with a program of further fiscal consolidation and structural reform, while tightening monetary policy to limit the pass-through of the more depreciated exchange rate to prices. Fiscal efforts under the program appropriately emphasize expenditure control to raise the primary surplus, while protecting spending on priority social areas and investment to resolve the energy shortage.

"Achieving the program's fiscal targets will ensure that the public debt dynamics remain under control, and will lead the ratio of debt to GDP to decline in the medium term. The authorities' structural reform agenda appropriately concentrates on the fiscal and financial sectors, seeking to further ensure the sustainability of the fiscal accounts and increase the efficiency of the financial system. The authorities' commitment to continue to allow the exchange rate to absorb some of the impact of economic shocks is welcome. At the same time, the authorities should continue to be vigilant in implementing monetary policy to ensure that inflation declines in line with expectations over the medium term. These policies, along with Fund support in the form of the new Stand-By Arrangement, will heighten the resilience of the Brazilian economy to shocks and promote continued, stable growth of output and employment," Ms. Krueger said.

ANNEX

Program Summary

Brazil performed strongly under the three-year stand-by arrangement approved in 1998 but has suffered recently from increased uncertainty in the international environment and to a domestic energy crisis. Since January, the real has depreciated by about one-fourth, and bond spreads have widened by some 200 points. The authorities have responded by adopting stronger measures, including the tightening of monetary and fiscal policy, and the adoption of a more proactive stance in the foreign exchange market. To complement these measures, the authorities also decided to request the replacement of the stand-by arrangement to expire in December 2001 with a new 15-month stand-by credit that will run until the end of the government's mandate.

The macro framework of the program is based on the assumption that the external environment will remain difficult in the coming months. Growth for 2001 is forecast at 2.2 percent, rebounding to 3.5 percent in 2002. The current account deficit is expected to rise to about US$26 billion in 2001 but still to be largely covered by foreign direct investment flows, and to narrow to US$24.5 billion in 2002.

Fiscal policy has been tightened further under the program in order to keep the debt dynamics under control and to put the debt to GDP ratio on a downward trend in the medium term. The targets for the primary surplus of the consolidated public sector have been raised to 3.35 percent of GDP in 2001, and to 3.5 percent of GDP in 2002, from the current targets of 3 percent in both years. The new targets will be achieved primarily through expenditure control, while protecting social spending and investments to address the energy crisis. As a result of the depreciation of the exchange rate and increases in interest rates, the debt-to-GDP ratio is projected to rise to 54 percent this year, but to stabilize in 2002 and to decline over the medium term.

Monetary policy will continue to be conducted under the inflation-targeting framework. Inflation through July has been higher than expected, and year-end annual inflation could exceed the upper boundary of 6 percent established by the authorities. Policies remain on track for meeting the end-2002 annual inflation target of 3.5 percent. The authorities remain committed to the floating exchange rate regime. To allow the Central Bank some scope for intervention to limit the spread of contagion, the program establishes a net international reserves floor of US$20 billion, or US$5 billion below the floor under the cancelled stand-by arrangement.

The structural reform agenda concentrates on the fiscal and financial sectors. Planned fiscal measures include reforms to the pension system for civil servants and to the system of indirect taxation. Financial sector reforms will seek to improve capital market supervision and to strengthen laws regarding bankruptcy and corporate governance.

Brazil is an original member of the IMF; its quota² is SDR 3.04 billion (about US$3.9 billion). Brazil's outstanding use of IMF credit currently totals SDR 2.96 billion (about US$3.8 billion).

Brazil: Selected Economic Indicators   1998 1999 2000 2001 (proj) 2002 (proj) Domestic Economy (in percent) Change in real GDP 0.2 0.8 4.5 2.2 3.5 Unemployment rate 7.6 7.6 7.1 6.7 ... Change in consumer prices (IPCA) (end period) 1.7 8.9 6.0 6.0 ...             External economy (in billions of U.S. dollars) Exports, f.o.b. 51.1 48.0 55.1 59.4 67.0 Imports, f.o.b. 57.7 49.3 55.8 59.9 65.0 Current account balance -33.4 -25.4 -24.6 -26.3 -24.5 Capital account balance 29.7 17.4 19.3 24.8 23.1 O/w Foreign direct investment 28.9 28.6 32.8 20.0 18.0 Gross official reserves 44.0 35.7 33.0 ... ...             Financial Variables (in percent of GDP) Public sector borrowing requirement 7.9 10.0 4.5 6.0 3.7 Public sector primary balance 0.0 3.2 3.5 3.4 3.5 Net public debt 43.4 49.4 49.3 54.2 53.8 Average overnight interest rate (in percent) 31.2 19.0 17.6 ... ...             Sources: Brazilian authorities and IMF staff estimates. 1 The SRF was introduced in 1997 to meet a need for a short-term financing on a large scale. Repayments are expected to be made within 1-1½ years but can be extended to 2-2½ years. 2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing , and its allocation of SDRs