home
***
CD-ROM
|
disk
|
FTP
|
other
***
search
/
CNN Newsroom: Global View
/
CNN Newsroom: Global View.iso
/
sam
/
braz
/
braz.ec3
< prev
next >
Wrap
Text File
|
1994-05-02
|
25KB
|
494 lines
<text>
<title>
Brazil: Economic Policy
</title>
<article>
<hdr>
Economic Policy and Trade Practices: Brazil
</hdr>
<body>
<p>1. General Policy Framework
</p>
<p> Brazil has a population of 155 million on a landmass which
constitutes 48 percent of South America.
</p>
<p> Upon assuming office in March 1990, President Collor
immediately announced his intention to implement sweeping
economic reforms designed to stop inflation and integrate Brazil
into the developed world economy. Although Collor's first two
economic programs have significantly reduced trade barriers, the
failure to reduce substantially Brazil's large fiscal deficit
has resulted in the continual resurgence of inflation and a lack
of confidence in the government's economic policy.
</p>
<p> With inflation running at a monthly rate near 25 percent in
October 1991 and accelerating, the government is hoping to
implement a tax reform program prior to the end of 1991 which
would substantially reduce the fiscal deficit, enable Brazil to
obtain an IMF program, reschedule its external debts owed to
commercial banks and Paris Club creditors, and regain
private-sector confidence in the ability of the government to
maintain a stable economic environment.
</p>
<p> Given Brazil's history and the current lack of support for
President Collor in the Congress, the domestic and external
financial markets are highly skeptical that the government will
be able to achieve all of these objectives and that structural
inflation can be reduced from the monthly double-digit range.
</p>
<p> Monetary Policy: Brazil has made many attempts during the
1980s to tighten monetary policy in an effort to reduce
inflation. However, these attempts were compromised by the
failure of the government to correct a large fiscal deficit,
forcing the Central Bank to soften its policies. In March 1990,
the Collor government introduced a stabilization program (Collor
I) which included price controls and the blocking of about two
thirds of the financial assets in the economy for a period of
18 months. These measures initially stopped inflation (then
approximately 90 percent per month) and substantially slowed
economic activity. Concerns about negative growth led the
government to prematurely release a large portion of the blocked
assets.
</p>
<p> By mid-1990 the monthly inflation rate was around 10 percent
and by the end of the year it was in the 20 percent range.
</p>
<p> On January 31, 1991 the Collor government introduced another
package of measures designed to reduce inflation (Collor II).
The package included wage and price controls. It also eliminated
the generalized "overnight" market, which was complicating
monetary policy, through the imposition of a graduated tax on
early withdrawals. The program initially brought monthly
inflation below 10 percent. However, the failure to reduce the
structural fiscal deficit, intermittent tightening and loosening
of monetary policy, the unfreezing of prices and wages by the
third quarter, and the unfreezing of remaining blocked accounts
resulted in monthly inflation rising above 20 percent by the
fourth quarter.
</p>
<p> Large fiscal deficits and uneven monetary policy are the
underlying factors causing inflation in Brazil. During the first
Collor plan, the government managed to reduce the operational
fiscal deficit from nearly 7 percent of GDP in 1989 to a surplus
of 1.3 percent of GDP. However, the bulk of the improvement was
made through a series of one-time measures that did not address
the structural deficit. Among such measures were the payment of
negative real interest rates on the blocked financial assets
and government securities, the payment of low real wages to
public-sector employees, and a one-time financial assets tax.
The operational deficit in 1991 is expected to be on the order
of 3 percent of GDP and is on a rising trend. The government has
presented a series of tax reform proposals designed to simplify
and increase revenues in an effort to improve its fiscal
position. This program passed the Congress at the end of 1991.
</p>
<p>2. Exchange Rate Policies
</p>
<p> Brazil has three exchange rates: a commercial rate, the
tourist rate and the underground, but officially tolerated,
parallel rate. Import-export transactions utilize the commercial
rate, while the tourist and parallel rates are generally for
individual transactions. During 1991 the Central Bank intervened
in the commercial market on a daily basis to allow the cruzeiro
to depreciate against the dollar in small, uneven increments.
The Central Bank also strived to maintain the spread between the
parallel and commercial rates at about 12 percent. Private
arbitrage generally keeps the tourist rate slightly below the
parallel rate. Increases in the spread between the parallel and
commercial rates had generally been seen as an indicator of
future expectations of inflation and depreciation of the
commercial rate, but the parallel rate is heavily influenced by
short-term speculative movements.
</p>
<p> During most of 1991, depreciation of the various rates was
not enough to offset increasing inflation; throughout most of
the year the Brazilian currency was viewed by many economists
to be at least 20 percent overvalued in relation to the the U.S.
dollar. However, in the last quarter of 1991, the commercial
rate was devalued by 15 percent in real terms, so that, as of
November, the exchange rate became more closely aligned with
international purchasing power parities. However, the spread
between the parallel and commercial rates has widened, reaching
a peak of 42 percent in late October, indicating future
volatility in the exchange markets.
</p>
<p>3. Structural Policies
</p>
<p> In August 1991 the government began to return the remaining
blocked financial assets, and, in the third quarter, reduced
price controls decreed under the two Collor plans. Although the
government has spoken of the possibility of selectively
reimposing some price controls, prices are now largely
determined by market demand.
</p>
<p> Tax policies were undergoing a major review at the time of
writing. The Collor Administration has proposed a four-tier
personal income tax that would raise the marginal rate to 35
percent and eliminate many exemptions. At the same time, other
bills in Congress could establish a unitary personal income tax
and a comprehensive value-added tax.
</p>
<p> While Brazilian tariffs remain relatively high, rates were
substantially reduced in March 1991, especially for machinery
and raw materials. The current trade-weighted average tariff
rate is approximately 32 percent, with a maximum rate of 85
percent, down from 105 percent in 1990. At present, only 600
items of traded goods enjoy bound Most-Favored-Nation status in
Brazil, about 5 percent of the total, compared to an average of
90 percent among GATT members.
</p>
<p>4. Debt Management Policies
</p>
<p> Brazil's external debt totalled about $120 billion at the end
of 1990. About half of this amount represents commercial bank
medium and long-term loans. In July 1989, Brazil stopped
servicing payments on medium and long-term debts owed to
commercial banks. By the end of 1990, interest arrears owed to
banks totalled nearly USD 9 billion. In January 1991, Brazil
resumed paying 30 percent of interest payments falling due to
banks. In April 1991 Brazil and its commercial bank creditors
agreed on a program that involved payment in cash of 25 percent
of the arrears outstanding as of December 1990 and the issuance
of 10-year bonds for the remainder.
</p>
<p> Brazil is currently negotiating with its creditor banks on
a Brady Plan package that would reschedule medium and long-term
debts and eliminate remaining arrears. Brazil also wants to
renegotiate its bilateral official debt under a Paris Club
accord. Both, however, are contingent on an agreement with the
IMF on a stabilization program which was approved in January
1992. A major condition for IMF approval was the passage by the
Brazilian