Fiscal and Monetary Policy of Brazil

In order to under­stand cur­rent mon­e­tary and fis­cal poli­cies of Brazil it is impor­tant to look at the dynam­ics of eco­nom­i­cal growth of the coun­try in past two decades. In the 1980 Brazil was endur­ing slow eco­nomic devel­op­ment com­pared to other devel­op­ing nations. This eco­nomic trend was attrib­uted to the large for­eign debt that was con­sid­ered to be piv­otal part of eco­nomic dif­fi­cul­ties of Brazil. How­ever, by early 1990 it was obvi­ous that this view was uni­lat­eral in the sense that it over­looked the pub­lic sec­tor of the coun­try   which in itself was heav­ily indebted to local and for­eign cred­i­tors.  At that time many econ­o­mists came to the unan­i­mous con­sen­sus that it was impor­tant to see how this par­tic­u­lar sec­tor was financed given the fact that it was almost bank­rupt. Since in 1982 the for­eign credit flow was elim­i­nated, and the cost of domes­tic cap­i­tal was extremely costly, the deficit was thought to be financed through infus­ing mon­e­tary sup­ply which in turn sky­rock­eted infla­tion rate to 4,000% (four thou­sand per­cent) at annual rate.  (1) The adop­tion of Fis­cal Sta­bi­liza­tion Pro­gram in 1998 pos­i­tively affected fis­cal posi­tion of Brazil push­ing down country’s debt-to-GDP ratio. (3) Gov­ern­men­tal spend­ing increased by 7% dur­ing this period of sta­bi­liza­tion (2) This resulted in the rel­a­tive sta­bil­ity of the coun­try until the global crises swayed the world in 2007 (2)

In 2009 Brazil is an emerging-market econ­omy that com­pared to other devel­op­ing coun­ties was affected less by global eco­nomic crises nonethe­less is deal­ing with the exter­nal and inter­nal dif­fi­cul­ties that neg­a­tively affect its econ­omy. In a con­text of cur­rent global crises Brazil is in a posi­tion of deal­ing with its rapidly dimin­ish­ing indus­trial pro­duc­tion, espe­cially in the motor sec­tor which is cap­i­tal inten­sive. The avail­abil­ity of the for­eign credit that was abun­dant before global eco­nomic dete­ri­o­ra­tion was dra­mat­i­cally reduced in 2008–2009 and the cost of domes­tic bor­row­ing went up.  (2) This period is also marked by the dwin­dled demand for Brazil­ian export that adds to pre­car­i­ous eco­nomic con­di­tions of the coun­try. (2)

Fis­cal Policy-Rules Based Fis­cal Management

To effec­tively deal with cur­rent con­di­tions Brazil is in a process of imple­ment­ing fis­cal pol­icy reforms that are indented to recon­sider its indi­rect tax sys­tem that is extremely com­plex. The  reform intends to lift up  tax bur­dens on the motor and con­struc­tion indus­tries as well as on finan­cial sec­tor that includes finan­cial trans­ac­tions. The goal of fis­cal reform is to extend from enter­prises to the labor taxes by elim­i­na­tion of Salário-Educação, a fed­eral levy on pay­rolls and indi­vid­u­als and decreas­ing the social secu­rity con­tri­bu­tions of labor force.(5) In addi­tion , The cur­rent fis­cal pol­icy reform dic­tates  the extended time period for unem­ploy­ment ben­e­fits, increased min­i­mum wage that will con­tribute to the higher spend­ing, social hous­ing pro­grams and cap­i­tal invest­ments in the devel­op­ment of the infra­struc­ture. Since his­tor­i­cally pub­lic debt was the sin­gle most cen­tral point of macro­eco­nomic dilemma in Brazil, the new fis­cal reforms are note­wor­thy in a sense that they con­tributed to the lower pub­lic debt. (2) It is pro­jected that the sur­plus of the pri­mary sec­tor, or in another words debt, will decrease from cur­rent 4.6% to 2.3% as of 2009. In addi­tion, the newly cre­ated Sov­er­eign Wealth Fund (Fundo Sober­ano do Brasil) was estab­lished in 2009 to pro­tect the econ­omy. Brazil intends to sell trea­sury bonds to finance its fund with the ulti­mate goal of facil­i­tat­ing local firms to extend abroad and engage in inter­na­tional trade. Also, it will facil­i­tate the invest­ment (4) Accord­ing to Paulo Bernardo, the Min­is­ter of Plan­ning and bud­get­ing of Brazil, the gov­ern­ment might be well able to increase spend­ing by accu­mu­lat­ing $8.6 bil­lion in its Sov­er­eign Wealth Fund within next year while avoid­ing the increase in its deficit all together. (4) In addi­tion, Sov­er­eign Wealth Fund might be able to finance the gap in tax losses. Tax breaks were granted this year and many firms choose to post­pone tax pay­ments aggres­sively exploit­ing the law of extend­ing tax pay­ments till next year.(4) As of begin­ning of 2009 Brazil is in posi­tion of los­ing 1. 9 % of tax rev­enue because of slow tax pay­ments, how­ever it claims that it is in a posi­tion of reim­burs­ing these losses using fund’s money in 2010(4)

Over­all, gov­ern­men­tal spend­ing increased from only 7% dur­ing the time of macro­eco­nomic sta­bi­liza­tion in 1994, to 32. 5 % of GDP in 2008.

Mon­e­tary Policy-Inflation Targeting

In order to acti­vate eco­nomic envi­ron­ment of Brazil, Cen­tral Bank of Brazil    reduced com­pul­sory deposit reserve, or in another words ‘’ require­ment for com­mer­cial banks to hold cash reserves equal the frac­tion of their deposits’’ to encour­age lending.

Also, the fed­eral gov­ern­ment granted loans of 4% of national GDP to BNDES (National Devel­op­ment Bank) and other banks that are owned by the gov­ern­ment. (2)  This rel­a­tively low per­cent rate allows these banks to engage into lend­ing as well (2). In addi­tion, the author­i­ties allow large finan­cial insti­tu­tions to pur­chase dis­tressed port­fo­lios of smaller banks that have been affected by unfa­vor­able credit envi­ron­ment. (2) The inter­est rates of real ax ante are at his­tor­i­cally low lev­els. (2)

Besides fed­eral loans and mon­e­tary eas­ing, Brazil is advised to let auto­matic sta­bi­liz­ers to take on its pur­pose with­out fur­ther gov­ern­men­tal inter­ven­tion that oth­er­wise might carry a neg­a­tive effect. (2)