MercoPress. South Atlantic News Agency

IMF after tax and pension reforms

The IMF had encouraging words for the current stringent budgetary policy of Brazil, but also warned that the maintenance of the needed surpluses would be facilitated by early action on proposed tax and pension reform. The remark was included in an official IMF release following the completion by the Executive Board of the second review of Brazil's performance under the US$31.4 billion Stand-By Arrangement approved last September 6, 2002. Completion of the review allows Brazil to draw up to US$4.1 billion, half of which is under the Supplemental Reserve Facility (SRF).

Completion of the review allows Brazil to draw up to US$4.1 billion, half of which is under the Supplemental Reserve Facility (SRF).

However "early action on proposed tax and pension reform", needs ample Congressional support that President Luiz Inacio Lula da Silva administration currently lacks and will therefore be forced to muster the necessary consensus and votes wooing conservative legislators who are not anathema for the diehards of the Workers Party.

"Brazil's performance under the September 2002 Stand-By Arrangement has been strong, and all performance criteria have been achieved. This record, and the new administration's commitment to maintain the sound fiscal and monetary policies of recent years, have led to a consolidation of the improvements in market sentiment experienced over the last few months, with the currency recovering some of its lost value and risk spreads declining markedly", said Anne Krueger, IMF First Deputy Manager.

"Nevertheless, market conditions continue to be difficult and risks remain due in part to the uncertain global environment. The new administration is moving decisively to deal with underlying vulnerabilities, demonstrating a commitment both to sound macroeconomic policies and to its ambitious structural reform agenda. These policies illustrate the authorities' conviction that their mandate to promote growth and achieve fundamental social change will be fulfilled as confidence is fully restored. A supportive external environment will also be important".

Ms. Krueger added that the higher primary fiscal surplus target of 4.25 percent of GDP established for 2003 is a strong signal of the authorities' resolve to keep the debt dynamics under control, and continued healthy primary surpluses are key to reducing the debt burden over the medium term. However the IMF First Deputy Manager underlines that "maintenance of the needed surpluses would be facilitated by early action on proposed tax and pension reforms".

"The central bank has responded to increased inflation and inflation expectations proactively, tightening interest rates by 850 basis points since October. Although there are early signs that inflation is abating, the monetary authorities should remain vigilant and stand ready to act if and as needed.

"Continuation of the strong macroeconomic policies being implemented by the authorities and further progress on the structural reform agenda will lay the foundation for sustained and equitable economic growth. The government's initiatives in tax and pension reform are especially crucial. In addition, measures to improve the investment climate and to boost trade will be particularly important. The authorities' efforts to ensure more effective targeting of social spending will also help reduce poverty," concluded Ms. Krueger.