MercoPress. South Atlantic News Agency

Brazil scales back levies on foreign loans to help prop the national currency

Mantega said the measure was geared to normalize the currency market, not to combat inflation

The government of Brazil is cutting the tax obligations faced by business receiving foreign loans, opening the door to more financing opportunities, while helping address the problem of the falling value of the national currency, Real.

 In a statement issued on June 5th the Ministry of Finance of Brazil announced that in order to help stabilize value of the national currency and to help small business to obtain new financing and credit options, the currently enacted transaction tax on obtaining international loans would be scaled back to exclude short term loans.

The tax, locally referred to as the IOF, was previously applied at a rate of 6% on the value of any international loan with a maturity of longer than six month, however, the threshold has now been raised to one year.

According to the Minister of Finance of Brazil Guido Mantega, the change will open more opportunities for local businesses to obtain financing from abroad, while also encouraging greater foreign investment into the country, ultimately raising the demand for the Brazilian Real, and stemming the international depreciation of the national currency.

Finance Minister Guido Mantega later told reporters that the aim of the tax cut was not to tame prices but to normalize the currency market.

“This measure is not directed at inflation. We do not administer our currency to control inflation,” said Mantega, adding that the biggest impact of the measure will be to help smaller banks to get cheap loans abroad.

Economic experts in Brazil have already suggested that the reduction of the IOF was in part aimed at helping reduce the country’s overwhelming rate of inflation, however, while announcing the change, the Finance Minister explicitly stated that the cut was not intended to ease inflation, and that the government was already taking adequate steps to address this separate issue.