Financial Daily from THE HINDU group of publications
Wednesday, Oct 02, 2002
Brazil's dilemma: The IMF (election) agenda
R. L. Chawla and
ON AUGUST 7, Brazil concluded a 15-month loan package with the IMF. Under the agreement, Brazil will receive a staggering $30 billion $6 billion this year and $24 billion in 2003. As reports indicate, this loan is in addition to the $15-billion the IMF lent Brazil in 2001. Further, the IMF has also permitted Brazil to use $10 billion more of its own net foreign currency reserves to protect the local currency from speculative attacks in September -October. Along with this IMF rescue package, the World Bank and Inter-American Development Bank (IADB) also announced their intention to lend a total of $7 billion by end 2003.
By any reckoning, multilateral institutions (particularly the IMF) funding generosity to Brazil remains unsurpassed in recent history. Conditionalities attached to this massive loan for Brazil include i) achieving primary surplus (interest payments) of 3.75 per cent of GDP in 2003; IMF monitoring surplus commitment on quarterly basis; and, iii) maintaining a set of current free market policies in future.
The IMF's massive rescue package seems to have the following motivational agenda. First, providing incentives and binding the incoming administration to maintaining status quo in economic policies of the yesteryear. Second, to restore confidence in the foreign investors, that unlike Argentina, Brazil has fundamentally a sound and vibrant economy and needs short-term financial support to push strong growth. During the 1990s, Brazil has relatively moved fast to open up its markets, control its runaway inflation put its financial house in order.
What is the reality check for the Brazilian economy? How can one explain the present honeymoon between the IMF and Brazil? In the series of economic crises engulfing the emerging markets in the 1990s, what portends for Brazil in the near future? Brazil is undeniably South America's largest economy with a population of 170 million and an estimated GDP of $500 billion per annum. While the 1990s was dubbed the `Decade of Reforms' by the Brazilians, growth of real GDP averaged 2.5 per cent per annum in 1991-99. Inflation reached a four-digit level in 1991-93 but fell sharply with the introduction of the Real Plan in 1994 and hovered around a 10-20 per cent subsequently. Brazil has maintained savings/investment rates of 20 per cent of its GDP over the years.
One of the worrisome aspects of the Brazilian economic scenario is its huge foreign debt and debt service obligations. In 1982, Brazil, with a foreign debt of $100 billion, was the largest debtor amongst developing countries and continued to maintain the same position in 2002 with an accumulated debt of $264 billion. During 1983-93, Brazil was running an annual average trade surplus of $13 billion to meet its debt service obligations. By 1994, the surplus had turned into a deficit, causing stress on current account deficit which reached 4.5 per cent of GDP by1998-99. The fiscal deficit became unmanageable in the second half of 1990s, reaching a high of 7-8 per cent of GDP and has considerable bearing on the Real Crisis of 1998-1999.
Brazil could not remain immune from the contagious effects of Asian, Russian and, now, the Argentine crisis. Not delving deep into IMF-Brazil relations, it is important to mention that Brazil had been almost continuously involved with the IMF over 1983-93. With the return of the civilian government in 1985, Brazil experimented with its half a dozen home-grown plans (a heterodox variety) notwithstanding the disapproval of the IMF. These stabilisation plans utterly failing to control the hyper-inflation and achieving a fiscal balance, Brazil embarked upon a phase of liberalisation, privatisation and globalisation in the early 1990s.
The launch of the Real Plan in 1994, was a pointer in this direction. Among other things, the Plan encouraged foreign investors to consider Brazil a better bet for investment. Soon Brazil was flooded with FDI and portfolio investments till the Asian crisis erupted in1997 and followed by the Russian crisis in 1998. According to some analysts, however, the Real Plan had an Achilles heel. As inflation fell, public finances weakened and the primary balance of the consolidated public sector shifted from a surplus of 5.3 per cent of GDP in 1994 to a deficit of about 1 per cent of GDP in1997. As a consequence and with little increase in private savings, current account deficit started moving up.
In the aftermath of the Russian crisis, the Brazilian government made renewed efforts to address the fiscal imbalance by adopting a "Fiscal Stability Programme" and initiated dialogues with the IMF. This culminated in a large Stand-By Agreement with the Fund in early December 1998, which was supplemented by the promise of extra financing from the World Bank, the IADB as also support from various industrial countries. It may be recalled that the Brazilian authorities managed a $41.5-billion rescue package from the IMF, the World Bank and IADB in November 1998. Brazil could draw $9 billion in December 1998.
In the light of all this, one is tempted to draw some parallels between the IMF rescue package of December 1998 and August 2002. First, both were concluded in and around the presidential election time and were meant to provide succour to the official candidates. Second, the magnitude of such assistance has been more or less the same, discounting the inflation factor in between these two packages. There is not much difference in the conditionalities of the package. However what distinguishes the present package from the earlier one is that there was certainty of the economic policies of Mr Fernando Henrique Cardoso in his second term of office. The world community, in general, and investors, in particular, are presently wary of the leading position of the Leftist candidate over that of the government-sponsored one.
A natural question arises whether the massive loan will turn the table in favour of the official candidate, or if the leading Leftist candidate, Mr Luis Inacio Lula da Silva, will compromise with the conditionalities of the current package. A look at the recent economic indicators, however, suggests that the Brazilian economy is not exhibiting a worthwhile performance. The GDP growth rate has almost stagnated at 2-2.5 per cent per annum in the beginning of the new millennium.
Since January 2002, the Brazilian currency Real has lost one-fourth of its value. Inflation reached 1.7 per cent in July against 0.4 per cent in June. All due to the recession in the world economy, the Brazilian exports are stagnating at $50-55 billion. Total external debt as a ratio of gross national income rose to 33.5 per cent in1999 from 22.9 per cent in 1995.
This ratio has maintained an upward trend in 2000 and 2001. Similarly total debt service as a percentage of exports of goods and services reached a staggering 110.9 per cent in1999 from 36.7 per cent in 1995. In short, default on debt service loomed large in 2002 and hence the reprieve through the loan package was considered a viable strategy to avoid Brazil going the Argentina way.
What seems a tenable proposition is that in case of the Leftist candidate winning the election, there will not be many options but to accept the ground reality, and bring turns and twists in the gamut of economic policies to apparently satisfy the constituency of voters. One obvious lesson of the whole episode is that Brazil is a bottomless pit for foreign capital, and multilateral institutions command on the economy does not seem to be a downward curve in the near future.
(The authors are, respectively, Associate Professor (Economics) Division of Latin American Studies, and Research Scholar Centre for American and West European Studies, School of International Studies, JNU, New Delhi.)
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