Via IMF (Den Internationale Valutafond)

Brazil: Staff Concluding Statement of the 2019 Article IV Mission

May 24, 2019

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

A Concluding Statement describes the preliminary findings of IMF staff
at the end of an official staff visit (or ‘mission’). This mission was
undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement.

The authorities have consented to the publication of this statement.
The views expressed in this statement are those of the IMF staff and do
not necessarily represent the views of the IMF’s Executive Board. Based
on the preliminary findings of this mission, staff will prepare a
report that, subject to management approval, will be presented to the
IMF Executive Board for discussion and decision.

A sluggish recovery is underway, constrained by subdued aggregate
demand and lackluster productivity. A robust social security reform and
additional fiscal measures are necessary to put public debt on a
sustainable trajectory, thereby boosting investor confidence. The
mission welcomes the government’s ambitious reform agenda which
includes pension reform, privatization, trade openness, tax reform, and
reducing state intervention in credit markets. These reforms are
essential to boost potential growth. The monetary stance is
appropriately supportive at present.

1. The recovery remains sluggish. After contracting by
almost 7 percent during the 2015-16 recession, real GDP grew by only 1.1
percent per year in 2017 and 2018. Short-term indicators show that weakness
persisted in Q1. Investment remains subdued, held back by large spare
capacity and lingering uncertainty about the prospects for fiscal and
structural reforms. Weak global growth and the recession in Argentina are
holding back exports. Growth in 2019 is projected between 1 and 1.5 percent
with significant downside risks. Conditional on the approval of a robust
pension reform and favorable financial conditions, growth is expected to
accelerate in 2020, supported by a recovery in private investment.

2. The fiscal stance was broadly neutral in 2018. In 2018, the nonfinancial public sector primary balance improved
marginally to ˗1.7 percent of GDP and the structural fiscal stance was
neutral. The current budget may entail a slight relaxation of the fiscal
stance in 2019. Compliance with the expenditure ceiling in the following
years depends on the approval of the pension reform and other consolidation

3. Monetary policy is supportive. The central bank has
held the policy rate at the historic low of 6.5 percent since March 2018,
providing the economy with some monetary stimulus. Headline inflation is
around the 4.25 inflation target for 2019, while core inflation is more
muted. Inflation expectations are anchored around target.

4. Credit growth has been subdued. Lending by public banks
has been declining, driven primarily by reduced funding available to BNDES
development bank. Credit from private banks has grown instead at around 8
percent in real terms over the past year, leading to a moderate growth of
overall bank lending. The reduction of the role of public banks in favor of
market-based credit allocation is a welcome structural transformation.
However, intermediation margins in the banking sector remain high,
hindering credit demand and investment. The financial system is well

5. Brazil’s external position remains strong. The current
account deficit widened to 0.8 percent of GDP in 2018 and is projected to
deteriorate to 1.5 percent of GDP in 2019 mostly because of one-off
operations related to the energy sector and the recession in Argentina.
However, Brazil’s external position is strong thanks to a large amount of
reserves, a flexible exchange rate, and a contained current account deficit
fully financed by large FDI inflows.


The improvement in social conditions has stalled in recent years.

The unemployment rate declined only marginally in 2018, remaining high
compared to pre-crisis levels, along with informal labor and
underemployment. Despite the economic recovery, income inequality and the
number of people living in poverty increased in 2017.

7. Domestic and external shocks could derail the recovery.
The main domestic risk is the failure to approve a robust pension reform.
In addition, other fiscal measures are necessary to comply with the
expenditure ceiling and put debt on a sustainable trajectory.

Failure to undertake fiscal consolidation could undermine confidence and
deter investment. External risks include a deepening of the recession in
Argentina and global trade tensions.

Decisive Policy Action is Needed


Historically low growth, high public debt, and pervasive inequality
call for a bold reform agenda.

Since 1980, economic growth in Brazil has averaged 2.5 percent, well below
peer countries. At 88 percent of GDP, public debt is one of the largest
among emerging markets. Furthermore, debt continues to grow and is
projected to peak only in 2024, conditional on continued fiscal
consolidation. Despite remarkable improvements in previous years,
inequality and poverty have increased since the 2015/16 recession and
remain high by international standards. To tackle these challenges, the new
government has rightly emphasized bold reforms with the overarching goals
of unleashing growth potential and achieving fiscal consolidation, while
its pension reform proposal would contribute to reducing inequalities.

Fiscal consolidation

9. Pension reform is the crucial step. The ambitious
pension reform proposal under consideration by congress would stabilize
pension spending over the next decade and make the system more equitable.
To deliver the needed fiscal adjustment, Congress should preserve the
proposed increase in retirement ages and decrease in the relatively high
benefits, particularly for public sector employees.


But additional measures beyond the pension reform are needed to comply
with the expenditure ceiling and stabilize debt

. The government should preserve a neutral fiscal stance in 2019.
Furthermore, to comply with the constitutional expenditure ceiling in outer
years, the government should lower the public wage bill (which would also
make earnings more equitable relative to private employees) and reduce
other current expenditures, including by limiting minimum wage increases to
cost of living adjustments since they also affect the growth of pensions
and other benefits. Given the high level of debt, windfall revenue from
oil—including proceeds from the upcoming Transfer of Rights
transaction—should be used exclusively to lower debt. While pursuing fiscal
consolidation, it is critical to protect effective social programs,
including Bolsa Familia, and support public investment, both essential for
sustained and inclusive growth.


The overly complicated and distortive tax system should be reformed

. An ambitious tax reform is necessary to eliminate multiple indirect taxes
by moving toward a single broad-based VAT, harmonize the fragmented federal
and state tax regimes, and remove distortionary and costly tax exemptions.
Efforts to strengthen revenue administration should continue.

12. The fiscal framework should be enhanced. To ensure the
quality of fiscal adjustment, the authorities should address budget
rigidities, including revenue earmarking, mandatory expenditure, and the
indexation of key spending items. In addition, to facilitate the prolonged
adjustment implied by the expenditure ceiling, the government should move
toward a medium-term budget framework.

13. Fiscal risks for some states loom large. Governors of
seven states have declared a state of calamity facing severe fiscal
challenges. Of these, Rio de Janeiro has negotiated a fiscal recovery
program with the federal government. Other states might also receive
temporary relief if they implement fiscal consolidation measures under a
program being considered by the authorities. But deeper structural
measures, including pension and tax reforms, are essential to restore the
medium-term sustainability of subnational governments.

Monetary policy


The monetary stance should remain accommodative, given the large output
gap and anchored inflation expectations

. The monetary stance is appropriately supportive at present. In the
future, to the extent that fiscal consolidation is contractionary, there is
scope to loosen further monetary policy provided inflation expectations
remain well anchored. The recent bill on the relationship between the
Treasury and the Central Bank enhances the institutional framework and is
welcome. Enshrining central bank independence into law would further
improve the inflation-targeting regime.


A flexible exchange rate remains important to absorb shocks.

Intervention in the foreign exchange market should be used only to address
disruptive market volatility. International reserves continue to provide a
buffer against external shocks and should be preserved.


Further steps should be taken to enhance oversight of the banking

While there has been progress towards many of the 2018 FSAP
recommendations, the authorities should build on recent efforts to further
enhance the prudential, crisis management, safety net, and macroprudential
frameworks. The regulatory and supervisory approach to credit risk should
be upgraded further with regards to related party exposures and
transactions, country and transfer risk, and restructured loans. A new
financial resolution regime in line with the FSAP recommendations should be
put in place promptly. The deposit guarantee fund should be brought into
the public sector and the process for providing emergency liquidity
assistance should be tightened. Efforts to create a multi-agency committee
with explicit mandates for macroprudential policy and crisis management
should be completed.

Structural reforms

17. Structural reforms are necessary to boost productivity.
The government has rightly identified reducing the footprint of the state
in the economy as a priority, by pursuing privatization, reducing state
intervention in credit markets, lowering trade barriers, tackling
corruption, and simplifying taxation.


The government is working on an ambitious privatization program.

While privatization may provide some helpful one-off revenue, its main
benefit will come by the improvement in productivity in some key sectors,
including infrastructure and energy.

Privatized companies may also increase investment without using limited
public resources.


Reforms are needed to improve bank intermediation efficiency.

Firms and households face an unduly high cost of borrowing
due to banks’ large credit losses, high operating costs, and lack of
competition. A proposed corporate bankruptcy law would reduce delinquency
costs for banks. Efforts to reduce the role of public banks and directed
lending in credit markets should continue. Actions are needed to facilitate
client mobility and financial product cost transparency. The recent
approval of a credit registry law (cadastro positivo) is a step in
the right direction.


Trade liberalization is essential to improve competitiveness.

Brazil remains one of the most closed economies in the world to trade.
After some trade liberalization in the early 1990s, tariffs have not
changed much and nontariff barriers are high. In this context, plans to
lower import barriers are welcome. Prospective OECD accession is an
opportunity to foster trade integration. But trade liberalization should be
pursued in any case.


The effective implementation of anti-money laundering and
anti-corruption measures remains critically important
. The government continues to pursue significant money laundering and
corruption cases and has submitted proposals to improve the legal
framework. Authorities are encouraged to continue focusing on preventive
measures, effective enforcement, and long-term legislative improvements. In
addition, authorities are urged to expedite the completion of the national
anti-money laundering risk assessment.

The mission is grateful to the authorities and other counterparts for
excellent discussions.

IMF Communications Department


Phone: +1 202 623-7100Email:

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