July 31, 2023
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Brazil.
In the first months of 2023, growth was supported by very strong agricultural output, while manufacturing and services were subdued. Slowing private consumption and falling investment point towards further growth moderation in the remainder of the year. Headline inflation has rapidly declined from last year’s peak, but core inflation remains elevated, and inflation expectations are above target. Tightening financial conditions have been partially offset by a structural broadening of credit in some sectors.
Growth is projected to moderate from 2.9 percent in 2022 to 2.1 percent in 2023, and then reach staff’s estimated potential rate over the medium term. Headline inflation is expected to reach 5.4 percent by end-2023 and converge to target by mid-2025, while core inflation is projected to come down more gradually. The current account is expected to narrow to about 2.3 percent of GDP this year and remain broadly stable over the medium term.
Strong buffers support resilience in the face of prevailing downside risks. On the external front, downside risks include an abrupt global slowdown, a sharp tightening of global financial conditions, and commodity price volatility. On the domestic front, risk mainly stem from renewed fiscal uncertainty and more persistent inflation. More ambitious fiscal consolidation; approval and implementation of the indirect tax reform; and green growth opportunities bring upside risks. Recent progress in the legislative agenda—with the tax reform, new fiscal framework, and the strengthening of the administrative review of tax disputes making strides—sends a positive signal. A sound financial system, adequate FX reserves, large public sector cash buffers, and a flexible exchange rate regime support resilience.
Executive Board Assessment[2]
Executive Directors noted that after a rapid recovery from the pandemic, supported by ample buffers and proactive policies, Brazil’s economic activity is converging towards potential levels. Directors noted the downside risks related to the uncertain external environment, but many emphasized that the balance of risks has shifted, with domestic risks now tilted to the upside. In this context, they encouraged the authorities to continue with their fiscal consolidation and price stabilization efforts, while sustaining their structural reforms agenda to promote a sustainable, inclusive, and green economy.
Directors welcomed the authorities’ commitment to improve the fiscal position to maintain debt sustainability and support monetary policy’s disinflation effort. They encouraged the authorities to aim for an ambitious fiscal effort to put debt on a clear declining path, supported by an enhanced fiscal framework, a broader tax base, and spending reforms. Directors welcomed the proposed indirect tax reform and plans to reform direct taxes and streamline tax expenditures, noting that additional revenue mobilization will help secure fiscal sustainability and create space for priority spending. Some Directors noted that the Debt Sustainability Assessment might have been overly pessimistic in recent years.
Directors commended the central bank’s proactive monetary policy response consistent with the inflation targeting framework. Noting the slow decline in core inflation and still above target inflation expectations, they considered the current monetary stance appropriate and called for continued forward looking and data-dependent monetary policy. Directors also welcomed the recent decision to adopt a continuous inflation target that should improve monetary policy effectiveness and commended improvements to BCB autonomy. They emphasized that a flexible exchange rate regime and adequate FX reserves remain important shock absorbers going forward.
Directors noted that the financial sector remains resilient, with adequately capitalized, profitable, and liquid banks. They welcomed steps to address household debt vulnerabilities and promote financial literacy. Directors commended the successful initiatives on the instant payment system Pix and Open Finance environment, as well as the plans for the Digital Real, while underscoring the importance of being mindful of potential financial stability risks related to digitalization. They also emphasized the need for carefully managing a bigger role for public banks to mitigate risks for fiscal sustainability and monetary policy transmission.
Directors commended the authorities’ structural reform priorities focused on raising productivity, reducing informality, and promoting green growth. They emphasized the need for continued efforts to foster innovation, trade integration, and competitiveness, upgrade investment and skills, and promote greater female labor force participation. Continuing efforts to strengthen the effectiveness of the anti-corruption and AML/CFT frameworks is also important. Noting Brazil’s prominent role in the international efforts to cope with climate change challenges, Directors welcomed plans to strengthen climate resilience, halt illegal deforestation, and decarbonize the economy.
- Country Report No. 2023/288 : Brazil: 2023 Article IV Consultation-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Brazil
- Country Report No. 2023/289 : Brazil: Selected Issues
Source – IMF