Brazil Economic and Financial Policy

Brazil Economic and Financial Policy

Like Argentina, the Brazil experienced a period of serious difficulties at the turn of the millennium. However, thanks to adequate economic policy interventions, he managed to quickly regain the confidence of domestic and foreign investors.

The Brazilian economy was strongly conditioned by the financial crisis that hit international markets starting from the second half of 1997. In 1999the country denounced a particular vulnerability of the external accounts, due to the huge accumulated public debt and the overvaluation of the real. To cope with a situation that had become unsustainable, the government decreed the exit of the national currency from the fixed exchange rate system, so that in the first months of the year it experienced a strong depreciation; at the same time it gave rise to a fiscal tightening, in order to contain the deficit and stabilize the incidence of public debt on GDP. In particular, measures were launched aimed at increasing tax collection Рabove all thanks to the reform of the social security system and the taxation of financial transactions Рand to contain expenditure relating to defense and infrastructure. All central and local government bodies were involved in the tax reform, and urged to implement a more responsible management of public resources. Furthermore, in order to promote the expansion and competitiveness of the banking system, taxes on credit transactions were reduced. In 2000 the economy registered an expansion of consumption, ensured by the increase in national income, by the expansion of credit and by a climate of widespread optimism among national and international investors. The tight control of public spending was accompanied by a monetary policy focused on reducing inflationary pressure, while the privatization of public banks and electricity distribution companies continued. However, the exposure of the economic system to short-term financing from abroad remained worrying, with potential threats to market stability. In 2001 the macroeconomic situation deteriorated again. In particular, the year was marked by a serious energy crisis, determined by adverse weather conditions but also by the absence of adequate investments in the sector during the nineties. The authorities were forced to ration electricity, with inevitable consequences on the level of production. Furthermore, the climate of uncertainty on international markets (due to the 11 September in the United States and the Argentine recession) contributed to the reduction of exports. To contain inflationary pressure and put a stop to the financial problems of the balance of payments, the government adopted a series of restrictive monetary policy measures. Interest rates were kept high, bank reserves were raised, liquidity was tightly controlled. On the foreign exchange market, the real came under severe pressure which helped to reduce its value against other currencies. This situation of uncertainty continued throughout 2002. The worsening of expectations of foreign investors led to a contraction in the inflow of direct investments and renewed pressures on the foreign exchange market. For Brazil 2010, please check programingplease.com.

Public debt, financed mostly by dollar bonds, was now out of government control, while inflation rose to 8.4 %. The authorities did not change the exchange rate policy, and promoted the regulation of foreign currency transactions on the financial markets; on the fiscal front, in agreement with pension funds and other operators involved in income taxation, they introduced a series of taxes: on oil, on the sale of public debt securities, on concessions to exploit natural resources. The greater financial resources of the state were used above all in the social security and health sectors, for the reduction of poverty and for the strengthening of the road system.

The new administration, which took office in January 2003, immediately showed itself in favor of fiscal responsibility and the containment of inflation, and launched reforms aimed at reducing the burden of social security and keeping the tax burden high; it also engaged in reform campaigns aimed at making the financial market more accessible to the less well-off population, simplifying the procedures for opening bank accounts and extending micro-credit. For its part, the central bank ensured control of the monetary aggregates, and in the first part of the year raised the interest rate; the appreciation of the real that occurred in the remainder of 2003 and 2004 offset some of the depreciation that occurred in 2002. During 2003, the economy regained the confidence of international operators. The growth forecasts gave good hope to the government, which from the first months of 2004 undertook numerous initiatives aimed at modernizing the country, such as the reduction of the cost of capital, the simplification of the rules for the opening of new entrepreneurial activities, the ” insertion of insurance and credit instruments to favor agriculture, the modification of the regulations for the start-up of infrastructure projects, the launch of a new law on technological innovation, the promotion of foreign trade. These interventions, accompanied by an external environment favorable to the development of the market, contributed to the achievement in 2004 of numerous economic successes, such as the containment of inflationary pressure (ensured by a prudent monetary policy), the gradual consolidation of public finances (aimed at greater sustainability of the state debt) and the surplus of the current account balance.

Brazil Economic and Financial Policy

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