Brazil's government today introduced a package of sweeping economic reforms designed to bring it back within the economic targets set by the International Monetary Fund, but observers said political compromises had limited its effectiveness.
The decision by the IMF and commercial banks to withhold loan payments exceeding $950 million this month, after Brazil failed to meet targets on public deficit ceilings, forced the government to introduce a new austerity package with further cuts in state subsidies and some tax increases.
The IMF has sent a team to Brazil this week to decide whether the new measures will be enough to put the nation back on the path to financial health. Sources in Washington hope that the negotiations can be completed by the end of this month, when Brazil will urgently need more cash to pay off emergency loans and to keep up payments for imports and debt service. It has more than $80 billion in foreign debt.
Brazil's representative at the IMF, Alexandre Kafka, said he believed there would be no problems, but other observers expected very tough talks with the team.
Commercial bankers are waiting to see the outcome of the IMF negotiations before deciding whether they will put up more money for Brazil. However, bankers agree that the nation will be unable to make it through this year without new loans of perhaps as much as $3 billion. These are needed partly because of the failure of banks so far to loan Brazil all the money originally promised.
Brazil is expected to ask for a new advisory committee of banks to help restructure its debt in the light of the problems it has had so far. However, one source said yesterday that a new medium-term loan that would ease the nation's immediate cash flow problems looks unlikely at the moment.
After a meeting of the national monetary council in Brazil, it was announced that prices of gasoline and other petroleum products would rise by 43 percent, as subsidies are lifted. Imported wheat prices will also rise sharply, although the increases will come more slowly than some overseas observers had hoped.
The new measures also include a reduction in the scale of agricultural and export subsidies in the form of cheap loans, and cuts in the budgets of the country's 358 state industries--the main target of IMF criticism.
"The costs are uniformly distributed, though the financial sector will make an important contribution," said Planning Minister Delfim Netto. He said taxes on non-wage income would rise to 25 percent and money-market operations would face a 4 percent tax. Banks would be obliged to pay income taxes in advance of operations. Compulsory deposits with the central bank have increased.
However, no details were given of new cuts in spending and investment. One source commented that it was not yet clear whether the Brazilians intended to make further cuts over and above those already promised to the IMF.
He described the package as "hesitant" at a time when lenders were looking for "decisive measures."
One major disappointment for business leaders and Brazil's creditors is that, for political reasons, the government decided not to curtail Brazil's wage program, which provides increases linked to the cost of living. Economists say the indexing program fuels the country's 130 percent annual inflation rate.