Economic Survey of Brazil
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Since the mid 1990s, Brazil has enjoyed improved economic and financial stability largely owing to a strengthening of its macroeconomic framework. In order to quickly catch up with the group of high income countries the overriding need is to achieve strong and sustainable growth. This will require continued good macroeconomic, social and environmental policies and structural reforms designed to boost savings and investment and foster infrastructure development. Higher international uncertainties and cross country interdependence, rapid population ageing and a greater reliance on oil revenues will call for policymakers to expand their tool kit to respond to this challenge. |
The key macroeconomic challenge is to damp inflation in a context of abundant global liquidity. The economy recovered rapidly from the 2008-09 global crisis thanks to a timely policy response. Annual growth in 2010 was the strongest in two decades. Driven by both structural factors and international financial conditions, the real has steadily appreciated since 2003, except during the 2008 financial crisis and more recently when a flight from risk in the midst of financial-market turbulence weakened it. Inflation pressures have emerged. To prevent excessive currency fluctuations and safeguard financial stability the authorities initially combined increases in interest rates and reserve requirements with foreign exchange intervention and a temporary tax on short term capital inflows (IOF). As the global outlook worsened, the policy mix was shifted toward easier monetary policy and some fiscal consolidation. If that proves insufficient in the current uncertain environment, policymakers can have recourse to macro prudential measures or adjusting the IOF. |
However, they should rely more prominently on fiscal consolidation. The spending cuts announced earlier this year and the setting of primary surplus targets for the next three years in levels consistent with public debt reduction in the draft 2012 Budget Law are welcome and the government should continue in this direction. Over the medium term, moving to a headline budget target and introducing an expenditure ceiling while removing widespread revenue earmarking would foster sustainability of government and social security accounts. |
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