IMF Executive Board Concludes 2021 Article IV Consultation With …
(MENAFN- Caribbean News Global) WASHINGTON, USA – On September 10, 2021, the Board of Directors of the International Monetary Fund (IMF) concluded the Article IV consultation with Brazil.
Economic performance has been better than expected, in part due to the authorities’ strong political response. GDP has returned to its pre-pandemic level in the first quarter of 2021 and momentum continues to be favorable, supported by booming terms of trade and robust credit growth to the private sector.
Tragically, the COVID-19 pandemic has claimed the lives of more than 550,000 Brazilians. Closures renewed after a second wave of severe COVID-19 earlier this year and the rollout of vaccination have helped bring down infections since April, with new daily COVID-19 cases and deaths down significantly from at their peaks. The government has purchased doses sufficient to inoculate the adult population in 2021, with the most vulnerable population expected to be fully inoculated by the end of the year.
Real GDP is expected to grow 5.3% in 2021. An improving labor market and high levels of household savings will support consumption, and as vaccinations continue, pent-up demand will return for in-person services. . Depleted stocks will be replenished and the rise in commodity prices will support new investments. Inflation is expected to decline steadily from recent peaks to the midpoint of the target range by the end of 2022. After jumping to 99% of GDP in 2020, public debt is expected to drop sharply to 92% of GDP in 2021 and stay around this level for the medium term. The uncertainty surrounding the outlook is exceptionally high, but the risks to growth are considered broadly balanced.
Major challenges remain. The depreciation of the currency and soaring commodity prices have fueled headline inflation and inflation expectations even as the output gap remains negative. The labor market is lagging behind the resumption of production and the unemployment rate is high, especially among young people, women and Afro-Brazilians. Emergency cash transfers will eventually expire and, without a permanent strengthening of the social safety net, poverty and inequality could worsen. Short-term fiscal risks are low, but the high level of public debt continues to pose medium-term risks. Restoring high and sustained growth, increasing employment, increasing productivity, improving living standards and reducing vulnerabilities will require political efforts to remove bottlenecks and encourage investments led by the private sector.
Directors praised the Brazilian authorities for their decisive political response to the COVID-19 shock, which significantly reduced the severity of the 2020 recession and cushioned its impact on the poor and vulnerable while paving the way for a strong recovery in 2021 Directors welcomed the momentum for institutional reforms, despite the pandemic, to lay the foundations for a more competitive economy. However, the pandemic has exacerbated long-standing challenges to higher growth and socio-economic inclusion. Further efforts are needed to build market confidence, encourage private sector-led investment and strengthen medium-term prospects.
Directors agreed that fiscal policy should focus on rebuilding reserves and reducing fiscal rigidities in order to create space for public investment and a stronger social safety net. The spending cap has played an important role in maintaining market confidence and continued compliance with the rule is necessary to reduce public debt. Comprehensive tax reform should aim to increase progressivity, simplify the system and improve resource allocation. The tax reform should include a bold plan to reduce tax expenditures in order to highlight the benefits in terms of fairness and efficiency. Directors encouraged the authorities to adopt a stronger medium-term fiscal framework and to strengthen subnational finances. These measures would help strengthen fiscal credibility, reduce fiscal risks and improve the government’s capacity to manage negative shocks.
Directors supported the continued tightening of monetary policy to cope with rising inflation and to keep inflation expectations firmly anchored. Given the uncertainty surrounding the outlook, policy should continue to rely on data, complemented by proactive communication and clear direction. Directors welcomed the authorities’ commitment to a flexible exchange rate and to limit intervention to tackling disorderly market conditions.
Directors noted that the banking system has shown resilience and supported the recovery. They agreed that a phasing out of crisis-related financial assistance was appropriate and endorsed the authorities’ efforts to strengthen financial inclusion and promote competition in the banking system.
Directors welcomed the ambitious supply-side reform program aimed at boosting productivity, potential growth and living standards. Concerted action is needed to liberalize foreign trade and product markets, increase the flexibility of the formal labor market, and improve governance. Strengthening the efficiency and predictability of anti-corruption and AML / CFT mechanisms remains essential. Steps are also needed to further improve the environment for private sector investment.
Directors welcomed initiatives to encourage environmentally sustainable activities in response to climate-related risks. Many directors encouraged closer collaboration between authorities and staff to analyze climate-related risks in macroeconomic assessments and financial stability assessments.
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