BRAZILIAN CONGRESS TO TEST AUSTERITY PACKAGE WEDNESDAY
Futures World News - November 02, 1998 10:23
Sao Paulo-Nov. 2-FWN--THE FIRST REAL TEST FOR THE $28 billion package of tax increases and spending cuts, announced by the Brazilian government last week, will take place Wednesday, when congress is due to vote on key changes to the pensions law.
Over-generous pensions paid to state-sector workers the past few years have been one of the main reasons state- sector finances have slipped deep into the red. A program of reforms aimed at halting the ballooning cost of pensions has been winding its way through congress for months, encountering endless obstacles.
The government wants various amendments which would result in the cuts being watered down to be thrown out in a vote this week. "The whole world will be watching to see whether congress will toe the line or not," said one source.
Many of the changes announced by the government last week, such as increases in taxes, cuts in public spending, and a reduction in the amount of federal money channeled through to states and towns, will have to be voted upon by congress before they come into operation in 1999.
A complicating factor is that many of the present congressmen lost their seats in last month's elections, and will not be returning in January, when the new congress convenes. This means their enthusiasm for voting in favor of unpopular measures may be limited.
The government is keeping the pressure on congress by hinting that reductions in the present sky-high interest rates of almost 50% a year will only start to be reduced once congress shows willingness to makes some cuts.
Congress is usually much more responsive to pressure from the big spending states than it is to the federal government. "It now remains to be seen whether parliamentarians have been sufficiently frightened by the dangerous state into which Brazil's affairs have gotten, to vote as the government wants in future," said one contact.
The flood of capital out of Brazil the past few weeks, as investors lost confidence in Brazil, is partly explained by congress's unwillingness to vote for major changes until now. Voices are suggesting last week's austerity package and the likely massive support from IMF may not be enough to restore the Brazilian economy.
Debts totaling $70 billion are due to be paid to foreign creditors in the next few months. One fear is that all the money which is to be loaned by the IMF, as well as more from the reserves, will just be used up in paying these debts, without affecting the long-term problems which caused them.
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