BRAZIL GOV'T PASSES FIRST TEST RE: AUSTERITY MEASURES
Futures World News - November 05, 1998 13:36
Sao Paulo-Nov. 5-FWN--THE BRAZILIAN CONGRESS HAS VOTED to throw out amendments which would have watered down changes to state pension plans. Thus, sources say the government has passed its first important test following the announcement of the drastic program of tax increases and spending cuts last week.
This comes as reports today said Brazil's central bank president is headed for Washington to iron out details for an aid package from the International Monetary Fund (IMF).
The scrapping of the proposed amendments will allow several billion dollars to be cut from the government's fiscal deficit in 1999. This opens the way to the final agreement of a package of financial aid for Brazil from the IMF, the World Bank, and Group of Seven countries.
The formal agreement between negotiators from Brazil's central bank and the IMF is expected to result in the release of $40 billion in loans to Brazil, albeit at high rates of interest. Many say the package might now be completed in the next few days, rather than in a week or two.
The IMF agreement will allow Brazil to meet the debt repayment commitments which will fall due in the next few months, and is expected to encourage those investors who still have funds in Brazil to leave them there.
Persuading congressmen to throw out the amendments to the pension reform was not easy. More than 200 of the deputies still in the present congress lost their seats in the October elections, and many of them blame losing on the lack of support from President Fernando Henrique Cardoso and his team. Brazil's new congress assembles next year.
Sources here say that Brazilian government officials made it clear to congress that only if they threw out the amendments--which would have allowed many Brazilians to continue to retire on full pensions at only 45 years of age if they had gone through--would sky high interest rates fall.
Business and industry officials have made it clear in recent days that it is vital for interest rates of about 50% a year, and which are driving many firms close to bankruptcy, to be lowered soon. "The government has not dared to cut rates until now, for fear that even more money would leave the country if they did," said one source.
More than $25 billion has already left Brazil in the past two months, taking reserves down to dangerously low levels. Criticism of last week's package and the suggestion that it will only result in Brazil staving off the time when it is forced to devalue its currency by up to 40% continue to be made.
Many economists now predict the Brazilian economy will shrink by up to 2% in 1999, which would cause a huge rise in the already large number of unemployed, particularly in the large cities. They suggest a big devaluation is needed to make Brazilian goods more competitive abroad, and for interest rates to remain low.
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