RESTRICTED
WORLD TRADE WT/BOP/W/7
27September 1995
ORGANIZATION(95-2842)
Committee onBalance-of-Payments Restrictions
1995 CONSULTATION WITH BRAZIL
UNDER ARTICLE XVIII:12(a) OFTHE GATT 1994
AND THE RELATED UNDERSTANDING
Background Paper bytheSecretariat
1. Thispaper hasbeenprepared inaccordance withparagraph 12oftheUnderstanding onthe
Balance-of-Payments Provisions oftheGeneral Agreement onTariffs andTrade 1994.
I. Introduction
2. Brazil disinvoked Article XVIII:B ofGATT 1947 on9July1991 (L/6885 andBOP/R/194).
Prior tothatdateBrazil hadheldsixfullconsultations withtheGATT 1947Committee in1971, 1976,
1978, 1981, 1983 and1987 andfoursimplified consultations in1978, 1980, 1985 and1989.
3. On27June1995 Brazil communicated, under thegeneral WTO notification procedures,
Provisional Measure No.1024 of13June1995 which prescribed asetofrules "reducing thetariff
rateonspecified products andcontaining other provisions" onimports ofmotor vehicles andparts,
including theestablishment ofaquantitative limitation forthesecond halfof1995 (WT/L/73). Ina
further communication dated 13July1995 Brazil notified, under paragraph 9oftheUnderstanding
ontheBalance-of-PaymentsProvisionsoftheGATT1994,thattheProvisionalMeasurehadbeenadopted
forbalance-of-payments reasons asprovided inArticle XVIII:B, paragraph 9ofGATT 1994
(WT/BOP/N/4).
II. Themeasures introduced inJune1995
4. Provisional Measure No.1024 of13June1995 provides arange ofmeasures:
(i) Tariffs arelowered to2percentonmachines andequipment forassembling and
manufacturing motor vehicles andtheirparts, andonrawmaterials andother inputs, including
setsandsub-sets (Article 1);
ii) Atrade-balancing framework isestablished, linking imports toexport performance
(Articles 2to6).Local content requirements arealsointroduced (Article 7).Imports ofmotor
vehicles andtheir inputs arelinked toexport performance percompany andperyear: a
proportion maybeestablished bytheExecutive Power between: (a)imports ofrawmaterials,
parts, components, setsandsubsets, andnetexports ofpassenger vehicles, goods vehicles and
buses byeachcompany; (b)imports byeachcompany ofeachitemofrawmaterials, parts,
components, setsandsubsets andthetotalimports ofsuchimports; (c)domestic purchases
andimports byeachcompany ofmachinery andequipment usedinthemanufacturing process,WT/BOP/W/7
Page2
theirparts, andmoulds; and(d)imports andnetexports byeachcompany ofpassenger motor
vehicles, goods vehicles andbuses (Article 2).Netexports aredefined inParagraphs 2and
3ofArticle 2andinArticles 3and4.Companies manufacturing parts, components andtyres
inBrazil mayusethenetexport value asatransfer price inselling suchparts toassociated
manufacturers ofvehicles (Article 6).
(iii) Quantitative limitations andrelated rules forbidding forimport quotas andissuance
ofimport licences areestablished (Articles 9,10and14).Import quotas apply tocompanies
thatdonotmanufacture therestricted items domestically (Article 9).Imports forthesecond
halfof1995 arelimited to50percentofthevalue ofvehicle imports thathadbeencleared
through customs between 1January and12June1995. Thequotas cover vehicles forpassengers
andmixed use,andjeeps; vans, station wagons, pick-ups andsimilar vehicles; vehicles for
transportation ofmerchandise andforthecollective transportation ofpassengers. Bidding for
theimport quantity willbemade through public offers, astobeestablished inregulations,
andthebidwinners shallbe,indecreasing order, theproponents thatpresent thelargest tariff
increases, taking asbasis theratesinforce atthedateofthepublic offer(Sole Paragraph to
Article 9).
(iv) SpecificrulesapplicabletomotorvehicletradewithinMERCOSULaretobeestablished,
withaviewtoestablishing theCommon Automotive Régime (Article 8).According tothe
Brazilian authorities, motor vehicle exports from Argentina arenotexempted from the
quantitative limitations of13June1995.1
III. TheTrade andExchange Policy Framework
5. Brazil 'sforeign trade policy isformulated bytheMinistry ofIndustry, Trade, andTourism,
implemented bytheSecretariat ofForeign Trade (SECEX), andcarried outbytheTechnical Department
ofCommercial Interchange (DTIC). TheMinistry ofFinance coordinates public sector import policy.
6. Theprocess oftradeliberalization which began in1990, withlower tariffs andreduced non-tariff
barriers andforeign exchange controls, produced significant changes inBrazil 'strade régime. As
aresult, tariffs havebecome theprimary instrument ofborder protection ofdomestic activities.
Tariffs
7. TheTechnical Department ofTariffs (DTT) under theMinistry ofIndustry, Trade andTourism
isresponsible forformulating tariff policy anddecides onchanges incustoms duties.
8. Asaresult ofannual dutyreductions between January 1991andJuly1993, thesimple average
m.f.n. tariff rateonnon-oil imports wasreduced to11.3percentasofend-1994 from32.2percent
in1990. Thetariff structure included: (i)zerotariff rates, applying toproducts inwhich Brazil had
aclearcomparativeadvantage(suchasorangejuice,ironore,andcellulose),productswithhightransport
1Themotor vehicle industry represents 28percentofinternal trade among MERCOSUL countries. Under
theOuroPretoAgreemen tofDecemb er1994motorvehiclesweregrantedspecialtreatment;arrivalatacommon
policyonintra-tradeinthissectorwaspostponeduntil1999,andArgentinawasgrantedfreeraccesstotheBrazilian
market thanitwasrequired togrant Brazilian exports inthemeantime. (Handelsblatt of14-15 July1995 and
Latin American Regional Reports -Brazil 1995)WT/BOP/W/7
Page3
costs(such asliveanimals andcement) products thatarenotproduced domestically andproducts with
small value added (such ascopper andzinc); (ii)5percentapplying toproducts thathadsuchtariff
ratein1990; (iii)ratesbetween 10and15percentapplying toproducts thatusedimported inputs
withzerotariffs (such aspaper andcotton); (iv)arateof20percentapplying tomost imported
manufactured products; and(v)ratesof30,35and40percentapplying tocertain manufactured
products, suchasfinechemistry items, televisions, stereo sound systems andinformatics products.
9. ByDecree 1427, published on29March 1995, Brazil raised tariffratesonabout 109items,
including automobiles andother durable consumer goods (some electronics anddomestic appliances
including answering machines, water heaters, interphones, earphones, walkmans, CDsound equipment,
video-lasers, parabolic antennae, amplifiers andwashing machines) fortheperiod 15May1995 -28
April 1996. On27April 1995, under Decree 1471, Brazil reduced tariffs fromthese increased levels
onanumber ofitems which would haveotherwise breached Brazil 'stariffbindings inBrazil 'sschedule
ofconcessions annexed totheMarrakesh Protocol onthese items (WT/L/66 andAdd.1).
10. Brazil hasadopted theCommon External Tariff (CET) oftheSouthern Common Market
(MERCOSUL)whichwentintoeffecton1January1995.CETratesrangebetweenzeroand20percent
instepsoftwopercentage points. Brazil mayidentify upto300national exceptions totheCET. Initially
Brazil applied 175national exceptions, 123above CETratesand52below. There arealso150items
included inthelistofexceptions forreasons ofprice-control anddomestic provisioning which include
the109items onwhich tariffs wereincreased byDecree 1427. Thelistofexceptions totheCETwas
increased to450items inDecree 1471 on27April 1995. Fiftyofthese items canbechanged every
three months while theremainder canberemoved butnotreplaced. Approximately 85percentof
Brazilian tariff linesarecovered bytheCET; allautomobile items arenational exceptions. There
isalsothelistofconvergence thatinclude 1,236 tariff items; capital goods willconverge totheCET
intheyear2000 andinformatics andtelecommunications goods in2006.
11. Intra-regional trade between Brazil anditsMERCOSUL partners hasbeenduty-free since
1January 1995, except for29tariff headings subject totheprocedure foradaptation tothetrade
liberalization programme untiltheyear1999.
12. Varying tariff preferences arealsogranted byBrazil under LAIA toother Latin American
countries inthecontext ofavariety ofcomplex product-specific andcountry-specific agreements.
Brazil grants concessions under theGlobal System ofTrade Preferences Among Developing Countries,
covering 98items andunder theProtocol Relating toTrade Negotiations Among Developing Countries
covering only12tariff lines.
Tariff bindings
13. Brazil bound itsentire tariff schedule intheUruguay Round negotiations: 86percentof
industrial products were bound atexisting applied levels and14percentatceiling duties (Table 1).
Bound rates aresetat35percent, withtheexception ofchemicals at20percentandagricultural
products (milk products, cheeses, wheat andmeat) at55percent. 66.7 percentoftariff lines,
accounting for50.6percentof1989 imports, arebound at35percent. Another 17.5percent,
accounting for20percentof1989 imports, arebound at20percent(Table 2).Thesimple average
ofbound rateshasdecreased from 54.1percentto30.0percentinthenewschedule. (Table 3)WT/BOP/W/7
Page4
Table 1
Overview oftariff bindings inBrazil
(US$ million andpercent)
Pre-Uruguay Round Post- Uruguay Round
1989 imports Tariff Lines 1989 Imports Tariff lines
Value Percent Value Percent Value Percent Value Percent
Allproducts (excluding
petroleum products)
Total 12,415 100 12,381 100 12,415 100 12,381 100
Bound 3,022 24 785 6 12,415 100 12,381 100
Fully Bound 2,024 16 432 3 12,415 100 12,381 100
Atexisting levels 2,024 16 432 3 9,780 79 10,571 85
Atceiling duties 0 0 0 0 2,634 21 1,810 15
Partially bound 998 8 353 3 0 0 0 0
Atexisting levels 998 8 353 3 0 0 0 0
Atceiling duties 998 0 0 0 0 0 0 0
Unbound 9,392 76 11,596 94 0 0 0 0
Allagricultural products
Total 888 100 1,520 100 888 100 1,520 100
Bound 320 36 81 5 888 100 1,520 100
Fully Bound 309 35 63 4 888 100 1,520 100
Atexisting levels 309 35 63 4 575 65 1,236 81
Atceiling duties 0 0 0 0 313 35 284 19
Partially bound 11 1 18 1 0 0 0 0
Atexisting levels 11 1 18 1 0 0 0 0
Atceiling duties 0 0 0 0 0 0 0 0
Unbound 568 64 1,439 95 0 0 0 0
Industrial products
(excluding petroleum
products)
Total 11,526 100 10,861 100 11,526 100 10,861 100
Bound 2,702 23 704 6 11,526 100 10,861 100
Fully bound 1,716 15 369 3 11,526 100 10,861 100
Atexisting levels 1,716 15 369 3 9,205 80 9,335 86
Atceiling duties 0 0 0 0 2,321 20 1,526 14
Partially bound 988 9 335 3 0 0 0 0
Atexisting levels 988 9 335 3 0 0 0 0
Atceiling duties 0 0 0 0 0 0 0 0
Unbound 8,824 77 10,157 94 0 0 0 0
Source: WTO Secretariat.WT/BOP/W/7
Page5
Table 2
Frequency distribution ofbound rates onindustrial products, excluding petroleum
(US$ million andpercent)
M.f.n. dutyrange Number oflines Percent Imports 1989 Percent
Total 10,851 100.0 11,409 100.0
Free 54 0.5 520 4.5
0.1-1.0 2 0.0 2 0.0
1.1-2.0 1 0.0 0 0.0
2.1-3.0 0 0.0 0 0.0
3.1-4.0 2 0.0 2 0.0
4.1-5.0 2 0.0 37 0.3
5.1-6.0 0 0.0 0 0.0
6.1-7.0 1 0.0 0 0.0
7.1-8.0 4 0.0 1 0.0
8.1-9.0 0 0.0 0 0.0
9.1-10.0 38 0.4 113 1.0
10.1-11.0 0 0.0 0 0.0
11.1-12.0 41 0.4 6 0.0
12.1-13.0 1 0.0 2 0.5
13.1-14.0 3 0.0 62 0.5
14.1-15.0 131 1.2 758 6.6
15.1-16.0 0 0.0 0 0.0
16.1-17.0 4 0.0 14 0.1
17.1-18.0 554 5.1 467 4.1
18.1-19.0 0 0.0 0 0.0
19.1-20.0 1,903 17.5 1,604 14.1
20.1-21.0 0 0.0 0 0.0
21.1-22.0 6 0.1 8 0.1
22.1-23.0 70 0.6 46 0.4
23.1-24.0 5 0.0 35 0.3
24.1-25.0 676 6.2 1,703 14.9
25.1-30.0 116 1.1 257 2.2
30.1-35.0 7,236 66.7 5,772 50.6
35.1-40.0 0 0.0 0 0.0
40.1-45.0 0 0.0 0 0.0
45.1- 50.0 0 0.0 0 0.0
50.1-60.0 1 0.0 74 0.0
Source: WTO Secretariat.
Table 3
Structure ofbound tariffs, industrial products (excluding petroleum products)
Pre-Uruguay Round Post-Uruguay Round
Number oftariff lines:
Total 11,180 11,180
With unspecified dutyrate 0 0
Simple tariff average 54.1 30.0
Standard deviation 28.3 7.6
Weighted tariff average based on1989 imports 40.6 27.0
Source: WTO Secretariat.WT/BOP/W/7
Page6
Other measures affecting imports
14. Most imports aresubject toautomatic import licensing intheformofprior approval byBank
ofBrazil, essentially forstatistical andprice-control purposes. Bank ofBrazil isauthorized tolevy
aprocessing feeR$66.70 perlicence. Import prohibitions apply tousedconsumer goods suchas
second-hand carsandmotorcycles.
Exchange arrangements affecting imports
15. TheNational Monetary Council (CMN) isresponsible forformulating overall foreign exchange
policy. AsfromJuly1994importers arepermitted topurchase foreign exchange intheexchange market
within 180daysofsettlement date.SECEX mayapprove applications forpayment forimports ofany
goods atterms ofupto720daysfromthedateofshipment without priorauthorization fromtheCentral
Bank. External financing atterms inexcess of720daysforimports mustbeauthorized bytheCentral
Bank, which willevaluate them inthelightofforeign debtpolicy. Payment oftheamount financed
andaccrued interest maybemade onlyuponpresentation ofacertificate ofauthorization andapayment
schedule issued bytheDepartment ofForeign Capital (FIRCE) oftheCentral Bank.
IV. Motor vehicles andparts
16. Brazil, with3percentofworld motor vehicle production in1993 wasninth among world
producers. Thevehicle industry plays asignificant roleintheBrazilian economy, accounting for
around 2percentofGDP; exports ofmotor vehicles andpartswere8.6percentofthetotalexports
in1994. Established inthelate1950s under heavy protection, including stringent local content
requirements, fiscal benefits, foreign exchange advantages andmarket reserve rules, themotor vehicle
industry wassetupinitially tocater forthedomestic market. However, asaresult offluctuations
indomestic demand overtheyears, external markets gained significance fromthemid-1970s: in1974
theIndustrial Development Council lifted allincentives previously granted, withtheexception ofthose
available under theCommission fortheConcession ofFiscal Benefits forSpecial Export Programmes
(BEFIEX). During thefollowing twoyears, allcarproducers thenoperating inBrazil signed export
commitments under theseprogrammes. Theshare ofexports ofmotor vehicles indomestic production
grew from 8percentin1975 to13percentin1980, 21percentin1985 and38percentin1987,
declining to24percentin1993. Exports ofengines andparts alsoincreased. Exports supported
production inyears ofsluggish domestic demand: attheonset ofthedebtcrisis inthe1980s, domestic
salesdropped bymore than40percentin1981, while exports increased by35percent.WT/BOP/W/7
Page7
17. Inrecent years, significant increases invehicle output haveoccurred in1988 (16percent),
1993 (30percent) and1994, when output roseby14percenttoover1.5million vehicles.
18. Currentlyvehiclemanufacturingisdividedamongnineproducers.Passengercars,whichaccount
fornearly 80percentofallmotor vehicles produced in1993, areproduced byfourmultinational
companies (Volkswagen, Fiat,General Motors andFord). Parts andcomponents areproduced by
nearly 1,600 firms, producing around 5,000 different items. Thefourmajor companies haveannounced
plansinvolving US$10 billion ofinvestment inthecoming years forincreasing capacity andproductivity
andupgrading factories.2
19. Brazilisanetexporterofmotorvehicles,withUS$1.5billionofearningsin1994frompassenger
motor vehicles, lorries andtrucks, buses andtractors, andUS$1.4 billion fromparts. Import payments
formotor vehicles in1993 amounted toUS$920 million (US$707.1 million forpassenger transport
vehicles) andUS$828.2 million forparts; imports ofmotor vehicles increased bynearly 80percent
toUS$1.6 billion in1994andbyUS$757 million inthefirsttwomonths of19953(Chart 2).Imported
vehicles were 12.2oflocalproduction in1994 and37.2percentinthefirsthalfof1995.
2Financial Times of11August 1995
3Economist Intelligence Unit, London: Brazil; Country Report, 2ndQuarter, 1995.WT/BOP/W/7
Page8
WT/BOP/W/7
Page9
20. Main export destinations ofpassenger transport vehicles, goods vehicles andpublic transport
passenger vehicles in1994wereArgentina (32percent), Italy(15percent), Chile 9percent), Mexico
(9percent), Uruguay (7percent). Argentina (31percent)andtheUnited States (23percent)were
themain markets forBrazilian exports ofparts in1994.
21. Main sources ofimports ofpassenger vehicles in1993 were Japan (29percent), Argentina
(22percent),UnitedStates(17percent),Italy(12percent),Germany(11percent),France(2percent),
Russian Federation (2percent)andRepublic ofKorea (2percent). Argentina (30percent), Germany
(19percent), United States (13percent) andJapan (13percent) were themain suppliers ofparts
in1993.
22. Theaverage nominal tariff protection forthemotor vehicles sector hasbeentraditionally the
highest intheeconomy. From thetariff reduction programme of1991 onwards, therateapplied on
imports inthissector wassuccessively reduced from 105percentto20percentby1994. Therate
wasagain raised to32percentinFebruary 1995andto70percentinMarch 1995. IntheUruguay
Round thetariff inthissector willbeconsolidated at35percent.
23. Tariffs onfullyassembled automobiles (HS8703.21-8703.90) andlighttrucks (8704.21.10, 90;
8704.31.10, 90)currently stand at70percent; tariffs onother classes ofassembled vehicles are
generally 32percent. Duties onpartsaregenerally 14percentand18percent. Under thecurrent
tariff reduction schedule, ratesof70percentwillbereduced to62percentinJanuary 1996 andto
30percentinMarch 1996, while the32percentratewillbecutto30percentinJanuary 1996
(WT/L/66/Add.1).
24. Inaddition totariffs, aseries offederal andstatetaxes arecharged onimports. Thefederal
taxesare:Importation TaxandTaxonIndustrialized Products. StateTaxes arecharged oncirculation
ofcertain merchandises andservices. Following anagreement withmanufacturers, unions anddealers
inApril 1992, theGovernment lowered stateandfederal taxes by12percentage points inreturn for
a7.5percentcutinprofit margins bymanufacturers anda2.5percentbydealers aspartofefforts
toincrease competition andprice stability.
V. Macroeconomic andTrade Developments4
Introduction
25. Despite itsmany achievements, theperformance oftheBrazilian economy hasbeenhistorically
marred bystrong inflationary pressures. Inflation control hasbeenoneofthecentral problems of
economic policy. Following asharp reduction ofexternal capital inflows andanincrease infactor
payments abroad intheearly 1980s, inflation accelerated, leading toaslowdown inthegrowth of
investment anddomestic output. Thesuccessive Brazilian governments havemade several attempts
tocontain theinflationary pressures. Theyhaveadopted stabilization programs thathaveheavily relied
onpriceandwage freezes andonunilateral modifications intheterms offinancial contracts. However,
thesemeasures werenotsupported byasufficient tightening offinancial policies andresulted, therefore,
inonlybriefperiods ofreduced inflation. Throughout thesecond halfofthe1980s andtheearly1990s,
monthly inflation remained mostly above 10percent,withseveral periods during which theinflation
4Thepresent analysis isbased onprovisional datafor1994 and1995. Incontrast tothestandard practice,
theanalysis draws ondifferent statistical sources thatmaynotbestrictly comparable.WT/BOP/W/7
Page10
reached arateashighas80percentpermonth (e.g., late1989). Following eachattempt tostabilize
thecurrency, inflation rebounded withgreater intensity ascontrols wererelaxed andindexation was
intensified, andthecredibility ofthese programmes dwindled.
26. Thelatest stabilization programme wasintroduced in1994. Theprogramme wasbuilton
measures adopted in1990thatincluded tightcredit targets, thestrengthening ofpublic finance, price
liberalization measures, privatization, trade liberalization, various adjustments totheexchange rate
policies andmodifications towageindexing. Themainobjective ofthe1994program wasthereduction
ofinflation from about 42percentpermonth inthefirstsemester of1994 tothelevel atparwith
international inflation rates. Theprogram 'smaincomponents included strictfinancial policies combined
withmeasures thatwould reduce whatisknown inBrazil asthe"inertial" element ofinflation. That
includes measures thatdonotresort toprice freezes ortounilateral modifications ofcontractual
arrangements. Theoperational balance ofthepublic sector wastargeted at0.6percentofGDP, and
theprogram assumed afurther reform ofpublic finances, anexpansion oftheprivatization program
andreductions inimport tariffs. Furthermore, anewcurrency -thereal-wasintroduced inthree
stages between March 1andJuly11994.
Output, Prices andEmployment
27. Thestabilizationmeasuresadoptedinthecourseof1994ledtoasignificantreductionofinflation,
eventhough theratestillremains high. Annual inflation dropped from about 2,700 percentatthe
endof1993 to1,094 percentattheendof1994 (Chart 3).Thisreduction reflected successful
stabilization measures inthesecond halfoftheyear,when monthly inflation ratesdropped dramatically.
Theestimates varyamong different sources buttheyshow aclear trend oflower inflation between
October 1994andMarch 1995intherange of1-3percentpermonth, compared toabout 48percent
inJuly1994. However, starting inMarch 1995, theinflationary pressures began again toaccelerate
asaresult ofdemand pressures, adjustment ofprices inthepublic sector andexchange rateadjustments
(Chart 4).Even though estimates varyfor1995, itisevident thattheinflationary pressures havenot
beenfullysubdued; inflation accelerated inJuneandJulybut,according tothemostrecent information,
itslowed down inAugust.WT/BOP/W/7
Page11
WT/BOP/W/7
Page12
28. Following stagnation andrecession in1991and1992, theeconomy began torecover in1993
when itregistered agrowth ofGDP of4.1percent(Chart 5).Therecovery wasstimulated byan
extremely rapid growth ofdomestic demand, induced bystrong growth ofrealwages andbythelow
levelofrealinterest ratesinthefirstthree quarters oftheyear; realinterest ratesintheovernight
market forgovernment securities dropped to4percentfrom about 30percentin1992, while real
wages inthemanufacturing sector, forexample, haveincreased in1993, according toofficial sources,
by11.4 percent(Sao Paulo region). Thegrowth wasgenerated byastrong recovery inthe
manufacturing sector, brought about byradical restructuring inthesector, inconstruction, commerce
andintransportation activities. In1994, GDPgrowth further accelerated toanestimated 5.8percent,
stimulated byafurther strong growth ofrealwages andbyasharp dropofinflation.5According to
Central Bank estimates, theDecember-to-December increase inrealwages intheSaoPaulo region
was11.4percentin1994. There areclear indications thatthestrong growth ofdomestic demand
continued intheearly partof1995. TheWorld Bank reports thatGDP increased by10.5percent
inthefirstquarter of1995 compared tothefirstquarter of1994, withindustrial sales growing at
28percent. Most recent estimates oftheBrazilian statistical institute (IBGE) suggest aslowdown
inthesecond quarter of1995. Nevertheless, growth inthefirst halfof1995 wasestimated bythe
same source at7.8percent.
29. Thedomesticrecoveryhasbroughtaboutsomeimprovementinthelabourmarket.Therecession
oftheearly 1990'sresulted insubstantial displacement oflabour andinrising unemployment. The
official rateofunemployment rosemore orlesssteadily between December 1989andApril 1993when
itreached thelevel of6.1percentcompared to2.4percentregistered inDecember 1989. The
manufacturing sector wasparticularly seriously affected. Forexample, measured employment inthe
manufacturing sector oftheSaoPaulo region, where alarge partofthesector islocated, declined by
21.3percentbetween 1989and1993. Therecovery ofproduction increased demand forlabour and,
asaresult, theunemployment ratestarted tofallinthemiddle of1993 andtheunemployment rate
continued tofallin1994. Bytheendof1994, theratewasdown to3.4percent. According tothe
World Bank, therateofunemployment stabilized throughout thefirsthalfof1995inallmajor regions
ofthecountry.
5Thecontribution ofwages toinflation isnotentirely clear. There aresome indications thatmanufacturing
productivity alsoincreased quite rapidly. Iftrue, theproductivity-adjusted growth ofrealwages would have
been substantially lower andsowould be,therefore, itsinflationary impact.WT/BOP/W/7
Page13
VI. Balance ofPayments
30. Thebalance ofpayments position ofBrazil hasbeencrucially dependent inrecent years on
thedevelopment oftheexternal debtburden. Brazil hascontracted overtheyears averylargeexternal
debtwhich stood attheendof1990 atUS$148.3 billion, orabout 26percentofGDP. Thismakes
Brazil oneofthemostheavily indebted nations intheworld. Thehighexternal debthasputaheavy
burden onthecountry 'sability toservice itsdebtobligations, which became particularly evident between
1989and1991when external arrears increased fromabout US$4 billion toUS$19.6 billion. Following
acomprehensive debtrescheduling package withtheParis Club andarestructuring agreement with
commercial bankcreditors, together withasignificant increase inthetradesurplus andinforeign capital
inflows,thebalanceofpaymentssituationstrengthenedandthevalueofarrearswasreducedconsiderably
in1992 -toUS$5.3 billion. Therelatively strong trade performance combined withrenewed access
toforeign capital markets andarelatively highlevelofrealinterest rateshavebeeninstrumental in
attracting foreign capital.
31. Despite thehighly unstable monetary situation andtheheavy external debtburden, thebalance
ofpayments continued toberelatively strong in1993 andin1994. This reflected partly the
continuation offavourable trends inthetrade balance. Italsoreflected afurther increase incapital
inflows andthecompletion oftheagreement onApril 15,1994 withcommercial bankcreditors that
provided forasignificant debtanddebtservice reduction. Theagreement, which involved the
restructuring ofsomeUS$47.2 billion ofdebt(including allexisting payments arrears tobankcreditors),WT/BOP/W/7
Page14
resulted inreductions ofUS$4.3billion inthestock ofdebtandofnearly US$10 billion inthepresent
value oftotaldebt-service obligations overthe30yearperiod.
32. Thefollowing section willdescribe separately andingreater detail thedevelopments inthe
current andcapital accounts. Inaddition, theanalysis willbeconcluded withanassessment ofthe
adjustment process overthelastfouryears asreflected inthechanges ofthemain macroeconomic
balances -thesavings-investment balances. Since changes inthesavings-investment balances have
adirect counterpart inthecorresponding changes inthecurrent account balances, theyareincluded
heretoidentify themainforces andinstruments ofthedomestic adjustment process anditsimpact on
theevolution ofthebalance ofpayments.
Current account
33. Thecurrent account ofBrazil hasbeenmoreorlessinbalance overthelasttwoyears. Following
alargesurplus, amounting toUS$6 billion in1992, orabout 1.5percentofGDP, thecurrent account
turned intorelatively small deficits in1993 and1994, amounting toUS$0.6 billion in1993 and
US$1.5 billion in1994, or0.1and0.2percentofGDP respectively (Table 4).6Thechanges inthe
current account inrecent years havebeendependent onthedevelopments ofthreevariables -thechanges
inthesurplus onmerchandise trade, inthedeficit intrade inservices andininterest payments on
outstanding debt.
6ThecurrentaccountpositionofBrazilisevenstrongerifitisexpressedinconstantprices,thatisafterallowing
forchanges interms oftrade thatimproved considerably in1993 andin1994. Theimprovement intheterms
oftrade hasbeen estimated bytheIMF tobe1.8and6.1percentrespectively.WT/BOP/W/7
Page15
Table 4-Brazil -Selected Indicators ofBalance ofPayments, 1991-94
(Inbillions ofU.S. dollars)
1991 1992 1993Prelim.
1994
Trade balance 10.6 15.2 13.3 10.4
Exports (f.o.b.) 31.6 35.8 38.6 43.6
Imports (f.o.b.) -21.0 -20.6 -25.3 -33.2
Services andtransfers (net) -12.0 -9.2 -14.2 -11.8
ofwhich: interest -8.6 -7.3 -8.4 -6.4
Current account balance1-1.4 6.0 -0.9 -1.5
Capital account -3.3 23.9 9.3 14.4
Foreign direct investment 0.9 1.3 0.6 1.8
Portfolio investment -0.4 1.6 5.7 6.4
Long-term capital (net) -1.5 19.6 3.8 7.3
Multilateral -0.3 -0.6 -0.7 -0.1
Banks -2.2 5.1 -3.4 5.0
Other 1.0 15.1 8.0 2.4
Misc.2-2.2 1.4 -0.8 -1.1
Overall balance -4.7 29.9 8.4 12.9
Change inreserves (-indicates anincrease) 0.4 -14.5 -8.7 -7.2
Liabilities 4.3 -15.4 -0.3 -5.7
Arrears 5.6 -14.3 1.1 -5.6
Other -0.7 -0.7 -0.3 0.1
Memorandum items
Current account inpercent ofGDP -0.3 1.5 -0.2 -0.2
Interest payments inpercent ofGDP -2.3 -2.1 -2.0 -1.3
Debt service inpercent ofexports ofGNFS352.1 45.8 52.8 30.2
Import volumes (percent change) 9.5 -4.0 21.5 33.1
Export volumes (percent change) 3.5 13.8 12.6 5.5
Terms oftrade (percent change) 4.6 -0.8 1.8 6.1
Gross reserves (endofperiod inUS$billions) 8.8 23.3 31.7 38.5
Gross reserves (months ofimports ofgoods andnonfactor
services)4.0 11.0 11.9 11.3
Trade balance inpercent ofGDP 2.6 3.8 2.8 1.7
1 Includes reinvested profits.
2 Includes Brazilian lending abroad, flows related toDDSR transactions, short-term capital, goldmonetization, valuation adjustments,
anderrors andomissions.
3 Goods andNon-Factor Services.
Source: IMF
34. Brazil hasafairly longhistory oflarge surpluses inmerchandise trade (since 1982). Even
though thetrade surpluses havebeenfalling bothinabsolute terms andasapercentage ofGDP since
1992, theycontinued tobelarge untilthesecond halfof1994. Thesurplus onmerchandise trade
amounted toUS$15.2 billion in1992, or3.8percentofGDP. Even though thesurpluses declined
in1993andin1994, theycontinued tobesufficiently largetocover deficits intradeinservices including
foreign transfers andinterest payments. Asaresult, thecurrent account remained roughly inbalanceWT/BOP/W/7
Page16
in1993and1994, andthelarge netcapital inflows thathavetaken place overthelastthree years (see
further below) haveresulted intheincrease ofinternational reserves.
35. Thedeterioration inthecurrent account in1993 and1994 relative to1992 entirely reflected
thereduction intradesurpluses. Thelatter wasduetotheconsiderable slowdown intherateofgrowth
ofexports andasharp acceleration ofimports between 1992 and1994 astheeconomic recovery
progressed anddomestic demand strongly expanded. Incontrast, interest payments declined in1994,
amounting toUS$6.4 billion, afallofabout 24percentfrom1993. Thedeficit intheservice account
alsodeclined fromUS$15.4 billion in1993toUS$14.4 billion in1994, mainly reflecting areduction
ininterest payments. Bytheendof1994 andthebeginning of1995, however, thepattern began to
change. Themonthly merchandise trade surpluses disappeared inthelatter partof1994, fuelled by
therapid growth ofdomestic demand (Chart 6).Thedeficits inservices andinfinancial contracts
increased considerably. According togovernment sources, thetradedeficits persisted untilJuly1995,
when asmall surplus ofUS$2 millions wasregistered. Preliminary figures forAugust 1995indicate
thatthetrade surplus increased toUS$300-350 million.
36. Thereduction oftrade surpluses reflected boththesignificant upturn oftheeconomy andthe
liberalization ofimport measures. These factors ledtoasharp increase ofdemand forimports stimulated
bythefastgrowth ofrealwages, thenominal appreciation ofthecurrency inthesecond halfof1994
and,mainly, bycredit andmonetary expansion. Imports expanded byabout 23percentin1993 in
realterms andevenfaster in1994 -by32percent. Theexpansion ofimport demand continued in
thebeginning of1995 asimports arereported tohavealmost doubled between January andMarchWT/BOP/W/7
Page17
of1995 compared tothesame period in1994.7Theslowdown inexports alsohaditsorigins inthe
domesticrecovery,whichdivertedresourcestothedomesticmarket.Anothershort-termfactoraffecting
theperformance ofexports andimports attheendof1994 andinthebeginning of1995 wasthe
anticipation bytraders ofadevaluation, aswellastheirexpectations about newtrade restrictions;
these expectations delayed some export decisions andaccelerated imports.
37. Thestrength ofdomestic recovery andthegrowth ofimport demand resulted inarapid growth
ofimports ofcapital goods. Total imports ofcapital goods expanded by45percentbetween 1990
and1993 incurrent dollar terms, considerably faster thantotalimports (Table 5).According to
government sources, strong growth ofimports ofcapital equipment continued in1994. Themost
dynamic capital import items included transport equipment, which more thantripled since 1990, and
imports ofelectrical equipment. Incontrast, imports ofconsumer goods, other thanpassenger cars,
andimports offuelsgrewmodestly, thelatter benefitting fromafavourable development infuelprices
inworld markets. Imports of"other rawmaterials" expanded butalsoatamore modest pace
(38percent).
38. In1994and1995,however,themostdramaticincreasewasinthegrowthofimportsofpassenger
cars. (SeeSection IVabove).
Table 5-Brazil: Commodity composition ofmerchandise imports byend-use, 1991-1995
(Inmillions ofUSdollars andpercentage shares)
January-June
1991 1994 1994 1995
Value %Share Value %Share Value %Share Value %Share
Total Imports 21,042 100.0 33,105 100.0 13,331 100.0 25,716 100.0
Nondurable consumer
goods1,501 7.1 1,435 7.4 797 4.0 2,316 9.0
Foodstuff 880 4.2 1,286 3.9 398 3.0 1,242 4.8
Clothing 66 0.3 109 0.3 38 0.3 194 0.8
Durable consumer goods 827 3.9 2,714 4.2 1,033 7.8 3,186 12.4
Machine andapparatus
fordomestic use163 0.8 329 1.0 107 4.8 335 1.2
Vehicles 121 0.6 1,233 3.7 435 3.3 2,360 9.2
Parts, spares and
accessories325 1.5 623 1.9 294 2.2 470 1.9
Fuelandlubricants 4,894 23.3 4,351 13.1 1,822 13.7 2,699 30.5
Oilandderivatives 4,073 19.4 4,044 12.2 1,799 13.5 2,641 10.2
Crude oil 3,371 16.0 2,342 7.1 879 6.6 1,423 5.5
Derivatives 702 3.3 1,702 5.1 920 6.9 1,152 4.7
Rawmaterials 8,624 40.9 13,715 41.4 6,553 49.2 11,920 46.4
Cereals 1,080 5.1 1,408 4.2 570 4.3 917 3.4
Fertilizer 374 1.8 636 1.9 219 1.6 336 1.2
Chemical products 2,833 13.5 4,573 13.8 1,805 34.1 3,451 13.4
Ironandsteel 342 1.6 433 1.3 191 1.4 332 1.3
Table Cont'd
7SeeBrazil: Country Report, 2ndQuarter, London: TheEconomist Intelligence Unit, 1995, p.22.WT/BOP/W/7
Page18
January-June
1991 1994 1994 1995
Value %Share Value %Share Value %Share Value %Share
Other metals 433 2.1 571 1.7 285 2.1 615 2.4
Paper products 443 2.1 559 1.7 232 1.7 629 2.4
Plastic products 741 3.5 1,334 4.0 566 4.2 1,234 4.8
Capital goods 5,205 24.7 5,886 29.1 3,126 23.4 5,593 21.7
Machines andapparatus
foroffice903 4.3 1,537 4.6
Tools 49 0.2 100 0.3
Accessories toindustrial
machines486 2.2 514 1.6
Industrial machines 1,611 7.7 2,349 7.7
Other fixed equipment 335 1.6 1,046 3.2
Spare parts for
industrial capital goods471 2.2 1,161 3.5
Accessories fortrans-
portation equipment868 4.1 1,813 5.5
Moving transportation
equipment336 1.6 964 2.9
Fixed transportation
equipment39 0.2 41 0.1
Spare parts fortrans-
portation equipment79 0.4 65 0.2
(Annual percentage change)
1992 1993 1994 1995
(Jan-
June)
Memorandum items
Total imports -2.3 23.0 31.1 93.0
Nondurable consumer
goods23.5 24.1 68.2 190.8
Durable consumer goods 4.6 83.5 71.0 208.0
Fuels andlubricants -8.1 -9.0 6.3 48.8
Rawmaterials -1.7 35.1 19.6 81.8
Capital goods 6.8 19.5 48.5 29.0
Source: IMF
39. Inaddition totheinfluence ofdomestic demand anddomestic policies, thetrade performance
hasalsobeenaffected byexternal factors. Allthese forces havestimulated anadjustment process in
thetradeables sector, especially intheexport producing segment. Therecession intheOECD area
intheearly1990s primarily affected exporters ofprimary andsemi-manufactured products. Theresult
wasstagnation ofvirtually allprimary exports suchascoffee, cocoa, tobacco, soybeans, sugar and
ironore(Table 6)between 1990 and1993. Semi-manufactured products ofagricultural origin also
stagnated orevendeclined. Incontrast, themanufacturing sector responded welltostructural policies
andother incentives, andtherecovery ofoutput noted above waspartly stimulated byfastgrowth
ofexports, which increased by39percentbetween 1990and1993. Themostdynamic exports included
electricandnon-electricmachinery,transportequipment,footwearandsteelproducts.Theimprovement
inexport performance in1994 wasmainly duetoastrong recovery ofprimary exports (coffee and
soybeans) andsemi-manufactured products; manufactured exports alsoincreased, albeit ataslower
pace.WT/BOP/W/7
Page19
Table 6-Brazil: Commodity composition ofmerchandise exports byprincipal commodity groups, 1991-1993
(Inmillions ofUSdollars andpercentage shares)
USdollars Shares
1991 1994 1995
(Jan-June)1991 1994 1995
(Jan-June)
Total exports (f.o.b.) 31,620 43,545 21,449 100.0 100.0 100.0
Primary products 8,743 11,058 5,257 27.7 25.4 24.5
Coffee beans 1,382 2,219 1,085 4.4 5.1 5.1
Raw sugar 209 173 236 0.7 0.4 1.1
Soybeans andsoybran 1,817 3,296 501 5.7 7.6 2.3
Cocoa beans 88 106 13 0.3 0.2 0.1
Tobacco leaf 681 694 182 2.2 1.5 0.8
IronOre 2,600 2,294 1,297 8.2 5.3 6.0
Other 1,966 2,274 1,937 6.2 5.2 9.0
Semi manufactures 5,364 6,893 3,804 17.0 15.8 17.7
Crystal sugar 47 614 233 0.1 1.4 1.1
Cocoa products 178 173 45 0.6 0.4 0.2
Tin 100 38 24 0.3 0.2 0.1
Soybean oil 209 828 434 0.7 1.9 2.0
Paper paste 578 840 663 1.8 1.9 3.1
Ironproducts 672 734 383 2.1 1.7 1.8
Steel products 952 1,072 606 3.0 2.5 2.8
Leather hides 308 459 271 1.0 1.1 1.3
Other 2,320 2,085 1,145 7.3 4.6 5.3
Manufactures 17,085 24,959 11,942 54.0 57.3 55.7
Soluble coffee 97 340 207 0.3 0.8 1.0
Refined sugar 142 185 140 0.4 0.4 0.7
Electric machinery 1,015 1,395 715 3.2 3.2 3.3
Non-electric machinery 2,597 3,660 1,904 8.2 8.4 8.9
Transport equipment 2,217 3,727 1,507 7.0 8.6 7.0
Footwear 1,245 1,625 757 3.9 3.7 3.5
Fruit juices 910 992 508 2.9 2.3 2.4
Steel products 2,648 2,660 1,012 6.4 6.1 4.7
Processed beef 219 287 162 0.7 0.7 0.8
Cotton fabrics andyarn 269 291 127 0.9 0.7 0.6
Other textiles 624 722 356 2.0 1.7 1.7
Petroleum derivatives 722 1,131 454 2.3 2.6 2.1
Other 4,380 7,944 4,093 13.9 18.2 19.1
Other exports 428 635 446 1.4 1.5 2.1
(Annual percentage change)
1992 1993 1994 1995
(Jan-June)
Memorandum items
Total exports 13.2 7.8 12.8 6.7
Primary products 0.9 6.2 18.1 7.4
Semi-manufactured -2.8 5.6 26.6 25.9
Manufactured 25.0 9.8 6.3 0.4
Source: IMFWT/BOP/W/7
Page20
40. Thesecond important feature oftheadjustment process wasthegeographical reorientation of
foreign trade. Inthepast,thetraditional partners ofBrazil werethedeveloped markets oftheEuropean
Union, theUnited States andthemarkets oftheoil-exporting countries andLatin America (Table 7).
Thetrade orientation began tochange dramatically inthebeginning ofthe1990'swiththerecession
intheOECD countries andwiththecreation ofMERCOSUL. Therecession anddepressed prices
intheOECD areaintheearly 1990'swereinstrumental ingenerating stagnation ofBrazil 'sexports
tothese countries andasignificant decline intheirshare intotalexports ofBrazil. Incontrast, the
Latin American market began toplayanincreasingly more important roleasparticularly exports to
theMERCOSUL countries began torapidly expand. Exports tothese countries almost quadrupled
inonlythree years -between 1990 and1993. TheLatin American market nowtakes about aquarter
ofBrazil 'sexports compared to11percentin1990 andtogether withtheEuropean Union, itisthe
most important export market forthecountry.
Table 7-Brazil -Direction ofTrade, 1990, 1994
(Inmillion USdollars andpercent)
USDollars Shares1
1990 1994 1990 1994
Total exports 31414 43545 100.0 100.0
Latin America 3469 10163 11.0 23.3
MERCOSUR 1313 5922 4.2 13.6
Argentina 639 4136 2.0 9.5
Paraguay 379 1054 1.2 2.4
Uruguay 295 732 0.9 1.7
Other 2156 4241 6.9 9.7
EC 9852 11812 31.4 27.1
United States17675 8951 24.4 20.6
Japan 2350 2574 7.5 5.9
Oilexporters21166 847 3.7 1.9
CMEA 704 534 2.2 1.2
Other 6198 8664 19.7 19.9
Total imports 20661 33105 100.0 100.0
Latin America 3776 6663 18.3 20.1
MERCOSUR 2327 4656 11.3 14.1
Argentina 1412 3612 6.8 10.9
Paraguay 330 366 1.6 1.1
Uruguay 585 678 2.8 2.0
Other 1449 2007 7.0 6.1
EC 4232 8590 20.5 25.9
United States24412 7674 21.4 23.2
Japan 1247 1798 6.0 5.4
Oilexporters33990 2382 19.3 7.2
CMEA 359 448 1.7 1.4
Other 2645 5550 12.8 16.8
1 Sums maynotaddupduetorounding.
2 Including Puerto Rico.
3 Algeria, Iran, Iraq, Kuwait, Lybia, Nigeria, Qatar andSaudi Arabia.
Source: Brazilian AuthoritiesWT/BOP/W/7
Page21
Capital account
41. Thecapital account remained relatively strong inrecent years despite thelarge andgrowing
external debtandsome weakening ofthecurrent account asnoted above. Thisprimarily reflected
therescheduling agreements withtheParis Clubandcommercial bankcreditors, theaccess toexternal
capital markets andrelatively highinterest ratescombined withimproving business prospects throughout
theperiod of1993 untilthebeginning of1995. Even though thetotaloutstanding external debthas
beenrising foranumber ofyears, theburden ofdebtservicing hasbeenconsolidated andevensomewhat
reduced since1990. While thetotalexternal debtoutstanding increased fromUS$115.5 billion in1989
toUS$145.7 billion in1993(Table 8),itsshare inGDPhasremained essentially constant. Theexternal
debtexposure interms ofearnings from exports ofgoods andnon-factor services declined more
significantly -from361percentin1991to349percentin1993. More importantly, thedebtservice
ratio-theratioofinterest payments andamortization andofexports ofgoods andnon-factor services -
wassignificantly reduced in1994 -from about 52.8percentin1993 to30.4percentin1994.
Table 8-Brazil -External Debt, 1991-1994
1991 1992 1993 1994
External Debt (Inbillions ofUSdollars)
Total 123.9 133.8 139.3 148.3
ofwhich:
Medium- andLong-Term 110.3 114.0 116.5 ...
Short-Term 13.6 19.9 22.8 ...
Memorandum items
Total External Debt
Inpercent ofGDP 29.6 31.5 30.7 ...
Inpercent ofexports GNFS1360.6 341.7 331.6 ...
ofwhich:
Short-term external debt
Inpercent ofexports GNFS139.5 50.7 54.3 ...
Inpercent ofgross
international reserves 155.0 85.4 71.9 ...
Interest Payments
Inpercent ofGDP 2.3 2.1 2.0 1.3
Debt Service
Inpercent ofexports ofGNFS152.1 45.8 52.8 30.2
External Payment Arrears
Inbillions ofUS$ 19.6 5.3 6.5 0.8
1 Goods andNon-Factor Services.
Source: IMF
42. Thesecondpositivefeatureofrecentdevelopmentsinthecapitalaccountwastherelativereduction
intheroleofshort-term capital. Exposure totheshort-term debtwassharply decreased, andthis
considerably reduced thevulnerability ofBrazil 'sexternal position tospeculative fluctuations ofshort-
term money. Theshort-term debtasapercentage ofgross international reserves dropped from
152percentattheendof1990to72percentattheendof1993. Even though theexposure toshort-
termdebtremains high, theterm-structure ofexternal debtwasmuch improved bytheendof1994.WT/BOP/W/7
Page22
43. Thethirdpositive symptom ofastrong capital account hasbeentheinflow offoreign capital.
Brazil hasbenefited inrecent years fromalargeinflow offoreign capital which substantially exceeded
therepayment offoreign loans mainly tomultilateral institutions. Initially, thebulkofthenetcapital
inflow came fromforeign direct investment. In1991, forexample, foreign direct investment amounted
to0.9billion andtheamount haddoubled by1994(Table 1).Starting in1992, however, thestructure
offoreign capital inflow shifted towards indirect foreign investments-portfolio investments, long-term
lending bycommercial banks andtowards financing newdebtissues. By1994totalportfolio investment
andnetlong-term capital amounted tomore than13billion. What isperhaps equally important isthat
virtually allofthis"new money" came fromprivate sources eventhough thecountry hasalsoreceived
aconsiderable support from multilateral financial institutions.
44. Inview ofthelarge capital inflows andtherelatively mildcurrent account deficit, thelevel
ofinternational reserves hasdramatically increased. Gross international reserves morethanquadrupled
between theendof1991andtheendof1994astheyincreased fromjustunder 9billion to38.5billion
(Chart 7).While thelevelofinternational reserves represented about 4months ofimports ofgoods
andnon-factor services attheendof1991, thecorresponding ratioincreased toabout 11.3months
ofimports bytheendof1994. International reserves continued toriseinthefirstseven months of
1995.
WT/BOP/W/7
Page23
VII. Macroeconomic Adjustment
Saving-Investment Balances
45. Onthebasisofcurrent annual data,theredoesnotappear tohavebeenmajor balance ofpayment
pressures toadjust themain macroeconomic balances (tomaintain theexternal equilibrium) during
theperiod of1992 and1994. Asnoted above, therelatively easyaccess toforeign capital andthe
relatively balanced current account havemaintained thebalance ofpayments fairly strong. Thegrowth
ofinternational reserves hasbeensosignificant thatthereserves cancurrently provide atemporary
cushion against short-term fluctuations inthebalance ofpayments. Theonlycompelling balance of
payments reason inthepastwastheheavy burden ofexternal debt,butthishasbeenaddressed through
thesuccessful negotiations withtheexternal creditors, alsoasnoted above. Totheextent thatdomestic
macroeconomic adjustment wasnecessary, thereasons forsuchanadjustment were, therefore, mainly
inflationary pressures. Even though thedomestic inflation hasproduced aconsiderable degree of
currency andexchange rateinstability, theimpact onthebalance ofpayments hasbeenrelatively mild
asindicated bythestrength ofcapital inflows andbythestrength ofthetradeaccount through mid-1994.
46. Nevertheless, thesituation maybechanging atpresent. After theinitial success incontrolling
inflation theinflationary pressures arerising again, asnoted above. More importantly, therapidly
deteriorating trade balance, which hasbeensensitive tochanges indomestic demand, hasalsoraised
serious concerns about thebalance ofpayments. Totheextent thatthedeterioration istemporary and
willreverse itself, theexisting level ofinternational reserves appear tobesufficient tocontain the
pressures ontheexchange rate. Ontheother hand, should thedeterioration reflect more permanent
forces, andtheacceleration indomestic inflation maybeindicative ofsuchpressures, anadjustment
directed towards afurther restraint ofdomestic spending willbecalled for.
47. Thenature ofadjustment thatwould berequired canbeseenfromthedevelopments ofsavings-
investment balances inthelastfouryears (Table 9).Amajor adjustment ofthesavings-investment
balance tookplace during therecession of1990-1992, which ledtoasharp increase intheinvestments
ratesrelative to1988. While inlate1980'stheinvestment rateswereabout 17percentofGDP, the
rateincreased to19.6percentin1991anditedged further upwards in1992-1994toabout 20percent
onaverage. Anegative side-effect oftherecession wasadropinsavings rates-thenational savings
asapercentage ofGDP dropped from 20.1percentin1989 to19.3percentin1991. Amajor
turnaround came in1992 when thesavings rateincreased to21.3percent.
Table 9-Brazil -Savings -Investment Balance, 1991-94
(Inpercent ofGDP inconstant 1980 prices)
1991 1992 1993 1994
Gross National Savings119.3 21.3 20.2 19.8
Gross Domestic Investments119.6 19.6 20.4 20.0
Current Account Balance -0.3 1.6 -0.1 -0.2
1 Gross National Savings, Gross Domestic Investments andthecurrent account balance arecalculated incurrent prices. Thefigures
arenotconsistent withthecorresponding datainTable 4andthesmall differences thatexistareduetorounding.
Source: IMFWT/BOP/W/7
Page24
48. Theadjustment process continued in1993and1994butwithrelatively lesssuccess thanin1992.
Domestic investment spending continued toberelatively strong astheinvestment ratemoved upwards
andwaswellabove theleveloflate1980's.However, thehighsavings ratethatwasachieved in1992
began toslidedownwards thereafter. Asresult, thecurrent account surplus thatrepresented 1.6percent
ofGDP in1992, turned intoasmall deficit ofabout 0.2percentin1993 and1994.
Public Finance
49. Theprincipal factors ofthestrong inflationary pressures havebeenofdomestic origin, and
these, inturn, primarily reflected thefinancial pressures inthepublic sector. Thepressures were
notsomuch emanating fromtheoperational activities ofthegovernment andthepublic sector enterprises
butrather from anenormous debtburden thathasbeencontracted bythese entities inthepast. The
operational activities arenormally represented bytwoindicators -operational andprimary balances.
Theformer includes andthelatter excludes netinterest payments onexternal anddomestic debt. In
addition, these entities havetoamortize olddebtthatcanbefinanced from operational surplus and
from newborrowing. Thetotalrequirements foroutside financing aretypically represented bythe
public sector borrowing requirements (PSBR). These indicators aresummarized inTable 10.
Table 10-Brazil -Public Sector Borrowing Requirements andPrimary andOperational Balances ofthe
Public Sector Operations, 1991-94
(Inpercent ofGDP)
1991 1992 1993 1994
Public Sector Borrowing Requirements (PSBR) 24.5 42.4 55.7 43.5
Federal government 6.5 14.3 19.2 16.6
State andmunicipal governments 8.8 15.8 23.6 18.6
Public sector enterprises 9.3 12.4 12.8 8.3
Primary Balance (Deficit -)13.0 2.3 2.7 3.9
Federal government 0.9 1.4 1.5 2.6
State andmunicipal governments 1.4 0.3 0.5 0.4
Public sector enterprises 0.7 0.6 0.7 0.9
Memorandum item
Operational Balance (Deficit -)11.4 -2.1 0.4 0.2
Federal government 0.3 -0.7 0.1 1.3
State andmunicipal governments 1.2 -0.8 0.2 -1.0
Public sector enterprises -0.1 -0.6 0.1 -0.1
1 Primary balance excludes andoperational balance includes netinterest payments. Bothexclude proceeds from privatization.
Source: IMF
50. PSBR increased dramatically between 1991 and1993. Thismainly reflected rapidly rising
borrowingrequirementsofthefederalandstateandmunicipalgovernments.Theborrowingrequirements
ofpublic sector enterprises alsoincreased butrelatively much less. Thegrowth inPSBR wasmainly
duetothesharp acceleration ofinflation inmid-1991 which ledtoalarge increase innominal interestWT/BOP/W/7
Page25
payments. Thegrowth ofborrowing requirements wasconsiderably slowed down in1994inallthree
segments ofthepublic sector, which wasalsoreflected inthereduction intheshare ofthePSBR in
GDP.
51. Theenormous burden ofdebtfinancing hasincreased pressures ontheauthorities toimprove
theireffort tomobilize theirownresources. Theprimary balance ofthepublic sector, measured in
terms oftheshare inGDP, hasbeeninsurplus inrecent years, andthesurplus hasbeenrising since
1992. Thishasbeenpossible asaresult ofnewrevenue measures introduced in1993, theexpansion
ofeconomic activity andstrengthening oftaxadministration. Various spending measures havealso
beenintroduced suchasspending limits andcutsinfederal budget spending. Theoperational budget
ofthepublic sector hasalsobeenrecently insurplus except in1992when interest payments considerably
increased following asharp increase ininterest rates. According tothemostrecent indicates, fiscal
policy weakened in1995. Theprimary surplus declined from 4.6percentofGDP inthefirsthalf
of1994 to3.2percentinthecorresponding period of1995. Theoperational balance swung from
asurplus of0.3percentofGDP toadeficit of1.5percentofGDP.
Monetary Developments
52. Monetary policy wastight during thefirsthalfof1994 -during thefirstmonths ofthe
stabilization programme. Thegrowth ofmoney supply wasunder tightcontrol andtheshare ofmoney
stock inGDP declined incomparison totheendof1993. Forexample, theshare ofbasemoney in
GDP declined from 1.1percentinDecember 1993 to0.7percentin1994. InJuly, however, the
money stock increased dramatically anditcontinued togrow fortherestoftheyear. Theshare of
basemoney inGDP increased from0.7percentinJune1994to3.4percentinDecember ofthesame
year. According totheWorld Bank, thetotalmonetary baseincreased by16billion Realinthesecond
halfof1994, aconsiderable increase incomparison tothefirsthalfof1994 when thecorresponding
increase was6.2billion Real(Chart 8).Other definitions ofmoney supply -M1,M2,M3andM4
allregistered similar changes.
53. Theexpansion ofmoney supply inthesecond halfof1994reflected several factors. Thesharp
fallininflation beginning inthesecond halfof1994 ledtoastrong remonetization process and
significantly contributed tothegrowth ofbasemoney. Nevertheless, domestic demand wasverystrong,
andthisledtoastrong demand forcredit. Domestic demand increased by9percentinrealterms
between JulyandDecember 1994, considerably fuelled bylarger -than-expected growth ofwages.
Stimulated bythestrong growth ofdemand, financial system credit totheprivate sector alsoincreased
rapidly -by50percentcompared withthecumulative inflation rateof17percent. Thesubstantial
inflow offoreign capital continued and,intheabsence ofcentral bankpurchases intheforeign exchange
market, thenominal exchange rateoftherealappreciated interms oftheUSdollar andcontributed
totheexpansion ofcredit andmoney supply.WT/BOP/W/7
Page26
54. Thedevelopments inthefirsthalfof1995 were marked byfurther tightening ofpolicies to
restrict thegrowth ofdomestic demand. Reserve requirements were increased inApril 1995 and
additional restrictions oncredit were introduced atthesame time. Monthly overnight interest rate
rosefrom theaverage 2.3percentinthesecond halfof1994 to4percentinthefirsthalfof1995.
More recently, some ofthesemeasures wererelaxed following signs thatrealGDPgrowth hadstarted
toslow down. Asaresult, thelevel ofovernight interest rates began tofallinJuneandJuly.
Nevertheless, themonetary authorities stepped uptheirrecourse towider useofopenmarket operations
inorder tosterilized theinflow offoreign capital thathascontinued tobeattracted byhighlevelof
interest rates. Despite these measures domestic demand andinflationary pressures continued tobe
strong.
