Brazil’s Central Bank advocates fiscal austerity notwithstanding pandemic

RIO DE JANEIRO, BRAZIL – “We have reached a moment, today, of confronting the pandemic, in which it is necessary to send a message of austerity and fiscal seriousness”, said Campos Neto, at the I Ibero-American Conference of Central Banks, organized by the Bank of Spain and the Ibero-American General Secretariat (Segib).

The economist emphasized that Brazil’s space for fiscal spending is “very small” at present, making it “very difficult” to have the same capacity to formulate policies to sustain the crisis generated by Covid-19 as developed countries.

The Brazilian government made an enormous outlay last year with the distribution of subsidies that reached 68 million Brazilians and which it has resumed this year with lower values and a smaller number of beneficiaries.

These extraordinary expenditures pushed the country’s nominal fiscal deficit to 14% and public debt to record levels above 90%.

Economic agents are now concerned about the distribution of this new round of state aid, as it could further weaken the battered public accounts and aggravate the fiscal crisis that the country is facing.

“When additional spending is attempted the price disorganization caused in the market has a greater impact on growth than the money put into the economy,” Campos Neto pointed out.

The president of the Central Bank thus alluded to the inflationary pressures of the last months that have shot up prices in the largest South American economy, especially those of foodstuffs.

Inflation in Brazil currently stands at 6.10% year-on-year, well above this year’s target of 3.75%, with a tolerance margin of 1.5 points plus or minus.

Rising inflation prompted the Central Bank of Brazil to raise, for the first time since 2015, the benchmark interest rate from 2.00%, a historic low, to 2.75% per year, with room for further increases in the coming months, despite the high incidence of the Covid-19 pandemic, which is experiencing its worst phase in the country.

Source: Swissinfo