New pandemic wave generates greater uncertainty about Brazil, Guedes tells IMF

RIO DE JANEIRO, BRAZIL – The International Monetary Fund (IMF) is holding its regular Spring Meeting, which occurs in early April each year. Because of the Covid-19 pandemic, the Brazilian minister will not attend the meeting but sent a speech to the International Monetary and Financial Committee, in which he expresses the economic team’s views on several topics.

According to Guedes, the Brazilian government provided an adequate and coordinated response to the pandemic’s economic crisis last year. Now the challenge is to pursue structural reforms to sustain a period of “strong recovery,” stressed the minister.

The minister said that the release of a new round of emergency aid, authorized by an amendment to the Constitution that permits breaching fiscal restrictions, allows guaranteeing public debt containment in the medium term.

Guedes pointed out that the new social protection measures are linked to the concern with public accounts’ sustainability, with measures such as a temporary freeze on government employees’ salaries and a freeze on hiring at the federal, state, and municipal levels.

“Broad parliamentary support was obtained for this approach, in which emergency aid was triggered along with stronger rules to control public spending. Therefore, fiscal support and protection of the vulnerable population came alongside measures to preserve the sustainability of public accounts,” said Guedes in his speech.

Challenges

Despite the new wave of Covid-19, the minister said he is confident of a quick resumption in economic activity as soon as the pandemic restrictions are over. According to him, this will be possible because the pandemic had a greater impact on the informal sector, which would have “greater flexibility to recover,” in the minister’s words.

In his speech, Guedes mentioned the need to promote mass vaccination and to pursue the agenda of structural and microeconomic reforms so that Brazil can grow sustainably.

“In short, the approach to boost sustainable and inclusive growth in Brazil is threefold: intensify mass vaccination, provide short-term fiscal support together with medium-term consolidation [rebalancing of public accounts] and pursuing pro-market reforms,” he said.

Regarding the recent interest rate increase by the Central Bank’s Monetary Policy Committee (Copom), Guedes said that the measure indicates the “normalization” of monetary policy after the SELIC rate (the economy’s benchmark interest rate) had been reduced to levels below inflation.

For him, the increase in the SELIC shows that the monetary authority is committed to the return of inflation to the target range “in the relevant horizon,” and the rise in inflation represents a temporary phenomenon due to the rising dollar and the price of commodities (primary goods with international quotation).

“The Central Bank has raised the basic interest rate to ensure that inflation and expectations remain within the target range for the relevant horizon for monetary policy. Even with the recent interest rate increase, monetary policy remains very accommodating.

Moreover, the financial sector, which was very well positioned when the crisis erupted, has shown remarkable resilience,” explained the minister, commenting that recent inflation has risen because of the rise in commodities and the exchange rate.

Forecasts

On Tuesday, the IMF raised its growth forecast for the Brazilian economy from 3.6% to 3.7% in 2021. The increase in Brazil’s projection was lower than the predicted expansion of the global economy, which rose from 5.5% to 6% this year.

Guedes cited last year’s projections in his speech when the IMF and several international agencies estimated a drop of 8% to 9% of the Brazilian GDP in 2020. In the minister’s assessment, the Brazilian economy’s performance last year, which shrank only 4.8%, showed that forecasts are not always right.

“The decisive action [with the emergency aid] mitigated the impact of the pandemic and led to widespread revisions of growth forecasts. Growth in 2020 positively surprised some international organizations. However, it should not be totally unexpected,” said Guedes.

Source: Moneytimes

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