It is a great pleasure for me to be here on this special occasion to mark Brazil’s achievement in repaying its remaining financial obligations to the IMF well ahead of schedule.
This achievement is indeed one to be proud of. Three and a half years ago, Brazil was in the depths of a crisis of confidence. There were many doubters who predicted that Brazil would have to default on its debt, that the exchange rate would collapse, and that there would be a quick return to the chronic high inflation of Brazil’s past.
What a difference three years make! Taking full advantage of a generally favorable world economic environment, Brazil’s external position has improved remarkably, helping to restore confidence in the economy and reducing Brazil’s risk spread to a record low.
Exports have doubled since 2002, generating a large current account surplus, which along with a resumption of capital inflows has restored international reserves to more comfortable levels. These developments have allowed full repayment to the Fund two years ahead of schedule.
Beyond the financial gains, even more important have been the very concrete advances in the real economy that benefit the everyday lives of all 184 million Brazilians.
From the start of his government, President Lula has been fully committed to keeping inflation under control, understanding well the impact of high inflation on the poor.
This commitment has been fulfilled, with inflation on a clear downward trend and converging to the Central Bank’s targets. At the same time, growth of output has been sustained despite the uncertainties, creating jobs and helping to bring the unemployment rate down into single digits.
Moreover, rising employment and increased resources for social programs have helped Brazil make continued progress to reduce poverty and inequality. It is particularly welcome that the poverty rate has been reduced by one third since the start of the Lula government, from 36 percent in 2002 to 25 percent in 2004.
These achievements are very impressive, and the credit is due in very large part to the government’s firm adherence to prudent macroeconomic policies and to the underlying credibility and strength of macroeconomic policy-making institutions in Brazil.
Fiscal policy has been steadfastly aimed at bringing down public debt relative to GDP. Perhaps the one crucial decision that underpinned the turnaround was the courageous choice in the early weeks of the Lula government to significantly increase the primary surplus objective. This decision has provided a key anchor for guiding policy and restoring confidence.
Monetary policy too has been handled with skill and determination. The inflation targeting regime has served Brazil well, as the Central Bank has conducted policy with flexibility, being prepared to make adjustments as necessary to achieve inflation targets.
The impressive degree of transparency in the decision making framework has further helped to underpin the credibility of the regime.
The economic team has also shown a commendable commitment to the floating exchange rate regime under shifting market conditions, while taking opportunities to replenish international reserves and reduce vulnerabilities through skillful liabilities management.
The Fund too deserves credit for the strong support it provided Brazil in difficult times. Indeed, in many ways our experience with Brazil provides a model for how the Fund can best help a country when it most needs it, and at the same time safeguard the stability of the broader international system.
The Fund was prepared to take the risk of committing unprecedented amounts of financing at a time of great market uncertainty. Some at the time questioned the wisdom of that decision. However, my predecessor Horst Köhler’s decision was the right one, and reflected our trust in the capacity of the Brazilian political leadership and the strength of Brazilian institutions to continue to deliver the necessary sound macroeconomic policies.
It is a mark of the success of that decision that Brazil has already been able to completely repay the Fund so far ahead of schedule.
It is also worth emphasizing how the Fund’s relationship with Brazil has been and remains one of partnership. The objectives of the program and the policies to achieve them were always those of the Brazilian government.
The Fund has played a supportive role through its financing and advice, while respecting the judgments of our counterparts in Brazil. The high degree of ownership by the Brazilian government has played an important part in the outstanding record of policy implementation.
Let me now look ahead. For the year in front of us, Brazil is well placed to take advantage of what should be continuing benign conditions in the global economy. GDP growth should grow at a healthy pace of around 4 percent this year.
Activity should be supported by continued export growth, growing employment, and reductions in domestic interest rates. Inflation is now moving firmly into the low single digits, while external performance will remain solid.
This is a very positive outlook, but I am convinced that this country can do even better. Brazil has passed a crucial milestone on the road to sustainable growth and shared prosperity.
I believe that based on its strong policies and credible institutions, Brazil has finally put a long period of macroeconomic instability behind it. As a result, there should be no more "lost decades", no more debt crises or record emergency financial packages.
But Brazil still faces many challenges in fully realizing its formidable potential for sustained growth, and in meeting the hopes and needs of its people. Recently, the growth performance has improved, but I am sure Brazil can still do much better, and provide a powerful engine of growth for the whole Latin American region.
And, notwithstanding the recent progress, far too many in this country remain in poverty. Economic growth, together with policies that help to promote a wide and more equitable distribution of opportunities, can help break down these barriers, and help people achieve a better life.
What then is required for Brazil to reach its great potential? There is of course an active public debate within Brazil on precisely this issue. Let me briefly contribute as a partner in this debate and discuss two main challenges, which are now well recognized in Brazil: the need to continue to consolidate macroeconomic stability, and the need to raise savings and channel them into productive investment.
First on macroeconomic policies, the task is clear: stay the course. The government’s present framework is working very well to bring down the vulnerabilities associated with a high public debt and to provide a stable low inflation environment, but must be consolidated.
We fully share the government’s commitment to bring down public indebtedness further and to improve its composition, which will help Brazil achieve investment grade credit rating. Sustaining the disciplined fiscal policy will also provide maximum room for the central bank to continue on its path of bringing down interest rates further and in a sustained way.
Such a policy balance would be most conducive to fostering growth based on a healthy mix of rising investment and exports. In this context, I would also hope that progress can be made toward achieving the government’s objective of providing the central bank with full operational autonomy, which would further entrench the credibility of the inflation targeting framework and thus help to provide additional scope for reductions in real interest rates.
Here I would like to add a personal note from my own experience as Finance Minister in Spain, which I think has some relevance for Brazil today. In the mid-1990s, Spain faced pressure on its currency and a need to raise interest rates, and there were questions about whether the country would be able to join the EMU on schedule.
I consulted with my Prime Minister and we decided that we needed to do everything necessary to ensure that Spain was ready to enter the EMU. So we raised the primary surplus objective as well as advancing other reforms – notably in the labor market.
Since then, with the primary surplus sustained at high levels five years after entering the EMU, the Spanish economy has gone from strength to strength, with buoyant GDP growth, declining real interest rates, and falling unemployment.
The key lesson for me is that fiscal discipline is not something to ease up on after harvesting the first fruits; rather it is a policy for the long haul, with pay offs that grow more and more over time.
The challenge of raising savings and ensuring productive investment is much more complex in all countries, and typically requires ambitious and courageous actions across a range of fronts. The Brazilian government already has an appropriately ambitious structural agenda, and has worked hard to advance reforms.
I recognize that it takes time to build a strong consensus and to implement such an agenda with the strong ownership that is needed to sustain the process. But without much higher rates of domestic savings and investment, and more rapid productivity growth, Brazil will continue to run quickly into capacity constraints that prevent bursts of high growth from being sustained.
This is not the occasion to enter into a detailed discussion of how these challenges can best be met, but allow me to comment on some of the priority areas proposed by Minister Palocci in his remarks.
* Fiscal policy. First, on fiscal policy, I fully support the government’s assessment that reducing budget rigidities – both revenue and expenditure – would unlock valuable resources to meet public investment and social needs consistent with sustaining high growth with rapid poverty reduction. Indeed, there is much experience from other countries of the favorable effects on growth of such public sector reforms.
* Financial system. Second, there is much room for the financial system to play a larger role in anchoring the growth process by mobilizing savings for longer term investments with greater efficiency and reduced cost. Again, our experience from other countries shows the growth benefits flowing from strengthened and more competitive banking systems.
The government has already taken a number of important steps in this direction by improving credit market functioning and information flows, and strengthening the bankruptcy framework. In my view, there would be substantial dividends from moving gradually to reduce the extent of directed credit requirements in the financial system, thus increasing the role of the market in the allocation of savings.
I am very encouraged that Minister Palocci has confirmed that reducing the cost of financial intermediation, and making it more efficient, remains high on the government’s agenda.
* Investment climate. Third, in today’s globalized world, there is great competition to attract new private investments-both domestic and foreign. Brazil is already an attractive destination for private investment, but my sense is that the potential out there is even greater.
Thus, consolidating and deepening recent initiatives by the government to improve the business environment and establish an outward looking economy will pay high dividends in sustaining growth.
Based on other countries’ experience, the priorities likely lie in reducing remaining obstacles to trade, further streamlining business approval and regulatory processes, and ensuring that labor market regulations are consistent with employment growth.
At this point, I would like to recognize the important role Brazil is playing to advance the Doha round of multilateral trade negotiations. President Lula and his administration have shown commendable commitment and courage.
Success of these efforts would be of enormous benefit to the world economy, and particularly to Brazil, especially if it involved significant progress toward increasing market access for Brazil’s agricultural products.
To achieve these overall gains, compromises will likely be needed in a number of areas and by all parties. Brazilian leadership can be instrumental for achieving a strong outcome that will benefit all countries.
Finally, let me say a few words about the Fund’s continuing relationship with Brazil. We are entering a new era. Brazil is no longer a borrower from the Fund, but the IMF will continue to be a trusted partner in a policy dialogue.
Our goal at the Fund will be to do all we can to support the Brazilian government to build on recent accomplishments, to consolidate macroeconomic stability and advance reforms, to help develop the country’s vast economic potential and improve the living standards of the population, particularly the poor.
And I know that we in the Fund will also continue to benefit from an open exchange of views with Brazil on global economic issues, benefiting from Brazilian perspectives and leadership.
The Fund must also adapt and evolve with changing times. One aspect of our policies that we are now actively considering, as part of our medium-term strategy, is to develop the role of the Fund as a provider of financial insurance, to reduce risks of future crises. Under the "sunny skies" of present global economic conditions, this need may not seem immediately compelling, but inevitably at some point the skies will become cloudier.
In these circumstances emerging markets with track records of good policies may well find it useful to have access to some form of instrument that would provide quick access to Fund resources should this be needed. Such an instrument should serve to further reduce vulnerabilities to shifts in global financial conditions, and thus reduce crisis risks further.
The need for such an instrument, and how such an instrument might be structured, is still being debated intensively within the Fund and among our shareholders. But I would like to take advantage of this occasion to recognize the constructive role that Minister Palocci and others have played in bringing attention to the need to fill this missing instrument in the Fund’s tool kit.
It remains for me to thank President Lula and members of his economic team for their very courteous welcome on this auspicious occasion, and to once again offer my friendship and support as Brazil goes forward on the road of economic success.
The text above are the remarks, as prepared for delivery, by Rodrigo de Rato Managing Director of the International Monetary Fund in Brasília, capital of Brazil.
