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IMF Praises Brazil's Fiscal Policies

by Mike Godfrey, Tax-News.com, Washington

09 August 2010


In its Article IV consultation with Brazil, the International Monetary Fund (IMF) welcomed Brazil's commitment to withdraw fiscal stimulus and to achieve the higher primary surplus target set for 2010, without resorting to the use of adjustors.

The primary surplus is projected to rise from 2.1% of GDP in 2009 to 3.3% in 2010. The IMF thought that Brazil's macroeconomic resilience was due both to the strength of the financial system and the combination of fiscal responsibility, exchange rate flexibility, and a credible commitment to inflation targeting pursued over the last decade.

The IMF would also like to see a faster consolidation if revenue collection turned out to be higher than expected and explained that it would relieve the burden of adjustment on monetary policy.

In October 2009, a 2% tax was imposed on purchases of domestic bonds and equities by foreigners, which, according to the IMF, helped to slow the heavy capital inflows from investors seeking to benefit from the economy’s growth and high interest rates. While recognizing the need for a temporary tax on portfolio capital inflows, the IMF suggested that consideration be given to a long-term response that combined a "tightening of fiscal policy, a lower interest rate, and prudential measures".

The IMF recommended that Brazil curtail quasi-fiscal spending in the form of loans by the development bank (BNDES), which are projected to remain high, at around 2.5% of GDP in 2010.

The IMF would also like to see a lowering of both gross and net debt-to-GDP ratios through the strengthening of the medium-term fiscal framework.

TAGS: tax | economics | interest | fiscal policy | International Monetary Fund (IMF) | Brazil | currency | inflation

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