by John Fitzpatrick

The announcement that Brazil would not be renewing its agreement with the International Monetary Fund, made on March 28 by finance minister, Antonio Palocci, was given massive coverage in the Brazilian press. Readers were treated to in-depth articles, historical backgrounders, quotes from the great and the good and opinion pieces from anyone who had an opinion. President Luiz Inacio Lula da Silva said the decision showed that Brazil was now able to “walk on its own feet.” He also reminded people that it was not his government but the previous administration of President Fernando Henrique Cardoso which had sought help from the IMF. Just to rub it in further, Lula added that the country had gone “broke” three times under Cardoso. In turn, Cardoso said (quite rightly) that one of the reasons why Brazil had had to turn to the IMF in 2002 was precisely because investors had been nervous at the prospect of Lula assuming power and introducing a socialist agenda.

The news was generally well received, with only a few disgruntled leftists grumbling that it would make no difference since the government would continue with its “neo-liberal” i.e. free market policies. The mainstream Workers Party (PT) was pleased to get out of the shadow of the IMF – a body which was always one of its (and Lula´s) bogeymen. Financial  analysts, bankers, businessmen and economist welcomed the announcement as a sign of economic stability. One of those who spoke in favor of the move was Cardoso´s long–serving finance minister, Pedro Malan. However, some days before the announcement, another former finance minister, Delfim Netto, made the interesting observation that the IMF support was the cheapest insurance policy Brazil could have. Netto, who sought IMF help in 1983, is well-known for his irony and wit and there is often has a ring of truth in  what he says. In terms of the amount involved, he was probably right.

It should be recalled that the IMF made the enormous sum of US$80 billion available to Brazil over the last six years, of which US$ 58 billion was used. It is, therefore, not surprising that the director general of the IMF, Rodrigo de Rato, was also pleased to see the end of the accord. Having so much of the Fund´s assets allocated to one country must have cramped the IMF´s activities in other areas.

The US, which is the Fund´s biggest contributor, also hailed the announcement through its treasury secretary, John Snow. Many people here still recall Snow´s loud-mouthed predecessor, Paul O´Neil, who annoyed Brazilians and Argentineans by asking publicly why American workers should pay for loans to corrupt Latin American countries.    

The move means that, in principle, Brazil is free to take its own economic way forward. Perhaps we should say almost free since the country still owes the IMF around US$ 24 billion which must be paid by 2007. Under IMF rules, if a country´s loans exceed its 100% quota then it is still monitored by the Fund. In Brazil´s case, its loan is about 500% of its quota so we can expect to see IMF visitors over the coming years, as well as the annual inspection which all countries receive under its rules. Regardless of this, the government was keen to show that it would now take its own decisions and Palocci announced that for this year and 2006 the primary surplus would be reduced from 4.5% of GDP (the IMF´s target) to 4.25%. However, there was nothing revolutionary about this since the 4.5% figure was introduced in 2004 due to the economy heating up and high levels of tax collection.

Time to Go It Alone
While I share Netto´s view about the value of the IMF standby loans I feel it is time for Brazil to go it alone. Lula has been pragmatic in economic terms over the last two years and is seeing the benefits in the  shape of industrial growth, higher employment and an enormous trade surplus. At the moment, he is still the odds-on favorite to win the next election and he is unlikely to be steered off course. “Freeing” Brazil from the IMF is something he can use to bolster his left-wing credentials and show he is no longer in debt to an international capitalist institution. At the same time, he can point to the widespread  support the non-renewal has received from the business and financial community to show his orthodoxy. Compare Lula with Argentina´s idiosyncratic Nestor Kichner who has picked fights with the IMF, defaulted on the country´s debt, and even attacked the Shell oil company and he looks like a statesman.

There are, of course, many dangers ahead. First of all, the government´s inflationary target policy looked like failing once again this year. The Central Bank has raised its expectations for the benchmark IPCA inflation rate from 5.3% to 5.5%. This is well above the Central Bank´s own target figure for the year of 5.1% and could jeopardize prospects for lower domestic interest rates.  The Central Bank is also projecting growth of 4% this year. This is pretty good compared with the last few years but is lower than the 5.2% growth recorded last year. Other problems include rising interest rates in the United States, which could attract investments from developing countries like Brazil, plus the ongoing increase in international oil prices. However, things could be a lot worse. US interest rates are rising slowly so no big upset is expected and the situation in Iraq seems to quieting down so oil prices could start falling.

It is too early to say whether Brazil is saying goodbye or au revoir to the IMF. However, given this country´s rocky economic history  don´t be surprised if it´s au revoir. It was interesting to read  reports that the IMF had refused to support a Brazilian idea for a special line of credit to be made available for Brazil should another crisis arise. This shows perhaps that while Brazil is ready to walk on its own two feet it wants the reassurance of friendly pair of hands in case it starts falling again. 

March 29, 2005

(c) John Fitzpatrick 2005