Tough Choices To Follow Vote
BRAZIL'S inflation rate is rampaging at 50 percent per month. Reflecting the soaring prices and lack of confidence in the government, monthly interest rates are hitting 60 percent. In an effort to preserve its dollar reserves, Brazil in September failed to pay $2-3 billion in interest on its foreign debt. Because Brazil's economic management is so bad, the International Monetary fund (IMF) is withholding a $600 million loan. One of its conditions was that Brazil would reduce inflation to 600 percent in 1988. Instead, the rate was 900 percent.Skip to next paragraph
Subscribe Today to the Monitor
Analysts believe that, to get a handle on this potential economic disaster, the president Brazilians will elect on Sunday will have to take some of these actions:
Clean up the budget deficit. Brazil has an internal debt of $90 billion. ``They have been printing money as if it's going out of style,'' says Walter Wriston, the former chairman of Citicorp.
The deficit has been growing in large part because of the large inflation rate. Government salaries and welfare programs are all indexed to the inflation rate. So is the interest rate the government pays to finance the debt. Since most of the debt is very short-term, it requires constant refinancing at higher and higher interest rates. ``We have a systemic problem,'' says Mario Henrique Simonsen, a former minister of finance.
End subsidies. A substantial portion of the government's deficit is made up of subsidies to state-run businesses such as the giant electrical utility companies. Stuffed into these companies are well-paid bureaucrats who will fight hard to prevent the dismantling of the state system.
Leading presidential candidate Fernando Collor de Mello promises to begin privatizing these companies. According to Ernesto Lozardo, an economic adviser to Mr. Collor, as workers are laid off, they will go into a ``pool'' where they will be sent to work in other departments.
Make the central bank independent of the treasury. ``A strong central bank could squeeze the inflation out very quickly,'' says Mr. Simonsen. However, to date politicians have found it more convenient to have an easy monetary policy.
End indexation. Price increases beget wage increases beget more inflation ... Economists refer to this as ``inertial inflation.'' William Cline, an economist with the International Institute of Economics in Washington, believes the least painful way to end the cycle is with a wage and price freeze. Understandably, Brazilians are jaded about such freezes since they have not held up before. However, they may be forced into some form of de-indexation.
Rework the tax system. Tax evasion is an art in Brazil, with many companies keeping separate books for the tax collectors. James Henry, author of ``The Debt Hoax,'' says in his book that evasion can be as high as 50 percent depending on the tax.
Renegotiate the external debt. Both candidates plan to do this. The interest on the $111 billion amounts to $10 billion a year. With reserves of $17 billion, Brazil can afford to pay the back interest it owes. This would make renegotiation easier next year.
The new president is scheduled to take office in March. An IMF official says the agency will visit Bras'ilia shortly afterward. It is also likely that commercial bankers will begin negotiating on the debt next year. Predicts an IMF official, ``The negotiations will be long and protracted.''
Simonsen believes Brazilians will give the new president six months to make progress on inflation. Without significant improvement Simonsen forsees political turbulence.