IMF predicts economic contraction in Brazil

14 Apr 15

The Brazilian economy is expected to contract this year because of squeezed public spending and a cut in investment from state-owned oil company Petrobras, the International Monetary Fund said.

The IMF projected a negative economic growth output of 1% in 2015 for the country but said Brazil’s economy could grow by 0.9% next year if the government succeeded in implementing fiscal reforms to boost investor confidence.

A political scandal over corruption at the oil giant hurt Brazil’s oil industry as well as the country’s job market, leaving thousands of workers unemployed. An ‘immediate priority’ for Brazil’s economic recovery is to address the problems of the oil company, the fund said as it welcomed the government’s commitment to finding a ‘swift resolution’.

The IMF also noted that the economic outlook was hindered by ‘significant downward risks’, including drought-induced rationing of energy and water and an uncertain international environment.

It welcomed the government’s decision to end policy lending to public banks, and its emphasis on reducing gross debt ratios. Achieving the budget targets would require ambitious, front-loaded measures, the IMF said.

There was also backing for government measures to cut current expenditures and tax exemptions to make room for priority spending on investment and social programmes.

It also pointed to the benefits of targeting a higher primary surplus over the next two years in further strengthening policy credibility and the fiscal position.

There is also a need for the government to simplify its tax system and reform its pension and wage indexation systems, the fund said.

In addition, supply-side reforms are critical for boosting the economy’s productive capacity and growth potential. The IMF recommended that priority should be placed on infrastructure investment and initiatives to enhance tax efficiency and expand the private sector.

  • Judith Ugwumadu
    Judith Ugwumadu

    Judith writes about public finance, public services and economics across Public Finance International and Public Finance. She previously undertook reporting stints at Financial Adviser, Global Security Finance and The Sunday Express.

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