Brazil Begins Tense Talks With IMF on Debt

“Peasants don’t recognize a foreign debt; give us agrarian reform,” said a poster waved in front of President Jose Sarney by rural union delegates in an assembly here Sunday.

“Out with the IMF” said slogans sprayed in red paint on walls in Brazil’s inland capital, referring to a high-level mission of the International Monetary Fund that arrived for talks on Brazil’s foreign debt.

As the negotiations began Monday, the atmosphere was tense. These talks will either move Brazil toward successful refinancing of its $104-billion foreign debt with foreign banks and governments or reach an impasse because of heavy domestic pressure to reduce debt payments.

The results are being carefully watched by other major debtors, such as Argentina, which is in arrears on its $45-billion debt and has been unable to reach agreement with the IMF on a stabilization agreement that would lead to bank refinancing. The negotiations in Brasilia represent a new start by a new Brazilian government on an old problem.

Since 1982, Brazil has signed seven letters of agreement with the monetary fund, all designed to reduce inflation, increase exports and balance foreign payments in return for postponement of loan payments. All seven agreements were violated because Brazil has been unable to meet the targets on reduction of public deficits and monetary expansion.

These violations were committed by the previous military-backed government of President Joao Baptista Figueiredo, which handed over power to a civilian government on March 15 with inflation running at 227% a year and internal public debt soaring even faster.

The elected leader of the new government, Tancredo Neves, never took office as president. He died of postoperative infections after abdominal surgery on the eve of his inauguration, and he was replaced by his vice president, Jose Sarney, as the head of the governing coalition. Before his death, Neves said that Brazil would pay its creditors but that he would not impose “misery and unemployment” on his country to service the debt. Just the interest due this year--$11 billion--will absorb all of Brazil’s expected trade surplus.

Sarney has repeated Neves’ promise that any debt renegotiation will allow for economic growth. He increased the national minimum wage by 5% to provide more internal purchasing power.

Most Difficult Since ’82

As the talks began, government sources here said that the negotiations would be the most difficult since Brazil was forced by the debt crisis in 1982 to accept IMF supervision of its economic policies as a condition for bank cooperation in easing debt payments.

Finance Minister Francisco Dornelles met in Washington earlier this month with Jacques de Larosier, managing director of the IMF, and described an economic program that is supposed to reduce inflation to an annual rate of 200% this year, while allowing economic growth of at least 4%.

The government has reduced public spending and is borrowing heavily on the open market to finance public deficits. But Brazil faces budgetary commitments, including huge subsidies for consumers and exporters, that could require printing money to cover deficits that would increase circulation by at least 150%.

Such a rate of inflation and monetary expansion would violate all the orthodox rules set up by the IMF over more than 35 years of serving as a creditors’ watchdog.

But Sarney has said that this government, a center-left coalition, will not sign an agreement with the IMF that prevents economic growth or that sets austerity conditions that cannot be met.

The IMF negotiators are led by Eduardo Weisner, the head of the western hemisphere department and a former finance minister of Colombia, who is known for very orthodox monetarist views that require cutting down on credit and money in the hands of the public in order to reduce prices.

The Brazilian government is following another line, based on price controls. Dornelles has imposed sweeping regulations on private producers, requiring government approval for price increases, and has ordered state enterprises providing electric power, gasoline and steel to freeze prices. In the food sector, there are major subsidies for wheat, which is mainly imported, and sugar.

During April, controls forced down the rate of price increases to 7.2%, compared to 12% in March. This month, prices are expected to increase less than 8%. But economic analysts wonder how long the government can keep the lid on key prices with inflation projected to reach 200% overall for the year.

Such policies also conflict with the IMF’s position against subsidies and in favor of free prices set by market forces. The temporary application of subsidies and price controls to reverse inflationary expectations is sometimes accepted by fund negotiators, but only if public deficits are also reduced and controls are temporary.

The main source of deficits here has been the indebtedness of state companies, which were forced by the former government to borrow heavily abroad to finance balance of payments deficits, rather than to build roads, dams or ports. Now, the state companies, under price controls, cannot finance their foreign debt payments, and the Central Bank has had to assume the obligations.

Won’t Remove Food Subsidies

The government has not yet announced steps to bring the deficit of the state enterprises under control. It also refuses to consider removal of food subsidies, and it has pumped billions of dollars of credit into agricultural production.

Dornelles and de Larosier have agreed that Brazil would negotiate on the basis of new figures, which include the discovery that the last government left a prospective deficit of more than $17 billion. But it is not clear whether the negotiators will reach an agreement on how to cut spending, how fast and in what areas.

The IMF can offer Brazil about $1.4 billion in new credits under a new stabilization agreement, but this is equal to about one month’s imports here. Brazil’s real objective in the negotiations is to obtain the IMF seal of approval for its policies that will permit refinancing of $46 billion in bank loans, with a grace period of 7 years and repayment over 16 years.