Monitoring of Nation’s Economy a Sensitive Issue : IMF Favors Holding Over Brazil Accord Until 1986

The International Monetary Fund has proposed to Brazil that agreement on its economic restructuring to deal with its $103-billion foreign debt be held over to 1986, a senior Finance Ministry source said Thursday.

The source said the IMF had suggested a “shadow agreement” to cover the remainder of 1985 and enable IMF Managing Director Jacques de Larosiere to give the green light for creditor banks to extend the standstill agreement on payments of principal.

Central bank Governor Antonio Carlos Lemgruber said some IMF and Brazilian officials were considering cutting the term of rescheduling to 1988 instead of the year 2000, to coincide with President Jose Sarney’s expected term in office.

The reason was the difficulty in agreeing over IMF monitoring of the Brazilian economy, he said.

The banks want to maintain an IMF watchdog role following the failure by the former military-backed governments to meet the terms of seven previous letters of intent with the IMF.

IMF surveillance is a politically sensitive issue for the Sarney government as politicians argue that, with Brazil’s record of meeting interest payments, such overt scrutiny is unwarranted.

But the Finance Ministry source warned that obtaining IMF agreement next year would be even harder, because IMF demands for cuts in public sector spending would be even more severe.

With general elections scheduled for 1986, the source said, the political will to implement IMF-recommended austerity measures would be diminished.

Sarney has said he would not accept IMF-imposed recession with increased unemployment and social hardship at the expense of planned 5% growth and a reduction in current reserves of more than $8 billion.

In July, the government proposed cutting $6 billion off the federal budget, but the cuts have yet to be implemented.

“Political pressures are against cuts of any kind,” the source said. “I agree with the Fund, the cuts are insufficient to bring inflation under control.”

Inflation, targeted to be held at 200% by the end of the year, is already running at nearly 220%, and the source warned that hyper-inflation in 1986 was a concrete possibility.