Advertisement

New Economic Team Seen Losing Credibility : Brazil Still Faces Surging Inflation

Times Staff Writer

The new economic team fielded by Brazil last week to defend against surging inflation is already losing credibility because of its contradictory statements and evidence of uncontrolled government spending.

After a staggering 14% rise in prices last month, President Jose Sarney fired Finance Minister Francisco Dornelles and brought in two representatives of Sao Paulo’s powerful private business community to guide economic policy toward the government’s goal of sustained growth with reduced inflation.

Dilson Funaro, an industrialist known for “progressive” social views, became minister of finance, and Fernao Bracher, international director of Bradesco, Brazil’s largest private bank, became president of the central bank. They brought into government a group of young university professors from Sao Paulo who share Planning Minister Joao Sayad’s view that economic growth is better than austerity for curing inflation.

The new team’s most pressing problem is inflation that seems about to go out of control. In the words of Antonio Ermirio de Moraes, president of Votorantim, Brazil’s largest industrial group, “Brazil is living the last hours of Pompeii.”

Advertisement

Inflation sent prices up 225% in the last year of the military regime headed by President Joao Figueiredo, who left office in March, and this contributed to the election of a civilian opposition candidate for president. But inflation is going to be at least as high this year unless the rate of increase is reduced sharply in the remaining four months of the year.

Some economists fear a level of 300% inflation for 1985 unless austerity measures are imposed.

The underlying uncertainty since Sarney took office involves what Brazil’s first democratic government in 21 years will do to overcome massive deficits in federal budgets left by the military. Dornelles and his ally in the central bank, Antonio Carlos Lemgruber, favored deep cuts, but this course was opposed by Sayad and other economists linked to the Brazilian Democratic Movement, the keystone party in the government’s majority in Congress.

Huge Government Deficits

Advertisement

With Sayad fighting Dornelles, Sarney hesitated, for he was in a weak political position. He was a replacement for President-elect Tancredo Neves, who died in April, and he had none of Neves’ personal prestige or party support.

As a result, huge deficits have piled up. The revenue shortage has been covered by borrowing that has increased the internal debt by 35% since March. And the monetary base has been expanded sharply, contributing to inflation.

In one week, Funaro and other officials have said a score of different things about how to slow inflation. Funaro and Bracher called in the country’s leading bankers and obtained a promise to reduce interest rates. Sayad said that taxes would have to be increased and that additional money would have to be issued because debt service was absorbing 35% of federal revenue. The government put pressure on supermarkets to fix prices on consumer goods.

Finally, Funaro announced that deep budget cuts would be necessary in order to reduce borrowing by half. Dornelles reportedly was fired for insisting on the same cuts.

Advertisement

Funaro said he wants spending cut by nearly $1 billion this month. But Sayad said there is no room for further cuts after those that were announced in July.

This was seen by bankers as evidence that the internal government debate over austerity or economic expansion continues unresolved.

Contributing to the confusion is the draft federal budget for next year submitted to Congress by Sayad. It calls for federal spending of more than $70 billion but provides for revenue to cover only 65% of that amount. This implies that the federal deficit, expected to reach $15 billion this year, will be even greater next year if the budget is adopted. Increased spending is called for in education, rural development and other social projects dear to Sarney.

“The possibilities of internal borrowing or printing money are being exhausted,” said Mario Simonsen, a former minister of planning.

Advertisement

Tax Increase Resisted

Increased taxes and more government borrowing to cover deficits by government enterprises, which are not included in the budget figures announced so far, are being strongly resisted by the Sao Paulo businessmen who supposedly back the Funaro-Bracher team.

The announcement by Funaro that lower interest rates would be a major line of attack on inflation has not been borne out in the marketplace. After dipping briefly last week, interest rates have risen again to more than 20% after correction for inflation. And in addition to the interest rate, there is a 10% tax on financial transactions, so the effective borrowing rate is more than 30%.

Sarney and the political parties in the governing coalition face important municipal elections Nov. 15, and the future of the government hinges on winning in such big cities as Sao Paulo and Rio de Janeiro. This has contributed to Brasilia’s reluctance to impose austerity measures.

Advertisement

But Brazil’s slide into foreign debt, with an accumulated debt of $100 billion, and the growing internal deficits make it more difficult to postpone cost-reducing measures in the public sector with inflation on the rise. Temporary measures, such as price controls, have delayed a real explosion in prices. But the underlying causes of inflation are still deficit spending and the huge cost of further borrowing to pay for the deficits.


Advertisement