Brazil Says Its Reforms Have Inflation Beat : Spiral in Prices Halted by Monetary Program
President Jose Sarney, bursting with optimism, has declared inflation dead in Brazil.
Six weeks after the government’s dramatic monetary reform of Feb. 28, Sarney said in a televised speech last week that the cost of living during March had been rolled back by 1.48%. In February, prices went up by 15%.
This was the first time since the world economic crisis of 1929 that Brazilians have experienced a price contraction. Moreover, price stability has been accompanied by growth in production, sales and employment.
By every indicator, the economic boom that began last year is continuing. Exports in the first three months of this year grew 30%, compared to last year. Industrial production, led by steel, is up 12%. Electric power consumption is up 9%.
Since the announcement of the anti-inflation measures and the creation of a “strong” currency, the cruzado, the price of shares on the major Brazilian stock markets has risen by an average of 50% on daily trading volume of more than $1 billion.
“The plan has worked, thanks to the support of everyone, and we will maintain price controls until we change the inflationary mentality of generations that never knew anything else,” Sarney said.
The government has taken strong measures, including a freeze on public employment, to control its deficit spending, which has been a major contributor to inflation. The target is to complete this year with a deficit of only 0.5% of the gross national product of more than $200 billion. Last year the deficit was more than 5% of the GNP.
In the first two weeks of April, the central bank borrowed nearly $500 million to cover current spending. Officials said there had been a drop in expected tax revenue because of the business sector’s need for adapting to the anti-inflation program. For the rest of the year, with an expected 5% growth in the economy, tax revenue will rise, the officials said.
The government can be expected to take vigorous measures to prevent a recurrence of inflation. Price stability has become the most valuable political asset of the government because consumers identify their interests with Sarney’s “zero inflation” program.
The policy that has turned housewives into price vigilantes in supermarkets is extremely popular. The only criticism has come from left-wing union leaders and opposition politicians.
Retail and wholesales prices have been frozen at the level of Feb. 28 for more than 3,000 items. Prices of key industrial products accounted for by state enterprises, such as electricity, steel and petroleum products, are also frozen.
The official exchange rate for the cruzado, 13.8 to $1, has not changed since March 1. But exporters are having no trouble selling, and if the present pace is maintained, Brazil will sell abroad $14 billion more than it imports this year.
Brazil, which imports about 40% of its petroleum needs, is enjoying a $1.5-billion windfall from lower oil prices. It is also cashing in on higher coffee prices and lower interest rates on its foreign debt.
Finance Minister Dilson Funaro, who leads the team of economists credited with putting together the plan, has said that Brazil will not need to borrow any new money from foreign banks this year.
But, from the position of strength provided by the prospect of internal price stability and a record trade balance, Sarney and Funaro are clearly expecting foreign banks and investors to take a constructive attitude on refinancing Brazil’s $100-billion foreign debt.
Funaro said at the recent annual meeting of the world’s finance ministers and bankers in Washington that Brazil could not continue to pay $10 billion a year in debt service and achieve its goals of economic and social development.
There was no immediate threat to halt or reduce debt payments, but Funaro was clearly serving notice to creditors that Brazil expects more flexible and favorable treatment leading to reduced debt payments.
For political reasons, Brazil refuses to submit its economic policies to supervision by the International Monetary Fund as a condition for long-term refinancing of its debt. The IMF is identified here with six highly unpopular standby agreements with previous military regimes under which workers lost purchasing power while inflation soared to annual rates of more than 200%.
Sarney and his political coalition face a critical election in November for a new Congress, which will also sit as a constituent assembly to write a new constitution, and of governors in all 23 states. The initial success of the anti-inflation program provides Brazil’s center-left government with a campaign platform that appeals to consumers and most businessmen and farmers.
Equally popular with most Brazilian voters would be a tougher stand by Sarney on foreign debt payments. Many political analysts here expect such a hardening on debt servicing before the election if the creditor banks do not move toward Brazil’s demands for lower interest rates.
Social Reforms Promised
Sarney said he will follow up the attack on inflation with long-promised social reforms, particularly providing landless peasants with irrigated farm plots and a national nutrition program for children of poor families.
“Now that we have brought some order into the economy, the great challenge is to create a more human and just society in which misery does not threaten our institutions or development,” he said.
Sarney observed that this country of 135 million people has achieved through industrialization and agricultural modernization the eighth-largest economy in the capitalist world but is ranked with poor African and Asian countries in terms of health, housing and education.