Brazil Losing Battle With Inflation : Problem Worsens Despite Trade Boom, Eased Debt Crisis

Brazil is racking up impressive trade surpluses and mending its relations with international creditors, but the Brazilian economy keeps spinning its wheels on the slippery slope of inflation.

In more than two months as finance minister, Mailson da Nobrega has accomplished little in his struggle with the inflationary crisis.

February’s official inflation rate was 18%, which would be more than 600% if compounded for a year. February was the eighth straight month in which the inflation rate rose, and some economists predict an even higher rate for March.

During 1987, Brazilian inflation reached its highest yearly rate in history, 366% by official calculation.

Nobrega, who took office Dec. 18 as Brazil’s third finance minister in less than a year, has emphasized that the key to controlling inflation is reducing the government’s deficit, which grew to 5.4% of the gross domestic product in 1987 from 3.8% in 1986. But he has not promised quick results.

“It does not help to promise that inflation will fall overnight, because it will not,” he was quoted as saying in a Brazilian newspaper. “What we have to do now is prevent it from exploding.”

Some analysts say inflation is the No. 1 political problem for President Jose Sarney. Paul Singer, a think-tank researcher, said last month: “In March or April, inflation will be very high, and there will be a demand from the society to either change the government or change the inflation.”

Salary increases have lagged behind inflation, triggering labor unrest. During 1987, a total of 12 million Brazilian workers walked out in more than 1,000 separate strikes, according to a major labor federation.

Reduced buying power has cut consumer demand, and the Sao Paulo State Federation of Commerce reported that 1987 retail sales were down 25% from 1986.

Business investment has also dropped off, and many economists contend that a long-feared recession is inevitable. Some say stagflation has already set in.

The Brazilian economy grew by less than 3.5% in 1987, down from 8.2% in 1986.

Hit Impressive Levels

Growth in 1986 was fueled by a consumption boom that followed a government-decreed price freeze and an increase in salaries. But the freeze also created economic imbalances that sharply reduced monthly trade surpluses and foreign currency reserves.

In the past nine months, trade surpluses have returned to impressive levels as domestic demand has declined and exports have boomed. A steady stream of mini-devaluations has kept exchange rates favorable for exporters but has added to inflation. Officials are predicting a trade surplus of $11.6 billion for 1988.

Despite the trade recovery, Brazil’s foreign reserves have not appreciably increased from the level of February, 1987, when Sarney declared a moratorium on debt payments to private foreign banks. He was concerned then about depleted reserves and the costs of meeting foreign debt obligations.

Those concerns continue, but the government has reached an accommodation with foreign banks and has resumed payments on the debt.

According to a preliminary agreement announced in New York last month, $64 billion of Brazil’s $70-billion debt to private foreign banks will be refinanced over 20 years, with an eight-year grace period on repayment of principal.

The banks’ negotiating committee agreed to lower Brazilian interest rates to 0.8125% over the London interbank offered rate, the same favorable spread conceded previously to Mexico and Argentina.

Brazil agreed to resume interest payments with the $700 million due for February. And the banks have begun providing about $5.8 billion in new credit to cover part of the interest payments through the first half of 1989.

Central bank Chairman Fernando Milliet resigned from the government Monday, saying he was leaving for personal reasons. But the newspaper Jornal do Brasil said he disagreed with the terms accepted by Nobrega in the debt agreement.

Others object to Nobrega’s plans for seeking help from the International Monetary Fund. Critics, including the majority Brazilian Democratic Movement party, say loan conditions imposed by the IMF are intrusive and generally recessionary.

But Nobrega argues that it is in Brazil’s interest to be on good terms with all major international sources of credit.