Brazil Acts to Slow Economic Expansion : Latin America: Tighter credit, taxes on foreign investment aim to fight inflation. Less-affluent consumers are affected<i> .</i>

Scrambling to keep its anti-inflation program on track, the Brazilian government Friday tightened credit to industry and consumers to rein in a rapidly expanding economy and imposed new taxes on foreign investment to keep increases in the monetary supply at bay.

It was a disheartening blow to the nation’s lower- and lower-middle-income consumers, who under extended payment plans enacted in the last three months had suddenly been able to afford products that were beyond their grasp during more than a decade of high inflation, when long-term credit was nonexistent.

“I was planning to buy a new refrigerator today,” said Gilberto Moraes, 31, a sanitation worker. “Until yesterday, I could pay for it over 12 months, but now that I have to pay in three months, I can’t afford it.”

Since the country’s economic plan went into effect in July, inflation dropped from 50% a month to less than 1% in September, its lowest level in 20 years. The newfound stability released a torrent of spending.

“That’s what the government is trying to stop,” said Wayne Perkins, a vice president at Banco NorChem, which is managed by Chemical Banking Corp. of New York. “It could drive inflation right back up.”

Auto sales have jumped as much as 15% since July, and production of major appliances, such as washers, dryers, refrigerators and some electronic equipment is sold out through January, analysts report.

“It’s been crazy,” said Ike Rahmani, managing director of Banco Tendencia in Sao Paulo. “I think the government may have gone a little far, but they had to act now because we are approaching the end of the year. That’s when consumption could really take off.”

In November or December, nearly all Brazilian workers receive a bonus equivalent to one month’s salary.

To limit consumer spending, the government imposed credit restrictions that cut terms for auto loans from 36 months to 12 months and loans for many other products from 12 months to three. It eliminated credit altogether for certain items. And credit cards must now be paid in full each month.

The government also implemented a 1% tax on foreign investment in the stock market and increased the tax from 5% to 9% on foreign investment in bond funds in order to slow growth in its money supply, a key factor in the success of its economic plan.

The government’s year-end target for currency in circulation of 10.2 billion reals ($12 billion) has already been surpassed by 2.8 billion reals. Record imports and a recent surge in foreign investment contributed to the increase in circulating currency, because the government is forced to print reals to redeem the foreign currency.

Also contributing to the currency increase was the purchase this month by the nation’s Central Bank of an estimated $1 billion to prop up the dollar, which has been falling steadily since July against Brazil’s real.

Analysts said the increase in taxes on foreign bond investment was largely symbolic, because the amount of money in that market is relatively small. The new tax on stock transactions, however, could send a negative signal to foreign investors, they said.

“It’s difficult to say what the effect will be,” Perkins said. “One percent is actually small, but it could make some people nervous, because this is a precedent in that the Brazilian government has never taxed foreign investment in equities.”

The market will slow some, Rahmani said, “but my personal view is that the worst has already happened. . . . I think as (President-elect) Fernando Henrique Cardoso starts naming his Cabinet, things will begin to pick up.”

Analysts largely praised the government for taking quick steps to keep the nation’s economy on stable footing.

“That’s the most important thing,” Perkins said, “that they keep the economy stable over a long term. They have done a very creditable job so far in managing the (economic) plan.”