INTERNATIONAL MONETARY FUND IN BRAZIL
Discussion
Changes experienced in Brazil since its acceptance by the IMF
The IMF loans are expected to trigger positive economic growth but in some cases are counterproductive (Pastor, pg. 9). In1998, Brazil approached the IMF for financial assistance after its currency devaluation resulted to the soaring of the countrys debts. This marked the beginning of a loan agreement between Brazil and the IMF. In 2002, the IMF approved a stand by arrangement for Brazil. Economic growth had Brazil in December 2005 make an announcement that it intended to make an early repayment of its debts to the IMF amounting to US 15.46 billion. The IMF financial assistance to Brazil over the years has had positive impact that has enabled Brazil to expand its presence in the world market .This can be attributed to growth and increased production in the manufacturing industry, agriculture, mining and private service sectors triggered by economic programs funded by the IMF. Since 2003, Brazil has managed to make stable improvement in macroeconomic stability, build up foreign reserves, adhere to inflation targets, maintain its commitment to fiscal responsibility and reduce its debts by shifting the debt towards domestically denominated instruments. In addition, investor confidence and positive growth in GDP have been boosted by the injection of IMF loans into the Brazilian economy (International Monetary Fund,np). However, the global financial crises, implementation of fiscal adjustment programs and efforts to meet the terms and conditions of lending have had counterproductive effects on the economy. For instance, the onset of the 2007 global financial crisis had adverse effects on the countrys economic growth.
The pulling out of resources from the country by foreign investors and changes in Brazils stock market and currency resulted to a recession in the economy. Commodity based exports in Brazil declined while the external credit was reduced. This was attributed to the vulnerability of the economy to global market shocks despite the positive impact of IMF loans in Brazil. Critics of IMF lending argue negative impact of loans can be attributed to the fact that the terms and conditions of the IMF in most cases represent the interests of the multinational investors more than the interests of the ordinary. Macroeconomic reforms and economic stabilization have improved economic growth in the country. In 2009, Brazil offered to give 10 billion to the IMF in order to boost its reserves and credit in developing countries. The recent signing of a US 10 billion Note Purchase Agreement with Brazil allows the loan to be paid in bond purchases.
The IMF Terms and Conditions of lending to Brazil
The IMF provides certain terms and conditions in order to offer its loans to the recipient country. IMF conditional lending to Brazil have had political and economical implications (Davis,np ).The strict fiscal conditions of lending have Terms and conditions of IMF lending demanded that the government cut on spending .Furthermore, demands that Brazil implement structural adjustment programs has aimed at increasing fiscal responsibility and discipline. The IMF lending has also demanded that the government maintain macroeconomic policies. Although structural adjustment programs are expected to improve economic growth, social unrest can be triggered by the failure of structural adjustment programs to promote development and address critical issues that are of concern to the people. In addition, loans that demand for a large number of reforms can have deleterious effect on democratic practices. Political terms during lending exist. For example, in 2002, the terms of lending that the IMF gave to Brazil during its lending of US30billion was considered to undermine the Brazilian economy and sovereignty. The IMF demanded that the presidential candidates who were running for elections agree to maintain economic policies that had earlier been adopted. This meant that it would be difficult for the new government make changes in economic policies without the interference of the IMF .The IMF efforts to promote social responsibility and good leadership to facilitate good spending of the disbursed funds demands that the government addresses the problem of corruption effectively.
Positive impact of IMF loans in Brazil
The IMF loans offered to Brazil over the years have been critical in boosting economic and social development in the country. Through a loan accord that the two parties accepted, Brazil has managed to secure financial assistance from the IMF since 1998.The injection of the funds into the economy has promoted economic growth and growth in industries. However, Brazil like its Latin American counterparts continues to experience problems of unemployment and poverty .Brazil is the largest economy in Latin America and economic problems has been attributed to a decline in the net private capital flows and the slowing down of the world trade. For instance, low real income per capita resulted from tough economic challenges experienced after the 1998-1999 economic crises. The deterioration of economic situation in the country and the negative impact of global economy changes on the economy has made it necessary for the country to request for financial assistance from the International Monetary Fund (Brown, pg.435).The IMF loans that have been given to Brazil have played a key role in boosting investor confidence in the countrys economy and stabilizing the economy. This has in turn restored investor confidence in the economy, Social development through the improvement of public services has improved the living standards of the people and lowered poverty levels. For example, changes in urban planning have been characterized by providing social amenities to the poor. Small-scale businesses and domestic industries have benefited from social development programs funded by the IMF.
During the 2002 presidential elections, fears that the possibility of having a left-wing president elected would interfere with Brazils economic policies had negative impact on the economy when investor confidence in the economy declined. In response to this, the 2002 IMF loan to Brazil was one of the largest ever made by the institution and it aimed at boosting economic programs in the country and restoring confidence in the economy. Funds received from the IMF have to some extent lowered inflation, reduced poverty levels, narrowed income disparities and calmed the financial market. Brazils financial and economic programs have benefited from financial assistance offered by the IMF due to the implementation of sound economic policies .Economic reforms that have been triggered by the terms and conditions of IMF lending have encouraged fiscal responsibility and minimized corruption where government funds are embezzled. .A macroeconomic policy framework has been put into place and due to the positive impact of the implementation of macroeconomic policies in economic and social development, the international community and the IMF have shown their support for the framework. As a result, the IMF has been supportive of the macroeconomic framework that empowers small scale businesses and people to improve their living standards while at the same time encouraging the implementation of reforms.
Following the election of Lula da Silva as Brazilian president in 2002, the government was expected to pursue economic policies that combined monetary and fiscal discipline.The policies were anticipated to support efforts that aim at eradicating poverty. Financial assistance through loans increases a countrys debts which in future affect growth and increases dependency (Tomz, pg.17).This has to some extent been achieved although more will need to be done to eradicate poverty and improve living standards. Sustainable and equitable economic growth has been achieved in Brazil through government structural measures and economic reforms that promote the adoption of a new bankruptcy law as well tax and pension reforms. The IMF loans have rescued the plummeting of Brazilian currency, minimized the chances of a new government to default public debt and prevented investor flight from Brazil.
Increased foreign investment and external assessment of the economy have been achieved as a result of IMF conditionality lending. Foreign investors are attracted to establish business enterprises in the country due to the favorable business environment provided by the implementation of economic policies (CIA World Factbook.Brazil, np). The IMF reviews on the progress of the Brazilian government in achieving the set targets has assisted the government to implement sound policies and make necessary adjustments whenever it is necessary to do so. The IMF loans have played a key role in averting an economic meltdown in Brazil that can affect both regional and global economy. The continued implementation of strong social and stabilization policies has improved economic growth beneficial. For instance, in 2006, the real GDP growth was projected to reach 3.75 per cent while growth in 2007 was expected to reach 4.5 per cent.
Negative impact of IMF loans on Brazil
IMF is an international monetary institution that is expected to provide financial assistance to the countries that need the assistance by addressing the national interests of the recipient country. The IMF loans have had counterproductive effects on the Brazilian national economy apart from the anticipated positive impact on the economy. The IMF financial assistance to Brazil has contributed to the exacerbation of economic problems through the implementation of a fiscal policy. The emphasis of IMF conditionality lending on structural adjustment has not been beneficial to the recipient nations. It is important to note that although efforts such as cutting down on spending may be the best solution fore economic crisis in some cases, cutting down of spending when the government needs to increase spending to revive the economy or to support public services has had negative economic impact. Furthermore, concentration on macroeconomic policies has not necessarily triggered positive economic growth. When the conditions imposed by the IMF are counterproductive, slow economic growth and the worsening of financial situation has been witnessed. For example, the IMF has in some cases favored standard tax increase recipe which has been anticipated to harm the economy and hurt the middle class. The high interest rates that go hand in hand with IMF lending has undermined economic progress.
Studies that have been conducted to determine the lending terms of the IMF have shown that a countrys political alignment with powerful nations such as the US increases the probability of the receiving country to secure an IMF loan (Strom Cronan, pg 38).Political motives of the IMF during lending has sabotaged opportunity by the government to make economic policy changes that may help eradicate poverty by empowering the poor. For example, during the 2002 presidential elections, the possibility of having a left-wing president elected into office was a cause of concern to the international finance capitalists especially those in the United States. The Workers Party candidate Luiz Inancio da Silva and the Popular Socialist Party Ciro Gomes were competing for the presidency while President Fernado Henrique was lagging behind. Left-wing leaders in Brazil had earlier indicated that they would have the countrys free-market approach to trade and economics reversed in order to improve the living standards of the people and address the needs of the poor who have been disadvantaged by the free-market economy.
This form of an economy is promoted by the economic policies that have been supported by the terms and conditions of IMF during lending over the years. For example, the IMF loan lending terms in 2002 required the presidential contestants who were running for office to express their support economic policies and reforms as well as budget policies that had already been put into place. About US 6 billion was to be given to Brazil by the end of 2002 while the remainder (US24 billion) was to be disbursed to the government for use after the elections. The new government would only continue receiving the remaining proportion of the loan if it was able to meet the set budgetary targets. The failure to do meet the targets can lead to the withholding of loans. Sometimes, the setting and achieving of the set budgetary targets affects the economy negatively if the achievement of the targets is counterproductive. President Henrique while in office was recognized by the West for his support for bold economic reforms and ability to win the confidence of the international donors,However, his economic policies have been linked to the dependency of the countrys economy on foreign countries. Although the IMF loans to Brazil have mitigated short term financial problems, it has contributed to limited economic growth in the long term. In cases where there have been no optimism in the revival of the economy due to financial crisis, maintenance of primary budget surpluses and reduced interest rates based on the terms of lending is an advantage to the recipient nation.
When the IMF advocates for fiscal discipline when lending to the needy countries, millions of people suffer because there is no social safety net to address the changes that result from fiscal policy implementation. Fiscal discipline demands that the government makes cuts in expenditure and because this has not always been favorable in a country where there is high rate of unemployment, maintenance of fiscal discipline is a disadvantage to the poor. For instance, cuts in spending when the government needs to increase economic revival stimulus or improve public services leads to a decline in public services and low economic growth. The overdependence of Brazil on the international financial institutions and multinationals for economic development has been linked to Brazils low rate of economic growth. The multinationals are considered to have their interests at heart when lending rather than the interests of the recipient nation (Mitra, np).This was the case in Brazil in the late 1990s when a trade deficit was experienced due to the loans it received from the IMF earlier.
In the early 1990s, Brazil experienced a trade surplus of between 10-15 billion annually due to economic growth.However, by 1998, the trade surplus was turned into a trade deficit of about 8.3 billion. This was attributed to the presence of multinational companies in Brazil which competed with the domestic companies.Furthermore, the pegged Brazilian exchange rate worsened the financial situation when the exports became expensive as compared to the competitors in countries with flexible exchange rate regime. The multinational institutions tend to access markets that maximize exports and purchase of existing assets hence the host country may only earn very little additional foreign exchange from the exported products that belong to multinational companies. Some analysts have indicated that the IMF loans to Brazil during economic crisis have been a bail-out for the US multinational interests. For example, loans to Brazil have been considered to be IMF efforts to boost the American banks Fleet Boston and Citigroup that may have lose greatly if Brazil defaulted its debt. In addition, the JP Morgan Chase has greater exposure to Brazilian loans as compared to its neighbors such as Argentina A lapse of investor confidence in economic performance leads to investor flight. International shocks in the global economy have affected the Brazilian economy when there is a depreciation of currency and a decline in foreign capital inflow. For instance, although the government tried to raise interest rates in order to prevent foreign capital inflow in 2001, there was need for an IMF loan to gain international financial markets confidence. The targets set by the IMF leads to economic problems if programs to facilitate the achievement of the targets lack adequate resources.
The IMF has been criticized for interfering with political autonomy of foreign countries and contributing to environmental destruction. When the terms and conditions of lending relate to political leadership and sovereignty of the recipient nations, the IMF interferes with the political autonomy of other nations. Lack of independence in political matters may undermine good leadership. For example, the IMF is considered to allow the powerful members of the organization to achieve their economic and political interests in the recipient nations at the expense of the national interests (Copelovitch, pg.52).The United States and other powerful nations within the IMF have been accused of intervening in political and economic matters of foreign nations. These interests are achieved through the acceptance of the terms and conditions that the IMF gives to the nations that require financial assistance from the institution
Conclusion
Brazil is the largest economy in South America and although the country has managed to make great progress in economic and social development, it has relied on IMF loans for along time to support economic growth and face challenges arising from financial crisis. Brazil has tried to pursue agricultural and industrial growth through the exploitation of natural resources. Although it is the leading regional and economic power leader in South America, crime and high unequal income distribution are pressing problems in the country. The fiscal situation in the country has been good despite the fact that the IMF loan lending terms have to some extent protected the interests of the multinational institutions in the country rather than the national interests. Financial assistance from the IMF has had both positive and negative impact in the country.