Reforms Are Essential For Brazil To Build On Recent Success

The Brazilian economy has made a rapid recovery from the global economic crisis, but further reforms are necessary to boost long-term growth, spur investment and further reduce poverty, according to the OECD’s latest Economic Survey of Brazil.

“Sound economic policies have helped Brazil weather the global financial crisis, but even more remarkable is the unprecedented progress being made on social goals including poverty reduction and inequality,” said the OECD Secretary-General, Angel Gurría. “We believe Brazil can achieve still higher, and more inclusive, growth over the medium term, provided policymakers meet the key challenges facing the economy by building momentum for further reforms.”

The report projects that GDP growth will slow to less than 4 percent over the coming two years, which is below trend rates of 4.5 percent annually, but well above the average for OECD countries.

Restraining inflation, currently above the upper end of Brazil’s 2.5-6.5% target range, without exerting upward tension on the exchange rate is the most immediate macroeconomic challenge. The use of various policy measures to smooth exchange rate volatility - including those that temporarily restrain short-term capital inflows - are understandable given the uncertainty facing the global economy, but Brazil should rely more prominently on fiscal consolidation, the report says.

Spending cuts announced earlier this year, combined with the establishment of budget surplus targets for the coming three years, are welcome, and the government should continue in this direction, the OECD said. The Bolsa Familia cash transfer programme has been highly successful in the fight against child poverty, and should be maintained and even extended.

The Survey focuses on the steady increase in the value of the Brazilian real in recent years, which has created concern over long-term competitiveness. The report points out that part of the currency appreciation has come in response to international growth and inflation differentials, and counsels against efforts to fully offset the rise.

Looking ahead, the Survey points out the importance of boosting investment rates, which are low by international comparison. Reforming the pension system and deepening long-term financial markets would help spur investment, as would lower tax burdens and policies aimed at achieving lower interest rates.

Brazil should prioritise infrastructure spending, which is crucial for long-term growth and social inclusion, while shielding it from government spending cuts, the report said.Read full report>>

Source: OECD