RETURN T.')REPORTS Dt-SI CIRQUPiT1 002Y R.-STRtCTED

WTI LiU?YED T0 A>zu;sTS DESK Report No. WH-195aWITHIN TO BE RETWU"ED TO RLEPL)E,TS DESKONE WEEK I161 CFE-'TRAL FILES

This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DfEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

CURRENT ECONOMIC POSITION

AND PROSPECTS

OF

BRAZIL

(in five volumes)

VOLUME I

THE MAIN REIPORT

December 19, 1969

Western Hemisphere Department

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CUR ENCY EQUIVALENTS

Currency Unit: Novo Cruzeiro (New Cruzeiro)

Average 1968 Exchange Rate:

U.S. $1.00 = NCr 3.396U.S. $1 million = NCr 3,396,000NCr 1 million = U.S.$294,464

Unless a specific indication to the contrary isgiven, all cruzeiro values in the report areexpressed in average 1968 prices and conversionsbetween dollars and cruzeiros were made at theaverage 1968 exchange rate.

Exchange Rates Effective October 3, 1969:

Selling Rate: $1.00 = NCr 4.210Buying Rate: $1.00 = NCr 4.185

CURRENT ECONOMIC POSITION AND PROSPECTS OF BRAZIL

TABLE OF CONTENTS

VOLUME I -- THE MAIN REPORT

BASIC DATASUMMARY AND CONCL11SIONS .............................. i iii

I. RECENT ECONOMIC TRENDS .. . . . ............ 1II. THE OUTLOOK FOR 1969-1974 ...... . 20III. THE BALANCE OF PAYMENTS AND EXTERNAL DEBT .40

STATISTICAL APPENDIX

VOLUME II

FISCAL AND MONETARY POLICY ......................... Annex 1THE AGRICULTURAL SECTOR........ Annex 2

VOLUME III

INDUSTRIAL POLICIES AND THE MANUFACTURINGINDUSTRIES IN BRAZIL .. Annex 3

VOLUME IV

THE FEDERAL SECTOR INVESTMENT PROGRAM . .Annex 4LIST OF PROJECTS FOR EXTERNAL FINANCING ..... Annex 5FLOWS OF FUNDS TABLES p.... Anex 6

VOLUME V

THE PUBLIC FINANCES OF SAO PAULO .. Annex 7

Members of the 1969 Economic Mission

General Mission: John A. Holsen, Chief of Mission; Marto Ballesteros,Curt Carnemark, Atle Elsaas, Richard Fletcher, Miss Fe Villafuerte(consultant).

Industry Group (Annex 3): Louis Walinsky (consultant), Chief of Mission;Mrs. Helen Hughes, Otto Wadsted (consultant).

Sao Paulo Group (Annex 7): Jose A. Guerra, Chief of Mission; CarlosAguirre (IMF), Raul Gochez (OAS).

a' *~~~~~~~~~~~~~~~~~~I S

BASIC DATA

Area: 8,512.,000 square kilometers c"u1at;ions 92 m3i'lion( 'i,.d-15',3,286,000 square miLes r7stn• , Jts s

Gross National. ?roducot in 1968 (preliminary):.

At, market prices: NCr 91.7 billion ($27.0 billioi); pe:r capita NCr I.;026 ( 23-2)

At factor cost: NCr 73.3 billion ($21.6 billion); per capVCa '(X 8 pY

GDP Growth Rates: 1968 GD? by Sector Fiancinr ineYst'.,, 1 3 0't St D _ $ % ren- a.h 19f68i %'Y1,, 32t19~{ 96 .of Oriegin (et.):.t?8

1962-1964 2.6% Agriculture ; I r731% ha& 3r a3 it

l96Li-967 h.5% Industry 31%03, Nactinal 8,a-vings 71 V

1967-1968 7.6% Services 38% C,urrent Acestt 8al. *

Government Finance: Consolidated Public Secto- Fd-eral B t t ,udgetbill-on NlCr I of GDP MfE icU7f3 ' ' P

Current Receipts 29.2 3L -(of w;hich taxes) (27.3) (295) (9.8)Current Expenditures 20.8 22M, 7.3 .119

Savings 9.c 3,0 3

Investment Expenditures 9.1 9.8 4. 2 5,Deficit 7 - .2

Money, Prices & Money Supply General Price Index Exchange ReExchange Rates: (private sector) (Dec. 1964 = loo) (seiling rats

million NCr % Change Index % Chas NCr/S

December 1965 7,891 77.0 134 3h .2 2.220 7 i gDecember 1966 8,801 11.5 187 39.1 2.223December 1967 12,735 L!4.7 233 25.0 2.715 23lDecember 1968 17,849 4O.i 293 25.5 3 83G 1.,' .

Balance of PayMents in 1968 (million $) Merchandise Eo orts (fob) in 1968Zil. $ nrce lt

Exports (goods & services) $2,072 Coffee -ffi.Imports j ' Cotton 131 6 9

Resource Gap -233 Iron Ore "L0?

S ugar 102Interest Payments (net) -180 CWocoa 72 3.8Other Factor Payments (net) -90 All Other 677 '35ADonations (net) 60 Total 1&39,0

Current Account Bal. External Debt on Dec. 21,, 1io

Foreign Direct Invest. 5h (outstanding andsYALT Loan Disbursements 3921LT Loan Amortization -286 Medium & Long TermrNet Short Term Credit b12 Short TermOther Transactions -150 TotalDecline in Official Reserves(+) 21

Debt Service Ratio in l961b 2 _5;,a

(excl. amort. of aho.-t term crodits)

Net Official Short Term Reserves: Loans from IBRD at Dec 31,l9i

$418 million on Dec. 31, 1968 (in- Outstanedirg & Disbursed $L67,7 mil.cluding IMF drawing of $75 million Undisbursed 3.3.5 which equals 21.h% of quota) Total. 17

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SUMARY AND CONCLUSIONS

Recent Economi-c Trends

1. Brazil's dominating economic concern in the post-war period hasbeen how to maintain a high rate of growth and at the sarm time avoid theinternal and external financial instability that would threater ft-uregrowth. The stabilization program begun in 1964 was a necessary, if f--cult, set of measures to restore order in the country's internal andex e

nal finances, which had deteriorated to a point vnere growth hadL 1memAtceased, external payments were in arrears and savings and investments wereshrinking, while inflation had reached axi annual rate of over 100 per,eent-During the next three years progress was made in correcting some of theprofound structural maladjust1zments of tae economy; growth rates were modestin 1964-1967 since relatively little could be done to accelerate groWthuntil sufficient progress had been made in solving these basic problems.When the administration of President Costa e Silva e=e into office r.n March1967 it found the economy in a recession, but it also found that the reTh.onsof the three previous years had created a much firmer base for renewed eco-nomic growth. Monetary and fiscal measures were taken to revive demand,but in sufficient moderation to avoid accelerating inflation, so that 1967and 1968 were years of substantial growth at the same time as further pro-gress was made toward price stabilization.

2. Brazil's economic prospects have improved dramatically as a conse-quence of the policies followed in recent years. The rate of inflation hasbeen brought down from close to 100 percent to about 20 percent. Publicfinances have been greatly improved; expenditures are under better control,tax revenues have been raised from 20 to 30 percent of GNP and borrowingfrom the banking system to finance budget deficits has been almost elimin-ated. The freedoma of state governments to pursue financial policies incon-sistent with those of the Federal Government has been curtailed and progresshas been made to use the federal tax system as a device to channel resourcesfrom the richest areas to the less developed regions, especially the North-east. Wages have ceased to be a source of inflationary pressures. Capitalmarket institutions are developing as inflation slows; the structure ofinterest rates is greatly improved through the growing use of monetarycorrections and the better organized and more competitive financial market.A flexible exchange rate policy has been adopted. Exports of manufacturedgoods are becoming a significant earner of foreign exchange. The most dif-ficult adjustments resulting from the stabilization period were completedby 1967; economic recovery was accomplished in i967-1968. If sound economicpolicies are continued and the necessary external assistance ean be maobi.-ized, the prospects for rapid and sustained economic growth are favorable.

3. In 1968 GDP rose by 7.4 percent to US$27.3 billion. Investmentand industrial production led the recovery. Investment expenditures Jumped25 percent above the depressed level of 1967. Industrial output increasedby 15 percent and industrial employment (measured only in Sao Paulo) rose by12 percent over prior year levels. These favorable trends have continuedin the first half of 1969; all of the major economic indicators registerednew highs during this period.

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4. Fiscal management contributed effectively to progress towardsstabilization goals in 1968. Treasury revenues were up by 22 percent inreal terms, a result of the higher rate of economic activity and of thetax reforms made in the previous years. A tighter system of expenditurecontrols enabled the Finance Ministry to hold expenditures within what waspermissible in terms of receipts and the deficit target. The deficit -

which in the early sixties had exceeded 5 percent of GNP - declined from1.8 percent, in 1967 to 1.3 percent in 1968. In the first half of 1969expenditures were held within the budgeted levels while receipts were sub-stantially higher; as a consequence the budget deficit in June was onlyone-fourth of the planned level. Treasury borrowing from the monetaryauthorities actually declined compared to the end of 1968 as unexpectedlyhigh receipts from bond sales more than offset the small deficit in theTreasury cash budget.

5. Wage policy in 1968 and 1969 was relaxed slightly compared toprevious years, but both the increases in the minimum wage and the officialformula for readjustment of wages determined through collective bargainingstill implied some continuing decline in real wages. Collective bargainingagreements approved by the labor courts, however, have frequently resultedin wage increases above the level implied by the official formula andslightly greater than the cost of living increase during the previous con-tract period. Increases in real wage rates, where granted, have been mo-derate; government policies continue to keep wages from re-emerging as acause of renewed inflationary pressures. Employment expanded considerablyin 1968; for the first time in several years the number of new jobs seemedto exceed the annual additions to the labor force.

6. The rate of inflation during 1968 was about 25 percent, the sameas at the end of the previous year. By September 1969 the annual rate ofincrease in the cost of living had fallen to 22 percent while that for thegeneral price index was only 20 percent. Both the failure to show some%Lmprovement during 1968 and the decline in 1969 are strongly influenced bythe behavior of wholesale prices for industrial products; in this case therate of increase rose from 23 percent at the end of 1967 to 34 percent atthe end of 1968 and then fell rapidly to 17 percent as of September 1969.This pattern was partly due to the adoption of a flexible exchange ratepolicy in August 1968; as a result some cost-push factors were felt in 1968that under the previous policies would not have been noticed until early1969. Prices for foods and other agricultural products are now rising morerapidly than at any time since early 1967. As a consequence the increasein the general level of prices during 1969 will probably be somewhat, abovethe 20 percent annual rate registered in September.

7. Merchandise imports rose by 29 percent in 1968 due largely to thegrowing needs for capital equipment and industrial raw materials that accom-panied economic recovery; in the first half of 1969 the growth rate fellto 10 percent. Exports have been growing at an average annual rate of 6percent since the early 1960's; 1968 export earnings were in line with thistrend. Partly reflecting the flexible exchange rate policy adopted inAugust 1968 and other measures to stimulate exports, in the first half of

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1969 export earnings were 16 percent a1bove the sane period of the previousyear. Recent favorable prices for coffee and other agriculttural comoditiesshould result in an even higher increase for the year as a whole.

8. Because of the growth in imports the current accorut deficit inth.e balance of p.ymen8s rose from $328 million in 1967 to $443 ailion in1966. As a resu:ab of the more favor.ble trade trends the deficit was to $209 million for the first six months of -1'69. :veCn more JiMportan.tthe difference in financing. in 1968 the {defict was largely financed bysome US$400 million of short term borrowing; net short. term reeserves de-clined slightly during the year. TMhile short term borrowing has continuedat a high level during 1969, this year's incerease is being of fset by increases in reserves. No liquidity problems are likely to arise as a resultof higher short term debt when, as in 1969, it J. offset by correspondinglyhigher foreign exchange reserves, Aware of the need fer careful debt ma-nagement, the government has recently taken measures to restriet the inllowof short term financial credits and is now placing closer control on mediumterm borrowing by both the public and private sector.

9. High current account deficits are unavoidable if the import re-quirements of sustained 6 percent growth are to be f-lfilled and debt servicemaintained. The immediate problem is that of obtaining a larger inflow ofexternal assistance on terms which will make successful debt managemaentpossible. Over the longer run, increases in exports are the only way ofresolving the problem. The adoption of a more flexible exchange rate policylin August 1968 is a major step in improving export prospects, and its ini-tial results have been highly satisfactory. Eight small exchange rateadjustments have been made between August 1968 and August 1969 which havekept pace with relative internal and external price movements. The increasein coffee prices in recent months significantly improves the outlook forthe trade balance in 1969. If prices stay at their mid-October levels forthe remainder of the year, earnings will be about $80 million above whathad been expected on the basis of price trends in the first half of theyear. Because of the uncertainty regarding future prices for coffee, thegains from present high prices are an opportunity to further strengthenBrazil's international reserves but do not reduce either the need to mobil-ize larger inflows of medium and long tern credit or the need to increasenon-traditional exports.

The Outlook for the Public Sector

10. In mid-1968 the government completed a three year investment planfor 1968-1970. It was soon apparent, however, that there were importantweaknesses in the information that went into the plan and in the adminis-trative structure needed to carryr it out. A new start is now being made atpreparing an operational investment program. A less comprehensive multi-year investment budget is to be prepared for the federal sector next yearwhile a longer term national development plan giving a broad perspective onthe future should be ready in 1971. The major problems and optionIs fae'ngthe government at present can be clarified by assessing the ongoing and

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planned investment activities of the major public agencies, both in termsof their adequacy to meet the country's main development needs and in termsof their consistency with presently foreseeable resource availabilities.

11. Because of the low investment levels in the past several years,gross investment will have to grow at 9-10 percent annually during the1969-1974 period in order to support a 6.0 percent growth rate for the longrun. This would increase investment expenditures from 14.5 percent of GNPin 1968 to a more normal level of about 18 percent by 1974. Almost all therequired additional resources must be obtained from national savings; amarginal savings rate of close to .24 will be necessary. The need to keepexternal debt and the debt burden within manageable limits, as well as thelikely availability of foreign credits on suitable terms, restrict theextent to which Brazil can rely upon external resources. The prospectsfor realizing the required high rates of savings and investment are quitefavorable but the outcome will depend upon effective government economicmanagement.

12. The tax reform efforts of the last five years have raised taxrevenues from 20 to 30 percent of GNP. The need to finance government def-icits by inflationary borrowing from the banking system has been almosteliminated. Because of the high tax burden future increases in savingsmust come from expenditure control rather than higher taxes. Among theidentifiable issues to which Government policy must address itself if sucha curtailment in the growth of current expenditures is to materialize, theprogressive reduction of the railroad deficit and restrictions on transfersto the social security institute loom large. Similarly, the control ofcurrent expenditures through administrative reform, particularly the reduc-tion of personnel expenditures, would have to be continued end strengthened.The gradual elimination of the subsidy on coffee for domestic consumptionwould significantly add to the savings of the extra-budgetary agencies.Steel prices should be raised so the government owned steel companies cancover depreciation and earn a reasonable return on their investment; theseresources can then be used to help finance the steel expansion program.All these measures conform to stated Government policies and in most of themsome progress can already be recorded; the continued willingness of theGovernment to proceed along these lines at an accelerated pace wll1 be amajor determinant of i ts success in its releasing resources for the accel-erated development of the private sector.

13. Greater efficiency in allocating tax revenues could be obtainedthrough some modifications in the present widespread practice of earmarkingtaxes for particular agencies and programs. In 1968 almost 80 percent ofbudgetary savings were earmarked for particular programs. This reo l1t` ininsufficient flexibility to adjust to changing requirements; e.g., whenbudget cuts have to be made for fiscal policy reasons the whole impact f'allsupon those sectors not receiving earmarked funds. Some agencies, with theirfunding assured by earmarking, may run surpluses or undertake relatively lowpriority projects while insufficient resources can be found for higher pri-ority activities elsewhere in the public sector. Tne port and watervays

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authority now i- iln the former situation and Petrobras may well be iniwithin a few years. The social security institute, whose savings ae inpractice, if not legally, earmarked for its own uses. is expected to gener-ate savings which should be made available to other sectors, While 2recg-niziLng the historic reasons for and the continuing advantage-s of some ear-marking, modifications are elearly called for. The 1967 Constitt on'awstep in thiz direction; others could yell be devi2ed.

14. With control of current expenditures and adequate pricing policiesto help generate savings, and a more flexible allocation procesa to see hatthey go to the highest priority uses, it should be possible to ctory out afederal sector investment program averaging $2.5 4inlion arnually in l969-,19T`¾Expenditures in the program for real investment would increase by 1005 -er-cent annually. This should be adequate to support a six percent GDP g'ovthwrate; no major bottlenecks would be likely to emerge in the key seetors optransport, power and basic industries, if the investments included in tI§3estimate took place. Investments of this magnitude would also be wit-hinthe government's capacity for efficient planning and execution, and stillleave a reasonable share of total saving to finance investment in the pri-vate sector, The investment expenditure estimates of individual gover-ennsagencies suggest that many of them are now preparing plans to spend sub-stantially more than would be consistent with these overall constraints. .a-though these "plans" are often requests for financing which the agencie.,expect to have reduced rather than realistic investment programs. An agreqdmedium term program for federal sector investments and their financing isurgently needed to determine priorities and encourage more realistic plan-ning in the individual agencies. The Ministry of Planning is beginningpreparation of such a plan for 1971-1974 as well as continuing its effortsto strengthen the planning capabilities of individual government agencies.

15. Although the public investments carried out by state and municipaleatuthorities are not, at present, susceptible of overall analysis and evelu-ation by the Federal authorities, a sizeable portion of them - those in r;>ehands of the state of Sao Paulo and the main metropolitan municipalitiea ofthe city of Sao Paulo - can be evaluated in some detail. This area, account-ing for one-fifth of Brazil's population and one-third of its GNP, has iTf.r

several decades been a major factor in the overall growth of the econoo@,rits public sector since 1966 has been well administered and its financesare now managed in such a way as to ensure fiscal order as well as an ejee-tive channelling of funds into high priority programs. The regional ta&/GNP ratio is well above the national average; some 83 percent of state andmunicipal investments are financed out of local resources in 1968. More-over, a sizeable part of-the taxes collected in the state are channelled topoorer areas by the Federal Government. The main constraint on carryingout the full amount of the economically Justifiable public investmentes in

the state is financial; given the high tax burden and the existing cautiouspolicy toward current expenditures, it would make good economic sense ifthe state complemented its own savings with additional foreign borrowing,About 70 percent of its investments are in the pover, water supply, andtransport sectors, and it is these that would seem to be most crucial to

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the continued growth of the economy's industry and agriculture over thenext few years. For the longer term an expanded investment program in edu-cation is also of demonstrable importance, and the state is well capable ofundertaking it.

16. For the public sector as a whole the feasible improvements insavings will leave the monetary system increasingly free from the need tofinance government deficits. This should permit further reductions in therate of inflation over the next few years. The monetary system should beable to expand credit to the private sector at a rate above the GDP growthrate. There are many advantages in having the monetary authorities carryout part of this expansion indirectly by purchasing, and for practical pur-poses retiring, readjustable Treasury bonds now held by the general public.It should be possible to do this on a substantiAl scale after 1971.

The Outlook for the Balance of Payments and External Debt

17. Earnings from Brazil's major exports - coffee and other tradi-tional agricultural products - are expected to grow slowly in the comingyears. The debt service burden (22.5 percent of export earnings in 1968)is already high. To keep balance of payments and debt difficulties fromconstraining Brazilian growth will require both a major effort to increasenon-traditional exports and careful planning and control of external bor-rowing so that the needed finance can be obtained on appropriate terms.

18. The government is aware of the need to stimulate exports. Taxincentives and credit programs have been strengthened in 1969. The flex-ble exchange rate policy adopted in August 1968 was a major step forward.It avoids the sharp fluctuations in the real exchange rate that took placeunder the previous system of approximately annual devaluations; furthermorea real devaluation of 8-9 percent between 1967 and 1969 is taking placesimply as a result of the shorter intervals between rate changes. If thesepolicies are continued and complemented by consistent domestic policiesaffecting domestic demand and industrial efficiency, the statistics on non-traditional exports should reflect sizeable results.

19. In order to obtain a significant widening of the export base, abroad reorientation of industrial policies will be required. In general,Brazilian industry has reached a stage where it would benefit from- greaterexposure to the competition provided by international- markets and a seriesof measures conducive to this end can be identified. In the short run arollback of recent tariff increases to the levels prevailing in early 1967would seem justified. At the same time a review of the existing tariffstructure should prove profitable; the general end to be sought woldd be tonarrow the range of rates which at present is unwarrantedly wide and toavoid the excessive protection of intermediate inputs which makes Brazilianfinal products unable to compete in export markets. Furthermore, a newapproach to administrative protection seems indicated. Well defined eco-nomic criteria are needed for applying "minimum" pricing for tariff pur-poses, licensing, and the Law of Similars. Conibined with appropriate wagecredit and fiscal policies, action in these fields, if pushed vigorously,should lead to making Brazil a significant exporter of industrial products.

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20. Even with such policies Brazil's resource gap ($233 million in1968) must be expected to increase in the next few years, but an eventualreversal of this trend is a precondition of keeping external debt withinmanageable limits. Even with a declining resource gap after 19T1, the cur-rent account deficit will grow steadily as interest payments on externalborrowing rise. This, together with amortization payments will make therequired gross capital inflow rise from about $800 million in 1969 to $1.2billion in 1974; the average will exceed $2 billion annually. Obtainingthese inflows on terms that will not create an unmanageable debt problem,will not be easy, and wi'l call for a carefully planned and effectively ad-ministered external financing program in which ceilings and targets for newdebts of given maturities and interest rates are set and adhered to. Inorder to keep the gross inflow within a feasible level, it will be necessaryto obtain some continuing concessionary assistance and to negotiate supplierscredits with relatively long repayment periods.

21. Although an external financial program does not yet exist, theauthorities recognize the need for such a program; it is to be hoped thatongoing work in this direction can be accelerated. It is possible to makesome rough estimates of what the main features of a viable program - con-sistent with the expected national savings and investments - might have tobe. Some 20 percent of required gross capital inflows might come in roughlyequal parts - from direct private investments and net additions to short termdebt. Medium and long term credits must be found for the remaining 80 percent($4.9 billion over the six year period). The required commitments for newmedium and long term loans rise from $580 million in 1969 to over $1 billionin 1973 and 1974.

22. Some increase in the debt service burden seems inevitable, but itcould be held below 28 percent if concessionary assistance made up about 20percent of new medium and long term loan commitments, and if use of mediumterm supplier credits were held close to 10 percent of the total. Projectloan comitments rising from $250 million in 1969 to $500 million in L974and long term supplier credits rising about from $100 million in 1969 to$300 million in 1974 would make up about 70 percent of the commitments. Asufficient number of projects can be identified to assure that, if a seriousand sustained effort is made to complete their preparation, medium and long

J term loan and supplier credits commitments in the required amounts could besought during 1969-1971; because of the time required for project preparationand loan negotiations, work should begin now on identifying investmentssuitable for external finance in 1972-1974.

23. Brazil's need for high future levels of external assistance isdue in large part to the costs of servicing existing debt. Interest andamortization on debt contracted prior to 1969 will amount to $3.2 billionduring 1969-1974; service on debt contracted during the period raises thetotal to $4 billion. On the other hand, Brazil's need to import capitalequipment is relatively low and the need for some imported raw materialsrelatively high because of its well developed capital goods industry. Thiscombination of factors makes it difficult for Brazil to rely exclusively on

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medium and long term assistance which is largely tied to imports of capitalequipment. The analysis suggests that the projected external borrowingwill not serve to close the gap in the balance of payments unless (a) Brazilsubstantially raises the proportion of investment goods imports which arefinanced by foreign assistance, (b) Brazil succeeds in attaching externalfinancing to a larger proportion of its investment program, and (c) externallending agencies are willing to provide a reasonable level of Iocal costfinancing. The latter could be accomplished if project loans financed, onthe average, 44 percent of total project costs. This proportion, which ex-ceeds that resulting from past practice, should provide the required amountsof financing for purposes other than the direct import component of theprojects to which official external loans can be attached.

24. Brazil's external debt was $3.8 billion at the end of 1968. Ofthe total, medium and long term loans (outstanding and disbursed) accountedfor $2.7 billion and the remaining $1.1 billion consisted of short termcredits. Projected new borrowing would raise the total debt to $6.8 bil-lion at the end of 1974 (including $1.6 billion in short term credits). Thedebt service burden would rise gradually from 22.5 percent in 1968 and anestimated 24.1 percent in 1969 to 27.4 percent in 1974.

25. Even if generally sound economic policies are followed, it is tobe expected that continuing concessionary lending will be required duringthe next 10-15 years in order to keep the gross inflow from medium and longterm loans to a reasonable level in relation to imports and to hold debtservice payments to a manageable portion of export earnings. Unless exportsgrow substantially faster than imports, however, the gross inflows required,the debt service burden, and total debt all would reach unmanageable levelseven with the continuation of concessionary assistance. Thus a key cri-terion which will have to be applied to domestic financial and economicpolicies will have to be whether they are conducive to bringing about along term growth rate for exports that is significantly (e.g., 1.5 percentagepoints) above the import growth rate. Brazil's market size, resource endow-ment, and existing level of development, combine to make such a result feas-ible. If these assets are fully exploited, the long term prospects forsustained and financially viable development are bright, even though overthe next ten years external debt management will remain a particularlyserious concern for the authorities.

I. RECENT ECONOMIC TRENDS

A. Introduction

1. Brazilian economic policy is dominated by the difficult task ofachieving high and growing levels of output and employment -while at thesame time making continuing progress toward internal and external financialstability. Looked at in this light, the two year perioC. ending in m;ide-A_6988W major progress with respect to output and ermloyment objectives an-.substantial progress toward internal financial stability. In the case ofbalance of payments management, important improvements were made in poLic.ebut the growth in import demnd that accompanied economic recovery has madethis set of problems increasingly urgent.

Background

2. From the early post-war years to 1962 Brazil maintained a re1a-tively high and steady growth rate albeit not without almost continuingproblems of both internal and external financial stability. Between 1947and 1962 growth in GDP averaged 6.0 percent annually (2.1 percent per cap-ita). Economic gronth was led by the industrial sector which expanded ata 9.5 percent annual rate; the agricultural sector, when allowance is madefor weather, maintained an almost constant 4.1 percent annual growth rate.Inflation during this period averaged 20 percent per year and financinghad to be found for balance of payments deficits which grew to an averageof $385 million annually in 1960-1962. Toward the end of this period in-flation accelerated and Brazil was unable either to borrow or to earn theforeign exchange needed to finance imports and growing debt service.

3. As the easier and more obvious forms of inport substitution werecompleted Brazilian industry lost much of its impetus to growth; it wasunable to produce at costs low enough to compete on the export market or totake full advantage of the potential domestic market. The agriculturalsector and both social and economic infrastructure suffered from relativeneglect due partly to the emphasis which had been placed upon rapid indus-trialization. Resource allocation within the country was distorted byprice controls, subsidies, insulation from world markets, and the processof inflation itself; relative prices not only failed to reflect relativeresource costs, but also changed with such rapidity that economic efficiencywas an elusive goal at best. The capital markets needed to mobilize and toallocate savings, were unable to develop properly in the inflationary envir-onment. The central government budget got completely out of hand, with taxrevenues not even sufficient to cover current expenditures, and much lessto finance needed capital investments. Government deficits financed bymonetary expansion were the main fuel for the inflation.

4. This economic system was clearly breaking down in 1963; in thatyear per capita output fell by 1.6 percent while the rate of inflationapproached 100 percent. The administration of President Castello Brancowhich came to power in March 1964 had no choice but to give priority tostabilization objectives, i.e., to bringing order into the country's inter-nal and external financial situation. As a result of its firm action the

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annual rate of inflation fell from 92 percent in Mlarch 1964 to 3 in March 1967 when the three-year period of the Castello Branco adminiktration came to an end. The current account balance of paqments - :<.oi tswere converted into surpluses which averaged $186 millon nna.Qr in?1464-1966; net official foreign exchange reserves grew by over $500 rai<.21orn

during these three years. The Treasury budget deficit, whic7h had. b..en 24.")percent of GNP in 1963, was reduced to 1.1 percent in 1966.

5. These gains toward stabilization objectivez. were obte&nd tC.'er,only with some sacrifice in growth objectives. Although tihe fs.tuesector, aided by the export market, did not depart sipsnificntl.y fian tslong r.Un grcowth trend o5 4.1 percent annrually, -industriai. output' tz O

higher in 1965 than it had been in 1962 rnd -fper e-pita (D-P

A recovery in the industrial sector began in 1966 t it -- ein the first; quarter of 1967 all. of the major indio aors f ity were below their 1966 averages. Upon taking office in March 9.6'-thadministration of President Costa e Silva thus folmd the econonw, in E:. rv.eis

sion. It also found, however, that the progress tOwa.rd both inter.h s3 .0.

external financial stability which had been made in the three previous yearshad created a much firmer base for renewed economic gryo.th. A1U12ie.AŽ- useof monetar, aJnd fiscal policy managed to revive demnan in the set9o hesif of196'7 but stiill avoid a return to higher rates of inflatinc-.

B. Trerds in Qn1oyment

6. Gross domestic prodict in 1968 i4 estiated at Nrr 92.7 bi-'lloO($27 3 b.iion). This represents an in.crease of 7.4- perce--t e^ the 19(Ylve-1eL Althc3ugh agricultural output in 7.968 wras at a reco'rd leirel. theincrease over the previous year was small (2.0 percent) since 1967 had alsobeen a geod year. It was the recovery of the industrial sector t at,.lsge1. responsible for the 7.4 percent inecrease in total output. WithinAndeustt7 tr the biggest increases were in production of investment relatedman.ufactured goods (mechanical and electric eauipmen*t, metals 9n trans-port equipment) and in civil onstructio n. Estiiated total expendit- es .-orfi.xed investment increased by 01out 25 percent in 1968 ain tlils were tneleadirng influence in the recovery, rf. e increase in 1968 raideed to4;e1 invIrest-ment to abo t 14 percent of' GlP? well above the 1964-196'J -ates b'/ pn:obab1ystill below the level necessary to susteai.n a slx percent. annul rate o'growth.

INDICES OF INDUSTRIAL PRODUCION,,(1962=100)

Percentage1967 1968 Change

Total Industry 115.0 132.1 14.9

A. Manufacturing 114.8 131.9 14.91. Investment Related 138.7 19.22. Consumption Goods 99.6 l10.4 10.83. Other Manufacturing 118.9 136.4 14.T

B. Mining 199.3 224,4 12.6

C. Civil Construction 91.1 106.9 17.3

D. Electric Energy 131.5 148.3 12.8

Source: Vargas Foundation; 1968 data are preliminary.

7. The index of industrial employment in Sao Paulo indicates that1968 was the first year in which employment in the covered activities ex-ceeded the 1964 average. This index - which unfortunately is incomplete inthat it excludes new firms - had fallen to 90 in the second quarter of 1967(1964-100), but rose steadily after that time to reach a level of 109 inthe last quarter of 1968. 1/ The average for the year was 12 percent above1967, although still only 3.0 percent above 1964 because of the low levelsof activity in the prior year. Time series covering trends in other sectorsand geographical areas are not available. However, the Ministry of Laborrecently began to collect information on hirings and discharges in commer-cial and industrial firms with five or more employees. These data indicatethat about 650,000 new jobs were created during 1968 in the firms includedin the survey, suggesting that the growth in employment in 1968 was - forthe first time in some years - greater than the number of new entrants tothe labor force.

8. The upswing in economic activity continued through the first halfof 1969. The most general indicator of industrial activity - industrialpower consumption in Sao Paulo, Guanabara and Minas Gerais - was up 14 per-cent over the first half of 1968. Industrial employment in Sao Paulo wasup almost 12 percent. Production of steel, petroleum products, and motorvehicles all reached new highs. New capital issues were up 17 percent inreal terms over the comparable six months in 1968. The only negative indi-cators were the high levels of both bankruptcy petitions and bills protected;both reached record numbers in the second quarter of 1969. 1/ Although

1/ See summary of economic indicators in Table 10.1.

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these indicators of financial difficulties fell when recovery began in mid-1967, they have been on an upward trend since late 1968. This reflects therelatively tight liquidity situation that has accompanied the high level ofindustrial activity. The growth in industrial activity slowed after themiddle of the year, but continued at a substantially higher level than in1968.

C. M ad Fislolic

Fiscal Policy in 1968 1/

9. The financial authorities had planned upon a Treasury budgetdeficit of NCr 1,148 million in 1968 and were able to hold it close to thislevel. Their suCcess was due to a combination of more effective controlson expenditures and a large increase in current revenues. Budgetary con-trol during 1968 was greatly aided by a procedure for tighter expenditurecontrols adopted in October 1967.

1968 TREASURY BUDGET (million NCr's)

Progran Results

Current Revenues 9,786 10,275.4Current Expenditures 7?343 72331.7

Savings 2,442 2,943.7

Capital Expenditures 3,590 4,182.6

Deficit 1,148 1,238.9

Source: Annex 1, Table 1-1. Cash budget data have been adjusted to anaccrual or economic activity basis. On a cash basis the planneddeficit was NCr 1,198 and the actual deficit NCr 1,226.7 million.

While previously agencies could obligate funds as long as they had an appro-priation in the legislative budget, under the new procedure no commitmentscould be undertaken unless the ministry concerned also had an expenditureauthorization from the Budget Office. Since the budget as passed by t1helegislature was usually unrealistic (by overestimating tax revenues and ig-noring some required expenditures, such as, the usual January increase inwages and salaries to compensate for inflation), it provided a poor guide

1/ See Annex I for a more detailed discussion of fiscal developments in1968.

for fiscal management. While the Finance h inis;r ha f r s yii<e 3ated on the basis of its own annual finamcial pro m rather' ttbe 41"hielative budget, its ability to implement its annv,.al fin al progvrtm wasgreatly strengthened by the controls on commitments st& .' :n l1.967.

19. The procedure adopted in preparing ; Li$63 fnanc.L o.n -

to estimate non-discretionary expenditres s .9.*C't, asalaries, etc.) and then hold aiscretiona:Xy 'xpen in..e t a ,iv 'Cpw

ent with the deficit target. I-n the course of t-!- - 5-iS%-that revenues were exceeding the original est-ioates, -i,authorize some additional expenditures. Ourrent 1c' re 11 e i.t

the original target, but capital expenditures wch1' been 3.-* sie 1.,,cut when the financial program was formulated - were aelos-ed to '

by roughly as much as revenues exceeded the inii ettes

11. Even with these additional authorizaitlorn tbF re.oi . i.capital expenditures was less than four perceuit (see Au=,x ') vl) l -3real increase in current expenditures amounted to 14 -pereenrt ,'nf i

authorities recognized that this was an undesirable trend -;n the com d9-of budget expenditures; measures have been taken 'In the !969 bu',-t -strain the growth in current expenditures (see par rank2 20 bel-oi, Iv.enthe importance attached to stabilization objectives, hcwever, the fina;i.authorities made restraining the total deficit 9heir pri oril Taget d

simply cut capital expenditures to the extent necessary.

12. Treasury revenues in 1968 increased by .1.6 percent, in real t er^x;.sAlmost three-fourths of the increase came from col .1ec.I n otf exciLse ta&%zeon industrial products (IPI) which now amount to abou"t haalf of total czrsarent receipts. Tfhe 35 percent increase in real. terms in -I"I co2lvectionswas caused by: (a) the increase in industrial outout and sales, (tb) theexcess of the rise in industrial prices over the rise of the general pr1.eeindex, and (c) a slight increase in tax rates. In addition, the receip-rVin 1967 had been held down by a policy of pstpo)ning excise tax, collecisonsas a fiscal measure to stimulate recover7 J@throm the recessi-on early in theXyear. Customs revenues rose by 41 perceat over 19,!)67 in reFl' tJerms, L1ostlybecause of the 29 percent increase in the 7pal.r o-e sf imports but alsopartly due to the higher average exchange ra,e !foULlowing the flexible rst-policy adopted in August 1968 (see paragraph `07 ;e.4o ,hn.t of the re-maining increase in revenues carme from the tax on petr'oaelm p 'otd1ct. The;ndemand was strongly influenced by industrial recove-.ry

13. The deficit in the Treasury cash budget had risen frosi 1.1erc.en-of GNP in 1966 to 1.8 percent in 1967 as counteret,cllcal fKcal MeaEreswere taken during the recession in the latter year. in 1963 the defiall",reduced to 1.3 percent of GNP. Although the increasoe i.n -the -Partickpatic_-Fund (the share of federal excise and income taxes earma,-ed for local trOernment) from 14 percent in 1967 to 20 percent inr 1 l only iCA8i)

small effect on total expenditures, it had a large one --a the deficit. K.it not been for this increase in transfers, the deficit i.n 1963 wou]d ha,.tefallen to less than one percent of GNP.

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14. The favorable fiscal results in 1968 must be credited in part tothe tax reforms of the previous several years, in part to the economic man-agement that brought about recovery from the early 1967 recession, and inpart to the improved control over total expenditures. The result was aneffective contribution both to stabilization objectives in 1968 and to theprospects for better budgetary management in the future. As stabilizationobjectives come closer to being realized and the emphasis shifts to sustain-ing a high rate of economic growth, however, the composition of budget ex-penditures becomes increasingly important. The high level of the tax burdenin Brazil - now about 30 percent of GNP - makes it imperative that the re-quirements for increased savings be fulfilled by restraining growth in cur-rent expenditures rather than by raising tax rates. Tlhis will require astrengthening of the budgeting and planning machinery which is still in thevery early stages.

Monetary Policy in 1968 1/

1968 MONETARY BUDGET (million NCr's)

Program iResults

I. Net International Reserves 400 316.0(in dollars) ($125) ($117)

II. Net Domestic Credit 1,215 2,903.7

Government Programs 667 609.6Treasury Deficit - 60- 1,079.1Net Coffee Operations -429 -626.4Autarky Deposits -284 -566.2All Other Programs 780 723.1

Commercial Bank Rediscounts 14 409.3

Private Sector Credit 700 2,092.5

Net Other Accounts -166 -20747

III. Net Assets = Reserve Money 1,615 3,219.7(I+II = III)

Commercial Bank Reserves 654 1,227.2

Held by the Pualic 961 1,992.5

Source: Annex 1, Table 1-8. Figures refer to the monetary authorities only.

1/ See Annex 1 for a more detailed discussion of mornetary developments in1968.

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15. The monetary program for 1968 called for an expansion in reser-semoney of 23 percent (NCr 1,615 million); the increase in net domestic Creditby the monetary authorities was to be held to li percent (NCr 1,215 million)in order to allow for an increase in international reserves of $1 25 million.It was expected that both total credit to the private sector and e oney sup-ply would increase at the same 23 percent rate as reserve money. '-he in-crease in net international assets was the only one of these targets closelyapproximated. Reserve money expanded by 45 ra;ther than 23 percent while netdomestic credit of the monetary authorities grew by 36 rather than 15 per-cent. The balance sheets at the end of the year shoved that private sectorcredit and money supply had grown by, respectively, 61 and 40 percent ratherthan the originally projected 23 percent.

16. These large departures from the original program reflect deliber-ate changes in the monetary targets as the year progressed. They becamenecessary because the reported increases in money supply and credit weremore apparent than real. In 1967 the commercial banks increasingly beganto ask their borrowers to maintain "compensating balances", i.e., minimumaverage balances related to the volume of credit they had received. Theaverage compensating balance was estimated to be 22.7 percent at the end of1967; by December 1968 the figure had risen to 33 percent. 1/ As a resultof this increase in compensating balances the reported monetary data greatlyoverstate the increase in effective money supply and credit. While a sub-stantial margin of uncertainty is necessarily involved in any specific esti-mate of the effects of changes in use of compensating balances, they are soimportant that failure to make an adjustment - albeit approximate - wouldbe far more misleading. When the estimated increase in compensating balanceis taken into account the expansion of private sector credit during 1968falls from 61 to 48 percent while that in money supply drops from 40 to 25percent. The latter figure hardly departs from the original program; inthe light of the increases in prices and economic activity between December1967 and December 1968 even the 48 percent expansion in private sectorcredit did not increase the real liquidity of the sector. The increase inthe general level of prices and output would have required a 33-35 percentexpansion in money supply if velocity were unchanged. Wholesale prices ofindustrial products rose by 34.2 percent during 1968 while industrial pro-duction indicators suggest that output grew by more between December of 1967and 1968 than the 14.9 percent average growth rate for 1968 compared to1967; thus for this sector a credit expansion in excess of 54 percent wouldhave been required simply to maintain the same real level per unit of output.As most short term credit is in fact either to industry or for the marketingof industrial products, the picture that emerges is one of a relativelytight credit situation.

1/ These estimates of compensating balances as a percent of credit werefurnished by the Central Bank. Bankers mention "typical" values of20 and 30 percent for the two dates; the results hardly differ whenthe second set of figures are used.

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17. Other information confirms this picture of tight liquidity con-ditions at the end of 1968. Interest rates in the letra de cambio marketwere rising in the latter part of the year even though the supply of fundsin the market was growing rapidly at the same time. Despite growing outputand incomes, bills protested - a fairly dependable indicator of liquiditysqueezes in Brazil - reached a record high in the last quarter of 1968;the number of bankruptcy petitions was higher in this quarter than at anytime except during the depth of the recession of early 1967. Furthermore,there was a high level of short term borrowing from abroad even thoughthese funds were available only with the borrower bearing the exchange riskplus paying interest of 12 percent to 16 percent, or even more. Net bor-rowing under Resolution 63 and Instruction 289 - the two main vehicles forprivate sector short term foreign credit - amounted to about NCr 1 billionin 1968 (US$293.3 million); this is equivalent to over 20 percent of theexpansion in effective credit by the banking system after adjustment forthe increase in compensating balances.

18. The expansion of net domestic credit by the monetary authoritiesin 1968 was thus undertaken in an effort to maintain enough liquidity tosupport the continuing economic recovery. It resulted from a deliberateexpansion in favor of the private sector rather than from unplanned expan-sion to cover government budget deficits as had happened in some previousyears. Monetary authority expansion to finance government programs was infact slightly less than in the original program (see table accompanyingparagraph 13) even though the difficulties experienced in marketing readjust-able Treasury bonds made it necessary for the monetary authorities to financethe entire deficit (see Annex 1 and Table 1-10). The main factors actingas public sector offsets were the coffee operations and build-up of autarkydeposits. The monetary authorities acted to ease the liquidity situationof the private sector both by increasing lending from the Bank of Braziland by increasing rediscounts granted to commercial banks. To facilitatecredit expansion by the commercial banks compulsory reserve requirementswere temporarily lowered by 10 percent in August-October and 5 percent inNovember; the effect of the restoration of the normal 30 percent compulsoryreserve requirement at the end of the year was partially offset by permit-ting banks to substitute holdings of Treasury bonds for 40 rather than forthe 20 percent of the total compulsory deposits. 1/

1/ This substitution of additional bonds for compulsory deposits couldonly be done by banks charging average monthly interest rates of 2.0-2.2 percent. In addition to encouraging lower nominal interest ratesand allowing the barns to hold an interest earning asset in place ofcompulsory deposits, the measure (a) provided additional liqluidity forbanks already holding bonds not needed to meet reserve requirementsand (b) enabled the Treasury to place bonds with those banks which didnot already hold bonds equivalent to 40 percent of their compulsory

.reserve requirement.

19. Thus, despite the sharp contrast between the monetary progr andthe results X and despite the large growth in acney supplj and credit reporttdon the balance sheets, the nonetery authorities in 1968 in fact had a highdegree of success in their efforts to maintain the delicastv balance betweenexcess liquidity which would accelerate inflation ard inadequate liquiditywhich would reverse the economic recovery begun in 1967, Tne monetary 'pro-gram. was cosely followed in the tz o respec¾s w1here this was particularlyimportant - the increase in net international reserves -which fell shiort of

the ;$125 million target by only $8 million and the control of total govern-ment borrowing from the monetary system.

Monetary and Fiscal Trends in 1969

20. In both fiscal and monetary policy, continued and very subatantiaJprogress was made toward stabilization goals in the first half of 1969,The 1969 Treasury financial program included a requirement that all rninsnitries and agencies gradually reduce their expenditures for civilian personnelat a rate which would - based on last year's pay scales - result in a 10percent reduction by the end of the year. This should result in a real de-crease in expenditures for civilian personnel of about the sate ms3ituo.C

since the 20 percent salary increase for civilian employees at the start of1969 is about the same as the expected rate of inflation during the year.As of mid-1969 this program was being carried out without significant slip-page. Other expenditures have been contained within budgeted levels. Actualtax collections have exceeded estimates by more than 12 percent. As a con-sequence, the cash deficit at the end of June was only slightly over one-fourth of the amount initially projected. Also significant has been thereappearance, during the second quarter, of bond operations as a substarntialsource of financial resources for the Treasury. An expanded market forbonds was created in June by allowing commercial banks to discharge up to50 percent of their compulsory reserve requirements by holding Treasurybonds (on the condition that banks so doing lower interest on their loans to1.6-1.8 per month). Both demands appear to have been further strengthenedby open market operations which have made the bonds attractive for investorswith short term funds. A shift from letras de cambio to Treasury bonds wasalso encouraged by a weakening of confidence in letras following the failureof two finance companies, an increase in taxatiorn of earnings from letrasand a fall in the interest rates paid upon them.

21. The cash budget deficit at the end of June vas NCr 260 millionwhile net proceeds from bond operations in the first six months were NCCr 700million; the government thus provided an appreciable net contractiona.ry mone-tary effect during the first semester. As a result public sector creditfrom the monetary authorities outstanding at the end of June was 17 percentbelow the level of June 1968; this is the first time in the 1960's thatmonetary authority credit to the public sector registered an absolute declineover a twelve-month period.

22. At the same time the rate of expansion of private sector creditdecelerated appreciably. At the end of June the reported twelve-month rateof expansion was 43 percent compared with 61 percent in December (see Annex1, Table 1-14). When adjustment is made to exclude the probable effect of

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changes in compensating balances, the rate of expansion in June was 39 per-cent compared to 48 percent in December. The decline has been relativelymore pronounced in the case of commercial bank than monetary authority'scredit. Consequently, the trend toward relatively faster growth in creditto the private sector from the monetary authorities observed in 1968 con-tinued during the first half of 1969. The expansion reflects the concernof the authorities about provision of an adequate volume of credit at rea-sonable real rates of interest. The favorable outcome of the treasury cashbudget and bond programs have thus far freed the monetary authorities fromhaving to finance treasury deficits and permitted a substantial expansionin private sector credit without exceeding a prudent overall level of credit.

23. During the course of 1969 the monetary authorities made severalattempts to bring down interest rates. In January the Bank of Brazil loweredinterest charged on its agricultural loans from 12 to 9 percent for smallproducers and from 18 to 15 percent for large producers. In May, at thesame time as interest rates on letras were lowered, banks were encouraged toreduce interest charges to 1.6 - 1.TTper month by allowing banks that com-plied to hold up to 50 percent of their compulsory reserves in the form ofreadjustable treasury bonds. The effort to lower nominal interest rates isin effect an effort to keep real interest rates from rising as the rate ofinflation slows down. Even rates of 1.6 - 1.8 percent monthly amount to trueannual rates of 36-42 percent when, as is now conventional in Brazil, theyare applied as discounts to 120 day paper and a compensating balance aver-aging 33 percent of the loan must be maintained. Thus the effective realinterest rate on such commercial bank credit is 13-18 percent, as long asthe annual rate of price rises is of the order of 20 percent. Even at theserelatively high effective real interest rates, the demand for short termcredit from industry and commerce substantially exceeds what can be suppliedby the commercial banks. Credit through the extra-bank market, principallyletras de cambio, continues to expand more rapidly than commercial banklending; by mid-1969 the former accounted for about one-fourth of totalworking capital credit provided through the Financial System. The cost ofborrowing in the letras de cambio market is slightly higher than throughthe commercial banks. The high level of real interest rates thus continuesto be a serious problem for both the monetary authorities and the borrowers.

24. Privately held money supply was increasing at the end of June 1969at an annual rate of 31 percent compared to 40 percent in December. Expan-sion in notes took place at a nearly identical rate as expansion in privatesector demand deposits. When adjustment is made for compensating balancesthe annual rate of increase in June is almost identical with that of lastDecember (24 compared to 25 percent). Developments in the monetary andfiscal fields during the first half of 1969 clearly point to a substantialimprovement in the situation. There is little doubt that 1969 will repre-sent another significant step forward in the stabilization effort should itprove possible to maintain comparable standards of performance during theremainder of the year.

- 3l

D. Wages and Prices

Wage Policy

25, During 196o' and the first ?a,2f ot 1769 government v!age P-Icy.although slightly relaxed lin comparison with e uprevious trree yer --rztinued to hold wage readjustments to levels tse to or somewheatw be. therate of inflation. Wage increases granted througl colle >ive b.regainntyl.agreements approved by the Laboor Courts have frequeatly alloved modestcreases in real wages, while civil servant salaries and the minimum wagehave tended to decline in real terms. The minimum wage was increAii&l at,the end of March 1968 by 23 percent, slightly less than the 24s2 perceatincrease in the cost of living in the thirteen months that liad elapzed nincethe previous adjustment. Although not enough to restore purchasing, nowerto its level at the time of the previous change, it came closer 'to ding sothan Lad the readjustments of the previous several years The minimum. wagewas again readjusted on May 1, 1969, In the maJor urban centers the monthl.yminimum rose by 20.3 percent while the cost of living index had increasedby 24.0 percent since the previous change; there was thus a 3.0 percentdecline in real terms. In other regions of the country, w'here the Diunwage is substantially lower, somewhat larger percentage increases weregiven in an effort to reduce the differentials gradually. The lowestminimum wage is now about two-thirds of that applying in Rio and Sao Pau-lo

26. During 1968 there was some relaxation of the wage policy formulaused as the basis for determining the wage readjustments of most privatesector employees not covered by the minimum wage. The formula adopted in1965 had fixed readjustments at a level which would restore the averagereal level of the two previous years; in 1966 it was modified to includean allowance for both "residual" (future) inflation and for productivityincreases. As "residual" inflation was consistently underestimated 'by morethan was offset by the productivity increase, this revised formula stiliresulted in decline in real wages from one contract period to the next. inmid-1968 the government announced a further modification of this formulaunder which future adjustments would take into account the difference betweenactual inflation in the previous contract period anid the estimate of "tresid-ual" inflation assumed in setting wages for that period. While this for;maproduces a higher readjustment than the previous fornirla, there will continueto be some decline in real wage rates as long as the estimate of "residual"inflation falls short of actual inflation by more than the productivityincrease. As the rate of inflation approaches the 15 percent "residual"used in the wage formula, however, the decline in real wages implied by theformula is gradually being eliminated. The wage formula has served as aguideline rather than as a rigid rule, since negotiated wage contracts canbe appealed to the Labor Courts which may approve increases slightly moreor less than those indicated by the formula. In major wage negotiations inlate 1968 and early 1969 the increases tended to be close to the rate ofinflation, with some groups doing slightly better and others slightly worse.A number of major wage contracts approved by the Labor Courts in the thirdquarter of 1969 granted increases of 25-26 percent, about 2-3 percent morethan the increase in the cost of living during the previous year. Wages

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for civilian employees of the Federal Government were increased by 20percent at the start of 1969 compared to a 24 percent increase in the costof living during 1968; the readjustment for military personnel was 40 per-cent.

Trends in Prices

RATES OF INFLATION DURING RECENT YEARS

Twelve months ending in month indicated:Dec. 1966 Dec. 1967 Dec. 1968 Sept. 1969

General Price Index 39.1 25.0 25.5 (19.7)

Cost of Living (GB) 41.1 24.5 24.0 22.5(Foods) (40.2) (14.1) (17.7) (25.9)(Other Items) (41.9) (32.8) (28.3) (20.4)

Wholesale Prices 37.4 22.7 25.0 n.a.(Industrial) (32.2) (23.4) (34.2) (17.2)(Agric. except coffee) (42.3) (21.4) (16.4) (24.7)

Cost of Construction (GB) 35.6 40.8 32.3 14.9

Source: Table 10.1; "GB" indicates Guanabara (the city of Rio de Janeiro).

27. The main price indices show that the rate of inflation at the endof 1968 was about the same as a year earlier - roughly 25 percent. At thewholesale level, however, the prices of industrial products increased by 34percent while those of agricultural products grew by only 16 percent. Asomewhat parallel movement is found in the non-food and food items in thecost of living index. The increase in construction costs was more moderatethan a year earlier, but still high due to the construction boom which hasaccompanied the simultaneous expansion of the National Housing Bank's pro-gram and the recovery in the general level of investment.

28. The failure of inflation to slow down in 1968 appears to resultlargely from the rise in the wholesale prices of industrial products and theeffect of this upon manufactured items entering the cost o living index.Two factors are mainly responsible for the more-than-average rise in pricesof industrial products. Firstly, the adoption of a more flexible exchangerate policy in August 1968 led to an effective devaluation of 41 percentbetween mid-December 1967 and mid-December 1968. Under the previous policyof roughly one large devaluation per year there would have been no changein exchange rates until very late 1968 or early 1969. The change in policymoved forward into the last four months of 1968 the cost-push effects ofdevaluation which would otherwise not have been felt until early 1969. Be-cause of the importance of imports of raw materials and capital equipment

- 13

for the inductrial sector, devaluation has a direct effect orn industgrialcosts as well- as a psychological effect upon thre pricing po icieu of firus,The second factor was the recovery of deman.6, for -p - 9roduct5; asrecovery took place during 1968 it was to be expected t.ha tApre vc< a besome hardening of prices.

29. The lack of a signif cant ,ŽC l.ne -- Qul. ate 4f rla&wtn '1968 does not seem a high price to have Paid for the Jnprovene nn exenbgerate policy and the recovery of o-atput aad eyent tnl; the e 'ecivecontrol over public sector expenditures and b>orovwing rde it poss. lb t -5achi eve these objectives without producing an increase in te rate of i.nfla-tion. Moreover, the new policy reduced the overhpn= of pr.'ce saQust,, 3entswhich under the previous practice would have taken pl&;ace in the followi;a,year.

30. In the first nine months of 1969 fiscal, mone-.:ry and. wage pol1cies - aided by a more effective scrutiny by the a thorities of prineincreases in the industrial sector together with the new exchange ratepolicy - are having a favorable effect upon the rates of inflation. Theannual rate of increase in the cost of living index fell from f4,O percentin December to 22.5 percent in September. The rate of increase in thegeneral price index dropped more sharply - from 25.5 percent inl Decemberto 19.7 percent in September. The latter was largely a result of the dra-matic fall in the rate of increase in the wholesale prices of industrialproducts; the annual rate fell from 34.2 percent in December to 179.2 illSeptember for these products. Prices of foodstuffs and other agriculturalproducts are now rising more rapidly than in the previous years due prin-cipally to poorer supplies; this will somewhat obscure the effects uponprice trends of the favorable fiscal performance. In addition the highlevel of bank operating costs (which results in relatively rigid nominalinterest rates and hence rising real interest rates as inflation slows)makes it increasingly difficult to reduce inflation rates without serious-ly affecting the levels of investment, output and employment. For theyear as a whole the increase in the general price index is now expectedto be somewhat above the 20 percent leve.L. X3ecause of the heavy weightof relatively rapidly increasing food prices in th'e cost of living index,the increase in 1969 is expected to be abotlt the se as in 1968.

31. The government, concerned about the rapid irecrease in prices ofindustrial producta during 1968, is now limiting increases in manufactouers'prices to what it considers justifiable by increases in coets. Although afew product lines such as perfumes are '"liberalized" , most large manufac-turers must seek the prior approval of CIP (Interministeria1 Council o.nPrices) before raising prices on any product-s. Once a sector has been'liberalized" prices may be increased without first seeking CIP approval,

but the increase must be justified ex-post and a roll back can be ordered.Producers violating CIP price orders have found themselves cut off fromrelatively cheap Bank of Brazil credit and in other cases greater access toBank of Brazil credit has been used as an incentive to restrain price in-creases. CIP's objective is to instill a greater cost-consciousness in

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Brazilian industry as well as to restrain price increases in the short run.After many years of inflationary conditions Brazilian manufacturers hadbecome accustomed to looking toward price rises more than toward measures tocut costs and improve efficiency as their first line of defense. There isno evidence to date that CIP regulations are leading to any undue squeezeupon the margins of reasonably efficient producers. The controls exercisedby CIP combined with the effect of the flexible exchange rate policy explainmuch of the recent sharp decline in the rate of increase in wholesale pricesof industrial products.

E. Trade, Payments and Exchange Rates

SUMMARY OF CURRENT ACCOUNT OF THE BALANCE OF PAYMENTS (1963-1968)(in millions of dollars)

Exports Imports Trade Other Balance(fob) (fob) Balance C/A Items on C/A

1963 1,406 1,294 112 -226 -1141964-66 Average 1,589 1,110 479 -293 1861966 1,741 1,303 438 -386 521967 1,654 1,441 213 -451 -2381968 1,890 1,855 34 _ 47 7 -443

Source: Table 3.1; reinvested profits are excluded from profits remittances.

Developments in 1968

32. One of the initial effects of the 1964 stabilization program wasa sharp improvement in the trade balance. As economic recovery has takenplace, however, the demand for imports has also recovered. Exports, how-ever, have grown relatively slowly. The result has been a rapid deterior-ation in the trade balance since 1964-1966. Payments for services, tradi-tionally a large outflow in Brazil's balance of payments, have also beengrowing because of rising interest payments and profits remittances (seeTable 14). As a result the current account deficit rose to $443 millionin 1968.

33. The increase in imports in 1968 amounted to $414 millior. (29 per-cent). Of this total almost half ($196 million) consisted of investmentgoods and most of the balance was made up of fuels and raw materials ($48million in petroleum products and $130 million in raw materials). Consumersgoods accounted for less than 10 percent ($40 million) of the total. (SeeTable 3.3.) Thus, the growth in import demand in 1968 consisted largely ofcapital equipment needed because of the increase in investment plus fuelsand raw materials required to support the higher level of economic activity.

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An examination of the growth in imports in the previous twCo years leads tothe same conclusion. Even after the 1968 increase, merchexidise imports(fob) amounted to less than seven percent of GDP; it seems vuitkely thatthis relatively low coefficient could be significantly decreased except byreductions in levels of investment and industrial output.

34. While exports in 1968 shoved a substantial increase (14.2 percent)over the 1967 level, this is attributable more to the low level in 1967(down 5.0 percent from 1966) than to favorable results in 1968, Exports oi`

manufactured products (excluding processed agricultural products) amountedto $132 million in 1968, down slightly from the previoeus year when the re-cession at home stimulated greater export sales. Exports of manufacturedgoods and of minerals accounted for, respectively, 7 and 8 percent of thetotal in 1968. The bulk of export earnings came from coffee (43 percent)and other agricultural products (42 percent). (See Table 3.4.) Althoughthere have been some variations depending largely on the supply of anddemand for these agricultural products, export receipts have been grovingat an average rate of about six percent since the early 1960's and 1968was in line with this trend.

CAPITAL ACCOUNT OF 1968 BALANCE OF PAYMENTS(In millions of dollars)

Deficit on current account -443

New direct foreign investment 54

Net medium & long term borrowing 106Disbursements 392Amortization (incl. compensatory loans) -286

Short term credit (net) 412Resolution 63 iInstructions 289 53Law 4,131 119

Other transactions -150Support of manual market 5Other private sector payments -14Cormercial bank reserves -15Errors and omissions -65

Change in official short term reserves 21IMF concept of net reserves -117Amortization of compensatory loans 138

Source: Tables 3.2, 3.5 and 3.6.

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35. Brazil was able to finance the $443 million current account deficitin 1968 only by a heavy reliance upon short term borrowing. Net short termfinancial credits amounted to $412 million. Some part of this, however,represented loans to subsidiaries by international companies which undernormal conditions are expected to be rolled over continually; in addition partof the "Law 4,131" loans were medium rather than short term financial cred-its. These factors are largely offset, however, by the omission from thestatistics of an estimated $50-$70 million build-up in short term creditsfor general imports which took place after the government dropped therequirement that importers had to purchase their foreign exchange prior toclearing goods through customs. Taking these factors into account, the in-crease in conventional short term credits was still close to $400 million.

36. Most of it was attributable to the inflow under an arrangementestablished in 1967 which permits commercial and investment banks to borrowabroad and lend the cruzeiro counterpart to the private sector. 1/ Thebuild-up was large in 1968 because, due to the recent origin of the proced-ure, amortization payments were low. Other short term credits, similar inpurpose, result from direct negotiations between Brazilian borrowers andforeign lenders; the borrowers in this latter case tend to be largerfirms with close international connections. 2/ Short term foreign borrow-ing is attractive to Brazilian firms because it permits them to borrowcruzeiros at interest rates which, even after covering the exchange risk,are lower than they would have to pay in Brazil. They are also, at leastin the short run, attractive to the Central Bank as they provide a sourceof freely useable foreign exchange. The Law 4,131 category is a "catch-all"for credits not clearly falling into any other category; while mostly shortterm credits, some autarkies and local governments have been obtainingmedium term financial credits which are included under this heading simplybecause the details are not available. Financing of this kind has in-creased substantially in the recent past.

37. Disbursements of medium and long term credits were $392 millionin 1968. Amortization payments, amounting to 72 percent of the gross in-flow, reduced the net inflow to only $106 million. (See Table 4.2.) halfof the gross inflow consisted of concessionary credits from either theUnited States Government or from the Interamerican Development Bank's Fundfor Special Operations and Social Progress Trust Fund. Supplier creditswere more important than regular project assistance from the internationallending agencies and the U.S. Export-Import Bank, although neither were veryimportant on a net basis. A large part ($138 million) of the amortizationconsisted of repayment on compensatory loans arising out of previous debtrenegotiations. Because of the low net inflow and the fact that part ofthe disbursements consisted of IDB credits repayable in cruzeiros, the in-crease in medium and long term debt (outstanding and disbursed) repayable

1/ Resolution 63 credits.

2/ Instruction 289 credits.

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in foreign excharnge was only $63.5 millionl; the total at the end of 1968was $2,737 million. In contrast, short term debt increased from $671 mil-lion to $1,083 million during the year. Net official reserves, ie., thteshort term assets and liabilities of the monetary authorit-es declined bN.S.$21 million, but as commercial bank international reserves rose by $15million, the change in total net short term reser-ves was insi4Aifi.,ant. I/

38. The concern about Brazil's balance of payiner . management i n 1968rises more from what the way in which the currsent accou.t deficit was fAian-ced presages for the future, than from the size of the deficit. If theimport requirements associated with 6 percent GDP growth are to be Inet anddebt service payments made, large current account defici-s and a higi grhsrcapital inflow are to be expected for some years. The medium term prcblemof balance of payments management is how to obtsain the needed financingwithout creating serious future debt service problems. The financial author-ities recognize that they neither can nor should continue to rely heavilyupon increased short term debt to cover current account balance of paymentsdeficits. Insofar as increased short term borrowinig is offset by risingreserves, however, it is likely to be expensive but should not otherviselead to difficulties. Resolution 63 borrowing (60 percent of the total in1968) cannot be expected to produce large net inflows indefinitely sinceonce it is established the amortization payments will roughly offset newborrowing. Furthermore, continued rapid growth in short term debt wouldincrease Brazil's exposure to a debt crisis should lenders become unwillingor unable to continually roll over their credits. Actions taken in 1969 tolimit short term borrowing are described below.

39. The longer run problem of balance of payments management is howto increase export earnings so that import requirements can be fulfilledwhile dependence upon foreign financing and external debt is gradually re-duced. The change in exchange rate policy adopted in August 1968 is a maJorstep in this direction. While during the previous several years the govern-ment had followed a policy of a large change in the rate once every 10 to 14months, since August 1968 it has followed a policy of small adjustmentsmade at intervals of one to two months. The rate (selling rate for dollarsin new cruzeiros per dollar) changed from 3.22 to 3.65 on August 28, 1968.In the following twelve months there have been eig ht adjustments rangingfrom NCr .05 to NCr .10; the rate on August 28, 1969, was NCr 4.15 per dol-lar. The cumulative devaluations have approximately kept pace with a parityconcept based upon wholesale prices in Brazil and its main trading partners.Although this more flexible exchange rate policy was adopted in large partto facilitate monetary management (by reducing the short term capital flows

1/ Net official international reserves as used in the "monetary budget"and defined by the IMF rose by $117 million during 1968; this increasewas entirely due to the repayment of medium and long term compensatoryloans ($138 million) which are included in this definition of reserves.

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that took place whenever a large devaluation was expected or had just takenplace), the stimulus it gives to developing foreign markets for manufacturedgoods and other nontraditional exports is likely to prove even more impor-tant in the lon& run.

Developments in the First Half of 1969

40. The impact of the fiscal, monetary and exchange policies on merch-andise trade has been generally encouraging as an indication of futuretrends, even though some part of the current improvement is attributable totransitory or fortuitous factors. The rapid growth in merchandise importswhich accompanied economic recovery in 1968 slowed down to 10 percent in thefirst half of 1969. Exports, on the other hand, increased by 16 percentover the level in January-June 1968. The trend in exports - in particular,a 27 percent increase in exports of manufactured products - suggests thatthe flexible exchange rate, tax incentives, and other export promotion meas-ures are already having some effect. The slow down in import growth, eventhough economic activity has continued to grow rapidly, indicates that thelatter does not necessarily imply last year's unsustainably high rates ofgrowth in import demand.

ESTIMATED BALANCE OF PAYMENTS FOR JANUARY-JUNE 1969(in millions of dollars)

Merchandise Exports (fob) 975Less Merchandise Imports (fob) -948

Balance of Trade 27

Services and Donations (net) -236

Balance on Current Account -209

Long Term Capital (net) 123Direct and Portfolio Investment 69AID Program Loan 50Loans Financing Imports 102Amortization of Import Loans - 98

Resolution 63; Instruction 289 174

Other Financial Credits (net) 179

Errors and Omissions - 4

Increase in Gross Reserves (-) -263

Source: Bank staff estimates based upon preliminary information from theFinance Ministry and Central Bank. Disbursement of "loansfinancing imports" estimated by difference between imports asreported in the trade data and payments for imports as reportedin the foreign exchange operations data.

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41. The preliminary information now available is insufficient to ex-plain fully how the current account deficit was financed. There was a largeexpansion of short term borrowing under Resolution 63 and Instruction 289,bUt this was more than offset by an increase in gross reserves of $263 mil-lion. The net inflow identifiable as long term capital was $123 million,substantially less than the $209 million deficit. The difference is madeup by a net inflow from financial credits of $179 million. Borrowing 'oycommercial banks accounts for $16 million of this total, and it is probeblethat only a small part of the remainder represents long term financing.Even so, however, the degree to which short term borrawing was used tofinance the current account deficit in January-June 1969 was small relativeto last year's 0400 million.

42. At the end of May the National Monetary Council, concerned aboutthe growth of short term credit in 1968 and early 1969, placed ceilings uponResolution 63 and Instruction 289 credits that limit new borrowing to aboutthe same level as is currently being repaid. A more recent decree is pro-viding tighter joint control by the Central Bank and Ministries of Planningand Finance over medium term financial credits which local governments havebeen using to supplement their budgetary resources. Thus the government isdemonstrating its awareness of the implications for debt management of therecent increases in short and medium term borrowing. The most disturbingstatistic in the January-June results is the very low level of net long termloans to finance imports; this is the form of finance that will have to in-crease most rapidly in the future.

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II. THE OUTLOOK FOR 1969-1974

A. Introduction

43. In June 1968 the Government of Brazil released its ProgramaEstrategico de Desenvolvimento ("PED") or Strategic Development Programfor the period 1968-1970. The "PED' defined a three-year program of invest-ments in selected "strategic areas" to be undertaken by the central govern-ment, its autarkies, and federal enterprises. It also discussed the activi-ties of the official credit agencies and, in more general terms, the majorissues of monetary, fiscal and development policies. The three basic ob-jectives outlined in the plan are (1) the acceleration of economic develop-ment simultaneously with the reduction of inflation, (2) improvements insocial conditions, and (3) the expansion of employment opportunities. Agrowth rate of six percent is adopted as a minimum target.

44. The "PED" was looked upon as an initial step in a continuousplanning process. The plan was to be operational for the federal sector.Government officials, however, recognized the inadequacies of both basicinformation and the administrative structure of the federal sector toaccomplish this in a single step. Partly as a result of initial diffi-culties the government has decided to postpone the originally proposedannual revision of the three year investment program and the related pluri-annual investment budget. The authorities have now decided to prepare twobasic planning documents-a three-year investment budget for the federalsector which will be revised annually, and a national development plan whichwill be prepared for the period of the president's mandate. The next in-vestment budget will be prepared in 1970 for the period 1971-1973 while thenational development plan will be prepared in 1971 and extend through 1974.The main government autarkies, however, have revised their investment plansfor 1969 and 1970 and have added 1971 to comvlete their own revised three-year program. While useful in themselves, these agency programs have notbeen reviewed by the government in the light of agreed priorities and avail-able financing. thus they do not constitute an investment program.

45. The government is now engaged in a series of steps which arenecessary to make future federal sector investment programing more effec-tive. These include improvements in the budget formulation process withinthe Planning Ministry, establishment of a mechanism for appraisal of stateinvestment programs (which are partly financed by the Federal Governmentthrough the Participation Fund), preparation of a consolidated budget forthe federal sector (including autarkies and mixed enterprises as well asthe Treasury budget), making the official Treasury budget more realisticso that it will not have to be drastically revised when the Treasury's"cash program" or "cash budget" is prepared, and creation of an effectivefollow-up system on the investments undertaken. At the same time thePlanning Ministry and other government departments and agencies are com-pleting needed background studies on a wide variety of topics ranging fromexternal debt to improvements in population statistics.

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46. The effort to improve Brazilian economic planning is complicatedby the size and diversity of the economy, the complex and decentralizedorzanization of the public sector, the lack of an established tradition oforerational economic planning and the scarcity of talent of the kinds neces-sary. The authorities are wisely concentrating upon strengthening the plan-ning capabilities of some of the sector agencies (especially education andagriculture) and upon a federal sector investment budget. The "PED" for1968-1970 is by now out of date and, even when prepared, the time horizon (30months) was too near for many purposes. Pending completion of the govern-ment's own revised investment program, a federal sector investment programfor 1969-1974 which seems consistent with governmental oblectives and witha viable development strategy for Brazil is outlined in this report togetherwith a suitable macro-economic framework including projections of budgetaryand other domestic financial flows and of the balance of payments. Theprolections indicate that a sustained six percent growth rate is a feasibleob-lective, but will require a high level of economic management. The reformsmade in the tax sYstem since 1964 should Drovide the nublic sector with mostof the needed revenues, but improvements are necessary in the allocation ofthese resources. Mobilizing the required inflow of external resources anddebt management will be continuing concerns of the authorities. There isan urgent need for both a federal sector investment program and an externalfinancial nlan as a basis for specific policy measures.

B. The Macro-Economic Framework

L7. The target of a GDP growth rate of six percent implies a muchmore ranid (9.4 Dercent) increase in fixed investment which would increasetotal investment expenditure to almost 18 percent of GNP by 1974. (Seeaccomnanyina table.) Investment exoenditures (excluding inventory changes)fell to between 9.3 and 12.5 percent of GNP in 1965-1967, but rose to 14.0percent in 1968 on the strength of a real increase in investment of 25 per-cent over the 1967 level. In respect to output and investment trends, theframework adoDted closely parallels that of the "PED". In both cases akey consideration was that the investment ratios in recent years have beenwell below the level necessary to sustain six percent growth rates. How-ever, there still exists some idle capacity in the economy plus opportuni-ties for more efficient use of existing capital stock; Brazil, therefore'needs only to move gradually toward higher investment ratios.

49. To finance this investment, national savings will have to increasebv annroximately 10 percent per year. The required marginal savings rateis .235 for 1968-1974 cornared to the actual rate of only .056 during the1963-1968 period. The high national savings effort is a necessity if theinvestment targets are to be accomnlished and at the same time unmanageablefuture external debt Droblems are to be avoided.

49. The savings required are large but not impossibly so. They wouldmainlv be generated in the public sector and would permit private consump-tion to continue to grow (at 5.3 percent or 2.2 percent per capita). Thus,the development path charted here would be compatible with rising standards

= 22. -

SUM&RY OF RESOURCE AVAIIABILITIE0, 0$3 ':. T S

In willions of' NCr' s -is perent of GNP:1963 1%9 .. ,- 7L 1 963 196W 19714

Gross Jomestic Product 72,962 92 660 1 100.5 101.0 101.3Gross National Product 72,607 91 743 129,755 100.0 100.0 100.0 Net Factor Service Payments 355 917 1,'725 .5 1.0 1.3

Resource Gap 257 791 992 .3 .9 .8Imports (exrl. factor services) 5,77 7,BE l2 7.9 7 , ,6- ixports (excl. factor services) -5,498 -7,037 - 7.6 -7.6 -7.8

Resource Availabilities = Uses 73,219 93,451 03 2), 100.8 101.9 102.1

Consumption Experditures 62 097 bc6 1 63 .5 87.4 84.2General Government 13,1417 14 . 13.9Private Sector 51,556 66,744 9, ,112 71.;) 72.8 70.3

Investment Enpenditures 11 122 1-, 2^8 2 3 . 114.5 17.9Fixed Investment 10 `2-`2,o7 - 4T.( 17.0

(General Government) (3,231) (5,943) (0'27) 4.0) (6.5) (7.7)(Private Sector & Public Enterprise) (7,228) (6,9114) (1 (10.0) (7.5) (9.3)

Inventory Investment 663 43 1 20 .9 .5 * 9

Domestic Savirgs 10,865 12,497 22, 2. 13.6 17.2National Savings 10,704 11,78L, 20, 70 14.7 12.o 16.0

(General Government) (3,231) (5,943) (4.4) (6.5) (7.7)(Public Enterprises) (7,22d) (3,182, ' IL 9.0) (3.4) (3-8)(Private Sector) _ (3,732) (7 ,17-3) (4.1) (5.5)

Average Annual Rate of Increase Marginal Rate (to change in GNP):77 aected Projected

1963-1968 1' 17 1903-1968 1968-1974

Gross Jomestic Product 4.9 6,o 1.029 1.0(21Gros; National Product 58 1.000 1.000Net Factor Service Payments 20.9 il ' .72 + .021

Reso-urc- Gar ... . .02U - .C00npov>t .(exc .. tor services) 6.4 D.l

-. n)<,rLs (excl. factor services) 5.1 3.4 -.'°° -. 003

Resocr,-e Avai9:;.blities Uses 5.0 1. )57 1.026

Consumption &penditures 5.2 5.3 .944 .763General Governmer-t .9 .150 .121Private Sector 5.3 5.3 .794 .642

Irvestmetit nterniitures 3.6 d .113 .263Fixe4 I1rves 7ment .12 3

(General Govetnment) (a) (7.6) (a) (.105)(Public !nnterprises) (a) (7.8) (a) (.04d)(Private Sector) (a) (11.3) (a) (.090)

Inventory Investment ... ... - .012 .020

iomestic Savings 2.8 [1.1 .085 .256National Savings 1.9 9.9 .056 .235

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of living. This rise in private consumption - 36 Dercerlt between 1069 and1974 - will also provide the market for light manufacturing industries andrelated services which must be depended upon to provide needed additionalemployment opportunities. Given the tax reforms already made r4us reasonablecontrols on current expenditures, the public sector will be m.o4biziingsavings well in excess of its own requirements and will have to channelthe surplus back to the private sector. The framework adopted impIiescontinuing and increasingly efficient econoanic nmanagem.ent. The projectedpattern of growth depends unon expanding im.ports et approximately the samerate as output, as substantially lower import levels would probably con-strain both investment dependent upon imported capital equipment and in-dustrial output dependent upon imported raw materials. Morsover, it wouldbe inconsistent with stabilization objectives. A level of export grow:Ththat is not at least somewhat higher than the import growth rate (e.g.,the projected 6.4 percent for exports and 6.1 percent for imports) is likelyto lead to debt management and balance of payments problems which wouldthreaten the whole development program. On the longer run the excess ofthe export growth rate over that of imports will have to be even greaterif debt service problems are to be avoided (see below paragraV'as 133-136).

Population

50. Brazil's population in 1969 is officially estimated at 92.3 mil-lion. This estimate is based upon a 3.2 percent annual growth rate sincethe 1960 census; this was the actual rate of increase between the 1950 and1960 enumerations. There is considerable uncertainty, however, regardingthe reliability of this growth rate. Recent studies which take more carefulaccount of the changing age structure of the population, and some of whichmake use of the demographic data resulting from a household survey programbegun in 1968, suggest that the growth rate has now fallen to at least 3.0and perhaps as low as 2.7 percent. It is estimated that the growth ratewould gradually decline to between 2.4 and 2.5 percent by the year 2000simply on the basis of changes in the age structure, i.e., without anychange in the age specific birth and death rates. Since the trend towardurbanization and the more widespread use of birth control will result inthe birth rate declining more rapidly than the death rate, it is expectedthat the actual growth rate will decline to about 2.0 percent by the year2000.

51. Information regarding birth control and contraceptive materialsare readily available in the major urban centers. Never methods, such asthe pill, have been the subject of numerous articles and opinion surveysfound in magazines and newsDapers. Knowledge and practice of modern birthcontrol techniques are still largely confined, however, to the urban middleand unDer classes. The government neither actively promotes nor attemptsto discourage family planning. The papal encyclical "Populorum Progressio"is cited as fixing the proper limits upon government action.l/ Governmentofficials are concerned about obtaining a rate of population growth which

1/ Pro ama Estrategico de Desenvolvimento, 1968-1970, Part II, Chapter III.Ministry of Planning, 1968.)

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will permit the effective occupation of the interior of Brazil and the de-velopment of its natural resources, but a 3.0 percent growth rate is con-sidered high because of its implications for investments in economic andsocial infrastructure and the need to create additional employment oppor-tunities. More immediate policy objectives are reducing infant mortality,creating 800,000 to 900,000 new jobs each year to absorb new entrants intothe labor force, and keeping a larger Dart of the 10-14 year old age groupin school rather than in the labor force.

C. The Consolidated Public Sector Budget

Trends in Tax Rece4pts

52. One of the most important influences upon the economic outlookfor 1969-1974 is the increase in public sector tax revenues that has re-sulted from the measures taken since 1964. The inadequacy of public sectorrevenues and the consequently high deficits financed by the monetary systemwere basic causes of inflation in the early 1960's. Reform of tax law andadministration have been major concerns and accomplishments of the post-1964

governments. Tax revenues have increased from less than 20 percent of GNPin 1963 to about 30 percent in 1968. The improvement in revenues has beensteady except in 1967 when the Federal Government deliberately reduced taxcollections to stimulate demand and ease working capital problems of the

TRENDS IN TAX RECEIPTS 1963-1968 AND PROJECTED 1969-1974

million NCr's at 1968 prices Taxes as_GNP Tax Revenues of GNP

1963 72,607 14,215 19.6%1964 74,937 15,473 20.61965 78,284 17,713 22.6

1966 81,379 20,653 25.41967 85,308 20,076 24.71968 91,743 27,335 '29.8

Projections:

1969 96,660 29,571 30.6%1970 102,982 31,477 30.61971 109,067 33,361 30.6

1972 115,503 34,862 30.21973 122,404 36,594 29.91974 129,755 38,498 29.7

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private sector and when tax receipts of the local governmients were adverselyaffected by temporary administrative difficulties associated with the re-form of local government taxes. It is the government's view - and thereis strong evidence to support it - that the threshold beyond which taxationinterferes, with efficient economic growrth may well have been reached - ifnot passed - in Brazil.

53. No further increase in tax rates should be required to financethe government's expanding investment expenditures. On the contrary, ifcurrent expenditures are kept under control and gross savings of publicenterprises improve as a result of proper pricing policies, the FederalGovernment should be able to begin reducing some tax rates during 1972-1974.Such reductions amounting to about one billion new cruzeiros by 1974 accountfor the projected decline in the tax burden after 1971.

54. In this report it is assumed that the proposed reduction in taxeswill take place entirely in indirect taxes collected by the Federal Treasuryand that no other major modifications in the system will be made. In theresulting 1974 tax structure the proportion of total tax revenues passingthrough the Treasury budget would remain at slightly over 37 percent. Al-though some of the federal taxes are highly elastic witk respect to incomechanges (e.g., the tax on petroleum products) the effect has been offset

COMPOSITION OF TAX RECEIPTS 1968 AND PROJECTED 1974

1965 1Wmillion NCr's percent million NCrs_ percent

Federal Treasury 10 254 75 14, 392 XDirect Taxes 2,8 3,500 9.1Indirect Taxes 7,946 29.1 10,892 28.3

Extra-Budgetary Sector 5 273 19.3 8 662 22.5Social Security Tax 3,985 6 15SOther Direct Taxes 62 .2 70 .2Coffee Export Tax l,064 3.9 1,269 3.3Other Indirect Taxes 162 .6 464 1.2

Monetary Authorities 370 1.4 548 1.4(Financial Operations Tax)

Official Credit Agencies 1,148 4.2 605 1.6(F.G.T.S. net of withdrawals)

Sub-tota'l Federal Sector17MU 2 7 - ~ .9

Local Governments 10,290 37.6 14,291 37.1Direct Taxes 235 .9334Indirect Taxes 10,055 36.7 13,957

Total Tax Receipts 27,337 lOOO3 100.0

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by the reduction in tax rates assumed in the projections. The proportionof federal taxes collected directly by nonfinancial autarkies (the "'extra-budgetary sector") rises especially because of the increase in social secu-rity tax collections. The latter is due in substantial measure to the ex-pected continuation of increasing efficiency in collections that has re-sulted from the unification of the previously separate social security'"caixas" or funds. The receipts from the F.G.T.S., a payroll tax earmarkedfor the use of the National Housina Bank, show a decline because thesereceipts are reported net of withdrawals; the latter rise over time as moreworkers become eligible to withdraw their deposits. As the shifts in thetwo payroll taxes (social security and F.G.T.S.) roughly offset each other,the total tax collections outside government budgets remain at about 25 per-cent of total tax revenue and 40 percent of federal sector revenues. Therelative stability of both the structure of the tax system and the size ofthe tax burden would be highly desirable as the pace of reform in recentyears has kept both taxpayers and budget makers in considerable uncertainty.

Current Expenditures and Savings

55. Although the expected compound average annual rate of increasein total tax revenues is only 5.9 percent, public sector savings grow atan average rate of 10.5 percent as policies of restraint in government con-sumption and lover subsidies to public enterprises should permit currentgovernmental expenditures to be held to a 5.1 percent growth rate. (SeeTable 5.1). This should be adequate to permit substantial expansion inpublic sector current expenditures in priority areas such as education,health, and agriculture, provided continued economies can be made in lessessential areas. Public sector consumption might well rise at even lessthan the 5.1 percent rate assumed here, without prejudicing social objec-tives if the large scope for improvements through more efficient use ofexisting budget allocations were fully exploited. The programs now underway to eliminate excess personnel and improve the quality of those whoremain in public service are assumed to be continued with increasing vigorthroughout the period.

56. Large increases in the gross savings (i.e., including depreciationallowances as well as undistributed profits) of Dublic enterprises and somereductions in exDenditures for subsidies contribute in important ways tothe increase in public sector savings. The projections assume that - con-sistent with present policies - the railway deficits will be substantiallyreduced during the period and that the subsidy on domestic consumption ofcoffee, which amounted to NCr 350 million in 1968, will be completely elimi-nated by 1972. A major factor in the improvement of public enterprisesavings is the expectation that increases in steel prices will be su..ffi-

cient to cover depreciation and to earn reasonable profits. (See Annex 4).Price controls have in the past prevented the steel companies from financingany substantial part of their exvansion plans out of their cash flow. Withfiscal and monetary developments under far better control, it can no longerbe argued that it is necessary to hold back on steel prices as a way ofslowing inflation. The government can now give higher priority to achievinga structure of relative prices more representative of relative costs.

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57. In 1968 the savings of the public sector were sufficient to fi-nance 92 percent of its fixed investments. Savings are expected to exceedfixed investment expenditures slightly in 1969; a modest surplus should begenerated throughout the early 1970's even after the previously mentionedtax reductions. This by no means indicates that there are no problems infinancing the federal sector investment program and public sector eaoitalformation in general. Some sectors and agencies such as the social securityinstitute, the port and waterways authority, and Petrobras - run surplusesin their capital budgets while others run deficits. Among the latter arethe federal railroads system and Eletrobras. Unless a way is found oftransferring the funds, the surplus agencies may increase their capitalexpenditures while higher priority programs elsewhere cannot be financed.Some of the savings are in the form of revenues earmarked by either law orDractice for transfer to the private sector through the official creditagencies; they are thus not available to finance fixed investment. Thisasymmetry between the location of resources and the need for them is oneof the chief reasons for the urgent need to impose greater coordination orcentralization into the public sector's capital expenditure decisions.

58. If a central budget office existed which received all revenuesand then allocated them to individual programs in accordance with agreedpriorities, then the problem of transfers to eliminate surpluses and defi-cits would not exist. But the earmarking of tax revenues has in largemeasure substituted for budget allocations at the federal level. Thus in1968, when savings in the federal cash budget were NCr 2,985 million, ear-marked capital transfers to local governments, transport autarkies, andfederal enter.prises amounted to NCr 2,332 (see Annex 6, Table 6-2), so thatonly 22 percent of savings were freely available for discretionary capitaltransfers and direct budgetary investments in such areas as agriculture,education and health. To meet needs in these areas as well as generaladministration and defense, it was necessary for the Treasury to run adeficit of NCr 1,227 million.

59. Beginning with 1969 the problem has been reduced by lowering thelocal government share in federal excise and income taxes from 20 to 12 per-cent. Nonetheless, the projections indicate that earmarked capital transfersto local governments, transport agencies, Eletrobras and Petrobras willstill amount to 62 percent of the Treasury's budgetary savings in 19,74 Ifthe projected Treasury budget proves a reasonable one in regard to both re-source availabilities and the expenditure pattern, then the present degreeof earmarking should, with minor exceDtions, prove tolerable. The flexi-bility in the budget, however, is not sufficient to readily adjust to chang-ing circumstances. In the case of the decentralized agencies practicallyall of the tax receipts are in law or practice earmarked for particularagencies. The major exception to this is the coffee export tax which issimply deposited with the monetary authorities and thus serves to offsetcredit expansion elsewhere.

Forei n Borrowing

60. To finance the projected public sector investment levels grossforeign borrowing would have to double between 1968 and 1974. The level

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rises from NCr 1,062 million ($313 million) in 1968 to NCr 2,107 million($620 million) in 1974.1/ Although the vast majority of this borrowingwill be by the Federal Government, local government borrowing (exclusiveof that by state enterprises) is expected to rise to 10 percent of the totalby 1974. The $313 million figure for 1968 includes $75 million in AID pro-gram loans, a type of financing not expected to be available after 1970;consequently, the requirements for increased project preparation are gre4terthan what is suggested by the increase in disbursements from $313 to $620million.

61. For the six year projection period as a whole, loan disbursementsto the public sector total NCr 10,968 million ($3,230 million) and repay-ments total NCr 4,180 million ($1,231 million). Loans repayable in cruzeirosaccount for about $300 million of the disbursements. When scheduled repay-ments of $413 million on compensatory loans during 1969-19T4 are also takeninto account, the net increase in public sector debt is reduced to $1,286million (disbursed and outstanding, repayable in foreign exchange). Astotal public sector fixed investments are projected at the equivalent of$22,059 million for the six year period, foreign financing covers 14.6 per-cent on a gross basisz when all foreign exchange repayments are deducted,the resulting net inflow financet only 7.2 percent of total fixed publicsector investment. The role of external lenders in financing Brazil'spublic sector investment is thus relatively small when loan repayments aretaken into account. The net foreign financing projected for 1974 is ofalmost the same size as the tax reduction suggested for that year. Largerdomestic financing, however, would not be an adequate substitute for theprojected foreign borrowing, given the tight balance of payments situation.

Local Government Finance

62. Brazil has a strong tradition of regional and local autonomyvhich has been reflected in the public sector's financial structure, al-though local autonomy is apparently on the wane at the present time. Recentreforms reducing the independence of the local governments include restric-tions on their domestic borrowing and the reduction in Treasury transfersvia the Participation Fund. The Federal Government is now trying to usethe Participation Fund to gain some control over local government capitalexpenditures. As noted earlier, the combined tax receiDts of local govern-ments are of the same order or magnitude as those of the federal Treasury.Since part of the national government's tax receipts are earmarked fortransfer to the local governments, from an expendit-ures point of view thelatter exceed the federal Treasury in importance.

63. In addition to their administrative and police power functionslocal governments have major responsibilities in the fields of highwayseducation, health and agriculture. Almost 60 percent of road constructionis carried on by local governments (largely financed by transfers of federaltaxes earmarked for this purDose). State governments are very active in

1/ See Table 5.1.

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the public enterorise field, o-wming controlling participation in power com-panies, railroads, airlines, telephone companies atnd banks. Of the manystate enterprises, it has been possible to take iL o account only the powercompanies in the pro.jections; others, except insofar as tley may oe in-eluded in state and municipa2l5budgets, are implicitly treat<ed as part ofthe private sector.

64. There is a paucity or informiation. readily availalble on the fi-nances of state and local governrents. The State and metropolitwn munici-palities of Sao Paulo (which are discussed in detail in Annex 7) are themain exceptions to this generalization. In spite of their importance -40 to 45 percent of total local government revenues and ex-encnit.ures - theyprobably do not offer a re-)resentative picture, being based on the -mostdeveloped area of Brazil. The projections reflect this dearth of infor-mation. Total investment has of necessity been estimated indirectly, i.e.,by assuming it to be equal to savings plus capital transfers and net borrow-ing. Investments in highways end electric power account for, respectively,24 and 19 percent or total fixed investment. These two important componentswere directly estimated and complement the programs included in the FederalSector Investment Program. (See Annex D.)

65. Since the reform of state and municinal tax systems at the startof 1967 the local governments have been largely dependent upon the "circu-lation tax" (ICM), a value added tax upon the movement of merchandise withrates of 15 to 17 percent. Although administrative difficulties coupledto recession resulted in a low level of revenues in the early months of1967, it has proved to be a very productive tax since that time. It was amajor factor in raising taxes as a percent of GNP from 25.4 to 29.8 percentbetween 1966 and 1968. For the future, increases in collections would besatisfactory at 5.5 percent; this would allow some broadening of the exempttransactions. Because of the high tax rate, exemptions can be very impor-tant in the promotion of nontraditional exports and an expansion of thepresent list of exemptions is anticipated.

66. Local government consumption e-penditures are assumed to increaseby five percent Der annum. Savings (excluding the state enterprises) shouldgrow at an average compound rate of 6.6 percent. Capital transfers fromthe federal budget are expected to grow by about 7.2 annually due to thehigh elasticity of the federal taxes which are shared with local govern-ments. Own savings, Treasury transfers and a modest increase in borrowingwill together permit direct investments in general government functions togrow at an average rate of 9.1 percent. Given the limited informationavailable about local government finances, either past or future, theseprojections have an even higher degree of uncertainty than those made forthe federal sector. 'They are good enough, however, to mark out the approxi-mate claim on resources that state and municinal governments will be making,and thus help establish the framework for considering the Federal SectorInvestment Program.

67. Coordination of local government investment expenditures in termsof national priorities has been inadequate in the past except in the elec-tric power sector (in which state programs depend heavily upon Eletrobras

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financing). The Federal Government is now planning to insist upon a reviewof local government programs as a precondition for making capital transfersthrough the Participation Fund. As local government expenditures for fixedinvestment are, when public enterprises are excluded, even greater thanthose of the federal sector, such a review is essential to efficient useof public sector savings and external finance. The need to prepare an ex-ternal financing plan also makes necessary greater central government co-ordination of local government investment expenditures.

D. The Federal Sector Investment Program and Its Finpan

68. As yet there is no agreed Brazilian investment program for thefederal sector which would clarify the policy options open to the Brazilianauthorities and establish a background against which external financingagencies could consider their own lending programs. The present "PED" goesonly to 1970 and, in any event, is now out of date in many respects. Sinceno official program exists, the available snending plans of the main indi-vidual agencies were reviewed. They were then assessed from the point ofview of financial and technical feasibility and revised accordingly. AFederal Sector Investment Program emerged which is consistent with (a) theforeseeable resource availabilities, (b) agency spending capacities and(c) general development objectives and criteria. This program would involveinvestment exDenditures totaling NCr 50,717 million ($14,934 million) overthe six-year period. About three-fourths of the total consists of fixedinvestments; the credit programs of the National Housing Bank (BNH) andthe National Economic Development Bank (BNDE) make up the remainder. (SeeAnnex 4 and Table 10.2.) Compared with the past several years, a relativeshift from economic infrastructure to the directly productive sectors (agri-culture, mining, steel and petroleum) is foreseeable but is unlikely totake place as rapidly as the agency estimates imply. The broad inter-sectoral priorities implicit in the agency estimates of fixed investmentexpenditures for 1969-1970, however, seem appropriate.

COMPOSITION OF FEDERAL SECTOR INVESTMENT EXPENDITURES

Actual Agency Proj. Mission Projections1966-1968 196 -1970 1969-1970 1969-1974

Average Yearly Expenditure:(millions of NCr's; 1968 nrices)

Directly Productive 1,106 2,051 1,452 1,857Economic Infrastructure 2,233 3,560 2,964 3,270Social Infrastructure 633 1 059 825 1

Sub-total Fixed Invest. 3,972 6,670 5,241 6,137

Credit Programs 851 1 X949 1949 1 ?3ltTotal Investment Expend. 4,824 8,619 7,190 8,453

As % of fixed investment:Directly Productive 27.9 30.8 27.7 30.3Economic Infrastructure 56.2 53,3 56.6 53.3Social Infrastructure 15.9 15.9 15.7 16.4Sub-total Fixed Invest. 100.0 100.0 100.0 100.0

Credit Programs 21.4 29.2 37.2 37.8Source: Table 10.2.

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69. In the case of the credit programs the projections show a largeincrease over the past level relative to expenditures for fixed investment.This reflects largely the low level of operations of the National HousingBank in 1966 and 1967. The projected level of expenditures for credit pro-grams relative to those for fixed investment in 1969-1974. is in fact belowthe actual relative level in 1968 (the first full year of housing bankactivity since the F.G.T.S. paw,roll tax was made available to finance itsactivities). Having moved to a high level in 1968, in the coming six yearsthe Housing Bank's credit program is expected to grow less rapidly. Inthe case of both BNH and BNDE credit programs the abso Klute expenditurerates for 1969-1971. are those projected by the agencies concerned, but be-cause of the downward revisions made in the agency estimates for fixedcapital investmaent the result is a substantially higher relative share forthe credit programs.l/ This higher relative share results from the overalllimit on federal sector fixed investment and the growing role of the publicsector as a mobilizer of savings which are then transferred to the privatesector.

The Level of Fixed Investment Expenditures

70. The program shown involves large reductions in "planned" invest-ment if one accepts the total of individual agency estimates as a "'plan".Most of the agency estimates, however, are unrealistically high in the lightof either possible physical execution or available financial resources.The.agency projections for 1969-1970 add up to annual fixed investment ex-penditures which are 68 percent above the 1966-1968 average; the jump fromactual 1968 to projected 1969 is over 60 percent. There is no doubt that,if the agency estimates had been reviewed by the government in the lightof resource availabilities and other considerations, large reductions wouldhave been made.

71. The fixed investments shown for the Federal Sector InvestmentProgram were, in the initial years, heavily influenced by the likely ratesof progress on work now under way. For the period as a vhole, however, theyare.based upon a judgment as to what wo-uld be a reasonable share for thefederal sector program in total fixed investment expenditures. Total fixedinvestment is projected as growing at 9.4 percent annually; a significantlylower rate would not accomplish the growth target while a significantlyhigher rate could not be financed without inflationary credit expansion.Private sector investment, which in 1968 was still recovering from the lowlevels of the post-1964 recession, must be expected to grow relativelyrapidly; the projections are based upon an 11.5 percent growth rate forthe private sector compared to an 8.5 percent growth rate for the publ.csector as a whole. On the assumptions that (a) federal sector fixed in-vestment expenditures outside the plan (largely a.]Ministration and defense)

1/ The BNDE projection of its program for 1969-1970 did not separate loansto the public and private sector; the figures given are an estimate ofthe private sector portion of the total.

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can be held to a 6.0 percent rate of increase, and (b) local governmentfixed investment grows at 7.0 percent annually, then expenditures on activi-ties within the Federal Sector Investment Program can grow at 10.5 percentannually.

72. This 10.5 percent growth rate thus is consistent with the generalmacro-economic framework adopted for the projections. The kind of infor-mation that would be required to say that this is the "optimum" averagegrowth rate for these federal sector activities is obviouisly not available.However, there is little doubt that the resulting expenditure levels arelarge enough to meet the most urgent requirements in the key sectors: basicindustries, power, transport and communications. (See Annex 4.) Thus, itis reasonable to expect that no major structural bottlenecks would inter-fere with development if public investments do not exceed the projectedlevels but provide for the required expansion in these key sectors. On theother hand, it is well within the capacity of the Federal Government toplan the projects and programs that could effectively utilize resourcesrising (from NCr 4.0 billion in 1968) to NCr 7.2 billion in 1974.

PROJECTED TRENDS IN FIXED INVESTMENT EXPENDITURES

AnnualMillion NCr's Averagein 1968 prices % of total Growth19b8l 1974 1968 1974 Rate

Total Fixed Investment 12,857 22,089 100% .100% 9.4Private Sector 3,732 7,173 29.0 32.5 11.5Public Sector 9,125 14,916 71.0 67.5 8.5

Federal Sector 4379 8 247 36.4 37.3 9.9Within Investment Program 3,971 7,43 30.9 32.8 10.5

(Budgetary) (764) (982) (5,9) (4.4) 4.3(Extra-Budgetary) (1,204) (2,428) (9.4) (11.0) 12.4(Federal Enterprises) (2,003) (3,833) (15.6) (17.4) 11.4

Outside Investment Program 708 1,o04 5,5 4,5 6.o

Local Governments 4,446 6,669 34.6 30.2 7.0

Source: Bank staff estimates.

Sector Objectives of the Program

73. Economic Infrastructure. To avoid bottlenecks in t;he power sec-tor outrut will have to increase at a rate of at least 9 to 10 percentannuaily. The investment levels for the power sector included in theFederal Sector Investment Program plus the exDenditures by local governmentsincluded in their projected investment budget shoulad be adequate to financeexpansion to meet this growth in demand. Telecommunications facilities areat present seriously inadeouate in Brazil; an expansion program was begun

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in 1967, but 4n order to catch up with demand the Drojected invrestmentlevel for 1974 is about twice that of 1968. Relatively modest investmentsin postal facilities are also included in the estimate'a for the communi-cations sector.

74. In terms of required investment expenditures the transport sectoris the most important in the progrvam. Anrnual expenditur averaging overNCr 2 billion annuallY - 50 percent above the 1966-1963 a-rerage - are in-cluded in the Federal Sector investment Prograza; local goverrments willspend an additional NCr 1.3 billion annually. The high priority highwayconstruction program outlined in the Brazilian Transport Survey requiresaverage annual expenditures of NCr 2.2 billion in 1969-1974 (NCr 1.3 fromthe states and NCr 900 million included in the federal program). Follo'wingTransport Survey recommendations, the suggested investmrent program for therailways emphasizes additions to rolling stock and improvements in selectedexisting lines; only a small amount is included for newi line construction.Priority is given to irmprovements of the ports of Paranagua, Santos, Rio,Recife and Tubarao; investments projected by the government in inland water-ways and the smaller ports have been scaled down pending demonstration oftheir economic feasibility. Even this reduced program will require expen-ditures on ports averaging NCr 225 million annually compared to an averageof 100 million annually in 1966-1968. The government's recently 4nitiatedprogram to modernize the merchant marine and equip it to handle 50 percentof Brazil's foreign trade by the early 1970's (compared to 26 percent in1966) is included in the Federal Sector Investment Program, but with com-pletion in 1972 rather than 1971. The airport program consists largely ofan expansion of the international airport at Rio to handle jumbo jets andsupersonic aircraft plus the installation of modern air traffic controlsystems throughout the country.

75. Direct)y Productive Sectors. The petroleum sector will requireinvestments averaging almost NCr 1 billion anmnally during 1969-1974. Thiswill permit an expansion in refinery capacity which should eliminate theneed to import most refined products by 1973. Crude oil production, whichby late 1968 was sufficient to meet half of domestic needs, is expected tokeep pace with increases in domestic demand as a result of investments indrilling. Foreign exchange expenditures for imports of crude oil andpetroleum products are not, as a consequence of this investment program,expected to rise much above the $200 million level reached in 1968 (11percent of total imports). The National Steel Plan, approved by the govern-ment in mid-1968, is based upon meeting a 10 percent annual increase indemand. Expansion of ingot capacity (4.6 million tons in 1968) is laggingat present, but investments in this sector are expected to grow from a,annual average of NCr 150 million in 1966-1968 to one of NCr 500 millionin 1971-1974. Exports of iron ore are expected tc increase from $107 mil-lion in 1968 to almost $200 million in 1974 largely as a result of the ex-panded output of C.V.R.D. (Companhia Vale do Rio Doce); this will be amajor contribution to the solution of balance of payments problems.

76. The projected level of expenditures for fixed investments in agri-culture is relatively modest - an average of NCr 345 million annually largely

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in facilities for the extension service, irrigation projects, rural electri-fication and agrarian reform. The major responsibility for financing fixedinvestments in agriculture lies with the private sector, but projectedgovernment investments are also limited because of the uncertainty regard-ing priorities and Plans for the agriculture sector; modifications in theinvestment levels may become desirable as the latter are clarified.

77. Social Infrastructure. There is a great need for more classroomsand additional teacher training facilities in the education sector, but thevalue of these investments depends heavily upon improvements in the effi-ciency and quality of the Brazilian educational system. Much of presentexpenditure is wasted because students do not remain in school long enoughto achieve effective literacy; improvements in curricula as well as betterteacher training are required to overcome this problem. Secondary schooltraining is often not relevant to the vocational and cultural opportunitiesopen to the graduates. The suggested investment program would almost doubleexpenditures between 1968 and 1974, an increase which is justified only ifthe needed improvements in the content of the education are being under-taken simultaneously. For other areas of social infrastructure the projec-tions provide for a 50 percent increase in annual average expendituresbetween 1966-1968 and 1969-1974. It is difficult to establish prioritiesin these areas because the expenditures combine social consumption withinvestments that show economic returns only in the fairly long run. Thesuggested 50 percent increase should, however, allow for significant ex-pansion while staying within the government's capacity to plan and executeworthwhile projects in these fields.

78. Ceit Prams. Projected investment credits extended to theprivate sector by the National Housing Bank (BNH) and the National EconomicDevelopment Bank (BNDE) average NCr 2.3 billion in 1969-1974; their lendingwould finance about 13 percent of total fixed investment expenditures duringthe period. These two institutions thus play a ma4or role in Brazilianinvestment finance. The BNH program would finance construction of about610,000 dwelling units in 1969-1972; this would meet about one-third ofthe deficit for urban housing of middle and lover income families but,since orer 90 percent of the units will be in urban areas, would barelytouch the problem of rural housing. The program of the housing bank isnoteworthy in that it is providing housing within the means of most urban

lamilies although there is only a modest interest rate subsidy (4 percentloans) for the least expensive housing and full monetary correction isapplied to all mortgage loans.

79. The BNDE in the past has concentrated its resources in the power,transport and steel sectors, but in the future is expected to rinance abroad range of industrial investments in the private sector. 11"he govern-ment recognizes that, even with the growth of private investment bankingand greater use of equity financing, private industry will need increasingaccess to the savings being mobilized by the public sector. Consequently,BNDE loans to the private sector are projected as growing at an annualrate of almost 16 percent (from NCr 300 million in 1965 to NCr 835 millionin 1974).

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Financing the Program

80. Federal sector savings during 1969-1974 should be in excess ofwhat is needed to finance the projected Federal Sector Investment Program.They are not enough, however, to cover the investment program, some fixedinvestment outside the program, and the high levrel of leg.ally requiredfinaricial transfers to the local governments. Corsequently, there will bea substartal deficit througnhout the period. (See mables 5.2 and 5.3 andAnnex 6.) In outline form the consolidated federal sector budget is sum-marized below:

SUMARY OF PROJECTED CONSOLIDATED FEDERAL SECTOR BUiDGET(millions of NCr's at 1968 Drices)

Average1969 1969-1974 1974

Current Receipts 20,512 24,296 27,892Current Exoenditures -12,397 -14,598 -16,364Current Account Savings 7,615 9,698 11,528

Federal Sector Invest. Prog. 6,739 8,453 10,044Other Fixed Investment 750 872 1,004Transfers to Local Governments 1 8372302

Sub-total 9,326 11,627 13,909

Deficit (-) -1,711 -1,929 -2,381

Financing the Deficit (+) 1,711 92381Private Sector (net) -233 381 1,079Monetary System (net) 579 315 257Foreign Borrowing (net) 914 1,044 1,078Inventory Disinvestment 451 189 -33

Source: Tables 5.2 and 5.3.

81. The most important source of federal sector savings is the Treas-ury cash budget; in the projections it generates 60 percent of the total(before capital transfers to other copmoonents of the federal sector). Thekey factor in this savings performance is holding the growth in budgetaryconsumption expenditures to an average of 4.0 percent annually. Becauselow civil service salaries for professional and technical staff alreadymake it difficult for the government to attract and hold the kinds of person-nel it needs, and because there is a need to increase current expendituresin areas such as education and agriculture, it will be possible to holdgrowth in total current expenditures to 4.0 percent only by continuing toeliminate unnecessary staff throughout the public administration. This is

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not an easy objective, but the recent programs of administrative reform andthe 10 percent reduction in expenditures for civilian personnel includedin the 1969 Treasury financial program indicate the government's awarenessof the need for a more efficient civil service. Other required policiesinvolve reducing further the deficits of and hence subsidy payments to thefederal railroads and restricting the Treasury transfer to cover adminis-trative costs of the private sector social security system (INPS) to aboutNCr 400 million annually (the 1968 level).

82. Given the revenue producing reforms of the past years, the savingstarget can be achieved without further increases in tax rates. It is esti-mated that the 1968 federal tax system had an average elasticity with re-spect to GDP of about 1.15, i.e., with the projected GDP growth rate of6 percent tax revenues would increase by 6.9 percent annually. A new motorvehicle tax enacted in 1969 raises the average growth rate, 1968 to 1974,to 7.1 percent. Growth in revenues at these rates is required in 1968-1971in order to eliminate the remaining deficit in the Treasury cash budget,but once this has been accomplished some reductions in tax rates may wellbecome desirable. These reductions would provide an opportunity to slightlyreduce the high tax burden and - if applied to sales taxes - might be usedto stimulate demand for manufactured goods important in popular consumption;tight control of current expenditures, however, is prerequisite to any suchdevelopment.

83. Given reasonable pricing policies, the gross savings of thefederal enterprises (i.e., depreciation allowances plus undistributed prof-its) should generate 22 percent of the total federal sector savings. Theyare expected to average NCr 2,104 million ($620 million) annually in 1969-1974,increasing from NCr 1,191 mJllion in 1968 to NCr 2,775 million in 1974.Such a result, however, depends upon increasing steel prices as well asmaintaining adequate rates for power and prices for petroleum products.l/

84. Fixed investment expenditures outside the projected Federal SectorInvestment Program consist of expenditures in the areas of administrationand defense plus some unidentified capital expenditures. As noted above,these are assumed to grow by no more than 6.0 percent annually. The federalsector's capital transfers to local government are made up largely of ear-marked taxes. The balance consists of Eletrobras financing of state bowercompanies and official credit agency loans to local government (the HousingBank's municipal water supply program and BNDE credits which largely go tofinance state investments in the transport sector).

85. The average federal sector deficit of NCr 1,929 million (see tablefollowing paragraph 80) is the net effect of what in fact are a very compli-cated set of transactions. (See Table 5.3 and Annex 6.) Net forelgn borrow-ing averaging NCr 1,044 million annually plus the private sector'a repeyinnts -

of official credit agency loans averaging NCr 592 million annually together

1/ The case for higher steel prices is discussed briefly in paragraph 56- and in detail in Annex 4.

.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3>

l L ~~~~~~~~- 37 -

more than cover tf'.c deficit. Other important capital receipts which godirectly to the financing of the Federal Sector Investment Program includethe compulsory loan to Eletrobras (averaging NCr 228 million annually) andpurchases of telephone company shares (everaging NCr 223 ti ion annually)by private individuals in order to get a priority position on the list \ofapplicants for phone service. These compulsory financial investments areon balance offset by autarky loans to the private sector.

Readjustable Bonds

86. Although the "'bond account"' (operations with readjustable Treasurybonds) transactions are insignificant on a net basis, the net figures con-ceal an important projected change in the bond holders. At the end of 1968the total volume of readjustable bonds outstanding was NCr 3,385 million(equivalent to $884 million at the end-of-year exchange rate). Based onthe analysis outlined below, the projections assume that the governmentwill vish to have the monetary authorities repurchase and in effect retirebonds now held by the general public. This would be done as rapidly asthe resources of the monetary authorities would permit, but large repur-chases would probably nov begin until 1972. The readjustable bonds werefirst issued in 1964 in an effort to obtain a non-inflationary source offinance for the Treasury budget deficit. Since that time receipts frombond sales have been used for a number of other purposes. Previous extra-budgetary uses included financing loans to the private sector throughfinance companies and investment banks ("Resolution 21") and providingassistance to state governments; more recently the receipts from bond sub-scriptions have been used to pay-highway construction contractors and fi-nance the expansion of government owned steel mills.

87. Because of the readjustment feature it is necessary to sell newbonds in ever increasing nominal amounts simply to cover the redemptionof those maturing. Consequently, the net receipts from subscriptions (i.e.,sales less redemptions) amounted to only NCr 734 million in 1967-1968 eventhough the amount outstanding rose by NCr 2,019 million during these sametwo years. In both 1967 and 1968 the commercial banks were the major netpurchaser of bonds as they were permitted to hold them as a substitutefor part of their compulsory reserve deposits. The volume of bonds somonetized in these two years amounted to NCr 622 million. When this mone-tized portion is excluded the net receipts from bond subscriptions fallto only NCr 112 million. This is much less than the NCr 300 million paidout in the form of interest in the two-year period. Thus on a net basisthe bonds provided no non-inflationary financing in 1967-1968; they wereclearly no longer serving their original purpose.

88. This result was not totally unintended; it was a by-product ofthe government's desire to avoid the upward press-re on interest ratesthat would have resulted from government competition with private borrowersin Brazil's still limited private capital market. When interest rates onthe readjustable Treasury bonds were lowered in mid-1967 it was with theexpectation that they would no longer be sold in large amounts to thegeneral public. The resulting partial withdrawal by the Treasury from theprivate capital market not only helped hold down interest rates, but also

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indirectly helped finance the increase in private fixed investment thattook place as the economy recovered from the recession of late 1966 andearly 1967.

89. It is expected that the government's desire to reduce the rela-tive role of the public sector as a claimant on resources in the economywill be realized and will permit a continued rapid growth of private fixedinvestment (11.5 percent annually). At the same time, however, the taxsystem will be transferring resources from the private to the public sectorwhich, given reasonable control of current expenditures, will within a fewyears eliminate the need for any net borrowing from the monetary author-ities. Further declines in monetary expansion and hence in the rate ofinflation can be expected to result. In addition, however, the monetaryauthorities will be able to provide relatively more credit for the privatesector consistent with any given ceiling on total expansion.

90. The purchase of presently outstanding Treasury bonds by the mone-tary authorities from the private sector offers a particularly advantageous,albeit indirect, way of providing monetary authority credit to the prlvatesector. It would gradually eliminate the present burden upon the monetaryand financial authorities resulting from the need to pay interest on andcontinually roll over the presently large debt. Furthermore, it would pro-mote the expansion of the investment banks and other private capital marketinstitutions by putting cash in the hands of investors. Given the growingneed of the private sector for long term finance, government policies shouldstrengthen the resources of both the private and the official developmentbanks.

91. Given the need to first reduce Treasury deficit financing, rela-tively little can be done along the indicated lines in the earlier yearsof the projection period. Beginning in 1972, however, it should be pos-sible to reduce rapidly the readjustable bonds.in the hands of the generalpublic. Part B of Table 5 thus shows the "bond account" purchasing bondsfrom the private sector and selling bonds to the monetary system. Whatis shown in the previous table as average annual federal sector borrowingfrom the monetary system of NCr 315 million is in fact largely increasedholdings of Treasury bonds that were purchased from the private sector.

E. The Monet l

92. In the early 1960's monetary developments in Brazi'l were domi-nated by the need to transfer resources from the p:O ivate sector to thepublic sector to cover the latter's deficits. The rapid monetary expansionduring these years resulted largely from the increases in public sectorborrowing from the banking system. Since the beginning of the stabilizationprogram in 1964 the public sector has increasingly covered its expendituresthrough taxation rather than borrowing. As a result the rates of increasein money supply, credit and prices have all declined and a larger shareof credit has gone to the private sector. In 1967 the increase in credit

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to the private sector amounted to 81 percent of the increase in monetarysystem liabilities; in 1968 this percentage rose to 87 percent.1/

93. For 1969-1974 a continuation and consolidation of' the recenttrend is assumed (see Annex 6). The prospective levels of public sectorsavings and investment mean that the government can continue to reduce itsborrowing from the monetary systeSm, thus permitting further declines inthe rates of monetary expansion. The rate of inflatiort should continue todiminish and reach a quite low level in about tvo years. Once free of theneed to finance large public sector deficits, monetary policy can then bedetermined by other economic objectives. The projected public sector budgetand the Federal Sector Investment Program are thus consistent with achievingand maintaining the government's price stability objectives while an in-creasing share of permissible credit expansion goes to the private sector,thus supporting the..projected rapid growth of investment and output in theprivate sector.

1/ See Annex 1 Table 1-10, and Annex 6 Table 6-8. Monetary system creditexpansion to the private sector in the latter part of 1967 and 1968contains a partly fictitious element due to the rapid expansion of"minimum average balance" requirements by the banks; see Annex 1.

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III. THE BALANCE OF PAYMENTS AND EXTERNAL DEBT

A. Introduction

94. Problems associated with balance of payments and external debtmanagement are likely to be both difficult and persistent in the comingyears. Trade and payments problems are likely to be the most difficulteconomic constraint upon the rate of economic growth. Broadly, the twoessential elements for dealing with the problem are a vigorous and sus-tained export promotion effort and a large increase in medium and long termexternal financing.

95. Despite the increases in imports that followed the 1967 tariffreductions and recent recovery in economic activity, the import coefficientin Brazil is still relatively low. Imports were only 8.5 percent of grossnational product in 1968. This import coefficient is expected to changelittle by 1974. After 1969 only imports of capital equipment are expectedto grow at a rate higher than gross domestic product. Although the largefluctuations in imports in the past make it impossible to establish anyvery good statistical relationship between the levels of investment andoutput on the one hand, and the demand for imports on the other, the growthin imports that has been assumed for the projections seems unlikely to over-state the requirements for a sustained six percent growth rate.

96. It will require careful management to finance even this relativelymodest growth in imports and at the same time avoid an increase in externaldebt that would soon lead to a crisis. Two factors make the problem anespecially difficult one. First, earnings from Brazil's major exports -coffee and other traditional agricultural exports - are expected to growonly slowly during 1969-1974. Secondly, Brazil already has a large externaldebt and a high debt service burden. To keep balance of payments and debtdifficulties from constraining Brazilian growth to below the six percenttarget will require both (a) a major effort on the part of the Braziliansto increase nontraditional exports and (b) careful planning and controlof external borrowing so that the permissible external finance is exclu-sively utilized for priority purposes and is obtained in the right formsand on appropriate terms.

97. The Brazilian authorities have become increasingly concerned withthis set of problems. During 1964-1966 their immediate attention was neces-sarily focused more upon internal financial stability and getting publicsector finances under control while reestablishing Brazi''s external creditand reserves. The lower rate of economic activity in 1964-1966 had re-sulted in current account balance of payments surpluses (averaging $186 mil-lion per year) and increases in net official short term international re-serves (averaging $176 million per year). These short term developmentsalong with a renegotiation of external debt provided a temporary solutionto the problem. With sustained economic recovery after mid-1967 the picturequickly changed. While in 1966 merchandise imports were still at the1961-1963 level of $1.3 billion, they jumped by 11 percent in 1967 and by

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29 percent in 1968. The current account showed a deficit of $238 millionin 1967; it rose to $443 million in 1968 (see Table 3.1). In the formeryear a decline of $260 million in official short term reserves financedthe deficit; in 1968 it was covered largely by short term borrowing of over$400 million (including Law 4,131 credits).

98. The Brazilian authorities recognize that alternatives must befound to reserve declines and increased short term debt. The adoption ofa relatively flexible exchange rate policy in August 1968, beside facili-tating monetary management by eliminating the previous periodic large inter-national flows of capital, was a major step in encouraging the expansion ofnontraditional exports. Tax incentives for exports of manufactured goodshave been extended and administrative procedures simplified. An aggressivecampaign has been mounted to sell coffee in "new markets", i.e., countriesto whom exports are not subject to quotas under the International CoffeeAgreement. When short term debt continued to grow rapidly in the earlymonths of 1969, the government placed ceilings on private sector short termborrowing under Resolution 63 and Instruction 289 (see paragraph 42 above).In June the Ministries of Finance and Planning and the Central Bank estab-lished closer controls on external borrowing by the public sectors. Thesesteps have all been in the right direction, but are only the beginning ofa continuing effort to expand exports and to make external financial pro-graming fully effective.

B. The Current Account

Trends in Imports

99. Merchandise imports (fob) are expected to rise from $1,856 mil-lion in 1968 to $2,757 million in 1974, an average compound growth rate of6.7 percent. Imports of non-factor services are expected to increase from$470 million in 1969 to $535 million in 1974, an average annual rate ofincrease of only 2.6 percent. The low growth rate of the latter is duelargely to "import substitution" in the ocean freight sector; the rapidexpansion of the Brazilian merchant marine (see Annex 4) will permit sub-stantial foreign exchange savings as a larger proportion of Brazilian tradeis carried by Brazilian ships. The assua ed trends in the main categoriesof merchandise imports are:

In Millions of dollars Growth1969 1_974 Rate:

Total merchandise imports (fob) $1,990 $2,757 6.7%

Investment Goods T74 1,213 9.4Petroleum and its Products 208 230 2.0Wheat 130 140 1.5Other Raw Materials 629 890 7.2Consumer Goods 249 284 2.7

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Imports of capital equipment are projected as rising by 9.4 percent annu-ally, the same rate as total fixed investment. Although Brazil has a rela-tively sophisticated capital goods industry, as is evidenced by the factthat imports of capital equipment amount to less than 20 percent of fixedinvestment, the expected rapid expansion of the steel, petroleum and chemi-cal industries plus investments in electric energy, telecommunications andrailroads will all require large imports. The direct foreign procurementcomponent of the 73 projects identified in the Project List amounts to$1.5 billion (see Annex 5).

100. Although demand for petroleum products is growing by about 10 per-cent annually, it is anticipated that payments for imports will rise onlyvery moderately since domestic crude supplies should meet most of the growthin demand. Although some uncertainty is inevitable and large investmentswill be required, successful exploratory vork and recent increases in pro-duction of demestie crude-suggest that this government objective can beaccomplished. In addition the planned expansion of refinery capacity willpermit Brazil to eliminate regular imports of almost all refined products.The import estimates used are identical with those of the Central Bank for1969-1973; the latter were extrapolated for 1974. Wheat is expected tocontinue to be Brazil's main food import. Although expanded domestic pro-duction should meet the increase in demand, imports are expected to con-tinue at slightly above 2 million tons annually (see Annex 3, paragraphs34-43). Better seeds and farm practices may in the longer run permit fur-ther import substitution in the case of wheat, but at present Brazilianproducers can only subsist because they are heavily subsidized.

101. Raw materials other than wheat and crude oil consist largely ofindustrial raw materials and are projected as increasing at the same rateas industrial output (T.2 percent annually). Imports of consumer goodsare expected to change very little during the period as practically all ofthe growth in demand can be supplied from Brazilian sources. Importeditems account for only about one percent of private consumption expendi-tures in Brazil; they consist mostly of either traditional consumptionitems such as dried cod fish and fruits or luxury items already very heavilytaxed.

Trends in Exports

102. Merchandise exports (fob) are projected as increasing from anestimated $1,890 million in 1968 to $2,725 million in 1974, an averageannual growth rate of 6.3 percent. Due particularly to increased earningsfrom merchant shipping Brazil's earnings from exports of non-factor servicesare expected to grow at a somewhat higher rate (7.1 percent).l/

1/ Between the import saving and the export earning effects of the mer-chant marine expansion program, the current account deficit on non-factor services in 1974 should be below that of any year after 1965.The improvement in the net balance on non-factor services, comparedto what it would have been in 1974 if all items simply grew at sixpercent annually from the 1968 level, is $119 million in 1974.

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The projected trends in merchandise exports are summarized below.

In millions of dollars Growth1968 L974 Rate:

Total merchandise exports (fob) $I8 27 6.3%

"Past parameters" 1,890 2,313 3.4

Agriculture Based 1,610 1,851 2.4(Coffee incl. soluble) (801) (8714) (1.5)(Other agricultural products) (809) (977) (3.2)

Minerals 146 232 8.0Manufactured Goods 132 230 9.7

"Required Additional Exports" - 412 -Agriculture Based 112 -_

Manufactured Goods 270

103. Based on "past parameters" - i.e., vhat could reasonably be anti-cipated if the incentives to export were the same as in the recent past -exports appear unlikely to grow by more than 3.4 percent annually. Theheart of the.problem is in agriculture based exports which might be ex-pected to grow by only 2.4 percent annually (see Annex 3). Earnings fromcoffee, which accounted for 43 percent of export receipts in 1968, willgrow slowly.l/ The medium term outlook is not favorable for cotton, sugarand cocoa, the three next most important agricultural products which to-gether accounted for 16 percent of merchandise exports in 1968. Only thefavorable outlook for a number of less important products such as corn,soybeans and rice keeps the "past parameters" estimate of agriculturalbased exports as high as 2.4 percent. The outlook for minerals exports -

largely due to increased iron ore exports resulting from the CVRD expansionprogram (see Annex 4) - is favorable. Exports of manufactured goods (vhichexclude soluble coffee and processed agricultural products such as pinewood,cocoa butter and soybean meal) might be expected to increase at about thesame absolute rate as in the past - $16 million per year.

104. With coffee and other agricultural exports representing 85 per-cent of the total in 1968, and likely to grow only very slovly in the comingyears, it is going to be difficult for Brazil to find the foreign exchangeto maintain imports at the required level and meet already high debt serviceobligations. To a considerable extent imports can and should be financedby increased foreign indebtedness, but the extent to Which this course canbe followed is limited both by the need to avoid urnmanageable future debtservice problems and the likely availability of foreign credits on acceptable

~/ See Annex 2 for details. This projection is based upon a conservativeprojection of coffee prices. To the extent that coffee prices areabove the average level of January-June 1969, Brazil's earnings shouldbe correspondingly greater.

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terms. If balance of payments and external debt problems are not to seri-ously constrain economic growth, Brazil has no alternative but to greatlyincrease export earnings over vhat might be expected on the basis of "pastparameters".

105. The increase in exports that, in conjunction with the increasedexternal borrowing discussed below, would be adequate to finance importdemand and other payment obligations reaches an annual level of over $400million by 1974. Agricultural products would be expected to provide mostof the increase in the first two years, but after that the burden would belargely upon manufactured goods. (See Table 3.4.)

106. Although it cannot be done without careful economic management,it by no means is impossible for Brazil to increase its earnings from mer-chandise exports from $1,890 to $2,725 million between 1968 and 1974. Gov-ernment officials have shown their awareness of the need to promote exports.An important start in obtaining the required additional exports has alreadybeen made via the tax incentives now offered to exporters of manufacturedgoods. An export credit program is being established. In mid-1969 thegovernment stated its intention to provide extra credit facilities to farm-ers producing nontraditional agricultural exports such as soybeans, cotton,rice and corn. The most important step taken so far has been the exchangerate policy adopted in August 1968. At that time the government adopted apolicy of frequent adjustments in the exchange rate based in large partupon trends in domestic and external prices. (See paragraph 39 above.)

107. Assuming the policy folloved is one of reestablishing with eachadjustment the purchasing power parity existing at the time of the previousexchange rate adjustment, the result of shortening the intervals betweenreadjustments is to raise the average exchange rate. Such an effect hastaken place in Brazil after August 1968.

TRENDS IN THE ACTUAL AND THE "EFFECTIVE" EXCHANGE RATE .

Brazil'sAverage General Wholesale Effective

Exch. Price Price "Parity" Exch.Rate inRate(NCr/$j Index in U.S. Index 1968 prices

1966 (average) 2.220 62.71 98.15 63.89 3.4751967 " 2.663 80.63 98.15 82.15 3.2421968 3.396 100.00 100.00 100.00 3.396January 1969 3.830 110.82 101.85 108.81 3.520October 1969 4.150 n.a. n.a. 117.56 3.530

/ Exchaage rate_is selling rate for dollars. Parity index is ratio ofBrazilian general price index to U.S. vholesale price index. Effectiveexchange rate in 1968 prices equals actual average rate divided by parityindex. Parity index for October 1969 estimated on basis of January toAugust price trends.

149

The average efi;1ective exchange rate in 1968 prices rcse by 4175 pereent in1968 and, assuaming the new policy is continaed throughou t L969, ay rxisebW anothez ^3,65 percent in 1969; the cumulative effect 7mv1d boe a rea de4valuation of 8.6 percent compared to the average 1967 'e1. Both the reaadevaluation and the greater stability of the reial exchange rate muust beexpected to have a favorable impact unorn exuorts. The latter .s especiallyi3an0rornt ifl the ease of e:co2Ptu o^mans mruac ftredte goo4is since it is onywith a relatively stable real exchange ra're tat it becoies prol b.ve toexport on a regular basis as distinct fenm malcking irregular sales Just aftera devaluation or when domestic demand is lowv it Is only the possibility otcontinuaos profitable exoort sales that caa Justify the effort and invest--ment in market development that are prerequisite to a su satanti all- i.e

rapid growth in Brazil's exports of manufactured goods.

108. It is to be expected that credit policies, t"x incentives, ma ket

development programs and exchange rate policies all -gill have a part toplay in the exDort drive which Brazil must undertake in order to help fi-nance its growing import requlrements and maintain its external det withinlimits that w11 make it feasible for external creditors to be forthcomingwith the balance of the financing required. The measures already takenare in the right direction, but it will be necessary to expand export in-centives and promotional efforts until the export statistics show that theproblem is being solved. In the effort at medium and long-run externaleconomic stability the growth of export earnings will play the same keyrole as tax revenues have had in the efforts at fiscal stability; they willbe the most readily available indicator of progress.

TIIE RESOURCE GAP AND THE DEFICIT ON CURREFT ACCOUNT

In millions of dollars: As Percent of Investment196_ 1971 19T4 1968 1971 74

Resource Gap $233 $3146 $292 5.6% 6.5% 4.3%

Current Account Deficit $443 $687 $760 11.3% 13.0% 11.1%

All figures are inflows; basic data in Tables 2.2 ead 3.26

10g. The net result of the trends and policies outlined in this reportis that the resource gap - i.e., the balance of payments on current acc&omtexclusive of donations and factor service payments - will grow larger be-fore it begins to decline. Given the import reqjuirements and the exportpossibilities, it must be expected to increase during the next twz years.An at least moderate rate of decline thereafter, however, seems a precondi-tion of keeping external debt within manageable limits. The current accountdeficit is expected to grow throughout the projection period in absoluteamount; the rate of increase, however, should slow after 1971 so the cuarrentaccount deficit will decline in relation to investment expenditure. Therole of foreign savings in financing Brazilian investment thus varies de-pending on the concept one has in mind. In terms of the real flows of

_46 -

resources (resource gap) it averages 5.3 percent for the projection period.But when flows of financial resources are also considered, foreign savingswill on the average finance 11.7 percent of investment expenditure. Thedifference is due to interest payments on external debt and remittance ofprofits on foreign investments (less a modest net inflow of donations fromabroad).

110. Since no reliable estimates of total reinvested profits are avail-able, they are included neither in factor service payments nor in the privateinvestment inflow in the capital account. As a result, the balance of pay-ments estimates substantially understate the size of the true current ac-count deficit and the role of foreign-owned savings in financing Brazilianinvestment although this bias does not affect the conclusions regardingoverall capital requirements or debt servicing capacity. Reinvested profitsof U.S. firms - the only ones for which data exist - averaged about $70 mil-lion annually in 1965-1967; with increases in the rates of profit and in-vestment accompanying a higher level of economic activity they may be sub-stantially higher at present and in the coming years. Since U.S. firmsprobably account for no more than 35 to 40 percent of total foreign directinvestment in Brazil, the total volume of reinvested profits is far in ex-cess of that reported for U.S. firms. The true annual deficit on currentaccount may be some $200-$250 million greater than indicated above whichwould make the proportion of investment expenditure financed by foreignreal and financial resources including reinvested profits more like 15 per-cent rather than the 11.7 percent indicated by the balance of payments esti-mates.

111. The rapid growth in interest payments on external debt is mainlyresponsible for the rising current account deficit even after the resourcegap has begun to decline. Interest payments (measured net of interestearned) are expected to grow from $180 million in 1968 to $394 million in1974 (see Table 3.2). They will rise somewhat more rapidly than the ex-ternal debt because, folloging trends in the international capital market,new loans are generally being contracted at substantially higher interestrates than the old loans being amortized.

C. The Ovapital Account

112. Over the six-year projection period the required total net capitalinflow from all sources is expected to be almost $4 billion. About 70 per-cent of this would be in the form of medium and long term credits; thebalance would come from direct private investments (16 percent) and in-creases in short term debt (14 percent). During this period the assumptionsabout debt management imply a strong shift away from short term borrowingand toward greater reliance on medium and long term credits.

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SUMMARY OF PROJEC ED NET CAPITAL INFLOWS -f = 2169 -1(In millions of dolls,ro

Annual AZfera e29-971 lT F2-7 6-Year- Total

r~~__wr -Direct Investment 98 16.6 110 i155.3 624 15.9

Medium and Long Term Loans 385 65.4 538 74.7 p2770 70.5

Short Term Credits 106 18.0 -2 10.0 534 13_6

Total $589 100.0% $720 100.0% $3,928 100.0%

Source: Table 3.2.

113. During the past three years (1966-1968) the inflow from directforeign investments was almost exactly offset by the outflow of profitsremittances; the former exceeded the latter by an average of only $3 mil-lion annually. While there are numerous factors that make these poor baseyears for projecting, it is not possible to-specify the direction of thebias. For the next few years the most reasonable assumxption is that re-mittances will offset new investments. Thus, the inflow from direct invest-ment in the capital account is balanced by an outflow in the current ac-count; the possible errors in this assumption regarding the effects ofdirect foreign investments are not likely to be large enough to signifi-cantly affect the conclusions. Over the longer run, however, one cannotassume that foreign investment will continue to be neutral because as longas the profit rate is above the growth rate in fixed investment, this wouldlead to an indefinitely increasing control of the economy by foreign in-vestors. Such a trend would, in the long run, be inconsistent with nationalobjectives and aspirations. In a long zran perspective one must thereforeexpect profits remittances to exceed new investments.

114. The net increase in short term borrowing has been estimated as aresidual after taking into account all other capital flows and assuming nochange in net official short term international reserves. Brazil's shortterm external debt at the end of 1968 is estimated at about $1.1 billion;it increased by over $400 million in 1968 (see Table 4.2). Thus the pro-jected annal increases of about $100 million assume only modest futurereliance on this form of financing in conmDarison with 1968. As it willprobably take time to develop the increasing net inflow from medium andlong term loans, some further inflow in short term debt can be justifiedduring the interval, but if the current account developments should prove

_48-

more favorable than projected above, reducing this debt (or increasingofficial short term reserves) would be desirable.l/

115. Some increase in short term borrowing by the private sector andthe commercial banks in addition to the amounts discussed above should notcreate debt management problems if it were wholly offset by an increase inthe net official short term reserves. Such a development is expected in1969 (see paragraph 41). The projections, however, include only the shortterm borrowings. used to finance payments for imports and other purposesexclusive of any affecting official reserves. In the present projectionsno explicit provision has been made for increases in net official shortterm reserves; at the end of 1968 they amounted to $418 million.2/ Inview of the expanding volume of international payments some build-up ofofficial reserves would be desirable and increases in short term debt forthis purpose are to be expected.

Medium and Long Term Credit

116. It is in this area of building up an adequate inflow of mediumand long term credits that the most difficult problems exist. Disburse-ments on medium and long term loans (including suppliers credits) amountedto only $392 million in 1968. During 1969-19T4 they will have to averagesome $825 million and rise to almost $1 billion by 1974 in order to main-tain imports at the desired level and cover payments for debt service. Aviable - albeit hypothetical - external financing program is summarized onthe following page. The disbursements which would result from the commit-ments shown in this summary program would be sufficient, when supplementedby disbursement of the $1,701 million pipeline, to provide the needed in-flow of medium and long term credits. It is, of course, not possible toforecast realistically the commitments for various kinds of assistancewhich Brazil will be able to obtain from international and bilateral sourcesover the coming years. Brazil's share in the total flow of external assist-ance to developing a-reas will depend upon the total amounts available, howvarious lenders from time to time evaluate the relative priority whichshould be given to Brazil, and how good a case Brazil can make for a higherlevel of assistance. A detailed external financing plan, consistent withspecific government policies and measures, will be necessary to define what

1/ As defined herein "short term debt" includes Resolution 63, Instruction289, and Law 4,131 credits. The latter included as of December 1968some $67.5 million which would not fall due for repayment until 1970or later. The short term debt total also includes a substantial butunknown portion of loans from international firms to their subsidiaoreain Brazil. which Brazilian officials believe are more like equity ia-vestments than ordinary short term credits. Thus Brazil's short termdebt is somewhat less volatile than would ordinarily be the case.

2/ When the definition of liabilities is expanded to include compensatoryloans, net official reserves become a minus $239 million as of the endof 19680 See Table 3.7 for details on foreign exchange reserves.

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Brazilts needs are and what limits must be set on various kinds of borrow-ing, to provide assurance that financing made available vill be used inpriority areas, to help demonstrate that Brazil takes seriously its problemof debt management, and to schedule project preparation activities and loancommitments so that disbursement can be forthcoming as required.

SU:ARY OF BA-LANCE OF PAYWNTS PROJECTIONS FOR 19691_974(in millions of dollars)

Total 2or1969 1974 1969-1974

A. Required Gross Capital Inflow (-) -810 -1,189 6,104

1. Deficit on Current Account(-) -490 _-322a. Resource Gap -215 -292 -1,733b. Interest Payments -221 -394 -1,811c. Profits Remittances - 94 -114 -624d. Net donations 4o 40 240

2. Amortization of M&LT Debt -320 -429 -2,176

B. Sources of Gross Capital Inflow 810 1.189 6 104

1. Private Direct Investment 94 114 624

2. Gross Borrowing 716 12075 5 48oa. Disbursement of M&LT Credits 599 979 4 s9XTb. Increase in Short Term Debt 117 96 534

Source: Table 3.2. Direct investment is not shown as profits remittancesand new investments are assumed to offset each other.

ASSUMED PROGRAM OF NEW MEDIUM AND LONG TEM CREDITS (1969-1974)(in millions of dollars)

Assumed Cormtmeint Level:1969 L970__9J5_71 192 193 1

Concessionary Loans 130 220 180 180 180 180(proJect loans) (100) (i4o) (150) (150) (150) (15o)(non-project assistance) (30) (80) (30) (30) (30) (30)

Regular Project Loans 250 4oo 450 450 500 500

Supplier Credits 200 200 250 300 350 400(medium term) (100) (100) (100) (100) (100) (100)(long term) (100) (100) (150) (200) (20) (300)

Total Commitments 580 820 880 930 1.030 1,o8o

Source: See notes to Table 3.2.

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117. Brazil does not now have such an external financing plan, althoagha start has been made on some of its elements, such as, a study of variouasalternative future profiles of the external debt and a decree providing forjoint Finance Ministry-Planning Ministry-Central Bank review of public sectorrequests for approval of external borrowing. A coordinating mechanism hasbeen established to ease the administration of public sector project loansonce the funds have been committed, but the task remains of pushing thisback to the earlier stages of establishing priorities and preparing pro3-ects consistent with overall guidelines for foreign borrowing. Given theimportance of supplier credits, it is essential that these be included inthe program.l/ Although the external financing plan would necessarily belargely concerned with government and government guaranteed borroving, itshould also include indicative levels for the private sector which areconsistent with overall debt management. It will also be necessary toorganize private borroving in ways that will insure finance on acceptableterms; the BNDE is now contributing this by contracting lines of creditsabroad-and making them available to Brazilian firms (see Annex 4).

118. In the absence of the guidance that could be given by a Brazilianexternal financing plan, the hypothetical external financing program out-lined in the above table at least suggests the probable magnitude of theloan commitments required if the overall growth objectives are to be metand the balance of payments is to remain manageable. Because of the lagbetween commitments and disbursements, with the assumed mix of loans itwill be necessary to obtain commitments for $5,320 in medium and long termcredits during the 1969-1974 period in order to generate disbursements fromnew loans of $3,245 million. As Brazil would also be drawing down theDecember 1968 pipeline of $1,701 million, the net increase in pipeline asa consequence of this $5.3 billion commitment level would be only $374 mil-lion.

119. A major effort in project preparation is essential if commitmentsare to be made in time to generate the needed disbursements. During1969-1971 total commitments for project loans amount to $1,490 million; thefigure rises to $1,900 million for the second half of the projection period.While in the case of supplier credits the lenders will require less ifn theway of feasibility studies and other preparatory arnalyses, substantial wor;is still involved simply to enable the government to fix its own priorities.When supplier credits are added to project commitments, the totals riseto $2,140 million for the first three years and t32,950 million for the finalthree years of the projection period. Feasible and apparently desirableinvestments with suggested foreign financing totaling $2,121 milllion,. andwhich could be ready for commitment during 1969-1971, hwave: been ideY.;ifiedJ(See summary on accompanying table and details in Annex W 'hen aAl.v asis made for additional private sector and local goverranent inveatments n,!X

included in tine list, the potential projects and supplier credits comra-0ments for 1969-1971 are greater than the required level.

1/ Undisbursed supplier credits (including lines of credit for financialinstitutions) amounted to $721 million on December 31, 1968. they madeup 42 percent of the total of $1,701 in undisbursed medium and longterm credits.

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PR0JM,'T3- FOTEWNI Y AVAIALLT!E FOR 0O1IMEMT IN 1969-l171'.n millions of dollars)

7ota MMct

Project International ForesignJo st Procurement Fin8nc.J11

1. Dirently Producti.ve Sectors

A. A,g; .r>1o01:?ie (proincts) 371.15 60.5 I- ) 0

B. Inxduotry, Fid 1,11ining 668.3302 ?ro,ject Loans 5T57 74 3StIPIA;.i. C^edits 516.6 239,9 2?0^9

0. Petroletm (wivpJ iers) 225.0 h6.0 h6,0

II. Economic Intrasi3*tractiire

D. glectric Fnergy 1,234^9 555t7Project Loans - h 202- 5 .7Supplier Gredi1ts 720., 353,0 3 -, i.

E. T2lecomun5catons 9.6 2nProject F >ns 05.0 36.0 33<Surnppler Credits 189.5 59.6 5i9

F. Transportat-ion 1h481.0 299.1 614.9Project ioans t9 1 90 4* i ISupplier Credits 521.9 250,1 250v1

IIIg Social Infrao'trncture

G. Fducat- on (project-s) 226.5 28 r 109-s

H. Water Snpplyv and Sewerage 633.4 61.0(projects only)

TV. Credit Progrms (projects) 400o0 80.0

Total Project List 520h-l 1 530.1 1472.2Potential rroject Tans 3,321.7 .1-5 l:t72.2Pot.qntial Suipplier Credits 2,173.4 9.8,6 94,8.6

Source: Prepared by Bank staff; see Annex for details.

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120. The investments on the Project List were classified as suitablefor supplier credit or project loan financing on the basis of the inten-tions indicated by the executing agency. When the resulting breakdowrn iscompared with that in the commitment program assumed for the balance ofpayments, it is apparent that there is a substantial surplus of investmentssuitable for financing as supplier credits, and a small shortage of potentialprojects suitable for project loans. The requirements of adequate debtmanagement, of course, relate to the terms upon which new borrowing is under-taken and not vhether a particular credit carries the label of "projectloan" or "supplier credit". Thus, if credit terms were the only consider-ation, this imbalance between project loans and supplier credits could bereconciled by obtaining supplier credit financing on terms comparable tothat available for project loans. However, project loans differ from sup-plier credits not only by generally having more favorable repayment terms,but also by more frequently including some element of local currency fi-nancing. The requirements for project loan commitments must be analyzedin terms of Brazil's need for "local cost financing" (i.e., loan disburse-ments providing foreign exchange available to finance imports not relatedto the particular project).

REQUIRED COMMNTS COPARED WITH AVAILABLE PROJECTS IN 1969-197(in millions of dollars)

A. Requiredi Commitments perAssumed M&LT Loan Program $2,280 Details by Credit Type

Project Supplier- Non-project, Credits -140 Credits Credits

- Required Project andSupplier Credit Commitments $2,140 1,490 650

+ Eximbank Adjustment -220 +220

Revised Recauirement $2,140 1,270 870

B. Potential Projects perProject List $2,121 1,172 949

+ Additional for Private Sector 150 - 150

Revised Project Availability $2,271 1,172 1,099

C. Surplus (+) or Shortage (-)of Potential Projects +131 *98 +229

Source: Bank staff estimates as shown in accompanying abJLes e .e "Eximbank-Adjustment".is made since credits from this source are classifiedas project loans in the balance of payments tables but as suppliercredits on the Project List. The "Additional for Private Sector"also includes any local government projects not now on the ProjectList.

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Local Cost Financing

121. Brazil has a large and relatively sophisticated industrial sectorthat can produce most of the machinery and equipment required by the econ-omy. Although many industrial raw materials must be imported, the need toimport capital goods such as are usually financed by external credits iscomparatively limited. On the other hand, a relatively high level of ex-ternal borrowing is required if Brazil is to both finance a substantialresource gap plus meeting interest and amortization payments on its externaldebt; the latter will amount to almost $4.0 billion in 1969-1974. With thiscombination of circumstances it is not possible for Brazil to obtain thelevel of external assistance disbursements required when the latter aretied to imports of capital equipment. Three things must take place forexternal borrowing to meet Brazilian needs effectively: (1) the Braziliansmust finance a larger portion of their capital equipment imports by externalcredits, (2) the Brazilians must "projectize" a larger portion of investmentexpenditures so they will be suitable for financing as project loans, and(3) agencies financing projects must be willing to include a reasonableamount of local cost financing in their credits.

122. In the 1965-1968 period about 38 percent of capital equipmentimports were financed by medium and long term credits, 60 percent werefinanced by Brazilian foreign exchange earnings, and the remaining 2 per-cent represented direct investments in the form of machinery and equipment.In the projections capital equipment imports financed from the country'sown foreign exchange are expected to rise only moderately in absolute termsand to fell substantially as a proportion of the total (e.g., from 60 per-cent in 1965-1968 to about 41 percent in 1969-1974). The proportion fi-nanced by medium and long term loans correspondingly rises to 57 percentof the total. The increase in commitments for supplier credits in 1968suggests that Brazil has made a good start in financing a larger portionof its capital equipment imports with medium term foreign credits althoughtoo-little is known about their likely disbursement rate and maturity struc-ture to assess their consistency with Brazil's overall debt managementneeds. While supplier credit disbursements were only $107 million in 1968,new commitments during the year amounted to $494 million. At the beginningof 1969 undisbursed supplier credits amounted to $721 million. Undisbursedproject loans totaled an additional $778 million, much of which will fi-nance imports of capital equipment. The utilization of these funds - alreadycommitted but undisbursed - should sharply raise the proportion of capitalequipment imports that is financed by medium and long term credits.

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FINANCING OF CAPITAL EQUIPMT IMPORTSAND HOW LOAN DISBURSEMES ARE USED

Annual AveragesActual Projected Projected

A. How Capital Equipment 1965-1968 1969-1271 19T2-1274Imports are Financed: million million million

dollars % dollars % dollars %

Total Imports (fob) 414 100% 754 100% 298 100%a. Foreign Exchange

payments 250 6o.o 313 41.6 406 41.2b. Direct Investment

in kind 7 1.8 14 1.8 18 1.8c. M&LT loan disburse-

ments 157 37.8 427 56.6 563 57.0

B. How Loan Disbursementsare used: (1968 ony)

Total M&LT loan disburse-ments 392 100% 718 100% 231 100%

a. For machinery &equipment (fob) 183 46.7 4 59.- 563 60.5

Supplier credits;Eximbank 116 29.6 299 41.6 398 42.7

Part of project loans 67 17.1 128 17.8 165 17.8

b. For other goods andservices 209 53.3 2 1 40.6 368 39.5

Other emodity imports 129 32.9 79 11.0 30 3.2Project Loan local

costs 57 14.5 165 23.0 276 29.6Ocean Freight 23 5.9 47 6.6 62 6.7

(on, supplier credits) (13) (3.3) (33) (4.6) (44) (4.7)(on project loans) (10) (2.6) (14) (2.0) (18) (2.0)

RecaDitula.ti-on for Project LoansProject Loan disbursements 134 100% 307 100% h59 100%

Machinery & equiDment (fob)T7 50.0 128 5 3f6 0Ocean freight on above 10 7.5 14 4.6 18 4.OLocal cost financing 57 42.5 165 53.8 276 60.0

Source: 1965-1968 data in Part A from Central Bank; Part B figures and allprojections are IBRD staff estimates. "Capital goods" includesmachinery and equipment (including transport equipment), but isless comprehensive than "'investments goods" shown in the balanceof payments.

55 -

123. Given Brazil's projected need for medium and long term o an dlis-bursements, a substantial dependence upon supplier credits is inevitable.The latter plus U.S. Export-Import Bank financing are projected as providingabout 46 - 47 percent of total disbursements (capital goods fob plus oceeafreight) in 1969-1974. Non-project assistance financing imports other thancapital equipment (e.g. AID program loans, wheat loans, fertilizer importloans) is expected to decline; only PL 480 assistance is assumed after 1970.Project loan disbursements will have to increase rapidly and a high pro-portion of the increase will have to be in the form of local cost finaeingin order to offset the decline in non-project assistance. Thuis, at the sametime as total project loan disbursements are shown as rising from $134 mil-lion in 1968 to an average of $459 million in 1972-1974, the local currencrfinancing component rises from 42 to 60 percent of the total. Project loandisbursements available to finance payments other than those for capital

goods imports should rise from $57 million in 1968 to averages of $165 mil-lion in 1969-1972 and $276 million in 1972-1974. Given :Brazil's import re-quirements, debt service obligations, and use of supplier credits, thesehigh. levels of local currency financing are an essential part of the exter-nal assistance program.l/

124. With the projected disbursement levels this implies raiking dis-bursements for local cost financing to 60 percent of the total project loandisbursements by 1972-1974. Presently committed project loans provide sub-stantially less, but - since the project loan pipeline will be disbursedlargely in the next three to four years - if future project commitments canon the average provide this level of local cost financing, then the 1972-1974objective becomes feasible. If future project loan commitments do not pro-vide such a high degree of local cost financing, then some form of continu-ing general import financing will be needed. Increased net short termborroving could serve this purpose, but to go much beyond the increasealready assumed ($534 million over the six years) would lead to an unde-sirable debt structure.

125. In order to raise disbursements for local cost financing to the60 percent level it would be necessary for project loan commitments to cover,on the average, 44 percent of the total costs of the investments indexntifiedas suitable for project loan financing in 1969-1971. Most of these invest-ments are already under study by one of the potential financing agencies

1/ From the balance of payments point of view it is the absolute levelof local cost financing that is important; there are an infinite numberof combinations of supplier credits and project loans (with varyingdegrees of local cost financing) that could provide the same combinationof capital equipment imports and local cost financing. The presentlyprojected levels of project loan financing, however, are as high asseems possible even under favorable assumptions regarding both project

preparation and the availability of this kind of assistance. There-fore Brazil's need for foreign exchange not linked to specific importswill have to be met out of the projected levels of project assistance.

- 56 -

and a loan amount has been tentatively determined. The figure for "suggestedforeign financing" shown in the Project List (summarized in the previoustable) is the amount now being considered by the agency concerned or, forthose projects not yet under ceonsideration by a particular lender, 40 per-cent of total project cost. The resulting commitments would cover, on theaverage, onlY 35 percent of project costs. It is not possible to raisethe average to 44 percent simply by increasing the proportion of total costsfinanced by project loans on those projects which are not yet under consider-ation by a particular agency; the resulting financing formula would be un-realistically high (95 percen.t of total project cost).

126. If the projected requirements for local cost financing are cor-rect (and assuming it is not possible to increase the total volume of proj-ect loan commitments due to competing claims on the resources of agenciesmaking project loans), then it will be necessary to increase the proportionof project costs that are covered by project loans. The "shortage"' ofpotential projects mentioned in paragraph 120 would disappear if, on theaverage, a 44 percent financing formula were used; the latter would, inacreasethe "suggested Foreign Financing" by $290 million so there would be a surr-plus of 3potential project loan as well as potential supplier credit commit-ments. Alternatively or in combination with the above, the needs could bemet by substituting non-project for project assistance or substituting proj-ects with a lower import component for some of those now in the ProjectList. The need to obtain the local cost financing suggested by the fore-going analysis reinforces the priority which should be given to preparinga full extarnal financing plan.

D. External Debt

127. Brazi'ls external debt statistics are not available in the detailthat w7-ulold be required for fully satisfactory analysis. However, for policypwzT,oses tVne main issues can be identified with reasonable clarity. Totalregistered ext.er.nal debt, outstanding and disbursed, repayable in foreignexchange, ;vas $3,819 million at the end of 1968, Undisbursed medium andlong-term loans amounted to $1f,574 million, raising the total to almost$5.4 billion. This amount includes an unidentifiable portion of privatedebt not guaranteed by the government, and thus is not fully comparablewith conrn-er.tonal debt statistics in most other coun-tries. About. 28 Der-cent of the outstanding end disbursed debt consisted of short-term credits.If only medi and long-term debts are considered, the total outstandingand disbursed is reduced to $2,737 million. tSee Table 4.lr)

128. While it is not possible to make a complete separr.¢tion betwveenpublic and private sector debt, most medium and long-term debt is elthera public s ctor obligation or carries an official! guarantee of the avail-abilit. of foreign exchange (although no, necessarili of repayment). Theshort-termn debt is largely privale sector debt (althou -TI oficial banksaccoun' for part of the Resolution 63 debt, while state governmerts andother public agencies are responsible for part of the Law 4.131 credlits).Both Resolutio-n 63 and Instruction 289 credits carry government guar anteesof exchan2ge availability.

- 57 -

Debt and Debt Service in 1969-1974

129. Brazil's external debt (outstanding and disbursed, repayable inforeign exchange) is expected to grow from $3.8 billion at the end of 1968to $6.8 billion at the end of 1974. Increases averaging some $500 millionannually seem inevitable if Brazil is to both meet its existing debt serviceobligations and maintain the import levels necessary to sustain the desiredgrowth rate. A further inflow of approximately $300 million in disburse-ments from loans repayable in cruzeiros - which are excluded from the debtfigures - would also be required. Short-term credits cannot be allowed torise as rapidly as in the past - e.g., in 1968 they accounted for 87 percentof the $476 million increase in debt;. a sound debt management policy wouldprobably imply that in the next few years not much more than 18 percent ofnet increases in the external debt be for maturities of less than one year.

SUMMARY OF ACTUAL AND PROJECTED EXTERNAL DEBT(in millions of dollars)

External Debt, Outstanding & DisbursedActual Projected Aver. Annual

Dec. 1968 Dec. 1974 Increase

Medium & Long-Term Debt $2,737 $5,207 $412Short-Term Debt 1,083 1,617 89

Total Debt $3,820 $6, 82 $501

Source: Tables 4.1 and 4.3.

130. The growth in debt is in large part the consequence of alreadyexisting debt. Cumulative interest payments over the six year period amountto slightly over $1.8 billion - 60 percent of the increase in indebtedness.Interest costs alone are projected as increasing to $394 million by 1974,one-third of which will be on short-term debt and the balance on medium andlong-term debt. Expressed as a percent of exports, however, the increasein interest payments appears more moderate; it rises from 9.8 percent in1969 to 13.1 percent in 1974. Amortization of medium and long-term debtis relatively constant at slightly over 14 percent of export earnings. Thustotal debt service is projected as rising from 24.1 percent to 27.4 percentof export earnings.

131. Interest paid on medium and long-term loans is the only item thatrises significantly as a percent of export earnings. This is partly ex-plained by the projected increase in the average interest rate on mediumand long-term debt - from 4.74 percent in 1969 to 5.59 percent in 1974 -but by far the more important factor is the increase in the size of thedebt. An increase in the average effective amortization period - postulatedon the assumption of success in a major effort to obtain supplier creditswith relatively long amortization periods as well as a high level of projectloans - keeps amortization payments to an almost constant proportion of ex-ports. Scheduled amortization of medium and long-term debt is 11.7 percent

- 58 -

of start-of-the year debt in 1969, but this percentage falls to 9.1 percentin 1974. This is the equivalent of an increase in the effective averageamortization of from eight and one-half to eleven years.

132. With total debt rising from $3.8 to $6.8 billion, with annualdebt service amounting to 24.0 - 27.4 percent of export earnings and with$1 billion or more in short-term debt to be rolled over each year, it isclear that effective debt management is crucial to Brazil. The preparationand execution of the external financing plan thus merits a very high priorityin Brazilian economic policy. The burden of past debt and the difficultiesof increasing foreign exchange earnings when the outlook is poor for tradi-tional exports make the situation especially difficult for Brazil's economicauthorities. However, the successful efforts of the authorities in thelast five years to move toward the solution of apparently eaual intractableproblems in other fields, especially those of low tax receipts and budgetarymanagement, gives grounds for confidence that the progress which has beenmade in other areas will now be matched by equally serious efforts in thefields of both export promotion and external debt management and with equallyefficacious results. Only thus can the objectives of external financialstability and growth be reconciled. A high degree of cooperation by ex-ternal creditors will also be required, and it should be possible for Brazilto elicit this cooperation if the lenders see that they are thereby comple-menting domestic policies conducive to maintaining both the growth rate andbalance of payments viability.

DEBT SERVICE IN 1969-1974tin millions of dollars)

Average1969 1969-1974 1974

Interest paynents 221 301 394

On short term debt 91 112 131On medium & long term debt 130 189 263

Amortization (M&LT only) 320 363 429

Total Debt Service 541 664 823

as percent of eports:

Interest payments 9.84 11.77 13.14

On short term debt 4.05 4.38 4.3rOn medium & long term debt 5.79 7h30 8.77

Amortization (M&LTonly) 14.25 14.14 14.30

Total Debt Service 24.09 25.91 27.44

Source: Bank staff estimates; see Table 4.3 for details. Interest onshort term debt is net of interest earned. "Exports" used incalculating percentage debt service burdens include non-factorservices.

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The Longer Term Debt Outlook (1975-1994)

133. The burden which past debt places on the balance of payments for1969-1974 suggests the importance of examining the consequences for the moredistant future of the external borrowing projected for the medium term.Longer run trade trends and debt parameters must, of course, also be assumed.Since relatively small changes in these assumptions produce large variationsin the results for periods as long as two decades, four alternatives whichseem to circumscribe the area of uncertainty are examined here. The fouralternatives may be characterized as:

I. "Softer external credit, better trade trends"

II. "Harder external credit, better trade trends"

III. "Softer external credit, poorer trade trends"

IV. "Harder external credit, poorer trade trends"

"Softer external credit" is defined as an indefinite continuation of thecredit mix assumed in the commitment program of 1974 (see paragraph 116).This mix has an average interest rate of 5.9 percent, an average amorti-zation period resulting in annual repayments equal to 8 percent of debtoutstanding, and includes $50 million annually in concessionary loans re-payable in cruzeiros. "Harder credit terms" assume that concessionarylending terminates and is substituted for by a corresponding increase insupplier credits. The resulting credit mix has an average interest rateof 7.3 percent and requires annual amortization equivalent to 10 percentof debt outstanding.l/ "Better trade trends" consist of a 7.7 percentgrowth rate for exports and a 6.0 percent growth rate for imports; "poorertrade trends" consist of a 6.5 percent rate for exports and a 6.0 percentrate for imports. It is the spreads between the import and export growthrates rather than their absolute levels that are more significant; thusthe "better" alternative may be considered as a spread of roughly 1.5 per-centage points while in the "poorer" alternative the spread is reduced toroughly 0.5 percentage points.

1/ Debt service on medium and long term debt thus runs 17.3 percent ofstart-of-year debt in the case of "harder credit terms" and 13.9 per-cent of debt in the case of "softer credit terms". These parametersare applied throughout the projection period. For 1974 the correspond-ing figure was 14.7 percent (see Table 4.3). The projection methodthus involves a sudden jump which is especially great in the case ofthe "harder credit terms" alternatives. In actual fact there wouldbe a gradual transition to the new parameter values (as "old" loanson different average terms were disbursed and eventually amortized).By not explicitly taking into account the transition period the pro-jection method exaggerates the effects in the earlier years. A morerefined approach would modify the numbers, but would not alter thegeneral conclusions.

- 60 -

134. Under the two "poorer trade trends" alternatives the resource gapdeclines so slowly that it is not eliminated until the final year (1994).The trends in gross borrowing, in debt service and in total debt undereither of the "poorer trade trend" alternatives would lead to unmanageabledebt problems. The compensatory lending under Alternative III would not besufficient to make the situation tolerable. In both III and IV the grosscapital inflow requirements continue to rise in absolute terms throughoutthe period, reaching $3.6 and $5.8 billion, respectively, in 1994. Through-out most of the 20-year period the gross capital inflow approximates one-third of import payments under Alternative III and one-half of import pay-ment under Alternative IV; to obtain amounts of this order does not seemfeasible. In both the "poorer trade trends" alternatives debt paymentscontinue to rise in absolute terms. Even with "softer external credit"the debt service burden as a percent of export earnings rises steadily untilreaching a maximum of 34.9 percent in 1991, and then declines only veryslowly. Under both these alternatives external debt grows by absolutelylarger annual amounts as the projection period progresses; by 1994 it reaches$27 billion under Alternative III and $36 billion under Alternative IV.Debt grows substantially faster than either gross national product or ex-port earnings.

SUMMARY OF RESULTS OF FOUR ALTERNATIVE BALANCE OF PAYMENTSAND DEBT PROJECTIONS FOR 1975-1994

Alternative Assumptions Sets:I II III IV

Gross Inflow from M&LT Loans

Maximum in million $'s $1,249 $1,927 $3,554* $5,847*Year of maximum 1981 1985 1994* 1994*

As % of imports (4-yr. aver.) 29.0% 36.9% 35.2% 54.8%Years of maximum 1975-78 1976-79 1986-89 1991-94

Debt Service

Maximum in million $'s $1,691 $2,750 $3,657* $5,900*Year of maximum 1988 1991 1994* 1994*

Maximum as % of exports 27.9% 37.0% 34.9% 55.8%Year of maximum 1979 1982 1991 1994*

M&LT External Debt

Maximum annual increase $617 $799 $1,527* $2,515*Year of maximum 1975 1980 1994* 1994*

Maximum total debt $11,189 $15,110 $26,860* $35,834*Year of maximum 1987 1990 1994* 1994*

Growth rate (1974 to max. 6.1% 6.9% 8.6% 10.1%year of maximum)

Resource Gap

Year exports exceed imports 1981 1981 1994 1994Source: Tables 4.4 and 4.5; * indicates maximum shown is maximum within

1975-1994 period; item was still increasing in 1994. Debt serviceis net of interest earned on short term debt.

_ 61 -

135. Under the "better trade trends" alternatives the situation appearsdifficult but manageable provided there is some contintuation of concessionaryassiatance beyond 1974. The need, however, for concessionary lending wouldbe steadily decreasing and it could soon be phased out. Under AlternativeI the required gross inflow from medium and long term loans reaches a maxi-mum of $1,249 in 1987; loan disbursements as a percent of imports start atless than 30 percent in 1975 and decline steadily from this level. If somecontinuing concessionary lending were not available, loan disbursementswould have to reach an unrealistically high percentage of imports in thelate 1970's. Under the "better trade trends" alternatives debt service asa percent of export earnings reaches a maximum of 27.9 percent when con-cessionary lending is assumed, but grows to a high of 37.0 percent withoutconcessionary loans. Under the most favorable alternative ("better exporttrends, softer external credit") debt will grow by larger absolute amountsuntil 1975 and then continue to grow by decreasing amounts until 1987; with"tharder external credit" these turning points change to 1980 and 1990.Under these alternatives debt grows less rapidly than export earnings and,in the case of Alternative I, at about the same rate as GDP.

136. Thus, even under favorable assumptions ("better trade trends,softer external credit") Brazil faces an extended period in which manage-ment of external debt will be a major concern. Some continuing concession-ary assistance is likely to be required after 1974 in order to hold thegross inflow from medium and long term loans to a reasonable level in re-lation to -imports and to limit debt service payments to an acceptable por-tion of export earnings. A vigorous and sustai-ned export promotion programand the implementation,of an external financial plan are essential if debtmanagement difficulties are not to seriously constrain growth possibilities.The steps taken by the government in these areas will also provide externallenders with measures of the likelihood of success and thus help Brazilobtain the external cooperation required.

4- I4

I 4

STATISTICAL APPENDIX

INDEX TO TABLES

Table

1. Population

Population by Region ...................... .............. 1.1

2. National Accounts

Resource Availabilities and Uses, 1963-1968 ...................... 2.1Resource Availabilities and Uses, 1968 and Projected 1969-1974 .... 2.2

3. Trade and Payments

Summary Balance of Payments for 1963-1968.......................... 3.1Summary Balance of Payments for 1968 and Projected 1969-1974...... 3.2Summary of Historical and Projected Merchandise Imports... 3.3Summary of Historical and Projected Merchandise Exports.t....s... 3.4Details on Capital Account in Balance of Payments for 1963-1968.. 3.5Details on Medium and Long Term Loans for 1968 and Projected for

l9 96l74o.o..1o*oo*... 3.6Trends in Official Foreign Reserves6.............................* 3.7

4. External Debt (and Long Term Balance of Payments Projections)

External Debt Requiring Foreign Exchange Repaymentas of December 31, 19.968.* .. ... 4.1

Disbursement, Amortization, and Changes in External Debt in 1968.. 4.2Trends in External Debt and Debt Service in 1969-197 4 4.......o.... 4.3Debt Service as a Percent of Export Earnings in 1975-1994 Under

Alternative Assumptions on External Credit and Trade Trends... 4.4Long Term Balance of Payments Projections (1975-1994) ............. h.5

Part A: Assumption I ("softer credit, better trade")Part B: Assumption II ("harder credit, better trade")Part C: Assumption III ("softer credit, poorer trade")Part D: Assumption IV ("harder credit, poorer trade")

5. Fiscal Statistics

Consolidated Budget for the Public Sector c.*....t o r*........ .. 5.1Consolidated Budget for the Federal Set o r 5.2The Structure of the Consolidated Budget for the Federal Sector

in 1969-1974 ...................................... 5.3(See Annex 1 for additional tables)

6. Monetary Statistics. ...... .... . .... o*.......... , oo see Annex 1

7. Agricultural Statistics.o......... , .. o..o......ee...see Annex 2

8. Industrial Statistics see Annex 3

-2-

Table

9. Prices

Average Annual Price Levels andChanges........................... 9.1Annual Rates of Price Increase at End of Each Quarter.......... .. 9.2

10. Other Statistical Tables

Economic Indicators ................. .. 10.1The Federal Sector Investment Programn............................. 10.2

Table l.l1 POPULATION BY REGION

(In thousands)

RegionState Estimated Growth(city in state) 1960 1968 Rate

North 2,542 3,295 3.3

Northeast 22,085 26,154 2.1

Ceara 3,281 3,838 2.0(Fortaleza) (509) (846) (6.6)

Pernambuco 4,o83 44,731 1.9(Recife) (792) (1,100) (4.2)

Bahia 5,897 6,915 2.0(Salvador) (651) (898) (4.1)

Other states 8,824 10,670 2.1

Southeast 30,481 38,971 3.1

Minas Gerais 9,622 11,480 2.2(Belo Horizonte) (686) (1,167) (6.9)

Guanabara (Rio Qity) 3,232 4,132 3.1

Sao Paulo (state) 12,744 16,624 3.4(Sao Paulo city) 3,676 (5,685) (5.5)

Other states 4,883 6,735 4.1

South 11,6?5 16,484 4.4

Rio Grande do Sul 5,361 6,561 2.6(Porto Alegre) 636 (933) (4-9)

Other states 6,314 9,923 5.8

Center-West 2,937 4,472 5.4

TOTAL 69,720 89,376 3.2

Source: Brazilian Statistical Institute (IBOK). States included in regions areas follows:North--Rondonia, Acre, Amazonas, Roraima, Para, AmapaNortheast--Maranhao, Piaui,Ceara,Rio Grande do Norte, Paraiba, Pernambucoe Fernando de Noronha, Alagoas, Bahia

Southeast--Minas Gerais, Espirito Santo, Rio de Janeiro,Guanabara,Sao Paulo.South--Parana, Santa Catarina, Rio Orande do SulCenter-West--Mato Grosso, Goias, Distrito Federal

lIs f

Table 2.1: RESOURCE AVAILABILITIES AND USES, 1963-1968

1963 19 6 4 1965 1966 19/7 194i

Millions of NCrts at 1968 Prices:

I. Gross Dmaeatic Product (up) 7 7 79,015 8OW084 86 153 9( 460A. Gross National Product (up) 72,607 7 38,8 v v

B. Net Factor Service Payments 355 565 731 701 Rh5 917

II. Resource Gap 7 -2 -1 679 -95 20 791

A. Imports (excl. factor services) 4 7°3

B. Exports (excl. factor services) -5,I98 -5,k6T -6,282 -,,487 -4,301 -7,037

IlI. Resource Availabilities = Uses 73,219 7k,7l0 77,33A 81,489 84At,7 91,h1l

IV. Consumption Expenditures 62 6309 A8,2 7 4-5k 75 3R9 Po 1_3A. General Government 10 541 -5G 130 99308 9 lOs72 I,1 MB. Private Sector 51,556 53,80% 58982 61, q7 At^1¢

64,7104

V. Investment Zxpenditures 11122 10 776 9 0h6 10.033 10,979 1? ppA. Fixed Investment 9xpendit resB. Inventory Investment 663 1,h22 1,762 992 47I )Ill

As Percent of Gross National Product:

I. Gross Domestic Product (mp) 0.0.5 100.8 100.9 100.0 101.0 101.n

A. Gross National Product (mp) 100.0 100.0 100.0 IR; 101.0 lO6.

B. Net Factor Service Payments .5 .8 .9 .9 1.0 1.0

II. Resource Gap . -1.1 -2.1 - .e .2 .9

A. TImorts (excl. factor serviess) 7.9 6.5 T.7

B. Exports (excl. factor services) 7.6 -7.6 -8.0 -8.0 -7.h -7-/

III. Resource Availabilities - Uses 100.8 99.7 98.8 100.1 101.2 101.°

IV. Consumption Expenditures 85.5 85.3 87.2 87.8 AR.3 P7.),A. General Government )14.51 3 ll. I" i 177

H. Private Sector 71.0 71.8 75.3 75.4 7T.3 72.q

V. Investment Expenditures _15.3 1i.4 11., 12.3 12.9 11 q

A. Fixed Investment UMT 12.1 = I TT. 0B. Inventory Investment .9 1.9 2.3 1.2

Source: Bank staff estimates based largely on Vargas Foundation data. (Brazil's national accounts data are now being

revised by the Vargas Foundation; substantial revisions in the published national accounts are expected whenthis has been completed.)

A ~ ~~ I t

Table 2.2: RISOURCZ AVAILABILITIES AND USES 1968 AND PROJECTED 1969-1974

1968 1969 1970 1971 1972 1973 1974

Millions of NCr's at 1968 Prices:I. Gross Domestic Product (mpJ 92 660 97 730 104,150 110,360 116 940 123 980 131 480

A. Gross Natioral Product (mp) -7 102,982 109,067 2 975B. Net Factor Service Paymnts 917 1,070 1,168 1,293 1,437 1,576 1,725

II. Resource Gap 791 730 975 1 175 1 056 958 992A. Imports (excl. factor services) 77fB ,354 BU0 I 9,92 0 iO,501 11,180B. Excorts (excl. factor services) -7,037 -7,624 -7,845 -8,201- -8,864 -9,543 -10,1dd

III. Resource Availabilities = Uses 93,451 9d,460 105,125 111,535 117,996 124,936 132,472

IV. Consumption &-penditures 8o.163 38 a 88.93 93,595 98,621 103.689 109.1l3A. Gereal Government 13,419 14,14o 14,978 15,696 16,471 17,212 ld,OL41B. Private Sector 66,744 69,745 73,860 77,899 82,150 86,477 91,142

il. Investaent Expenditures 13 288 14,567 16 287 17 940 19 375 21,249 23,289A. Fixed Investment 25 1 9ld ,5 20,333 22,009

(1. General Goverrnent) (5,943) (6,B19) (7,299) (6,o65) (8,523) (9,150) (9,927)(2. Public Enterprises) (3,182) (3,274) (3,647) (3,965) (4,320) (4,735) (4,909)3. Private Sector) (3,732) (4,009) (4,372) (4,965) (5,750) (6,448) (7,173)

B. Inventory Investment 431 465 769 945 782 916 1,200

As Percent of Gross National Product l/I. Gross Domeetic Product (iip) 101.0 101.1 101.1 101.2 101.3 101.3 101.3

A. Gross National Product 101.0 1o0o. 1 1o0.o To0. 0 0.o lo..0 100.0B. Net Factor Service Payments 1.0 1.1 1.1 1.2 1.3 1.3 1.3

II. Resource Gap .9 .8 1.0 1.1 .9 .0 AA. Imports (excl. factor services) 7. 5 8. 7 d . 6 7 7 d .6 d 6B. Ekports (excl. factor services -7.6 -7.9 -7.6 -7.5 -7.7 -7.8 -7.3

ITI. Resource Availabilities - Uses 101.9 101.9 102.1 102.3 102.2 102.1 102.1

IV. Ccnsumption Experuditure 87.4 86.8 66.3 85.9 85.4 84.7 34.2A. Gereal Government 14.6 14 6 14. T1 .3 1T1 13.9B. Private Sector 72.8 72.2 71.8 71.5 71.1 70.6 7C.3

V. Investment ExPenditures 14.5 15.1 15.8 16.4 16.8 17.4 17.9A. Fixed Investment -4.U 14.0 MI 6 1 Z. Ib.o 177(1. General Goverment) (6.5) (7.1) (7.1) (7.4) (7.4) (7.5) (7.7)(2. Public Enuerprises) (3.5) (3.4) (3.7) (3.6) (3.7) (3.0) (3.o)(3. Private Sector) (4.0) (4.1) (4.3) (4.6) (5.0) (5.3) (5.5

B. Inventory Investment .5 .5 .7 .8 .7 .d .9

1/ Percentages have been rLinded so componert s add to totals.

Source: Bank staff projections; see Annex 6 for details.

I

Table 3.1: SUMMARY BALANCE OF PAYMENTS FOR 1963-1968

(In millions of dollars)

196 3 1964 19F5 19'1 1Q74

A. Exports (excl. factor services) 1499 1546 1747 1975 1P21 207?1. Merchandise (fob) lhOh 1430 1977i T-l-2. Non-Factor Services 93 1)f 151 134 167 JR?

B. Imports (excl. factor services) 1569 1330 12-80 1703 !-23051. Merchandise (fob) 1 97 1ii 91dE I M2. Non-Factor Services 275 244 339 hoo h39 lk9

C. Resource Gap - 70 216 4167 172 -'59 -2331. Balance on Merchandise Trade -3i7i -7Ii7 4 32. Balance on Non-Factor Services -182 -128 -188 -266 -272 -?67

D. Net Factor Service Payments (-) -87 -132 -175 -1,99 -246 -2701. Profits Remittances 0 O -- Q -4O -63 _0O2. Interest Payments (net) -87 -132 -157 -157 -193 -lCn

E. Donations 43 55 75 -79 T7 401. Official Donations (net) 33 31 j3 34 57 -- ro2. Private Donations (net) 10 24 39 4550 J10

F. Balance on Current Account -114 139 367 52 -238 -Wt3

G. Direct Foreign Investment 30 28 70 74 76 511

H. Net Medium & Iong Term Loans 31 -34 3h6 167 Ih 2?1.2251. Disbursements 2S 22 1 566 S 3Q 7502. Amortization -219 -255 -220 -3Al -h8' -t525

I. Short Term Credit (net) -4 -28 -170 -127 -_9 2h

J. Other Capital Transactions 21 78 -130 -102 -66 -37

K. Errors and Omissions -53 -165 15 -53 12 -65

L. Official Short Term Reserves (net) n.a. - 18 -h98 - 11 260 211. Net Reserves per IMF Concept =9 -F7 -295 -17- 112 -1172. Compensatory Loan Repayments n.a. 89 -203 11 1h8 13P

Source: Central Bank

I I *

Table 3.2: SUMNARY BALANCE OF PAYMENTS FOR 1968 AND PROJECTED 1969-1974

(In millions of dollars)

1968 1969 1970 1971 1972 1973 1974

A. Sxports (excl. factqr services) 2,072 2.21& 2.310 2.415 2.610 2 810 3,0001. Merchandise (fob) 1,o90 2,05 0 2 z E0 2Y Z7 27252. Non-Factor Services 182 195 210 225 240 255 275

B. Imports (excl. factor services) 2,305 2,460 2,597 2,761 2,921 3,092 3,292

1. Merchandise 1,856 1,990 2,117 2,261 2,411 2,572 2,7572. Non-Factor Services 449 470 480 500 510 520 535

C. Resource Gap -233 -215 -287 _346 -311 -282 -2921. Balance on Merchandise Trade 314 -60 - 17 -7l -41 7-1 322. Balance on Non-Factor Services -267 -275 -270 -275 -270 -265 -260

D. Net Factor Income -70 -315 -3 -Ib -423 -464 -1. Jividends and Payments n.e.i. -90 -994 -90 -102 -106 -110 -Ii12. Interest on Debt -180 -221 -246 -279 -317 -354 -394

E. Donations 60 40 40 40 40 40 401. Official (nt) 20 io i i lo lo lo2. Private (rat) 40 30 30 30 30 30 30

F. Balance on Current Account -443 -490 -591 -687 -694 -706 -760

G. Jirect Foreign Investment 54 94 9d 102 106 110 114

H. Medium and Long Term Credit (net) 106 279 360 497 547 517 5501. Disbursements 392 799 71 644 916 897 9792. Amortization -286 -320 -331 -347 -369 -380 -429

I. Short Term Credit (net) 412 117 113 8d 41 79 96

J. Transactions n.e.i. 1/ -150 - - - - - -

(including errors & omissions)

K. Change in Official Short Term Reserves 21 0 0 0 0 0 o1. IMF Concept of Net Reserves -117 -109 -92 -d3 -58 -37 -342. Adj. for Amort. of Compensatory 138 +109 +92 +83 +58 +37 +34

Loans (included in H.2)

1/ In 190d the outflow consisted of $56 million in support of the manualmarket, $15 million from an increase in commercial bank net foreignassets, $14 million in identifiable private sector payments, and $65million in errors and omissions.

Source: 1968 data are from the Central Bank; 1969-1974 are Bank staff projections. Capital account data for 1968in this table differs from that shown in Table 3.1 because of the differing treatment of Law 4,131 loans.In the historical series in Table 3.1 these are treated as medium and long term credits. In recent years,however, they consist almost entirely of short term credits (see Table 4.2) and the appropriate reclassifica-tion has been made in this table. It is not possible, however, to correct figures for earlier years.

I

4

Tablo ',e .Az i&\ 0t e ii. u'' :w .PROJEC'L0 Jk:~1i) 0D ;JlirOITS

(in : OL.s _t dollars)

AverageH1storI D1ata: __1960-63 1 96 4 1965 9[61967 1968

T Jt.e1 Oaern:b-j:- i f1n r p tpo L i','ob) ¾,295>) 736.3 940.6 1,T,3 1 ,44j13 13855.1

Ikwesta-,ent Co&s 53U.9 >1).0 262.0 jo9.6 5077') 704.2

Raw 9.~~~~~~~jP15 664.3' o3~~~~~~~~~~~61.? 5W04.o 760.6 '7 WI.2 9214.9',, :Iam and its Products 0 T)9177 13 .9 2(02.6&Whe%s (Crain) 129.4 '76.3 113.6 142.3 153.2 153.70Knp.r Raw aterials 336.3 206,0 313.7 44d,9 439.1 56i.6

Conswer Goais (incm. .-.iscl.) 100.3' 111.7 94. 6 153.2 166.2 226.0

?rnea Lns: 1969 1970 1971 1972 1973 1974

Total Merchandise Ziriorts (fob) 1,990 2,117 2,261 2,412. 2,572 2,757Ir, estment Goods 77i. A47 926 1,013 1,109 1,213Raw 'teri-is )67 °014 1,072 1 21 191 260

. oleit1!nI 'QTRi± its Products 212 217 22TiAtIeat (grailn) 1.30 122 132 135 138 140Otier Raw natnoials 629 674 723 775 831 890

Consumer Goods (incl. miscl.) 249 256 263 267 269 264

Source. 1960-68 from CGntral Bank; 1969-74 figures az-s Bank tataff projections.

I tf

Table 3.4s SUMMARY OF HISTORICAL AND PROJECTED MERCHANDISU tU0RTS

(In millions of dollars)

aistorical Data: 1963 I 16 12§ 126616

Total Merchandise Ekprts (fob) 1,406 1, 43J 1,596 1,741 1,654 1,890

AgricuLtiural Products 1 255 1 245 3497 1,9 1,610Coffee (incl. soluble) 771WCocoa (beans and butter) 52 46 41 72 84 72Cotton 114 108 96 311 91 1319uga:r 63 33 54 81 80 102Other Products 278 298 432 459 381 504

IiU*rals 101 107 1414 143 132 146Iron we 70 81 103 100103Others 31 26 4L 43 29 39

Maimfacturers 38 70 109 97 143 132

Special Trancactions (inc. fLels) 12 8 12 4 10 2

Projctions: 2 1970 1971 1972 1973 1971

Total Merchandise parts (fob) 2,050 2,100 2,190 2,370 2,555 2,725

Agricitural Products 1,36 1L731 1 767 1 844 1 926 1.99Coffee (incl. soluble) 771 790Cocoa (beans and butter) 150 98 82 66 57 45Cotton 169 121 92 92 92 92Sugar 126 126 126 126 126 126Other Specific Products 520 542 581 621 667 7114Additi onal ]bports - 57 78 108 132 142

Minerals 1614 190 211 218 225 232Iron Ore 150171 17 8 1Others 40 40 40 40 40 40

Manufac t2 rers 150 176 212 308 404 500At Past Growth Rate 15 l9o 2430Reqai red Additiomal Erorts 10 30 110 190 270

Source: 1963-1968 from Central B -n<, 1969-74 flrig-res are Bank staff projections.

* 7 I

TahLe 3.,: Dz1i 'Lo CN QAP1&< ACCOUNT IN BALANCE OF PAMNIMNTS ktiv 1963-1968

(In millioris of dollars)

1963 1964 1965 1966 1967 1968

A. Balance on Capital Account 114 -139 -367 -52 238 443(= -current account deficit)

3. Direct Foreign Inveestment 30 28 70 74 76 54

C. Medium & Long Term Borrowing (net) 31 -34 346 167 45 2251. Disburseients 50 221 56 3ir 772. Amortization -219 -225 -220 -341 -485 -525

D. Short Team Private Capital (net) - 4 -28 -170 -127 -89 2451. Commercial Bank Position 16 - 5 20 -27 -2 -152. Instruction 289 Credits - - 136 124 -82 533. Resolution 63 CrediTs - - - - 4 2404. Swaps -30 -52 -190 -111 -125. Manual Market (part) - - -80 -96 -60 -326. Other Short Term 10 29 -56 -17 26 -1

E. Other Capital Tranactions 21 7d -130 -102 -66 Z3L1. Subscriptions to Intern'l. Org. -15 -20 -11 2. Other Govenint Transactioas 42 103 -63 48 -143. Manual Market (part) - - -60 -72 -45 -244. Other -5 -5 4 3 -7 -13

F. Errors ard Omissions -53 -165 15 -53 12 -65

G. Official Short Term Reserves (ret) n.a. -1 -496 -11 260 211. Net Reserves per IMF Concept 89 7 -2 -126 2 -1172. Compensatory Loan Repayments n.a. 69 -203 115 148 138

(included in item C)

Source: Central Bank; Law 4,131 loans are classified as medium and long term credits.

e I I

A 0 ' I

Table 3.6: DETAILS ON MEDIUM AND LONG TERM LOANS FOR 1968 AND PROJECTIONS FOR 1969-1974

(In millions of dollars)

1968 1969 1970 1971 1972 1973 1974

H. Medium and Long Term Credit (net) 105.8 279.1 380.5 497.5 546.8 516.5 550.0

1. Disbursements 392.3 599.4 711.0 844.0 916.o 896.5 978.5

a. Concessionary Loans 1/ 196.3 168.8 217.0 200.5 192.5 170.0 173.5i. Pipeline 196.3 153.8 110. 0 110.0 65.0 15.0

ii. New Loans - 35.0 107.0 90.5 127.5 155.0 173.5

b. Regular Project Loans 67.7 134.8 224.0 336.0 386.0 404.0 452.51. Pipeline *~~~~~~~~~~~~T7 II 163Z37 -3o 90.0 20.0 -

ii. Niewloane 16.5 79.0 161.0 296.0 384.0 5~,

C, Supplier's Credits 2/ 128.3 275.8 270.0 307.5 337.5 322.5 352.5i. Pipeline 220.6- 16-0.0 130.0 110.0 60.0 470.0-

ii. New Loans - 55.0 110.0 177.5 227.5 262.5 312.5

2.. Amortization 286.5 320.3 330.5 346.5 369.2 380.0 428.5

a. CorvpensaD"7 Loans 130.4 109.1 91.8 o3.2 58.2 36.9 34.o

b. Concessionary Loans - 3.0 7.2 11.4 15.3 19.1i. Disbursed before 1/1/69 - - - .2 . 3.ii. On Pipeline Disbursements - - 1.5 3.0 4.5 6.o 7.5

iii. On new Loans - - 1.5 3.0 4.5 6.0 7.5

c. Begular Project Loans 50.2 68.7 78.1 86.9 96.5 105.5 129.8i. Disbursed before 1/1/69 54.7 . 57.0 717 49.0ii. On Pipeline Disbursients -14.0 21.1 28.1 35.1 38.8 55.6

iii. On New Loans - - - - 6.7 25.2

d. Supplier's Credits 79.2 115.2 134.3 150.4 188.2 207.4 230.2i. Disbursed before 1/1/69 79.2 79.2 62.2 4.0 .2ii. On Pipeline Disbursements - 36.0 72.1 82.4 103.0 97.8 92.7

iii. On New Loans _ - _ 20.0 40.0 71.1 102.2

e. Other Specific Credits(all disbursed) 18.7 27.3 23.3 18.8 14.9 14.9 .).4

1/ Includes IDB loans repayable in new cmuzeiros.

2/ Includes wheat loan for $20.8 million in 1968.

Source: Figures on amortization of compensatory loans and loans disbursed before 1/1/69 are from the Central Bank; other figures are Bank staff estimates.

I

Table 3.7: TRENDS IN OFFICIAL FOREIGN RESERVES

(Hold by the Xonetary Authorities; in millions of dollars)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)Convertible Reserves (including Inconvertible and Expired Bilaterals Net Reserves Compensatory Official Short Grosscompensatory loans in liabilities) Net Incon- Net Exp. (IMF Concept) Loan Liab.- Term Reserves Official

Net Assets Liabilities Sub-total vertible Bilaterals (1) + (4) incl. in (7) (net) (-( Reserves

Outstanding at End of Year(- indicates liabilities)

1963 -806 369 -1,174 55 46 9 -751 -925 174 2161964 -735 367 -1,102 71 59 12 -664 -856 192 2521965 -435 682 -1,117 66 53 13 -369 -1,058 689 5051966 -344 618 -962 101 82 19 -2143 -943 700 4091967 -438 388 -867 83 51 32 -356 -795 439 1t91968 -291 460 -751 52 27 25 -239 -657 418 257

Change During the Year(- indicates decrease inassets or increase in liab.)

1964 71 -2 73 l6 13 3 87 69 18 361965 300 315 -15 -5 -6 1 295 -203 498 2531966 91 -64 155 35 29 6 126 115 11 -961967 -94 -230 135 -18 -31 13 -112 148 -260 -2101968 147 72 76 -31 -24 -7 117 138 -21 58

Source: Central Bank and International Monetary Fund. Components may notadd to totals because of rounding. "Gross Official Reserves" areas reported in IFS; gold, the Fund gold tranche position, andforeign exchange holdings are included. The "Net Reserves" conceptin column (7) is that used in the monetary budget. "Official ShortTerm Reserves" (excluding liabilities for compensatory loans) areshown in the balance of payments tables in this report.

S I

Table 4.1: EXTERNAL DEBT REQUIRING FOREIGN EXCHANGE REPAYMENT AS OF

IErIMBER 31, 1968

(In millions of dollars)

Outstanding Totaland Including

_ Disbursed Pipeline Undisbursed

A. Concessionary Loans 828.9 326.5 1 155 41. AID Program Loans 550.0 75.02. AID Sector & Project

Loans 193.9 251.5 .445.43. PL 480 Loans 85.0 - 85.o

B. Regular Project Loans 462.5 526.3 988.81. IBRD 167.7 330.5 498.22. IDB Regular Operations 122.1 110.9 233.03. Export-Import Bank 156.1 82.9 239.04. IFC 16.6 2.0 18.6

C. Supplier's Credits 374.2 720.8 1,095.0

D. Other M&LT Loans 1 070.9 - 1 070 91. Compensatory Loans -2. Other Specific Credits 414.2 - 414.2

SUB-TOTAL: M&LT Credits 2,736. 1,573.6 h,310.l

E. Short Term Loans 1,082 8 - 1,082.81. Resolution 63 281.2 - 281.22. Instruction 289 331.9 - 331.93. Law 4,131 469.7 - 469.7

TOTAL $3,819.3 $1,573.6 $5,392.9

+ IDB Concessionary LoansRepayable in Cruzeiros ... 127.3

= Total Pipeline ... $1,700.9

Source: Central Bank (April 1969) and reports of lending agencies.See notes to accompanying Table L.2.

I

Table 4.2: DISBURSEMENT, AMORTIZATION, AND CHANGES IN EXTERNAL DEBT DURING 1968

(In millions of dollars)

Outstanding Change During 1968: Outstanding& Disbursed Amorti- Disburse- Net & DisbursedDec.31,_1967 zation ment C*an e Dec. _ 1,968

A. Concessionary Loans 674.9 - 196.3 196.3 828.91. AID Program Loans 47.0 - 75.0 75.0 3 0.o2. AID Sector & Project Loans 147.3 - 46.6 46.6 193.93. PL 480 Loans 52.6 - 32.4 32.4 85.04. IDB (NCr amortization) - 42.3 42.3 -

B. Regular Project Loans 445.0 50.2 67.7 17.5 462.51. IBRD 161.7 13. T197 &70 167.72. IDB Regular Operations 112.6 9.6 19.1 9.5 122.13. Export-import Bank 161.1 26.4 21.4 -5.0 156.14. IFC 9.6 0.4 7.4 7.0 16.6

C. Supplier's Credits 345.9 79.2 107.5 28.3 374.2

D. Other M&LT Loans 1,207.2 157.1 20.8 -136.3 1,070.91. Compensatory Loans 795.1 138.4 - -138.4 656.72. Other 9pecific Credits 412.1 18.7 20.8 2.1 414.2

SUB-TDTAL M&LT LOANSExcluding IDB NCr Amort. 2,673.0 286.5 350.0 63.5 2,736.5Including IDB NCr Amort. ... .., 392.3 105.8 Soo

E. Short Term Loans 670.5 574.2 986.5 412.3 1,082.81. Resolution 63 0.9 328.5 240.3 281.22. Instruction 289 278.9 247.4 300.4 53.0 331.93. Law 4,131 350.7 238.6 357.6 119.0 469.7

TOTAL ALL LOANSExcluding IDB NCr Amort. 3,343.5 860.7 1,336.5 475.8 3,819.3Including IDB NCr Amort. ... ... 1,378.8 518.1

Note: AID program loans are considered as disbursed when released since theyare included in Monetary Authority net foreign exchange reserves at thetime of release. IMF rollover of $75 million excluded from changes shownin Line D.I. Approximately 10 percent ($49.1 million) of the Law 4,131loans outstanding on December 31, 1968, were not due for payment untilafter December 31, 1970, and should be considered medium term financialcredits. KFW and Bank of Denmark credits included in item C. IDB figuresexclude part of loans disbursed in cruzeiros. IDB loans disbursed inforeign exchange but repayable in local currency are excluded from figureson outstanding and disbursed debt so latter is limited to debts repayablein foreign exchange.

Source:Central Bank (April 1969) and reports of lending agencies.

0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ *I

Table 4.3t ThINDS Ik JXTMANAL DEBT AND DEBT SERVICE IN 19 6 9-1974

(In millions of dollars)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

MULT Debt ST Debt Change in Interest Total 1&LT Total Debt Service

at Start Amort. of DiSb. of Interest on at Start ST Debt (net) on Debt Ser- at Start of on Total

of Year M&LT Debt M1LT Debt M&LT Debt of Year in Year ST Debt vice (2+4) Year (1+5) Debt (7+8)

1969 (projected) 2,737 320 569 130 1,083 117 91 450 3,820 5411970 (projected) 2,986 331 658 145 1,200 113 101 476 4,186 577

1971 (projected) 3,313 347 779 168 1,313 88 111 515 4,626 626

1972 (projected) 3,745 369 864 200 1,401 4 1 117 569 5,146 6861973 (projected) 4,240 380 847 231 1,442 79 123 611 5,682 734

1974 (projected) 4,707 429 929 263 1,521 96 131 692 6,228 823

1975 (projected debt) 5,207 - - - 1,617 - - - 6,824 _

Basic Debt Parameters:Service as a Percent of Debt The Debt Bruden: Debt Service as a Percent of Export Earnings

Medium aad Long Term Debt Short Term E port iedium and Long Term Debt Interest Total Debt

Amort. Interest Total Debt (net) Earnings Amort. Interest Total on ST Debt Service

1969 11.69 4.74 16.43 8.40 2,245 14.25 5.79 20.04 4.05 24.09

1970 11.09 4.85 15.94 8.42 2,310 14.33 6.28 20.61 4.37 24.98

1971 10.47 5.07 15.54 8.45 2,415 14.37 6.96 21.33 4.60 25.93

1972 9.85 5.34 15.19 8.35 2,610 14.14 7.66 21.80 4.48 26.28

1973 8.96 5.44 14.40 8.53 2,810 13.52 8.22 21.74 4.38 26.12

1974 9.11 5.59 14.70 8.61 3,000 14.30 8.77 23.07 4.37 27.44

Soarce; Bank staff estimates.

? I I I

i & f

Table 4.4: DEBT SERVICE AS A PERCEWT OF EXPORT EARNINGSIN 1975-1994 UNDER ALt ATIVE ASSUMPTIONS ON ETRHK&L 0RDIT AND.TRUDE TRD6D

Debt Service on Medium and Long Term Loans Debt Service Including Net Interest on Short- .as a Percentage of Export Earnings Term Credits as a Percent of Export Earnings- ~ I II III IV I II III IV

1975 22.4 27.9 22.7 28.2 26.7 32.2 26.9 32.41976 23.4 29.7 23.9 30.4 27.3 33.6 27.9 34.41977 24.o 31.2 25.1 32.5 27.7 34.8 28.8 36.21978 24.5 32.4 26.2 34.5 27.9 35.7 29.7 38.0

1979 24.8 33.3 27.2 36.4 27.9 36.4 30.5 39.71980 24.8 33.9 28.1 38.2 27.8 36.9 31.2 41.31981 24.7 34.3 29.0 39.9 27.4 37.0 31.9 42.91982 24.4 34.5 29.7 41.6 26.9 37.0 32.5 44.3

1983 23.9 34.4 30.4 43.2 26.3 36.8 33.0 45.71984 23.2 34.1 31.1 44.6 25.4 36.3 33.5 47.01985 22.4 33.5 31.6 46.o 24.4 35.6 33.9 48.21986 21.3 32.7 32.1 47.3 23.2 34.6 34.2 49.3

1987 20.2 31.7 32.5 48.5 21.9 33.5 34.5 50.41988 18.8 30.5 32.8 50.0 20.5 32.1 34.7 51.51989 17.3 29.0 33.1 50.6 18.9 30.6 34.8 52.41990 15.7 27.4 33.2 51.6 17.1 28.8 34.9 53.2

1991 14.0 25.5 33.4 52.4 15.3 26.8 34.9 54.o1992 12.1 23.4 33.4 53.2 13.3 24.6 34.8 54.71993 10.0 21.1 33.4 53.9 11.2 22.3 34.8 55.31994 7.8 18.6 33.3 54.5 8.9 19.7 34.6 55.8

Alternative Assumptions SetsI: "Softer external credit, better trade trends"II: "Harder external credit, better trade trends"III: "Softer external credit, poorer trade trends"IV: "Harder external credit, poorer trade trends"

Source: Calculated from mission's "Long Term Balance ofPayments Projections" (see accompanying tables).

I I I I~~~~~~~

St S

Table 4.5 (Part A): LONG TEM4 BALANCE OF PAYMENIS PROJECTIONS (1975-1994)

Assumption Set I"Softer External Credit, Better Trade Trends"

(In million of dollars )

Details of Payments for Debt Service Trend in M&LT DebtDisbursenent Other Payments Payments Interest

Export of Items for for Debt Medium and Lcng Term Debt on At Start ChangeEarnings M&LT Credit (net) Imports Service Interest Amort. Total ST Debt of Year in Year

Projection for 1974 3000 929 3292 823 263 429 692 131 4707 500

Parameters for later years 7.5% 90 6% 5.9% 8%

Projections: 1975 3225 1034 90 3490 860 307 417 724 136 5207 6171976 3467 1088 90 3699 946 344 466 810 136 5824 6211977 3727 1136 90 3921 1032 380 516 896 136 6446 6191978 4006 1178 90 4156 1118 417 565 982 136 7066 613

1979 4307 1211 90 4405 1203 453 614 1067 136 7679 5971980 4630 1236 90 4670 1286 488 662 1150 136 8276 5741981 4977 1249 90 4950 1366 522 708 1230 136 8850 5411982 5350 1248 90 5247 1441 554 751 1305 136 9391 497

1983 5752 1230 90 5562 1510 583 791 1374 136 9888 4391984 6183 1193 90 5895 1571 609 826 1435 136 10327 3671985 6647 1134 90 6249 1622 631 856 1487 136 10694 2781986 7145 1050 90 6624 1661 647 878 1525 136 10972 172

1987 7681 936 90 7022 1685 658 891 1549 136 11144 451988 8257 787 90 7443 1691 660 895 1555 136 11189 -- 1081989 8877 598 90 7889 1676 654 886 1540 136 11081 -2881990 9542 368 90 8364 1636 637 863 1500 136 10793 -495

1991 10258 85 90 8865 1568 608 824 1432 136 10298 -7391992 11027 -256 90 9396 1465 564 765 1329 136 9559 -10211993 11854 -661 90 9960 1323 504 683 1187 136 8538 -13441994 12744 -1140 90 10558 1135 424 575 999 136 7194 -1715

Debt at end of 1994 5479

Source: Mission extrapolations on the basis of the indicated projection for 1974 and the stated parameters. "Other items" includeloans repayable in local currency.

I I

Table 4.5 (Part B): LOW[ TERM BALANCE OF PAYNNTS PROJECTIONS (1975-1994)

Assumption Set II"Harder External Credit, Better Trade Trends"

(In millions of dollars)

Disburse- Other Payments Payments Details of Payments for Debt Service: Trend in M&LT DebtExport ment of Items for for Debt Medium and Long Term Debt Interest on At Start Change

Earnings M&LT Credit (net) Imports Service Interest Amort. Total ST Debt of Year in Year

Projection for 1974 3,000 929 3,292 823 263 429 692 131 4,707 500

Parameters for later years 7.5% 4o 6% 7.3% 10%

Projections: 1975 3,225 1,262 40 3,490 1,037 380 520 900 136 5,207 7421976 3,467 1,357 4o 3,699 1,165 434 595 1,029 136 5,949 7621977 3,727 1,451 40 3,921 1,297 490 671 1,161 136 6,711 7801978 4,0o6 1,542 4o 4,156 1,432 547 749 1,296 136 7,491 792

1979 4,307 1,627 4o 4,405 1,569 605 828 1,433 136 8,284 7991980 4,630 1,707 40 4,670 1,707 663 908 1,571 136 9,083 7991981 4,977 1,779 40 4,950 1,845 721 988 1,709 136 9,882 7911982 5,350 1,839 40 5,247 1,982 779 1,067 1,846 136 10,673 772

1983 5,752 1,886 4o 5,562 2,115 835 1,144 1,979 136 11,445 7421984 6,183 1,916 40 5,895 2,244 890 1,218 2,108 136 12,187 6981985 6,647 1,927 4o 6,249 2,365 941 1,288 2,229 136 12,885 6391986 7,145 1,915 40 6,624 2,475 987 1,352 2,339 136 13,524 562

1987 7,681 1,874 4o 7,022 2,573 1,028 1,409 2,437 136 14,087 4651988 8,257 1,799 40 7,443 2,653 1,062 1,455 2,517 136 14,552 3441989 8,877 1,685 40 7,889 2,713 1,087 1,490 2,577 136 14,896 1951990 9,542 1,529 40 8,364 2,747 1,102 1,509 2,611 136 15,091 19

1991 10,258 1,317 40 8,865 2,750 1,103 1,511 2,614 136 15,110 -1941992 11,027 1,045 40 9,396 2,716 1,089 1,491 2,580 136 14,916 -4461993 11,854 705 40 9,960 2,639 1,056 1,447 2,503 136 14,470 -7421994 12,744 285 40 10,558 2,511 1,002 1,373 2,375 136 13,728 -1088

Debt at end of 1994: 12,640

Source: Mission extrapolations on the basis of the indicated projection for 1974 and the stated parameters.

4 a l

Table 4.5 (Part C): LONG TERM BAIANCE OF PAYMENTS PROJECTIONS (1975-1994)

Asautption Set III"Softer External Credit, Poorer Trade Trends"

(In millions of dollars)

Disburse- Other Payments Payments Details of Payments for Debt Service: Trend in MSLT DebtExport ment of Items for for Debt Medium and Long TerM Debt Interest on At Start Change

ZEnarigs M&LT Credit (net) Imports Service interest Amort. Total ST Debt of Year in Year

Projection for 1974 3,000 929 3,292 823 263 429 692 131 4,707 500

Parameters for later years 6.5% 90 6.0% 5.9% 8.0% 13.9% 136 -

Projections: 1975 3,195 1,065 90 3,490 860 307 417 724 136 5,207 6481976 3,403 1,156 90 3,699 949 345 468 813 136 5,855 6881977 3,624 1,252 90 3,921 1,045 386 523 909 136 6,543 7291978 3,859 1,354 90 4,156 1,147 429 582 1,011 136 7,272 772

1979 4,110 1,459 90 4,405 1,254 475 644 1,119 136 8,044 8151980 4,377 1,570 90 4,670 1,367 523 709 1,232 136 8,859 8611981 4,662 1,685 90 4,950 1,487 573 778 1,351 136 9,720 9071982 4,965 1,805 90 5,247 1,613 627 850 1,477 136 10,627 955

1983 5,288 1,930 90 5,562 1,745 683 926 1,609 136 11,582 1,0041984 5,631 2,059 90 5,895 1,885 743 1,007 1,750 136 12,586 1,0521985 5,997 2,194 90 6,249 2,032 805 1,091 1,896 136 13,638 1,1031986 6,387 2,332 90 6,624 2,185 870 1,179 2,o49 136 14,741 1,152

1987 6,802 2,475 90 7,022 2,345 938 1,272 2,210 136 15,894 1,2031988 7,245 2,620 90 7,443 2,512 1,008 1,368 2,376 136 17,097 1,2521989 7,716 2,770 90 7,889 2,687 1,083 1,468 2,551 136 18,349 1,3021990 8,217 2,924 90 8,364 2,867 1,159 1,572 2,731 136 19,651 1,352

1991 8,751 3,079 90 8,865 3,055 1,239 1,680 2,919 136 21,003 1,3991992 9,320 3,236 90 9,396 3,250 1,322 1,792 3,114 136 22,402 1,4441993 9,926 3,395 90 9,960 3,451 1,407 1,908 3,315 136 23,846 1,4871994 10,571 3,554 90 10,558 3,657 1,495 2,027 3,522 136 25,333 1,527

Debt at end on 1994: 26,860

Source: Mission extrapolations on the basis of the indicated projection for 1974 and the stated parameters.

a

Table 4.5 (Part D): LONG TERN BALANCE OF PAYHNTS PROJECTIONS (1975-1994)

Asnsmption Set IV"Harder External Credit, Poorer Trade Trends"

(In millions of dollars)

Disburse- Other Payments Payments Details of Payments for Debt Service: Trend in M&LT DebtExport ment of Items for for Debt Medium and Long Term Debt Interest on At Start Change

Earnings M&LT Credit (net) Imports Service Interest Amort. Total ST Debt of Year in Year

Projection for 1974 3,000 929 186 = 3,292 823 263 429 692 131 4,707 500

Parameters for later years 6.5% 4o 6% 7.3% 10% 17.3% 136

Projections: 1975 3,195 1,291 40 3,490 1,036 380 520 900 136 5,207 7711976 3,403 1,426 40 3,699 1,170 436 598 1,034 136 5,978 8281977 3,624 1,570 40 3,921 1,313 497 681 1,178 136 6,806 8891978 3,859 1,724 40 4,156 1,467 562 770 1,332 136 7,695 954

1979 4,110 1,887 40 4,405 1,632 631 865 1,496 136 8,649 1,0211980 4,377 2,062 40 4,670 1,809 706 967 1,673 136 9,671 1,0951981 4,662 2,247 40 4,950 1,999 786 1,076 1,862 136 10,766 1,1711982 4,965 2,443 40 5,247 2,201 871 1,194 2,o65 136 11,937 1,249

1983 5,288 2,651 40 5,562 2,417 963 1,319 2,282 136 13,186 1,3321984 5,631 2,872 40 5,895 2,648 1,060 1,452 2,512 136 14,518 1,4201985 5,997 3,105 40 6,249 2,893 1,163 1,594 2,757 136 15,938 1,5111986 6,387 3,352 40 6,624 3,155 1,274 1,745 3,019 136 17,449 1,606

1987 6,802 3,613 40 7,022 3,433 1,391 1,906 3,297 136 19,056 1,7071988 7,245 3,886 40 7,443 3,728 1,516 2,076 3,592 136 20,763 1,8101989 7,716 4,174 4o 7,889 4,041 1,648 2,257 3,905 136 22,572 1,9161990 8,217 4,480 40 8,364 4,373 1,788 2,449 4,237 136 24,489 2,030

1991 8,751 4,798 40 8,865 4,724 1,936 2,652 4,588 136 26,520 2,1461992 9,320 5,131 4o 9,396 5,095 2,093 2,866 4,959 136 28,666 2,2651993 9,926 5,481 40 9,960 5,487 2,258 3,093 5,351 136 30,931 2,3881994 10,571 5,847 40 10,558 5,900 2,432 3,332 5,764 136 33,319 2,515

1995

Debt at end of 1994: 35,834

Source: Mission extrapolations on the basis of the indicated projection for 1974 and the stated parameters.

I

Table 5.1: CONSOLIlDAlT BUDGET FOR THE PUBLIC SECTOR

(Estimated 1968 and Projected 1969-74; Millions of NCr's at 1968 Prices)

1968 1969 1970 1971 1972 1973 1974

I. Current Receipts 29,220 31,555 33,882 36,149 37,979 40,026. 42,273

A. Total Tax Revenue 29 571 3477 3361 4 862 36 59 38 4961. Direct Taxes 7,738 ot,1 9,205 9,73 - 10,246 10,785 1L,32. Indirect Taxes 19,597 20,960 22,272 23,623 24,616 25,809 27,130

B. Current Transfers 386 260 267 259 259 259 2591. Fran Private Sector =31 2-2 233 2252 225 227 22. From Abroad (donations) 65 34 34 34 34 34 34

C. Savings of Pablic 3iterprises 1,499 1,724 2,138 2,529 2,858 3,173 3,516

II. Current Experditires 20,850 21,395 22,535 23,584 24,680 25,746 27,o47

A. Governmnt Consumption 13,419 14,148 14,978 15,696 16,471 17,212 18,041

B. Transfer Payments 6,250 6,63 6,457 6,875 7,306 7,746 j232

1. To Private Sector 6,137 5,929 6,295 6,681 7,075 7,476 7,9122. To Abroad (interest) 113 134 162 194 233 272 320

C. Subsidies 1,161 1,184 1,100 1,013 90o 766 774

III.Savings on Current Account 8,370 10,160 11,347 12,565 13,299 14,260 15,226

L{. Fixed Investment 9,125 10,093 11,146 12,030 12,843 13,665 14,916

V. Jeficit (-) or Surplus (+) -755 +67 +201 +535 +456 +395 +310

iI. Financing the Deficit 755 -67 -201 -535 -456 -395 -310

A. Transactions with Private Sector -818 -2,100 -1,774 _9768 -2,117 17221. Capital Receipts -77 B99 1,057 1, 22 1,017 1,213 1,832. Capital Payments -1,695 -2,999 -2,831 -3,030 -3,144 -3,330 3,560

B. Transactions with Monetary System 706 654 510 60 145 139 2111. Credit (net of repayments) 773 742 571 393 531 62. Increases in Deposits (.) -67 -88 -61 -333 -386 -495 -474

C. Net Foreign Borrowing 559 928 674 1,112 1,253 1,387 1,2341. Loan Disbursenents 1,062 1,502 1,50 1,754 1,970 2,131 2,1072. Loan Repayments -503 - 574 -630 -642 -717 -744 -873

D. Net Inventory Disinvestment 308 451 189 61 273 196 -33

Source: Bank staff estimates for 1968 and projections for 1969-74; see Annex 6 for details.

a

Table 5.2: CONSOLThThD BUDGT FOR THE PNAL SECTOR

(Estinmted 1968 and ProJected 1969-74; Millions of NCr's at 1966 Prices)

1968 1969 1970 1971 1972 1973 1974

7. Current Rleceipts l7 01 22,226 2334 2479 26,325 27,692

A. Tota L Tax Revenas 17,045 1,705 20,001 21,239 22,057 23,067 214,2071. airect Taxes (7,503) (8,362) (8,941) (9,4568) (9,949) (10,470) (11,034)2. Indirect Taxea (9,542) (10,343) (11,060) (11,781) (12,108) (12,597) (13,173)

B. Current Transfers 386 260 267 259 259 259 2591. From Private Sector (OL8) (226) (233) (225) (225) (225) (225)2. From Abroad (68) (34) (34) (34) (34) (34) (34)

C. Savings of Federal &-terpriess 1,332 1,547 1,95d 2,336 2,663 2,999 3,426

II. Current Expenditures 13.022 12,697 13.629 j14j.24 i4116 15 163 64

A. GCovernsnt Consumption 7,115 7,529 8,028 8,399 8,809 9,167 9,594B. Transfer Paymaents 4,843 4,315 4,648 5,002 5,371 5,744 6,161

1. To Local 1orernmunts (760) (506) (535) (565) (599) (633) (671)2. To Private Sector (3,970) (3,675) (3,951) (4,243) (4,539) (4,839) (5,170)3. To Abroad (i.nterest) (113) (134) (162) (194) (233) (272) (320)

C. Subsidies 1,064 1,053 953 848 736 621 609

IIT. Savings on Current Accont 5,741 7,615 8,597 9,585 10,063 10,793 11,528

17. Federal Sector Investarnt Program 6,739 7641 6230 8,672 9 391 10 044A. Fixed Investment 37I 4;372 5,610 *8 B. BNH/BNDE Credit Programs 1,604 1,667 2,031 2i,251 2,373 2,576 2,801

V. Fixed Investmnrt Outside Program 708 750 796 843 694 947 1,004

VI. Transfers to Local Government 20' 1,o37 2 Oil 2.161 2358 2.54 2 d61A. Treasury Budget Capital Trnsfers L.4 1,237 011 2 1 1,729B. &Lectrobras Transfers 529 d38 420 422 448 487 556C. BNH/BND9 Credit Programs (not) 66 217 247 278 321 368 423

Vil. )eficit (-) or Suirplus -2,556 -1,71:1 -l,d5l -1,649 -1,d61 -2,129 -2,36l

VIII. Financing the jeficit 2,556 1,711 1,651 1,649 1,861 2,129 2,301

A. Transactions with Private Sector 586 -233 257 483 246 459 1,0791. Capital Receipts 677 899 1,057 1,262 1,017 1,213 1,8302. Capital Payments (-) -91 -1,132 -800 -779 -771 -754 -759

B. Transactions with Monetary a 1tem 117 57 1 2571. Credit (net of repayment3) 1664 3 577 6SRI 7312. Increase8 in Deposits (-) -67 -88 -61 -333 -386 -495 -474

C. Net Foreign Borrowing 545 914 827 1,000 1,151 1,289 1,0761. Loan Disbursemnts 1,028 1,468 1,436 1,618 1,834 1,995 1,9032. Loan Repayments (-) -483 -554 -609 -618 -683 -706 -825

D. Net Inventory Diasinvestsnt 308 451 189 61 273 196 -33

Siources Bank staff estimates for 1968 and projeotions for 1969-74; see Annex 6 for details.

I l f

Table 5.3: TH sTRUCTrE OF THE ONSULIMM BUDaET FOR TEFX lIAT SECOR TN 1969 - 1974

(Projected awnmge receipts and payments in millions of ICr's at 1968 prices)

Treasury Extra- OfficialCash Budgetary Federal Credit Bond

Budget Accounts Enterprises Agencies Account Total

I. Current Receipts 12,798 8,104 2,104 1,290 - 24,296

A. Total Tax Revenue 12,798 7,815 - 933 - 21,5461. Direct Taxes 2,995 - 933 - 9,7022. Indirect Taxes 9,803 2,041 - - - 11,844

B. Carrent Transfers - 261 - - - 2611. From Private Sector - 227 - - - 2272. From Abroad - 34 - - - 34

C. Savings of Federal Enterprises - 28 2,104 357 - 2,489

II. Current Expenditures 7,027 7,393 - 14 164 14,598

A. Consumption 5,831 2,743 - 14 - 8,588

B. Current Transfers 585 4,457 - 164 5,2o61. To Local Governments - - - - 5 ,2. To Private Sector - 4,238 - _ 164 4,402' To Abroad (interest) - 219 - - - 219

C. Subsidies 611 193 - - - 804

III. Savings on Current AccountA. Before Intra-sectoral Transfers 5,771 711 2,104 1,276 -164 9,698B. Intra-Sectoral Current Transfers -1,004 840 - - 164 0C. After Intra-sectoral Transfers 4,767 1,551 2,104 1,276 0 9,698

17. Federal Sector Investment Program 801 2,202 3 134 2,316 - 8 453A. Fixed Investment 2,202 - -B. BNH/BNDE Credit Programs - - - 2,316 - 2,316

V. Fixed Investment Outside Program 872 - - - 872

VI. Capital Transfers to Local Gov'ts. 1,541 - 452 309 - 2,302

VIJ. Deficit on Capital AccountA. Before Intra-sectoral Transfers 1,553 - 651 -1,482 -1,349 0 -1,929E. Intra-sectoral Transfers -1,625 533 832 289 -29 0C. After Intra-sectoral Transfers - 72 - 118 - 65o -1,060 -29 -1,929

YIII. Financing the Deficit 72 118 650 1,060 29 1,929

A. Transactir,ns with Private Sector -37 -599 400 952 -335 3811. Capital Receipts - 121 4-9 l33 1,T2-12. Capital Payments (-) -37 -720 -76 - - - 833

B. Transactions with Monetary System 109 87 -245 - 364 3151. Credit (net of repayments) 109 - 7 3 - 34,632. Increase in Deposits (-) - - -248 - - -248

C. Net Foreign Borrowing - 335 601 108 -_10441. Loan Disbursements - - V2 150 - 1,7092. Loan Repayments - -399 -224 -42 - - 665

D. Net Inventory Disinvestment (+) 295 -106 189

Source: Bank staff projections; see Annex 6 for details.

I I

Table 9.1s AVERAGI ANNUAL PRICK LEVELS AND CHANGOS

1964 1965 1966 1967 1968

Index Values (annual averages): 1953m100

1. General Price Index 2,811 hb'6 6,115 7,862 9,767

2. Cost of Living IndicesIn Guanabara (Rio de Janeiro) 2,889 4,787 6,76h 8,82h 10,766In Sao Paulo 3,005 4,860 7,126 9,233 ll,lt67

3. Wholesale Price IndicesAll Products 2,813 Lt,25h 5,820 7,29( 9g,olAll Products except Coffee 3,010 4,622 6,50h 8,232 10,135

By Sector:Industrial Products 3,137 -,063- 6,701 8,432 10,903Agricultural Products (total) 2,583 3.677 .,l94 6,4(V9 7,608Agricultural except Coffee 2,882 4,l;2 6,307 Pl,027 9,224Coffee 1,842 ?,h31 2,1l3N 2,733 3 pt~

By Degree of ElaborationRaw Materials 2,631 3,902 5,43ht 6,691 Q,10?Mfgs. and Semi-Mfgs. 3,100 4,80$A A4A23 8,?2 10,It74

4. Cost of Cnorstruction (in GB) 2,(1 4h3h9 5,9ho 8,372 11,065

Rates of Incr3ase (%) from Annual Average to Annual Average

1. General Price Index 90.8 57.1 39.-^ 28.6 2h1.2

2. Cost of Livring indicesIn Guanabara (Rio de Janeiro) 91.7 Li5. 7 [Li.- 30.5 ?2.0In Sao Paulo 87.0 61.7 46.6 29.6 2,.9

3. Wholesale Price IndicesAll Produc t: 91.6 51.2 36.8 2X.11 2h.1All Produc.ts except Coffee 4l03 O.7 26.6 23.1

By Se, T.orIndustrial. Products 83.3 (1.5 32.3 25.8 30.3Agricultural Products (total) 99.5 42.h h1.3 2h.q 17.4Agricultural except Coffee 79.2 45.0 50.9 27.3 V1.9Coffee 2q[.9 39.0 0.3 12.3 O .o

By Degree of ElaborationRaw Materials 9h.0 48.3 39.3 23.1 21.1Mfgs. and Semi-Mfgs. 88.6 55.0 33.1 28.0 27.11

L. Cost of Constraction (in GB) 82.3 p9.R 3(%.A h0.9 32.2

Notes: Basic data from Getulio Vargas Foundation. The General Price Tndex is aweighted average of total wholesale prices (60%), the cost of living inGuanabara (30%), and costs of construction (101). Data for 1948 are finalfigrures. The 1968 general price index used as the implicit deflatorthroughout this report differs slightly from that shown above (a 24.01rather than a 2h.2% increase over 1967) since the implicit deflator wascalculated from orelimirnary price data.

U 1,

v I I

Table 9.2: ANNUAL RATES OF PRICE INCREASE AT IND OF EACH1 QUARTEE

General Cost of lving (in Guamabara) Index of Whol-sale Prices Iniex ofPrice Non-Food Including Coffee Industrial Excluding Coffee ConstructionIndex Total Foods Items Total Agcultural Products Total Agricultural costs @3)

1964 March 88.8 93.2 103.3 82.7 89.2 109.1 69.2 77.8 87.4i 73.2June 90.2 97.1 101.1 93.0 88.3 99.7 77.0 78.2 79.4 80.7September 90.6 90.8 96.2 85.4 90.9 92.1 89.4 79.8 70.4 88.3December 92.1 86.6 75.9 98.3 93.3 86.5 101.3 84.1 67.7 Olo4o

1965 March 72.5 79.2 57.1 104.5 67.0 52.0 85.9 69.6 53.0 85.4June 62.4 69.5 50.1 90.2 56.3 45.3 68.6 59.0 48.2 78.1September 51.5 62.8 42.5 84.1 45-. 37.8 53.3 47.8 41.8 66.2Decerber 34.2 45.4 31.7 58.6 28.3 25.3 31.6 31.4 31.2 43.4

1966 March 33.2 38.6 34.2 43.2 30.1 29.9 30.4 33.4 37.2 32.9Jura 38.0 39.5 36.9 40.0 37.6 45.2 30.3 40.7 53.5 35.0September 40.7 41.1 37.8 43.9 39.4 45.8 32.8 44.0 57.1 38.1Dooeber 39.1 41.1 40.2 41.9 37.4 42.3 32.2 41.6 52.4 35.6

1967 March 33.9 35.2 30.2 39.4 31.9 37.9 25.9 35.4 46.6 41.3June 28.5 31.9 21.8 40.3 24.0 21.3 27.0 25.7 24.4 44.0September 25.1 26.6 17.8 33.5 21.7 17.8 25.5 21.4 17.3 40.0December 25.0 24.5 14.1 32.8 22.7 21.4 23.4 22.0 20.5 40.8

1968 March 23.2 21.0 10.2 29.4 23.7 17.9 29.1 22.6 15.6 28.2June 25.4 22.6 13.2 29.3 25.6 19.8 30.3 24.5 17.1 33.5September 24.5 22.0 13.6 27.7 24.6 16.2 33.3 24.2 13.9 31.7December 25.5 24.0 17.7 28.3 25.0 16.4 34.2 24.2 13.2 32.3

1969 March 20.6 23.9 21.3 25.6 17.7 12.4 22.9 16.7 9.3 25.3June 18.4 20.0 20.7 19.7 18.0 16.0 19.9 17.8 15.0 15.7September 19.7 22.5 25.9 20.4 n.a. 24.7 17.2 n.a. n.a. 14.9

Source: Calculated from price irdices published by the Vargas Foundation. The wholesale price index was revised inSeptember 1969; data for September are incomplete since all components are not available on a comparablebasis.

I II

Table 10.1: ECONOMIC INDIChTORS(1964 monthly average - 100)

Power Consumption by Industry Industrial Industrial Production Electrical Financial Indicatbts (GB & SP).Rio Sao Paulo Light & Employment Steel Portland Refinery Motor Appliance Bankruptcy Bills Capital

QUARTERLY Light Light CMIG (in SP) (ingots) Cement Runs Vehicles Sales Petitions Protested IssuesAVWLGES:1966 I 95 109 n.a. 96 111 100 104 116 n.a, 161 163 197

II 109 114 n.a. 99 lid 108 103 123 n.a. 225 199 133III 113 124 n.a. 100 132 117 118 125 n.a. 255 251 123IV 112 122 n.a. 96 129 114 115 100 n.a. 283 253 321

1967 I 44 114 111 92 105 103 106 98 n.a. 299 285 103II 100 117 115 90 120 112 110 122 n.a. 324 284 186III 114 125 125 92 129 122 117 139 n.a. 268 218 409IV 118 130 129 94 135 124 122 125 n.o* 234 211 137

1968 I 1i14 126 127 97 135 124 120 125 11S 253 245 237II 120 136 136 101 142 129 126 155 107 296 253 327III 123 146 146 106 153 134 139 164 128 260 231 455IV 121 150 148 109 158 137 142 167 198 319 289 440

1969 I 119 147 146 110 158 129 148 173 150 321 307 319II 128 153 153 111 161 132 139 205 124 381 380 343

ANNUALAVER&GS:1964 100 100 100 100 100 100 100 100 100 100 100 1001965 98 100 101 90 99 100 98 97 77 151 138 2151966 107 117 117 98 125 109 110 116 96 230 213 2161967 106 121 120 92 124 115 114 121 108 282 241 2091968 119 139 139 103 147 131 132 155 138 282 254 365

Source: Ceatral Bank

a

I

Table 10.2z THE FEDERAL SECTOR INVESTMENT PRLGRuM, -- HISTORICAL DATA, AGENCY PROJECTIONS, AND MISSION PROJECTIONS

(Millions of NCr's at 1968 prices)

Historical Data Agenpy Estimates Mission Projections

1966 1967 1968 1969 1970 1969 1970 1971 1972 1973 1974

I. Fixed Investments 3,611 4,334 3,971 6,435 6,905 4,872 5,610 5,979 6,299 6,815 7,243

A. Directly Productive Activities 1,139 1,131 1 047_ 1,908 2 193 1,252 1,653 1 725 1 970 2,209 2 330

1. Agriculture 292 332 244 372 400 270 333 3 3792. Mining 4 58 43 64 124 64 124 77 125 194 241

3. Steel 144 134 163 575 578 125 302 465 550 549 403

4. Petroleum 663 607 597 897 1,091 787 894 858 947 1,087 1,286

B. Economic Infrastructure 1881 2,630 2188 3547 3,573 2831 3097 3,260 3,244 3 461 3 724

1. Electric Power 75 3 9 582 z31F 6 03* 543 6 -1W 4 7 75i

2. Conmrnications 176 277 393 746 503 446 539 523 597 660 7503. Transportation 1,199 1,594 1,213 2,258 2,467 1,842 1,955 2,096 1,958 2,067 2,223

C. Social Infrastructure 591 573 736 980 1,139 789 860 994 1.085 1,145 1.189

1. Educati on 225 275 253 332 424 287 349 421 489 545 571

2. Health 150 140 131 117 122 106 116 122 129 137 145

3. Housing - - 121 127 146 70 70 70 70 70 70

4. Social Welfare 66 42 87 256 269 200 169 175 184 193 203

5. ifater Supply 150 116 144 148 178 126 156 206 213 200 200

II. Credit Programs 206 747 1,604 1867 2,031 1 867 2 031 2,251 2373 2,576 2 801A. BNDE Loans to Private Sector 110 299 3f1* 4t73* 3t43 623 721 !3T

B. BNH Loans to Private Sector 96 490 1,305 1,486 1,558 1,486 1,558 1,651 1,750 1,855 1,966

III. Total Investment Program 3,17 5,081 5,7 8,302 8,936 6,739 7,641 8,3 3Zv 9,391 10,044

Source: Annex 4, Table 4-1 and supporting tables. Asterisk (*) indicates mission projections used since agency estimate not available. (MEetrobras program

included state and private as well as federal compardes while BNDE prcgram covered total lors rather than private sector only.)