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Brazil: Lula and IMF Agree to Renew $14bn Loan Program

by Raymond ColittFinancial Times
November 6th, 2003

The left-leaning government of Luiz Incio Lula da Silva, Brazil's president, agreed in principle with the International Monetary Fund on Wednesday to renew its expiring loan programme by one year.

The $14bn accord announced by both sides in Braslia on Wednesday is made up of $6bn in fresh funds as well as an $8bn tranche that remained under the agreement expiring in December. In addition, about $5.5bn in Brazil's payments on principal to the IMF would be delayed in 2005 and 2006.

Brazil would also maintain its target for next year of a primary budget surplus (excluding debt payments) of 4.25 per cent of gross domestic product.

Antonio Palocci, the finance minister, said on Wednesday: "The accord is preventative. We do not plan on drawing on the funds but merely want to have an insurance policy."

He added that the government's objective was to "leave" the IMF after this accord. "We are clearly saying we want to prepare our exit from the agreement with the fund but we don't want to do it abruptly."

Since taking office in January Mr Lula da Silva has regained investor confidence with economic austerity and exceeded IMF targets, sending financial markets to record highs.

Yet for the governing Workers' party, which had spent nearly two decades in opposition criticising the IMF, it was a historic occasion.

Anticipating criticism from his party's leftwing hardliners, Mr Palocci insisted the programme was entirely proposed by the government. "The targets are those already established by the Brazilian government."

He was backed by Anne Krueger, the IMF's first deputy managing director, who said "programmes that are not supported by the countries do not work. In my judgment, the [Brazilian] authorities are putting together a sound programme."

Faced with a serious financial crisis during the election campaign, Mr Lula da Silva endorsed a $30bn IMF loan negotiated by his predecessor.

The IMF has been praising the economic policies of Mr Lula da Silva and even said that Brazil's economy was doing so well it did not require a new accord. "Brazil is in a very positive circle," Ms Krueger said.

The government has pledged to move ahead with structural reforms, such as improving access to credit and lowering bank interest rate spreads - among the highest in the world.





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