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Brazil’s Plan to Guarantee 4% Growth in 2009

Weighing moneyBrazil announced a series of measures to stimulate the economy and try to strengthen the country against more severe effects of the international crisis. Among the measures is a package for reduction of taxes. Such a package will result in a tax cut of 8.4 billion Brazilian reais (US$ 3.6 billion) in 2009, with the objective of leaving more money in the pocket of consumers.

After a meeting between Brazilian president Luiz Inácio Lula da Silva and businessmen in Brazilian capital Brasília, ministers Guido Mantega (Finance) and Miguel Jorge (Development, Industry and Foreign Trade) and the president of the Central Bank of Brazil, Henrique Meirelles, presented the measures that include the allocation of part of the foreign currency reserves to finance companies.

Part of the actions are turned to providing incentives to consumption through the creation of new Income Tax charts and reduction of the tax on financial operations (IOF) in financing for natural people. The government believes that, this way, consumers will have money to spend.

In the case of Income Tax, two new tax rates were established, 7.5% and 22,5%, which are added to the existing ones, of 15% and 27.5%. Starting on January 1st, those earning up to 1,434 reais (US$ 613) will be tax free; from that value to 2,150 reais (US$ 919), the rate will be 7.5%, from there to 2,866 reais (US$ 1,225), it will be 15%; from there to 3,582 reais (US$ 1,531), 22.5%, and from then on, the rate will be 27.5%. With regard to the IOF on credit operations for natural people, it will drop from 3% to 1.5%.

Still in the tax area, the government decided to reduce the Tax on Industrialized Products (IPI) for the auto industry, which has been complaining about the drop in sales due to the lower volume of credit available.

In this case, cars with engines up to 1,000 cc will not pay the tax (currently they pay 7%); from there to 2,000 cc, the percentage should be reduced from 13% to 6.5% in gasoline-fueled vehicles and from 11% to 5.5% in alcohol or flexible fuel vehicles. More powerful cars will continue with the same tax rates.

The incentives will be valid from now to March 31st 2009; Minister Miguel Jorge said that the carmakers agreed to transfer the tax breaks to the prices paid by consumers. The objective is to make cars cheaper and avoid dismissals in the industry.

All tax measures should total tax breaks of 8.4 billion reais next year. Minister Guido Mantega said, however, that the objective of the package is to stimulate the economic activity, to maintain the country growing and, consequently, to guarantee the reduction forecasted in the Budget. “We will have the return of these funds in growth,” he said.

Mantega pointed out that the budget proposal, already sent to the National Congress, will be maintained. Next year, what may initially take place, is that expenses should be cut and public investment should rise. He added that the government is keeping the target for growth of the Brazilian GDP in 2009 at 4%.

The minister added that it is not yet possible to forecast whether the measures announced should be enough to guarantee this objective, but he pointed out that the government is going to disclose new actions for stimulation of the economy in current weeks.

According to the governor of the Central Bank, the organization is going to hold dollar auctions from the country’s foreign currency reserves. This money may be bought by banks and transferred to Brazilian companies that have debts abroad. The companies should use the values to extend their debts mature between September 2008 and December 2009.

The total funds to be spent in these operations should reach US$ 10 billion, out of the over US$ 200 billion in reserves that Brazil currently has. To Meirelles, the measure should have two positive results: first the companies involved abroad are going to stop borrowing in reais in the country to pay their debts abroad, leaving more money available for the financing of the domestic market, contributing to reduce the exchange pressure.

Earlier, Chief of Staff Dilma Roussef had already announced president Lula’s decision of asking the two great federal banks that operate in the retail sector, the Federal Savings Bank and the Bank of Brazil, to review their interest rates on financing plans. In case there are no technical justifications to maintain the rates at the current levels, Lula hopes that the institutions may charge lower interest.

The package was announced one day after the Foreign Policy Committee (Copom) decided to maintain the benchmark interest rate in the country, the Selic, at 13.75% this year, which generated criticism from business sectors concerned with the reduction of consumption. The Central Bank uses the Selic in the control of inflation. The higher the rate, the harder the greater consumption and the lower the inflationary pressure.

There was certain hope in the private sector that the Copom would reduce interest rates to stimulate consumption, but the scenario of international uncertainty caused the organization to remain cautious. One of the concerns is the strong depreciation of the real against the dollar since the end of August. With the more expensive dollar, prices of inputs used by industry rise, causing inflation.

On Tuesday, the Brazilian Institute for Geography and Statistics (IBGE) revealed that the GDP of Brazil grew 6.8% in the third quarter of 2008, over the expected rate, showing that the country’s economy was moving faster than expected.

Anba

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