Cablegate: Imf Questions Need for New Imf Program in 2004

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: DECL: 06/10/2013

Classified By: Acting EconCouns David Edwards. Reasons:
1.5 B and D

1. (C) Summary. Rogerio Zandamela, IMF Resident
Representative in Brazil, told econoff that Anne Krueger, the
IMF's Deputy Managing Director, is not interested in renewing
the IMF stand-by arrangement when it expires at the end of
the year. Instead, she prefers to declare victory with the
current successful program and wait in reserve in case needed
again. Zandamela added that he has his doubts about how a
follow-on program would be structured. He said the next key
steps for restoring confidence are structural reform, and he
believes that an IMF program with significant structural
reform commitments would generate political opposition and be
counter-productive. End summary.

2. (SBU) In a June 3 meeting with IMF Resident
Representative Rogerio Zandamela, econoff asked whether
Brazil's IMF program would be renewed when it expires at the
end of the year. (Note: When an IMF mission visited Brazil
in early May for the third review, a local paper carried a
story that the GOB had already decided not to renew the
program, which was quickly denied by the Ministry of Finance.
Later, when Anne Krueger, the IMF's First Deputy Managing
Director, visited Brazil on May 19-20, she told the media
that the question of renewing the agreement had not been
discussed with the GOB.)

3. (C) Zandamela said the there had been internal IMF
discussions about a follow-on program during the May 19-20
visit. Anoop Singh, Director of the IMF's Western Hemisphere
Department, had accompanied Krueger and had been interested
in exploring another IMF program. However, according to
Zandamela, Krueger's initial reaction was negative. Krueger
evidently said that the IMF should declare its current
program a success and when it is over, step to the side and
be available to help when and if necessary.

4. (C) Econoff asked if the GOB had the resources to repay
its current IMF obligations without a new IMF agreement, and
how the market would react if there were no IMF program.
Zandamela said that gross reserves are high enough that
Brazil could repay its obligations and still have a cushion,
particularly if the GOB continues to issue bonds in the
international market. (Note: Gross reserves were $43.3
billion as of June 6, while net reserves (minus IMF funding)
are approximately $17.0 billion.)

5. (C) Regarding the private sector reaction, Zandamela said
that he is not concerned. He continued that the key next
step for the government is implementing its reform program
(notably tax and pension reform, but also Central Bank
autonomy and bankruptcy law reform). Featuring structural
reform in an IMF program would be difficult and maybe
counter-productive, he said. The administration cannot
guarantee that congress will act on its reform proposals, and
an IMF program conditioned on congressional action would
probably generate political resistance in congress.
(Typically, in Brazil's IMF programs, the administration
commits to present legislation to congress but is silent on
the question of approval.) Therefore Zandamela has his
doubts as to what a notional next IMF program should look

6. (C) Econoff asked whether the IMF would consider a
monitoring program in the absence of a formal stand-by
arrangement. Zandamela said that he doubts the GOB would
submit itself to a special review regime without the
financial support of a regular program, given that the IMF
missions are very time-consuming for the GOB. He added,
though, that even without an IMF program, the Fund would
undertake twice-yearly reviews, compared to four times a year
under a stand-by program.

7. (C) Zandamela cautioned that it is too soon to talk about
a "virtuous circle." However, he added that by the end of
the year the government's economic policies, combined with
falling inflation, may open the way for a cycle of growing
confidence, falling inflation, lower interest rates,
accelerating economic growth, and reasonable capital inflows.

8. (C) Comment. It's a bit early to make any judgment on
whether Brazil should renew its IMF program at the end of the
year, but Krueger's and Zandamela's comments provide a useful
perspective on why a program may not be necessary. In
general, Zandamela is on target in his assessment that
Brazil's economic success depends far more on GOB action
rather than an IMF program. However, we are less sanguine
than Zandamela about market confidence in the absence of an
IMF program, since a program would provide a buffer against
balance of payment pressure as well as valuable benchmarks to
measure the government's macroeconomic effort.


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