Brazil is advancing two initiatives with the IMF to create mechanisms and instruments that would be valuable for the international financial community, says Finance Minister Antonio Palocci. The Latin nation is seeking a new approach to accounting on public investments and the establishment of preventive credit lines. These measures are consistent with international risks, analysts say.
The first proposal would facilitate public investment in infrastructure by shifting IMF accounting so that income-yielding investments are not counted when tallying up current spending and the primary surplus. Brazil first put forward the idea some time ago but is renewing its claims. "We are interested in having an institutional dialogue with the Fund. This could be an instrument in the future for other countries," says Palocci, who adds that Brazil will probably not seek a new agreement with the Fund next year. The present agreement ends in March, though it has acted more as a preventive measure since Brazil has not drawn down on it for about a year.
Brazil is also proposing to the Fund the creation of a preventive credit line, a new instrument that would be available for countries that suffer shocks. "We propose that by 2005 the Fund have that instrument," the minister says.
During the IMF meetings, Palocci has discussed this idea with IMF Managing Director Rodrigo Rato and with US Treasury Secretary John Snow. "There is good acceptance, although not unanimous," says Palocci.
The preventive credit line idea responds to the current international economic environment. "What he says makes total sense, which is that we need some contingency line when shock comes from outside, and that risk goes up as long as there are imbalances in large economies," says Mohamed El-Erian, managing director at Pimco, the biggest portfolio investor in emerging markets.
Last December, the Fund's former preventive facility, the Contingency Credit Line went out of existence because it was not renewed. The CCL had not been used as countries shied away from sending a signal that they were in trouble. A successor to the CCL is being debated, but no prompt action is expected, Fund sources say.
A preventive credit line would have to be modernized and "must be a little simpler” than the CCL, Palocci says. Contingency lines must be fast-disbursing mechanisms, adds El-Erian.
Palocci denies Brazil is playing a leadership role in Fund affairs, but recognizes that "when Brazil makes proposals here, there is an audience". The country's economic growth of 5% this year and out-performance on its fiscal targets have brought market confidence in Brazil's administration.
Market observers see the initiatives as part of a new, expanded Brazilian activism in the international economy. "We're seeing Brazil play a more important leadership role across the board on economic issues," says El-Erian.