The Brazilian economy is on the reforms path, ready to address the high-debt, tax burdens and social spending. The reforms are aimed at improving the business climate so as to attract investments.
After many years of stagnant growth, the Brazilian economy recorded a 5.5% GDP growth in 2004its highest growth this decade. The debt burden was slightly reduced because of the prudential fiscal policy; however, the debt levels remain the highest among the developed nations. Fiscal adjustment was achieved in recent years by hiking revenues and decreasing investments in the country. The current administration under Lula da Silva is making some progress in reducing public debts and improving the investment climate in the country, which is necessary for sustained growth in the economy. Investments in infrastructure are crucial to attract FDI. IMF forecasts that with a 3.7% growth due to inflation rates and excessive monetary constraints in the current fiscal, Brazil may end up with a lower growth rate than in the previous year.
FDI in Brazil has been declining since the past four years; this year investment activities are slowly picking up. In 2000, it had managed to attract $30 bn worth FDI into the country. But the global economy slowdown and 9/11 impacted Brazil's economy resulting in the decline of FDI flows in to country. Also, impressive growth of other emerging economies forced FDI away to those nations. China has emerged as a very strong contender for a share of the same FDI pie. With declining FDI, the government is unable to meet the investments needs of the country to fund infrastructure projects. Dean Baker, Co-Director, Center for Economic and Policy Research, Washington DC says, "Brazil's per capita GDP growth has averaged just over 1.0% annually over the last decade. This would be a bad performance for a rich country; it is extremely weak for a developing country." Lack of savings in Brazil is the main obstacle to internal investments; money is yet to be paid back to foreign banks and institutions as interest payments and loan repayments. High debt burdens have led to high debt servicing costs for Brazil. Even though conditions are improving in public savings, high levels of debt are raising debt service ratios. This ever-increasing debt levels are forcing the central, federal and municipal governments to continue to maintain a record level of interest rate payments, creating wider budget deficits by increasing the level to service the debt. Another factor leading to high debt levels is the high interest rate policy. Interest payments on public debt have reached 10% of the GDP. At present, Brazil's debt stands at $350 bn; the highest among the developing countries, in terms of debt to GDP. According to Baker, "Brazil's biggest problem is the high interest rate that it is maintaining as the core component of its anti-inflation policy. It is running real interest rates of more than 10%. It will be very difficult to sustain strong investment and growth as long as it keeps interest rates at such levels." Debt levels are escalating causing the fiscal deficit to widen and forcing the government to hike taxes to improve revenues and reduce government expenditure. Brazil's tax burden is the highest among the developed nations; it constitutes 36% of the total GDP. For sustaining economic growth, Brazil needs to invest 22% of the GDP and improve the employment situation. Last year, the investments were at 18.5% of the GDP, which is very low when compared to other countries with similar economic conditions. The high tax burden is making it difficult for Brazil to boost its domestic investment.
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