Brazil after the Real Plan

Abstract

Four years after its inception, an overall assessment of the Real Plan reveals ambiguous and paradoxical results. Great success in terms of disinflation was achieved without the deep changes in the fiscal-monetary regime that many considered indispensable for the stabilization of the Brazilian currency. However, a persistent overvaluation of the exchange rate and an acceleration of import liberalization produced large external deficits and rapid growth in the country's international liabilities. Moreover, lax fiscal policy and high domestic interest rates led to an increase in government deficits and short term internal public debt. As a result, the Brazilian economy became financially vulnerable and highly dependent on the availability of foreign resources. The consolidation of monetary stability and a return to sustained economic growth rates require a solution for the public sector’s financial problems and, particularly, the removal of the structural disequilibrium in the external accounts.