SUNS  4326 Wednesday 18 November 1998

Rio de Janeiro, Nov 16 (IPS/Mario Osava) -- A new accord with the International Monetary Fund (IMF) set several conditions and targets for the Brazilian economy, but in line with the country's
penchant for a gradualist approach.

The IMF announced a $41.5 billion credit package for Brazil last Friday. For its part, Brazil promised to apply a number of austerity measures designed to slash its budget deficit.

The official announcement of the terms of the accord revealed targets that are even stricter than those announced two weeks ago, when the government of President Henrique Fernando Cardoso adopted a fiscal adjustment programme. The government pledged to slash its nominal fiscal deficit to 4.7% of Gross Domestic Product (GDP) next year, after previously mentioning only a 2.6% primary surplus.

According to the new targets, public sector expenditure including interest payments must remain below 7.3% of GDP, or around $58 billion. In order to meet that goal, interest rates must stand
around 21.9% on average, the level projected by the government's Fiscal Stability Programme.

But given the fact that the interest rate set by the Central Bank currently stands at 39 percent, a major reduction will be necessary - which could be hindered by a worsening of the international
financial turmoil. In that case, an even tougher fiscal effort would be demanded, which would generate resistance.

The commitment to the IMF gives a boost to demands by provincial governors, business and unions for an immediate slashing of interest rates.

The Sao Paulo Federation of Industries advocates a 23% reduction within two months at the most. The Federation's vice-president, Paulo Skaf, said "there is no reason to keep the interest rate at
the present absurd level."

But the Central Bank, presided over by Gustavo Franco, a conservative, continues to follow the gradualist approach that has been traditional throughout Brazilian history. The Bank's base rate
has been falling 0.5 points a day since Wednesday, and everything indicates that the rate will continue to be slow, in spite of protests.

Without an immediate cut to a 30% rate, and to at least 20% by March, unemployment in Brazil will continue to soar, warned Luiz Marinho, president of the ABC Metal-Workers Union which represents trade unionists from a group of municipalities on the outskirts of Sao Paulo, Brazil's industrial capital.

Governors of Brazil's most influential states, like Sao Paulo's Mario Covas and Rio de Janeiro's Anthony Garotinho, are also demanding a swift cut in interest rates.

A gradualist exchange rate policy was also confirmed by the agreement with the IMF. In 1995, in response to the Mexican crisis, the Central Bank adopted a system of narrow bands that leads to a
slow, gradual devaluation of the national currency, the real, by 7.5 percent a year.

After the agreement with the IMF was signed, Finance Ministry Pedro Malan reiterated that the exchange rate policy would not be modified.

The Central Bank is slowly broadening the band, which is set monthly. The band currently allows the real to fluctuate slightly more than one percent.

Economists, especially monetarists, believe exchange rates demand radical policies, with the local currency pegged to the dollar like in Argentina and Hong Kong, or allowed to float in wider bands. In
their view, the middle option followed by Brazil is the worst.

Many analysts, like Harvard University's Jeffrey Sachs, predict that Brazil will have to carry out a sharp devaluation of more than 15 percent, probably in the first few months of next year.

Although Brazil resorted to brusque devaluations during the 1980s foreign debt crisis, a glance at Brazilian history reveals a marked tendency toward gradual, negotiated solutions.

The transition from the military dictatorship installed in 1964 was slow and gradual. Democracy was finally restored 11 years after de facto president General Ernesto Geisel first announced the start of
the transition process in 1974.

Slavery was also abolished last century in stages. In 1850, trafficking in slaves from Africa was banned. In 1871, the children of slaves were born into freedom, and in 1888 all slaves were freed.

The fiscal adjustment measures finally adopted in response to the fallout from the global markets crisis - which has hit Brazil hard - have been discussed since Cardoso first took office four years
ago. Delays and limited measures allowed the public debt to double in size in the past four years, making less gradual solutions necessary today, even if they clash with Brazil's idiosyncrasy - a
penchant for gradual solutions.