Former president of the Central Bank, Gustavo Loyola was in office before and after the implementation of the Real Plan
The former president of the Central Bank, Gustavo Loyola, said that the fiscal problem in Brazil is the “Achilles heel” of monetary stability. In an interview with Power360commented that the high primary deficit and the lack of adjustments in public accounts threaten an economic crisis.
Ruled out the possibility of a return to hyperinflation in short time, but stated that it was necessary to “do your homework”. He explained that Brazil lost one of the main bases of the Real Plan: the balance of public accounts.
Since the Dilma (PT) government, “the story was never the same again from a fiscal point of view, even though there was a recovery with the approval of the spending cap”.
Although he was not part of the implementation of the Real Plan, Loyola was president of the Central Bank during two historic moments of monetary change. He held the position during the effectiveness of the Collor II Plan (1992 to 1993) and returned to the role in the first year of the new economic project (1995 to 1997).
Here are excerpts from the interview:
Poder360: You were in the position of commanding the Central Bank at two moments in Brazil: before and after the Real Plan. What was Brazil’s problem at the time, in your view, and why was only the real plan able to reduce hyperinflation?
Gustavo Loyola: I think that Brazil from a macroeconomic point of view had 3 serious problems:
- inflation, which had been accelerating steadily with brief intervals between previous plans that failed;
- external debt, the external debt crisis, which had been dragging on since the 1980s and had no definitive solution. Along with this, there was also a very significant amount of internal debt indexed in foreign currency: and
- imbalance in public accounts, which continues to this day.
Previous plans failed because they did not address some sources of imbalance, such as foreign and fiscal issues. Brazil had a very closed economy, at least until the Collor government and, therefore, when you enacted a plan, especially when there was a freeze [de preços]generated additional demand and there was a reduction in supply. Prices were frozen and there was no way to sustain this freeze. Finally, the interference that the plans had in the contracts, the so-called tablitas [tabela criada durante a vigência do Plano Bresser para correção inflacionária dos contratos de aplicação financeira com valor de resgate pré-fixado]conversions and stuff.
Why did the plan work?
- if you knew what didn’t work;
- the plan it was announced in advance and there was the transition phase of the URV (Real Unit of Value);
- dexempted any type of interference in private contracts;
- vand when Brazil had practically finished negotiations on its foreign debt. It had not been fully resolved, Brazil did not yet have international reserves as strong as they are today, for example, but it was already a little more resolved;
- jwe already had a degree of economic openness, although Brazil still had a closed economy;
- There was a concern about implementing some type of fiscal adjustment at that time, so the Social Emergency Fund was created, which was basically a way of decoupling expenses, decoupling revenues. The social emergency fund, they said, which was neither a fund, nor a social fund, nor an emergency fund, was a way for you to create this fiscal margin.
Unfortunately, during Dilma’s (PT) government, we lost one of the foundations of the stabilization plan, which was fiscal balance. Since Fernando Henrique’s government, through Lula’s first two terms and part of Dilma’s term, the Brazilian government had a primary surplus. This was lost during Dilma’s government, and from then on, the story has never been the same from a fiscal point of view, although there was an attempt at recovery with the approval of the spending cap, but with a lot of fiscal repression.
The bases of the plan are there, Brazil has a target regime and I think there has been an important improvement with the autonomy of the Central Bank, which only came recently, but we have just abandoned spending ceilings adopting the fiscal framework that is lacking much credibility. Unfortunately, we have not yet been able to resolve this fiscal issue, and it is an Achilles heel and a major threat that we have today for monetary stability here in Brazil.
I think it’s interesting to say that one thing was the plan, the positive shock it brought, to reduce inflation. Another thing is our daily task of maintaining economic stability, which is not a sufficient condition for Brazil to grow further, but it is necessary. It has changed for the better since then, but there is still a lot to do.
Public spending in Brazil today, in addition to being excessive, is poorly distributed and our tax system is unfair and there is a lot to change, but it is not possible to make this change in the context of fiscal disarray. The market is experiencing tension because of this and it is because of this that Brazil does not have lower interest rates.
The macroeconomic tripod created with the Real depends on a fiscal target. In May, Brazil had a primary deficit of R$60.98 billion. Looking ahead to a future in which we will supposedly maintain a high deficit scenario, do you believe that the country is at risk of a new hyperinflation?
I don’t see this risk on the short-term horizon, but it is a big concern because the reason is very simple: there is a debt limit. It is not a fixed limit, this limit will be given by economic agents at the moment they believe that this debt will not be honored and there is disbelief in relation to a government’s ability to honor this debt.
If we do nothing, at some point, we will have two options. Either default on the debt, which would be truly disastrous, because contrary to what some people think, the debt does not belong to the financial market, it belongs deep down to all of us. Or the other would be hyperinflation, which would reduce the real value of the debt.
We need to be responsible with the fiscal issue because we are pushing a bill onto future generations that may not be able to be paid.
In a documentary about the real Plan, economists recall that they asked for a fiscal adjustment to be approved before the plan. Would this change the scenario we have today?
Brazil’s fiscal problems began with the 1988 Constitution: first, the creation of onerous duties, most of which were the responsibility of the federal government, and the decentralization of revenues to the states and municipalities. Then, federal government expenses were created and revenues were transferred to the states and municipalities. Perhaps the most serious was the creation of budgetary constraints. As a result, the fiscal situation began to deteriorate.
When the Plano Real came into effect, there was an attempt to unlink revenues, but later we were able to make a fiscal adjustment, which lasted for a while due to the Fiscal Responsibility Law, for example. Unfortunately, during Fernando Henrique’s government, the Social Security Reform, which would have made a big difference, was not approved. And I believe it was not due to the government’s lack of attention, but perhaps there was a lack of political conditions at that time to make these reforms that would have changed the core of the issue. For example, when the Temer government created the spending cap, we economists warned that it was a positive thing, but that other reforms would have to be made because otherwise the increase in compulsory expenses would end up bringing down the cap. There is no way around it.
And the government talks about increasing revenue, but it’s no use. Every revenue you create ends up creating more expenses, which only makes it more burdensome for society.
In a conversation with economists for the Plano Real special, they say that it would be impossible for us to see a new hyperinflation in Brazil due, among other reasons, to the independence of the Central Bank. Do you also see that this would be the main reason?
The Central Bank will always go against the current, but the cost will increase because it is a bit of political economy, not just economic policy. The effort becomes too great, interest rates become high, the Central Bank becomes increasingly stressed to the point of reaching a situation where the autonomy of the Central Bank becomes politically unsustainable. So the Central Bank is not the 4th power, the autonomy of the Central Bank is autonomy granted by Congress.
Looking at a more technical side of the issue, there is what we call fiscal dominance: when the Central Bank’s interest rate increase has an effect exactly opposite to what it intended. When the Central Bank raises interest rates, the objective is to bring down inflation, but when there is a perception that the increase in interest rates will cause a fiscal crisis or a financial crisis, this increase in interest rates becomes counterproductive. In other words, it makes the situation worse instead of better.
So the autonomy of the Central Bank creates additional costs for the country to choose the path of inflation. It is a barrier, but it is not insurmountable.
The autonomous central bank to hang needs to have alongside it a fiscal policy that is also responsible. Only monetary policy can sustain this for some time, but it is not for life.
Before the Real Plan and after, what was the main difference you felt when presiding over the Central Bank?
The Central Bank’s mission is to guarantee or maintain the purchasing power of the currency. Before the Real Plan, this was an impossible mission. You had an institution that had an impossible mission.
What the Central Bank did in the monetary area at that time was simply trying to keep the situation minimally under control from a monetary point of view. From a balance of payments point of view, there was no way to have a monetary policy that sought stabilization because it alone could no longer achieve this.
With the Plano Real, the Central Bank recovered its instruments to achieve its mission, which is precisely to maintain purchasing power. So, everything changed, and the Central Bank began to have an active monetary policy, mainly due to the adoption of the inflation targeting regime in 1999.
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