According to Reuters, Brazil Despite early indications of an impending announcement, President Luiz Inacio Lula da Silva’s administration delayed the publication of long-awaited spending-containment measures on Monday, which caused Brazil’s currency to fall.
The real dropped almost 1% versus the US dollar, bringing its annual depreciation to more than sixteen percent.
The decline in the value of the currency, which increases import prices and exacerbates inflationary pressures, comes after Finance Minister Fernando Haddad suggested last week that the government would unveil a fiscal plan to slow the sharp increase in required spending.
The administration hasn’t provided a specific date for the announcement since then, though, as Lula has been meeting with ministers from various sectors that are probably going to be impacted by budget cuts as well as his economic team.
Paulo Gala, chief economist at Banco Master, stated that “a weaker currency has a severe inflationary impact and is already affecting market expectations.”
He added that Donald Trump’s win in the U.S. presidential election is another important factor driving inflationary pressures going forward. “A spending cut package would help with this, it would help reduce the risk premium on long-term interest rates and the exchange rate,” he said.
Lula promised to combat the “speculative greed” of financial markets in a Sunday television interview, saying that the judiciary and Congress should also help reduce spending.
A new fiscal framework that combines primary budget aims with a cap for spending growth of up to 2.5% above inflation was adopted by Lula last year.
However, some spending has been increasing at a far higher rate than others, such as pensions and various social benefits, which has forced other budgetary items, including investments and operating costs, under the spend cap.
This tendency may threaten the sustainability of the fiscal framework in the upcoming years, making it more difficult for it to control the growth of the public debt, according to economists and some government officials.
“This combination of budget cuts is essential. Henrique Meirelles, a former finance minister and head of the central bank, stated that it must take place, no matter how long it takes.
Speaking at a Sao Paulo event, however, he questioned whether the move would be sufficient to allay worries about the public debt’s expansion, calling it “unsustainable.”
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