Minister criticizes IMF recommendations on capital control

On Tuesday, April 5, the International Monetary Fund recommended that Brazil reduce interest rates and tighten its fiscal belt in order to control capital (so far this year more than $35 billion have flowed into the country even as the government raises the costs of transactions with dollars).

Minister of Finance, Guido Mantega, called the IMF recommendations insufficient and inefficient. “If we do what they are telling us to do we will go broke first and then take measures to control capital,” said the minister, as he added that the IMF suggestions were inopportune.

The minister revealed that by raising surtaxes on financial operations (“IOF”) the government was successfully reducing gains by investors. “When you tax an investment at 6% that pays 11.75%, you effectively cut the yield in half,” said Mantega.

As for interest rates, Mantega explained that they were high because of inflation. “The Brazilian Central Bank must keep an eye on inflation, not the dollar. The Ministry of Finance does now work with forecasts for interest rates,” declared the minister. Mantega also defended the latest measure announced by the government, a 6% tax on loans made abroad for up to two years. According to Mantega, the measure will not harm exporters. “Nowadays it is perfectly normal for banks to create hedges. All you have to do is get credit for periods of more than two years,” he said.

The Minister of Finance declared that Brasilia would not tax direct foreign investment. He also denied that Brazil’s Sovereign Fund, now with some $20 billion in assets, would be used to buy dollars in the future. The Central Bank is buying dollars and doing a good job of it, the minister concluded.