The government's newest ally, the Partido do Movimento Democrático Brasileiro (PMDB), is parading its unhappiness with the government's steady economic policymaking. The government has left monetary policymaking to the central bank and allowed the bank to focus on curbing inflation. The pay-off from this policy has been a dramatic improvement in the sovereign credit rating. The problem is that the restrictive monetary policy has hobbled domestic demand. This has left Brazilians feeling poorer and wondering what made a Lula government different from its orthodox predecessors.
The PMDB, prodded by a range of prominent politicians, notably Orestes Quércia, the former governor of São Paulo, is threatening to desert the government it only joined on 23 January unless it switches to a more expansive monetary policy. The PMDB is the biggest single party in congress. Quércia argues that the government cannot go on saying, as its predecessor did, that the market will sort out the country's economic problems.
Its complaints about economic policy look opportunistic. The government is under pressure from the corruption scandal which is lapping ever closer to Dirceu. The PMDB clearly feels that a bit of growling may squeeze some political concessions from the beleaguered government. What the PMDB wants is tax breaks for small business and a clear list of priorities for public investment.
Palocci: backed by Lula
Besides backing Dirceu, President Lula is also holding firm and backing his two orthodox economic managers, Antônio Palocci, the finance minister, and Henrique Meirelles, the president of the central bank. The pressure for a change in economic policy is coming not only from the PMDB but also from the opposition and Lula's own Partido dos Trabalhadores (PT) and maverick parties such as the Partido Liberal, which supplies Lula's vice-president, José Alencar.
The PT wants the government to do more to get the economy moving. It argues that if the government does not do something soon it will fail in the forthcoming (October) municipal elections. However, President Lula, the PT's fulcrum, is sticking with the technocrats. He said that the economy would grow this year, by more next year, and even faster in 2006, and that inflation would continue to fall. President Lula also said that it was increasingly likely that the government would hit its 5.5% 2004 inflation target, and that beating inflation, which ate away at wages, was a priority for his government.
President Lula made it clear to the PT that his government would not relax monetary policy in order to go for growth, and that the economy would be run seriously and calmly. Lula does, however, recognise that the government needs to make its case rather better and to broadcast the fact that it is taking action.
He pointed out that the government is committing US$20bn to infrastructure projects this year and that it has tripled the money going on anti-poverty programmes aimed at the very poor. He claims that by the end of this year the family support scheme will be helping 6.5m families (around 25m people). At the end of 2003, the programme was helping 3.6m families.
It is not only the PT that is edgy about the government's economic policy. The influential businessmen's association, the Federação das Indústrias do Estado de São Paulo (Fiesp), argues that the government's policy is excessively cautious. This phrase was picked up by the PMDB at the end of March when it called for the government to become more daring with its economic policy. Fiesp president Horácio Láfer Piva says that the government should be taking advantage of falling inflation and the plummeting country risk rating.
One of the main trade unions, the Força Sindical, argues that with interest rates rising (in real terms), people and companies prefer to keep money in the bank rather than spend or invest. The government economic research agency, the Instituto de Pesquisa Econômica Aplicada (Ipea), reckoned that in 2003 real interest rates were close to 13%. In order to get the economy growing properly, it argues, real rates need to be down to between 8% and 9%.
Industry is also bothered about the rising level of real interest rates. Even after the central bank's quarter of a percentage point cut on 17 March, real interest rates, or the official interest rate minus the annual inflation forecast, have actually got higher. With the fall of annual inflation forecast from 5.69% to 5.38%, the real interest rate rose from 10.2% to 10.6%, after the cut. This is the highest rate in the world, and it is well ahead of other countries in Latin America. In both Argentina and the US, the real interest rate is negative.
Stats
The other sign that the economy could be becalmed is the falling away, again, of inflation. The official inflation index for February (the IPCA) recorded a fall to 0.6%, from 0.76% in January. The snap conclusion from independent economists was that the statistic showed that there was no real problem with underlying inflation and that the rate was under control. Indeed, economists pointed out that if the education sub-index (which has a comparatively high rating and covers school fees, books, and clothes) is excluded, the IPCA rate would have been just 0.3%.
This dearth of inflation has become linked in some policymakers' minds with the lack of growth. In 2003, the economy contracted by 0.2%. The government had been hoping for growth this year towards the top end of a range of between 3.5% and 4%. The most recent official forecast for 2004 growth, from Ipea, cut the rate from 3.6% to 3.4%.
The better than expected IPCA figure for February points to lower inflation from hereon. The market expected a 0.7% IPCA figure for February and now expects the March figure to be below 0.4%. The trade union-backed think-tank, Dieese, expects an inflation rate close to nil for March.
Picking up
The good news for the central bank is that not only is its tough line of inflation working but the economy is also beginning to rev up. There were strong retail sales figures for January. The figures showed a year-on-year rise of 6% on January 2003. This was the strongest performance for three years.
To put the figure into context: January 2003 was a poor month for sales. Nevertheless, economists say that there is increasing evidence that consumers are getting the bit between their teeth. Retailers are reasonably confident. They believe that inflation is ebbing and interest rates will soon start to fall heavily again, and that these two factors will encourage consumers to spend. Sales of white goods, comparatively big ticket items, were up strongly in January (19.6%, year-on-year), the Instituto Brasileiro de Geografia e Estatística (Ibge) reported.
The recovery in domestic demand should feed through into industry. Industrial output in the state of São Paulo, the country's workshop, was up by 4.6% in January, compared with January 2003. This was the sixth consecutive month of growth. Ibge, the official statistical agency, found that seven of Brazil's 12 regions had increased industrial output: top of the lot was Rio Grande do Sul, where a strong performance by the agribusiness sector led to an 11.3% increase in output.
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The
Dirceu scandal
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José
Dirceu is a key player in the government. He was responsible for the successful
management of congress in Lula's first year, which got the government's
two key reforms, to the fiscal and pension systems, approved without significant
concessions. Now Dirceu is vulnerable because of the scandal detonated
by Dirceu's longtime friend and former business partner, Waldomiro Diniz.
Diniz has been accused of corruption and resigned from the government
in February. The opposition parties argue that a congressional investigation,
a CPI, would be the quickest way to get to the bottom of the scandal.
A government investigation concluded that Diniz had been corrupt during
his 14 months in government. In particular, he appeared to have been involved
in a GTech contract for the Caixa Econômica Federal, the state agency
that regulates lotteries in the country. End of preview - This article contains approximately 1586 words. Subscribers: Log in now to read the full article Not a Subscriber? Choose from one of the following options 
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