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Friday, November 13, 1998 Published at 12:38 GMT

Business: The Economy

Brazil gets $41bn aid package

The economic crisis has hit Brazil's unemployed

The International Monetary Fund (IMF) and rich industrial nations have agreed to rescue Brazil's economy with an aid package worth $41bn over three years.

The money will be used to support tough economic reforms and protect the country's currency.

The aid package is a bid to prevent a financial meltdown in Latin America's largest economy - and the rest of the continent. However, many Brazilians will have to suffer hardship before things get better.

[ image: The IMF's Michel Camdessus says the reforms are in place for the rescue work to begin]
The IMF's Michel Camdessus says the reforms are in place for the rescue work to begin
Michel Camdessus, the IMF's managing director who announced the package in Washington, said Brazil could call on $27bn within the next 12 months.

The Brazilian finance ministry said it would receive $9bn immediately after the loan package is approved by the IMF board.

The IMF itself will contribute $18bn to the package, while the World Bank and Inter-American Development Bank will give $4.5bn each.

The European Union will provide $7.55bn in bilateral contributions, the United States $5bn and the remainder other industrialised countries.

Mr Camdessus stressed the aid package had only been made possible by Brazil's reform programme, which "first and foremost addresses the chief source of its external vulnerability, namely its chronic public sector deficit."

[ image: Pedro Malan, Brazil's Finance minister, promises deep, tough budget cuts]
Pedro Malan, Brazil's Finance minister, promises deep, tough budget cuts
The IMF and Brazil have agreed ambitious targets for cutting public sector spending. The deal calls for a budget surplus of 2.6% of GDP in 1999, 2.8% in 2000, and a massive 3% in 2001.

All sections of Brazil society will be smarting. The country's poor will suffer as the government spends less, and new taxes will hit both the middle class and corporate earnings.

The alternative, however, would have been economic chaos with dire consequences for everybody in Brazil - and nasty repercussions on financial markets around the world.

"The funds being made available serve to uphold the recessionary economic policies currently in place," said Luciano Coutinho, an economist at the University of Campinas.

"All agreements with the IMF demand sacrifices, but things would get much worse without the rescue package. There would be an exchange crisis and a complete collapse of the economy."

Markets pleased

Stocks markets in Brazil and the United States moved higher on the news of the aid package and Brazil's currency, the real, climbed against the US dollar.

Officially the real is pegged to the dollar one-to-one, but has drifted during the past year.

Containing the crisis

Leading financial institutions and governments believe that Brazil's economic success is vital to the health of the whole financial system. After the collapse of the economies of Asia and Russia, they are desperate to prevent the crisis from spreading to Latin America.

During the past months Brazil saw a huge flow of capital out of the country, averaging $1bn a day in September and $500m a day in mid-October.

Still a threat

The IMF has warned that the global economic crisis is still a threat.

Mr Camdessus said recently: "Even if, in the past few weeks, an air of calm has begun to return to global markets, we could argue that the crisis in the functioning of the global financial system is not over yet."

Mr Camdessus also praised Brazil and other Latin American states for moving swiftly to head off an Asian-style financial meltdown.

The IMF has been impressed by the Brazil government's far ranging austerity plan and its measures to shake up of its troubled pensions system.

The government presented a revised version of its 1999 budget to include a hefty cut of 8.7bn reals ($7.3bn), which some observers say will mostly affect the poor.

The new budget, which must be approved by Congress by December 15, puts the total federal spending next year at 41.4bn reals ($34.8bn), or 17% lower than the original budget proposal submitted in August.

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