Just when newly inaugurated President Fernando Enrique Cardoso appeared to have Brazilian inflation on the ropes, his plan to kill it so strengthened consumer demand and the country's currency that it caused another problem: a gaping trade deficit.
The plan indexes prices and wages to a new U.S. dollar-anchored currency--the real--whose value is backed by the central bank's foreign exchange reserves. Brazil cut inflation from 45% per month in 1994 to 0.8% in January.
However, increased consumer spending has pushed the trade balance into deficit (chart). And remedies such as a devaluation of the real and a Mar. 29 hike in import tariffs to 70% on cars and 108 other durable goods are pushing prices higher. Inflation has quickened to 2.5% per month in April, just as the minimum wage is set to jump 43% in May. Analysts have lifted their inflation forecasts to 30% for all of 1995, while cutting this year's growth projections to about 4%, after 5.7% in 1994.
Some companies are going back to the old way of linking prices to the cost of living, which could kill the real plan. Moreover, because the Mexican crisis has caused investors to shun countries with big trade and government deficits, Brazil has had to use a chunk of its reserves to defend the real.
To cut back demand and save the real, the central bank tightened monetary policy on Apr. 24, and the government is making plans to put forth other anticonsumption measures. President Cardoso himself flew to New York on Apr. 17 to reassure Wall Street that he can reform the Constitution, overhaul the tax system, cut government spending, and privatize state-run companies.
For now, analysts are optimistic, but they warn that reform will come slowly. Cardoso does not yet have a legislative liaison to deal with the new Congress. Furthermore, more than 60% of the public debt is owed by local governments and state-run companies. With the real plan at risk, however, the need for structural reform has taken on a heightened sense of urgency.