At the beginning of January 1999, the average exchange rate of the national currency vis a vis the US dollar was R$1.21/$1.00. On January 13, the Brazilian government was forced to allow the Real to float freely and the final averages at the end of January and February were, respectively, R$1.52/$1.00 and R$ 1.91/$1.00.
For more than four years, overvaluation of the Real had been the Government´s main tool to combat inflation. Now, until Brazil regains full access to the international financial markets and the public deficit is substantially reduced, interest rates need to be kept at very high levels. On March 4, the Central Bank increased its interbank interest rate to 45%. Also, in order to reduce bank liquidity, the Central Bank increased compulsory reserves from 20 to 30%.
The devaluation of the Real caused an immediate impact in the public deficit, both external and internal, the internal being linked to the dollar. The total public deficit is now more than 53% of the GNP. High interest rates do not help. The government is aware of the necessity of regaining international credibility and reducing public deficit. Also, the government admits that the Real needs to be made a fully convertible currency soon.
Meanwhile, privatization is still a priority. Entities to be privatized in 1999 include: the Bank of the State of São Paulo – BANESPA, the sixth largest Brazilian bank which is under Federal administration; the banks of the states of Bahia and Paraná; BB/DTVM which is linked to Banco do Brasil and the Brazilian Institute of Reinsurance – IRB.
As of April 1, funds of foreign capital fixed income were to become subject to 15% income tax. However, in order to attract foreign capital, Provisional Measure 1753, published on March 12 1999, kept the prevailing zero income tax rate for an additional quarter until June 30.
Also, from March 15 to June 30, the financial tax IOF will be reduced from 2 to 0.5% for exchange operations relating to international remittances to Brazil for: a) investments in funds of foreign capital fixed income; b) interbank exchange operations; and c) deposits into accounts of non-residents. To compensate for the reduction in tax revenue, IOF on payments of international credit cards has been increased from 2 to 2,5%.