September 29, 2016 / 6:36 PM / 10 months ago

UPDATE 2-IMF urges Brazil to step up austerity to shield recovery

3 Min Read

(Adds IMF recommendations, government official comments and context)

By Alonso Soto

BRASILIA, Sept 29 (Reuters) - The International Monetary Fund on Thursday called on Brazil's new government to step up efforts to close a yawning fiscal gap, recommending tough policy changes for Latin America's biggest economy to pull out of a bruising recession.

In the preliminary findings, the IMF warned that substantial changes to fiscal reforms in Congress could threaten the country's gradual recovery from a two-year recession that has slowed the reduction of social inequalities due to income.

"If key reforms are watered down or get stalled in Congress, the boost to confidence will be short lived, and the recession may continue," the IMF wrote in a summary ahead of the full report expected in coming months.

To protect that recovery, the IMF urged Brazil to frontload measures to rebalance its public accounts whose dramatic erosion in recent years has raised fears about the country's ability to repay its debt.

In an unusually detailed menu of recommendations, the IMF said Brazil should aim to reach a primary budget surplus goal of 3.5 percent of its gross domestic product in five years and also consider revenue measures to shore up its accounts.

The primary balance, or budget result prior to interest debt payments, is a key gauge of a country's financial health.

Once flushed with cash during a decade-long commodity boom, Brazil is now struggling to plug a primary deficit that is expected to reach a record 2.65 percent of GDP this year.

Despite proposing long-term measures to close that gap, President Michel Temer has been criticized for not making deeper spending cuts and other more immediate austerity measures.

Temer, who replaced leftist Dilma Rousseff in May after she was put on trial in the Senate for allegedly doctoring the fiscal accounts, has proposed a cap on public expenditures and plans to submit legislation to reduce overly generous social security benefits.

Treasury chief Ana Paula Vescovi told reporters that the government's agreement to allow the IMF to release those recommendations shows its commitment to fiscal discipline.

The IMF also recommended Brazil revise its formula to adjust its minimum wage annually, propose legislation to limit states' expenditures and work on a pension reform that sets a minimum age of retirement and includes all civil servants.

It commended the central bank's strategy to reduce its stock of traditional currency swaps, which are derivatives that mimic future dollar sales.

Still, the IMF said monetary policy should remain tight until inflation expectations converge more clearly to the 4.5 percent center of the official target range. Most market traders and economist expect the central bank to start cutting rates in October to bolster the economy. (Reporting by Alonso Soto; Editing by Alan Crosby and Lisa Shumaker)

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