Brazil's new finance minister must tackle troubled economy

The appointment of a new finance minister appears to have ended the economic feud in Brazil that has roiled the government ever since Jos'e Sarney became president last April. But Brazilian and foreign sources say that the warm welcome could melt away in this overheated economy.

President Sarney's appointment of Dilson Funaro, a toy manufacturer and head of the National Development Bank, as finance minister last week was a boost to the nation's worried public and powerful business community.

Sarney acted quickly, naming the liberal Mr. Funaro to fill the post vacated by Francisco Dornelles, who was once the most powerful member of the economic team and the chief negotiator for Brazil's $103 billion debt. (The central-bank president and his seven-member board also resigned Aug 26.)

Funaro is a personal friend of Sarney and has good credentials with the President's center-left political coalition. He is more in tune with the current economic team, which advocates loosening credit and spending to stimulate economic growth.

The day after Funaro took office, government economists announced that inflation, tamped down due to price controls to under 8 percent a month over the past four months, soared to 14 percent in August (225 percent over the past year) -- the highest rate Brazil has ever recorded. The formula for monetary correction gambled on a falling inflation rate for the cruzeiro, the nation's battered currency -- and thus will have to be torn up.

Funaro froze prices and huddled with top business people, bankers, and government officials to try to win a pact to lower domestic-interest rates, now running at a ruinous 25 percent above inflation.

Still ahead are other problems. Domestic savings have dropped by half in the past 10 years, new investments have bottomed out, and economic observers say Brazil will be hard pressed to service its debt and still grow at Sarney's target ratio of 5 percent a year -- which is merely enough to keep the country afloat.

Although Brazil has showed some signs of marked recovery, social conditions are deteriorating alarmingly.

Meanwhile, the economy has responded vibrantly to the foreign-debt demand, as export revenues have jumped from $16 billion four years ago to $27 billion expected this year.

All members of the economic cabinet agree on the necessity to reduce the public sector -- whose $30 billion debt could nearly double by year's end -- but there has been little consensus on how to do this.

Dornelles' classical approach, looked on favorably by the banks and the International Monetary Fund (IMF), was to contain the money supply and make deep cuts in the public payroll. Goverment borrowing to finance its deficit, he argued, crowded savings and squeezed up domestic-interest rates.

On the other hand, in the near supply-side logic minted by Planning Minister Joao Sayad, economic adviser Luiso Paulo Rosenberg, and shared by Funaro, the government could first cut interest rates, then loosen credit and spending, and so spark economic growth. The increased production and supply of goods would sop up the abundance of cruzeiros. A short-run inflation, the theory goes, would be offset by increased prosperity, which would ease pressure on the government coffers.

There are perils to in either approach.

Fortunately for Sarney, the Cabinet shakeup came just after Brazil had manged to win some breathing room from the IMF and 700 creditor banks who agreed to extend until mid-January $16 billion in vital short-term lines of credit, due to expire last Friday. Both Funaro and the banks have pledged to honor the agreements.

The first real test of the new policies will likely be in November, when the nation holds mayoral elections. The second will come next year when Brazil, which failed all year to strike an agreement with the IMF, takes up again negotiations to reschedule over 16 years some $45 billion dollars of its debt.

For Sarney, drafted into office with no political constituency of his own when President-elect Tancredo Neves passed on in April, the most delicate times are still to come.