IMF RESREP ON INVESTMENT ACCOUNTING INITIATIVE

C O N F I D E N T I A L BRASILIA 002051

SIPDIS

TREASURY FOR OASIA - NLEE AND SSEGAL
STATE FOR EB/IFD/OMA - KMOSS

E.O. 12958: DECL: 08/10/2014
TAGS: EFIN ECON PREL BR
SUBJECT: IMF RESREP ON INVESTMENT ACCOUNTING INITIATIVE

REF: BRASILIA 291

Classified By: Economic Counselor Roman Wasilewski, Reasons 1.4 (b) and
(d).


1. (C) Summary: An IMF mission visited Brazil the last two
weeks of July to discuss a pilot project effort at how the
IMF accounts for investment. The pilot project grew out of
an initiative by President Lula, advocated in letters to the
G-7 heads of state, to increase the space for investment
within the budgets of countries on IMF programs. IMF Resrep
Max Alier (please protect) says the trickiest part of the
issue is project selection. It appears the GoB hopes for
some IMF political cover as it seeks to build consensus to
change the expenditure/investment mix within its fiscal
constraints. End Summary.


2. (C) The GoB initiative was launched by Lula in early 2004,
at a time when the GoB was under considerable criticism for
having frozen investment spending budgeted by the Congress,
in order to meet the primary surplus target (reftel). This
coincided with pressure from Argentina for the GoB to support
its defiant stance towards the IMF. Argentina's Kirchner
argued that the GoA could not both meet the needs of its
populace, meet its IMF budget targets and pay off its
creditors. Lula's response sought, in a set of letters to
the G-7 heads of state, support for an initiative to IMF for
a change in how investment was accounted for in terms of
primary surplus targets.


3. (C) Alier told Emboff that the easiest way to conceive of
how the GoB's accounting proposal works is by comparison to
the primary surplus target adjustor that was built into
Brazil's current IMF program, which expires at the end of the
year. The GoB was allowed to invest in a series of
sanitation projects, in the amount that it had over-performed
its primary surplus target in the previous year. The primary
surplus target was adjusted downward by this amount.
Likewise, in the pilot project case, the primary surplus
target would adjust to account for investment on one of these
agreed projects. It is not clear to post that in this pilot
project case, as was the case with the sanitation projects,
that there would be any requirement to have over-performed
the target in previous periods.


4. (C) A sometimes bemused Alier pointed out that the GoB's
IMF progam expired at the end of the year and there was no
expectation that the GoB would seek a new one. That meant
that the GoB could do as it wants with its budget next year,
he pointed out. Neither had the GoB invoked its right to use
the adjustor in the current program. Quite the contrary, it
was significantly over-performing the primary surplus target,
with the de-cascading and rate increase of the PIS/COFINS tax
that formed part of last year's tax reform increasing
revenues by 1% of GDP.


5. (C) In a separate conversation, Finance Ministry International Secretary Luis Pereira told Emboff that the GoB ultimate goal is to use the exercise to "build political consensus to change the current expenditure/investment mix." Alier seconded this point, saying he had been told that the GoB wants to increase investment but needs a bit of incentive to "to it right."


6. (C) Alier emphasized that the investment accounting exercise only makes sense if you can find public investment projects with a positive rate of return. He said the Fund
could usefully help the GoB re-build its project-evaluation
capacity, which has eroded. This would have the happy
knock-on effect of helping the GoB capacity to evaluate
projects proposed under the prospective Public-Private-Partnerships law, which is still pending in Congress.


7. (C) Comment: It appears that the Finance Ministry, and
maybe the GoB more broadly, hope to use the Fund pilot
project for political cover as it works to change the
expenditure/investment mix within existing financial
constraints. Maintaining some level of IMF involvement
through this pilot project would also help the GoB reassure
the markets that it will remain fiscally responsible even as
it looks to increase investment spending.
DANILOVICH