Fernando Collor de Mello (original) (raw)

The Collor Plan

EXECUTIVE OVERVIEW

The March 15, 1990 inauguration of Brazil's new President Fernando Collor occurred against a background of unprecedent economic disorder. Inflation of over 70% per month, plumetting exports, an overvalued currency, unsustainable budget deficits, lack of investment and an inefficient bureaucracy all called for urgent corrective measures. By his refusal to be pressured into assuming power before the date stipulated in the Constitution, Collor allowed his economic advisors, led by the new-Finance Minister, Zelia Cardoso de Mello (no relation), time to prepare corrective measures. The resulting package, known as The Collor Plan, is contained in a series of Provisional Measures and other legislation dated March 15, 1990.
In comparison with Brazil's previous economic plans, Collor's is more severe. If implemented in its entirety, it appears likely to succeed. Collor's plan attacks the basic cause of inflation, namely the government's deficit, by sharpingly increasing tax revenues and reducing the cost of financing the internal debt. An entirely new-feature of Collor's plan is the reduction of money supply, in the form of overnight deposits and short term savings, by approximately 80%. This may be expected to avoid any possibility of excess demand during the period of prices, and wages freeze. Finally, learning from past mistakes, Collor's plan maintains the system of indexation by the BTN (Treasury's bonds), and doesn't interfere in the settlement of past debts.

Economic comentators have so far overlooked various provisions of the Collor plan which are designed to promote a "Cultural Revolution" in Brazil. The underground economy is known to have grown substantially in recent vears, and is no longer restricted to small companies and individuals who provide professional services. If the new rules prevail and have the effectes intended, then they will affect the lives of millions and substantially increase tax revenues.

The Provisional Measures have the force of Law during 30 days. After this period they must be transformed into law by Congress or the will lapse. The following is a summary of the more important points contained in this legislation:

Anti-inflation Measures

- Introduction of the cruzeiro (Cr$) as a new currency. One cruzeiro will be equivalent to one cruzado.
- Conversion of new-cruzado bank balances and deposit account into cruzeiros, will be limited to NCz$ 50,000 on current accounts and saving accounts, and to 20% of overnight deposits.
- Unconverted balances are to be deposited with the Central Bank and will only be refunded in cruzeiros with monetary correction and interest of 6% p.a. in twelve installments commencing after 18 months (September 1991).
- Price freeze until April 30, except where government authority for an increase is obtained. Subsequent automatic price adjustments. allowed every 30 days, limited to a preindexed amount set by the government at the beginning of each month.
- March salaries adjusted for February inflation. Subsequent increases in accordance with a preindexed minimum determined as of the 15th of each month.
- Severe penalties for abuse of economic power through non compliance with price control legislation and for anti free market practices.

Measures to Reduce Government Expenditure

- Reduction in the number of Ministries from 23 to 12.
- Extinction of 24 state companies.

Measures to Increase Government Revenues

- Extensive privatization program, to be partially funded by a compulsory deposit levy on financial institutions, insurance companies and pension funds.
- Sale of government assets.
- Increased tax revenues through extensive application of IOF tax to financial transactions, increased IPI tax rates, increased income tax for activities, previously subject to reductions in the standard rates (exports and agricultural), elimination of incentive deductions from taxable income both regional and sectorial, changes in the calculation basis, for the social contribution tax, extensive indexing of Federal taxes and a new tax on large fortunes, to be levied on individuals and foreign owners of Brazilian assets.

Measures to Improve the Eficacy of the Tax Collection Process

- Increased penalties for tax evasion by the taxpayer.
- Severe penalties for a tax inspector who accepts bribe, facilitates contraband, adulterates records, etc.
- Extensive measures designed to bring the informal economy into the opening, including: elimination of all investments instruments which do not identify the beneficial owner, prohibition of using bearer checks for payments of over 100 BTN and concentration of nonresident bank accounts in branches to be designated.

Foreign Exchange Policy

Although not included in the above mentioned legislation, the new government's economic team has announced that the foreign exchange rates for conversion of the cruzeiro will no longer be determined by the Brazilian Central Bank. The currency will be allowed to float and its value will be determined by the market. Otherwise all regulations regarding foreign exchange will remain unaltered, including those restricting access to the foreign exchange market.