High Current Account Deficit in Brazil During 1980s

High current account deficit in Brazil during 1980s

Brazil had a high level of external debt by international standards and was increasing fast during the 1980s. The ratio of total external debt to GDP was around 35%. The reason was that government spending in Brazil increased continuously but the revenues of government from taxes were substantially lower. Thus, in order to sustain its increasing spending, the government of Brazil continued to fund its spending through increased its borrowings. Thus, interest payments on the ever increasing borrowings of the government led to higher current account deficits during 1980s. Brazil government responded to its high current account deficit by ‘maxi-devaluation’ in February, 1983 when its currency was devalued by 30%.This devaluation made a significant impact on trade balance as exports amount increased. This led to positive current account balance in 1984.

Higher Current account deficit during 1995 - 1999

Government adopted policies to target high inflation in Brazil during 1994 – 1998. The Brazilian government used high interest rates and privatization to attract foreign capital and to sustain appreciation in foreign exchange rate. However, this main objective of reducing inflation and appreciation of exchange rate led to substantial increase in current account deficit. Current account deficit reached to 4.2% in 1999 and low reserves of foreign exchange reserves. As a result, currency was devalued again in 1999. This caused improvement in trade balance and increase in current account balance during the years to come till 2004. Infact, current account balance became positive in 2003 and 2004.

Rise in current account deficit post 2014

Post 2000 inflation was rising and was as high as 14.7% in 2003. Accordingly, government actions were concentrated to counter