(Adds IMF recommendations, government official comments and
By Alonso Soto
BRASILIA, Sept 29 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
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
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