Imports Restricted

Brazilian Government Attempts to Slow Growing Trade Deficit

by Thomas B. Felsberg

Brazil’s reduction of inflation from 40% per month to a projected 7% annual rate for 1997 has significantly stabilized the Brazilian currency. This stabilization, secured by relatively high internal interest rates and heavy foreign capital inflows, has led to perceived overvaluation of the Brazilian real. This currency overvaluation has resulted in the conversion of visible trade surpluses, which had been running in excess of US$10 billion for years, into a situation of growing trade deficits projected to reach US$12 billion this year. The trade deficit becomes substantially higher when the deficit on services is added. Because the Brazilian government considers the importation of foreign capital desirable to develop the country’s economy, it has been prepared to sustain a situation in which a small trade deficit and a deficit on services are financed by capital inflows. The increasing trade deficit was perceived as a threat, however, in spite of the fact that Brazil’s foreign currency reserves, having exceeded US$60 billion at their peak, still stand at a figure only slightly below this.

In view of these circumstances, the Brazilian government has taken measures to restrict credit extended to Brazilian importers, as well as to prohibit the financing of purchase of goods and services abroad through credit cards.

With circular No. 2,747 of March 25, 1997, the Central Bank of Brazil altered the regulations governing the payment for Brazilian imports made on credit terms of up to 360 days and originating abroad after March 31, 1997.

The circular, in its relevant passage, states:

The exchange operations destined to the payment of imports made on credit terms of up to 360 days should be made for future payment, observing the following advance criteria:

a) prior to the date of registration of the corresponding Import Declaration, in the case of importations which should be paid up to the last day of the fifth month subsequent to the month of registration of the Import Declaration.

b) up to the last day of the sixth month prior to the month of payment in the remaining cases.

In the event that the payments schedule in the Import Declaration establishes payments in installments, the provisions of the previous item should be observed regarding each installment."

The circular also states that electronic verification of compliance with the provisions of Circular No. 2,747 will take place "on the occasion of the payment of the contract or of the appropriation of same to the respective Import Declaration."

Provisional Measure 1,569 stipulates fines that importers will be subject to "if a violation of the regulatory requirements [is] verified.”

The payment, in reales, of an importation licensed to be paid in foreign exchange will also subject the importer to the fine stipulated in Provisional Measure 1,569.

Basically, this new law requires that foreign exchange transactions involving imports with payment terms of up to 360 days be closed prior to the payment of the exporter in accordance with the terms of the commercial invoice. For imports with a payment term of up to five months, the foreign exchange transaction must be closed prior to customs clearance. For imports with a payment term beyond five months and up to 360 days, the foreign exchange transaction must be closed six months prior to the exporter’s due date specified in the commercial invoice.

The importer will close the corresponding exchange contract with a bank authorized to deal with foreign exchange transactions. This bank will retain the amounts paid by the importer and will pay the foreign exporter for the importation according to the payment schedule established in the commercial invoice.

This measure, together with the seasonally high shipments of the soy crop and its derivative products and a reduction in the demand for imports (which reflects a degree of cooling in economic activity), has led to a considerable reduction in the trade deficit in the two months since it came into force.

Also, Resolution No. 2,389, issued by the Brazilian Central Bank on May 22, 1997, was adopted because payments abroad through credit cards in general have become a material factor in the overall current account deficit. Article 1 resolved "to prohibit financial institutions from conceding credit to the users of international credit cards, destined to finance goods and services acquired abroad from the date of publication of this resolution.”

It’s too soon to tell whether Resolution No. 2,389’s restrictions on credit purchases abroad through credit cards has led to any substantial reduction in transfers abroad on Brazil’s current account.

Thomas B. Felsberg is a partner at the law firm Felsberg e Associados in São Paulo, Brazil. The law firm's practice areas include corporations, banking, finance, intellectual property and environment.

REACTION TO THE NEW RESTRICTIONS

The impact on imports will be between US$1 and US$6 billion a year.
-- Gustavo Franco, director of international affairs of Brazil's Central Bank.

"Brazil may, complying with the rules of the WTO, exclude Mercosur of the restriction..."
-- Alejandro Mayoral, Undersecretary of Foreign Trade of Argentina

"I believe that if Brazil cannot revert the measure (restriction on imports), the government (of Paraguay) has to provide funds to finance the exports..."
-- Arturo Jara Avelli, president of the Paraguayan Industrial Union