Lula dropped the dollar from R$ 11.64 to R$ 3.41, but now presses higher

Four days after the victory of Luiz Inácio Lula da Silva (PT), the dollar fell to its lowest level since the beginning of the second half of this year, closing at R$ 5.03 for sale.

Since then, it has always fluctuated above that level, reacting to the president-elect’s criticism of the spending cap and the demand from his transition team that the Bolsa Família budget remain outside the public expenditure control mechanism.

The falling dollar at this moment would be crucial to help the Central Bank to combat inflation; and to anticipate the reduction of the basic interest rate, the Selic, today at 13.75%. This would alleviate both the household budget and the pressure on the increase in the public debt, corrected by interest rates.

On the eve of assuming the Presidency for the first time in 2003, Lula faced an enormous crisis of confidence, bringing the average price of the dollar, in December 2002, to R$ 11.64 —in a value corrected by the inflation of the last 20 years.

But the maintenance of a responsible fiscal policy in his eight years in office, with consecutive primary surpluses to reduce the public debt, helped the former president to end his government, in 2010, with the dollar at R$ 3.41, also in corrected value. That is, below the current approximately R$ 5.40.

In 2002, the dollar soared as Lula gained favoritism in the polls. Brazil owed around US$40 billion to the IMF (International Monetary Fund) and had foreign exchange reserves of just over US$30 billion. In addition, much of the public debt was indexed to the dollar.

In his record, Lula had strong statements against the Fund, which only made things worse. But when she realized that he could win the election, she softened the speech.

First, with the so-called “Letter to the Brazilian people”, of June 22, 2002. In it, he said mainly that he would respect “the country’s contracts and obligations”.

In August of that same year, before the election, in a meeting with then-president Fernando Henrique Cardoso, Lula committed himself (as well as three other candidates, José Serra, Ciro Gomes and Anthony Garotinho) to honor the agreement with the Fund.

Despite this, and with Lula finally elected, the turbulence in the exchange rate and the outflow of dollars from the country continued until the beginning of his term, taking the currency above R$ 11.

Lula, however, maintained his commitment to the IMF. His then finance minister, Antonio Palocci, a politician and public health doctor appointed a few days before taking office, would end up going countless times to the IMF headquarters in Washington, seeking recommendations that would end up stabilizing the Brazilian economy.

At the heart of the Fund’s program were primary surpluses to control the public debt, in addition to maintaining inflation targets and free exchange rates.

according to Sheet accompanied him at the time in Washington, these visits to the American capital also provided inspiration for Bolsa Família. The program would be managed in the building adjacent to the Fund, at the World Bank, which had guided Mexico, in 1997, to create Progresa, today called Prospera.

In the 2000s, Brazil under Lula benefited greatly from the longest period of synchronized global growth since World War II and the rise of China. Facts that would boost the prices of agricultural and mineral commodities and help the country accumulate billions of dollars in reserves. In 2005, Brazil would settle its debt with the Fund.

The conditions in which Lula assumes his third term, however, are much more challenging than in 2003. If distrust against the elected president is lower than at that time, the world economy is in a cooling-off phase, with interest rates rising to the fight against inflation in several countries.

According to Bráulio Borges, an associate researcher at the FGV’s Brazilian Institute of Economics, the unnecessary noise generated by Lula’s statements in relation to the spending ceiling and fiscal responsibility exacerbate this adverse scenario.

“From the point of view of the soundness of the external accounts [balança comercial, de pagamentos e reservas cambiais acima de US$ 320 bilhões]there would be reasons for the dollar to be between R$ 4 and R$ 4.50, which would be a positive shock for the beginning of the new government”, says Borges.

“But in demanding a license to spend [com a PEC da Transição] without clarifying what the new fiscal rule will be, the government misses a great opportunity.”

For Alexandre Schwartsman, economic consultant and former director of the Central Bank (2003-2006, in the Lula government), under current conditions, without clear signs about what the fiscal policy of the next government will be, the exchange rate will continue to be pressured, as well as inflation and the interest that corrects the public debt.

“Even if something is presented, there is no guarantee that the rule will be fulfilled, as there have not been many others over the last few years.” In his opinion, the most likely thing is that the Lula government will end up pursuing new rounds of increased contributions and taxes to finance more spending.