After more than 50 years, it’s hard not to wonder if Brazil will ever regain full control of its monetary system. The country has been fighting to restrain its runaway inflation since former President Juscelino Kubitschek pioneered the creation of Brasilia. The government didn’t have enough money to build its new city, so if there’s not enough money, print more! Right? In 1964, after years of printing to support government needs, the inflation rate had surged to around 90 percent. By the 1980s, inflation soared out of control, ranging from 100 percent in the early years of the decade to nearly 1800 percent at the end. Despite numerous attempts to control the situation, each president’s plan ultimately resulted in failure and an overall loss of consumer confidence in the Brazilian cruzeiro.
At one point in 1990, inflation was climbing at an unfathomable rate of 80 percent per month. Imagine your $3.00 morning coffee costing nearly $3,500 one year later. Every day, prices would go up. People’s paychecks lost value the minute they were brought home.
What did Brazil do about it?
When rates started spiraling out of control in the ‘80s, the government decided to step in on the problem that it essentially created. First came the Cruzado Plan in early 1986, which called for a general price freeze that included wages, rents, and mortgage payments – it was actually illegal to raise prices. The Cruzado plan did wonders for the economy…for the next couple of months. But vendors started holding back stock because they didn’t want to sell at the frozen price, which led to shortages, and by the end of the year, the currency situation was essentially back where it started. A solid effort, but clearly not a long term solution. And so begins the ride.
What came next was as ineffective as it was short-lived. President Fernando Collor decided on another freeze, but this time on all financial assets held by the bank. As a result, banks would shut down and people would lose control of their holdings – hope you didn’t want to cash out any time soon. Don’t worry though, it was all to be returned after 18 months. Needless to say, consumers quickly lost respect for the government and the economy tanked…again.
Meanwhile, four economists were working to develop what would eventually become the most effective attempt to return Brazil to a more constant state. Their exasperation with the government’s unsuccessful endeavors led to the creation of the Real Plan. After witnessing first-hand what didn’t work, the Plan was founded on three elements, including a Social Emergency Fund, monetary reform, and a more aggressive foreign exchange policy. The government was granted its Social Emergency Fund via a constitutional amendment, and the monetary reform consisted of what started as an imaginary currency. The intangible “unit of real value” (URV) was developed as a way to keep prices stable. Although consumers continued to earn and use cruzeiros, everything from groceries to wages was listed in URVs. The link between the two was a conversion rate that was printed in the newspaper each day where one URV would be worth a certain amount of cruzeiros. The plan’s goal was to have URVs stay the same, while slowly bringing down the conversion of cruzeiros. Sure enough, inflation started falling, and when the exchange reached a level that the government decided was controllable, those URVs became the physical Brazilian Reals in use today (and yes, my favorite part of the story is that they called their initially fake currency the Real). Of course, under the new plan the government also had to agree to keep its budget under control and back off from its money-making rampage.
How is Brazil doing now?
Well, inflation is still a problem. Not an 80 percent per month problem, but with a growing middle class population that has more disposable income, the government is constantly challenged to try to keep consumer spending under control. And with the rise in credit card use (buy now, pay later!), it can’t be easy. According to the Banco Central de Brazil, the number of credit cards more than doubled from 53.5 million in 2004 to 137.8 million in 2008, with a forecast of 195 million by 2013. Interestingly, many purchases in Brazil, both online and in-store, are made on a monthly repayment schedule with a set number of installments that factor-in varying rates of interest, depending on the purchase. Or, consumers with cash can make a single payment and receive a discount…or an even better discount if you know how to bargain. For example, a certain printer may cost R$470.59 online (just 10 easy payments of R$47.06!), or they can get a 15 percent discount if they pay in cash…I’ll take it!
Rising ecommerce in Brazil also makes it easier for consumers to buy. Almost two thirds of the Brazilian consumers that make less than $1,870 per month made their first online transactions in the first six months of this year (see also: Ecommerce Surges in Brazil). Further, retail sales in the region have been on the rise, with the most recent months pulling in higher-than-expected gains: 0.6 percent in May, 0.2 percent in June, and an impressive 1.4 percent in July.
However, increased spending is also likely to result in counteractive credit measures and interest rate hikes from the government in an effort to curb consumer spending. In July, the Brazilian government raised the benchmark interest rate for the fifth time this year to a high of 12.5 percent before cutting that rate back to 12 percent at the end of August to offset a worsening economy.
Looking forward, Brazil’s Central Bank president expects annual inflation to drop by several percentage points by April 2012, though a central bank survey indicated that inflation will continue to breach the upper limits of the government’s target over the next two years. Further, the August inflation rate reached its highest point since 2005, demonstrating that the country is still far from a permanent solution. But even if Brazil has yet to see light at the end of the tunnel that is its battle against the country’s runaway currency, it has come a long way from its days of quadruple digit disaster.