Brazil has raised taxes on fuel, imports and consumer loans as Latin America’s biggest economy battles to narrow budget deficits. According to new Finance Minister Joaquim Levy, the tax rise will raise government revenue by US$7.8 billion in 2015.
But analysts have warned that the increase in fuel prices may stoke inflation, another serious impediment plaguing the South American country. Brazil’s central bank is expected to raise interest rates again to combat inflation.
Widening trade and budget deficits, a weak currency, soaring inflation and drying capital inflow have tied the hands of the new finance minister, who is scrambling for tools to reverse the country’s economic fortunes.
The tax increases are the first major decision Levy has taken since taking office a month ago. The measures include doubling financial transaction tax on credit to from 1.5% to 3% and increased taxes on imported goods and cosmetics starting in June
In a bid to overcome its complex economic problems, Brazil is also taking the unusual step of raising fuel prices in 90 days time, despite petrol prices having fallen by more than 60% in the international market.
There is some good news for Brazil. The country’s recent measures, including targeted spending cuts and tighter control of pension and unemployment benefits, seem to have helped reduce longer-term interest rates.
Brazil has raised its benchmark interest rate 11 times since April 2013, from a record low of 7.25% to the present rate of 11.75%.
But its decision to tax technology imports has already hurt the prospects of several international firms. Japanese gaming firm Nintendo, for example, recently exited the Brazilian market, complaining of high tariffs on technology imports.