Monetary framework distortions

Image: Alexey Vinogradov


The Central Bank should not be able to make monetary and exchange decisions that affect the future of the country by autonomous decision

There is a lot of talk about reviewing the fiscal framework and labor legislation from 2023 onwards, assuming, of course, that the current President of the Republic is not re-elected. Perfect. But let's not forget that it would also be necessary to review the monetary framework. A lot of barbarity has been done in this area in recent years. (By the way, in what area not?!)

They passed the herd. Not only in the environmental issue, but also in the field of currency and exchange. I will be modest, reader. Nor do I want to discuss today the autonomy of the Central Bank (BC), which provides for fixed mandates that do not coincide with that of the President of the Republic for the president and other directors of the monetary authority. If elected, Lula will inherit, for the initial phase of his government, the president and most of the directors appointed by Bolsonaro/Guedes. However, Lula and his spokesmen have already made it clear that they intend to live with this. The candidate does not have the courage or does not feel in a political position to face this parade.

Even so, there is much that can and should be done in the monetary area. I am referring to two interconnected themes: a) the composition of the National Monetary Council (CMN); and b) the exchange mark law.


Expansion of the National Monetary Council

The CMN is the body that gives instructions to the BC and takes other important decisions. It sets, for example, inflation targets for the Central Bank and guides the financial system. The difficulties here lie, on the one hand, in the inadequate composition of the CMN and, on the other, in its hollowing out by recent decisions.

The CMN currently has only three members: the Minister of Economy, the Secretary of Finance of the Ministry of Economy, subordinate to the former, and the President of the Central Bank. The Minister of Economy chairs the CMN and its secretariat is exercised by the BC. Anyone with the slightest bit of experience knows that working as a secretariat for an agency gives you control over the agenda and the handling of issues, giving you a lot of power and influence. Thus, the BC has one of the three votes and command of the agenda. In practice, it gives instructions to itself.

Since the Real Plan, the CMN was made up of the Minister of Finance, the Minister of Planning and the President of the BC, with the BC's secretariat. Lula and Dilma didn't touch that. There were considerations of expanding the CMN in 2004 and 2005, with the support of the Economic and Social Development Council, the CUT, the Fiesp and the CNI, but the matter ended up not advancing.

With the merger of the ministries of the economic area in the Bolsonaro government, what was bad got worse. Not only the Ministry of Planning disappeared, but also the Ministry of Industry and Commerce and even the Ministry of Labour.

I imagine that an eventual Lula government would undo this inefficient centralization of the economic area in the hands of a single minister, recreating the ministries of Finance, Planning and Industry and Commerce. The one at work has already been recreated in the meantime.

Well then, why not include in the CMN, in addition to Planning, the Ministries of Industry and Commerce and Labor? And, who knows, also Agriculture? And why not make the CMN even more representative, including a representative from the business area and another from the workers and, perhaps, someone from the academic area? The elected government would retain the majority, but would give voice and vote to representatives of society. The CMN would then have eight or nine members. To avoid a possible inflationary bias, it can be predicted that the secretariat will remain with the BC and that the Minister of Finance, in addition to chairing the CMN, will have a clearly preponderant role, something like the power to veto certain decisions, for example.

I remember that during the dictatorship, at this more democratic point, the CMN was much broader. From the time of its creation in 1964 until 1994, the CMN had the presence of sectoral ministries, presidents of public banks and representatives of the business sector and workers.


Reverse the emptying of the National Monetary Council

Expanding the CMN would not be enough, however. It so happens that, in the Bolsonaro government, the CMN was emptied with the transfer of strategic functions to the Central Bank. See the absurdity, reader. Strategic decisions were transferred to a Central Bank autonomous from the elected government.

Under the new exchange rate framework, approved practically without discussion by Congress in 2021, the Central Bank was authorized to liberalize international capital transactions, at its discretion, being able, at the limit, to decree the full convertibility of the national currency. Now, such measures may or may not be defensible, there are controversies among economists, but they are undeniably of enormous importance, difficult to reverse, and cannot remain in the exclusive hands of the combination of financiers and technocrats who usually command the Central Bank – now with more independence in relation to political power.

The Central Bank was also authorized to expand the chances of internal use of foreign currency, receiving carte blanche to regulate accounts in foreign currency, including the requirements and procedures for opening and operating them. Again, it should be noted, at its sole discretion, without going through the scrutiny of the CMN or anyone else. The risk is that the Brazilian economy could be gradually dollarized, following the unfortunate path of most Latin American countries.

The Central Bank deserves respect, has a good staff and, as a general rule, performs its duties with competence and seriousness. The exchange mark law certainly has positive aspects, modernizing and simplifying transactions with foreign currency. But you have to separate the wheat from the chaff. Keep the changes that bring efficiency, abandon those that create vulnerabilities for the Brazilian economy and bring the risk of dollarization.

No matter how competent it may be, the Central Bank should not be able to take monetary and exchange decisions that affect the country's future in a profound way that is difficult to reverse, by autonomous decision, in spite of the elected political power. It doesn't work that way anywhere in the world, as far as I know.

Therefore, it would be necessary to return to an expanded and more representative CMN, the responsibilities unduly transferred to the Central Bank. This review of the monetary framework would be an important step towards correcting distortions introduced in the recent past.

*Paulo Nogueira Batista Jr. he holds the Celso Furtado Chair at the College of High Studies at UFRJ. He was vice-president of the New Development Bank, established by the BRICS in Shanghai. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa).

Extended version of article published in the journal capital letter, on May 27, 2022.


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