Lula approves spending cuts to meet Brazil's fiscal framework, says minister

Demonstrators hold placards during a protest to symbolize the funeral of the Brazilian real, the country's currency introduced 30 years ago, in Sao Paulo, Brazil July 3, 2024. /Carla Carniel

BRASILIA - Brazil's President Luiz Inacio Lula da Silva ordered his economic team on Wednesday to comply with the country's fiscal framework, and approved suggestions of spending cuts, the country's finance minister told journalists.

Brazilian assets had suffered a sell-off in recent weeks as markets feared fiscal deterioration amid a government reluctance to cut spending, which led to investors' concerns about the government's ability to comply with the fiscal framework approved last year.

On Wednesday, however, the Brazilian real rose nearly 2% against the U.S. dollar in spot trading, as market participants awaited details from Lula's meeting with his economic team, and after the president said earlier in the day that his government would remain committed to fiscal responsibility.

"The first thing the president ordered us to do was 'comply with the fiscal framework'," Finance Minister Fernando Haddad told journalists in Brasilia after the meeting, referring to a constitutional law that sets a limit to government spending.

Haddad also said that Lula approved suggestions the officials presented in the meeting to cut 25.9 billion reais ($4.7 billion) in government spending, which would allow Lula's administration to comply with the fiscal framework next year.

These measures would include a greater scrutiny to cut social benefits from people who are ineligible, while some of the moves could be brought forward if required to help the government meet the fiscal rule this year, according to him.

Haddad added the government could also block planned spending, depending on the development of public accounts. A bi-monthly revenue and expenditures report will be released later this month.

The Brazilian real has weakened around 13% against the U.S. dollar this year, and 6% in June alone, impacted by prolonged high interest rates in the U.S. and domestic fiscal uncertainties.

The fall has been exacerbated by Lula's persistent criticisms of the central bank and the institution's reluctance to cut spending.

Before the meeting, Haddad attributed part of the strength the real showed on Wednesday to the government's better communication.

($1 = 5.5580 reais)

-(Reuters)