Concerns Arise Over Underfunding of Brazil’s Farm Credit Program

A recent report indicates Brazil’s farm credit program is underfunded by R$2.2 billion, largely due to rising interest rates. Current subsidies allocated R$14.1 billion, but real expenses could reach R$25 billion. Historical disbursement rates suggest potential expenses of R$16.3 billion this year. Furthermore, recently authorized emergency credit may require offsets elsewhere in the budget to ensure fiscal balance.

A technical report by Warren Rena warns that Brazil’s farm credit program, known as Crop Plan, is significantly underfunded by R$2.2 billion in the federal budget proposal for interest rate subsidies. This shortfall arises due to rising interest rates which are anticipated to inflate the government’s subsidy expenses. Currently, Congress is reviewing a budget that allocates R$14.1 billion for these subsidies, yet considering the projected average Selic rate, actual expenses could soar to R$25 billion, necessitating an additional R$10.9 billion.

The report highlights that last year, only 65% of the allocated subsidy funds were disbursed. If this year’s execution rate mirrors that of the previous year, total expenses could reach R$16.3 billion, exceeding current allocations by R$2.2 billion. It is important to note that these figures do not factor in the recently authorized R$4.2 billion in emergency credit through Decree 1289/2025, aimed at reviving subsidized loans for the 2024/25 Crop Plan, which had previously been halted.

Authors of the report, including Chief Economist Felipe Salto, analyze whether the provisional measure serves merely to avert disruptions in loan disbursements caused by rising interest rates and delayed budget approvals, or demonstrates the government’s intent to signal higher-than-planned subsidy expenses for the year. They express concern that if the budget necessitates recalibrations, it could impose pressure on other government spending, resulting in required cuts or a deterioration in the primary fiscal balance.

Mr. Salto remarked, “The issue with Crop Plan is not a concern on its own, but the extraordinary credit authorized by Decree 1289 will need to be offset by cuts elsewhere within the spending cap…” He further emphasized the importance of maintaining fiscal balance amid market skepticism towards the government’s economic strategy. If Crop Plan becomes a fiscal burden, it could infringe upon the government’s intended adherence to the new fiscal framework’s expenditure limit.

Even though extraordinary credit does not directly fall under the fiscal framework’s spending cap, it is included when calculating the primary fiscal result. The report concludes that the only viable method to accommodate these additional expenses would be through the cancellation of other primary expenditures.

In summary, Brazil’s farm credit program faces significant underfunding, with projections indicating a drastic shortfall due to rising interest rates. The report underscores the potential consequences of underfunding, including the need for budget adjustments that may affect other government priorities. Maintaining fiscal responsibility will require careful balancing of expenditures to avoid exacerbating the country’s economic challenges. Ultimately, the implications of the Crop Plan’s budgetary issues highlight the importance of strategic fiscal planning within the broader economic framework.

Original Source: valorinternational.globo.com