Pessimistic IMF scenario: inflation returns in 2007

NBR might be facing an inflation outbreak next year, from 5.7% in December 2006 to 6.5-7% in December 2007, Emmanuel van der Mensbrugghe, head of the IMF team of experts that has just concluded a periodic assessment of the economy, warned on Tuesday. The possible scenario outlined by the Fund official could be brought about by the Government’s decision to let spending run free until it reaches a GDP deficit of 2.5%, according to the draft budget under discussion, to a bigger wage raise in the public sector than this year, due to trade union pressure, as well as the continued increase in controlled prices. In addition to a reversal of the inflation decline process, this would lead to an increase in foreign deficit to 12.5-13% of GDP against a level estimated at 10.4% of the GDP for 2006. “We have recommended that the Government should keep the budget deficit as close as to zero as possible. As long as investment activity in the private sector is very dynamic and we are not expecting any decline, it is the state’s job to intervene and control the foreign deficit by tempering public sector spending,” said Van der Mensbrugghe.