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The COVID-19 pandemic exposed Brazil to an unprecedented health, social and economic challenge, leading to a 4.1 percent GDP decline in 2020, followed by a rebound in 2021. An emerging recovery in demand, both domestic and external, and a pick-up in commodity prices are expected to push GDP growth to 5.3 percent in 2021. Rising vaccination rates also contribute to the expected improvements in growth rate. However, the path to a full recovery in the medium-term remains steep given Brazil’s preexisting structural and fiscal vulnerabilities and the impact of inflationary pressures on the economy.

Brazil has become the second country in the world in terms of absolute deaths due to COVID-19 (only behind US), and eight in terms of per capita deaths. By end-September 2021, Brazil has reached more than 590,000 confirmed COVID-19 deaths, and more than 21 million cases (third worldwide, behind US and India). While deaths and cases are now well below the peak registered in April 2021, Brazil still accounts for 16 percent of all recorded COVID-19 related deaths worldwide since the peak of March 2021. The newest and more contagious Delta variant is already spreading in the country, which raises concerns about a possible new wave of infections like the one experienced in March-May 2021, when 20 out of 27 states faced over 90% of ICU bed occupancy rate and acute shortages of critical supplies such as oxygen and sedatives. Vaccination efforts have accelerated recently, with almost 70% of the population having received its first dose by end of September 2021, though still just 40% are fully vaccinated.

The pandemic, and the related restrictions in economic activity resulted in a sharp decline of external and domestic demand while also constraining supply.  It has brought uncertainties to the macroeconomic policy framework, especially in the fiscal area, which translate into downside risks, thus calling for strong fiscal consolidation and the adoption of structural reforms, as soon as the spread of the disease is controlled.

The COVID-19 pandemic is  jeopardizing years of progress in poverty reduction and human capital accumulation. Brazil is among the LCR countries that suffered the longest spell of public schools’ closures to date, which is expected to raise learning poverty from 48 to 70 percent and to disproportionately affect the poor (remote learning benefited less than 50 percent of students in less developed regions, vs. 92 percent in richer parts of the country). As a result, the impact of COVID-19 is expected to reverse a decade-long steady improvement in the Human Capital Index (which had increased from 0.52 to 0.58 between 2007 and 2019) and calls for strong remedial acceleration policies.  To protect the poor and the most vulnerable people, the Government put forward a large, timely, targeted and time bound fiscal package focused on health spending (tests, vaccines, transfers to municipalities to strengthen health response and attend acute emergencies), social assistance (the generous social emergency transfers (Auxílio Emergencial) to 66 million individuals and the expansion of the Bolsa Familia Conditional Cash Transfer (CCT) program.), and support to firms to contain layoffs. The cost of this package was estimated at BRL 815.5 billion (US$156.8 billion), or 11.4 percent of GDP in 2020. The large fiscal stimulus limited the annual economic growth contraction in 2020 to 4.1 percent. It also served as a swift and generous temporary relief, which helped poverty go down from 19.6 percent in 2019 to 12.8 percent in 2020 (poverty rate is rate based on the US$ 5.5/day (PPP) line). However, poverty is expected to increase to 15.7 percent in 2021, even after considering the new round of emergency Auxílio Emergencial income support approved in April 2021, as the poor and vulnerable have been disproportionally affected by the COVID-19 pandemic and the labor market recovery has been weak with unemployment remaining above the pre-pandemic levels.

Striking the right balance between protecting the poor and ensuring sustainable public finances, including at subnational levels, will be a key policy challenge in 2021.

Supporting the transition to a greener and more resilient growth model also remains a key challenge. Brazil is home to more than 60 percent of the Amazon rainforest, the largest tropical forest in the world and has a high share of renewables in its energy matrix, but high exposure to climate risks and deforestation call for a strong reform agenda to address these challenges. Due to the increase in deforestation emissions, Brazil is not on track to meet its NDC targets (a reduction of GHG emissions of 37% by 2025 and 43% by 2030, relative to 2005) and has yet to develop an integrated long term national strategy to achieve its climate goals. Recent reforms in the infrastructure sector, together with the administration’s renewed interest in the climate agenda, provide sound opportunities for Brazil’s green recovery and for lifting millions of Brazilians out of poverty.

Last Updated: Oct 14, 2021

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