IV. The Risks of Overheating and Measures to Constrain Demand

Given the excessive consumer demand during the initial months of the Real Plan, the government had no other choice but to constrain credit in order to avoid shortages and the return of high inflation rates. Of course, the best defense against excess consumption is to increase production, but this line of reasoning obscures a very serious problem. Namely, since two or three years are necessary to build a factory, short-term supply is limited by the availability of production capacity and imports. Over the short term, therefore, excess demand could definitely hurt the Plan. To avoid this threat, the following measures were adopted in October 1994:

• advances, loans and credits offered by the financial system could be granted for no more than three months, effectively reducing consumer credit;

• the financial system could no longer finance intermediaries and credit card companies;

• partial payments of credit cards were prohibited;

• consumer consortium purchases of appliances and electronic products were suspended;

• consumer consortium purchases of vehicles could not exceed 12 months; and

• a 15% compulsory, non-interest earning reserve requirement was established for bank loans and credits.

Despite these measures, economic activity in the first quarter of 1995 continued at a high level. The GDP that quarter rose 10.5% relative to the same period in 1994. Some industrial sectors, according to the Getúlio Vargas Foundation (Table 4), were already using 100% of their installed capacity in April 1995.

Table 4

Sectors with the Highest Levels of Utilization, April 1995

Sector of Activity	Rate of Utilization (%)
Cellulose and mechanical paste	99
Automotive	98
Artificial and synthetic fibers	97
Metals for household use, non-ferrous metals, industrial equipment for hydraulic, thermal, ventilation and refrigeration installations, paper for printing, and natural fibers	96
Non-metallic material products for construction, paper, cardboard and products for packaging, tires, fuels and petroleum lubricants	95

Source: FGV Survey - April 1995

Thus, in the first quarter of 1995, the government adopted additional fiscal and monetary measures. In the fiscal area, it:

• eliminated some $3.2 billion in programmed government expenditures and some $3.4 billion in state company investments;

• delayed public-sector wage payments until the beginning of the month following that for which payment was being made;

• reduced by 10% and 15% the current expenditures of, respectively, state enterprises in the productive sector and government financial institutions, relative to those of 1994;

• re-negotiated existing contracts and bids of state companies;

• transferred a number of public services to the private sector, notably in the electrical and transport areas; and

• set quarterly limits for budgetary expenditures in order to balance outlays and revenues.

In the monetary area, it:

• prohibited financial institutions from granting credits guaranteed by various checking operations;

• forbade financial institutions and investment funds from acquiring or intermediating the sale of commercial paper;

• required compulsory reserves for guarantees offered by banks in support of loans or credits between individuals or non-financial companies;

• raised the tax on financial operations; and

• increased existing reserve requirements and mandated a 60% reserve for balances in excess of levels set by the Central Bank.

The measures adopted to control consumption were essential to ensure price stability and to secure the successes achieved since initiation of the Real Plan. Even with the restrictive measures, GDP grew close to 8% in the first 12 months of the Plan, which represents a per capita income growth on the order of 6.5%. This increase was the best result in the last 15 years.