By Elzio Barreto
SAO PAULO (Reuters) - Brazil's government may only have one way to keep the local currency from strengthening too much, former Central Bank President Gustavo Franco said: scrapping all import tariffs so that more dollars flow out of the country.
Franco, who as president of the bank in the late 1990s spent billions of dollars trying to defend a fixed exchange rate, said local companies would buy more foreign goods and seek more dollars in the spot currency market if tariffs were slashed.
The move would help soak up the flood of U.S. currency from surging Brazilian exports, he said.
"Higher imports are the only thing to wake up the exchange rate from its deep sleep," Franco told the Reuters Latin American Investment Summit in Sao Paulo.
Brazil's currency, the real (BRBY: Quote, Profile, Research, Stock Buzz) has traded near a six-year high of 2.067 and could go below 2 reais per dollar soon because of the country's healthy balance of payments, he said.
Politicians and business leaders have called for more vigorous efforts to weaken the real to protect local manufacturers from affordable imports and encourage more newcomers to the export market.
The central bank on Friday raised its forecast for the current account surplus in 2007 to $7.7 billion from $4.5 billion because of higher exports and foreign direct investment.
"Brazil has a huge surplus in the current account that shows no sign of coming down," Franco said. "You can't have lunch and keep your money too."
Lowering the import tariffs temporarily may harm some companies, but it is a much cheaper way for the government to weaken the real because the government sells local bonds that yield almost 12 percent a year to buy dollars in the spot market, he said.
FOREIGN RESERVES
The central bank has bought an average $5 billion a month in the currency markets, pushing Brazil's foreign currency reserves to a record $107.53 billion. The bank's daily intervention has done little to weaken the currency, and Franco sees no end in sight.
"It is hard to see a limit, politically," for the bank's reserve accumulation program, Franco said. "Reserves are at an extremely high level already. It is possible to go much further if the fiscal situation accommodates and interest rates come down, because the cost (to fund the dollar purchases) would be much lower."
(Additional reporting by Daniela Machado and Renato Andrade)
© Thomson Reuters 2009. All rights reserved.
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