The role of BNDES and financing development in Brazil: an analysis of treasury loan prepayments and the creation of TLP

Abstract

The article discusses the decision of the Brazilian government to prepay R$ 280 billion in Treasury loans to the BNDES and also to index the cost of BNDES funding to a 5-year market rate indexed to IPCA, through the substitution of TJLP for the new TLP. In addition to the legal aspects, the allocative and economic implications are assessed. It is argued that the traditional view, which circumscribes the mission of a development bank to the correction of deviations between the social and private return of projects intensive in externalities, should be combined with a vision emphasizing the stabilizing character, via the credit channel, of a development bank, acting in a relevant systemic scale, as a tool to offset the pro-cyclical and short term propensities of private finance. Furthermore, we should consider its contribution to development through the mitigation of the extreme severity of long-term credit rationing over private investment in Brazil linked to the historically high interest rates, that removes a bias against capital intensive projects and those with significant potential scale economies. The paper emphasizes the need for an evaluation of both the costs and the fiscal benefits derived from the banks' contribution to economic growth and financial stability. It also proposes a change in the rule of formation of the new TLP such as to preserve some degree of flexibility required for policy makers to be able to react to the challenges posed to monetary and credit policies in different economic contexts.