r FOR OFFICIAL USE ONLY Report No: PD000152 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$1,000 MILLION TO THE FEDERATIVE REPUBLIC OF BRAZIL FOR THE BRAZIL INCREASING PRODUCTIVITY, SUSTAINABILITY AND INCLUSION February 18, 2025 Macroeconomics, Trade and Investment Latin America And the Caribbean This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) Federative Republic of Brazil GOVERNMENT FISCAL YEAR January, 1 – December, 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of 1/31/2025) Currency Unit US$1: RS$ 5.83 Regional Vice President: Carlos Felipe Jaramillo Regional Director: Oscar Calvo-Gonzalez Country Director: Johannes C.M. Zutt Practice Manager: Shireen Mahdi, Erwin de Nys Task Team Leader(s): Cornelius Fleischhaker, Werner L. Kornexl, Luigi Butron Calderon The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) TABLE OF CONTENTS SUMMARY OF PROPOSED FINANCING AND PROGRAM ...................................................................... i I. COUNTRY CONTEXT AND OPERATION SUMMARY......................................................................... 1 II. MACROECONOMIC POLICY FRAMEWORK .................................................................................... 2 A. Recent Economic Developments ................................................................................................3 B. Macroeconomic Outlook and Debt Sustainability ......................................................................6 C. IMF Relations……… ......................................................................................................................8 III. PROPOSED OPERATION ............................................................................................................... 9 A. Link to Government Program, CPF, other WBG operations, and Corporate Priorities ..............9 B. Prior Actions, Triggers, Expected Results and Analytical Underpinnings .................................10 C. Consultations and Collaboration with Development Partners .................................................20 IV. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 21 A. Poverty and Social Impacts .......................................................................................................21 B. Environmental, Forests, and other Natural Resources Aspects ...............................................21 C. PFM, Disbursement, and Auditing aspects ...............................................................................22 D. Monitoring, Evaluation, and Accountability .............................................................................23 V. SUMMARY OF RISKS AND MITIGATION ...................................................................................... 23 ANNEX 1. Policy and Result Framework .......................................................................................... 26 ANNEX 2. Paris Alignment Assessment ........................................................................................... 29 ANNEX 3. Required Accompanying Documentation......................................................................... 36 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) The Brazil Increasing Public Finance, Sustainability and Inclusion Policy Loan was prepared by an IBRD team lead by Cornelius Fleischhaker (Senior Economist, ELCMU), Werner L. Kornexl (Natural Resources Management Specialist, SLCE2) and Luigi Butron Calderon (Economist, ELCMU), and consisting of Leonardo Silveira do Nascimento (Sr. Financial Management Specialist, ELCG1), Joaquim Diogo Ribeiro Tavares (Counsel, LEGLE), Eli Weiss (Lead Agriculture Economist and Program Leader, SLCDR), Arthur Amorim Bragança (Senior Economist, SLCE2), Arthur Augusto de Freitas Catraio (Consultant, SLCE2), Ildo Jose Lautharte Junior (Senior Economist, HLCED), Priscilla Nunes Cardoso de Sá (Team Assistant, LCC5C), Rodrigo Silveira Veiga Cabral (Senior Financial Officer, TRECI), Kajetan Wladyslaw Trzcinski (E T Consultant, ELCPV), Hugo Rolando Nopo Aguilar (Senior Economist, ELCPV), Isabella Miranda Meyer (Junior Professional Associate, HLCED), Beatriz Couto Ribeiro (Consultant, ELCMU), Fernanda Ailina Pedro Massarongo Chivulele (Research Analyst, EAEM2), Fabiano Silvio Colbano (Senior Economist, ELCMU), Rafael Amaral Ornelas (Economist, ELCMU), Raphael Pinto Fernandes (Consultant, ELCMU), Patricia Rodrigues de Melo (Finance Analyst, WFACS), Monica Tambucho Perez (Consultant, WFACS) and Faruk Miguel Liriano (Financial Sector Specialist, ELCFN). The team received guidance from Practice Managers Shireen Mahdi (ELCMU) and Erwin de Nys (SLCE2), as well as Oscar Calvo-Gonzalez (Regional Director, ELCDR) and Johannes Zutt (Country Director, LCC5C). Matteo Morgandi (Lead Economist, HMNDR), Abdoulaye Sy (Lead Country Economist and Program Leader, EMNDR) and Diji Chandrasekharan Behr (Lead Environmental Economist, SAEE2 9270) served as peer reviewers. The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) @#&OPS~Doctype~OPS^dynamics@paddpfbasicinformation#doctemplate SUMMARY OF PROPOSED FINANCING AND PROGRAM BASIC INFORMATION Operation ID Programmatic P507322 No Proposed Development Objective(s) To support the Federal Government of Brazil to (i) improve taxation and fiscal sustainability, (ii) promote climate action by enabling sustainable finance and environmental preservation, and (iii) strengthen social inclusion. @#&OPS~Doctype~OPS^dynamics@padborrower#doctemplate Organizations Borrower: Federative Republic of Brazil Contact Title Telephone No. Email Mario Gouvea de Almeida Advisor +55 61 3412 1704 mario.g.almeida@tesouro.gov.br Implementing Agency: Ministry of Finance / Secretariate of the Treasury Contact Title Telephone No. Email Marina Jabur Advisor +55 61 3412-1843 marina.jabur@tesouro.gov.br @#&OPS~Doctype~OPS^dynamics@padfinancingsummary#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Yes Is this project Private Capital Enabling (PCE)? Yes SUMMARY Total Financing 1,000.00 i The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) DETAILS World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 1,000.00 @#&OPS~Doctype~OPS^dynamics@padclimatechange#doctemplate PRACTICE AREA(S) Practice Area (Lead) Contributing Practice Areas Environment, Natural Resources & the Blue Economy; Macroeconomics, Trade and Investment Social Protection & Jobs; Finance, Competitiveness and Innovation; Education CLIMATE Climate Change and Disaster Screening Yes, it has been screened and the results are discussed in the Operation Document @#&OPS~Doctype~OPS^dynamics@padoverallrisk#doctemplate OVERALL RISK RATING Overall Risk ⚫ Moderate @#&OPS~Doctype~OPS^dynamics@paddpfannexpolicyandresult#doctemplate ii The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) RESULTS Baseline Closing Period Improve taxation and fiscal sustainability RI1. Number of federal consumption taxes (excluding excise taxes) (Number) Dec/2024 Jan/2027 3 (PIS/PASEP; COFINS, IPI) 1 (CBS) RI2. Personal income tax revenue from offshore and exclusive funds (Text) Dec/2023 Dec/2026 0 R$7 billion RI3. Ratio of real growth of current primary expenditures relative to that of current revenues (Percentage) Nov/2022 Nov/2026 90 70 percent or less Promote climate action by enabling sustainable finance and environmental preservation RI4. Cumulative volume of sustainable sovereign debt issued and covered by with allocation and impact reports. (Amount(USD)) May/2023 Dec/2026 0 US$ 6 billion RI5. Private financing mobilized for sustainable development investments under ECOINVEST Brasil (Text) Dec/2023 Dec/2026 0 R$50 billion RI6. Volume of rural credit provided in compliance with new, stricter environmental criteria (Text) Dec/2023 Dec/2026 0 R$200 billion RI7. Number of States that have introduced ecological transfers to municipalities or are required to introduce them. (Number) Dec/2023 Dec/2026 18 26 RI8. Difference in Amazon rainforest lost to forest fires in program adhering municipalities compared to eligible municipalities not in the program (Percentage) Dec/2023 Dec/2026 0 At least 20 percentage points Strengthen social inclusion RI10. Number of families moved from permanent Bolsa Familia beneficiary status (in transitional protection phase). (Number) May/2023 Dec/2026 0.69 million (3.3 percent of total beneficiaries) 2.2 million (10 percent of total beneficiaries) RI9. Number of families in the Amazon enrolled in the Bolsa Verde program. (Number) May/2023 Nov/2026 0 55,000, with at least 80% having a woman as the recipient of the benefit. RI11. Percentage of food in school feeding procured from family farmers. (Percentage) Dec/2023 Dec/2026 40 50 iii The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) IBRD PROGRAM DOCUMENT FOR A PROPOSED LOAN TO THE FEDERATIVE REPUBLIC OF BRAZIL I. COUNTRY CONTEXT AND OPERATION SUMMARY 1. The proposed U$1 billion standalone Development Policy Financing (DPF) aims to support the Federal Government of Brazil to (i) improve taxation and fiscal sustainability, (ii) promote climate action by enabling sustainable finance and environmental preservation, and (iii) strengthen social inclusion. It reflects the Government’s commitment, expressed in their Multiannual Plan (Plano Plurianual – PPA) 2024-27, as well as its Ecological Transformation Plan1 (ETP) and the country’s G20 chairmanship, to pursue a more dynamic economy, and an environmentally sustainable and socially inclusive development model, while assuming global leadership on climate. The proposed operation is aligned with the World Bank Group (WBG) Country Partnership Framework (CPF) for Brazil FY24 - FY28 and builds on the WBG's longstanding dialogue on key topics such as tax reform, sustainable finance, and targeted conditional cash transfers. The first DPF with the Federal Government of Brazil since 2009, it is part of a set of coordinated technical and financial support for Brazil’s green transition from international partners, including the Inter-American Development Bank (IDB) and planned support from the Asian Infrastructure Investment Bank (AIIB). 2. Brazil is an upper-middle-income country that aspires to become a global leader in creating a productive, green and inclusive economy that generates opportunities for all. To achieve these goals, Brazil needs to maintain a sustainable fiscal framework and foster a more productive economy while promoting green and resilient growth. Despite a strong recovery from the COVID-19 pandemic, Brazil’s fiscal accounts remain a challenge, with public debt at 78 percent of Gross Domestic Product (GDP) being significantly above the average of emerging market peers. Safeguarding fiscal sustainability requires a credible fiscal anchor and a progressive fiscal adjustment. It also requires higher growth. This has been a long- term challenge for Brazil. Low productivity has long hampered economic growth, in large part due to numerous economic distortions, low integration in global markets, limited innovation, and the high cost of doing business. One major culprit is Brazil's overly complex tax system, which imposes high administrative, and litigation costs and introduces market distortions that hamper productivity growth. Hence, deep structural reforms that place Brazil on a sustainable fiscal footing and that increase economic productivity are critical if it is to meet its ambitions. 3. Brazil, the world’s 6th largest greenhouse gas (GHG) emitter, is also stepping up actions to address deforestation, land degradation and climate risks in an effort to realize its potential as a leader in climate-friendly development. Climate change is altering temperature and rainfall patterns, threatening Brazil’s natural capital, especially the Amazon rainforest, the world’s largest carbon store. Weak land governance and environmental enforcement, along with agricultural and cattle ranching demands, exacerbate this issue. Brazil is also exposed to extreme weather events, such as droughts and floods, estimated by the Bank to cause annual losses of around R$13 billion (US$2.3 billion). The country’s 2023 Nationally Determined Contribution (NDC) under the Paris Agreement targets a 48 percent reduction in emissions by 2025, 53 percent by 2030, and net-zero emissions by 2050. Achieving these goals requires combating illegal deforestation and forest fires, improving land governance, and promoting sustainable agricultural practices. Yet, Brazil, with its low carbon energy supply and significant renewable energy potential, also stands to benefit from climate action. At COP28, the Government launched the ETP to stimulate investments in renewable energy, low carbon agriculture, and other sustainable activities. Implementing this plan will require substantial private sector investments in decarbonization and resilience, supported by policies to create sustainable finance frameworks and reduce investor risks. 1Brazil’s ETP is a comprehensive initiative aimed at promoting sustainable development and addressing climate change. The plan focuses on three main goals: higher productivity and green jobs, a new relationship with the environment, and shared and fair earnings. Page 1 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) 4. Brazil’s social reality is marked by a history of extreme inequality and exclusion; however, the country also has a track record of successful social inclusion policies, which need updating to current and future realities. Social exclusion has deep roots in Brazil going back to the times of colonialization and slavery. During an extended period of relatively high growth with the help of effective social programs, poverty was cut in half between 2003 and 2014, with extreme poverty all but eliminated. Yet progress stalled as the economy entered a downturn in 2015 and today remains at levels essentially unchanged from a decade ago. Spending on social assistance expanded during the pandemic and remains high compared to the pre-COVID level, while demographic change results in ever higher pension outlays. Therefore, using social assistance resources more efficiently is critical, as is strengthening social policies that improve human capital and support a livable planet. 5. The three pillars of the reform agenda are interconnected, creating a framework that enhances economic sustainability, environmental stewardship, and social equity. Fiscal reforms boost productivity and revenue, enabling climate initiatives that promote sustainability and resilience. These reforms also provide budgetary space to support vulnerable communities while ensuring environmental conservation. This approach addresses immediate economic and social challenges and lays the groundwork for a more equitable and sustainable future for Brazil. Overhauling the complex tax system will make taxation more progressive and improve economic productivity, enhancing growth potential. A new fiscal framework increases fiscal policy predictability, contributing to gradual fiscal adjustment and stabilizing public debt. The second pillar promotes climate action through sustainable sovereign bonds, currency hedging for green investments, and conditioning agricultural credit on environmental compliance, mobilizing financing for mitigation and adaptation. Performance-based ecological transfers and support to combat forest fires aid local preservation. The third pillar combines climate action and social inclusion through cash transfers to vulnerable families engaged in forest protection. Improvements to the social registry enhance the targeting of social programs like Bolsa Família and the new VAT refunds. Improving school feeding quality supports post-COVID learning recovery and productive inclusion for family farmers, especially women. 6. The proposed operation is aligned with the World Bank’s approach to financing in countries above graduation discussion income (GDI). As laid out in the CPF, a key aim of the Bank’s engagement in Brazil is to strengthen the quality and sustainability of institutions for economic and social development. The program supported by the proposed DPF strengthens institutions in key areas of taxation, fiscal sustainability, sustainable finance (public and private) and targeting of social assistance programs. Further, it contributes to global public goods through climate change mitigation and adaptation. II. MACROECONOMIC POLICY FRAMEWORK 7. Brazil’s macroeconomic policy framework is deemed adequate for the proposed operation. Activity remained robust in 2024, driven by recovering investment and strong private consumption, supported by a resilient labor market. Real GDP is expected to grow by 2.2 percent in 2025 before converging to its potential of about 2.3 percent. The Federal Government has made notable progress in implementing consistent, growth-oriented structural reforms to improve the business environment, enhance financial sector performance, and is advancing with a comprehensive reform to streamline indirect taxes. Fiscal policy is anchored by a new framework that enhances clarity and predictability, supporting gradual fiscal consolidation, with the debt-to-GDP ratio expected to stabilize by the end of the decade. The Federal Government reached the primary balance target in 2024, signaling its commitment to improve fiscal outcomes. Public debt remains sustainable, and the country’s external position is resilient, with a low share of foreign currency- denominated debt and ample reserves. Additionally, the Government is committed to a medium- and long-term debt management strategy to extend the maturity of its debt portfolio. Brazil’s macroeconomic framework is underpinned by an independent and credible Central Bank, a resilient financial system, an inflation-targeting regime, and a flexible Page 2 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) exchange rate. Liquidity risks remain low, supported by the Government’s strong cash buffers and limited exposure of public debt to exchange rate fluctuations. A. Recent Economic Developments 8. Brazil’s GDP growth rate surpassed 3 percent annually in both 2023 and 2024. In 2023, growth was driven by robust private consumption, a resilient labor market, fiscal stimulus (including through social transfers), and declining inflation, which enabled monetary easing. A record grain harvest and favorable external conditions also boosted exports. In the first three quarters of 2024, GDP grew by 3.3 percent year-over-year (yoy), supported by expanded private consumption and investment recovery. In December 2024, unemployment fell to 6.2 percent (the lowest since 2014), and real household incomes rose 4.3 percent yoy. Consumer Price Index (CPI) inflation ended 2024 at 4.8 percent, above the upper limit of the Central Bank’s target range (4.5 percent), driven by strong demand for services, higher food prices, and exchange rate depreciation (27.9 percent in 2024). In response, the Central Bank reversed the loosening cycle that started in 2023, raising the policy rate by 275 basis points since September 2024. By January 2025, inflation moderated to 4.6 percent. The financial sector remains well capitalized, liquid, and profitable, with the capital-asset ratio reaching 17.7 percent in June 2024, well above the regulatory minimum (8 percent internationally and 10.5 percent in Brazil). 9. Brazil’s external position remains robust despite the recent currency depreciation. In 2024, the trade surplus reached 3.0 percent of GDP (US$66.2 billion), while the current account deficit stood at 2.6 percent of GDP (US$56 billion), partly covered by net foreign direct investment (FDI) inflows of 2.1 percent of GDP (US$ 46.8 billion). The trade balance has benefitted from improved terms of trade (up 3.0 percent y-o-y), although imports volume rose (up 16.1 percent y-o- y). Foreign reserves stood at 15 percent of GDP (US$329.7 billion) in 2024 (an amount sufficient to cover 14 months of goods imports). The Central Bank’s net foreign exchange (FOREX) position stood at 10.4 percent of GDP (US$228.9 billion) after currency swap operations of US$100.8 billion. External financing needs were moderate at 10.3 percent of GDP in 2024, well below their 2020 peak. The exchange rate depreciated from R$/US$4.8 in December 2023 to R$/US$6.19 at the end of 2024, reflecting shifts in the US monetary outlook and uncertainty over Brazil’s fiscal position. 10. In 2024, the Federal Government achieved its primary balance target under the fiscal framework, with revenues increasing and limited spending growth. Net revenues rose by 8.9 percent in real terms, primarily due to higher economic activity, income tax, and social contributions. Meanwhile, spending decreased by 0.7 percent in real terms, influenced by the dissipation of one-off judicial payments (precatórios) of R$92 billion (0.9 percent of GDP) in December 2023.2 Consequently, the primary fiscal deficit dropped to 0.4 percent in 2024. Excluding extraordinary spending, mainly related to the flood in the State of Rio Grande do Sul, the primary deficit stood at 0.1 percent of GDP, within the fiscal framework’s target range (zero deficit ± 0.25 percentage points of GDP). This improvement also reflected in the General Government (GG) primary deficit, which declined to 0.3 percent of GDP in 2024, from 2.4 percent in 2023. Despite a rise in net interest payments from 6.6 percent of GDP in 2023 to 6.9 percent in 2024, the overall GG deficit improved from 8.9 percent of GDP in 2023 to 8.3 percent in 2024. GG gross debt increased to 76.1 percent of GDP by the end of 2024 from 73.8 percent of GDP in 2023, with over 90 percent of the debt portfolio denominated in domestic currency. 2 Precatórios are government liabilities derived from judicial claims, usually related to public wages, social security, and social assistance. Page 3 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) Table 1: Key Macroeconomic Indicators 2021 2022 2023 2024e 2025f 2026f 2027f Real economy Annual percentage change, unless otherwise indicated Real GDP 4.8 3.0 3.2 3.2 2.2 2.3 2.3 Contributions (supply side): Agriculture 0.0 -0.1 1.1 -0.1 0.1 0.2 0.2 Industry 0.9 0.3 0.3 0.5 0.4 0.3 0.3 Services 3.0 2.5 1.7 2.4 1.4 1.4 1.4 Indirect taxes 0.9 0.3 0.2 0.4 0.3 0.3 0.3 Contributions (demand side): Consumption 2.8 3.1 2.9 3.0 1.6 1.8 1.8 Investment 2.4 0.2 -0.6 0.7 0.5 0.4 0.4 Net exports -1.2 0.7 1.4 -0.6 0.1 0.1 0.1 Statistical discrepancy and change in inventories 0.9 -1.0 -0.5 0.0 0.0 0.0 0.0 Imports, GNFS 13.8 1.0 -1.2 8.0 3.0 3.0 3.0 Exports, GNFS 4.4 5.7 8.9 3.5 3.3 3.3 3.3 Unemployment rate (ILO definition) 13.2 9.3 8.0 6.8 7.2 7.5 7.8 CPI (end of period) 10.1 5.8 4.6 4.8 3.9 3.7 3.7 CPI (average period) 8.3 9.3 4.6 4.4 3.8 3.7 3.7 Fiscal Accounts Percent of GDP, unless otherwise indicated Expenditures 38.5 41.2 46.1 45.7 45.9 44.8 43.3 Revenues 36.4 39.4 37.2 37.4 38.4 37.9 37.7 Overall Balance -4.2 -4.6 -8.9 -8.3 -7.5 -6.8 -5.6 Primary Balance 0.7 1.2 -2.4 -0.3 -0.1 0.0 0.3 General Government Gross Debt (Authorities' definition) 1/ 77.3 71.7 73.8 76.1 78.1 79.2 79.4 Selected Monetary Accounts Annual percentage change, unless otherwise indicated Base Money -5.2 2.6 0.7 6.7 - - - Credit to non-government 17.9 15.0 8.1 10.8 - - - Interest rate - Selic (period average) 4.8 12.6 13.3 11.0 - - - Balance of Payments Percent of GDP, unless otherwise indicated Current Account Deficit 2.4 2.1 1.1 2.6 1.8 1.9 1.9 Imports, GNFS 18.0 18.9 15.5 16.7 16.4 16.3 16.2 Exports, GNFS 18.9 19.5 17.9 18.0 17.6 17.5 17.4 Net Foreign Direct Investment 1.8 2.1 1.7 2.1 2.4 2.5 2.5 External Debt (in US$, eop) 3/ 670.3 681.1 732.7 768.3 779.2 791.5 797.5 External Debt 3/ 40.1 34.9 33.4 35.0 33.0 31.4 29.4 Terms of Trade (% change) 8.2 -5.2 1.8 3.0 -0.9 -0.2 0.0 Exchange Rate (average) 5.4 5.2 5.0 5.4 - - - Memorandum items Per Capita GDP (In real US$) 9,098 9,321 9,543 9,760 9,923 10,099 10,273 Gross Reserves (in US$, eop) 362.2 324.7 355.0 329.7 340.4 352.8 366.6 In months of next year’s imports 19.1 13.0 11.6 11.7 11.2 10.9 10.7 As % of short-term external debt 2/, 3/ 208.4 193.7 197.2 166.1 177.7 181.3 186.8 Nominal GDP (R$ billion) 9,012 10,080 10,943 11,810 12,439 13,391 14,416 Source: Central Bank of Brazil, Ministry of Finance, Brazilian Institute for Geography and Statistics (IBGE), and World Bank staff calculations. Notes: 1/ Brazilian Central Bank definition (2008 methodology), that excludes the Federal securities in the Brazilian Central Bank (BCB) portfolio and includes the stock of BCB repo operations. 2/ It includes the long-term debt repayments due in the next 12 months as short-term debt. 3/ It includes securities issued in Brazil held by foreign residents and intercompany loans. Page 4 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) Table 2: Balance of Payments (percent of GDP) 2021 2022 2023 2024e 2025f 2026f 2027f Financing Requirements 2.7 2.0 1.1 2.9 1.8 1.9 1.9 Current Account Deficit 2.4 2.1 1.1 2.6 1.8 1.9 1.9 Trade Deficit (GNFS) 1/ 2/ -0.9 -0.6 -2.4 -0.8 -1.2 -1.2 -1.2 Primary and Secondary Incomes 3.3 2.7 3.5 3.3 3.0 3.2 3.2 Net Errors and Omissions 0.2 -0.1 -0.1 0.4 0.0 0.0 0.0 Financing Sources 2.7 2.0 1.1 2.9 1.8 1.9 1.9 Capital Account Balance -0.3 -0.4 -0.5 -0.7 -0.4 -0.4 -0.4 Net Foreign Direct Investment 1.8 2.1 1.7 2.1 2.4 2.5 2.5 Net Portfolio Investment 0.5 -0.1 0.4 0.0 0.1 0.1 0.1 Net All Other Flows 1.6 0.1 0.4 0.3 0.2 0.2 0.2 Change in reserve assets -0.8 0.4 -1.0 1.2 -0.5 -0.5 -0.5 External Financing Gap 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Source: Central Bank of Brazil, IBGE, and World Bank staff calculations. Notes: 1/ GNFS: Goods and Non-factor Services. 2/ A negative sign in Financial Requirements means a reduction of Financing needs, i.e., a surplus in the account, and vice versa. Source: Central Bank of Brazil, Ministry of Finance, and World Bank staff estimates. Table 3: General Government Fiscal Indicators (percent of GDP) 2021 2022 2023 2024e 2025f 2026f 2027f General Government Overall Balance -4.2 -4.6 -8.9 -8.3 -7.5 -6.8 -5.6 External Financing 1.7 -0.6 0.6 1.1 1.1 1.1 1.1 Domestic Financing 2.6 5.1 8.4 7.3 6.4 5.7 4.6 General Government Primary balance 0.7 1.2 -2.4 -0.3 -0.1 0.0 0.3 of which: Central Government -0.4 0.5 -2.5 -0.3 -0.1 0.1 0.4 Total Revenues (and grants) 36.4 39.4 37.2 37.4 38.4 37.9 37.7 Total Primary Revenues (and grants) 34.2 36.6 34.6 35.0 35.3 35.2 35.1 Tax revenues 31.7 32.2 30.9 31.4 31.6 31.4 31.4 Taxes on goods and services 14.1 13.2 12.4 12.5 12.5 12.4 12.3 Direct Taxes 9.6 10.9 10.6 11.0 11.1 11.0 11.0 Social insurance contributions 7.3 7.5 7.4 7.4 7.3 7.3 7.3 Taxes on international trade 0.7 0.6 0.5 0.6 0.6 0.6 0.6 Non-tax revenues 4.7 7.2 6.3 6.0 6.8 6.5 6.3 of which: Interest revenues 2.2 2.8 2.6 2.4 3.1 2.7 2.6 Total Expenditures 38.5 41.2 46.1 45.7 45.9 44.8 43.3 Total Primary Expenditures 33.6 35.4 37.0 35.3 35.4 35.2 34.8 Current expenditures 37.2 39.2 44.2 43.9 43.7 42.6 41.3 Wages and compensation 10.4 10.6 10.7 10.4 10.3 10.1 10.0 Goods and services 4.9 5.4 5.5 5.2 5.1 5.1 5.0 Net Interest payments 4.9 5.8 6.5 8.0 7.4 6.8 5.9 Current Transfers 17.0 17.5 18.8 17.9 17.9 17.9 17.8 Pensions to the private sector workers 7.2 7.2 7.2 7.3 7.4 7.5 7.6 Pensions to the public servants 4.6 4.5 4.5 4.5 4.4 4.4 4.3 Social Assistance 3.2 3.5 4.6 4.1 4.0 4.0 3.9 Other Current Transfers 2.0 2.3 2.5 2.0 2.0 2.0 2.0 Investments (net) 1.2 1.9 1.9 1.8 2.2 2.1 2.0 General Government Gross Debt (Authorities' definition) 1/ 77.3 71.7 73.8 76.1 78.1 79.2 79.4 Domestic Debt 66.6 62.7 64.6 66.5 68.3 69.3 69.5 External Debt 10.7 9.0 9.2 9.5 9.8 9.9 9.9 Note: 1/ Brazilian Central Bank definition (2008 methodology), that excludes the Federal securities in the BCB portfolio and includes the stock of BCB repo operation. Page 5 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) Table 4: Debt Stock and Debt Service Debt Stock (end of period) Debt Service 2024 2024e 2025f 2024e 2025f in million Percent Percent Percent of in million BRL BRL of Total of GDP GDP Gross general government debt (B) 8,984,237 100.0 76.1 3,136,812 3,258,308 21.5 20.2 Internal gross debt 7,780,063 86.6 65.9 2,753,617 2,742,394 19.4 17.1 Securities debt market 6,236,545 69.4 52.8 1,317,627 1,171,100 11.2 9.4 National Treasury securities debt 6,279,036 69.9 53.2 1,326,604 1,179,079 11.2 9.5 Investment of public agencies in securities -49,910 -0.6 -0.4 -10,545 -9,372 -0.1 -0.1 Other federal debt 7,419 0.1 0.1 1,567 1,393 0.0 0.0 BCB repo operations 1,250,516 13.9 10.6 1,384,425 1,525,464 11.7 12.3 Bank Debt 293,002 3.3 2.5 51,565 45,830 0.4 0.4 Federal Government bank debt 19,207 0.2 0.2 3,380 3,004 0.0 0.0 State and Municipal Governments bank debt 273,794 3.0 2.3 48,184 42,826 0.4 0.3 Foreign gross debt 1,204,174 13.4 10.2 383,195 515,914 2.2 3.1 Federal Government 1,031,453 11.5 8.7 328,231 441,914 2.8 3.6 of which: Debt securities traded in the domestic market 680,450 7.6 5.8 216,534 291,531 1.8 2.3 Others 351,003 3.9 3.0 111,697 150,383 0.9 1.2 State and Municipal Governments 172,721 1.9 1.5 54,964 74,000 0.5 0.6 Source: Central Bank of Brazil, Ministry of Finance, and World Bank staff estimates. B. Macroeconomic Outlook and Debt Sustainability 11. GDP growth is estimated at 3.2 percent in 2024 and is expected to stabilize at 2.3 percent over the medium term. Private consumption, sustained by a robust labor market and fiscal transfers, continues to support growth, while a pick-up in investments is expected to boost output in the following years. Inflation is projected to gradually converge towards 3.7 percent by 2026, within the Central Bank’s target range. However, a recent deterioration of inflation expectations led to a more contractionary monetary policy, which in turn will contribute to moderate growth in 2025. Medium-term growth is expected to stabilize at 2.3 percent, reflecting slightly higher potential output estimates due to recent and ongoing structural reforms. With limited fiscal space for significant policy interventions, poverty reduction in 2025 and 2026 is expected to slow, with a rate of 20.5 percent expected by 2026 (from 21.2 percent estimated in 2024). 12. The external position is expected to remain solid in the medium term. The current account deficit is projected at 1.9 percent of GDP on average for 2025-2027, fully financed by net foreign direct investment inflows of 2.4 percent of GDP over the same period. Brazil’s flexible exchange rate regime and ample international reserves are expected to cushion potential adverse shocks. In addition, foreign currency-denominated public debt will remain at relatively low levels, mitigating exposure to foreign exchange risk. 13. The financial system is expected to remain sound and stable, with a well-capitalized banking sector. Capitalization ratios are expected to remain above minimum regulatory levels. Furthermore, the Central Bank has been increasing the scope of its financial stability assessment and systemic risk metrics, highlighting the resilience of the system in terms of solvency, liquidity, and adequate provisioning for losses. Additionally, its Financial Stability Committee assessed Page 6 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) the neutral macroprudential policy to be adequate in the medium term, with the Countercyclical Capital Buffer3 for credit exposures in Brazil remaining at zero percent over the next meetings. 14. Previous and ongoing structural reforms are expected to boost potential output growth in the coming years. Following the approval of the tax reform in December 2023, further legislation is needed to operationalize the new tax system.4 The reform is expected to simplify the system, reduce compliance costs, enhance competitiveness by reducing distortions, and make the system more progressive. Recent financial sector reforms are expected to foster efficiency, competition, inclusion and strengthen financial infrastructure.5 Labor market reforms in 2017, with 2020 and 2021 amendments, and infrastructure reforms facilitate private sector entry into key sectors. As a result of all these measures, country risk perceptions have improved. In December 2023, Standard and Poor Global Ratings raised its long-term global scale ratings on Brazil to 'BB' from 'BB‘ and, in October 2024, Moody’s upgraded Brazil’s Ba2 rating to Baa1, one notch below investment grade, with a positive outlook. Fitch has affirmed Brazil's Long-Term Foreign Currency Issuer Default Rating at 'BB' and kept the outlook stable. However, structural challenges, such as limited total factor productivity growth, low national savings, and a slower labor force growth rate in the context of an aging population, remain, restricting potential growth. The successful implementation of growth-enhancing structural reforms, including those related to trade openness, market competition, and the business environment, could provide a boost with respect to baseline projections. 15. Compliance with the new fiscal framework will require a gradual fiscal consolidation over the medium term. The fiscal framework limits real expenditure growth to 70 percent of real recurrent revenue growth, with a floor and ceiling of 0.6 and 2.5 percent, respectively. It also incorporates targets for the central government's primary balance for four years (with a tolerance band of 0.25 percentage points of GDP) and emphasizes the expected impact of these targets on public debt. In April 2024, the authorities maintained their zero primary deficit target for 2024 but revised the targets for 2025 and 2026 to a zero deficit and a surplus of 0.25 percent of GDP, respectively (from the previous targets of surpluses of 0.5 and 1.0 percent of GDP), delaying the projected stabilization of the public debt-to-GDP ratio to the end of the decade. If annual targets are not met, the legal limit for spending growth is reduced to 50 percent of recurrent revenue growth and additional triggers to restrict current spending will be applied (bans on new hiring, increases in public wages, new mandatory spending, or increases in assistance policies). 16. Following the fiscal rule, baseline projections assume primary spending to grow less than recurrent revenue over the medium-term. GDP growth is expected to support tax revenues in the following years, while the fiscal rule limits central government primary spending growth to a share of the revenue’s growth. Yet, both the central and general government are expected to run a primary deficit of 0.1 percent of GDP in 2025, but gradually turn into a 0.1 percent of GDP surplus in 2026. The primary fiscal balance of the General and Central Governments is expected to continue its gradual improvement and reach 0.3 and 0.4 percent of GDP surpluses, respectively, by 2027, helped by the constraints on real 3The Committee decides the value of the Countercyclical Capital Buffer for Brazil, which is a reserve to be accumulated by the banks during the expansion phase of the credit cycle, and to be consumed during its contraction period. To determine the level of this indicator, the Committee considers the credit growth pattern, credit market conditions, pricing of assets and other financial stability risk indicators. Thus, the risks of excessive credit growth/decline are mitigated in times of great optimism/pessimism. 4 The proposed tax reform already submitted to Congress includes, among others, the regulation of IBS, at state and municipal level; the CBS, a federal consumption tax; the excise tax, which will apply to products that pose a risk to health and the environment; the Tax on Industrialized Products (IPI), which will apply to goods competing with those produced in the Manaus Free Trade Zone; and the cashback mechanism for poorer families. The proposal foresees an average VAT rate of 26.5 percent, which may vary between 25.7 and 27.3 percent. Moreover, the reform will introduce a fully digital tax system, aimed at preventing fraud and expanding the tax revenue base. Other benefits highlighted include the elimination of cumulative (cascading) taxes and the non-exportation of taxes. 5Financial sector reforms include the instant payment system (PIX), the Open Finance environment, the ongoing Digital Brazilian Real (Drex) and regulation of cryptocurrencies. Page 7 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) spending growth (mainly on current transfers and the wage bill). Subnational governments, which have limited ability to borrow, are expected to generate an aggregate deficit of about 0.1 percent of GDP on average for 2025-2027. With short- term interest rates remaining elevated, the overall fiscal deficit of the general government is expected to improve from 7.5 percent of GDP in 2025 to 5.6 percent in 2027. 17. Public debt is projected to increase to 79.5 percent of GDP by 2028 and then slowly decline to 79.1 percent by 2030, driven by GDP growth and the expected fiscal consolidation. GG gross financing needs are expected to decrease from 27.3 percent of GDP in 2024 to 25.6 percent in 2026 on the back of lower interest payments and improving primary balances. They will be met largely through domestic debt issuances (with over 90 percent of percent of federal debt being domestic and in local currency). In terms of debt composition, the Government expects to increase from 4.2 to 7 percent its federal public debt bonds indexed to the exchange rate by 2035, contributing to reducing short-term debt (maturity of up to a year) and promoting the issuance of sustainable bonds. The main macroeconomic shocks that pose risks to debt trajectory include lower than projected primary balances, lower GDP growth, and higher real interest rates. A combined negative shock could lead to an increase in public debt by 21.7 percentage points above the baseline scenario by 2030, with debt stabilizing after 2034. 18. Key macroeconomic risks arise from a slower-than-expected fiscal consolidation and deteriorating external conditions. Downside risks encompass a slower path of fiscal consolidation, especially failure to generate expected revenue gains and contain expenditures in the near term, which could compromise a more accommodative monetary policy stance, increase risk premiums, and worsen debt dynamics. The new federal fiscal framework requires significant additional revenue collection or expenditure controls to support compliance with the primary balance targets. Externally, an economic slowdown in China could lead to reduced global demand, including for some of Brazil’s major exports. Tighter-than-expected global financial conditions could increase borrowing costs. On the upside, a strong labor market and fiscal stimulus via expanded social transfers will continue contributing to robust household consumption and resilient economic activity, and revenue mobilization in line with the Government’s estimates would lead to better fiscal outcomes and faster implementation of structural reforms could lead to higher than projected potential growth. Figure 1. Public Debt Sustainability Analysis Debt to GDP ratio under the standarized stress tests Debt to GDP ratio under the combined stress tests Perrcent of GDP Perrcent of GDP 100 110 100 90 90 80 80 70 70 60 60 50 50 2016 2018 2020 2022 2024 2026 2028 2015 2017 2019 2021 2023 2025 2027 2029 2030 2031 2016 2018 2020 2022 2024 2026 2028 2030 2015 2017 2019 2021 2023 2025 2027 2029 2031 Baseline Primary Balance Shock Real GDP Growth Shock Real Interest Rate Shock Baseline Combined shock Real Exchange Rate Shock Source: World Bank calculations. C. IMF Relations 19. The Federal Government of Brazil maintains an ongoing dialogue with the International Monetary Fund (IMF) on Brazil’s macroeconomic policy. On July 8, 2024, the Executive Board of the IMF concluded the Article IV consultation Page 8 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) with Brazil. The Bank and the IMF have collaborated closely with the Federal Government in the last years, including on public financial management, public investment management, and a Financial Sector Assessment Program. The IMF has also provided technical assistance to Brazilian authorities in other areas, such as fiscal transparency and fiscal frameworks for subnational governments. III. PROPOSED OPERATION A. Link to Government Program, CPF, other WBG operations, and Corporate Priorities 20. The Brazilian Federal Government has proposed an ambitious program of improving economic productivity, social inclusion and leadership on climate action. Taking office during the early recovery phase from the COVID-19 pandemic, the Government prioritized policies focused on re-anchoring fiscal policy while addressing long-standing structural reform needs and re-assuming Brazil’s position as a leader on climate change and environmental protection. The detailed program is laid out in the multi-annual plan 2024 to 2027, which is built around three thematic axes: 1. Social development and guaranteeing rights; 2. Economic development and socio-environmental, and climate sustainability; and 3. Defense of democracy, and reconstruction of the state and sovereignty. Further, in September 2023, the Ministry of Finance announced an economy-wide ETP. Brazil also held the presidency of the G20 in 2024, focusing on (i) fighting hunger, poverty and inequality, (ii) sustainable development (economic, social and environmental), and (iii) global governance reform. 21. The three pillars of the proposed DPF are closely aligned with the Government’s priorities, including its ETP, and guiding themes of the PPA for 2024-2027. Pillar 1 is linked to the Government’s highest priorities, namely, fiscal and productivity enhancing reforms. It is also aligned with the public sector management axis of the PPA, to the chapters on fiscal management and public management modernization. Pillar 2 supports key elements of the ETP. The ETP consists of an inclusive and sustainable development strategy, created to promote employment, productivity, environmental sustainability, and social justice. The actions of Pillar 2 mainly support the ETP pillar on sustainable finance, as well as initiatives to reduce deforestation. Pillar 3 is closely aligned with the strategic objectives of the PPA regarding the improvement of development and social assistance policies for a greater impact on society. Likewise, it is aligned with the Government’s objective of promoting the development of healthy food systems in a sustainable manner. 22. The proposed DPF is fully aligned with the WBG CPF for Brazil FY2024–28. The DPF is fully aligned with the CPF by focusing on three main outcomes: increased productivity and employment; greater inclusion of the poor and underserved; and a greener economy with less vulnerability to climate shocks. Specifically, the DPF aligns with objective 1.1 (strengthen fiscal management) under Pillar 1 of the CPF, which supports fiscal sustainability, with tax reform being crucial for achieving greater productivity and employment. Under Pillar 2, the DPF aims to reduce deforestation and boost private investment in Brazil's green transformation, supporting CPF objectives 1.2 (promote greener competitiveness), 2.2 (promote land ownership and sustainable livelihoods for disadvantaged groups), 3.1 (improve natural resource management), 3.2 (expand the clean energy matrix), and 3.3 (promote green and resilient cities and communities). Additionally, Pillar 3 of the CPF, which supports greater inclusion of the poor and underserved, is reinforced by the DPF through objectives 1.3 (improve human capital) and 2.1 (improve access to essential services and products). The DPF is also consistent with the WBG Climate Change Action Plan 2021-2025 and 2050 targets, enhancing climate action to help countries meet and exceed their Paris commitments. 23. The proposed operation is aligned with the Maximizing Finance for Development approach by enabling new private sector investments for the country’s green transition and benefits from synergies with several ongoing World Bank operations. Several policies enable private investment in areas of critical importance for Brazil’s climate agenda, Page 9 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) such as sustainable agricultural practices and clean energy. Prior Action 3 establishes benchmarks and provides transparency for the issuance of sustainable bonds, which is expected to support the growth of the sustainable private capital market and encourage private issuers to enter the market by enhancing market confidence. Directly, it is expected to result in US$6 billion in sovereign sustainable issuances, held overwhelmingly by private investors. Prior action 4, on enabling investment though improved management of currency risks, is expected to enable R$50 billion of private capital for Brazil’s green transformation, which could include involvement of the International Finance Corporation (IFC). The DPF benefits from synergies with World Bank advisory and technical assistance (e.g. on tax reform, green transfers and sustainable bonds) and ongoing operations (e.g. on cash transfers and education) as well as IFC engagements (e.g. on ECOINVEST). 24. The proposed operation aligns with the goals of the Paris Agreement, as detailed in Annex 2. The DPF reform program is consistent with Brazil’s climate commitments and the findings of the Country Climate and Development Report (CCDR). Regarding mitigation commitments, all the Prior Actions have low mitigation risks, and can be considered aligned on mitigation. Regarding adaptation and resilience, risks from climate hazards are not likely to have an adverse effect on the Prior Actions’ contribution to the attainment of the Development Objective for Prior Actions 1 through 9. PA10, which involves local agro-food systems, could be subject to some risk from climate hazards, such as drought, extreme heat and extreme precipitation. Given the central role of local food producers, the Government has rural programs to support family and community farms affected by natural hazards. These programs aim to enhance preparedness and response frameworks for extreme climate events. Therefore, all PAs are aligned with the adaptation and resilience goals of the Paris Agreement. 25. The proposed operation incorporated lessons learned from past DPFs at both national and sub-national levels of Brazil. The last DPF with the Federal Government of Brazil (P095205, approved in FY2011) was rated as unsatisfactory. The proposed operation applies lessons learned from that experience. Key lessons include: (i) Eschewing a programmatic approach as two previous programmatic series had to be cancelled after the first operation (P095205 and P080829) due to shifting government priorities; (ii) consolidating high level reforms, including constitutional amendments in the standalone DPF, even if it delays its processing, as backloading of reforms was identified as a weakness in the previous operations; and (iii) focusing on reforms within the scope of the implementing agency (Ministry of Finance) and ensuring high level alignment with other ministries on reforms under their purview. The proposed operation also benefitted from the experience of a series of recent State level DPFs which support mutually-reenforcing policies to improve fiscal and environmental sustainability.6 B. Prior Actions, Triggers, Expected Results and Analytical Underpinnings Pillar 1: Improve taxation and fiscal sustainability 26. The Brazilian Government is pursuing a gradual and socially balanced fiscal adjustment while advancing reforms to boost productivity, long hindered by an archaic tax system. Brazil's public finances have deteriorated due to the 2015- 16 recession and the COVID-19 pandemic. The primary balance adjustment needed to stabilize debt-to-GDP is about 3 percent of GDP. Given high spending rigidities and pressures from Brazil’s demographic transition, the Government is making a gradual adjustment, combining revenue and expenditure efforts. Fiscal rules will guide this process by limiting current expenditure growth and allowing revenue measures to achieve fiscal targets. The framework also protects investment expenditures critical for climate resilience and the green transition, while providing for additional spending in 6 DPFs with the States of Mato Grosso (P164588), Amazonas (P172455) Goías (P177632), Ceará (P180497) and Sergipe (P181501). Page 10 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) response to climatic shocks like the 2024 flooding in southern Brazil and forest fires in the Amazon. Higher, productivity- driven growth would greatly facilitate fiscal adjustment, and the reform of indirect taxes is promising to unlock it. Prior Action #1: To reduce economic distortions and the administrative burden of taxation, and increase revenue in a progressive manner, the Borrower has (i) approved a reform streamlining indirect taxation through the creation of a new Value- Added Tax (VAT); and (ii) expanded the taxation of investment funds and income obtained abroad through offshore vehicles. 27. Rationale. Brazil’s tax burden is heavily concentrated in taxes on goods and services, making it regressive. The country has one of the world’s most complicated indirect tax systems, with five different consumption taxes across three levels of government and numerous special regimes. This fragmentation results in cumulative taxation and distortions due to different taxation of similar goods or the same goods and services in different regions. These issues have hampered competitiveness, productivity, and growth for decades. Brazilian taxpayers spend four times more time complying with tax obligations than the Latin American average and eight times more than the OECD average. The system creates high uncertainty and extensive judicial disputes, with taxes in dispute reaching R$5.4 trillion (about 75 percent of GDP).7 Taxes on personal income, especially from capital gains and dividends, are relatively low and represent a small share of total tax revenue. Investment vehicles used by the very rich, such as offshore companies and exclusive investment funds, had favorable tax treatment, being taxed only at the time of distribution of returns to domestic shareholders, unlike more commonly held domestic investment funds subject to semi-annual taxation.8 28. Policy content. An overhaul of indirect taxes was approved via constitutional amendment on December 20, 2023. The reform replaces five existing consumption taxes levied by Federal, State and Municipal Governments with a dual Federal-Subnational VAT and an excise tax. While the VAT is made up of two, legally separate taxes (the federal Contribuição sobre Bens e Serviços, CBS and subnational Imposto sobre Bens e Serviços, IBS), they share a single, broad and unified tax base, harmonized regulations and administration. The reform eliminates cumulative taxation by enabling full VAT crediting and shifts from an origin-based to a destination-based system, removing incentives for state tax competition. It establishes a zero-tax rate for basic consumption items and a 60 percent reduced rate for select goods and services. Additionally, a VAT refund scheme for low-income families mitigates the regressive impact of consumption taxes efficiently. On income tax, Law 14.754/2023 establishes new rules for the taxation of investments held by Brazilian tax residents abroad (including offshore companies and trusts). Further, it applies advance payment of income tax, which has been in place for most investment funds previously, to certain closed-end exclusive investment funds. Under the new law, the profits of offshore companies will be taxed once a year at a rate of 15 percent.9 Gains from exclusive funds will be taxed twice a year, as was already the case with returns to the more common non-exclusive investment funds. 29. Expected results. Once fully implemented, the reform is expected to simplify businesses taxation, make Brazil’s high indirect tax burden more transparent and equitable for consumers, reduce compliance costs, and make this revenue source more reliable. The introduction of the new VAT will require a lengthy implementation process, with legislation advancing in 2024 and 202510 and a phase-in period between 2026 and 2033. Federal taxes will be replaced first, so by early 2027, a federal VAT (CBS) will replace three existing federal taxes on goods and services (PIS-PASEP, COFINS, and IPI, 7 https://www.conjur.com.br/dl/co/contencioso-tributario-alcancou-75-pib.pdf 8 Only about 2,500 Brazilians are estimated to hold investments in exclusive funds, which have a minimum amount of R$10 million (US$1.8 million). 9 This automatic annual taxation applies to offshore funds meeting at least one of the following three criteria: (i) being incorporated in a tax haven; (ii) being subject to a privileged tax regime; (iii) having an Active Income of less than 60 percent. For other offshores taxation will continue to only occur when the funds are made available to the shareholders in Brazil. 10 Two laws called for in the constitutional amendment were approved by the lower house of Congress, pending final approval as of November 2024. Page 11 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) with the latter becoming a narrower excise tax). This will align Brazil’s indirect taxes with international practices, eliminating current system distortions and resulting in higher productivity, competitiveness, and economic growth, with potential GDP increasing by 12 to 20 percent over 15 years. While, the reform is designed to be fiscally neutral, the tax burden is expected to decrease for complex value chains and lower-income households. Changes to income taxation of investment vehicles are expected to raise at least R$7 billion by 2026, being highly progressive. Overall personal income tax revenue is expected to increase from R$333.5 billion in 2023 to R$427.6 billion in 2026, contributing to primary balance targets and creating space for priority expenditures under the new fiscal rule. VAT reform in Brazil – a critical step towards higher productivity Brazil has long struggled with indirect tax reform, having one of the most complex and inefficient systems globally. The country introduced VAT-type taxes in the 1960s, but by the late 1970s, the system lagged global VAT practices, such as a broad tax base, comprehensive crediting, and the destination principle. Instead of fundamental reform, new taxes were added over the decades, leading to a fragmented and inefficient system with judicial uncertainty. In 2019, the estimated time for a small business to pay taxes was 1,500 hours. The largest tax by revenue, the States’ Goods and Services Tax (ICMS), is primarily charged at the origin (where goods are produced) rather than the destination (where goods are consumed). This has led to tax competition among states, eroding the tax base and distorting the industrial landscape. The cumulative nature of this tax has affected the competitiveness of industries with complex value chains due to the lack of full crediting, hampering overall productivity and economic complexity. In December 2023, Congress approved a constitutional amendment to replace five consumption taxes levied by federal, state, and municipal governments with a VAT system and a new excise tax, significantly modernizing the tax system . The reform will eliminate cumulative taxation and move tax collection to the basis of destination, reducing distortions in value chains and tax competition between states and municipalities. This simplification of the system for businesses makes the indirect tax burden more transparent and less subject to judicial dispute. Overall, the reform aligns more closely with international best practices, boosting productivity, competitiveness, and economic growth, which estimates suggest could be as much as one percentage point higher over the next 15 years because of the reform. Brazil’s new VAT also introduces measures that reduce the regressivity of indirect taxation. A narrow basket of basic consumption items most associated with the poor like staple foods will be exempt. In addition, the reform introduces tax refunds to low-income families for essential purchases like electricity and cooking gas, as well as the potential to refund a share of total VAT paid by families registered as poor. A reduced VAT rate will apply to sectors such as healthcare, education, public transportation, and agriculture. Additionally, a new excise tax will target goods with negative health and environmental impacts. Prior Action #2: To strengthen fiscal sustainability, the Borrower has approved a fiscal rule limiting expenditure growth and has mandated the establishment of annual primary balance targets. 30. Rationale. Fiscal frameworks can strengthen the credibility of fiscal policy, increase market confidence, and improve governments' access to financing. They establish a set of rules, procedures, and institutions that guide and promote sound public finance management. To curb the steady increase in public debt over the previous decade, Brazil adopted in 2016 a fiscal rule that capped the Federal Government's primary spending in real terms.11 However, this rule came under pressure, as the COVID-19 pandemic required large, extraordinary expenditures, which were only partially reversed. Repeated adjustments to allow for spending growth turned the rule ineffective as fiscal balances deteriorated. 11 Emenda Constitucional nº 95, de 15 de dezembro de 2016. Page 12 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) 31. Policy content. To strengthen policy credibility, the Government, via Lei Complementar 200/2023, adopted a new fiscal framework that limits the growth of federal primary current expenditures to a proportion of revenue growth, aims to achieve primary surpluses in the medium term, and seeks to stabilize the public debt-to-GDP ratio by the end of the decade. At the core of the framework is a limit for real primary current expenditure growth, with a floor of 0.6 percent and a ceiling of 2.5 percent. Within that range, the specific annual limit depends on fiscal revenue growth and the achievement of the primary balance target set in the annual budget laws.12 Specifically, the annual spending increase is capped at 70 percent of primary revenue growth in the last 12 months to June of the previous year if the primary balance target was achieved. This proportion is reduced to 50 percent if the primary balance target was not achieved. 32. Expected results. The new fiscal framework is expected to increase the predictability of public finances and allow for a gradual process of fiscal consolidation from a primary deficit of 2.5 percent of GDP in 2023 to a primary surplus of 0.25 percent of GDP in 2026. Underpinning this adjustment is expenditure control with the real growth of current primary expenditures expected to be, at most, 70 percent of that of current revenues (compared to a baseline of 90 percent in 2022).13 As part of the implementation of the new fiscal framework and related legislation, the Ministry of Finance has published regular monitoring reports associated with the fiscal targets mandated by the new framework, the most recent being published in September 2024. The gradual consolidation will promote the sustainability of public finances, with debt to GDP expected to stabilize and then slowly decline towards the end of the decade. Pillar 2: Promote climate action by enabling sustainable finance and environmental preservation 33. Brazil has launched an ambitious Ecological Transformation Plan for the economy. The ETP views this transformation as an opportunity, given Brazil’s potential as a green superpower with significant environmental assets and opportunities for sustainable production of food, energy, and other goods. This transformation requires significant investment, primarily from the private sector. Climate mitigation and adaptation investments are estimated at 1.2 percent of GDP from 2022 to 2050, in addition to an existing infrastructure investment gap. The ETP includes initiatives to foster institutions and regulatory environments to mobilize sustainable finance. 34. Brazil has also prioritized the fight against deforestation, especially in the Amazon biome, and has made progress in reducing deforestation, recognizing that a multi-faceted policy approach is needed to maintain progress. Deforestation, the largest contributor to Brazil’s GHG emissions, is being reduced from a recent spike. The deforestation rate in the Amazon more than doubled between 2014 and 2021, reaching over 13,000 km² annually, but declined to 9,000 km² in 2023, with further reductions expected in 2024.14 Reducing deforestation, which provides climate mitigation (through carbon storage) and adaptation (through ecosystem services), requires command and control activities by federal, state, and local agencies, stronger preservation incentives for local governments and communities, strengthening land-use governance, and shifting regional economies from extraction to sustainable, productivity-driven growth.15 12The 2025 draft budget bill proposed a zero-deficit target for 2025 (revised down by 0.5 percentage point of GDP), that will be binding for the preparation of the 2025 Budget, and indicative targets for the federal primary balance with surpluses of 0.25 percent of GDP for 2026 (down from 1.0 percent of GDP), and 0.5 percent of GDP and 1.0 percent of GDP for 2027 and 2028, respectively. The tolerable band for the targets is +/- 0.25 percentage points of GDP. 13The 2022 baseline is more appropriate, as in 2023, expenditure growth outran revenue growth nine-fold, due to a very large increase in payment of precatórios (see section II A. above). Definitions of current revenue and current primary expenditure are given in Lei Complementar 200/2023. 14 Data up to June 2024 collected by the real time deforestation detection system (DETER) suggest a decline of 51 percent year on year. 15 Hanusch (2023). Page 13 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) Prior Action #3: To facilitate financing for environmental sustainability, the Borrower, through the Sovereign Sustainable Finance Committee, has approved a framework for the issuance of sovereign sustainable bonds, which defines the eligible expenses to which proceeds of such bonds may be applied, the process for selecting eligible expenses, the procedures for managing the funds raised, and reporting on allocation and impact. 35. Rationale. Given federal budget constraints, mobilizing private and foreign financing is crucial for Brazil to meet climate change mitigation commitments and adaptation needs. Comprehensive financing strategies require leveraging both public and private funds. As the largest debt issuers in an economy, many sovereign issuers now use labeled bond instruments to mobilize private capital for sustainable objectives.16 Labeled sovereign bonds act as catalysts in developing sustainable debt markets by setting benchmarks and enhancing market confidence, which, in turn, encourages private issuers to enter the market. Sovereign issuances demonstrate governmental commitment to sustainability, reducing perceived risks for private investors and leading to a significant increase in private sector sustainable bond issuances within the same jurisdiction. Even though sustainable and green bond instruments have developed significantly over the past decade, Brazil had not participated in these markets until the implementation of the supported policy. 36. Policy content. Brazil’s Sovereign Sustainable Bond Framework (SBF), published in September 2023, provides a foundation for the sustainable financing of public projects and programs through labeled bonds. It encapsulates the country’s strategy to attract investments aligned with the guidelines of the International Capital Market Association (ICMA). The SBF offers transparency, a governance framework,17 clear definitions of eligible budgetary expenses and rigorous reporting criteria, making it an effective tool for financing Brazil's sustainability objectives.18 The framework allowed Brazil to successfully issue the first US$2 billion, 7-year, sovereign sustainable bond in November 2023. The indicative allocation of this issuance is at least half for green categories, with around 70 percent dedicated to climate change mitigation and adaptation activities, such as green transport and renewable energy. 37. Expected results. The SBF will support the implementation of Brazil’s policies and commitments on climate change, fair transitions to a low-carbon economy, and social and economic equity. This will be achieved by tagging budgetary expenses that directly contribute to advancing sustainable development in the country and by establishing a sovereign sustainable benchmark to foster the growth of the sustainable private capital market, including by broadening the investor base for sustainable finance in Brazil. Expected outcomes include the mobilization of US$6 billion between 2024 and 2026 in sustainable sovereign bonds for environmental and climate objectives, such as control of GHG emissions, renewable energy, clean transport, terrestrial and aquatic biodiversity, adaptation to climate change, and circular economy, along with the publication of corresponding allocation and impact reports post-issuance. Prior Action #4: To enable foreign investment in sustainable projects in connection to Brazil's ecological transformation agenda, the Borrower has provided tools for managing foreign exchange risks as part of the foreign private capital mobilization and exchange protection program (ECOINVEST Brasil). 38. Rationale. The ecological transition of the Brazilian economy, as outlined by the ETP headed by the Ministry of Finance, will require large-scale and long-term private investment in activities contributing to climate mitigation (e.g. renewable energy, green hydrogen, forest restoration) and adaptation (e.g. resilient infrastructure, improved water resources management). Attracting foreign investment is an integral component to mobilizing this financing. However, 16 Labeled bond instruments are bonds issued with specific labels, such as Green, Social, or Sustainability Bonds, indicating that the funds raised will finance projects with environmental, social, or sustainable impacts. 17Along with the SBF, the Federal Government established the Sovereign Sustainable Finance Committee under the purview of the Ministry of Finance in May 2023 through Decree No. 11.532. 18 The forthcoming framework for Amazonia Use-of-Proceeds Bonds seeks alignment with the SBF. Page 14 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) exchange rate risks constitute a significant obstacle to the entry of foreign capital.19 This is a particular problem for Brazil, as the Brazilian currency has historically been more volatile than other large-economy currencies. While instruments to manage exchange rate risks through currency hedging are available in financial markets, these markets only offer liquid and affordable instruments for short-term hedging, with long-term instruments being scarce and prohibitively expensive. 39. Policy content. The ECOINVEST Brasil program, created by Law 14.995/2024, aims to remove obstacles to external long-term financing for investment for the ecological transition. ECOINVEST Brasil enables the National Climate Fund (Fundo Nacional sobre Mudança do Clima, FNMC) to provide long-term FX liquidity and hedging instruments to investors in qualifying projects with climate mitigation or adaptation benefits (e.g. energy transition, resilient infrastructure, climate adaptation and circular economy). The program addresses investor challenges related to foreign currency debt and revenues generated in local currency in cases of material devaluation, allowing for effective cash management and credit enhancements. Beyond FX risk management, it also provides blended finance to attract foreign investments to priority areas of the ecological transition and a credit line for project structuring to facilitate the development of large sustainable projects, bridging the current gap in Brazil’s green project landscape. The program has received technical and financial support from the World Bank and the Inter-American Development Bank (IDB). 40. Expected results. The ECOINVEST Brasil program is expected to enable at least R$50 billion in private-sector capital by 2026, including new investment opportunities for IFC. This will contribute to financing the significant investment needs of Brazil’s green transition, resulting in significant climate mitigation and adaptation benefits, such as decarbonization of energy, industry, and transport and expansion of low-carbon and climate-resilient agricultural practices. A first auction under the program took place in October 2024, mobilizing R$37 billion (about US$7 billion). Prior Action #5: To ensure that the provision of rural credit benefits borrowers who comply with environmental regulations, the Borrower, through the Brazilian Central Bank, has strengthened climate criteria for credit analysis and extended their application to all biomes. 41. Rationale. Agriculture is Brazil’s second-largest source of GHG emissions (24 percent) and is also closely linked to land use change, the leading source (52 percent) due to agricultural expansion driving deforestation and biodiversity loss. Brazilian agriculture also faces adaptation challenges, such as increasing droughts, heightening the need to transition to resilient, climate-smart practices. Rural credit, totaling around R$600 billion (5.5 percent of GDP) and about 12 percent of financial intermediaries’ total credit, is a powerful entry point for policy. Half of all farmers secure loans through rural credit programs. Evidence shows that restricting access to credit based on compliance with land-use contributes to reducing deforestation in the Brazilian Amazon. The Central Bank’s Rural Credit Manual (Manual de Credito Rural, MCR) regulates agricultural financing, which includes environmental, social, and governance criteria. It is designed to prevent the provision of rural credit to those who fail to comply with environmental regulations and encourage financing for low- carbon and resilient agriculture. 42. Policy content. Brazil’s Central Bank adopted Resolution CMN No. 5.081/2023 (which became fully effective in 2024), which provides new guidelines and criteria for granting rural credit, with a focus on sustainable, low carbon, and resilient agricultural practices. The resolution embeds climate change mitigation and adaptation criteria as it extends land- use restrictions on rural credit to all biomes (previously limited to the Amazon), prevents rural credit in areas that overlap with conservation units and public forests, and on properties without a registered Rural Environmental Cadaster and in areas embargoed due to recent deforestation. These measures ensure the responsible allocation of rural financing that 19 Avinash Persaud (2023). Page 15 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) actively improves environmental compliance, restauration of native forests, climate change mitigation through reduced deforestation and adaptation through the protection of the preservation of natural assets and biodiversity. 43. Expected results. Tightening rural credit regulations is anticipated to enhance sustainable and climate-smart practices in agriculture, thereby advancing Brazil's mitigation and adaptation goals. It will provide incentives for compliance with environmental regulations, increase attractiveness for funding for activities linked to reduce the environmental deficit, reduce deforestation, particularly in embargoed areas. The borrowers’ behavior is expected to occur in the face of more credit applications being rejected in the short term and provides the incentives for more demands for credits that address the environmental compliance. After the measures came into effect, in 2024, a volume of R$726.2 million in loans was rejected (January to June 2024), far above the pre-reform baseline of R$173.6 million in 2023. It is expected that by 2026, rural credit of at least R$200 billion will be compliant with the new requirements. Prior Action #6: To promote environmental preservation at municipal levels, the Borrower has established a mandatory intergovernmental transfer from States to Municipalities, based on environmental preservation criteria. 44. Rationale. Green fiscal transfers have found increasing application globally. They provide a financial mechanism to support and encourage environmental conservation at the local level, where much of the responsibility for managing natural resources and enhancing climate resilience lies. Brazil has significant experience with ecological fiscal transfers from the State to Municipal levels, but these have not been universally applied. States are required to transfer at least 25 percent of their ICMS revenues to municipalities, with scope to define the allocation criteria for part of this transfer. The State of Paraná used this discretion to tie part of the transfer to ecological criteria starting in 1991. Subsequently, the “Green ICMS” (ICMS Verde or ICMS ecológico), was adopted by 18 of Brazil’s 26 states, with volumes, objectives and allocation criteria set by the States. Ninety percent of the States have adopted the conservation of Protected Areas and Indigenous Territories as their main criteria, which are critical for climate mitigation. Most States adopted additional criteria of high relevance to climate mitigation and adaptation such as solid waste management (37 percent), improved sanitation (12 percent), watershed management (25 percent), environmental registry of rural properties (6 percent), maintenance of forest cover (6 percent) and wildfire management (6 percent). 45. Policy content. As the ICMS is being phased out as part of the indirect tax reform, legislative action was needed to preserve the existing ecological fiscal transfers from states to municipalities. The inclusion of a mandatory ecological component in the transfer of revenues from the new subnational VAT (IBS) from States to Municipalities, which was included in the constitutional amendment on tax reform (Emenda Constitucional 132/2023) extends this mechanism to States that had not previously adopted it. The amount of the ecological transfer is defined as 5 percent of IBS transferred to municipalities (which is 25 percent of total IBS revenue).20 Allocation criteria of the future IBS will remain with the States but are expected to continue to focus on climate mitigation and adaptation priorities as is the case under the ICMS Verde. 46. Expected results. The new ecological transfer will be phased in with the new subnational VAT between 2029 and 2032. Before this, States must define in State law how transfers will be split among municipalities based on environmental and climate criteria. States with existing ecological transfers can maintain their approach, but most will need to increase its size. States without this transfer must create it and define allocation criteria, continuing the climate mitigation and adaptation focus of the current 18 States under ICMS Verde. By the end of 2028, eight additional states are required to create green fiscal transfers through State legislation. Once fully implemented, the total resources transferred to municipalities are expected to increase by about 60 percent compared to a non-reform baseline, due to the expansion to all States and fixing the transfer at 5 percent of the new State VAT, higher than currently practices in some of the largest 20Percentages under the existing ecological transfers (ICMS Verde) vary among States that have adopted them from 1 percent to 13 percent of ICMS transfers (which are 25 percent of total ICMS), with most States applying 5 percent or less. Page 16 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) States. Increased transfers tied to environmental and climate outcomes are expected to contribute to mitigation and adaptation, including reduced emissions from deforestation. Prior Action #7: To strengthen local capacity and resources for the prevention, monitoring, control and reduction of wildfires, deforestation and forest degradation in the Amazon biome, the Borrower has established criteria to annually select municipalities to receive increased financial and technical support for environmental governance and forest protection. 47. Rationale. Deforestation and forest degradation are the largest drivers of Brazil’s GHG emissions and entail the risk of the Amazon biome reaching a tipping point. Satellite surveillance indicates that the Amazon is facing a troubling surge in forest fires in 2024 amidst the region's second worst drought in 120 years, with non-allocated public lands and indigenous territories experiencing increases of 175 percent and 139 percent in burned areas compared to 2023.21 The 2024 dry-season’s increase in fires suggests that wildfires are human-induced, driven by activities such as illegal slash-and- burn.22 Moreover, satellite data reveal that areas subject to deforestation and fires are highly concentrated in 70 out of the 772 municipalities of the Legal Amazon.23 Therefore, focusing resources and policy interventions in these locations promises to quickly reduce deforestation and forest fires. While not eliminating the need for comprehensive structural policies to sustainably reducing deforestation, such a focused approach has been highly effective in past.24 48. Policy content. To address the critical issues of deforestation and forest fires in the Amazon, focusing on the most affected areas, the Federal Government launched the program “União com Municípios” (Decree No. 11.687/2023, of September 5, 2023). The program establishes a transfer mechanism to municipalities with demonstrated need to step up interventions (deforestation hotspots), but which often lack institutional capacity and resources to address environmental challenges at scale. Program resources will fund expenditures for environmental and territorial governance, environmental and land regularization actions for family farmers, technical assistance and rural extension, municipal fire brigades, productive forest recovery and payment for environmental services. The program combines needs-based and performance prioritization criteria: the greater the annual reduction in deforestation and degradation, the greater the amount to be transferred. Hence, it provides financial and technical support to local governments that often do not have sufficient institutional capacity and resources to address environmental challenges at scale. All participating municipalities will receive at least R$0.5 million for capacity building. The program will be financed with R$600 million from the Amazon Fund and R$130 million from “Floresta+” an initiative raising private resources for forest conservation. Participation of municipalities is voluntary, ensuring local ownership. As of August 2024, 53 of the most affected municipalities had joined the program. These account for most Amazonian deforestation (59.1 percent) and a third of burned areas (32.4 percent). 49. Expected results. The cooperation with frontline municipalities is expected to result in increased financial support, enabling them to more effectively combat deforestation and forest fires. Hence, it directly addresses Brazil’s main source of GHG emissions, destruction of the Amazon rainforest, and contributes to the preservation of valuable ecosystem services and invaluable biodiversity. To control for exogenous shocks, results are to be measured by comparing the municipalities included in the program, to a control group made up of municipalities in similar conditions, including those eligible for the program who opted not to participate. Forest loss to fires is expected to be reduced by at least 20 percentage points more in program municipalities than in a control group of eligible municipalities not in the program. 21 IPAM Amazônia (2024). Fogo no Brasil em 2024: o retrato fundiário da área queimada nos biomas - 22 Mataveli, G., de Oliveira, G., Silva-Junior, C.H.L. et al. (2022) 23 The Legal Amazon is a political and administrative area made up of nine Brazilian states that contain Brazil’s share of the Amazon biome. 24 See Assunção and Rocha (2019) for the effectiveness of the 2008 initiative. Page 17 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) Pillar 3: Strengthen social inclusion 50. Brazil’s social inclusion policies have played a significant role in reducing poverty, but adjustments are needed to improve the design and efficiency. Effective social programs helped to reduce poverty (from 48.7 percent to 24.3 percent, at the US$6.85 poverty line) and extreme poverty (3.3 percent at the US$2.15 rate) between 2003 and 2014. Progress stalled as poverty increased during the economic downturn of 2015-17. The COVID-19 pandemic created additional strain, causing spending on the largest non-contributory social assistance programs to grow from 1.25 percent of GDP in 2019 to 2.4 percent in 2023. Following the recovery from the pandemic, social policies need to balance the continued need for support to the most vulnerable, including indigenous and traditional communities, with the need for budgetary efficiency. The COVID-19 pandemic also negatively affected learning outcomes through long school closures and higher drop-out rates, exacerbating existing inequalities. Policies that improve school nutrition, while increasingly procuring food from local family farmers, offer a double dividend, of healthier children, who are more likely to remain in school and productive inclusion of farming communities and especially women farmers. Prior Action #8: To promote social inclusion in communities who protect forests and other natural resources, the Borrower has instituted the payment for environmental services program “Bolsa Verde” for households located in the Brazilian Amazon rainforest. 51. Rationale. Conservation units and indigenous territories in the Amazon and the traditional peoples who live in them play a crucial part in preserving this natural asset of global importance. Sustainable use areas and indigenous territories in Brazil cover about 1.7 million km2 or about a quarter of the entire, cross-national Amazon biome. Payments for environmental services to these populations are important not only to recognize their essential role in co-management of these natural resources but also to compensate them for their land use limitations compared to farmers outside the protected areas. These payments can also support families to transition to productive and sustainable activities as part of the bioeconomy. Women and female-headed households stand to benefit disproportionately from these payments, as they are more likely to experience extreme poverty and face high barriers to economic opportunities due to remoteness and lack of basic public services. 52. Policy content. A first Bolsa Verde program was created in 2011, supporting up to 100,000 families living in extreme poverty. That program was discontinued in 2017. Decree 11.635/2023 creates a new Bolsa Verde program serving low-income families that carry out biodiversity protection activities and are registered in the Social Registry (CadUnico). The new Bolsa Verde program, provides families with quarterly payments of R$600. As an innovation relative to the previous program, the new Bolsa Verde includes families that live in communal areas and sustainably manage forest resources in a collective manner. Eligible areas include national forests, federal extractive reserves and federal sustainable development reserves; forest settlement projects, sustainable development projects or agro-extractive settlement projects established by the National Institute of Colonization and Agrarian Reform (INCRA); and other rural areas, as indicated by the Bolsa Verde Program Management Committee. In line with existing regulations, social payments financed by the Federal Government are preferably made to a woman responsible for the family unit.25 Therefore women represent the majority (83.6 percent) of the initial new Bolsa Verde recipients. Payments to women have proven effects on empowerment and economic inclusion.26 53. Expected results. The new Bolsa Verde program is expected to grow quickly. From zero at the time of launch, it grew to 6,251 families enrolled by the end of 2023 and is expected to reach over 55,000 families by 2026, of which at least 80 percent are expected to be women recipients. The program will start in the Amazon region (87 conservation units) but 25 Decree No. 11.016, of March 29, 2022. 26 Hagen-Zanker et. al (2017). Page 18 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) will ultimately cover all 228 conservation units with the intention to reach estimated 100,000 families, which would be close to the entire target population of people sustainably managing protected lands. Ultimately, the growth of the program will strengthen the economic and social conditions for traditional people who live in communal areas. By doing this, the program will also contribute to the sustainable management of these areas and the natural resources they contain, with mitigation (avoided deforestation) and adaptation (preservation of ecosystem services) benefits. Prior Action #9: To improve the targeting of social programs, including Bolsa Familia, the Borrower has taken measures to improve the quality of information in the single social registry (CadUnico). 54. Rationale. During the COVID-19 pandemic, Brazil increased the coverage and generosity of cash transfer programs substantially. The COVID-19 relief program Auxílio Emergencial (Emergency Aid) increased coverage to 67 million beneficiaries (compared to 14 million previously covered). The average cash transfer per beneficiary increased by 380 percent. This massive expansion was so successful in mitigating poverty impacts that Brazil saw a decline in poverty at the height of the pandemic. The expansion of cash transfers was only partly reversed post COVID as Bolsa Familia was revised and rebranded (as Auxílio Brasil) with about 21 million beneficiaries at the end of 2022. This resulted in a large and permanent increase in expenditures from 0.5 percent of GDP in 2019 to 4 percent in 2020, decreasing to 1.2 percent in 2022. Increased spending was in part due to deteriorating quality of information in the social registry (CadUnico), which is imperative for effective targeting— minimizing inclusion and exclusion errors— of cash transfers and over 30 other social programs. Interruption of in-person services during COVID-19 contributed to a backlog of updates in the registry. Further, the design of Auxílio Brasil, which included a high minimum benefit per household, incentivized the separation of family members to register as unipersonal households. 55. Policy content. Many of the changes under Auxílio Brasil were reversed in early 2023 as Bolsa Família was re- established. Subsequently, the Government issued regulations to improve the information in the social registry and monitoring of Bolsa familia benefits (Decrees 11.762/2023 and 12.064/2024). This includes regular verification of eligibility criteria, such as cross-checking of reported income against employment and social security databases.27 Cross-checking has become a regular procedure and families found to have become ineligible due to increased income from other sources, primarily formal employment, are transferred to the continued protection rule (regra de proteção), which provides transition support at half the regular Bolsa Familia amount for two years, at which point families that maintain formal employment will leave the program permanently. CadUnico improvements also resulted in the exclusion of single-person family records found to be inaccurate. 56. Expected results. With the improvements to the CadUnico, the income assessments of approximately 19 million recipients will be crosschecked continuously. A key outcome is more beneficiaries being graduated from the permanent Bolsa Familia program to the transitory protection stage. Due to lack of crosschecking, the number of beneficiaries in this transition stage used to be very low: 0.69 million (in early 2023), about 3.3 percent of all beneficiaries. With crosschecking being applied continuously, it increased to over 2 million by the end of 2023 and is expected to be at least 2.2 million (about 10 percent of all beneficiaries). Moreover, the percentage of single-person families among Bolsa Familia beneficiaries is expected to decrease from 23.4 percent in 2023 to below 20 percent going forward. Prior Action #10: To reduce absenteeism, improve nutrition and learning outcomes by providing higher quality food in schools, and to promote gender inclusion, the Borrower has revised guidelines for school feeding programs to promote healthier meals and promoted the procurement of food from female farmers. 27 Crosschecking was enabled through a Ministry Instruction (Instrução Normativa nº 1/SAGICAD/MDS/2023) but institutionalized with the policy. Page 19 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) 57. Rationale. Children's diet at school plays a major role in improving learning outcomes and school attendance, especially in vulnerable contexts seen in most public schools in Brazil. Several studies indicate a significant and immediate impact of school feeding interventions, and of the quality of these meals, on behavior, concentration and cognitive ability of children while learning.28 Improved nutrition enhances cognition, reduces tardiness at school due to the reduction of illness-related absences, and indirectly increases income for households with children receiving subsidized meals.29 Although ample evidence supports nutrition interventions at schools, funding for school feeding programs in Brazil has declined over the past decade in real and per-student terms, resulting in low-quality food being provided, particularly in schools that lack additional funding (e.g., from State Governments). In early 2023, the values for school feeding per child were adjusted by 28 to 39 percent, respectively, benefiting more than 40 million students.30 School feeding programs also offer an opportunity to support the productive inclusion of farming communities, particularly female farmers who face important gender gaps in terms of their access to markets. 58. Policy content. Decree 11.821/2023 promotes adequate and healthy food in schools by listing the types of high- quality, healthy foods that should be prioritized for school feeding. In addition, Law 14.660/2023 establishes that 50 percent of the Federal School Feeding Program (PNAE) resources be spent on food procured from family farmers and 30 percent (of the total) from women farmers. 59. Expected results. Federal Government spending on school feeding is expected to increase by about R$2 billion (35 percent). This is expected to result in a greater share of students enjoying school meals of improved quality. Ultimately, this is expected to contribute to children growing up healthier in Brazil and to more children remaining in school and attending more regularly. Further, local food producers, especially women-led family farms, are expected to benefit from increased school demand for locally produced foodstuffs. Specifically, it is expected that spending of federal school feeding resources on purchases from family farmers will increase from 40 percent in 2023 to 50 percent in 2026. C. Consultations and Collaboration with Development Partners 60. Consultations on the reforms supported by the program took place both during the design of the policies, and during discussions at National Congress. For federal laws and constitutional amendments, these consultations follow the procedures laid out in the Federal Constitution and the National Congress’s legislative rules and procedures, which include a high level of transparency and opportunity for civil society participation. Decrees and other regulatory actions underwent a period of public consultation, including on the Government’s online system.31 The consultation process increases the legitimacy of policies, while allowing authorities to benefit from outside advice and technical knowledge. The Government of Brazil confirmed that the program supported by the proposed operation is based on a broad consultation process with a variety of stakeholders, including civil society and business associations. 61. The proposed operation is closely coordinated with policy-based financing by the IDB and by AIIB. The Federal Government is seeking policy-based financing of US$3 billion, through parallel operations by the three institutions (IBRD, IDB and AIIB), supporting a coherent program of reforms structured around the ETP. The World Bank and IDB also cooperated closely in providing technical assistance and advice to the Government on several reform areas, such as VAT reform, sustainable bond framework and ECOINVEST Brasil. 28 Glewwe et al, 2001, Sorhaindo and Feinstein, 2006 29 Bhattacharya et al, 2006. 30 Resolução CD/FNDE nº 2/2023, published March 13, 2023. 31 https://www.gov.br/participamaisbrasil/consultas-publicas Page 20 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) IV. OTHER DESIGN AND APPRAISAL ISSUES A. Poverty and Social Impacts 62. Several of the reforms supported by this proposed operation are expected to contribute meaningfully to poverty and inequality reduction. The most salient is the consumption tax reform (PA1), which beyond simplifying the complex current system, is expected to introduce progressivity gains. Two key aspects of this reform are the exempt basic basket of goods and the targeted cashback. Microsimulations indicate that the new system is expected to impose an effective tax rate of 16 percent for the most vulnerable families compared to 20 percent for the rest of the population.32 Other reforms will likely have indirect impacts. We highlight those with directly attributable effects. Where there are "winners" and "losers" of the PAs, special attention will be needed to ensure that traditionally vulnerable groups are not disproportionally negatively affected. 63. Adjustment of social assistance programs (PA8) and the national registry (PA9) will contribute to poverty reduction. The re-introduction of the Bolsa Verde Program, beyond contributing to forest conservation, is expected to alleviate poverty through two of its key aspects. First, its geographical focalization in the states of Amapá, Amazonas and Pará where poverty among households headed by indigenous females is almost three times the national average. And second, its conservation angle, providing economic compensation for families who face limitations on land use for living in protected areas. For the wider system, strengthening the quality of the national registry and integrating it with other administrative data will allow for the use of more precise and updated information for faster and fairer decision-making. 64. Improving the quality of meals in public schools (PA10) is expected to have nutritional, educational and economic impacts. This policy is expected to have impacts through at least three channels. The first is the nutritional supplement for children in food-insecure households. A second channel operates in education not only through higher school attendance but also, and more importantly, through higher alertness and attitudes towards learning. All these should transform into leveling disparities in human capital formation in the long run. A third channel, relevant for the short run, is the improvements in local economies as small farmers will be the providers of inputs for the improved meals. B. Environmental, Forests, and other Natural Resources Aspects 65. The policies supported by the proposed operation are expected to positively impact the environment, forests, and natural resources. The First Pillar's prior actions could indirectly benefit the environment through investment in preservation and deforestation prevention. The Second Pillar is expected to have significant direct positive impacts. The Sustainable Sovereign Bonds Framework (PA3) can finance sustainable projects, reduce GHG emissions, and develop a sustainable capital market. The ECOINVEST Brasil program (PA4) aims to attract foreign investment in sustainable projects, with positive impacts like GHG reduction and climate change mitigation. Negative impacts from infrastructure works are mitigated by Brazil’s robust environmental licensing system, governed by Law No. 6.938/1981 and CONAMA Resolution No. 237/1997, which requires rigorous evaluation and monitoring. Enhancing sustainability and transparency in rural credit (PA5) can reduce deforestation, promote sustainable agriculture, and support a low-carbon economy. Intergovernmental transfers based on environmental criteria (PA6) will encourage protected areas, deforestation measures, and natural resource management, reducing carbon emissions and improving water quality. PA7 can reduce deforestation and forest fires, preserve biodiversity, and support local communities. 32 Campante Vale, Ricardo; Lara Ibarra, Gabriel; Fleury, Eduardo; Trzcinski, Kajetan (2023). Page 21 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) 66. Focusing on social inclusion, the Third Pillar includes the Bolsa Verde income transfer program (PA8), whose objectives are reducing deforestation through sustainable land use and supporting the conservation of priority areas. This contributes to maintaining ecosystem services like climate regulation and water protection. PA9 can bring indirect environmental impacts by improving the efficiency of social programs. PA10 revises school feeding program guidelines to promote healthier meals and purchases from family farmers, potentially benefiting the environment by promoting sustainable agriculture and reducing the carbon footprint associated with food transportation. Mitigation measures are crucial to avoid negative impacts such as excessive pressure on small farmers and the promotion of monocultures. C. PFM, Disbursement, and Auditing aspects 67. The Brazilian Public Financial Management (PFM) environment and auditing practices are adequate, limiting fiduciary risks. A well-developed legal framework—including the Federal Constitution, the Fiscal Responsibility Law (LRF), and other laws and regulations—underpins the PFM environment in the Federal Government of Brazil. The primary responsibility for implementing this framework is with the Ministry of Finance. Budget preparation and monitoring processes are considered appropriate, and budget documents, including the Federal budget, are publicly accessible online.33 The PFM environment features strong internal rules and commitment controls.34 The use of the Treasury Single Account (TSA) model for cash management and a clear allocation of responsibilities for managing it facilitates the performance of bank reconciliations on a regular and timely basis.35 Improved external oversight mechanisms are consistent with international standards. The Federal Government Financial Statements are of considerable quality and prepared in a timely manner. The annual financial statements are audited by the Federal Supreme Audit Institution (Tribunal de Contas da União - TCU). The last three audit reports (2021 to 2023) issued a qualified opinion, mostly on budget execution, and assets and liabilities disclosures. However, these findings do not represent relevant distortions, and recommendations are followed up promptly and diligently by the Federal Government. The Federal Government, with support from the World Bank, is advancing important reforms to improve financial reporting quality. These include: (i) implementing the International Public Sector Accounting Standards (IPSAS) and other requirements for the preparation of periodic financial reports as mandated by the Brazilian legislation36; (ii) enhancing internal audit arrangements; and (iii) Reforming the Federal Government's integrated Financial Management System (Sistema Integrado de Administração Financeira - SIAFI) to comply with minimum reporting standards established by law and implementing other functionalities regarding costs of public services and sustainability budget tagging. 37 Based on the analysis of the adequacy of the Federal Government’s PFM environment, no additional fiduciary arrangements will be implemented for the operation. 68. Loan proceeds will be disbursed against satisfactory implementation of the DPF program and will be deposited into a commercial bank. Once the loan is effective, the Borrower will request the World Bank to disburse loan proceeds into a US dollar denominated account opened by the Federal Government of Brazil at Banco do Brasil in New York, USA, to 33 Portal da Transparência da Controladoria Geral da União . Available in: https://portaldatransparencia.gov.br/ . 34 The latest Data Adequacy Assessment Rating of the 2024 Report on Article IV Consultation of the International Monetary Fund was “A”, (https://doi.org/10.5089/9798400282898.002 ). According to the IMF, data is generally timely, comprehensive, and accurate for conducting analysis and formulating policy advice across all sectors (including fiscal data). 35 Established by Federal Decree n.º 93.872, 1986. 36Portaria STN nº 548/2015 (updated by Portarias STN 10.300/2022 and 1.569/2023) - Plano de Implantação dos Procedimentos Contábeis Patrimoniais – PIPCP, to be fully implemented by December 2024, and additional requirements by December 2031. 37 Decree 10.540/2020 (updated by Decree 11.644/2023) establishes minimum reporting requirements for the National and Sub-nationals’ Integrated and Unified Systems for Budget Execution, Financial Management, and Control (Sistemas Integrados de Administração Financeira e Controle, SIAFICs). Page 22 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) be managed under the Treasury Single Account (TSA).38 Banco do Brasil is deemed acceptable to the World Bank, as it is financially sound, audited regularly, performs a wide range of banking services, provides detailed bank statements, is part of a satisfactory banking network, and charges reasonable fees for its services. Within 30 days after receipt of loan proceeds, the Federal Government of Brazil will confirm to the World Bank that: (i) loan proceeds were transferred to an account denominated in U.S. Dollars in Banco do Brasil; (ii) an equivalent amount was credited to the account that finances the Government´s commitments according to the applicable TSA procedures;39 and (iii) the amount was accounted for in the National Treasury and budget records. If loan proceeds are used to finance excluded expenditures as defined in the Loan Agreement, the World Bank will require the Borrower to refund the amount. D. Monitoring, Evaluation, and Accountability 69. The Ministry of Finance will be responsible for collecting and monitoring information related to program implementation and progress towards the achievement of results. The Ministry of Finance is responsible for coordinating necessary actions among the agencies involved in the reform program supported by this DPF series. The World Bank has worked closely with the Ministry of Finance and line ministries to define results indicators that are clearly spelled out and measurable, giving preference to those that are already collected on a regular basis to avoid additional reporting burden. 70. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as Prior Actions or tranche release conditions under a World Bank Development Policy Financing may submit complaints to the responsible country authorities, appropriate local/national grievance mechanisms, or the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Project affected communities and individuals may submit their complaint to the Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred, or could occur, as a result of Bank non-compliance with its policies and procedures, and the Dispute Resolution Service, which provides communities and borrowers with the opportunity to address complaints through dispute resolution. Complaints may be submitted at any time after concerns have been brought directly to the World Bank’s attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the Bank’s Accountability Mechanism, please visit https://accountability.worldbank.org. V. SUMMARY OF RISKS AND MITIGATION 71. The overall risk of this proposed operation is assessed as moderate. Policies supported by the proposed operation are of high priority to the Federal Government, and complex and potentially contentious reforms such as the overhaul of the indirect tax system have been subject to a long process of consensus building in the national congress and with extensive dialogue with civil society. The Federal Government of Brazil has a strong track record of implementing technically complex policies, including on the issues of financial intermediation and cash transfers. 72. Macroeconomic risks are substantial, due to fiscal pressures, elevated public debt, and reduced policy buffers. Brazil’s public debt, at about 78 percent of GDP, is high for emerging markets. High debt and double-digit interest rates have resulted in a large nominal fiscal deficit, despite the gradual reduction of the primary deficit. The Federal 38 According tothe Federal Decree N. 93.872, the National Treasury's cash resources will be held at Banco do Brasil S.A, and the direct use of financial resources from internal or external credit operations is prohibited, and these must be deposited in the National Treasury account at Banco do Brasil S.A. This account will not form part of Brazil’s foreign exchange reserves. 39 According to the Federal Decree N. 93.872 and other complementary federal legislation. Page 23 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) Government’s ability to respond to shocks is limited, as most debt is domestic and short-term, causing monetary tightening to rapidly increase deficits. The new fiscal framework aims to stabilize and reduce the debt-to-GDP ratio gradually, but this approach risks interruptions from shocks or political developments. Structural fiscal reforms are needed due to aging-related pressures, and failure to implement these could crowd out discretionary resources, affecting policy implementation, where additional budget resources are needed (e.g. on forest protection and school feeding). However, Brazil’s mature economic institutions, independent Central Bank, and prudent macro-management history, along with low external debt and high international reserves, mitigate macroeconomic risks. Page 24 The World Bank Brazil Increasing Productivity, Sustainability and Inclusion DPF (P507322) Table 4: Summary Risk Ratings @#&OPS~Doctype~OPS^dynamics@padrisk#doctemplate Risk Categories Rating 1. Political and Governance ⚫ Moderate 2. Macroeconomic ⚫ Substantial 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Moderate 5. Institutional Capacity for Implementation and Sustainability ⚫ Moderate 6. Fiduciary ⚫ Moderate 7. Environment and Social ⚫ Moderate 8. Stakeholders ⚫ Moderate 9. Other ⚫ Overall ⚫ Moderate Page 25 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) ANNEX 1. Policy and Result Framework Prior actions and Triggers Expected Results Prior Actions under DPF 1 Indicator Name Baseline Target Pillar 1: Improve taxation and fiscal sustainability RI1. Number of federal 3 (PIS/PASEP; 1 (CBS) Prior Action #1: To reduce economic distortions and the administrative burden of taxation, and consumption taxes (excluding COFINS, IPI) increase revenue in a progressive manner, the Borrower has (i) approved a reform streamlining excise taxes) (2024) January 2027 indirect taxation through the creation of a new Value-Added Tax (VAT); and (ii) expanded the taxation of investment funds and income obtained abroad through offshore vehicles, through a RI2. Personal income tax revenue At least R$7 Constitutional Amendment and a Law.40 from offshore and exclusive funds Zero (2023) billion (2024 to 2026 cumulative) RI3. Ratio of real growth of Prior Action #2: To strengthen fiscal sustainability, the Borrower has approved a fiscal rule No more than 70 current primary expenditures 90 percent limiting expenditure growth and has mandated the establishment of annual primary balance percent (2025 and relative to that of current (2022) targets, through a Law.41 2026) revenues.42 Pillar 2: Promote climate action by enabling sustainable finance and environmental preservation Prior Action #3: To facilitate financing for environmental sustainability, the Borrower, through the RI4. Cumulative volume of Sovereign Sustainable Finance Committee, has approved a framework for the issuance of sovereign sustainable sovereign debt Zero US$6 billion sustainable bonds, which defines the eligible expenses to which proceeds of such bonds may be issued and covered by allocation (2026) (June 2023) applied, the process for selecting eligible expenses, the procedures for managing the funds raised, and impact reports. and reporting on allocation and impact, through the Sovereign Sustainable Bond Framework. 43 Prior Action # 4: To enable foreign investment in sustainable projects in connection to Brazil's RI5. Private financing mobilized ecological transformation agenda, the Borrower has provided tools for managing foreign R$50 billion for sustainable development Zero (2023) exchange risks as part of the foreign private capital mobilization and exchange protection (2026) investments under ECOINVEST. program (ECOINVEST Brasil), through a Law.44 Prior Action #5: To ensure that the provision of rural credit benefits borrowers who comply with RI6. Volume of rural credit environmental regulations, the Borrower, through the Brazilian Central Bank, has strengthened provided in compliance with new, R$200 billion climate criteria for credit analysis and extended their application to all biomes, through a Zero (2023) stricter environmental criteria. (2026) Resolution.45 Page 26 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) RI7. Number of States that have Prior Action #6: To promote environmental preservation at municipal levels, the Borrower has introduced ecological transfers established a mandatory intergovernmental transfer from States to Municipalities, based on 18 (2023) 26 (2026) to municipalities or are required environmental preservation criteria, through a Constitutional Amendment. 46 to introduce them. Prior Action #7: To strengthen local capacity and resources for the prevention, monitoring, RI8. Difference in Amazon control and reduction of wildfires, deforestation and forest degradation in the Amazon biome, rainforest lost to forest fires in At least 20 the Borrower has established criteria to annually select municipalities to receive increased program adhering municipalities Zero (2023) percentage points financial and technical support for environmental governance and forest protection, through a compared to eligible (2026) Decree.47 municipalities not in the program. Pillar 3: Strengthen social inclusion At least 55,00049, Prior Action #8: To promote social inclusion in communities who protect forests and other RI9. Number of families in the with at least 80 natural resources, the Borrower has instituted the payment for environmental services program Amazon enrolled in the Bolsa Zero (June 2023) percent being “Bolsa Verde” for households located in the Brazilian Amazon rainforest, through a Decree.48 Verde program. women (December 2026) Prior Action #9: To improve the targeting of social programs, including Bolsa Familia, the RI10. Number of families moved 0.69 million (3.3 Borrower has taken measures to improve the quality of information in the single social registry from permanent Bolsa Familia percent of total (CadUnico), through two Decrees.50 beneficiary status (in transitional beneficiaries) 40 Constitutional Amendment N. 132, of December 20, 2023, and Law 14.754, of December 12, 2023. 41 Complementary Law (Lei Complementar) N. 200, of August 30, 2023. 42 Using expenditure and revenue definitions of the Lei Complementar 200/2023 and considering the minimum allowance for expenditure increase of 0.6 percent in case of low revenue growth. 43 Sustainable Sovereign Bond Framework, dated August 2023, published on STN’s website in September, 2023. 44 Law No. 14.995, of October 10, 2024. 45 Resolution CMN N 5.081, of June 29, 2023. 46 Constitutional Amendment N. 132, of December 20, 2023. 47 Decree N 11.687, of September 5, 2023. 48 Decree N 11.635, of August 16, 2023. 49 Expected to represent about 50% of the target population of eligible families in protected areas. 50 Decree N. 11.762, of October 30, 2023, and Decree N. 12.064, of June 17, 2024. Page 27 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) protection phase). (Apr-Jun 2023 2.2 million, 10 average) percent of total beneficiaries (2026) Prior Action #10: To reduce absenteeism, improve nutrition and learning outcomes by providing RI11. Percentage of food in higher quality food in schools, and to promote gender inclusion, the Borrower has revised 40 percent 50 percent (2026) school feeding procured from guidelines for school feeding programs to promote healthier meals and promoted the (2023) family farmers. procurement of food from female farmers, through a law and a decree.51 51 Law N. 14.660 of August 23, 2023, and Decree N. 11.821/2023 of December N. 12, 2023. Page 28 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) ANNEX 2. Paris Alignment Assessment Program Development Objective(s): To support reforms of the country of Brazil to: (i) improve taxation and fiscal sustainability, (ii) promote climate action by enabling sustainable finance and environmental preservation, and (iii) strengthen social inclusion. Step 1: Considering the climate analysis (e.g., Answer: Yes. Country Climate and Development Reports or Explanation: The operation supports the achievement of key CCDRs), is the operation consistent with the aspects of Brazil’s Update of the First Nationally Determined country climate commitments, including for Contribution (NDC) submission (October 2023) by promoting, instance, the NDC, National Adaptation Plan inter-alia, actions to prevent and control deforestation. In (NAP), Long Term Strategy (LTS), and other addition, the operation contributes to improved climate relevant strategies? resilience in alignment with the NAP by advancing in protecting vulnerable populations, as well as biodiversity and ecosystems and nutritional security. Furthermore, it aligns with key CCDR findings and recommendations including reduce deforestation, climate policies focused on poverty reduction and mobilization of private investment toward more resilience and low‑carbon development (e.g. green bonds). Mitigation goals: assessing and reducing the risks Pillar 1: Improve taxation and fiscal sustainability Prior Action 1. To reduce economic distortions and the administrative burden of taxation, and increase revenue in a progressive manner, the Borrower has (i) approved a reform streamlining indirect taxation through the creation of a new Value-Added Tax (VAT); and (ii) expanded the taxation of investment funds and income obtained abroad through offshore vehicles. Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: The new taxation rules in Brazil are not expected to significantly increase GHG emissions. These rules aim to simplify the tax system and target very wealthy individuals. The reform is fiscally neutral, reducing the tax burden on complex value chains and lower-income households, while progressively focusing on profits from offshore companies and exclusive funds gains. This reform is projected to potentially increase Brazil's GDP by 12-20 percent over a 15-year period. Conclusion for PA 1: Aligned on mitigation Prior Action 2. To strengthen fiscal sustainability, the Borrower has approved a fiscal rule limiting expenditure growth and has mandated the establishment of annual primary balance targets. Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: PA2 is unlikely to cause a significant increase in GHG emissions, since it introduces new fiscal framework that limits primary expenditure growth to a proportion of revenue growth. This fiscal framework is expected to increase the predictability of public finances and allow fiscal Page 29 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) consolidation from a primary deficit of 2.1 percent of GDP in 2023 to a primary surplus of 0.25 percent of GDP in 2026. Conclusion for PA 2: Aligned on mitigation Pillar 2: Promote climate action by enabling sustainable finance and environmental preservation Prior Action 3. To facilitate financing for environmental sustainability, the Borrower, through the Sovereign Sustainable Finance Committee, has approved a framework for the issuance of sovereign sustainable bonds, which defines the eligible expenses to which proceeds of such bonds may be applied, the process for selecting eligible expenses, the procedures for managing the funds raised, and reporting on allocation and impact. Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: PA3 is not likely to cause a significant increase in GHG emissions. Instead, Brazil’s SBF will support the foundations for sustainable financing of public projects and programs, increasing private investment in climate change and low-carbon economy. Conclusion for PA 3: Aligned on mitigation Prior Action 4. To enable foreign investment in sustainable projects in connection to Brazil's ecological transformation agenda, the Borrower has provided tools for managing foreign exchange risks as part of the foreign private capital mobilization and exchange protection program (ECOINVEST Brasil). Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: PA4 is not likely to cause a significant increase in GHG emissions. On the contrary, it introduces tools for managing foreign exchange risks, offering long term FX liquidity and hedging instruments to investors in projects supporting climate mitigation or adaptation benefits. Conclusion for PA 4: Aligned on mitigation Prior Action 5. To ensure that the provision of rural credit benefits borrowers who comply with environmental regulations, the Borrower, through the Brazilian Central Bank, has strengthened climate criteria for credit analysis and extended their application to all biomes. Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: PA5 is unlikely to cause a significant increase in GHG emissions. In fact, the policy reform aims to inhibit deforestation (Brazil's main source of GHG emissions), by extending credit operations restrictions for irregular deforestation activities to cover all biomes in Brazil. The PA seeks to strengthen compliance with environmental regulations, effectively preventing funding for deforestation-linked activities. Conclusion for PA 5: Aligned on mitigation Prior Action 6. To promote environmental preservation at municipal levels, the Borrower has established a mandatory intergovernmental transfer from States to Municipalities, based on environmental preservation criteria. Page 30 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: PA6 is not likely to cause a significant increase in GHG emissions. In fact, the policy reform expands intergovernmental transfer from States to Municipalities based on environmental criteria and climate-critical outcomes, extending the regulation to eight additional states. Conclusion for PA 6: Aligned on mitigation Prior Action 7. To strengthen local capacity and resources for the prevention, monitoring, control and reduction of wildfires, deforestation and forest degradation in the Amazon biome, the Borrower has established criteria to annually select municipalities to receive increased financial and technical support for environmental governance and forest protection. Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: PA7 is not likely to cause a significant increase in GHG emissions. It aims to intensify interventions (e.g. land regularization, technical assistance, municipal fire brigades, productive forest recovery and payment for environmental services) in Municipalities that account for 59.1 percent of deforestation in the Amazon and 32.4 percent of burned areas. Conclusion for PA 7: Aligned on mitigation Pillar 3: Strengthen social inclusion Prior Action 8. To promote social inclusion in communities who protect forests and other natural resources, the Borrower has instituted the payment for environmental services program “Bolsa Verde” for households located in the Brazilian Amazon rainforest. Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: PA8 is not likely to cause a significant increase in GHG emissions. Instead, it aims to provide cash transfers to eligible families in communal areas, incentivizing traditional sustainable practices in natural resources management that contribute to conservation of the Amazon and other biomes. Conclusion for PA 8: Aligned on mitigation. Prior Action 9. To improve the targeting of social programs, including Bolsa Familia, the Borrower has taken measures to improve the quality of information in the single social registry (CadUnico). Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: PA9 is unlikely to cause a significant increase in GHG emissions as it aims improve the quality of information in the single social registry for cash transfers, reducing error in beneficiaries’ inclusion and exclusion. Conclusion for PA 9: Aligned on mitigation Page 31 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) Prior Action 10. To reduce absenteeism, improve nutrition and learning outcomes by providing higher quality food in schools, and to promote gender inclusion, the Borrower has revised guidelines for school feeding programs to promote healthier meals and promoted the procurement of food from female farmers. Step M2.1: Is the prior action likely to cause a Answer: No. significant increase in GHG emissions? Explanation: PA10 is not likely to cause a significant increase in GHG emissions. It promotes expansion of higher quality food access at schools, preferably purchased from local family or communitarian farms. Conclusion for PA 10: Aligned on mitigation Mitigation goals: All prior actions are aligned on mitigation. Adaptation and resilience goals: assessing and managing the risks Pillar 1: Improve taxation and fiscal sustainability Prior Action 1. To reduce economic distortions and the administrative burden of taxation, and increase revenue in a progressive manner, the Borrower has (i) approved a reform streamlining indirect taxation through the creation of a new Value-Added Tax (VAT); and (ii) expanded the taxation of investment funds and income obtained abroad through offshore vehicles. Step A2: Are risks from climate hazards likely Answer: No. to have an adverse effect on the prior action’s Explanation: PA1’s development impact is not expected to be contribution to the Development Objective(s)? threatened by climate risks. It focuses on simplifying Brazil’s fiscal policy and introducing progressive taxation on wealthy individuals' investments. The changes will reduce the tax burden on complex value chains and lower-income households, while targeting profits from offshore companies and exclusive funds. The reform is fiscally neutral and could increase GDP by 12-20 percent over 15 years. Conclusion for Prior Action 1: Aligned on adaptation Prior Action 2. To strengthen fiscal sustainability, the Borrower has approved a fiscal rule limiting expenditure growth and has mandated the establishment of annual primary balance targets. Step A2: Are risks from climate hazards likely Answer: No. to have an adverse effect on the prior action’s Explanation: PA2’s development impact is not expected to contribution to the Development Objective(s)? be threatened by climate risks, as it introduces new fiscal framework limiting primary expenditure growth to a proportion of revenue growth. This framework aims to increase the predictability of public finances and allow a fiscal consolidation, moving from a primary deficit of 2.1 percent of GDP in 2023 to a primary surplus of 0.25 percent of GDP in 2026. Conclusion for Prior Action 2: Aligned on adaptation Pillar 2: Promote climate action by enabling sustainable finance and environmental preservation Prior Action 3. To facilitate financing for environmental sustainability, the Borrower, through the Sovereign Sustainable Finance Committee, has approved a framework for the issuance of sovereign sustainable bonds, Page 32 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) which defines the eligible expenses to which proceeds of such bonds may be applied, the process for selecting eligible expenses, the procedures for managing the funds raised, and reporting on allocation and impact. Step A2: Are risks from climate hazards likely Answer: No. to have an adverse effect on the prior action’s Explanation: PA3’s development impact is not expected to contribution to the Development Objective(s)? be threatened by climate risks. Instead, Brazil’s SBF will set the foundation for the sustainable financing of public projects and programs, boosting private investment focused on adaptation actions. Conclusion for PA 3: Aligned on mitigation Prior Action 4. To enable foreign investment in sustainable projects in connection to Brazil's ecological transformation agenda, the Borrower has provided tools for managing foreign exchange risks as part of the foreign private capital mobilization and exchange protection program (ECOINVEST Brasil). Step A2: Are risks from climate hazards likely Answer: No. to have an adverse effect on the prior action’s Explanation: PA4’s development impact is not expected to contribution to the Development Objective(s)? be threatened by climate risks. In fact, it introduces tools for managing foreign exchange risks, offering long term liquidity and hedging instruments to investors. These financial tools are available only for qualifying projects that are focused on climate mitigation or adaptation. Conclusion for PA 4: Aligned on mitigation Prior Action 5. To ensure that the provision of rural credit benefits borrowers who comply with environmental regulations, the Borrower, through the Brazilian Central Bank, has strengthened climate criteria for credit analysis and extended their application to all biomes. Step A2: Are risks from climate hazards likely Answer: No. to have an adverse effect on the prior action’s Explanation: PA5’s development impact is not expected to contribution to the Development Objective(s)? be threatened by climate risks. On the contrary, it aims to limit environmental damage, such as deforestation and biodiversity loss, by expanding restrictions of credit operations for irregular activities to all biomes in Brazil, beyond just Amazon. Conclusion for PA 5: Aligned on mitigation Prior Action 6. To promote environmental preservation at municipal levels, the Borrower has established a mandatory intergovernmental transfer from States to Municipalities, based on environmental preservation criteria. Step A2: Are risks from climate hazards likely Answer: No. to have an adverse effect on the prior action’s Explanation: PA5’s development impact is not expected to be contribution to the Development Objective(s)? threatened by climate risks. It expands intergovernmental transfer rules from States to Municipalities, requiring eight additional states to transfer based on environmental and climate-critical outcomes, which are expected to decrease climate hazards. Page 33 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) Conclusion for Prior Action 6: Aligned on adaptation Prior Action 7. To strengthen local capacity and resources for the prevention, monitoring, control and reduction of wildfires, deforestation and forest degradation in the Amazon biome, the Borrower has established criteria to annually select municipalities to receive increased financial and technical support for environmental governance and forest protection. Step A2: Are risks from climate hazards likely Answer: No. to have an adverse effect on the prior action’s Explanation: PA7’s development impact is not expected to be contribution to the Development Objective(s)? threatened by climate risks. The policy reform focus on intensifying interventions (e.g. land regularization, technical assistance, municipal fire brigades, productive forest recovery and payment for environmental) in municipalities that concentrate amazonian deforestation (59.1 percent) and burned areas (32.4 percent). Conclusion for PA 7: Aligned on mitigation Pillar 3: Strengthen social inclusion Prior Action 8. To promote social inclusion in communities who protect forests and other natural resources, the Borrower has instituted the payment for environmental services program “Bolsa Verde” for households located in the Brazilian Amazon rainforest. Step A2: Are risks from climate hazards likely Answer: No. to have an adverse effect on the prior action’s Explanation: PA7’s development impact is not expected to contribution to the Development Objective(s)? be threatened by climate risks. It provides cash transfers to eligible families living in communal areas to incentivize traditional sustainable practices of natural resources management, contributing to Amazon and other biomes conservation. This expands forest protection and recovery while promoting economic and environmental resilience. Conclusion for PA 8: Aligned on mitigation Prior Action 9. To improve the targeting of social programs, including Bolsa Familia, the Borrower has taken measures to improve the quality of information in the single social registry (CadUnico). Step A2: Are risks from climate hazards likely Answer: No. to have an adverse effect on the prior action’s Explanation: PA8’s development impact is not expected to contribution to the Development Objective(s)? be threatened by climate risks as it enhances single social registry information quality to cash transfers, reducing errors in beneficiary inclusion and exclusion. Conclusion for PA 9: Aligned on mitigation Prior Action 10. To reduce absenteeism, improve nutrition and learning outcomes by providing higher quality food in schools, and to promote gender inclusion, the Borrower has revised guidelines for school feeding programs to promote healthier meals and promoted the procurement of food from female farmers. Step A2: Are risks from climate hazards likely Answer: Yes. to have an adverse effect on the prior action’s Explanation: Brazil has high vulnerability to extreme contribution to the Development Objective(s)? temperature, drought and extreme precipitation. Hence, the supply of higher quality food in schools, preferably Page 34 The World Bank Brazil Enhancing Productivity, Sustainability and Inclusion DPF (P507322) purchased from local family or communitarian farms is exposed to climate hazards and impacts. Step A3: Does the design of the prior action Answer: Yes. reduce the risk from climate hazards to an Explanation: The program's financial support for local food acceptable level, considering climate producers aims to enhance their production capabilities. adaptation good practices applicable to the Brazil also has rural governmental programs to support country context? family and community farms affected by natural hazards. These include the Crop Guarantee Fund (Law No. 10.700/2003), the Agricultural Activity Guarantee Program (Law No. 12.058/2009), and the National Irrigation Policy (Law No. 12.787/2013). These programs aim to improve farmers' emergency preparedness and reduce the impact of extreme climate events on food production. Conclusion for PA 10: Aligned on mitigation Page 35 ANNEX 3. Required Accompanying Documentation Letter of Development Policy [Unofficial Translation] MINISTRY OF FINANCE OFFICIAL COMMUNICATION SEI No 7731/2025/MF To Johannes Zutt Director – Brazil Latin America and Caribbean Region The World Bank Subject: Intention of contracting of a loan for the Development Policy Financing (DPF) for the Program “Increasing Productivity, Sustainability and Inclusion in Brazil” Reference: When Responding to this official communication, please state explicitly the Process No 17944.004467/2024-57. Mr. Director, 1. This document outlines a set of policy measures with the following objectives: to improve the tax system and fiscal sustainability, promote climate actions that contribute to sustainable financing and environmental preservation, and strengthen social inclusion. 2. The Federal Government of Brazil understands that the technical and financial support from the International Bank for Reconstruction and Development (IBRD), through the Development Policy Financing (DPF), will be important for the success of the Program 'Reforms for Brazil’s Productive, Sustainable, and Inclusive Growth.' Beyond strengthening financing for ecological and climatic transformation, the aforementioned program reflects the deep partnership between the Federal Government of Brazil and the IBRD on critical development issues, such as the pursuit of sustainable, socially inclusive growth that is productivity driven. Public finance overview: 3. Brazil has experienced a strong economic recovery from COVID-19 and has maintained relatively high growth in recent years. In 2023, real growth reached 2.9% and remains robust in 2024. At the same time, the Federal Government of Brazil has been following a sustainable fiscal trajectory, implementing key structural reforms to ensure the continuity of sustainable economic growth. Two major reforms stand out: a comprehensive tax reform approved in December 2023, aimed at simplifying and rationalizing the fiscal system in the medium term, and a new budget framework that anchors fiscal policy, providing clarity and predictability. This framework may contribute to a gradual fiscal consolidation that, combined with the normalization of inflation and interest rates, is expected to support the stabilization of the debt-to-GDP ratio. Furthermore, an independent Central Bank, a resilient financial system, an inflation-targeting regime, and a flexible exchange rate are components that help anchor inflation expectations and maintain growth resilience. The Bank’s support via DPF: 4. Considering the above, the Federal Government of Brazil is seeking a loan from the International Bank for Reconstruction and Development (IBRD) in the amount of US$1,000,000,000.00 (one billion dollars) under the Development Policy Financing (DPF) modality. Through the DPF, the World Bank supports the Government in its efforts to implement policies aimed at improving the tax system and fiscal sustainability, promoting climate actions that foster sustainable financing and environmental preservation, and strengthening social inclusion. 5. This DPF is closely aligned with the government’s priorities, especially those outlined in the Ecological Transformation Plan and the Multi-Year Plan (PPA – Plano Plurianual) for 2024-2027. Specifically, the program supports the priorities for improving fiscal management outlined in the PPA and the actions for sustainable development defined in the Ecological Plan, with an emphasis on mobilizing sustainable financing and reducing deforestation. Finally, the program contributes to the enhancement of social development and assistance, as outlined in the PPA, and promotes the sustainable consumption of healthy food. 6. The program consists of 10 concrete policy actions, each representing a priority area of the government. The program is organized into three thematic pillars that mutually reinforce each other. COMPONENT I: IMPROVING THE TAX SYSTEM AND FISCAL SUSTAINABILITY OF THE BRAZILIAN ECONOMY Actions in this component focus on structural reforms to strengthen Brazil's economic and fiscal conditions, thus creating better conditions for private investment, productivity, growth, and inclusion. 1.1 (A) SIMPLIFICATION OF TAXATION ON GOODS AND SERVICES THROUGH THE INTRODUCTION OF A NEW VALUE ADDED TAX (VAT) This measure aims to simplify consumption taxation, in compliance with the principles of transparency, tax justice, cooperation and environmental protection, contributing to the improvement of the business environment and attracting foreign capital. 1.1, b) TAXATION OF INVESTMENT FUNDS AND INCOME OBTAINED ABROAD THROUGH OFFSHORES This measure aims to increase equity of the national tax system and broaden the tax base. 1.2 ESTABLISHMENT OF A SUSTAINABLE FISCAL REGIME TO ENSURE THE COUNTRY'S MACROECONOMIC STABILITY AND CREATE THE RIGHT CONDITIONS FOR SOCIOECONOMIC GROWTH. This measure aims to contribute to the country's long-term fiscal sustainability, positively impacting the business environment, the attraction of foreign capital, and economic productivity. COMPONENT II: PROMOTE CLIMATE ACTION BY ENABLING SUSTAINABLE FINANCE AND ENVIRONMENTAL PRESERVATION. The actions in this component focus on reforms to increase financing and advance green transformation 2.1 ESTABLISHMENT OF RULES FOR ISSUING SUSTAINABLE SOVEREIGN BONDS IN ALIGNMENT WITH THE PRINCIPLES AND GUIDELINES OF THE INTERNATIONAL CAPITAL MARKETS ASSOCIATION (ICMA) This measure aims to establish the obligations Brazil must meet as an issuer of sustainable sovereign bonds 2.2 ESTABLISHMENT OF THE ECO INVEST BRAZIL PROGRAM FOR MOBILIZING EXTERNAL PRIVATE CAPITAL AND EXCHANGE RATE PROTECTION, UNDER THE NATIONAL CLIMATE CHANGE FUND (FNMC – FUNDO NACIONAL SOBRE MUDANÇA DO CLIMA) This measure aims to encourage foreign investment in sustainable projects in the country and provide exchange rate protection solutions to mitigate the risks associated with currency volatility, thereby promoting the attraction of the investments needed for Brazil's ecological transformation. 2.3 STRENGTHENING REGULATIONS ON CREDIT GRANTING TO INCLUDE ENVIRONMENTAL, SOCIAL, OR CLIMATE FACTORS This measure aims to accelerate ecological transformation in the agricultural sector by expanding the assessment of socio-environmental criteria when granting financing to rural producers. 2.4 CREATION OF THE "PARTNERSHIP WITH MUNICIPALITIES" PROGRAM FOR REDUCING DEFORESTATION AND FOREST FIRES IN THE AMAZON BIOME This measure seeks to strengthen the prevention, monitoring, control, and reduction of deforestation and forest degradation in the Amazon Biome, with the goal of protecting areas at risk of degradation and rationalizing land use. COMPONENT III: STRENGHTN SOCIAL INCLUSION The actions in this component focus on structural reforms to strengthen the social inclusion of vulnerable rural groups engaged in environmental conservation, improve the quality of information, leading to improvements in the efficiency and targeting of the Bolsa Família program, and promote resources for the National School Feeding Program (PNAE - Programa Nacional de Alimentação Escolar). 3.1 PAYMENT FOR ENVIRONMENTAL SERVICES (NEW GREEN BOLSA) TO SUPPORT THE SOCIAL INCLUSION OF VULNERABLE GROUPS CONTRIBUTING TO ENVIRONMENTAL CONSERVATION This measure aims to promote active citizenship, improve living conditions, and increase the income of people involved in the conservation of natural resources in collective areas, while encouraging the participation of beneficiaries in environmental, social, educational, technical, and professional training activities. 3.2 IMPROVING MONITORING AND THE QUALITY OF INFORMATION IN SOCIAL RECORDS This measure seeks to improve the quality of information in social records, including CadUnico, by updating family records. Enhancements in information quality should lead to reductions in errors in the inclusion of individuals in programs that use CadÚnico, including Bolsa Família. 3.3 REDUCING SCHOOL ABSENTEEISM, IMPROVING NUTRITION AND LEARNING OUTCOMES, AND GENDER INCLUSION MEASURES THROUGH THE PROMOTION OF ADEQUATE AND HEALTHY SCHOOL FEEDING This measure aims to promote access to adequate and healthy food in schools to increase school retention rates, reduce absenteeism, improve student learning and nutrition, and promote the acquisition of food produced by women-led groups within family farming. 7. The ongoing development policy financing operation being negotiated with the World Bank is aligned with this set of measures. Throughout the program, it is expected that the Bank will continue to provide technical support for initiatives focused on ecological transformation, including financial innovations, additional resource mobilization, and regulatory improvements. The Bank may also offer technical assistance for reforms aimed at more progressive taxation and improvements in social goods and services for social inclusion. 8. We trust in this operation to continue advancing the reforms aimed at increasing the productivity of the Brazilian economy, ensuring fiscal sustainability, strengthening financing for ecological and climate transformation, and accelerating social inclusion. Document Signed electronically FERNANDO HADDAD Minister of Finance Document signed electronically by Fernando Haddad, Minister of State, on 02/13/2025, at 4:02 p.m., Brasília time, pursuant to § 3 of art. 4 of Decree No. 10.543 of November 13, 2020. Fund Relations Note Bibliography Operational Support Prior Actions Pillar 1: Contencioso tributário no Brasil Relatório 2020 - Ano de referência 2019 Dezembro Brazil Support for de 2020 Structural Reforms and https://www.conjur.com.br/dl/co/contencioso-tributario-alcancou-75-pib.pdf Trade Policy ASA - (P172039) Distributional Impacts of Brazil’s Tax Reform: scenarios regarding Cesta Básica exemption PA #1 https://documents1.worldbank.org/curated/en/099101623102535733/pdf/P179603 Brazil Poverty and 087614f090b1c80baff0071cd8d.pdf Equity Program FY24 - CCif - Simulações dos impactos macroeconômicos, setoriais e distributivos da PEC (P500749) 45/2019 https://ccif.com.br/wp-content/uploads/2020/10/CCiF_NT_Impactos.pdf Brazil 2040 - (P173458) OECD (1999), Taxation of Cross-Border Portfolio Investment: Mutual Funds and Possible Tax Distortions, OECD Publishing, Paris https://doi.org/10.1787/9789264172883-en. Pedro Romero Marques, Clara Zanon Brenck, Laura Carvalho, Lucca Henrique Brazil Policy Notes Gustafson Rodrigues, João Pedro de Freitas Gomes (2023). 2022 - (P178762) Quais os efeitos do novo arcabouço fiscal sobre a trajetória de gastos públicos? Uma análise preliminar. Nota de Política Econômica nº 036. Brazil: Public PA #2 Made centro de pesquisa em macroeconomia das desigualdades. Expenditure Review on https://madeusp.com.br/wp-content/uploads/2023/04/npe-036_site.pdf Greening Fiscal Policy - International Monetary Fund (2023). 2023 Article IV Consultation with Brazil. (P179495) https://www.imf.org/en/Publications/CR/Issues/2023/07/31/Brazil-2023-Article-IV- Consultation-Press-Release-Staff-Report-Staff-Supplement-and-537328 Pillar 2: Cheng, G., Ehlers, T., Packer, F., & Xiao, Y. (2024). Sovereign Green Bonds: A Catalyst World Bank Treasury TA for Sustainable Debt Market Development? PA #3 https://www.imf.org/en/Publications/WP/Issues/2024/06/14/Sovereign-Green- Bonds-A-Catalyst-for-Sustainable-Debt-Market-Development-550527 World Bank Group Climate Change Action Plan 2021–2025: Supporting Green, Brazil Climate Finance Resilient, and Inclusive Development Project (P178888) https://openknowledge.worldbank.org/handle/10986/35799 PA#4 Avinash Persaud (2023). Unblocking the green transformation in developing countries with a partial foreign exchange guarantee. https://www.climatepolicyinitiative.org/wp-content/uploads/2023/06/An-FX- Guarantee-Mechanism-for-the-Green-Transformation-in-Developing-Countries.pdf Assunção, J., Gandour, C., Rocha, R., & Rocha, R. (2020). The effect of rural credit on Brazil Climate Finance deforestation: evidence from the Brazilian Amazon. The Economic Journal, 130(626), Project (P178888) PA #5 290-330. Brazil CCDR http://hdl.handle.net/10986/39782 Brazil. Rural Finance Policy Note. 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