Currency crisis occurs where there exists a serious doubt on the valuation of the currency and if the available reserves in a country’s central bank can support a fixed exchange rate. It can occur when a country is forced to devalue its currency because of enormous capital outflows resulting from speculative attacks. The decline in a country’s value of the currency can also result in currency disaster. In the event, the value of a currency declines, it will negatively affect the economy through the creation of fiscal uncertainties including the rate of exchange and the fact that there would be an automatic decrease in the amount that a unit of currency can buy. During a currency crisis, financial institutions such as the central banks are mandated to stabilizing the rate of exchange using the country’s available reserves usually in foreign countries. Moreover, the solution could include allowing a floating rate of exchange or devaluing the currency (Cooper ; John, 2012). Devaluation of currency could end in currency crashes, although it can be avoided through restricting the amount of foreign currency that individuals can purchase or sell. A currency crisis draws a large number of currencies that are not central to the problem to depreciate for instance, during the Brazilian crisis in 1999, the Asian crisis of 1997-1998 and the crisis caused by the Russian default in 1998. In this paper, I will examine the cause and resolution of the Brazilian currency crisis of 1999 and the interventions of the International Monetary Fund (IMF) in ending the crisis.
Causes of currency crisis in Brazil
The 1999 Brazilian currency crisis was caused by some key factors including inflation, poor fiscal policy, and poor exchange rate policies (Vieira, 2012). All these factors were mainly responsible for the crisis that culminated in 1999 to negatively impact the Brazilian economy. Despite rigorous efforts form the Brazilian government to alleviate these problems before the crisis, the stability, and growth of the economy struggled with deficits due to a rise in the price of the US dollar.
Brazil experienced a difficult period in its monetary policies throughout the 1980’s and early 1990s due to poor financial decisions regarding the relationship between the ineffective tax system, running on persistent budget deficits and flooding the economy with printed money to cover for the ineffective tax system and its effect on inflation. In the early 1970’s the Brazilian inflation stood at 20 percent, however, by mid-1990 the value had skyrocketed to an astonishing 3000 percent (Saad-Filho ; Mollo, 2012, p. 118; Afonso, Araújo, ; Fajardo, 2016). Brazil had the highest rates of inflation in South America in the two decades beginning 1980 to 1999 with the values averaging between 100 percent and 3000 percent. Nonetheless, during this period the government provided various intervention measures to assist in controlling the problem. Before eventually embarking on the Real Plan, different five other methods including the Crudazo, Bresse, Verao, Collar I and Collar II were introduced to control the problem with limited success (Bolten, 2012). The first plan Cruzado rolled out in 1986 was the most effective of the five. However, its impact was not sufficient enough to tame an impending and dangerous hyperinflation.