Why we don’t want to subsidize the BNDES again – 07/03/2023 – Bernardo Guimarães

The government should soon propose the return of subsidies to the BNDES and changes in the TLP law (law 13,483 of 2017).

Prior to this law, the BNDES financed itself with subsidized interest rates. The government even paid interest of 14% per year on its debt while effectively transferring resources to the BNDES at 7% per year. He looked like someone with a debt on the overdraft that he invests in his savings account.

The TLP law basically established that, after a long transition period, the BNDES would borrow from the treasury at the government bond interest rate, which is the lowest market interest rate in the economy.

It might seem that with market interest rates so high, it makes sense for the BNDES to offer subsidized credit.

Let’s see.

The culprit for the huge interest rates could be the Economy’s high base rate (the cost of lending to banks) or the banks’ margin (difference between the rate charged to customers and the cost).

If the banks’ margin is too high, the BNDES may seek to offer loans at interest rates closer to the basic rate. However, this does not require a subsidy.

If the basic interest rate is too high –which is indeed the case in Brazil–, subsidized credit makes credit cheaper for some. The problem is that it makes lending to others more expensive.

To understand this point, consider an economy that has BRL 2 million loaned to companies and the interest rate is 6%. Now suppose the government decides that $1 million should be loaned at lower rates to other firms. There is only R$ 1 million left for companies that, at 6% interest, want R$ 2 million in loans. So interest rates rise to balance this market.

In fact, the big drop in interest rates that started in 2017 coincided with the sharp contraction in BNDES credit.

Thus, subsidized credit for some is high interest rates for others.

Some sectors benefit the economy as a whole. In jargon, they generate positive externalities. Infrastructure is a good example. One argument in favor of subsidized credit is that it makes sense to finance these sectors even if it makes credit more expensive for others.

It is difficult to define exactly which sectors generate positive externalities, but, in principle, this type of subsidy is supported by economic theory.

However, this must be done explicitly by the Budget. Subsidies must compete with other types of government spending. After all, they are in fact financed with our taxes, like other Budget expenditures.

Decisions on the cost of credit for the BNDES are effectively about subsidies. Thus, they cannot be in the hands of the National Monetary Council, as the current BNDES board wants.

The government plans to propose a new instrument, the LCD, whose remuneration would be exempt from Income Tax. The BNDES would borrow by issuing these bonds and thus raise funds at lower than market rates.

Banks do the same when issuing an LCA (for agricultural credit) or an LCI (for real estate credit). Wouldn’t it make sense for the BNDES to do the same to finance, for example, infrastructure projects?

Activities generate externalities, no matter who lends. If the objective is to make credit cheaper to finance infrastructure, we can create tax-free bonds for that, but why should only the BNDES issue them?

This type of intervention in the economy was the trademark of the Dilma government and it went very wrong, but it brings political benefits to those who run the BNDES and economic benefits to the benefited companies. Then the pressure for change will arise.

I hear footsteps on the stairs. We need to debate the matter intensely.

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