World Bank: Mato Grosso to Enhance Fiscal Sustainability While Also Protecting the Environment

WASHINGTON, May 24 -- The World Bank issued the following news release:

The US$ 250 million Mato Grosso fiscal adjustment and environmental sustainability development policy loan was approved today by the World Bank Board of Executive Directors. The loan will support the Brazilian center-west state in two pillars: (i) to regain fiscal sustainability and (ii) increase institutional capacity for sustainable agriculture, forest conservation and climate change mitigation. The loan will help the state implement a heavily frontloaded fiscal reform package and critical environmental policies, including a new Deforestation and Forest Fire Prevention and Control Plan, and support to the implementation of a rural environmental cadaster and to the state Secretariat for the Environment.

"The situation of the state led us to declare a state of financial calamity and to propose the 'Pact for Mato Grosso', which, among other measures, instituted a state fiscal responsibility law, an administrative reform, changes to the state Fund for Transport and Housing (Fethab), the change to the state's pension agency and the law that provides the criteria for granting the Annual General Review (RGA) to public servants," said Mauro Mendes, governor of Mato Grosso. "The operation with the World Bank will allow us to improve the profile of our debt, significantly reducing our annual debt service payments over the next three years, which will free up resources for other pressing priorities," the governor concluded.

Although Mato Grosso's economy is growing above the Brazilian average, its fiscal situation has deteriorated dramatically since 2015 due to the high payroll growth (wages and pensions) that increased 67% in real terms from 2011 to 2018. The result was a buildup in delays of payments to suppliers that reached US$ 0.7 billion (15% of revenues) by the end of 2018, according to World Bank estimates.

The state has global relevance for agricultural production, forest protection and mitigation of climate change. Over 50 percent of state GDP is directly related to agriculture and it has become a global powerhouse for soy and beef production, with 32 million tons of soy beans and 5.4 million head of cattle produced in 2018. However, this agricultural expansion has historically taken place through clearing of forests, including in the Amazon biome. While average deforestation post-2010 has been 75 percent below its 2001-10 average, deforestation continues to be considerable and since 2015 the pace has increased.

A state Fiscal Responsibility Law is supported by this operation, enabling the state to regain and maintain sustainability of its finances. The operation will ensure that key expenditure drivers, such as wage growth, can be controlled going forward. Policies supported by the operation also strengthen Mato Grosso's tax base by reducing tax expenditures and increasing fiscal contributions from the agrobusiness sector. To sustain the state's agricultural export-led growth model, the operation supports policies to control deforestation and forest fires, and accelerates the implementation of the rural environmental cadaster. It also supports the institutional consolidation of the state's efforts towards attracting investment in sustainable, inclusive, and climate-smart agriculture through "Produce, Conserve, Include" (PCI).

"The two pillars supported by this loan are mutually reinforcing. Fiscal and environmental sustainability are both essential for addressing the long-term development prospects of Mato Grosso. This operation puts the state in a leadership position on policies that support inclusive, innovative, and sustainable rural development in Brazil," said Paloma Anos Casero, World Bank Country Director for Brazil.

Among the outcomes supported by the program are:

Increase in current savings to 5 percent of revenues

Reduction in the share of net current revenues spent on wages and pensions to 60 percent

Containment of the state pensions deficit and increases in state revenues.

29 percent reduction of deforestation in the state's part of the Amazon biome (relative to 2018 estimates)

Seven-fold increase in the area covered by validated rural land cadasters

Increase in resources mobilized for the state's flagship green growth strategy

This loan from the International Bank for Reconstruction and Development (IBRD) to the state of Mato Grosso is guaranteed by the Federative Republic of Brazil and has a final maturity of 19.5 years, with a 3-month grace period.

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