BRAZIL'S SARNEY FACES CHALLENGE

Poor Harry Schlaudeman, the U.S. ambassador to Brazil. He can't indulge in a round of golf without badgering by local reporters.

The reporters, and a lot of other people here, want to know if the United States is really serious about its threat of hiking tariffs on Brazilian exports if Brazil does not open its computer market wider to foreign firms by Dec. 31.The computer flap, however, is one of the lesser problems facing Brazilian policy makers.

How to steer Brazil's economy toward sustained growth with low inflation, while managing the nation's $105 billion foreign debt, is the Brazilian government's overarching challenge.

How the government fares in this task during the next half-year or so should make one of the more fascinating chapters in Brazil's economic history.

On Feb. 28, Brazilian President Jose Sarney, until recently widely regarded as a cautious, bland politician, took a dramatic step.

To exorcize Brazil's rampant inflation, he ordered a general price freeze and hiked wages, in what has come to be called the Cruzado Plan.

Brazil's economic growth received new impetus and is expected this year to range around 7 percent to 8 percent. Inflation has slowed sharply, to between 1 percent and 2 percent a month, according to Brazil's official figures.

But now, eight months into the Cruzado Plan, Brazil's economy is showing strains. Queues to buy meat or eggs, black market dollar quotes at twice the official exchange rate, waits upto six months for new cars, surging real estate prices, imports of items in which Brazil had been self-sufficent, and real interest rates of 20 percent or more are among the disturbing symptoms.

The Cruzado Plan clearly has sparked a commercial boom, and most Brazilians, it seems, are rejoicing. Income and jobs are up. As Finance Minister Dilson Funaro, Brazil's reputed economic czar, puts it, meat lines are preferable to unemployment lines.

Just as clear, however, is the fact that the Cruzado Plan will have to be adjusted. Both producers and consumers are plagued by scarce supplies and/or illegal surcharges. The surcharges, some analysts claim, make for inflation rates substantially higher than those officially reported - perhaps in the 4 percent- to 5 percent-a-month range.

And business executives complain the price freeze is slicing their profits, which, if true, could slow the investment needed for Brazil to keep growing while keeping inflation within reason.

Supply-demand distortions are tending to reduce Brazil's foreign trade surpluses. In September, the surplus fell to $840 million, the smallest since the Cruzado Plan's inauguration. It marked the fourth successive monthly decline in the surplus.

Strong domestic demand is deflecting goods from export markets, and the government, trying to alleviate domestic scarcities in other products, is authorizing more imports.

Meanwhile, the country's foreign reserves are declining.

Slimmer trade surpluses and falling reserves have important implications for the Brazilian government's international debt strategy.

Brazil insists on solving its economic and finance problems in its own way, without involvement by the International Monetary Fund. It hopes to win, by early next year, a rescheduling of debt payments to creditor governments and foreign banks.

Mr. Funaro recently told reporters in Washington that he even hopes to negotiate some new voluntary commercial bank loans, which would be Brazil's first since the developing countries' debt crisis surfaced in 1982.

But falling trade surpluses and reserves, besides, of course, a domestic economy under increasing stress, seem likely to weaken Brazil's negotiating hand. Chances of winning creditor concessions could fade.

Further complicating the Brazilian scene are the Nov. 15 national elections, which will bring a new Congress to Brasilia next February.

And it won't be an ordinary Congress. It must write a new Brazilian constitution and it may decide just how long Mr. Sarney stays in office.

President Sarney's economic policy decisions are likely to be influenced by the kind of Congress that is elected. At the same time, he will try to influence the Congress to write the kind of constitution he favors.

Uncertainties about the Congress and the constitution it will design are not helping Brazil's immediate economic prospects. Foreign companies are widely reported holding back new investment decisions until they learn Congress' plans for investment guidelines.

In September, a presidentially appointed advisory commission on the constitution suggested nationalizing banks and insurance firms and favored market reserves for Brazilian firms.

It also supported the principle of limiting Brazil's foreign debt interest payments, something Brazil's creditor banks will follow closely.

So what is the government to do?

In the near future, it is likely to do a combination of things, to slow demand and promote production. Among the possible steps are selective price increases and a variety of tax measures, to help boost profit margins, slow consumption and encourage savings. Import restrictions may be eased, too.

Higher electicity charges seem a near certainty. Brazil's utilities are short of funds and, without new investments, energy rationing soon may be a threat.

How serious the government is toward guiding Brazil to a more efficient, productive economy may best be measured, however, by what it does to cut its own spending and improve, if not sell off, public enterprises.

Mr. Funaro is reportedly pushing for substantial government cutbacks, but Joao Sayad, the planning agency chief, is said to be resisting. Cutbacks, his aides argue, might prove recessionary.

A decision last July requiring Brazilians to make compulsory loans to their government, for use by state enterprises, does not suggest that the government will soon lessen its grip on the economy.

Another crucial near-term issue is whether Brasilia will alter its commitment this year to raise national wage levels if inflation in the 12 months through next February hits 20 percent or more.

Rising inflation in recent months, even as compiled by the government, indicates that inflation might top 20 percent. An offsetting wage hike early next year could lead to a new inflationary spiral, exactly what the Cruzado Plan was to avoid.

Let Mr. Schlaudeman play his golf round in peace. Far more intriguing is the chess game Mr. Sarney is about to play.

For the full story: Log In, Register for Free or Subscribe