World Bank approves loan to support in fiscal and green reforms in the municipality of Rio de Janeiro

WASHINGTON  – The World Bank Board of Directors approved today the Rio de Janeiro Adjustment and Sustainable Development Policy Loan, a US$ 135.2 million disbursement to the Municipality of Rio de Janeiro with the goal to strengthen fiscal management to improve medium-term fiscal sustainability and accelerate the transition towards a low-carbon, resilient and inclusive urban development.

“Rio de Janeiro has been working on tax reforms since 2021 and we have signed a commitment to rebalance the accounts within the scope of the Fiscal Balance Promotion Plan (PEF) with the federal government. The World Bank-supported fiscal reform package will allow the municipality to regain access to advanced reforms to promote investments in favor of Rio’s environmental, social and economic objectives”, said the mayor of Rio de Janeiro, Eduardo Paes.

Rio de Janeiro fell into fiscal distress before the pandemic due to rapidly growing personnel spending, stagnant revenues, and high debt service costs. COVID-19 worsened the municipality’s public finances. As in the rest of the country, Rio de Janeiro faced higher spending needs in 2020 as part of its response to the COVID-19 pandemic, including a BRL 850 million increase in health budget to cope with the outbreak. This further compromised the municipality’s ability to promote investments in favor of its environmental, social and economic goals, including low-carbon, resilient and inclusive urban development.

This Development Policy Loan (DPL) will support the municipality’s adhesion to the federal Fiscal Equilibrium Plan (Plano de Promoção do Equilíbrio Fiscal – PEF), a program that supports Subnational Governments in re-establishing fiscal sustainability. To help the municipality meet the PEF’s fiscal targets, this DPL is supporting critical fiscal reforms, that include: (i) adopting a fiscal rule that triggers fiscal adjustment measures in case of fiscal distress; (ii) simplifying the tax on services (ISS) and improving collection from tax evaders; and (iii) a legislative reform increasing the contribution rate of civil servants to the pension system from 11 to 14 percent. This is expected to allow the municipality to pursue its fiscal adjustment path, curb recurrent expenditure growth, and strengthen tax revenues.

The project will also support the municipality in shifting to a low-carbon, resilient and inclusive urban development. To do so, actions include: (i) critical legislation to improve the Bus Rapid Transit (BRT) system to attract passengers to public transport, including steps to increase safety for women; (ii) measures to expand the cycling network and make the urban environment more conducive to walking and cycling; (iii) the approval of legislation that promotes climate mitigation and adaptation practices (Low Emission District); and (iv) the adoption of a municipal sustainable development and climate action plan.

A second operation is planned to deepen reforms on both fronts, fiscal and green.

“We are working closely with the Municipality of Rio de Janeiro to support their efforts to bounce back from the COVID-19 pandemic, improve their fiscal sustainability and support climate action for a more sustainable, resilient, and inclusive urban development”, says World Bank Director for Brazil, Paloma Anós Casero.

Outcomes supported by the program include:

· Modernizing legislation to deal with fiscal distress.

· Simplifying the tax on services (ISS).

· Improving collection from tax evaders.

· Legislative pension reform.

· Legislation to improve the Bus Rapid Transit (BRT).

· Measures to expand the cycling network and make the urban environment more conducive to walking and cycling.

· Legislation that promotes climate mitigation and adaptation practices (Low Emission District).

· Adoption of a municipal sustainable development and climate action plan.

This loan from the International Bank for Reconstruction and Development (IBRD) to the Municipality of Rio de Janeiro is guaranteed by the Federative Republic of Brazil and has a final maturity of 21.5 years, with 1-year grace period.

 

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