Mato Grosso. 2019
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JEC Assessment: Mato Grosso. 2019 Ref: ToR by &Green | Sail Ventures JEC Assessment: Mato Grosso. 2019 October 1, 2019 1 TABLE OF CONTENTS 1. MACROECONOMIC OUTLOOK 1 2. POLITICAL DEVELOPMENTS IN 2018-2019 4 3. INSTITUTIONAL AND OTHER MAJOR DEVELOPMENTS IN 2018-2019 5 REM MT Program 5 Mato Grosso World Bank Policy Development Loan 6 PCI Institute 6 Land regularization program contract within Amazon Fund 7 4. CURRENT CHALLENGES 8 2019 forest fires 8 Slow implementation of the Rural Environmental Registry 10 5. ANALYSIS OF PROGRESS ON DEFORESTATION RATES VERSUS TARGETS 11 Checklist JEC 1: Scope Re-assessment 16 Checklist JEC 2: Ambition and Strategy Re-assessment 19 Checklist JEC 3: Progress Update 29 Checklist JEC 4: Monitoring, Reporting and Verification (MRV) Update 34 Checklist JEC 5: Social and environmental safeguards Update 36 ANNEX 1. FOREST FIRES IN THE AMAZON 38 0 JEC Assessment: Mato Grosso. 2019 1. Macroeconomic Outlook Mato Grosso is Brazil’s third largest State by area (903,357 km2 , about the same as France and Germany combined) but home to only 3.4 million people (1.6 percent of the Brazilian population). Its GDP-per-capita (as of 2016) is the fourth highest among Brazilian states at US$10,700. Over 50 percent of the State’s GDP is related to agriculture and it has become a global powerhouse for soy and beef production, with 32 million tons of soy beans - 27 percent and 9 percent of Brazilian and global soy production, respectively - and 5.4 million heads of cattle raised in 20181. In 2017, Brazilian economy began to recover, growing 1.1 percent at the back of a strong agriculture sector. In 2018, GDP growth remained unchanged at 1.1 percent, supported by recovery in household consumption and investment. Job creation is slowly improving with unemployment declining from a peak of 13.6 percent in March 2017 to 12.3 percent in 2018 but still above pre-crisis levels. Also, most of the new jobs are created in the informal sector. Extreme poverty (at US$1.90/day in 2011 PPP) increased from 4.1 percent in 2014 to 7.4 percent in 2017 and is estimated to have barely changed in 2018. Inflation has declined rapidly since 2016, facilitating subsequent monetary policy easing. The recession exerted downward pressure on prices and wages and inflation fell rapidly to 2.9 percent at the end of 2017, which allowed the Central Bank to take a more accommodative stance, keeping the policy rate at 6.5 percent since March 2018. In 2018, inflation remained moderate at 3.7 percent2. On September 10, 2019 Brazil’s government raised its 2019 economic growth forecast to 0.85% from 0.81% although the accompanying official document rounded the new projection down to 0.8%. That is largely in line with the market consensus view of 0.87% growth, according to the central bank’s latest weekly ‘FOCUS’ survey of economists and financial institutions but will still be the slowest pace of annual growth since Brazil emerged from recession three years ago. According to the Economy Ministry estimates, the economy should expand by 0.2% in the third quarter, the half the 0.4% pace of growth in the second quarter. According to Economy Ministry Secretary Adolfo Sachsida, the extremely difficult cycle of the Brazilian economy seems to have ended in August. From September onwards there should be a more consistent step-by-step recovery. The government’s new estimates also included a reduction in the 2019 inflation forecast to 3.6% from 3.8%, even further away from the central bank’s official forecast of 4.25%. The new forecasts are the economic parameters that will be used as the basis for the government’s upcoming bi- monthly spending review. So far in 2019, the government has announced spending freezes totaling 34 billion reais to ensure it stays on track to meet its primary deficit target of 139 billion reais3. 1 Mato Grosso Financial Adjustment and Environmental Sustainability Development Policy Loan. Program document. World Bank, 2019. 2 Mato Grosso Financial Adjustment and Environmental Sustainability Development Policy Loan. Program document. World Bank, 2019. 3 UPDATE 2-Brazil ups 2019 GDP growth forecast, but keeps iron grip on spending, Reuters. Retrieved September 12, 2019. 1 JEC Assessment: Mato Grosso. 2019 Figure 1. Expectation on Economic Recovery. Source: Banco Central do Brasil (retrieved September 12, 2019) Figure 2. Inflation control and expectation anchorage. Source: Banco Central do Brasil (retrieved September 12, 2019) Figure 3. Credit/GDP, annual growth and volume. Source: Banco Central do Brasil (retrieved September 12, 2019). 2 JEC Assessment: Mato Grosso. 2019 In 2019, Mato Grosso's GDP decreased 0.3% in the first quarter of 2019 when compared to the same period of the previous year. Among the three major sectors that make up the state economy, two presented negative variations: Agriculture (-4.4%), Industry (-6.7%) and Services (3.7%) in the first quarter. According to the IBGE Quarterly National Accounts System, the GDP of Brazil in the same period grew 0.5%. For the last four quarters ended in March 2019, compared to the four immediately preceding quarters, the Mato Grosso economy grew by 1.2%. The sector performance included: agriculture (-7.3%), industry (-3.1%) and services (3.8%). In the same period of time, Brazil's GDP grew by 0.9%.4 Figure 4. Cumulative growth rates of GDP of Mato between 2016 and 2019. Source: Government of Mato Grosso (retrieved September 12, 2019).. Despite the relatively strong local economy, the State Government is in fiscal crisis. Mato Grosso has been relatively less affected by Brazil’s recent economic recession, given its strong agriculture exports, with growth averaging 2.6 percent between 2011 and 2016. The unemployment rate in Mato Grosso stood at 8.4 percent in 2018, below the national average (12.3 percent). Yet, revenues trail economic growth as production of agricultural commodities for export is exempt by federal legislation from the State’s value-added tax (ICMS) and States cannot tax rural properties. Expenditure growth in turn has been high, driven by increases in public employment, a growing pension deficit and generous wage policies. This imbalance has resulted in a growing financing gap, covered by accumulating arrears. 4 Quarterly GDP of Mato Grosso state. 1st Quarter of 2019. Retrieved September 12, 2019. 3 JEC Assessment: Mato Grosso. 2019 2. Political developments in 2018-2019 In October 2018, Brazil had national and state elections. The current State Governor won the October 2018 state election in the first round with 58.7 percent of valid votes. Upon taking office in January 1st , 2019, the new administration urgently addressed the State Government’s fiscal crises, starting with the declaration of “financial calamity”. Fiscal adjustment and sustainability are a key priority for the new Government, with a medium term plan currently being developed. In his opening speech to the legislature, the Governor emphasized the State’s broken public finances and the need to address the fiscal crisis swiftly, as a pre-condition to achieving other government priorities such as improved outcomes in health and education. These priorities are aligned with the governor’s program for the 2018 election, which focused on reducing the state bureaucracy and increasing the efficiency of public spending. The program also called for supporting the sustainable management of forests and progress in environmental regularization of rural properties and recovery of degraded areas, as key drivers to the agricultural sector growth. By end of January 2019, it had approved a package of fiscal adjustment and reform measures termed Pacto por Mato Grosso (Pact for Mato Grosso). The package focuses on expenditure control, including the State Fiscal Responsibility law, changes to public sector pay adjustments, changes of the State’s public pension system and an administrative reform, reducing the number of State Secretariats and allowing for the closure of State companies. It also increases levies on the main agricultural commodities produced in the State. Moreover, the multi-stakeholder Produce, Conserve and Include (PCI) program has become a critical instrument to develop and implement a sustainable natural resources-based growth model. The package focuses on scaling-up efforts to reduce deforestation and forest fires, accelerating implementation of the environmental regularization in private properties, and institutionalizing the PCI strategy. 4 JEC Assessment: Mato Grosso. 2019 3. Institutional and other major developments in 2018-2019 REM MT Program The REDD+ for Early Movers (REM) program is an essential element of Germany's bilateral involvement in REDD + (Reducing Emissions from Deforestation and Forest Degradation), commissioned by the Federal Ministry for Economic Cooperation and Development of Germany (BMZ) and implemented jointly by the German Development Bank, Kreditanstalt für Wiederaufbau (KfW) and German International Development Cooperation, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH. The REM program supports countries called Early Movers, rewarding “REDD pioneers” such as Colombia, Ecuador and Brazil for their success in reducing deforestation. KfW offers results-based financial cooperation for the REM program, while GIZ provides the technical cooperation necessary for the national counterparts to implement this financing scheme. The REM Program in Brazil, launched in 2017, is co-financed by the Government of the United Kingdom and implemented with the State Governments of Mato Grosso and Acre via their Environment Secretariats and the Acre Climate Change Institute and with the Brazilian Federal Government via the Environment Ministry (MMA)5. GIZ provides technical assistance, particularly related to social environmental safeguards, participative governance and construction of indigenous territories program. The Brazilian Fund for Biodiversity (FUNBIO) acts as the Program's financial agent. According to PRODES / INPE analysis, deforestation in the state of Mato Grosso was below the 1,788 kmퟸ agreed for 2016/2017 period.