Brazil Lifts Its Tax on Purchases Abroad

President Dilma Rousseff on March 28, 2011 took the unusual step of increasing a tax on what Brazilians buy abroad, the latest in a grab bag of unorthodox measures to combat what officials say are the damaging effects of having one of the world's strongest currencies.

What concerns the three-month-old Rousseff administration is that the ultrastrong real is producing a group of Brazilian jet setters who are spending in countries, including the U.S., where their money goes further than at home. In the first two months of the year, Brazilians spent $2 billion overseas, a 33% increase from the year-earlier period, government officials said.

"At this point there's almost nothing in my house that I bought in Brazil, except things I can't bring on a plane, like my TV," says Andrea Spinelli, a São Paulo-based finance executive at an international company who often travels to the U.S. for work.

That has Brazilian business associations griping that the overseas spending is the latest way they are being hit by an overvalued currency. Already, domestic manufacturers have demanded more protective measures to stave off a flow of less-expensive imports from China. In a move aimed at China, the government has responded by raising import tariffs on toys and other goods.

By many estimates, Brazil's currency is now at its strongest level in decades following a nearly 40% rise against the dollar since early 2009. A strong currency is often a good thing: It holds down inflation by making imported goods cheaper. But government officials are concerned that the real has become so strong that it may threaten growth by making local producers vulnerable to foreign competition.

Containing the side effects of a strong currency has become a priority for the Rousseff government. To slow the rise, finance officials have slapped taxes on foreign portfolio investments, and made it costlier for banks to make speculative currency bets. The central bank is buying dollars at a furious pace to cool off the real.

The added tax lifts fees on overseas credit-card purchases to 6.4% from 2.4%. But critics say it ignores the biggest reason why Brazilians who can are buying abroad. Multiple layers of taxes often make products sold in Brazil's mostly closed economy—from deodorant to computers—twice as expensive as they are in the U.S.

Ms. Spinelli says the tax increase won't change her spending habits. "This seems like an excuse to raise a new tax to me, because it will still be incredibly cheaper to buy abroad," she said.

Several economists say the government is failing to attack a root of the problem. Brazil has the highest real interest rates in the world, which is attracting a wave of speculative investment and pushing up the real. But Brazil can't lower interest rates until it cuts spending and shrinks its deficit, economists say. The government recently announced a package of spending cuts, but economists say they didn't go far enough.

The International Monetary Fund's Western Hemisphere director, Nicolás Eyzaguirre, called over the weekend on Latin American nations such as Brazil to avoid unorthodox measures, such as capital controls, and instead curtail spending to keep their economies from overheating.

"The more unconventional measures can never be a substitute for the fundamental measures," Mr. Eyzaguirre told a news conference in Calgary, Canada.