Brazil’s Currency Retreat and the Fragility of Multilateral Rules

Having pledged to eliminate the Financial Operations Tax (IOF) on foreign exchange transactions by 2029, Brazil’s reversal violates its commitments under Article VIII of the International Monetary Fund’s Articles of Agreement.

By Jeff Alvares

In an era of growing geoeconomic fragmentation, middle powers like Brazil can ill afford to undermine the very rules that safeguard their economic stability. Yet that is precisely what the Brazilian government did by abruptly increasing the Financial Operations Tax (IOF) on foreign exchange transactions to 3.5% in May, a decision upheld by the Supreme Federal Court in July. The move reverses decades of progress toward financial transparency and violates Brazil’s A commitments under Article VIII of the International Monetary Fund’s (IMF) Articles of Agreement.

This decision is not merely a domestic policy shift—it is emblematic of a broader and more troubling global trend. From the US-China trade war to the EU’s imposition of carbon border adjustments, unilateral economic interventions are becoming increasingly common. While economic giants may view such measures as leverage in a multipolar world, Brazil, dependent on foreign investment, commodity exports, and regional integration, gains no such advantage. On the contrary, its retreat from multilateral discipline threatens to erode the very framework that protects smaller economies from financial manipulation by larger actors.

The Broken Bretton Woods Promise

Brazil’s obligations under Article VIII, accepted in 1999, include a clear commitment to refrain from discriminatory currency practices. These rules were designed after World War II to prevent the chaos of the interwar years, when competitive devaluations and ad hoc current account controls deepened the Great Depression and fomented geopolitical instability. The Bretton Woods system, although originally tied to fixed exchange rates, evolved to emphasize transparent and rules-based behavior in foreign exchange markets.

Brazil’s current IOF regime contravenes both the spirit and the letter of Article VIII. The IMF has explicitly classified Brazil’s IOF—which imposes disparate rates on various foreign exchange transactions, from consumer credit card spending to cross-border remittances—as a “multiple currency practice.” That means the tax creates implicit exchange rate differentials depending on the nature of the transaction, distorting market signals and undermining Brazil’s legal commitments.

This is not a minor technical issue. It strikes at the heart of the rules-based monetary order that countries like Brazil depend on for macroeconomic credibility and access to global trade. By flouting these obligations, Brazil not only weakens its international standing but also contributes to the fragmentation of global financial governance.

The Costs of Ambiguity

The timing of this policy reversal could hardly be worse. Brazil has been positioning itself as a leader among emerging markets, advocating for reforms in the IMF and World Bank to give greater voice to the Global South. Yet credibility in multilateral diplomacy depends on consistency and compliance. Having pledged to eliminate the IOF on foreign exchange transactions by 2029 in conversations with both the IMF and the OECD, Brazil’s apparent reversion to ad hoc financial repression risks undercutting its moral authority to demand change from others.

Investor confidence, already sensitive to political and economic volatility in developing markets, could suffer lasting damage. Capital is highly mobile, but it is also highly selective. Investors are wary of countries that appear to shift the rules of the game without warning. For exporters and importers alike, distortions in foreign exchange pricing introduce unwelcome uncertainty and add hidden costs that ripple through supply chains.

Moreover, such measures are likely to backfire economically. While they may generate temporary fiscal gains or slow currency depreciation in the short term, they undermine the broader conditions needed for long-term growth. Foreign direct investment, vital to upgrading Brazil’s infrastructure and industrial base, depends on transparency, predictability, and adherence to international norms.

A Path Back to Compliance

The government has defended the IOF hike as a tool for raising revenue and controlling the depreciation of the real. But this rationale reflects a short-term mindset. Brazil’s economic challenges—high public debt, inflationary pressures, and external vulnerabilities—require structural solutions, not improvisation. Fiscal reform, credible monetary policy, and regulatory predictability offer a far more sustainable path to currency stability and investment inflows than arbitrary taxes on payment flows.

There are precedents for course correction. In the aftermath of previous crises, Brazil has demonstrated its ability to adopt sound macroeconomic policies and regain investor confidence. Returning to compliance with Article VIII would not require heroic measures—only a clear timetable for phasing out the IOF and a reaffirmation of Brazil’s commitment to rules-based governance.

More broadly, Brazil must decide what kind of economic actor it wants to be. As a member of the G20 and a prominent voice in BRICS, it has an opportunity to shape a more inclusive and resilient global financial architecture. But this influence hinges on consistency. A country that disregards its current obligations is unlikely to be entrusted with new responsibilities.

Holding the Line

The larger lesson is one of strategic alignment. In a world where trust in international institutions is eroding and where powerful countries are testing the boundaries of economic cooperation, middle powers have a vital role to play in upholding the rules. For Brazil, this is not merely a legal or technical question—it is a matter of national interest. The credibility of its institutions, the prosperity of its citizens, and the stability of its region all depend on a functioning, rules-based global economy.

To walk away from that framework is to invite instability. And for a country with Brazil’s history of financial crises, that is a risk it can ill afford to take.

Jeff Alvares is senior counsel to the Central Bank of Brazil, former counsel to the IMF, and a former member of the Financial Stability Board secretariat. The views expressed are his own.