(ATR) The declaration of a "public state of calamity in financial management" in the state of Rio de Janeiro will keep the state afloat through August, at the expense of long-term solutions.
In an interview with Globo, acting State Governor Francisco Dornelles said that the main motivation behind the declaration was to finance the Olympic Games. Dornelles said that "we cannot fail," in hosting the Olympic Games, which necessitated the need to seek alternative avenues to receive federal funding to cover the costs for the Games.
"The president said he recognizes that the Olympics is a national event, which is important for Brazil, and the whole world will be watching," Dornelles said. "I think Rio is experiencing a specific situation. We will invest in metro and security. We need to have more people on the street, ostensive policing. We have to be enhanced during the Games."
Rio de Janeiro state is delivering the line 4 metro expansion and security for the Olympics according to Dornelles. The metro has had its budget swell last minute, as tests continue to run around the clock to deliver the new line on Aug. 1 for tourists to travel to the Olympic Park from the city's South Zone.
The state of Rio de Janeiro is projected to run a shortfall of $5.58 billion this year, which violates the country’s balanced budget law. States in Brazil are not allowed to have spending exceed income, and the state of Rio is running out of money, fast.
Rodrigo Zeidan, an economics professor at NYU Shanghai and Fundação Dom Cabral, told Around the Rings Dornelles’ move to keep services afloat through the Olympic Games was clearly political and not a long-term solution.
"The state is broke; that is a very easy picture to paint," Zeidan said. "Because they [prioritized] the Olympics they chose to go to this route to make sure they have enough money to last until the end of August.
"This is only a short-term solution, but at least he was honest about the choice. Dornelles was telling the population that we will sacrifice services to fund the Olympics. I don’t like it, but at least it’s a clear choice that he made and will have to live with that."
Zeidan says there are two main causes for the decline in the state’s fortunes. First, the state gambled by spending money from oil revenues to fund permanent state services, and now that oil revenues have declined there is not enough money to continue funding the programs. Second, the overall Brazilian economic crisis has seen a steep decline in tax revenues creating a second supply shock for the state.
A solution to the problem does not seem to be on the horizon, as city and state governments are unable to sell bonds to finance debt in Brazil. Zeidan says that federal budgetary reform may be required to give states a reprieve to refinance their debt and ensure there are no lapses in services.
Rio state employees have not been paid in the month of June, showing how deep the problem runs, as employee incomes are usually the first expenditures to be fulfilled. Additional budget cuts to services such as the state police have seen local residents pitching in to provide goods such as toilet paper for stations according to reports.
"I don’t see an easy solution, now," Zeidan said. "We created a balanced budget law exactly to prevent governments being bad managers of state finances but it didn’t work, but also because the crisis is really much harder than we thought at first."
Written by Aaron Bauer in Rio de Janeiro
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