Are so many people really illiterate in Brazil?

There are over 6 million people living in the city of Rio de Janiero alone.
I do not think a majority of the city showed up to have a letter written.
I'm not sure how well you were able to follow the movie if you do not know some portuguese, but her job as a letter writer is important to the plot. In the beginning of the film she was just keeping the money and not mailing the letters. Toward the end of the film after her and the boy team up in the letter writing business she changes and is seen walking into the Correios(Post Office) to mail the letters.

yeah. that's real.
there are a lot of illiterate here in brazil.
principally people that come from poor regions, like north and northeast.
in the middle of the thirties, potencialized in the fifties, a long rush of northeastern brazilians, coming to the southeast looking for better conditions of living.
arriving in such big cities like rio de janeiro and sao paulo, they suffered having to live in the favelas, and having to survive with such a little wage, and without access to basic education.

not only these facts, but necesseraly these facts, helped to create a large mass of illiterate and opressed people.

nowadays, things are starting to change. government are improving a lot the educational system, even to the seniors.
we still have a high level of illiterates, camparing to other countries of south america (12%), three decades ago, the level was approximately 30%.

There are many people who don't know how to write or read here, but it isn't all of the population.

Yes, there are STILL a lot of illiterate people in Brazil, especially in the northeast part of the country.