Transcript

IMF Press Conference of Michel Camdessus, Managing Director and Stanley Fischer, First Deputy Managing Director

November 13, 1998

MR. ANJARIA: Good morning, ladies and gentlemen. I'd like to welcome you to the press conference of the Managing Director of the International Monetary Fund, Mr. Michel Camdessus; the First Deputy Managing Director, Mr. Stanley Fischer; and to his right, Mrs. Teresa Ter-Minassian, Deputy Director of the Western Hemisphere Department, who has negotiated the program with Brazil.

I would like to thank you for coming on such short notice. We are in the middle of a very hectic work program, and the Managing Director will have to leave shortly to carry on an important meeting of the Executive Board. Then, we will continue the press conference with Mr. Fischer and Mrs. Ter-Minassian.

Managing Director, would you like to make some introductory remarks?

MR. CAMDESSUS: Yes, thank you. Before I talk about this agreement with Brazil, I would like to tell you about another sad Brazilian event, namely, that Mr. Alex Kafka, who has been the Executive Director for Brazil for 32 years in this institution and who was the highly-respected dean of our Executive Board, has just this week decided to retire.

I wanted to tell you that, of course, this leaves us all saddened and admiring of what he has done. The Executive Board has taken the very exceptional step of adopting a Resolution of Appreciation for his service here, and you will find this Resolution and the few words I pronounced in his honor on several occasions in the back of this room.

And now, let me tell you my pleasure in announcing that today, the Brazilian authorities and an IMF team have successfully concluded negotiations on a strong three-year program of economic and financial reform. I have said today, but perhaps it was yesterday, because conversations were concluded sometime last night on technical aspects. But what matters is that this program first and foremost addresses the chief sources of Brazil's external vulnerability, namely, its chronic public sector deficit, which the country is now tackling in a serious and sustainable manner.

The program combines large up-front fiscal adjustment of over 3 percent of GDP with reforms of social security, public administration, public expenditure management, tax policy and revenue sharing that confront head-on the structural weaknesses that lie at the root of the public sector's financial difficulties.

Within this framework of structural reforms, Brazil's three-year fiscal program targets primary surpluses of 2.6 percent of GDP in 1999, 2.8 percent in 2000, and 3 percent in 2001. The Brazilian authorities are also committed to further opening up the economy, ensuring firm monetary discipline and macroeconomic stability, and maintaining the current exchange rate regime, while reinforcing the exchange reserves and improving the competitiveness of the economy.

The way is now open for the international community to provide financial support to Brazil that will enhance market confidence in the government's economic policies and help ensure the success of the country's program.

Official creditors, multilateral and bilateral, will provide support totaling more than $41 billion over the next three years, roughly $37 billion of which is available, if needed, in the next 12 months. I say "if needed" because this is a program which has an important precautionary character, and Brazil, of course, feels free to draw on the resources for their entirety or only in part.

I believe that the soundness of Brazil's program and the authorities' commitment to it together with the strong support demonstrated by the official international community provide the conditions for Brazil's private creditors now to act to help ensure its success.

I will be asking the IMF's Executive Board to support the program with a three-year stand-by arrangement, augmented in the first year by the Supplemental Reserve Facility, for a total amount of SDR 13.0 billion, equivalent to a little bit more than $18 billion. Around 70 percent of these funds will be under the Supplemental Reserve Facility, thus ensuring the early availability of a very significant sum.

Mr. Wolfensohn, President of the World Bank, has assured me of his readiness to recommend to his Board provision of up to $4.5 billion in support of Brazil's program. Similarly, Mr. Enrique Iglesias, President of the InterAmerican Development Bank, has recommended to his Executive Board an IDB support package of $4.5 billion.

Brazil's program will also receive strong support from a large number of industrial countries in North America, Europe and Asia whose governments or central banks will provide through the Bank for International Settlements, the BIS, additional financing totaling approximately $14.5 billion.

Let me add that the recent passage by the Brazilian Congress of the social security reform law is a significant and long-awaited achievement. Together with the recent submission to the Congress of a revised budget for 1999, in which every effort has been made to spare basic social programs from the expenditure cuts that fiscal discipline requires, this reassures me that Brazil will implement the rest of its program rigorously. And in turn, the success of Brazil's efforts will greatly brighten the economic prospects of the region as a whole.

Let me finally, in conclusion, express my gratitude to the IMF staff team led by Mrs. Teresa Ter-Minassian, which has been working hard to put the program together with the Brazilian authorities, and to all those who have helped to complete this sizeable financing package. I want to mention here my two colleagues, Jim Wolfensohn and Enrique Iglesias, the bilateral donors, the presidency of the European Union, and the BIS, which has helped, as I have just said, in putting in place with the contributors the bilateral contributions.

Thank you for your attention. Now, as Mr. Anjaria has told you, I must join the Executive Board to complete an important discussion before leaving for Ecuador and Central America in the circumstances which you know, but Mr. Fischer and Mrs. Teresa Ter-Minassian will be with you to answer all possible questions from your side.

Thank you very much.

MR. ANJARIA: Thank you very much, Mr. Managing Director.

Could I ask Mr. Jack Boorman to come up here and fill a void? Mr. Boorman is Director of the Policy Development and Review Department.

QUESTION: There are several things that I find missing here in the statement, as how much will Brazil be paying for the money, how did you come to the amount that you judged necessary, or is that the sum of what everybody was willing to contribute came out to?

MR. FISCHER: On the rates, the Fund's 600 percent of quota; 420 percent of that is the SRF, the Supplemental Reserve Facility, and 180 percent of that is normal Fund GRA resources. On the normal Fund resources, the rate is a little bit above the equivalent of the Treasury Bill rates of the mixture of currencies that constitute the SDR.

On the SRF, there is a premium above that--this is shorter-term money for circumstances like this--and the premium begins at 300 basis points above the rate on the GRA resources which are at the moment about 4-3/4 percent.

On the amount, obviously, there is no precise rule that enables you to derive the right size of a financing package, and the most important element in making a financing package succeed is the actions that the Brazilian government is taking to strengthen the fiscal effort and the other structural elements which are present.

Given that, the international community is providing a very large, sufficiently front-loaded package to give confidence that Brazil has the resources to deal with any possible drawings on reserves that might become necessary in the next few months or during the course of the program.

We go through a variety of scenarios in looking at how much to consider for a program, and then we add something to that, and according to the analyses we have done, this amount is significantly above the amounts that we could envisage being needed to deal with events that might occur.

We did the analysis before we went out and raised the money, not ex post.

MR. ANJARIA: On the specific amount of the rates, during the first year from the approval of the SRF financing, borrowers pay a surcharge of 300 basis points above the rate of charge on IMF loans which, as Mr. Fischer mentioned, is around 4-3/4 percent. This rate is increased by 50 basis points at the end of that period and every six months thereafter until the surcharge reaches 500 basis points.

MR. FISCHER: Let me just make one more clarification.

The interest charge, the 4-3/4 percent on basic IMF resources, is based on the mixture of currencies in the SDR, so it is for a combined loan of dollars, francs, deutschemark, yen and pound sterling, and is an average of the interest rates on those currencies including, for instance, the very low rates, the very, very low rate on the yen, and the very low rate on the deutschemark and the French franc.

QUESTION: This program is going to live or die on its success in getting the private sector to keep its money in Brazil and grant them additional credits. That fact was semi glossed over in the Managing Director's statement, and I would like to know a bit more specifically what the role of the private sector has been during these negotiations, what you expect from it going forward and what indications you have had about their willingness to give Brazil a chance here.

MR. FISCHER: You are absolutely right that the program to succeed will require the broad support of the financial community. What will happen is that once the package is announced--that is now, it is being announced simultaneously in Brasilia--the Brazilian authorities will approach foreign creditors, particularly foreign bank creditors, to explain the program and the nature of the official support Brazil is receiving and will seek the support of the private sector.

We have been working over the past few weeks with the Brazilian authorities to put in place a system for monitoring private sector participation in support of Brazil. We expect from conversations with private sector participants in the United States and in other countries--and those conversations are taking place in a broad range of contexts between Brazil and the private sector participants and between official sectors in countries and private sector participants--that they will be supportive of the program.

QUESTION: Could you be more specific about the exchange rate regime, the assumption about the exchange rate regime that the program makes, and whether that regime would include any increase in the slide?

The second thing is what other assumptions surround the program, or what other targets are part of the program, for example, relating the inflation rate to foreign exchange reserves and whatever else may be part of it.

MR. ANJARIA: Before Mr. Fischer answers that, maybe I should have mentioned that the Brazilian Government will be posting on the Brazilian Government website shortly the letter of intent or the policy memorandum describing the policies of Brazil that is being submitted to the management of the IMF. We in turn at the IMF will post Brazil's policy memorandum or letter of intent on the IMF's web site. So within the course of the next hour or two, I hope, barring any technical glitches, you will have the details of the policy document that the Executive Board of the IMF has been given.

MR. FISCHER: The exchange rate regime will continue. The Brazilians made clear from the first announcement that was made during the Annual Meetings that the exchange rate regime will continue. It has a basic rate of crawl of about 7-1/2 percent, with the Brazilian inflation rate expected to match that of industrialized countries or the United States. That will mean a continuing rate of real devaluation of about 7-1/2 percent a year.

Also, the Brazilians, as you probably know, have been gradually broadening the band around the central crawling rate, and that broadening of the band will also continue.

As for other targets in the program, the budget targets were announced by the Brazilians and incorporated in the program. As you know, we don't have targets on a variety of things like the inflation rate; we just have assumptions as to how they are going to turn out--there are understandings on monetary policy and there are, of course, understanding on the reserves, but this program is designed in a way to ensure that if Brazil is following policies that we have agreed, and as the Brazilians emphasize--and we are happy to agree with them--these are Brazilian policies, provided those are being implemented, there will be quite ample access to the reserves being provided under the facility.

QUESTION: Mr. Fischer, Mr. Iglesias told us yesterday that the IDB part contribution to the package will carry a 400 basis-point interest charge over their normal rate. I'd like you to factor this into this interest rate description you just gave.

Second, is there any money being disbursed up front after approval by the Board? Is there a need for that? And how would you compare this program with the programs that were negotiated with the Asian countries, with Russia? Some people said that it would have some elements of the new architecture. Could you describe it in those terms?

MR. FISCHER: Thank you for the clarification on the IDB money, and since it comes from an impeccable source, you may regard that as all the confirmation you need. Mr. Sotero has just mentioned that the IDB money has the 400 basis-point premium.

On the question of whether there will be a drawing on the first tranche, at least part of the first tranche is likely to be drawn. The Brazilians haven't yet decided whether they want to draw the whole tranche--and incidentally, there would be drawings also available from the bilateral creditors in parallel with the first tranche from the IMF. So precisely how much they will choose to draw will be determined by the Brazilian authorities. They have indicated they want to treat this program as precautionary in several respects. We are not quite clear yet, nor possibly have they decided, whether they want to treat subsequent tranches as precautionary or also part of this and that it will be their decision.

As to the relationship between this and other programs we have had, it is different in several respects. First of all, the very large first tranche with parallel available financing from the bilaterals is different than in the Asian programs. In the Asian programs, there was a very largely first tranche in the Korean case, but the bilateral financing was in the second line of defense and came only much later and if needed. That's a difference.

Equally important, there is a so-called floating tranche. The second tranche, which is as large as the first and therefore also very large, would under a normal arrangement only be available after a certain date, typically, three months or possibly even six months after the first tranche. But in this case, provided Brazil is on track with the program, and if there is a need, that tranche could be advanced so that possibly, within a few months, Brazil could have access, if the program is on track, to two very large tranches that would quite possibly be a feature of the contingent reserve facility which the Fund is now working on.

So there are sort of contingency and precautionary elements in both the design of the program and in Brazil's decision as to how it wants to treat this money, whether to draw it or to leave it available for future drawing.

MR. BOORMAN: Just to be a little bit more specific on the amounts that are available up front. The first tranche, which as you all know is available upon approval of the program by the Fund Board, will total 175 percent of quota, and that will be a mixture of resources--25 percent under the stand-by arrangement, which are on the regular Fund charges that Mr. Fischer explained; and 150 percent of quota under the Supplemental Reserve Facility, which is the facility which is of shorter-maturity resources and carries the surcharge that both Mr. Fischer and Mr. Anjaria explained.

The second tranche will be of the same size--a total of 175 percent of quota with the same mix of resources. As Mr. Fischer indicated, the Brazilians haven't said exactly what they intend to draw on the approval of the program, but if they were to draw the full amount from the Fund, that would be slightly in excess of the equivalent of $5 billion, and if they were to also draw from the BIS a proportionate amount of that which has been committed by the bilateral creditors through the BIS, it would take the total up to over $9 billion.

MR. ANJARIA: And just to mention the number, the quota of Brazil in the Fund in terms of SDRs is $2.171 billion, which translates to something just in excess of $3 billion. So the percentages that Mr. Boorman referred to should be related to this quota number of $3 billion.

QUESTION: Can you actually clarify the numbers that you are talking about--give them in dollar numbers, when money is going to be available? That would be very helpful.

Also, is Brazil offering any kind of collateral?

MR. BOORMAN: The answer to the second question is that the collateral a member offers to the Fund is the program, which it agrees with the Fund, and the economic policies to which is commits itself. That's where the Fund takes its security, in the performance of the country.

Let me reiterate. With the approval of the arrangement by the Fund Board, the member has immediately the right to request the purchase or to draw against the resources that have been committed. The amount that will be available to Brazil at that point will be 175 percent of its quota, which is just slightly over $5 billion.

The same amount of money will become available from the Fund in a second tranche, and as Mr. Fischer has indicated, that tranche will float in the sense that it typically would be available, let's say at the end of February or the middle of March, under the normal structure of our arrangements. But what we have tried to do is to be a bit innovative in this particular operation. If the Brazilian authorities have a need for resources, and if they request an earlier review by the Board of the way in which the program is unfolding and the way in which their policies are being implemented, it could have access to that second tranche much earlier, as early as about the turn of the year.

Along with those two tranches, or certainly, along with the first tranche, there will be the money from the bilateral creditors that is coming through the BIS, and that would be proportionate to the amount that is drawn from the IMF. So if the Brazilians drew the full roughly $5 billion from the Fund for the first drawing, they could draw an additional amount from the BIS that would take the total up to over $9 billion from both the Fund and the bilateral creditors operating through the BIS. There could be up to the same amount of money available in the second tranche.

QUESTION: Also, Mr. Fischer, you said that the amount of the total package was significantly larger than you thought was needed. Why?

MR. FISCHER: Because you want to provide reassurance to the markets that you're not sort of slicing it very, very thin. You want the markets to know there is a sufficient amount available comfortably.

Just to nail down the numbers, the amount available from the Fund is $5.3 billion--it varies a bit as the exchange rate of the dollar varies; that's why we give you numbers in SDRs; from day to day, the precise dollar value changes--and together with the BIS numbers, we're talking about a number in the area of $10 billion for each of the first two tranches. The reason we aren't giving you exact BIS numbers, or at least bilateral numbers, is that the bilaterals will be making their own announcements shortly, and we'll leave them to give the full details of what they are doing.

QUESTION: Today?

MR. FISCHER: I believe so, yes.

QUESTION: I was wondering, can you tell us when the Board will actually consider the program and how soon that first tranche could be available?

MR. FISCHER: It will probably be very early in December, and the tranche is available immediately after the Board meeting.

QUESTION: A couple of quick questions. One, is there any ranking for the money? Does the IMF money, the multilateral money, come before the bilateral money?

Secondly, is the bilateral money through direct loans, or as guarantees for loans through the BIS? And why wasn't the private sector included in this original package? Why are they waiting to act?

MR. FISCHER: On the ranking of the money, I don't think there is a formal ranking, but I stand subject to correction by Jack Boorman.

MR. FISCHER: On the guarantees, the bilateral participants will reveal all the details of what they are doing, and it is quite a complicated transaction. Fundamentally, the money will be lent by the BIS with guarantees from the bilaterals, but not all the bilaterals are going to be in in the same way, which is why we will cut that particular thing off right there. Fundamentally, but not 100 percent fundamentally, it is money lent by the BIS with guarantees from the bilateral creditors.

As to why to not involve the private sector formally at this stage of the proceedings, the approach to the private sector in each case in the emerging international architecture is going to have to differ depending on the circumstances. This is a case where the private sector creditors have by and large, since early October, been maintaining their exposures reasonably well, and it's not a case where it was thought necessary as part of the initial phase to do something very formal.

The Brazilians want, and it is part of the design of this program and its precautionary nature, to maintain voluntary market relations with their creditors, and the design of the program with the amount of financing is intended to help them achieve that, and that's part of the reason why the approach to the creditors will be a voluntary one, seeking their participation on a voluntary basis.

QUESTION: Mr. Fischer, part of the program itself, I would like to know--you mentioned the scenarios that you analyzed--what is the basic scenario now, after the program has been completed for the Brazilian economy, for the Latin American economy? For example, in the program, the Brazilian authorities talked about a reduction in GDP of one percent. So I would like to know what you think are going to be the consequences--how soon, for example, the interest rates can come down, and how this program will affect the Brazilian economy and the Latin American perspective for the next year.

MR. FISCHER: The program is drawn up on conservative assumptions, that is, ones which would not be a best outcome. So we have assumed that interest rates come down quite slowly during the course of the year. I believe that participants will be watching this program; they will certainly be looking at the design of the program, at the plans of the Brazilian Government, and will be watching for the implementation of the program.

We believe that as the program is implemented, interest rates will come down gradually; so we have them coming down slowly over the course of the year in our assumptions. It could turn out better than that; it depends on what the Congress does, it depends on how the authorities are seen to implement the program, and it also depends on what happens in the capital markets in the industrialized countries.

We do not want to build in any assumption that requires the interest rate to come down very fast, and that's not something that we have built in. Of course, we would be very happy if it did happen, but the central assumption, the one on which the financing is built, is for a gradual reduction to just a little under 20 percent by the end of next year.

On other assumptions, we do not build in very rapid rates of increase of exports because of the likelihood that 1999 is not going to be a banner year for the world economy. So there is moderate export growth built into the program, and as you mentioned, the output decline 1 percent, which we see, however, as also being consistent with what is assumed, that the fourth quarter output will be higher than the first quarter, that is, that growth will resume, I think, in the second quarter--

MRS. TER-MINASSIAN: Around the second quarter.

MR. FISCHER: --around the second quarter and then continue.

MRS. TER-MINASSIAN: It is clear that the combination of substantial fiscal restraint and still relatively high interest rates will take a toll on domestic demand next year, and it will decline significantly. Nevertheless, we also believe that net exports will make a positive contribution and that therefore the decline in GDP could be contained to around one percent, on average, for the year, but with a pattern of gradual recovery in the course of the year.

QUESTION: What will be the U.S. contribution to this plan in dollars?

MR. FISCHER: Well, I think that is possibly being announced to some of your colleagues in a meeting right now, but the newspapers seem to have it right this morning. I believe it will be $5 billion.

QUESTION: Could you touch on one of the reforms that you have outlined in the program, specifically, the tax policy reforms, and expand on that?

MRS. TER-MINASSIAN: Well, the details of the proposed tax reform have not yet been released by the authorities, and in fact we understand they are still being worked on, because they involve some complex negotiations with the states. Brazil has a pretty good system of direct taxation, but the indirect tax system is still in need of substantial revamping. In particular, it is characterized by the superimposition of many different taxes, some of them distorting; also, the VAT, the state-level VAT, is on a non-uniform basis and is riddled with exemptions and incentives which are being given by some of the states as an instrument of industrial policy, so to speak, or to attract investment, with the result that this leads to a substantial erosion of the tax base.

We understand that the idea is to have a nationwide VAT with a common base and common rate, the revenue of which will be shared among the different levels of government. Most probably--but this is not assured, it has not been decided yet--it will still be administered at the state level, because they have all the machinery already in place to do so, but the revenue will be shared among the different levels of government; and having the same tax nationwide will stop this so-called tax war among the states.

The idea is also that the VAT will be complemented by excises, probably at the federal level, and that it will replace some of the distorting cascading taxes that now exist.

QUESTION: This deal has been discussed over quite a few months. I was just wondering if there were any particular difficulties that extended the length of negotiations and why it might have taken as long as it did.

MR. FISCHER: Yes, I also had the impression it was months, but actually, it began in October, and it's just about a month.

I think this is the preferable way of doing it. We've gotten used to programs being negotiated in heroic circumstances with nobody sleeping for a week and ending in negotiations. This way of going through it very carefully, of the Brazilians developing their program, working out what they want to do, discussing it with their Congress, presenting it domestically and so on, is far preferable, so this should be the normal course of events--not the great rush crisis negotiation.

And of course, the thing that made this possible is the fact that the Brazilians decided to come to the IMF when their reserves were still very comfortable, somewhere around six months of exports, and when the situation was entirely manageable. That gave us the time to work things out carefully, to check the calculations, check them again, and go through all the difficult points.

You are trying to set out in broad terms the policies that will be in place in some detail for the coming year and then, in more general terms the coming two years. That's a major job, and I think there is nothing unusual except for the fact that previous programs that you have been really interested in have been done on an emergency basis.

QUESTION: The Managing Director mentioned and several of you have echoed the strongly precautionary nature of this program. Is this a way station toward a more institutionalized system of precautionary finance, or is it a model for what we may be seeing in the future?

MR. BOORMAN: There are a number of innovative aspects to this. This program can have the precautionary character to it that it has because of the points that Mr. Fischer has made about Brazil coming to the Fund for assistance at an early stage, still having a high level of reserves and so forth.

But we have tried in casting the facilities for this particular arrangement to take account of some of the ideas that have been put on the table in recent months about dealing with countries that find themselves in a situation, both where a policy adjustment is needed, but also where clearly the current stress on the country is a function of what has been going on in world markets. It is not just Brazil, specifically, by any means.

So by way of innovation, there will be this precautionary aspect to it. It will, as was described, have a floating tranche to it which will permit the Brazilians, should the need for reserves turn out to be higher than anticipated, to draw further resources from the Fund and possibly from the other creditors as well. It involves in a very formal sense and in a sense that is going to make money available to Brazil up front official bilateral support in a way that hasn't been contained in Fund programs in the way that this has now been built in. Similarly, it includes an approach by the Brazilians to the private sector to participate, to maintain their exposure in Brazil.

It also has the features--they are not innovative as of today, but they were innovative less than a year ago--in the Supplemental Reserve Facility, in the use of that facility as was done in Korea. That is short-maturity money, shorter than any other resources provided by the IMF, and also at the higher charges that have been explained. So it has a number of these features to it which either haven't been seen before or not put together in the way they have been put together in this package.

QUESTION: Is the IMF involved in the discussion about the need for Brazil to give real guarantee to the bilateral donors, and what kind of collateral could it be?

MR. FISCHER: That's for discussion between Brazil and the bilaterals.

QUESTION: The new program seems to be quite different both in size and in composition from the Russian one, and my question is whether this is a reflection of the relative importance of the two economies or of the lessons learned or any other reason.

MR. FISCHER: It could also be a reflection of the difference between the two economies and the differences of the fiscal capacities of the two governments. A fundamental difference here is that there is not in the Brazilian system the problem that there was in the Russian program continuously of whether the government could deliver on the revenue-raising aspects of what it was doing. The Brazilian Government has its fiscal system fundamentally under control. So that element is just completely absent, plus there are so many other features that are different that I don't think it is very useful to speculate on why and on the many ways in which these programs differ.

QUESTION: There have been estimates that the Real is overvalued by 25 percent. How can the program be sustainable given that? And second, on the private sector, do you think it is necessary that there be some sort of renegotiation of the debt, or more than just rolling over the debt, a restructuring of the debt or extending it or anything like that, to make this program work?

MR. FISCHER: We don't see those estimates that you specified as being very accurate; they seem to fail to recognize that the real has been depreciating in real terms for well over a year and that there is another significant depreciation likely to happen in the course of the coming year and to continue under the exchange rate regime that Brazil has. So those estimates which are easy to say but less easy to substantiate don't seem quite relevant.

When I do my own thinking on these issues, I tend to look at current account deficits and ask what is sustainable, and current account deficits of the range of 3 to 4 percent, where Brazil is, should be sustainable given the very high levels of foreign direct investment that Brazil has been able to attract. And the productivity of the Brazilian economy which, as measured through relative unit labor costs, has been improving quite steadily for the last few years, will continue to improve.

On the question of formal rollover and/or restructuring: on formal rollovers, the Brazilian authorities believe, in light of the current market conditions, and we agree with them, that there isn't a need for a formal rollover. They will speak to their creditors, explaining the program and asking their continuing support. It's a reasonable request. It is not only reasonable, it is probably a profitable request to agree to under these circumstances.

And as to a formal restructuring of Brazil's debt, this is an issue where the Brazilians insist that the analogies with other countries are just wrong, and again, we think they are right.

Brazil has not, even during the 1980s, had trouble rolling over its domestic debt, and it hasn't in this crisis, either. It is gradually moving to lengthen its debt, but as in everything that Brazil does, it tends to move incrementally, not through drastic steps. They believe very firmly in the importance of maintaining underlying stability of the economy, and therefore, if you look carefully, they have been moving to gradually lengthen the maturities of their domestic debts; they have been very gradually moving more of them onto a fixed interest rates basis. And those changes will continue; there is in the Letter of Intent a paragraph and possibly two about that, but not a one-time over formal restructuring.

QUESTION: You've talked a lot about short-term money available at a premium and longer-term funds being made available, but I was wondering if you could just give us some more specific time frames of when the IMF expects that money to be repaid. And secondly, I know you also said the bilaterals would be announced separately, but if you could be so kind as to just let us know how much Japan has provided under the BIS agreement.

MR. BOORMAN: To back up to the full frame of the program, as was indicated, the total program is 600 percent of Brazil's quota in the Fund, amounting to just over $18 billion. One hundred and eighty percent of quota, almost a third of the total, will come under the stand-by arrangement; that has maturities of three to five years and carries the rate of charge that Mr. Fischer referred to of 4-3/4 percent, roughly.

The other 420 percent of quota will be provided under the Supplemental Reserve Facility. Of the 180 percent under the stand-by arrangement, 100 percent will be available in the first year, and all of the 420 percent of quota under the Supplemental Reserve Facility will be available in the first year. So this is an extremely heavily front-loaded program. There are only limited resources, then, that trail out under the stand-by arrangement available to Brazil in the second year and in the third year.

The majority of that large bulk of resources, then, under the Supplemental Reserve Facility that will be available to Brazil in the first year has initially a maturity of one year to one and a half year. A drawing under the Supplemental Reserve Facility is structured such that one-half of it comes due, is expected to be repaid, at the end of one year, and the other half of it is expected to be repaid one and a half years later.

I use the word "expected" because there is a provision within the Supplemental Reserve Facility that if the country feels that it would be useful to hold those resources for a longer period of time, it can request the Board to agree to an extension that takes the maturities for those resources out to two and two and a half years instead of one to one and a half years, as I explained.

QUESTION: As my colleagues all read this Letter of Intent in Brazil, we're all going to be looking for the catch--you know, where is the catch. And if you could just talk a little bit about that--

[Laughter.]

QUESTION: --and also, how will Brazil emerge? What will Brazil be like at the end of this period?

MR. BOORMAN: We need to issue guides for reading Letters of Intent, apparently.

MR. FISCHER: I'm not even sure in which sense there would be a catch, so you must have something very definite in mind that escapes me.

I don't think there is any catch. The Brazilians have said what they intend to do; they have been very, very careful to make sure that they explain domestically what they are doing. They are also laying out in the Letter of Intent what they are doing. So I don't think there is a catch.

As to the Brazil that will emerge, Brazil is a country which has made remarkable progress in this decade, and the structural reforms began before the Plan Real. The cleaning up of the federal/state fiscal relations, the cleaning up of the banking system--all of those things have been underway for some time. The Plan Real itself, which is one of the most successful inflation stabilizations ever, also one of the technically most interesting and accomplished stabilization plans ever, was a remarkable success in bringing inflation down. In the last couple of years, partly because the fiscal sector was not under sufficient control, the external deficit became large, and Brazil found itself, when the contagion from Russia developed, with a currency and reserves under attack.

I don 't think we'll see a fundamentally different Brazil after this program, because we are already in the process of seeing a fundamentally different Brazil emerging, that is, a Brazil with what the Minister of Finance likes to call the "culture of stability." And that concept, that the country is stable, that it doesn't go through drastic changes of policy every few years, that inflation stays low, with no big shocks, that culture is becoming ingrained, and this loan is part of an attempt to ensure that that culture continues to stay in place.

I think during this period, Brazil will make further progress in a variety of different areas including the tax system, as Mrs. Ter-Minassian described, including in reform of the fiscal sector, including in a variety of areas where protectionism has been removed from the Brazilian economy and will continue to be, and it will take this opportunity to ensure that the balance of payments situation becomes sustainable. That's what this is basically about, the continuation of structural reforms, many of them underway, perhaps their intensification, and the fixing of the interlinked elements of difficultly in the macro situation, which are the budget and the balance of payments.

So it is the latter two which are what will be fixed by the Brazilian Government's policies this year, 1999, and what is very significant is that Brazil has committed itself to a three-year program with the IMF so that the commitment to fix the budget, which is inevitably a longer-term commitment, is embodied in an international agreement and has the support of the international community.

Time and time again in these negotiations, the Brazilians have said to us, "We are not going to make commitments on which we cannot deliver. Sure, we could offer to do twice as much on this as we think we can, but it will cost us dearly in the long run." I believe we have a realistic program, one which will fix the main current problem in Brazil, a problem that has been affected to an important extent by contagion from elsewhere.

QUESTION: You have addressed the issue of taxes and tax reform and also the interest rate issue, but you haven't given very many details on what you are expecting in terms of spending cuts in Brazil and whether President Cardosa will be able to actually push through some domestic spending cuts.

What are you expecting to see, and are there any assumptions in your plan regarding those?

MRS. TER-MINASSIAN: Well, I think you have all seen the article in The New York Times [November 11], saying that Brazilians have scaled back pledges to cut the budget. This is simply not true.

The budget cuts that have been announced are exactly in line with what had been promised by the Government in the medium-term fiscal program that was announced a few days ago. These cuts refer to the initial 1999 budget as presented to Parliament in late August.

Of course, compared to the budget for 1998--revised budget--which already embodies cuts which were made and announced in September, the reduction in the current and capital discretionary spending, which is nonmandated, nonwage spending, is of the order of 4 billion Reals.

What I would like to note is that in this item, which is the item that, really, the Government can control because it is non-entitlement programs, the revised budget for 1999 involves an 8 percent cut in real terms compared to the 1997 level. So this is a very substantial effort that is being made on a very limited component of the budget, but it is the one on which the Government can act.

Now, on a more fundamental level, the authorities are also taking measures through the structure of fiscal reforms to address the fundamental weaknesses in the areas of social security and civil service, which will not produce very large improvements in the short run--I think it is somewhere on the order of 2 billion reals for 1999 from these combined measures at the federal level, and more if the states and municipalities are included--but the savings will grow over time.

And precisely as Mr. Fischer has said, this program is intended to give a chance to these reforms to work, and to also over time create space for eliminating some of these distortive taxes which Brazil needs to eliminate to continue improving its competitiveness.

MR. ANJARIA: Thank you very much.

[Edited transcript]