Brasília, Brazil
April 20, 2000

Mr. Stanley Fischer
Acting Managing Director
International Monetary Fund
Washington, D.C. 20431
United States of America

Dear Mr. Fischer:

In its letter of November 13, 1998, the Government of Brazil requested support from the Fund for an amount equivalent to SDR 13,024.80 million (US$ 18,032.21 million), in the form of a stand-by arrangement (SBA) for a period of 36 months. That letter, and our letters requesting the completion of the subsequent reviews of the SBA—the fourth of which was completed by the IMF Executive Board on November 29, 1999—had attached a Memorandum of Economic Policies (MEP) describing the government's economic policy program that has been supported by the SBA. The government remains fully committed to the thrust of that program. The attached MEP outlines the progress to date in implementing these policies and discusses the government's current economic program and the economic outlook for the remainder of this year. As usual, also attached is a Technical Memorandum of Understanding that sets out the specific quantitative targets (in the form of performance criteria, indicative targets, and structural benchmarks), that will be applied under the ongoing stand-by arrangement with the Fund for the current year.

The full repayment this month—which was made partly ahead of schedule—of the borrowing under the Fund's Supplemental Reserve Facility and the bilateral support package, is a direct consequence of the success of the policies that have already been implemented. We believe that these policies, along with the reforms that the Brazilian government is currently undertaking and which are detailed in the attached MEP, will be instrumental in promoting sustainable, noninflationary economic growth and a further improvement of the external accounts in 2000 and beyond, thereby contributing to address Brazil's priority social needs. The government stands ready to take additional policy measures, if needed to ensure the achievement of these objectives. We look forward to continued support from the Fund to these policies.

During the period of the arrangement, we will maintain the customary close policy dialogue with the Fund on the implementation of the program.

Yours sincerely,

Attachment:

Brazil—Memorandum of Economic Policies

1.  Brazil has successfully completed the first four reviews under the three-year Stand-By Arrangement (SBA) from the International Monetary Fund (the Fund) that was approved by the Fund's Executive Board on December 2, 1998. This Memorandum of Economic Policies (MEP) briefly reviews the performance of the Brazilian economy in 1999, and outlines a proposed update of the program framework for 2000, in the light of the revised economic and policy outlook for the year.

2.  Brazil's economic performance under the program has been significantly better than expected. GDP, which had been projected to show a sizable decline in 1999, began to recover already in the first quarter, and rose during most of the year, accelerating in the fourth quarter, and posting an average rate of growth close to 1 percent for the year as a whole. Employment rose by over 2½ percent during the year, and the national unemployment rate declined slightly to 7.53 percent in 1999 against 7.60 percent in 1998. Wage moderation, along with the recovery in output, certainly contributed to sustaining the growth of employment.

3.  Inflation in consumer prices also remained moderate, with the broadest national consumer price index (IPCA) rising by less than 9 percent in the course of 1999—within the 6–10 percent tolerance range defined by the government—despite a nearly 50 percent nominal depreciation of the Real, supply shocks, such as a drought, and substantial adjustments in domestic oil products prices and other administered prices. The general price index (IGP-DI), in which prices of tradable goods have a substantially larger weight than in the IPCA, rose by 20 percent through the year. The firm stance of fiscal and monetary policies, and the absence of indexation mechanisms, were instrumental in containing the pass-through of the rise in prices of tradable goods to consumer prices.

4.  The external trade balance improved less than originally projected, due to an unexpectedly large (over 13 percent) loss in the terms of trade, reflecting the rise in international oil prices and weakness of export prices, especially of agricultural commodities, and the economic downturn in the region. Also, the response of export volumes to the depreciation was somewhat slower than initially expected, but export performance strengthened progressively over the year, with export volumes rising by nearly 23 percent year-on-year during the fourth quarter of 1999. The substantial improvement in competitiveness was also evident in import substitution, with import volumes declining by about 15 percent on average for the year, in the face of a positive, albeit modest, growth of output. On the whole, the trade deficit declined markedly, to US$1.2 billion in 1999 from US$6.6 billion in 1998, with the balance already shifting into seasonally adjusted surpluses toward the end of the year. The improvement has continued in the first months of 2000.

5.  The improvement in the external trade account in 1999 was accompanied by a declining deficit in the services account, despite an increase of over US$3 billion in net interest payments abroad. Thus, the current account deficit of the balance of payments narrowed markedly, from US$33.6 billion in 1998 to US$24.4 billion (4.4 percent of GDP) in 1999. This deficit was more than fully financed by net foreign direct investment (FDI), which rose to a record level of about US$30 billion (5.4 percent of GDP), despite some slowdown in the pace of privatizations.

6.  The strengthening of market confidence in Brazil's economic performance in the course of 1999 was reflected not only in the rise of FDI, but also in regained access to foreign financing, with issues of medium- and long-term debt reaching the equivalent of over US$17 billion for 1999 as a whole, and interbank external credit lines being progressively rebuilt during the year. The total external debt remained broadly stable at under US$242 billion (43 percent of GDP) by end-1999. Less than 11 percent of this debt is of original maturity of one year or less. All program ceilings on the external debt of the nonfinancial public sector were observed with ample margins.

7.  Following a sizable (over US$10 billion) deficit in the first quarter of the year, the overall balance of payments remained in approximate equilibrium during the rest of 1999. Net international reserves (NIR)—defined to exclude borrowing from the IMF and the BIS and Japan loan facilities—stood at US$24 billion at year-end (US$3.7 billion above the floor in the program), have continued to rise in 2000, and currently stand at around US$27.1 billion (US$5.3 billion above the program floor for end-April 2000). Following the full repayment—partly ahead of schedule—of the borrowing under the IMF's Supplemental Reserve Facility and the BIS and Japan loan facilities, gross international reserves, at nearly US$29 billion, currently amount to nearly 5½ months of imports of goods and nonfactor services, or 47 percent of the short-term external debt on a residual maturity basis (48 percent of which represents trade financing).

8.  The year 1999 marked a major turnaround in Brazil's fiscal performance. The targeted shift of the primary balance of the consolidated public sector from near-equilibrium in 1998 to a surplus equivalent to 3.1 percent of GDP in 1999 was achieved against a background of declining domestic demand and imports. The government also made significant progress in its structural fiscal reform agenda, which is essential to ensure the sustainability of the fiscal adjustment over the longer term. The program target for the primary surplus of the consolidated public sector (R$30.2 billion) for 1999 was indeed met with a margin, as the surplus reached R$31.1 billion for the year. The nominal public sector deficit (defined to include the increase in the foreign exchange-linked component of the domestic public debt due to the depreciation of the exchange rate) reached the equivalent of 9.5 percent of GDP (significantly below the program projection of 10.8 percent of GDP). The net public debt rose to R$516.6 billion, 47 percent of estimated GDP at end-1999, slightly above the indicative ceiling in the program.

9.  The primary surplus of the central government—defined to include the treasury, the social security system, and the central bank (BCB)—increased by the equivalent of 1.7 percent of GDP between 1998 and 1999. This improvement reflected not only a wide range of tax policy and tax administration measures (detailed in previous MEPs), which contributed to an increase in total tax revenues equivalent to 0.7 percent of GDP, but also a substantial effort to contain non-interest expenditures, which declined by about 1 per-centage point in relation to GDP. The reduction in primary expenditures reflected in part the initial favorable impact of the first round of reforms of the social security system approved in 1998, as well as efforts to rationalize the public administration and prioritize public expenditure programs. The government endeavored to protect spending on education, health, and targeted social programs from the brunt of the expenditure restraint.

10.  A sizable improvement was also recorded in the primary balance of the states, which shifted from a deficit equivalent to 0.4 percent of GDP in 1998 to a surplus of 0.15 percent of GDP in 1999. This improvement reflected the enforcement of the limits on borrowing by the states, and of their debt restructuring agreements with the federal government, which have been outlined in previous MEPs. The government extended debt restructuring in 1999 to some large municipalities that were facing unsustainable debt burdens, with a view to enabling them to begin again an orderly servicing of such debts, which will require them to generate significant primary surpluses in the years ahead. The public enterprises also recorded a substantial improvement—equivalent to nearly 1 percent of GDP—in 1999, reflecting not only increased revenues—especially of Petrobrás due to the higher oil prices—but also efforts to contain expenditures.

11.  The government made significant progress in structural fiscal reforms in 1999. It obtained congressional passage of the constitutional amendments for the administrative reform, and of most of its implementing legislation. It also secured congressional approval of its proposed reform of the social security system for private sector workers, which introduces actuarial principles in the current pay-as-you-go system, by linking pension benefits to the age and contributive history of each worker. This reform is expected to help moderate the deficit of the social security system over the medium term. A constitutional challenge to this important reform was recently rejected by the Supreme Court. The government has also presented to congress three bills regulating private and public complementary pension plans, which are expected to acquire increasing importance over time in the provision of social security. Finally, the government submitted to congress a draft fiscal responsibility law covering all levels of government, which sets limits on their indebtedness and expenditures, and aims at increasing fiscal transparency. After extensive public debate and congressional hearings, the draft law was approved by the Lower House, and is currently being discussed by the Senate; its approval is expected in the month of April.

12.  Following the shift to a floating exchange rate regime, the BCB has been successfully implementing an inflation targeting framework for monetary policy, with a view to anchoring price expectations to a gradually declining inflation path. Consistent with this framework, the BCB has followed a cautious interest rate policy, halting the decline in the overnight (SELIC) interest rate in recent months, until it was confident that expected inflation was well within the target band for end-2000. This interest rate policy has contributed—along with the improving trend of the fiscal and external accounts—to strengthening the exchange rate.

13.  At the same time, the BCB has strived to improve the functioning of credit markets, and to facilitate a narrowing of the relatively wide banking spreads through a range of measures—detailed in the previous MEP—including a progressive reduction of the high bank reserve requirements. These steps—along with the improved economic outlook and a 1 percentage point decline in the share of nonperforming loans in total loans to 8.5 percent in the course of 1999—have facilitated a progressive recovery of credit to the private sector in recent months. The BCB has also made further progress in strengthening the regulatory prudential framework for banks, by issuing new regulations on capital requirements for interest rate risk and on a forward-looking loan classification system. It has continued efforts to improve bank supervision, by beginning global consolidated inspections of banks, and has completed a first audit of the major federal banks. Preparations have continued for the privatization of most remaining state banks in 2000–01.

14.  In cooperation with the Treasury, the BCB has also taken steps to improve the public debt management and the functioning of the secondary market for this debt. Reflecting these efforts, strengthened confidence in economic stability, and declining inflation expectations, the average maturity of total outstanding public debt in the market has risen to 8.6 months at end-February 2000 (and the share of the fixed-rate securities in total federal domestic securitized debt has increased from 1 percent in March 1999 to 11 percent by end-February 2000).

15.  Economic policies in 2000 aim at consolidating the recovery in output and decline in unemployment; securing the targeted decline in inflation; further strengthening the external accounts; and continuing the process of modernization and integration of the Brazilian economy into the global economy, through structural reforms, privatization, and the promotion of competition. The government's economic program for 2000, which was endorsed by the Fund in November 1999, centers on continued fiscal adjustment, with the primary surplus of the public sector targeted to rise to the equivalent of 3.25 percent of GDP; on a monetary policy geared to reducing inflation in the IPCA to 6 percent by year-end, with a tolerance band of 2 percent on each side of the central target; and on external policies aimed at promoting a sustainable current account path and the maintenance of a comfortable level of international reserves.

16.  The strengthening of the economic recovery in the recent months lends confidence that, in the absence of serious adverse external shocks, average GDP growth will reach 4 percent in 2000. Assuming continued moderation in wage adjustments, the faster GDP growth should be reflected in a sustained further growth of employment.

17.  The rate of increase in consumer prices—which had accelerated in the last quarter of 1999, due to seasonal factors, the supply shocks mentioned above, and the weakening of the Real—has resumed a declining trend since the beginning of this year, aided by the firming of the exchange rate and the cautious monetary management. Assuming no substantial further supply shocks, and a gradual moderation of international oil prices in the course of the year, the 12-month rate of inflation in consumer prices is expected to remain within 1 percentage point of the path targeted in the program, which envisages a smooth decline to 6 percent by year-end. Greater convergence is likely between the paths of inflation in consumer prices and in the general price index (IGP-DI), reflecting the expected broad stabilization of the ratio of tradable to nontradable goods prices during the year.

18.  The external trade balance is expected to continue to improve this year, shifting into a surplus close to US$4 billion. This reflects a sustained growth of export volumes which, although probably decelerating in the second half of the year, should more than offset the impact of the projected pickup in imports, as domestic demand increases. Import volumes are expected to grow more moderately than in previous similar cyclical phases, in view of the improvement in the competitiveness of domestic industry, as a result of the real depreciation of the exchange rate, and also of the modernization and shift to local production associated with the increased FDI. On the above mentioned assumption that imported oil prices will decline from their recent high levels, and also reflecting an incipient recovery in prices of exported commodities, the terms of trade are expected to improve gradually in the course of 2000. The development of the terms of trade in the months ahead remains, however, a source of vulnerability in the external trade performance. The improvement in the current account of the balance of payments in 2000 is expected to be moderated by increasing payments of interest and profits abroad. Therefore, the current account deficit is projected to decline to around US$23 billion (about 3½ percent of GDP). Once again, this deficit is expected to be more than fully financed by net FDI.

19.  Medium- and long-term (MLT) capital inflows, excluding FDI, are currently projected to show a significant positive net balance, as a result of, in particular, a decline of MLT debt amortizations—from nearly US$50 billion in 1999 to US$30 billion in 2000; continued sizable net inflows from multilateral developments banks; planned sovereign debt issues abroad of around US$6 billion (of which over US$3.4 billion have already been realized in the first quarter of the year); and a steadily improving access of other Brazilian borrowers to foreign capital markets. The proposed program limits on the external public- and publicly-guaranteed debt, and its short-term component, have been established in the light of these prospects.

20.  Reflecting these projected developments, and a continued increase in trade-related interbank credit lines, the overall balance of payments is projected to show a sizable surplus in 2000, allowing a buildup of international reserves throughout the year, with projected NIR remaining comfortably above the NIR floor in the program that is detailed in the attached TMU. Gross international reserves at end-2000 are projected to be equivalent to six months of imports, or nearly 52 percent of short-term debt on a residual maturity basis, assuming that—as is the government's intention—no further purchases are made under the SBA.

21.  As outlined in the MEP for the fourth review of the program, the government presented to congress in August 1999 a budget proposal for 2000 envisaging a primary surplus for the central government equivalent to 2.6 percent of the then projected GDP, in line with the directives of the budget framework law (Lei de Diretrizes Orçamentárias) approved by congress earlier in 1999. At the same time, the government presented to congress a proposed constitutional amendment to reduce the earmarking of federal revenues, a step which will greatly facilitate the containment of primary spending envisaged in the budget. Congressional approval of this constitutional amendment, which was only completed in mid-March, was a prerequisite for the approval of the 2000 budget, which is now expected to be signed into law by mid-April. In the meantime, non-mandated federal primary spending has been constrained to 2/12 of budget allocations, as required by the budget framework law. This, in conjunction with a continued strong growth of tax revenues, and with a further improvement in the social security finances, has contributed to substantial primary surpluses of the federal government in the first two months of 2000.

22.  Updated projections for the year as a whole suggest that federal revenues may fall slightly short—in relation to GDP—of their initially projected amount, because of slower than expected growth of some components of the tax base. The revenue projections continue to assume a surplus equivalent to R$3.5 billion in the petroleum account of the Treasury. Achievement of such a surplus may require further adjustments later in the year in the domestic prices of petroleum products (which were already increased by 7 percent or more in March 2000), depending on developments in international oil prices and the exchange rate. The government is committed to implementing the full liberalization of the domestic market for oil products as soon as possible, and, for this purpose, will present to congress before end-June 2000 a constitutional amendment to introduce an explicit taxation of oil products to replace the current cross-subsidy arrangement embodied in the petroleum account of the Treasury. The government will work with congress, seeking approval of this amendment by the end of 2000.

23.  Achievement of the targeted primary surplus of the central government in 2000 will require continued control in federal spending. This has constrained the scope for real increases in the minimum wage and in social security benefits, and will require limiting commitments of some non-mandatory expenditures below budgetary appropriations. In setting the new federal minimum wage, the government has been mindful of the likely adverse impact of an excessive increase of the minimum wage on unemployment, especially of low-skilled workers in the formal sector.

24.  The states are expected to benefit from the recovery of economic activity, increased transfers from the federal government, and the greater scope for reducing personnel expenditures provided by the approval by the administrative reform in 1999. The government intends to continue enforcing firmly the debt restructuring agreements concluded with the states and a number of municipalities, which, in conjunction with the limits on their recourse to new financing, require them to generate significant primary surpluses. The expected maintenance of a sizable surplus (over 0.5 percent of GDP) in the finances of the public enterprises, especially Petrobrás, provides reassurance that the targeted 3.25 percent of GDP primary surplus for the consolidated public sector remains fully achievable in 2000.

25.  This surplus appears consistent with a substantial decline in the overall public sector deficit (PSBR) to under 4 percent of GDP in 2000, from the above mentioned 9.5 percent of GDP in 1999, under the working assumptions that the overnight interest rate would decline modestly in the course of the year, and that the exchange rate would remain around the average level of the last few months. Under this scenario, the net public debt would show a further decline in relation to GDP, which would be moderated, however, by the planned further securitization of previously unrecognized liabilities. The government intends to continue its efforts to increase the share of fixed-rate securities in the domestic public debt, further raise its average maturity, as market conditions allow; and gradually reduce the foreign exchange indexed debt.

26.  The crowded congressional agenda has led to some delays in the planned timetable for proposed structural fiscal reforms. The government intends to continue its efforts to secure approval of most of the proposed legislation before congress' scheduled recess in the runup to the municipal elections in October. In particular, the government will try to obtain congressional passage of the remaining implementing legislation for the administrative reform, and of the fiscal responsibility law before mid-year, and of the proposed social security contributions for retired civil servants before the end of the year. The government has also been actively working on securing a broad-based consensus on a sound reform of the system of indirect taxation, aimed at streamlining the system, removing distortions, and making the base of the state-level VAT uniform across the nation. The enactment of such a reform remains a high priority of the government.

27.  Monetary policy will continue to be conducted within the inflation targeting framework. The BCB will continue a prudent interest rate policy, with further changes in its intervention rate in the overnight market being guided by the inflation outlook. The BCB will also continue its efforts to further strengthen bank supervision; seek increased cooperation with other relevant domestic and foreign supervisory authorities; further enhance the transparency of its operations; and improve the functioning of the credit and financial markets. It has just begun a second, more in depth, audit of the federal banks, a necessary input in defining an appropriate strategy for restructuring and strengthening these banks. The privatization of the former state bank of São Paulo (BANESPA), now under federal ownership, has been slightly delayed by court challenges, but is still expected to take place by mid-2000. The privatization of other remaining state banks, such as BANESTADO, BEA, BEG, BEP, and BESC, is expected to continue in 2000–01.

28.  No substantial changes in trade policy have occurred since the last review of the program, but some progress has been made in defusing trade tensions, and promoting dialogue and coordination in financial and other macroeconomic policies within Mercosur. Agreements have been reached between Argentine and Brazilian private sector representatives in certain sectors, which have been endorsed by the respective governments. Negotiations are continuing with NAFTA and the EU on reducing reciprocal trade barriers. The government remains committed to further opening up the economy and promoting its integration in international financial markets. The acceptance in November 1999 of the obligations under Article VIII, Sections 2, 3, and 4 of the Articles of Agreement of the IMF, and the removal as of February 1, 2000 of the last remaining restriction under Article VIII (a rate of over 2 percent for the tax (IOF) on exchange operations carried out in payment for credit card charges contracted abroad) witness to this commitment.

29.  In summary, Brazil's performance during the first year of the program supported by the Fund was significantly better than expected. The government remains fully committed to the policies and targets of the program for this year, but is requesting some modifications in the timetable of the structural benchmarks of the program, reflecting delays, largely out of its control, in some of the proposed structural reforms in the program.

Brazil—Technical Memorandum of Understanding

This Technical Memorandum of Understanding (TMU) sets out the specific performance criteria (PCs), indicative targets (ITs), structural benchmarks (SBs) and assumptions that will be applied under the Stand-By Arrangement (SBA) for Brazil for the remainder of 2000.

I.  Phasing of Purchases and Reviews

The general phasing of purchases and reviews remains unchanged from what was set out during the Fourth Review;¹ the schedule is summarized in Table 1. Accordingly, after completing the fifith review, which will make available to Brazil a purchase under the credit tranches (CT), there will be two more reviews in the year 2000 and four more purchases available under the CT:

•   A second purchase under the CT in calendar year 2000 will become available on May 31, 2000, upon observance of the relevant PCs under the arrangement.

•   A third purchase under the CT in calendar year 2000 will become available no earlier than June 30, 2000, upon completion of sixth review, and observance of relevant PCs under the arrangement.

•   A fourth purchase under the CT in calendar year 2000 will become available on August 31, 2000, upon observance of the relevant PCs under the arrangement.

•   A fifth purchase under the CT in calendar year 2000 will become available no earlier than October 31, 2000, upon completion of the seventh review, and observance of relevant PCs under the arrangement.

•   PCs, ITs, structural and statistical benchmarks, and all other relevant program parameters, including, among others, number and timing of reviews during calendar year 2001 will be established during calendar year 2000.

Table 1. Brazil: Phasing of Purchases and Reviews, 1998–2001

1.  Fiscal Targets

a.  Performance criterion for the primary balance of the consolidated public sector¹

The cumulative primary balance of the consolidated public sector is defined as the sum of the cumulative primary balances of the various entities that make up the public sector. The public sector is defined to comprise the central government, state and municipal governments, and the public enterprises (including federal, state and municipal enterprises); the central government includes the federal government, the social security system, and the Central Bank of Brazil (BCB).

For any given month, the primary balance of the consolidated public sector is measured, in Brazilian reais (R$), as the total net interest (i.e., net interest accrued on the consolidated net domestic debt of the public sector, plus the net interest due (competência contratual) on the net external debt of the public sector) minus the borrowing requirement of the consolidated public sector, where the public sector is defined as above. For foreign-exchange indexed government securities, the interest rate is the accumulated rate of change of the U.S. dollar vis-à-vis the R$, plus the fixed coupon rate. The fixed coupon rate applies to the nominal value of the security revalued by the rate of change of the U.S. dollar vis-à-vis the R$ from the issuance date to the relevant date. For any given month, the borrowing requirement of the consolidated public sector is defined as the change in the nominal outstanding net domestic debt plus the change in the net external debt, converted into R$ at the actual period average R$/US$ exchange rate.² The stock of the U.S. dollar-indexed domestic debt is revalued at the end of a given month to reflect any change in the value of the real vis-à-vis the U.S. dollar that has taken place during the month. The proceeds from privatization during that period are added to these results; amounts representing the recognition of unregistered liabilities during that period are subtracted from these results. The cumulative primary balance from January 1 of a given year to the relevant date of the same year is the sum of the monthly primary balances of the consolidated public sector for that period.

The above floor for the cumulative primary balance of the consolidated public sector is predicated on the baseline path for concession revenue shown in Table 2 below. Deviations from this path will be taken into account as appropriate during the relevant reviews.

b.  Indicative target on the net debt of the consolidated public sector¹

Total net debt outstanding of the consolidated public sector (dívida líquida total) equals the public sector's gross debt (including the monetary base), net of its financial assets; it is defined as the sum of the registered net domestic and net external debt (all valued in R$), of the central government, state and municipal governments, and the public enterprises (including federal, state and municipal enterprises); the central government is defined as above.

Total net debt outstanding of the consolidated public sector is measured on an accrual basis (including accrued interest) for the domestic debt component, and on an interest-due basis (competência contratual) for the external debt component. The stock of external debt and of foreign-exchange indexed domestic debt is valued at the actual R$/US$ exchange rate prevailing at the end of each period.

Deviations of the net debt of the consolidated public sector from the above ITs will be taken into account during the relevant reviews in setting or revising the PCs for the primary balance of the consolidated public sector for subsequent periods to give sufficient confidence that the target ratio for public sector debt to GDP of 46.5 percent can be reached in the year 2001.

The central government will continue to incorporate into its registered debt various unregistered liabilities that are currently outstanding. The above ceilings for the total net debt outstanding of the consolidated public sector are predicated on the paths for privatization receipts (defined here to exclude concession revenue) and the recognition of unregistered liabilities that are shown in Table 2 below. These ceilings will be adjusted downward (adjusted upward) to the extent that privatization receipts exceed (fall short of) the amounts implied by Table 2 below; they will be adjusted upward (adjusted downward) to the extent that the recognition of unregistered liabilities exceeds (falls short of) the amounts implied by Table 2 below.

2.  External Sector Targets

a.  Performance criterion on external debt of the nonfinancial public sector¹

For any given quarter, the stock of debt disbursed and outstanding is defined as the stock of debt disbursed and outstanding at the end of the previous quarter, plus gross disbursements that take place during the quarter in question, less the gross amortization payments made during the quarter in question.

The above limits will be adjusted upward to accommodate new external borrowing that is made in order to undertake a voluntary early or advance repurchase to the Fund or to the bilateral sources of support for the exceptional financing package. Should the authorities wish to make any early or advance repayments to other contributors to the exceptional financing package, they would make advance repurchases from the Fund on at least a proportional basis.

b.  Performance criterion on publicly guaranteed external debt of the private sector¹

For any given quarter, the stock of external debt guaranteed by the public sector is defined as the stock of external debt guaranteed by the public sector that is outstanding at the end of the previous quarter, plus the net addition to external debt guaranteed by the public sector during the quarter in question.

c.  Performance criterion on nonfinancial public sector short-term external debt¹

Short-term debt is defined as all debt with an original maturity of strictly less than one year. For any given quarter, the stock of short-term external debt (disbursed and outstanding) is defined as the stock of short-term external debt (disbursed and outstanding) at the end of the previous quarter, plus the net flows associated with the disbursements and amortizations of short-term debt that take place during the quarter in question.

The above limits will be adjusted upward to accommodate new external borrowing that is made in order to undertake a voluntary early or advance repurchase from the Fund or to the bilateral sources of support for the exceptional financing package.

d.  Performance criterion on net international reserves (NIR) in the BCB¹

The NIR in the BCB are equal to the balance-of-payments concept of net international reserves in the BCB (reservas internacionais líquidas ajustadas) and include gross official reserves minus gross official liabilities.

Gross official reserves are defined as liquid foreign currency denominated claims in the BCB. Gross official reserves include (i) monetary claims, (ii) free gold, (iii) holdings of SDRs, (iv) the reserve position in the IMF, and (v) holdings of fixed income instruments. Items (i) through (iv) will be valued at the end-period prices shown in Table 3 below. Item (v) will be valued at the purchase price. Gross official reserves will exclude participation in international financial institutions, the holdings of nonconvertible currencies, and the holdings of precious metals other than gold.

Gross official liabilities in foreign currencies include (i) foreign currency liabilities with original maturity of one year or less, (ii) the use of Fund resources extended in the context of the exceptional financing package, (iii) the use of bilateral credit extended in the context of the exceptional financing package, and (iv) any forward foreign exchange (FX) liabilities on a net basis—defined as the long position (posição vendida) minus the short position (posição comprada)—directly undertaken by the BCB or by other financial institutions on behalf of the BCB. Items (i) through (iii), will be valued at the prices shown in Table 3 below.

After February 29, 2000, any increases in foreign currency-denominated claims (both spot and forward) against residents, or against foreign branches or subsidiaries of Brazilian institutions, do not count toward NIR in the BCB.

e.  Performance criterion on the BCB's exposure in FX futures markets

The BCB will continue to refrain from entering into FX futures contracts, either directly or through any institution it uses as its financial agent. This constitutes a performance criterion under the program.

f.  Performance criterion on the BCB's exposure in FX forward markets

The BCB will continue to refrain from entering into FX forward contracts, either directly or through any institution it uses as its financial agent. This constitutes a performance criterion under the program.

3.  Monetary Targets

a.  Indicative target on net domestic assets in the BCB

Net domestic assets in the BCB (NDA) are defined as the difference between the monetary base and the net international reserves in the BCB (NIR) valued in Brazilian reais (R$). The monetary base consists of currency issued and total reserves on demand deposits of financial institutions. Total reserves on demand deposits include both required reserves and free reserves. The NIR are equal to the balance-of-payments concept of net international reserves in the BCB (reservas internacionais líquidas ajustadas) and are defined as set out above (section 2.d).

The monetary base for any given month is measured as the average of the daily closing positions during the working days of that month (média nos dias úteis do mês). The NIR for any given month, are measured as the average of the NIR (daily closing positions) during the working days of that month (média nos dias úteis do mês). The resulting U.S. dollar number will be converted into R$ using the average accounting exchange rate for that month, as shown in Table 3 below.

In addition, for any given period, the following automatic adjusters to the NDA ceilings will apply:³

• Adjuster for changes in the required reserve ratio on demand deposits.

For any change to the required reserve ratio on the stock of demand deposits, the NDA ceilings will be adjusted by NDA = D(r_n–r_o), where r_n and r_o denote the new and the old reserve ratio respectively, and D denotes the stock of demand deposits subject to the relevant reserve ratio at the time of the change. In the formula, D is measured as the average of the daily closing positions in the last month for which the old reserve requirement is still in effect.

For any change to the required reserve ratio on changes in the stock of demand deposits, the NDA ceiling, in any period t subsequent to the change in reserve requirements, will be adjusted by NDA = (D_t–D_o)(r_n–r_o), where D_t and D_o denote the stock of demand deposits subject to the relevant reserve ratio at time t and at the time of the change, respectively. In the formula, D_o is measured as the average of the daily closing positions in the last month for which the old reserve requirement is still in effect, and D_t is measured as the average of the daily closing positions in month t.

• Adjuster for changes in the reservable base of demand deposits.

For any change to the definition of the reservable base for any category of demand deposits, the NDA ceilings will be adjusted by NDA = rR, where R represents the difference in the reservable base as a result of the change in definition, and r is the relevant reserve ratio that applies to the reservable base; R is measured using the data for the close of business on the day immediately prior to the day the change enters into effect.

b.  Consultation mechanism on inflation

The quarterly consultation bands for March –December 2000 around the target for the 12-month rate of inflation in consumer prices (as measured by the Indice de preços ao consumidor ampliado (IPCA)), remain as specified under the fourth review (EBS/99/205):

Consultation bands for the 12-month rate of change of the IPCA (in percent)

The BCB will discuss with the Fund staff about the appropriate policy response should the 12-month rate of IPCA inflation exceed the upper limit of the inner band specified in the table above. Should the 12-month rate of IPCA inflation exceed the upper limit of the outer band specified above, the authorities will complete a consultation with the Executive Board of the IMF (henceforth the Board) on their proposed policy response.

A. Structural Benchmarks

By end-June 2000

• Enactment and beginning implementation of regulatory legislation for the administrative reform.

• Enactment of the Fiscal Responsibility Law.

• Presentation to congress of a constitutional amendment (followed by an ordinary law) establishing an explicit system to tax oil products that will offset the adverse revenue impact from the liberalization of the oil market, which will take place as soon as both are enacted, but no later than end-December 2001.

• Substantial progress in implementing the government's privatization plans for the year 2000, including the privatizations of electrical and reinsurance companies, as well as the sale of some minority shareholdings in companies.

• Further progress in the resolution of state-owned banks, including the conclusion of the privatization of BANESPA and the state bank of Maranhão (BEM).

• Full enforcement of regulations on capital charges related to interest rate risk and the forward-looking loan classification system.

• Issuance of regulations for the implementation of a capital charge related to equity and commodity risks.

• Definition of a comprehensive strategy for strengthening the federal banks in a timely fashion.

• Implementation of a rating system for banks that will serve as a basis to determine the frequency of global consolidated inspections (GCIs).

• Completion of a revision and upgrade to international standards of the plan of accounts for financial institutions, the rules for recording and evaluating assets and liabilities of these institutions, and the reporting to the BCB and the public of the financial statements of financial institutions.

• Resolution of most of the state-owned banks to be completed, including the privatization of the state banks of Amazonas (BEA), Ceará (BEC), Goiás (BEG), Piauí (BEP), and Paraná (BANESTADO).

The above list of structural benchmarks will be reassessed and amended as necessary during the scheduled reviews of the program.

B.  Statistical Benchmarks

• Begin dissemination (with a lag of no more than one week) of monthly data on international reserves and other foreign currency assets of the central bank, according to the SDDS template section 1, and in line with practices of all the SDDS subscribers.

• Begin systematic compilation and publication of quarterly statistics on external debt by creditor and debtor, and projections of external debt service by creditor and debtor, for both short-term debt and medium- and long-term debt.

• Begin publishing the following fiscal data: monthly "above-the-line" central government balance data (including the social security system and the results of the central bank), initially with a two-month lag (utilizing one of the flexibility options of the SDDS); and quarterly central government debt data with an appropriate breakdown, with a three-month lag.

By end-December 2000

• Begin regular publication of quarterly national accounts at current and constant prices, including price and volume indices of the various components of GDP. The publication lag should be no longer than three months.

The above list of statistical benchmarks will be reassessed and amended as necessary during the scheduled reviews of the program.

The authorities will regularly provide to Fund staff the following specific daily, weekly, and bi-weekly data (at the indicated frequencies, and lags):

• Composition of gross international reserves under the cash concept (posição de caixa) and the liquidity concept (posição liquidez internacional) (weekly, the following week);

• The levels of gross international reserves and of net international reserves as defined under the NIR concept (daily, the next business day);

• The BCB's position in FX futures, including notional amounts of open-interest contracts, both bought and sold, in each contract for the next four months (daily, the next business day if this position should exceed zero; otherwise, once a month at the end of each month);

• Base money (base monetária); currency issued (papel-moeda emitido); bank reserves (reservas bancárias); factors determining the monetary base (fatores condicionantes da base monetária); sources of base money expansion (base monetária—fontes de expansão) with details; monetary impact of federal debt titles (impacto monetário com títulos públicos federais) with details (daily, the next business day);

• Maturity structure (vencimentos) of outstanding federal debt by instrument and day (bi-weekly, with a one-week lag);

• Outstanding stocks of FX-indexed federal debt by instrument, showing auction values (preço de lastro) and updated nominal values (valor nominal atualizado), as well as information on gross maturities coming due, and gross placements (bi-weekly, with a one-week lag);

• Results of domestic debt auctions, listing the instruments, the amounts supplied and demanded, the demand accepted; averages, minimum, and maximum prices and interest rates achieved in the auctions (weekly, with a lag of one week);

• Individual bank data for the 50 largest banks on their summary balance sheets (monthly, with a two-month lag);

• Coded individual bank data on foreign currency exposure for the 50 largest banks, including exposure in off-shore branches and affiliates, dollar-indexed assets and liabilities, and off-balance sheet positions (monthly, with a two-month lag).

• Quantitative results of the monitoring of the external credit lines of financial institutions (two business days after the deadline at which these institutions have to comply), and of external medium- and long-term bank claims on Brazilian nonbank debtors (once a week for the previous week).

All data will be provided preferably in electronic format; the above list will be reassessed during future reviews of the program.

The following Tables 2 and 3 set out program assumptions for selected variables.