Brazil and the IMF
News Brief: IMF Completes Third Review of Stand-By Arrangement with Brazil
Country's Policy Intentions Documents
Mr. Horst Köhler
Dear Mr. Köhler:
In its letters dated August 23, 2001, November 30, 2001 and March 4, 2002, the Government of Brazil provided Memoranda of Economic Policies (MEP) describing its economic program supported under the current 15-month Stand-By Arrangement (SBA). The MEP attached to this letter outlines recent progress and discusses additional policies and prospects for 2002. Also attached is a Technical Memorandum of Understanding (TMU) that sets out specific targets (in the form of performance criteria, indicative targets, and structural benchmarks) that are to be observed under the SBA. In addition to the policies outlined in the attached MEP, the Government stands ready to take additional measures as appropriate to ensure the achievement of its objectives. During the period of the SBA, the authorities of Brazil will maintain the usual close policy dialogue with the Fund.
As part of the continuing policy dialogue with the Fund, we have in the past expressed our concern that including investment expenditure by commercially-run public enterprises under the performance criterion on the public sector primary balance does not recognize that investment expenditure creates valuable assets and does not have a negative impact on sustainability of the public finances. Reflecting this view, we are therefore requesting that the performance criterion on the primary surplus of the consolidated public sector for September 2002 be modified to include an adjustor on investment expenditure by the state oil company Petrobrás, as explained in the MEP and TMU. As noted in these documents, care has been taken in crafting the proposed adjustor to ensure that in providing flexibility for Petrobrás to undertake additional investment it does not create scope for a weakening of the fiscal effort elsewhere in the public sector. In this connection, a new performance criterion on the primary balance of the consolidated public sector excluding Petrobrás is also being proposed for end-September 2002.
In addition, the TMU has been modified to clarify some technical matters and to reflect new informational requirements of Fund staff arising from the change in the method of rolling over foreign exchange-indexed debt (as described in our letter to you of March 4, 2002) and from the application of the proposed adjustor.
After surmounting the severe external and domestic shocks of last year, the Brazilian economy experienced a period of relative calm in the first quarter of 2002, with economic activity showing signs of a modest expansion, financial variables holding steady, and firms and the government continuing to have good access to international capital markets. Nevertheless, risks to the economic recovery remain present, putting a premium on continued disciplined macroeconomic policies and further structural reforms.
I. Recent Performance of the Brazilian Economy
1. Economic activity has recovered gradually from the low levels of the second half of 2001 but aggregate demand remains subdued. Industrial activity rose steadily from October 2001 through February, before suffering a decline in March. During the first quarter, industrial production (seasonally adjusted) was 2.8 percent higher than in the fourth quarter of 2001. The latest survey of agricultural production shows a relative stability in 2002 grain crops despite negative weather effects; but improved growth prospects remain for livestock and permanent cultures such as coffee and sugar cane. As a result, first quarter GDP decreased just 0.7 percent over the same period of last year, much less than expected. Relative to the last quarter of 2001, first quarter GDP (seasonally adjusted) increased 1.3 percent. In the first quarter, retail sales in the São Paulo metropolitan area increased by 2.4 percent (seasonally adjusted versus the previous quarter). Data for April indicate a decline of 1.4 percent over March. However, sales of durable goods grew 1.7 percent in April after growing 1.1 percent in March. The volume of exports and imports in the first quarter of 2002 declined by about 5.7 percent and 25.5 percent, respectively, from the levels observed in the first quarter of 2001. The very sharp decline in imports is due in part to the spike in imported capital goods that occurred in the first quarter of 2001 (in response to a temporary cut in import duties on these goods), but also reflects the significant import substitution occurring in response to the depreciation of the real last year.
2. Labor market developments have begun to reflect the economic recovery. The unemployment rate decreased by 0.3 percentage point in March on a seasonally adjusted basis, despite an increase in the labor force. Employment in March increased by 1.3 percent from February and was 2.9 percent higher than in March 2001. Nonetheless, wage pressures are not emerging, with average real earnings in February dropping 0.26 percent (seasonally adjusted) from the previous month in the six metropolitan regions surveyed by IBGE.
3. Consumer price inflation has remained high in 2002 due in part to the carry-over effect of the high inflation experienced last year, and also because of increases in gasoline and energy prices. Monthly inflation measured by the IPCA reached 0.6 percent in March, interrupting a string of four consecutive months of decline and pushing the 12-month rate to 7.8 percent, above the band for consultations with Fund staff under the Stand-By Arrangement. Monthly inflation rose to 0.8 percent in April, bringing the 12-month rate to 8.0 percent. Nonetheless, the general price index increased by substantially less than the IPCA during the first quarter of 2002.
4. The performance of the balance of payments has strengthened. The current account posted a deficit of US$3.2 billion in the first quarter of 2002, less than half that registered in the same period of 2001, mostly reflecting a US$1.7 billion turnaround in the trade balance and declining profit remittances and interest payments. The 12-month cumulative current account deficit reached US$19.8 billion in March, the lowest level since October 1996. Foreign direct investment (FDI) amounted to US$4.7 billion in the first quarter of 2002, virtually the same level observed in the same period last year. In fact, the 12-month cumulative flow of FDI is once again greater than the 12-month cumulative current account deficit.
5. Brazil's access to the international sovereign bond market continued to improve in 2002, with placements of about US$2.7 billion in March and April made at relatively favorable terms. The rollover rate on interbank credit lines averaged 100 percent during the first 3 months of the year. Gross international reserves increased from US$35.9 billion at the end of 2001 to US$36.7 billion at end-March, but declined by US$3.6 billion in April because of Brazil's full prepayment of the IMF's Supplemental Reserve Facility. The Government decided to make this prepayment in light of the improved market access of Brazil. Net international reserves (NIR), as measured under the program, stood at US$28.9 billion at end-April, US$8.9 billion above the floor established by the program.
6. External debt indicators remained virtually stable in January, consolidating the modest improvement observed since September 2001. At end-January, the total external debt amounted to US$209 billion (about 41 percent of estimated GDP), compared to US$217 billion in September 2001. Forty-four percent of the debt was owed by the nonfinancial public sector in January, slightly less than in September 2001. The short-term component of the external debt, which is virtually all private debt, measured on an original maturity basis, increased marginally in January to US$27.8 billion, representing about 13 percent of the total debt.
7. Fiscal performance in the first quarter of 2002 continued to be in line with the program. The consolidated public sector posted an accumulated primary surplus of 3.8 percent of period GDP (R$11.6 billion), slightly above the end-March PC. The public sector borrowing requirement was about 4.0 percent of GDP (R$11.9 billion), when measured on a harmonized basis that excludes the impact of exchange rate-induced changes in the valuation of the debt stock accrued but not actually paid during the reference period. The net public debt rose to 54.5 percent of GDP at end-March from 53.3 percent at end-2001 (although it remained below the indicative target ceiling for the net public debt), due to the recognition of a previously unrecorded pension liability of the federal oil company, Petrobrás, as well as stock adjustments due to exchange rate changes.
8. The strong performance of the central government, as well as of the regional governments (states and municipalities), offset a primary deficit of the federal public enterprises. The central government posted a primary surplus of 3.8 percent of period GDP in the first quarter of 2002, against 2.7 percent of GDP in the same period of 2001, aided in part by the payment of outstanding income tax liabilities by the pension funds. The states and municipalities recorded a combined primary surplus of 1.2 percent of GDP. Revenue performance was solid at the federal and regional levels of government, and expenditure control also remained strong. The primary deficit of the public enterprises of 1.2 percent of GDP was due to the impact of lower international oil prices on revenues of the state oil company Petrobrás, and certain one-off transactions between the company and the central government arising from dividend payments and payments to its employee pension fund.
9. Congressional approval of the extension of the bank debit tax (CPMF) scheduled to expire on June 17, 2002 has been delayed. The extension of the CPMF had to be approved by March 17 to avoid experiencing revenue shortfalls because there is a 90-day waiting period after approval of the tax before it can be collected. To compensate the loss in revenues due to the failure to extend the CPMF in a timely manner, estimated at some R$4.9 billion, a new budget execution decree was issued on May 15 freezing R$5.3 billion of federal expenditures, in spite of the possibility of non applicability of the waiting period in the extension of the tax. In obeyance to the Fiscal Responsibility Law, the new budget execution decree combined with an increase in the financial transactions tax (IOF), projected to yield R$1.1 billion in revenues, also aim at compensating for the upward revision in the deficit of the social security system by R$0.5 billion, due essentially to a downward revision in projected contributions, and a R$1.0 billion increase in government spending on personnel relative to the program.
10. Debt management remains cautious and in line with the 2002 Debt Management Plan announced in January. The average maturity and duration of the securitized public debt have been stable at about 25 months and 10½ months, respectively, since end-2001, following a substantial lengthening in 2001. The share of short-term public debt, defined as the stock of debt maturing in less than 12 months, fell to less than 24 percent of the securitized public debt stock, its lowest level since end-1999. The share of exchange rate-indexed securities in the total debt stock declined to less than 29 percent at end-March, down from the peak of about 33 percent in October 2001. A new mechanism for rolling over foreign exchange-indexed debt was introduced successfully in late March allowing the stripping of the foreign exchange insurance component of the debt from the underlying domestic currency-denominated bond. Rollover costs in the auctions conducted through this mechanism are estimated to have fallen by about 250 basis points on an annualized basis relative to the cost of rolling over foreign exchange-indexed securities of similar maturities offered just prior to the shift to this new instrument. Notwithstanding these good results, in May the Central Bank decided to further increase its flexibility in the rollover of the foreign exchange indexed debt by offering foreign exchange swaps independently from the offer of the domestic currency-denominated debt, without increasing the government's foreign exchange exposure.
11. Noting that the recent inflation dynamics have been driven mainly by inertia in administered prices and supply shocks, while competitive price growth and aggregate demand pressures have remained subdued, the Central Bank lowered its main policy interest rate (the SELIC) by a total of 50 basis points in the February and March monetary policy committee meetings, to 18.5 percent. However, with headline inflation remaining high, the BCB kept the SELIC rate unchanged at its April and May meetings.
12. The reduction in the SELIC rate in February and March led to a modest fall in average bank lending rates to 60.2 percent in March, equal to their end-2001 level. Average spreads, however, increased by 2 percentage points from end-2001 due to a fall in banks' funding costs. The expansion of freely allocated bank credit was modest in the first quarter of 2002, with newly granted credit growing by 4.5 percent from the same period last year. The share of loans with payments overdue for more than 120 days rose slightly from end-December to 4.5 percent at end-March. Nevertheless, total bank provisions rose to R$25.4 billion at end-March, more than fully meeting minimum provisioning requirements, and the banking system remains healthy.
13. The Government has continued to push for approval by Congress of important structural reforms. A recent government effort to improve the efficiency of the tax system by replacing the PIS, a federal cascading tax, with a levy on value added has been well received in Congress, and includes measures to ensure that no revenue will be lost during implementation. Successful implementation of this scheme in a revenue-neutral manner will lay the groundwork for a similar conversion of the COFINS in 2003, thus moving further ahead to remove competitiveness hindrances caused by these taxes. The Government also announced that a significant volume of the shares of Banco do Brasil will be offered in an auction later in the year, paving the way for the floating of shares in the Novo Mercado of the BOVESPA, which is restricted to enterprises adopting best practices of good governance.
II. Policies and Prospects for The Remainder of 2002
14. The maintenance of strong macroeconomic policies allowed the Brazilian economy to emerge from the significant internal and external shocks of last year poised for a resumption of growth. In the remainder of 2002, and as has been the case for many years, the Government will remain committed to its economic and structural reform program and to managing its policies with the aim of sustaining market confidence and strengthening the grounds for the incipient economic recovery.
15. The macroeconomic framework for 2002 is based on real output growth between 2-2½ percent, driven mainly by a recovery in consumer and business confidence and further market-driven import substitution. The external trade surplus is projected to widen to about US$5 billion, and the current account deficit to narrow to US$20.7 billion, falling by about 0.8 percent of GDP to 3.8 percent of GDP. FDI is conservatively projected to equal US$18 billion, well below last year's US$22.5 billion but still equal to 87 percent of the projected current account deficit. Overall, the balance of payments is projected to record a deficit of about US$4.4 billion (entirely due to Fund repayments), leaving gross reserves at US$31.5 billion and NIR at US$27.9 billion at year-end, compared to a floor of US$20 billion under the Stand-By Arrangement.
16. Notwithstanding the unexpected delays in passing the extension of the CPMF, the Government reaffirms its commitment to achieve a consolidated public sector primary surplus of 3½ percent of GDP this year and in 2003, consistent with the Budget Guidelines Law submitted to Congress in April. The Fiscal Responsibility Law (FRL) and the Budget Guidelines Law, supported by the debt restructuring agreements between the state and municipal governments and the National Treasury, continue to provide a framework ensuring that all elements of the public sector contribute to the ongoing fiscal consolidation efforts. The ceilings on indebtedness recently approved by the Senate, as well as the provisions of the FRL imposing more restrictive conditions on the contracting of discretionary spending in electoral years, provide a sounder institutional framework to safeguard the public sector's fiscal performance in the remainder of the year.
17. Reflecting the fact that investment spending by public sector enterprises run on a commercial basis creates assets with financial value and therefore does not reduce the net worth of the public sector nor put in jeopardy the sustainability of the public sector finances over time, the government is proposing important changes to Brazil's Stand-By Agreement with the IMF, affecting the September 30 performance criteria. Specifically, to allow Petrobrás to pursue its market-driven investment strategies without putting at risk the achievement of the public sector primary surplus target, the government proposes the introduction of an adjustor to the primary surplus target for September 2002, as set out in the Technical Memorandum of Understanding (TMU). The adjustor allows a reduction in the primary surplus target by an amount equal to investment expenditure by Petrobrás. Reflecting the intention to use this flexibility solely to increase investment, the adjustor will be reduced for any shortfall in Petrobrás's current primary balance (that is, current revenues minus current non-interest expenditure) from the level assumed in the program. In addition, to avoid the possibility of slippages elsewhere in the public sector, a new performance criterion will be introduced for September 2002 on the primary surplus of the consolidated public sector excluding Petrobrás. Petrobrás was selected for this special status under the program because of its clear commercial orientation, as evidenced by its listing on major stock exchanges, its strong profitability and corporate governance, and its purely market-determined pricing policy since the liberalization of the domestic petroleum market in January. The change in the methodology implied by this proposal is in line with the IMF's new Government Finance Statistics manual and would represent a first step toward the implementation of the manual's recommendations.
18. The net debt of the public sector is projected to stabilize at about 55 percent of GDP this year. As called for in its debt management plan for 2002, the shares in the debt stock of foreign exchange-indexed securities and floating-rate securities are expected to decline, respectively, to between 25-30 percent and 51-56 percent. Debt management will also seek to continue to lengthen the average maturity of the securitized debt and new debt issuances, maintaining the current levels of short-term debt, defined as those securities maturing in less than 12 months, of between 26-29 percent of the debt stock, and reducing rollover rates should circumstances permit. The Treasury will maintain its efforts to increase transparency in debt management by continuing to pre-announce its schedule for auctions.
19. In support of fiscal policies, the Government remains committed to seeking further progress on its fiscal legislative agenda despite the limited time remaining on the congressional calendar before the October elections. In particular, the Government will continue to seek congressional approval of an extension of the bank debit tax (CPMF), along with measures to mitigate the impact of the tax on capital markets, including the exemption of stock market transactions. It will also try to seek approval of legislation creating complementary pension funds for civil servants, as well as legislation converting the PIS into a value-added tax. The Government is working on a new bankruptcy law and intends to submit it to Congress this year.
20. Monetary policy will continue to be guided by the forward-looking nature of the inflation targeting framework. Inflation has been under pressure recently by the rise in international oil prices, which is translating into higher-than-expected price increases in the domestic market for petroleum products after it was liberalized at the beginning of the year. More generally, the BCB now projects prices administered by the government or subject to contracts to rise 7.2 percent in 2002, contributing 2.2 percentage points to 2002 inflation. Under current policies, the structural model of the BCB projects total inflation of slightly above 5 percent at year-end—still below the 5½ percent upper limit under the inflation targeting regime—and of less than the 3¼ percent midpoint of the target in 2003.
21. While monetary policy therefore remains on track for achieving inflation rates in the targeted range by end-2002 and 2003, there is a risk that the upper limits of the consultation bands in the second and third quarters of 2002 could be exceeded. Inflation prospects will continue to be analyzed during the fourth and final quarterly review of the program, and the Central Bank will maintain its regular exchange of views with the Fund staff about the evolution of monetary policy. The Central Bank remains ready to respond to changes in projected inflation to help achieve the inflation targets.
22. The experience of last year confirms the importance of the floating exchange rate regime in helping the economy respond to shocks. Nevertheless, as noted in previous memoranda of economic policies, the size and scope of the shocks experienced last year and the inflationary implications of a continued depreciation of the real required the Central Bank to alleviate some of the pressure on the exchange rate through the issuance of foreign exchange-indexed securities, as well as through spot market sales of limited quantities of foreign exchange. The Central Bank has ceased direct and indirect intervention in foreign exchange markets in 2002, confirming its belief that net increases in the stock of exchange rate-indexed debt as well as spot market interventions should be limited to extraordinary circumstances. Moreover, the Central Bank took advantage of the continued strength and stability of the real in mid-April to stop rolling over the final interest payments coming due on its dollar-linked securities. As market conditions allow, the Central Bank will seek to further reduce the sensitivity of the domestic debt to exchange rate fluctuations.
23. The Central Bank will continue its efforts to enhance its off-site bank supervision and, in this context, has developed a systematic monitoring system of bank operational limits with data provided by banks to the off-site banking supervision department. The release of consolidated analysis reports of banking system compliance with the fixed asset limit and the Basle capital adequacy ratio on a more frequent basis will begin in the second quarter of this year, satisfying a March structural benchmark under the Stand-By Arrangement with a slight delay. Also, existing regulations regarding the use of independent external bank auditors and regarding bank governance are being evaluated and updated in light of international experience (see the attached TMU). The process of auctioning the remaining federalized state banks is expected to be completed by August of this year. In May, the second mission of the Financial Sector Assessment Program continued its work in Brazil.
24. A new payment system (SPB) operating a real-time gross settlement system (RTGS) was launched on April 22. The SPB aims at fostering efficiency, safety, integrity, and confidence by adopting internationally-accepted standards and practices in the design and operation of payment and settlements systems.
25. The Government remains committed to Mercosur and will maintain its markets open to other member countries. It stands ready to work with partner countries to resolve trade and payment issues that may arise because of the financial difficulties currently facing some of Brazil's partners. In addition, the Government will continue efforts to reduce industrial country restrictions on Brazilian exports, while working to further liberalize Brazil's own trade regime, both through bilateral and multilateral negotiations, as well as in the context of Mercosur.
26. In summary, firm management of macroeconomic policies in the context of the floating exchange rate regime has continued to serve Brazil well this year. Brazil has maintained good access to international capital markets, and there are signs that a gradual economic recovery is underway. Nevertheless, the external environment remains volatile, and there are the normal uncertainties associated with the change of government next year. Continued disciplined monetary and fiscal policies and further structural reform as outlined in this MEP are therefore essential to safeguard economic stability, nurture the incipient economic recovery, and lay the groundwork for an acceleration of growth and further improvements in the economic well-being of the population in the years ahead. In addition to the measures outlined in this MEP, the Government stands ready to adjust policies as needed to ensure the achievement of the objectives of its economic program, and looks forward to a continued close and constructive dialogue with the Fund.
1. 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 during 2002.
I. Phasing of Purchases and Reviews
2. The general phasing of purchases and reviews for the remainder of 2002 is shown in Table 1 below.
II. Quantitative Targets
A. Fiscal Targets
3. 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).
4. 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.1 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.
(ii) Performance criterion for the primary balance of the consolidated public sector excluding Petrobrás1
5. The primary balance of the consolidated public sector excluding Petrobrás will be defined on the same basis as that for the consolidated public sector, except that the primary balance of Petrobrás will not be included.
6. 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$), of the central government, state and municipal governments, and the public enterprises (including federal, state and municipal enterprises); the central government is defined as above.
7. Total net debt outstanding of the consolidated public sector is measured on an accrual basis (including accrued interest) for the domestic debt component, and on an interest-due basis (competência contratual) for the external debt component. The stock of external debt and of foreign-exchange indexed domestic debt is valued at the actual R$/US$ exchange rate prevailing at the end of each period.
8. 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.
B. External Sector Targets
9. For any given quarter, the stock of debt2 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.
10. 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.
11. 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.
12. Short-term debt3 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.
13. 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.
14. 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. Any increases in foreign currency-denominated claims (both spot and forward) by the BCB against residents, or against foreign branches or subsidiaries of Brazilian institutions from the levels existing on September 14, 2001 do not count toward NIR in the BCB.
15. 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 marked to market. Gross official reserves will exclude participation in international financial institutions, the holdings of nonconvertible currencies, and the holdings of precious metals other than gold.
16. 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, and (iii) any forward foreign exchange (FX) liabilities on a net basis—defined as the short position (posição vendida) minus the long 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.
(v) Performance criterion on the BCB's and the Treasury's exposure in futures markets
17. The BCB and the Treasury will continue to refrain from entering into futures contracts involving the Brazilian real, either directly or through any institution they use as their financial agent. This constitutes a performance criterion under the arrangement. This limitation does not apply to futures contracts issued by the BCB or the Treasury, either directly or through any institution they use as their financial agent, for transactions associated with the rollover of existing foreign exchange-indexed debt instruments described in the letter from the Minister of Finance and President of the Central Bank dated March 4, 2002.
(vi) Performance criterion on the BCB's and the Treasury's exposure in forward markets
18. The BCB and the Treasury will continue to refrain from entering into forward contracts involving the Brazilian real, either directly or through any institution they use as their financial agent. This constitutes a performance criterion under the arrangement. This limitation does not apply to forward contracts issued by the BCB or the Treasury, either directly or through any institution they use as their financial agent, for transactions associated with the rollover of existing foreign exchange-indexed debt instruments described in the letter from the Minister of Finance and President of the Central Bank dated March 4, 2002.
C. Monetary Targets
(i) Consultation mechanism on the 12-month rate of inflation
19. The quarterly consultation bands for the 12-month rate of inflation in consumer prices (as measured by the Índice de preços ao consumidor ampliado (IPCA)) are specified as follows:
20. Inflation prospects will be an important part of each review under the arrangement. In addition, the BCB will discuss with the Fund staff 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.
III. Structural and Statistical Benchmarks
A. Structural Benchmarks
By end-June 2002
By end-September 2002
IV. Disclosure of Specific Information
21. Specific data to continue to be provided by the authorities to the Fund staff include the following (at the indicated frequencies, and lags):
V. Program Assumptions for Selected Variables
The following Tables 2 and 3 set out program assumptions for selected variables.
1Foreign currency debt denominated in currencies other than the US$ is first converted into US$ at actual average exchange rates for the period.
2The term "debt" has the meaning set forth in point No. 9 of the IMF's Guidelines on Performance Criteria with Respect to External Debt (Decision No. 12274-(00/85) of August 24, 2000).
3The term "debt" has the meaning set forth in point No. 9 of the IMF's Guidelines on Performance Criteria with Respect to External Debt (Decision No. 12274-(00/85) of August 24, 2000).