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The following item is a Letter of Intent of the government of Brazil, which describes the policies that Brazil intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Brazil, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

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Memorandum of Economic Policies
November 12, 1999

1.   Brazil has successfully completed the first three reviews under the stand-by arrangement (SBA) from the International Monetary Fund (henceforth the Fund), that was approved by the Executive Board on December 2, 1998. The Brazilian government remains fully committed to the thrust of the policy framework under the SBA, as amended in March 1999, to adapt it to the floating exchange rate regime. This memorandum of economic policies (MEP) provides an update of main economic developments since the completion of the third review in July 1999 and a revised outlook for the remainder of 1999 and the year 2000, and details the steps that are being taken to implement the economic program of the Brazilian government supported by the Fund (henceforth the program).

I.   Recent Developments and Prospects For The Rest of 1999

2.   Developments in economic activity have been better than projected in the program. GDP, which already began to reverse its decline in the first quarter of 1999, mainly on the strength of a favorable harvest, continued its recovery in the second quarter, when industrial output picked up as well. The better than expected performance of GDP reflected a strengthening of confidence, both domestically and abroad, which eased financing constraints and facilitated a gradual reduction of interest rates. Barring further external shocks, GDP is likely to record a slightly positive average growth in 1999, compared to the decline of up to 1 percent projected in July, and the decline of 3.5–4 percent projected in the March 1999 program.

3.   The improved output performance has been reflected in a slight decline of the unemployment rate in the first 9 months of the year. The average 7-day unemployment rate declined to 7.7 percent in the period April–September 1999, from 7.9 percent in the same period of 1998. With the continued recovery of economic activity, and in view of the favorable seasonality, the unemployment rate is expected to continue to decline gradually during the rest of this year.

4.   Brazil's inflation performance to date (as measured by the 6 percent accumulated increase in the national consumer price index (IPCA) during the first nine months of 1999) is in line with the government target of 8 percent for the year. Most of the increase recorded during the third quarter reflected adjustments in administered prices, particularly of energy; excluding the impact of those increases, inflation in consumer prices remains low. The general price index (IGP-DI), in which tradables goods have a larger weight, is projected to register inflation of about 16 percent in 1999, reflecting the increase in the relative prices of these goods. The low passthrough of the exchange rate depreciation to consumer prices is a result of the firm stance of macroeconomic policies, the absence of formal indexation mechanisms, and the still significant output gap.

5.   Developments so far in the external trade balance have been less favorable than expected. The trade deficit has narrowed to US$770 million during January–September 1999, compared to US$3.6 billion in the corresponding period of 1998. The relatively modest size of the improvement to date reflects a substantial (around 18 percent) unanticipated loss in Brazil's terms of trade, due to the sharp increase of international oil prices, the declines in the prices of some major export commodities, and the (external demand-related) weakness of manufacturing export prices. The real trade balance (measured at 1998 prices) improved by the equivalent of US$8 billion in the first three quarters of 1999, mainly reflecting a 22 percent contraction in imports. Exports, particularly of manufactured goods, have been adversely affected by the recession in the region, but have shown clear sings of recovery in recent months, growing by 6 percent in the third quarter of 1999, compared with the same period last year. For 1999 as a whole, the trade balance is now projected to show a deficit of around US$1.0 billion, compared to the surplus of US$3.0 billion projected in the MEP of July 1999.

6.   The external current account deficit has declined significantly, from over US$22.1 billion in the first nine months of 1998 to US$16.8 billion in the same period this year. This reflects, in addition to the decline of the trade deficit, an improvement in the balance of nonfactor services (in particular tourism) that has offset most of the increased interest burden. For the year as a whole, the current account deficit is expected to reach about US$24.7 billion (approximately 4.5 percent of GDP), compared to US$33.6 billion in 1998.

7.   The capital account of the balance of payments continues to be affected by significant uncertainties related to the external environment. Like other emerging market economies, Brazil is not immune to shocks in international financial markets, but the strengthening of economic policies, the shift to a floating exchange rate regime, and the reduced reliance on nontrade-related short-term capital inflows have significantly reduced this vulnerability. In the first three quarters of 1999 net capital inflows (excluding net foreign direct investment (FDI)) were significantly negative, reflecting large capital outflows in the early months of the year and substantial (nearly US$40 billion) amortizations of medium- and long-term debt.

8.   Net FDI, which in the first nine months of 1999 increased to US$22.6 billion from US$17.7 billion in the same period in 1998, is projected to exceed US$27 billion in 1999. As a result, the 1999 current account deficit is projected to be more than fully financed by FDI, notwithstanding a postponement to 2000 of some privatization operations that were originally planned for the second half of 1999.

9.   The Republic, and a number of public and private companies (including banks) have returned to the international capital markets in recent months. Following the successful US$3 billion global bond issue in late April 1999, in July and September, Brazil accessed the Euro-bond market with two further sovereign issues that helped refinance maturing external public debt and establish benchmarks along the yield curve for private sector borrowers. In October, as part of its active liability management policy, the Republic issued a US$2 billion 10-year global bond in exchange for US$2.9 billion outstanding Brady bonds, which resulted in a US$205 million reduction in net present value of the debt, an improvement in the profile or amortizations of the external debt, and a US$250 million release of collateral.

10.   The voluntary agreement with private banks in March 1999 for the maintenance of interbank credit lines through end-August 1999 was instrumental in rebuilding confidence. The rollover rate of these lines has averaged 97 percent through end-September 1999, remaining above 100 percent after the expiration of the agreement. The rollover rate for bank-to-corporate credits has also increased to over 100 percent in recent months.

11.   Following a large depreciation in the aftermath of its floating in mid-January 1999, and a partial recovery during the second quarter, the real weakened in the third quarter by over 15 percent from its first post-devaluation peak of R$1.65 per U.S. dollar, reflecting lingering market concerns about domestic and external developments and the slower than expected improvement of the trade balance. In line with its commitment to a freely floating exchange rate regime, the central bank (BCB) has largely refrained from direct intervention in the foreign exchange market. As a result, net international reserves (NIR) at end-September 1999 remained around US$24.5 billion, US$2.6 billion above the program floor for that month. Since April 1999, the BCB has also reduced to zero its net open position in the exchange futures market. During the third quarter, however, to counter what it considered temporary pressures on the exchange rate, the BCB increased its offer of hedge to the market in the form of U.S. dollar-indexed central bank securities. As a result, the total stock of foreign exchange linked securities (including also those issued by the Treasury), which had declined from a peak equivalent to US$56.5 billion in mid-January 1999 to US$53.5 billion at end-June, rose again, to around US$57 billion by end-September. It is the authorities' intention to broadly stabilize the stock of these securities around this level in the next few months. In view of the significant uncertainties regarding capital flows until the end of this year, it is proposed that the program floor on NIR for November and December 1999 be reduced by US$2 billion below the levels set in the third review of the program.

12.   The government's commitment to its fiscal adjustment and consolidation effort is reflected in the fact that June 1999 marked the third consecutive quarter in which the program fiscal targets were met with margins. Available information to date gives confidence that the target for the cumulative primary surplus of the consolidated public sector for January-September 1999 (R$23.8 billion, or about 3.2 percent of GPD) was met as well. The government is fully committed to ensuring that the R$30.2 billion (or about 3.1 percent of GDP) primary surplus target for 1999 as a whole is also observed, and for this purpose will continue to monitor closely developments during the fourth quarter, and take timely corrective measures, if necessary, to counteract any risk of slippage.

13.   To ensure strict adherence to the fiscal primary target, the government has already taken prompt corrective measures on a number of occasions in the course of 1999. Some of these measures were already detailed in previous MEPs. In particular, the government: (i) has successfully fought judicial challenges to most of the revenue measures implemented earlier in the year; (ii) has obtained the extension of the turnover tax (COFINS) to industries hitherto exempt; (iii) has strengthened efforts to collect past due taxes, with an estimated yield of R$4.5 billion so far in 1999; (iv) has raised domestic oil prices on average by over 60 percent so far this year, moderating the erosion of the surplus in the petroleum account of the Treasury that would have resulted from the increase in international oil prices and the depreciation of the exchange rate; (v) has successfully resisted strong spending pressures by various interest groups, and (vi) has firmly enforced the service by the states of their restructured debt with the federal government. Restraint in spending on nonentitlement programs has been instrumental in ensuring adherence to the primary target. Within this constraint, the government has endeavored to safeguard expenditures on education and health, as well as on key social assistance programs.

14.   The achievement of the targeted primary surplus for 1999 as a whole should permit the public sector borrowing requirement (PSBR) to remain close to with the level projected in the revised March program. However, the indicative target in the program for the net debt of the consolidated public sector at end-1999 (adjusted for a projected shortfall in privatization proceeds net of past debt recognitions) is likely to be exceeded because of the larger than projected depreciation of the exchange rate.

15.   Since July 1999, the government has instituted a formal inflation targeting framework for monetary policy, with the annual targets for consumer price inflation through the year being set at 8 percent in 1999, 6 percent in 2000 , and 4 percent in 2001. The BCB has been given the responsibility to secure the achievement of these targets through its conduct of monetary policy. Following the shift in mid-January 1999 to a flexible exchange rate regime, the BCB's monetary policy has been successful in moderating the passthrough of the depreciation of the real to the prices of nontradables. After the a sizable jump in short-term interest rates in early March, the central bank has gradually reduced the overnight (SELIC) interest rate to 19 percent by end-September, the lowest level since the beginning of the Real Plan in mid 1994.

16.   To date in 1999, monetary policy has been consistent with the quarterly performance criterion on the net domestic assets (NDA) in the BCB. The monthly ceilings on NDA for July-October 1999 were all met; the October ceiling was met with a margin of R$2.5 billion, despite a significant excess of the growth of base money over the program projection, which mainly reflected a strong portfolio shift toward demand deposits, in connection with the reintroduction of the financial transactions tax (CPMF) in June 1999, and the introduction of new rules governing investment funds in August. The faster-than-projected growth of base money (taking into account the reduction in required reserves on demand deposits that became effective in October) has been fully reflected in the excess of NIR over the program floor. An indicative ceiling on the NDA of R$4.52 billion has been proposed for end-December 1999, reflecting the US$21.3 billion floor for NIR and the projected 17 percent growth of base money by year-end. It should be noted that greater than usual uncertainty surrounds this projection on account of possible Y2K effects on the demand for money.

17.   As indicated in the previous MEP, available evidence suggests that, in general, the banking system has weathered well the impact of the economic crisis earlier this year. After rising to 9.5 percent of total bank loans at end-1998, the share of nonperforming loans has declined to 8.8 percent at end-August 1999, and total provisions account for over 130 percent of those loans.

18.   In mid-October, the government announced a comprehensive package of measures aimed at promoting a reduction in financial intermediation spreads, and the cost of bank credit which, especially for medium and small enterprises, and for households, remains very high. The package includes: (a) a reduction from 10 percent to zero of the portfolio requirement on time deposits, which, by reducing required holdings of government securities, should help banks diversify their assets; (b) a reduction of the tax on financial operations (IOF) for personal loans from 6 percent to 1.5 percent, the same rate as for corporate loans; (c) proposed legal changes to make it easier for lending institutions to realize the collateral on nonperforming loans, which should reduce lending risk and thus the final cost of credit; (d) changes to encourage competition between financial institutions, including the daily publication on the BCB's internet site of rates currently charged by banks for standard types of lending; (e) the creation of a "register of good borrowers;" and (f) guidelines to increase the transparency of financial statements of banks.

II.   Policies and Prospects For 2000

19.   The macroeconomic and structural policy framework for the year 2000 aims at promoting a pickup in GDP growth to around 4 percent, thereby facilitating a further reduction of unemployment and improvement in living standards of the population; and at securing a further decline of inflation in consumer prices to around 6 percent, as well as continued adjustment in the balance of payments. The government considers further progress in fiscal consolidation and structural reforms essential to the achievement of these objectives. For this purpose it has presented a budget for 2000 which targets a further increase in the primary surplus of the federal government, and is working with other levels of government and the public enterprises to consolidate the improvement recorded in 1999. It is also advancing its structural fiscal reform agenda through Congress. The BCB, for its part, will continue to gear monetary policy to achieving the government's inflation target.

20.   The 2000 budget proposal presented to Congress at the end of August, targets a primary surplus for the federal government equivalent to about 2.65 percent of GDP, in line with the budget framework law (Lei de Diretrizes Orçamentais) already approved by Congress, and also in line with the 3.25 percent of GDP primary surplus for the consolidated public sector targeted in the March 1999 program. The proposed budget relies only minimally on new tax measures, with the projected robust (over 13 percent) growth of tax revenues mainly reflecting the expected pick up in GDP growth, the full-year impact of revenue measures enacted in the course of 1999, and continued efforts to strengthen tax enforcement. The expected decline in nontax revenues (especially from concessions) will require, however, continued moderation in primary spending, which in the budget proposal is targeted to decline modestly in relation to GDP, to 18.7 percent. Within the total spending envelope, the budget continues to give priority to spending on education and health, and to safeguard core social assistance programs.

21.   The proposed budget for 2000 is fully consistent with the four-year plan for 2000–03 (Avança Brasil), also submitted to Congress at the end of August 1999. This plan identifies the federal expenditure programs that are to receive priority in the allocation of budgetary resources over the next four years, reflecting the main governmental objectives in the social, infrastructure and other public expenditure areas. It seeks to exploit regional and cross-projects synergies, and to attract partnerships with the other levels of government, the public enterprises, the multilateral development banks, and the private sector, to promote a more regionally balanced and sustainable development of the country. Increased emphasis will be placed on the evaluation of the results of these programs, and on the accountability of the public managers of the programs for these results.

22.   The recent decision by the Supreme Court on the unconstitutionality of the changes in the social security contributions for civil servants approved by Congress in February 1999, which involves an estimated R$2.4 billion (0.2 percent of GDP) loss of revenue for the federal government in 2000, was met once again by a prompt policy response of the government, involving a commensurate package of new tax measures and cuts in the proposed budgetary spending for 2000. Some of these measures—in particular the nondeductibility of the additional 1 percent of the COFINS from the contribution on enterprise profits (CSLL)—are intended to be temporary, until the government succeeds in implementing adequate changes in the social security regime for government employees. The sharp increase in international oil prices and the depreciation of the exchange rate in recent months have led to an erosion of the accumulated surplus of the petroleum account. The government intends to keep developments in this account under close review, and to adjust domestic oil prices in 2000 as needed to meet the primary fiscal target. The planned liberalization of the domestic fuels market in August 2000 will necessitate a redesign of the taxation of oil products to replace the revenues from the petroleum account.

23.   Reflecting the further improvement in the primary balance, and the projected broad stabilization of the exchange rate and gradual decline in interest rates on the public debt, the PSBR is expected to fall substantially as from the beginning of 2000, to the equivalent of around 3.5 percent of GDP for the year as a whole, compared with the 10.8 percent of GDP projected for 1999. The net public sector debt is targeted to decline to around 49 percent of GDP from around 52 percent of GDP in 1999, also reflecting projected net privatization proceeds equivalent to nearly 1.7 percent of GDP.

24.   Progress continues to be made in the major areas of structural fiscal reform, which the government sees as crucial to ensure sustainable, high-quality adjustment in the public finances. The government is advancing through Congress the fiscal responsibility law and the last piece of implementing legislation for the administrative reform, the main features of which were described in the July 1999 MEP.

25.   Also, in August, the government submitted to Congress under fast-track procedures a draft law reforming the public social security system for private sector workers. By linking the level of pension benefits to the age and contributive history of the worker, and thereby providing incentives for workers to contribute for a longer period, the reform is expected to yield growing expenditure savings over the medium term, that would help to stabilize the deficit of the INSS system at around 1 percent of GDP. This law has already been passed by the Lower House of Congress and, following its approval by the Senate, is expected to be enacted before the end of this year. Part of the legislation on the reform of private pension funds, submitted to Congress earlier in the year, has also already been approved by the Lower House.

26.   The government has also submitted to Congress a two new constitutional amendments aimed at reducing the financial imbalance, and improving equity in the social security system for government employees. Approval of this amendment would remove constitutional obstacles to the enactment of social security contributions for retired employees at all levels of government, equal to those charged on active employees. The initial rates of these contributions could be subsequently modified by ordinary laws. The government has secured support for this reform from most state governments, for many of which the financial burden of employees' pensions is becoming increasingly unsustainable, especially after the decision by the Supreme Court referred to above.

27.   The government is also pursuing a reform of indirect taxation aimed at consolidating the existing distortive and cascading federal, state and municipal taxes into a national destination—based value-added tax (VAT), to be shared among all levels of government, complemented by a low rate retail sales tax at the municipal level, and selected ad-valorem excises at the state level. The proposed reform aims at eliminating the scope for "fiscal wars" among states, reducing evasion, broadening the tax base, and minimizing distortions due to tax cascading. In addition, the government has just sent to Congress proposed changes in the tax code, and new measures on income taxation aimed at, among other things, reducing the scope for tax avoidance and limiting revenue losses from excessive tax litigation.

28.  Monetary policy in 2000 will continue to be geared to securing the achievement of the inflation target. The BCB expects that, in the absence of unforeseen external shocks, and with continued progress in fiscal adjustment and reforms, the achievement of this target will be consistent with a continued gradual decline of interest rates through the end of next year. This belief is supported by the still sizable output gap, and by improved prospects for the balance of payments and the exchange rate in 2000. The BCB remains fully committed to a flexible conduct of monetary and interest rate policies, and to a timely response to indications of excessive demand or cost pressures which were to threaten the achievement of the inflation target.

29.   As indicated in the July MEP, the program's monetary framework for 2000 is to be adapted to the BCB's inflation targeting framework. We understand that the Executive Board of the Fund is expected to review later this year the monetary conditionality in Fund-supported programs with countries utilizing a formal inflation targeting framework. Pending this review, indicative ceilings on NDA in the BCB have been proposed for March and June 2000. It is intended that they be replaced with appropriate leading indicators of inflation, in the course of the fifth review of the program during the first quarter of 2000. As a step in this direction, quarterly indicative targets have been proposed for the 12-month rate of inflation in the IPCA for end-1999 and during 2000, consistent with the 6 percent government target for year-end, and with an inner band of 1 percent and an outer band of 2 percent around each target. The authorities will discuss with the Fund staff the appropriate policy response, in the event of an excess of the 12-month rate of inflation over the inner band. In the event of an excess over the outer band, the authorities will complete a consultation with the Executive Board of the Fund on their proposed policy response before requesting further purchases under the program.

30.   There has already been significant progress in prudential regulation. After issuing in May 1999, regulations to limit banks' open positions in foreign exchange, the BCB is preparing new regulations for interest rate risk and a forward-looking loan classification system, to be issued by end-November 1999. The BCB will require banks to comply with these regulations during the first quarter of 2000. In the course of next year, the BCB will also complete the preparation of, and issue regulations on other aspects of market risk (particularly equity and commodity risks).

31.   The BCB is also working, with the technical and financial support of the World Bank, on improving banking supervision, including through increased frequency of on-site inspections and continuous off-site monitoring of financial institutions. Efforts continue to be made to address as rapidly as possible the existing staff resource constraints, through new recruitment and training of existing personnel. Significant progress has also been made by the BCB in auditing of the federal banks. The BCB aims at completing these audits before the end of 1999, and preparing shortly thereafter, for submission to the government, a comprehensive strategy for strengthening these banks.

32.   Progress has continued as well in the privatization of the state-owned banks, although there have been some delays concerning the largest of these banks, São Paulo's BANESPA, which, with an asset base of about R$25 billion, represents more than half of the state-owned banking assets. While the privatization of BANESPA was originally planned to be completed by November 1999, it has had to be delayed until the first half of next year because of a dispute with the federal tax authorities. Accordingly, it is proposed to move the structural benchmark on the privatization of BANESPA from November 1999 to June 2000. The restructuring/privatization of other smaller state-owned banks has remained broadly on track, and will be mostly completed by the end of 2000.

33.   The government expects that the firm implementation of the policy framework for 2000 outlined above will result in continued significant progress in the external accounts. The external trade balance is expected to improve significantly to a surplus of around US$5 billion in 2000, as the response of exports to the real exchange rate depreciation strengthens, financing and other structural constraints on exports continue to ease, and the terms of trade recover. This improvement is, however, expected to be contained by the still relatively weak demand conditions in some of Brazil's major trading partners, and by the foreseeable gradual recovery of imports, as domestic economic activity picks up. The current account deficit in the balance of payments is projected to decline to around US$22.5 billion (4.0 percent of GDP) in 2000, also reflecting some further improvement in the balance on nonfactor services and a moderation in the growth of interest payments on the external debt.

34.   The capital account of the balance of payments is expected to strengthen significantly in 2000, reflecting continuing large FDI, a substantial decline in scheduled amortizations of medium and long term external debt, and an increase in trade-related financing. This, in conjunction with the expected improvement in the current account, should lead to a significant (around US$10 billion) surplus in the overall balance of payments and increase in net international reserves, allowing the maintenance of a comfortable level of gross reserves—equivalent to over six months of imports of goods and nonfactor services—after the scheduled repayments of credits from the IMF and BIS and Japan loan facilities. Nevertheless, in view of the uncertainties affecting the capital account, the floor on net international reserves (NIR) in the program has been set below the projected baseline path of NIR with a margin of US$2.5 billion in the first quarter and US$2 billion for the rest of 2000. The appropriateness of this margin will be reassessed during the fifth review of the program.

35.   The total external debt is projected to decline significantly in the course of 2000, to around US$235 billion (41.3 percent of GDP), reflecting in particular scheduled repayments of credits extended to Brazil by the Fund under the SRF and by bilateral lenders under the BIS and Japan loan facilities. Drawings by Brazil under these facilities in December 1998 and April 1999 amounted in all to about US$16.5 billion, of which US$2.7 billion have already been repaid to date. In seeking to partly refinance these repayments with recourse to international capital markets, the government is aiming to secure a further lengthening of the maturity of the total public debt, which—as indicated in previous MEPs, —remains an important policy objective. The government also intends to continue reducing the stock of foreign exchange-indexed Treasury bonds; and to limit the future resort by the BCB to net issues of foreign exchange-indexed securities to exceptional and temporary circumstances, with the aim of also reducing the outstanding stock of these BCB securities over time as confidence strengthens, and private sector hedging mechanisms develop.

36.   In the context of Brazil's acceptance of the obligations under Article VIII, Sections 2, 3, and 4 of the Fund's Articles of agreement and the establishment of a timetable for removing remaining restrictions—a structural benchmark under the program for November 1999—the government received in October 1999 a mission of the Fund's Legal and Monetary and Exchange Affairs Departments. The government is reviewing the findings of that mission, and will propose a timetable for eliminating remaining restrictions, paving the way for acceptance of the obligations under Article VIII, Sections 2, 3, and 4 by end-November 1999.

37.   As regards the adoption of an action plan for statistical improvements that will permit Brazil's subscription to the Special Data Dissemination Standard (SDDS), the authorities have recently informed the Fund staff that they agree with the thrust of the action plan proposed by a multisector mission of the Fund's Statistical Department that visited Brasilia in May this year. Indeed, some of the recommendations of that mission have already been addressed since May. The government will remain in close contact with the Fund's Statistics Department to discuss issues that may arise in advancing Brazil's subscription to the SDDS.

Table on Quantitative Performance Criteria and Indictive Targets for 1999–2000


 

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 fourth quarter of 1999 and in 2000.

I.  Phasing of Purchases and Reviews

The general phasing of purchases and reviews was changed slightly from what was set out during the Third Review;1 the new proposed schedule is summarized in Table 1 below. Accordingly, after completing the fourth review, which will make available to Brazil the fourth purchase under the Supplemental Reserve Facility (SRF) together with a purchase under the credit tranches (CT), there will be 3 reviews in the year 2000 and 5 purchases available under the CT:

  •   A purchase under the CT will become available no earlier than February 28, 2000. This purchase will become available upon observance of the relevant PCs, and upon completion of the fifth review.

  •   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, 1999–2001

    Amounts (in million SDR) and sources

    Date of Board Review (earliest possible dates unless indicated otherwise)

    Conditions and remarks

    3,798.900 total

    542.700 CT

    3,256.200 SRF

    December 2, 1998

    (IMF Board date)

    Available upon Board approval.

    3,256.200 SRF

    March 30, 1999

    (IMF Board date)

    Completion of first and second reviews, and observance of the relevant PCs under the arrangement.

    1,709.505 total

    1,302.480 SRF

       407.025 CT

    July 28, 1999

    (IMF Board date)

    Completion of third review, and observance of the relevant PCs under the arrangement.

    1,709.505 total

    1,302.480 SRF

       407.025 CT

    November 29, 1999

    (preliminary IMF Board date)

    Completion of fourth review, and observance of the relevant PCs under the arrangement

       814.050 CT

    February 28, 2000

    Completion of fifth review, and observance of the relevant PCs under the arrangement

       217.080 CT

     

    Funds become available on May 31, 2000 upon observance of the relevant PCs under the arrangement.

       217.080 CT

    June 30, 2000

    Completion of sixth review, and observance of relevant PCs under the arrangement.

       217.080 CT

     

    Funds become available on August 31, 2000 upon observance of the relevant PCs under the arrangement.

       217.080 CT

    October 31, 2000

    Completion of seventh review, and observance of relevant PCs under the arrangement.

    Four more purchases of 217.080 each CT

     

    PCs and the number and timing of reviews for the year 2001 will be established during the seventh review of the program.


     

    II.   Quantitative Targets

    1.  Fiscal Targets

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

      Floor2
    (In millions of R$)
    Cumulative primary balance of the consolidated public sector1
    January 1, 1999–June 30, 1999 (preliminary) 15,473
    January 1, 1999– September 30, 1999 (performance criterion)3 4 23,788
    January 1, 1999–December 31, 1999 (performance criterion) 3 4 30,185
    January 1, 2000–March 31, 2000 (performance criterion) 7,240
    January 1, 2000–June 30, 2000 (performance criterion) 16,175
    January 1, 2000–September 30, 2000 (indicative target)5 29,000
    January 1, 2000–December 31, 2000 (indicative target)5 36,770
    1As defined below.
    2Minimum cumulative primary surplus of the consolidated public sector.
    3As specified in the third review of the SBA (EBS/99/115).
    4The indicative targets for the primary balance of the consolidated public sector for October 1999 and November 1999, which are used to help assess progress toward the December 1999 performance criterion, remain as specified in the third review of the SBA (EBS/99/115).
    5Performance criterion to be set at the time of the sixth review under the arrangement.

     

    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

      Ceiling2
    (In millions of R$)
    Total net debt outstanding of the consolidated public sector
    End-June 1999 (preliminary) 485,738
    End-September, 1999 (indicative target)3 4 504,619
    End-December, 1999 (indicative target)3 4 513,519
    End-March, 2000 (indicative target) 565,868
    End-June, 2000 (indicative target) 569,483
    End-September, 2000 (indicative target) 568,842
    End-December, 2000 (indicative target) 574,128
    1The public sector is defined as above; the net debt includes the monetary base.
    2Maximum stock outstanding of total net debt of the consolidated public sector.
    3As specified in the third review of the SBA (EBS/99/115).
    4The indicative targets for the net debt of the consolidated public sector for October 1999 and November 1999, which are used to assess progress toward the indicative target for December 1999, remain as specified in the third review of the SBA (EBS/99/115).

    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
      Ceiling
    (In millions of R$)
    Stock of total external debt of the nonfinancial public sector at
    End-June 1999 (actual) 84,256
    End-September, 1999 (performance criterion)2 90,407
    End-December, 1999 (performance criterion)2 93,778
    End-March, 2000 (performance criterion) 92,900
    End-June, 2000 (performance criterion) 94,680
    End-September, 2000 (indicative target)3 95,795
    End-December, 2000 (indicative target)3 96,140
    1The data in this table apply to all external debt of the nonfinancial public sector that is disbursed and outstanding. The nonfinancial public sector includes the federal, state, and municipal governments, the public enterprises, and the social security system. Excluded from measured debt stocks are any liabilities incurred in the context of the exceptional financing package, either vis-à-vis the Fund or bilateral sources of support.
    2As specified in the third review under the SBA (EBS/99/115).
    3Performance criterion to be set at the time of the sixth review under the arrangement.

    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
      Ceiling2
    (In millions of R$)
    Stock of publicly guaranteed external debt outstanding
    End-June 1999 (preliminary) 919
    End-September, 1999 (performance criterion)3 1,580
    End-December, 1999 (performance criterion)3 1,580
    End-March, 2000 (performance criterion) 1,580
    End-June, 2000 (performance criterion) 1,580
    End-September, 2000 (indicative target)4 1,580
    End-December, 2000 (indicative target)4 1,580

    1The limit applies to all private external debt guaranteed by the public sector. The public sector includes the nonfinancial public sector (as defined above), the BCB and the financial public sector.
    2These ceilings will be adjusted upward for publicly guaranteed external debt that is actually transferred to or assumed by the private sector in the context of the planned privatizations of the following public enterprises: CESP, CHESF, Furnas, Comgás, Eletronorte, and Eletropaulo; the maximum total upward adjustment of the ceiling is limited to US$1,250 million.
    3As specified in the third review under the SBA (see EBS/99/115).
    4Performance criterion to be set at the time of the sixth review under the arrangement.

    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

      Ceiling
    (In millions of R$)
    Stock of total short-term external debt of the nonfinancial public sector as of
    End-June 1999 (preliminary) 3,062
    End-September, 1999 (performance criterion)2 5,302
    End-December, 1999 (performance criterion)2 5,419
    End-March, 2000 (performance criterion) 4,343
    End-June, 2000 (performance criterion) 4,430
    End-September, 2000 (indicative target)3 4,609
    End-December, 2000 (indicative target)3 4,797
    1The data in this table apply to all external debt (disbursed and outstanding) of the nonfinancial public sector with original maturities of strictly less than one year. The nonfinancial public sector includes the federal, state, and municipal governments, the public enterprises, and the social security system. Excluded are any liabilities incurred in the context of the exceptional financing package, either vis-à-vis the Fund or the bilateral sources of support.
    2As specified in the third review of the SBA (EBS/99/115).
    3Performance criterion to be set at the time of the sixth review under the arrangement.

    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

      Floor
    (In millions of R$)
    Stock net international reserves in the BCB as of
    End-September, 1999 (preliminary) 24,783
    End-November, 1999 (performance criterion)2 20,600
    End-December, 1999 (performance criterion) 2 21,300
    End-January, 2000 (performance criterion) 18,950
    End-February, 2000 (performance criterion) 19,750
    End-March, 2000 (performance criterion) 21,350
    End-April, 2000 (performance criterion) 21,800
    End-May, 2000 (performance criterion) 23,700
    End-June, 2000 (performance criterion) 23,750
    End-September, 2000 (indicative target)3 28,100
    End-December, 2000 (indicative target)3 29,800
    1NIR are measured as defined below. The performance criterion for end-October, 1999 remains as specified under the third review (EBS/99/115).
    2For October-December 1999, the adjuster for deviations from the baseline path of gross disbursements of loans from the Interamerican Development Bank (IDB) and the World Bank Group remains as specified in the third review of the program (EBS/99/115); the baseline path for these disbursements is shown in Table 2 below.
    3A performance criterion for each month during July-September 2000 will be set at the time of the fifth review; a performance criterion for each month during October-December 2000 will be set at the time of the sixth review.

    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 September 30, 1999, 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 towards 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

      Ceiling1
    (In millions of R$)
    Outstanding stock of net domestic assets as of:
    September 1999 (preliminary)2 –6,687
    December 1999 (indicative target)3 4,519
    March 2000 (indicative target)4 311
    June 2000 (indicative target)4 –6,476
    1Calculated on the basis of the definitions set out below; indicates the maximum level of net domestic assets in the BCB; i.e., smaller or more negative numbers are within the ceiling.
    2On the basis of the actual average exchange rate and period average NIR for September 1999.
    3To help assess progress toward the indicative target for December 1999, an indicative target for net domestic assets in the BCB for November 1999 is set at R$-3,382 million. The indicative target for October 1999 remains as specified under the third review of the program (EBS/99/115).
    4The indicative targets for the year 2000 are to be reviewed during the fifth review of the program, at which time they may be replaced by indicative targets for appropriate leading indicators of inflation, as explained below.

    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.

    For October–December 1999, the NDA ceilings are predicated on the assumption of net disbursements of loans from the IDB and the World Bank Group as shown in Table 2 below. The NDA ceilings for October 1999, November 1999, and December 1999 will be adjusted upward (downward) for the cumulative shortfall (excess) from July 1999 to the month in question of the actual net disbursements of loans from these sources relative to the cumulative baseline path in Table 2, up to a maximum adjustment of US$1,000 million, converted at the relevant accounting exchange rates (as shown in Table 3).

    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 DNDA = D(rn- ro), where rn and ro 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 DNDA = (Dt-Do)(rn- ro), where Dt and Do 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, Do 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 Dt 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 DNDA = rDR, where DR 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

    Reflecting the BCB's inflation targeting approach to monetary policy, quarterly bands of +/–1 percentage point for the inner band and +/–2 percentage points for the outer band have been established around the target for the 12-month rate of inflation in consumer prices, as measured by the IPCA (Indice de preços ao consumidor ampliado).

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

      December
    1999
    March
    2000
    June
    2000
    September
    2000
    December
    2000
    Outer band (upper limit) 10.0 9.5 9.0 8.5 8.0
         Inner band (upper limit) 9.0 8.5 8.0 7.5 7.0
              Inflation target 8.0 7.5 7.0 6.5 6.0
         Inner band (lower limit) 7.0 6.5 6.0 5.5 5.0
    Outer band (lower limit) 6.0 5.5 5.0 4.5 4.0

    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 before requesting further purchases under the program. The consultation mechanism on inflation is expected to be supplemented in the fifth review by conditionality on monetary aggregates and/or other leading indicators of inflation, to be agreed upon in light of the outcome of a more general consideration by the Board on the appropriate monetary conditionality in Fund-supported programs with countries using a formal inflation targeting framework.

    III.   Structural and Statistical Benchmarks

    A.   Structural Benchmarks

    By end-November 1999

    • Proposal of an action plan for statistical improvements that will facilitate Brazil's subscription to the Special Data Dissemination Standard (SDDS).

    By-end December 1999

    • Issuance of regulations for implementing a capital charge related to interest rate risk and for a forward-looking loan classification system (as described in paragraph 21 of the MEP of July 1999 (EBS/99/115)).

    By-end February 2000

    • Removal of the remaining restriction under Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreement, by, at a minimum, lowering to no more than two percent the rate of the financial operations tax (IOF) on exchange operations carried out in relation to credit card purchases abroad by residents, as identified in the aide mémoire of a recent mission by the Fund's Legal Department and its Monetary and Exchange Affairs Department.

    • Begin implementation of the INSS reform with the new formula for calculating pension benefits, as described in paragraph 25 of MEP for the fourth review.

    • Complete enactment and begin implementation of regulatory legislation for the administrative reform.

    • Enactment of the Fiscal Responsibility Law.

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

    • Develop a specific implementation plan and inspection schedule to ensure global consolidated inspections (GCIs) of all commercial banks, multiple-banks and savings banks. The plan should envisage a frequency of the inspections of not less than one inspection every 18 months.

    • Completion of ongoing audits of federal banks, and progress in the preparation of a comprehensive strategy to strengthen these banks.

    By end-June 2000

    • Further progress in the resolution of state-owned banks, including the conclusion of the privatization of BANESPA.

    • 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 shares.

    • Commencement of GCIs.

    • 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.

    By end-July 2000

    • Enactment of an explicit system to tax oil products, to offset the adverse revenue impact from the scheduled liberalization of the oil market on August 6.

    By end-December 2000

    • The first round of GCIs is to be underway or completed for most financial institutions.

    • Resolution of most of the state-owned banks to be completed, including the privatization of BEM, BEG, BEC, BEA, BEP, and BANESTADO.

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

    B.  Statistical Benchmarks

    By end-June 2000

    • Begin dissemination of weekly data on international reserves of the central bank, according to the SDDS template section 1, and in line with practices of all the SDDS subscribers.

    • 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.

    • 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 (incl. 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.

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

    IV.  Disclosure of Specific Bi-Weekly (or More Frequent) Information

    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 (pre_o 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 scheduled reviews of the program.

    V.  Program Assumptions for Selected Variables

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


    1See EBS/99/115.
    2Non-US$ debt is first converted into US$ at actual period average exchange rates.
    3In each and every case where reference is made to a reserve ratio (or "r" as in any of the formulas set out), it is defined strictly as the sum of the relevant reserve ratio in the form of cash in vault and the relevant reserve ratio in the form of deposits at the BCB. All changes in the reserve ratio are measured with respect to the relevant reserve ratio that was in effect on October 31, 1999.

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