## cr17104 ## Source details **Canonical URL:** [cr17104](https://www.imf.org/-/media/files/publications/cr/2017/cr17104.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17104.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17104.pdf.json) --- ### Preface and Executive Summary - Mission: IMF Fiscal Affairs Department (FAD) mission visited Brasilia June 1-14, 2016; evaluation completed January 2017. - Participants: Mission led by Benedict Clements; team included Paulo Medas, Miguel Alves, Fabien Gonguet, Xavier Rame (FAD staff); Fabian Bornhorst (IMF Resident Representative), Timothy Irwin (FAD expert), Ernesto Jeger, Jose Luiz Rossi (IDB). - Assessment framework: 2014 IMF Fiscal Transparency Code (FTC); context includes 2000 Fiscal Responsibility Law (FRL). - Progress noted: - Regular information on budget and implementation across government levels; FRL strengthened reporting. - Advances implementing international standards; fiscal statistics cover general government and recognize most assets/liabilities. - Frequent, timely fiscal reports; annual financial statements audited by Federal Court of Accounts (TCU). - Institutional scope of budget documentation comprehensive; extensive online disclosure. - FRL mandates publication of a statement of fiscal risks; monitoring and management have improved. - Key weaknesses: - No systematic summary documents covering entire public sector risks and policy priorities. - Fiscal reports omit key public enterprises Petrobras and Eletrobras. - Absence of a medium-term budgetary framework; limited disclosure on medium-term fiscal goals. - Insufficient disclosure on public banks’ quasi-fiscal activities and exposures. - No independent fiscal council to scrutinize forecasts or compliance ex ante. - Past unreported liabilities (“pedaladas”), accounting changes, and unclear reporting standards undermined fiscal rules. - Corruption in large public enterprises exacerbated fiscal risk. ### Principal recommendations (executive summary) - Produce comprehensive fiscal statistics on the public sector: - Incorporate Petrobras and Eletrobras into non-financial public enterprises data and disclose quasi-fiscal costs of all public corporations. - Present a more comprehensive view of the public sector (Table 0.2 referenced). - Disclose relationships between public banks and other public-sector parts: - Reveal exposures of public banks to public enterprises and subnational governments. - Improve transparency on Central Bank (BCB)–Treasury transactions: - Separate reporting of transactions and balance sheets of the BCB and the central government; clarify policy objectives and fiscal costs. - Formalize decision making ahead of the budget: - Publish a medium-term fiscal policy statement; consider a modern organic budget law. - Create an independent fiscal council: - Evaluate realism of budget forecasts, assess fiscal policy, monitor compliance with fiscal rules and reporting standards. - Note: Instituição Fiscal Independente established by the Federal Senate in November 2016 will have some functions but only for the federal government. - Strengthen disclosure and management of fiscal risks: - Create a working group to monitor fiscal risks across the public sector; strengthen the fiscal risk statement; expand risk analysis to public enterprises, subnational governments, and the financial sector. - Disclose medium-to long-term fiscal challenges: - Publish a long-term fiscal sustainability report (for example, pensions). *International Monetary Fund. Brazil: Fiscal Transparency Evaluation. (Preface and Executive Summary; mission June 1-14, 2016; evaluation completed January 2017.)* ### 3. Fiscal Risk Analysis — Summary and key statistics - Institutional fragmentation (2014): public sector comprised 7,231 entities. - General government: 6,099 entities. - Budgetary central government: 459 entities. - Extrabudgetary units and funds: 43 entities. - State governments: 27 entities. - Local governments: 5,570 entities. - Central Bank: 1 entity. - Nonfinancial public corporations: 1,119 entities. - Other financial public corporations: 12 entities. - Decentralized federation: central government < half of general government expenditures (net of intragovernmental transfers) in 2014; state governments ≈ 1/3; local governments ≈ 20 percent. - Main summary fiscal reports (selected): - Monthly financial statistics, monthly debt management reports, bi-monthly budget execution reports, revenue collection reports, annual GFS (GFSM 2001/2014 and 2008SNA), annual report on public corporations (DEST), Federal Government Financial Statements (BGU), consolidated financial statements (BSPN). - Coverage and stocks (BGU 2014): - Nonfinancial assets: 13.5 percent of GDP (13.1 percent of GDP in buildings, structures, land). - Financial assets: 46.1 percent of GDP (5.4 percent of GDP in shares/equity; 18 percent of GDP in currency and deposits; 19 percent of GDP in loans). - Liabilities: 86.5 percent of GDP (59.1 percent of GDP in debt securities; 21.3 percent of GDP in pension entitlements of civil servants; 5.9 percent of GDP in accounts payable). - Overall net worth: -26.9 percent of GDP. - Net financial worth: -40.4 percent of GDP. - Consolidated public sector (IMF staff estimates, 2014): - Public sector assets: at least 216 percent of GDP. - Public sector liabilities: around 217 percent of GDP. - Material unrecognized/undervalued items (staff estimates, 2014): - Unrecognized subsoil assets (central government): around 87 percent of GDP. - Undervalued land and other nonfinancial assets by states/municipalities: at least 2.8 percent of GDP. - Unreported civil service pension entitlements (armed forces, states, municipalities): around 58.8 percent of GDP accrued to date. - Assets/liabilities under PPPs/concessions: 4.6 percent of GDP (central 2.2 percent; subnational 2.4 percent). - Public corporations (including Central Bank): 107.2 percent of GDP in non-equity liabilities and 119 percent of GDP in assets. ### Coverage gaps, caveats, and reported aggregates (selected figures, 2014, percent of GDP) - Treasury’s annual general government financial statistics accounted for 63 percent of public sector expenditure. - Expanding coverage impact: - Including nonfinancial public corporations increases deficit by 1.3 percent of GDP (mainly Petrobras and Eletrobras). - Including nonfinancial and financial corporations (including BCB) results in public sector deficit of 5.8 percent of GDP. - Tabulated fiscal aggregates (selected): - Public Sector revenue 40.1; expenditure 45.5; balance -5.4; intra-PS expenditure 4.6; net expenditure 40.9; percent net expenditure 70.3. - Central government (consolidated) revenue 27.8; expenditure 32.5; balance -4.6; intra-PS expenditure 11.9; net expenditure 20.6; percent net expenditure 35.3. - Nonfinancial public corporations revenue 11.2; expenditure 12.5; balance -1.3; intra-PS expenditure 2.2; net expenditure 10.3; percent net expenditure 17.7. - Other financial public corporations revenue 7.0; expenditure 6.2; balance 0.8; intra-PS expenditure 1.3; net expenditure 4.9; percent net expenditure 8.5. ### Significant unreported accrued flows and adjusted balances (2014, percent of GDP) - Staff estimate unreported annual net accrual of pension liabilities: 4.7 percent of GDP in 2014 (could vary year-to-year). - Annual investments in PPPs and concessions estimated at 1.1 percent of GDP (accrued expenses not reflected due to IPSAS 32 not yet adopted). - Cash-to-accrual and expanded fiscal balances (selected lines): - NFPS Primary balance (below-the-line, cash) 1/: -0.4 - Net interest expenditure (accrual): -5.5 - NFPS Overall balance (modified cash) 1/: -6.0 - Coverage adjustments: 0.1 - NFPS Net Lending/Borrowing (modified accrual): -5.8 - Adjustment for missing public enterprises: Petrobras: -1.2; Eletrobras: -0.1 - NFPS (expanded) Net Lending/Borrowing: -7.1 - Additional accrual adjustments: PPP Investment: -1.1; Accrual of pension entitlements: -4.7 - Augmented Public Sector Net Lending/Borrowing FTE: -11.6 - Net fiscal impact summary: - Including estimated accrual adjustments and broader coverage for 2014 yields estimated public sector net lending/borrowing around -11.6 percent of GDP. - NFPS deficit would be 5.8 percentage points higher than currently reported in official documents. - Including deficits of Petrobras and Eletrobras adds about 1⅓ percent of GDP to the reported deficit. (1/ Based on authorities reports (RTN, Nota Imprensa Bacen).) ### “Pedaladas” (unreported liabilities) — 2015 settlement - Examples: - Treasury extended about R$ 500 billion in loans to BNDES since 2008; delayed recognition of liabilities to BNDES by up to 24 months until TCU ruling. - Arrears to Banco do Brasil for agricultural credit subsidies; arrears with Caixa Econômica Federal and FGTS for Minha Casa Minha Vida advances and social contributions. - Economic effect: delays functioned as financing for central government by public banks and reduced public banks’ lending capacity. - Settlement at end-2015: Treasury payments amounted to R$ 72.4 billion or 1¼ percent of GDP (included interest). ### Tax expenditures - Central government tax expenditures averaged 4.1 percent of GDP over 2011-2016. - Subnational tax expenditures could represent as much as 1 percent of GDP. - Central and subnational tax expenditures together: Brazil comparable to regional average and below advanced economies like the United Kingdom or the United States. ### Frequency and timeliness of reporting - Federal government financial statistics: monthly with 30-day lag. - Central Government Primary Balance Bulletins: monthly within 30 days of month end; cover budgetary central government (~45 percent of total general government expenditure). - Since April 2016, Treasury publishes quarterly general government data in GFSM 2014 format for IMF IFS dissemination with a lag of 90 days after quarter end. - TCU opinion on “Accounts of the President” (PCPR) usually within six months of fiscal year end. - PCPR transmission and TCU publication examples: - FY2015: Transmission April 1, 2016; TCU Opinion October 5, 2016. - FY2014: Transmission April 4, 2015; TCU Opinion October 7, 2015. - Final approval of the accounts by Congress not timely; last accounts approved by both chambers date from 2001. ### Internal consistency checks and revisions - Above-the-line central government fiscal balance computed by Treasury; below-the-line by Central Bank; reconciled monthly in primary balance tables. - Average absolute deviation between above- and below-the-line central government primary balances: 0.1 percent of GDP. - Average stock-flow adjustments over 2007-2015: around 0.2 percent of GDP. - Revisions: all revisions applied retroactively with qualitative explanations; online databases updated retroactively. Bridging tables rare. ### Key integrity and comparability findings - TCU opinions (recent years): qualified opinions on PCPR for FY2014 (16 major issues, 2 limitations), FY2013 (13 major issues, 3 limitations), FY2012 (4 major issues). - Methodological implementation improvements needed: - Align classifications to economic substance over legal form. - Institutionalize inter-agency coordination (STN, IBGE, BCB). - Strengthen cross-checks with external sector and monetary statistics and TCU audits. - Recommendation highlights (Section conclusions): - Recommendation 1.1: Expand institutional coverage to incorporate all public corporations and public banks. - Recommendation 1.2: Expand balance sheets to reflect full market value of infrastructure, subsoil assets, and pension entitlements; expand flow statements accordingly. - Recommendation 1.3: Enhance integrity via permanent inter-agency committee, record Treasury–BCB transactions per international standards, regular consistency checks, and reconciliations across fiscal reports. ### Expanding public sector balance sheet (Chapter 10 highlights) - Public sector net worth estimates: - Initial staff estimate (2014) public sector net worth about -0.9 percent of GDP, 33 percent of GDP higher than currently reported. - Treatment of pensions: - Including private sector employees’ pension entitlements would decrease net worth to -209 percent of GDP. - Current statistical treatment: RGPS financial assets included; liabilities not included. - Significant accrued flows missing: - Unreported annual net accrual of pension liabilities estimated 4.7 percent of GDP (2014). - Annual PPP/concession investments estimated 1.1 percent of GDP. - Depletion of subsoil assets not reflected; royalties received thus bias net worth. - RAP (unpaid commitments): - RAP grew from around 5 percent of central government budgetary expenditures to 13.4 percent at end-2014 (close to 4 percent of GDP). - RAP in 2015: 12.3 percent of budgetary expenditures. - Recent coverage improvements: - Federal government recognized liabilities related to extra-budgetary funds in 2015 following TCU recommendation; did not restate previous years. - Joint Treasury/IBGE GFSM 2014/2008SNA-based data retroactively recorded accrual of missing expenditure. - BCB regularly compiles operations between Treasury and extra-budgetary funds. ### Macroeconomic forecasts, MTBF, and budgeting (Chapter 2 highlights) - Forecast coverage: - PLDO and PLOA include forecasts for real GDP growth, inflation, real/dollar exchange rate, short-term interest rates; time coverage budget year and between one and three years forward. - PPA 2016-2019 (Presidential Message) time horizon: 4 years (2016-2019). - PLDO 2016 time horizon: 3 years (2016-2018). - PLOA 2016 time horizon examples: 3 years (2015-2017); some sections 2 years (2015-2016). - Forecast performance: - Average deviation between one-year-ahead GDP forecasts and outturns: systematically negative since 2011; deviation reached -3.9 percentage points over 2011-2015. - Central Bank Focus reports average deviation over 2011-2015: -2.7 percentage points. - MTBF shortcomings: - No rolling medium-term budgetary framework; PPA is strategic but relies on optimistic assumptions and does not act as a policy anchor. - LDO provides objectives for two forward years but mainly rough indicative objectives without robust published projections. - Investment execution: - Investment execution ratios (LOA planned vs executed): - 2013: R$ bn planned 107.5; executed 82.8; Ratio 77%. - 2014: planned 103.0; executed 75.1; Ratio 73%. - 2015: planned 99.3; executed 48.2; Ratio 48.5%. - Petrobras and Eletrobras: - Excluded from fiscal targets since 2009; excluded from fiscal statistics. - If included, would have caused further deterioration of primary surplus ≈ ½ percent of GDP yearly on average during 2009-14. - Petrobras affected contracts valued at about R$ 200 billion; estimated overcharging ≈ 3 percent of contract value (R$ 6.2 billion). - Petrobras’ net debt almost quadrupled since 2011 to 6½ percent of GDP. - Neither company paid dividends in 2015 (had paid up to 0.3 percent of GDP in 2009). ### Credibility (Chapter 4 highlights) - Independent evaluation: Not Met. "There is no independent evaluation of the government’s economic and fiscal forecasts and performance." - Supplementary budget: Basic. Practice issues: modifications frequently implemented prior to formal approval by Congress. - During fiscal year 2015: - 21 decrees increased budgetary credits totaling R$ 116 billion. - Congress approved 28 laws increasing budgetary credits by R$ 40 billion. - Six provisional executive measures made available additional budgetary credits totaling R$ 116 billion. - Forecast reconciliation: Basic. Revisions between LDO and LOA not well explained in budget documents; bimonthly execution reports better documented. ### Fiscal risks — disclosure, analysis, and management (detailed findings) - Disclosure assessment against FTC: - Macroeconomic risks: Basic. PLDO Annex V provides sensitivity analyses (1 percentage point changes) for revenues and some expenditure/debt impacts; stress test introduced in PLDO 2017; sensitivity analysis does not cover budget balance and gross financing needs. - Specific fiscal risks: Basic. Annual fiscal risks statement discusses government financial assets, public banks, public debt, lawsuits, but not comprehensively subnational governments, public corporations, government guarantees, private banks, natural disasters, PPPs; correlations among risks not addressed. - Long-term sustainability: Not Met. No medium-/long-term sustainability information for key aggregates like gross debt in budget documents; LDO projects debt only for budget year and two forward years. - Example projection: "under present policies, spending related to the RGPS is projected to increase by almost 9 percentage points of GDP between 2014 and 2060." - Pension table from Fiscal Monitor database: Brazil Pension spending Change 2015-50 (% GDP) 10.2; Accrued Pension Liability (% GDP) 296. - Risk management specifics: - Budgetary contingencies: Good. FRL requires contingency reserve; 2016 LDO contingency at least 2 and 1 percent of net revenue in PLOA and LOA; contingency reserve unused 2013–2015. - Asset-and-liability management: Good. At end-March 2016: gross debt of general government 73.6 percent of GDP; financial assets 34.1 percent of GDP (deposits at BCB 16.5 percent; loans to BNDES 8.5 percent). - Guarantees: Good. Recorded guarantees end-2014: R$ 224 billion (3.9 percent of 2014 GDP); federal limit 60 percent of net current revenues. - PPPs/concessions: Not Met. World Bank records 494 projects (1995–2014) with estimated investment $133 billion; off-balance-sheet assets/liabilities ≈ 5 percent of GDP; no consolidated reporting of obligations. - Financial sector: Not Met. Aggregate liabilities of financial institutions (March 2016): R$ 7,673 billion (130 percent of 2015 GDP); deposits 35.4 percent of 2015 GDP; public banks owed liabilities 61.7 percent of 2015 GDP; deferred-tax assets of six largest banks (Dec 31, 2015) R$ 233 billion (3.8 percent of 2015 GDP). Public banks’ aggregate liabilities (March 2016): R$ 3,641 billion (61.7 percent of 2015 GDP). - Natural resources: Not Met. Known oil and gas reserves 15 billion barrels (2014); ANP publishes reserves/production/prices/royalties but not valuation of hydrocarbon reserves. - Environmental risks: Basic. Droughts and disasters (2014–16 drought; 2015 Samarco dam collapse) have fiscal effects; World Risk Report 2015 ranked Brazil 123rd of 171 for exposure. - Fiscal coordination and subnational governments: - Subnational gross debt ≈ 13 percent of GDP (states 11 percent; municipalities 1.8 percent at end-2015). - Statutory subnational debt and personnel limits: net debt/net current revenue limits: states 2; municipalities 1.2. Personnel spending limit 60 percent of net current revenue. - At end-2015 six states breached personnel spending limit: Rio Grande do Sul, Mato Grosso do Sul, Minas Gerais, Paraíba, Goiás, Rio de Janeiro. - Public corporations: - Eletrobras gross liabilities 1.9 percent of GDP. - Petrobras gross liabilities 11.4 percent of GDP. - Liabilities of Eletrobras and Petrobras combined: 13 percent of GDP. ### Priority recommendations (explicit timing preserved) - Recommendation 3.1: Create a risk group to provide a centralized overview of fiscal risk management (identify, monitor, mitigate) — 2016: Create a risk group; 2017: form risk group; 2018–2020: risk group to prepare statement of fiscal risks. - Recommendation 3.2: Improve disclosure of fiscal risks in budget documents: - a. Present comparison of past forecasts with fiscal outcomes (April 2017) and develop fan charts based on stochastic analysis (2018 or 2019). - b. Ensure sensitivity analyses show effects on total spending, revenue, primary/nominal balances, and government debt (April 2017) and present alternative scenarios (April 2018). - c. Add disclosures of explicit support for the financial sector and risks related to public corporations and subnational governments (April 2017). - d. Ensure statement sections relate risks to the budget and medium-term forecast (April 2017). - e. Include in annual report on public corporations a chapter on government financial relationships with federally-owned banks and quasi-fiscal activities (2017). - Recommendation 3.3: Improve long-term sustainability reporting: - a. Publish periodic report projecting primary/nominal balances and debt over at least 20 years; initial steps: add section to Presidential message attached to 2018 PLOA (projection over next 10 years at least); full report with 20-year projections in 2019 PLDO. - b. Expand long-term sustainability analyses of social security and pension schemes and include projections for health care expenditure and pension funds of public enterprises (2018–2019). ### Annex 1 — Fiscal Transparency Action Plan (selected timeline highlights) - Institutional/statistical coverage: - 2016: Consolidate missing units into central government fiscal statistics; estimate pension entitlements of military and subnational RPPS; recognize market value of government property holdings in GG balance sheet. - 2017: Consolidate Petrobras and Eletrobras into nonfinancial PS (incomplete); recognize annual accrual of pension liabilities to civil servants. - 2018: Consolidate BB, CEF, BNDES, and BCB into PS (incomplete) fiscal statistics; adopt IPSAS 32-like recording of PPPs/concessions; recognize subsoil assets in GG and PS balance sheet. - 2019–2020: Consolidate remaining nonfinancial and financial public corporations; recognize depletion and valuation changes in subsoil assets. - Fiscal policy framework and institutions: - 2016–2020 phased actions to develop MTBF, publish medium-term fiscal policy statement, design and operationalize independent fiscal council (2016: high-level design group; 2017: integrate findings; 2018: operationalize; 2019: publish first reports). - Fiscal risk management: - 2016–2018: Create risk group; 2018 LDO include comparison of past forecasts with outcomes and sensitivity analyses; 2019 LDO include fan charts and fully developed alternative scenarios. - 2018–2019: Improve annual report on public corporations with chapter on federally-owned banks’ relationships and quasi-fiscal activities. - 2018–2019: Publish long-term sustainability reports and projections (10–20 years). ### Annex 2 — Transactions between the Treasury and the Central Bank (key features and numeric instances) - Institutional/measurement issues: - More than 20 percent of public debt has been issued for monetary policy purposes. - At end-2015 about 20 percent of public debt used as collateral for repos (compromissadas). - Since 2010, BCB profits averaged about 1½ percent of GDP per year (largely unrealized revaluation gains). - Valuation gains from FX reserves have ranged from plus 4 percent of GDP to -4 percent of GDP. - Quantitative episodes: - Net exposure through FX swaps in 2015: USD 110 billion (about 30 percent of international reserves). - Total cost of FX swaps in 2015: 1½ percent of GDP. - In 2016 net FX exposure reduced to below USD 30 billion and gains from FX swaps amounted to about 1⅓ percent of GDP (through mid-December). - Reporting/standard differences: - BCB’s statistics consider BCB part of central government; GFSM treatment differs (central bank as public financial institution). - GFSM 2014 prescribes profits due to current operations of central banks transferred to government recorded as dividends; compensations for losses as subsidies; holding gains/losses treated as withdrawals/injections of equity—treatment differing from current Brazilian practice. - Annex 2 conclusion: Complex BCB–Treasury relationship and divergence from international practices require greater transparency to improve comparability of fiscal aggregates such as public debt and primary/overall fiscal balances. *Source: IMF staff, “Brazil: Fiscal Transparency Evaluation” (selected chapters and annexes extracted from cr17104).* ### PREFACE ___________________________________________________________________________________________ 5 ### PREFACE ### Mission, timing, and participants - IMF Fiscal Affairs Department (FAD) mission visited Brasilia during the period June 1-14, 2016 to conduct a Fiscal Transparency Evaluation (FTE). - The mission was led by Benedict Clements and included Paulo Medas, Miguel Alves, Fabien Gonguet, Xavier Rame (all FAD staff); Fabian Bornhorst (IMF Resident Representative), Timothy Irwin (FAD expert), Ernesto Jeger, and Jose Luiz Rossi (both IDB). - The evaluation is based on information available at the time it was completed in January 2017. - The mission met with senior officials at the Ministry of Finance, the Central Bank of Brazil, the Ministry of Planning and Budget, the Ministry of Mining and Energy, Casa Civil, and the Federal Court of Accounts (TCU). Key interlocutors included Mr. Henrique Meirelles (Minister of Finance), Ms. Ana Paula Vescovi (incoming Treasury Secretary), Messrs. Otavio Ladeira, Carlos Hamilton Araujo, Mansueto Almeida, Marcelo Caetano, and numerous senior staff listed in the report. - The mission prepared an action plan to further improve fiscal transparency. ### Executive Summary: assessment of fiscal transparency - The report assesses Brazil’s fiscal reporting, fiscal forecasting and budgeting, and fiscal risk analysis/management against the 2014 IMF Fiscal Transparency Code (FTC). - Progress noted: - Significant progress over recent decades in providing regular information on the budget and its implementation at all levels of government, partly driven by the 2000 Fiscal Responsibility Law (FRL). - Advances in implementing international standards to improve data quality. - Fiscal statistics encompass the general government sector and recognize most of its assets and liabilities. - Fiscal reports are published in a frequent and timely manner and annual financial statements are audited by the Federal Court of Accounts (TCU). - The institutional scope of budget documentation is comprehensive; key sequences of the budget process are timely; extensive budgetary information is made available via websites and online databases. - Fiscal risk disclosure and management are anchored in the FRL, which mandates publication of a statement of fiscal risks; monitoring and management of fiscal risks have improved recently. - Key weaknesses and concerns: - Some key elements of fiscal policy and fiscal risks are not well communicated to the broader public; Brazil does not systematically provide summary documents describing developments across the entire public sector, main risks, and their relation to policy priorities. - Fiscal reports omit information on key parts of the public sector, notably Petrobras and Eletrobras, which represent large fiscal risks and have played major roles in implementing government policy. - Limited information on medium-term fiscal policy goals and challenges, reflecting the absence of a medium-term budgetary framework; budget documents do not provide a clear picture of objectives for key fiscal aggregates such as public debt. - Insufficient disclosure and clarity concerning the role of public banks in implementing public policies (including quasi-fiscal activities) and their exposures to public enterprises and subnational governments. - The government’s budget and compliance with fiscal rules are not scrutinized by an independent fiscal council; there is no ex-ante independent assessment of the realism of fiscal projections or budget compliance with rules. - Past practices inconsistent with FRL principles—such as unreported liabilities (“pedaladas”), accounting changes, and lack of clarity on fiscal reporting standards—have undermined effectiveness of fiscal rules. - Corruption involving some of the largest public enterprises has exacerbated fiscal risk and transparency concerns. ### Principal recommendations and actions proposed - Produce comprehensive fiscal statistics on the public sector: - Incorporate Petrobras and Eletrobras into data on non-financial public enterprises and disclose the quasi-fiscal costs of all public corporations. - Present a more comprehensive view of the public sector (Table 0.2 referenced) to improve assessment of the sector’s financial position and fiscal risks. - Further disclose relationships between public banks and other parts of the public sector: - Reveal exposures of public banks to public enterprises and subnational governments to better understand fiscal costs and risks. - Improve transparency on transactions between the Central Bank of Brazil (BCB) and the Treasury: - Include separate reporting of transactions and the balance sheets of the BCB and the central government; present policy objectives and fiscal costs more clearly. - Formalize decision making ahead of the budget and clarify policy intentions: - Publish a medium-term fiscal policy statement. - Consider improvements to the legal framework, including introducing a modern organic budget law. - Create an independent fiscal council: - Task it to evaluate the realism of budget forecasts, assess fiscal policy, and monitor compliance with fiscal rules and reporting standards for all levels of government. - Note: The Federal Senate, in November 2016, created the Instituição Fiscal Independente (Independent Fiscal Institution) which will have some functions envisaged for a fiscal council but only for the federal government. - Strengthen disclosure and management of fiscal risks: - Create a working group to monitor fiscal risks across the public sector. - Strengthen the fiscal risk statement by clearly explaining key risks and their potential impact. - Expand risk analysis to include public enterprises, subnational governments, and the financial sector. - Disclose key medium-to long-term fiscal challenges, especially rising pension and health costs: - Publish a report on long-term fiscal sustainability to help build consensus for reforms (for example, pensions). ### Key statistics and fiscal indicators cited - Evaluation completion: January 2017. - Mission visit: June 1-14, 2016. - Reference framework: 2014 version of the IMF Fiscal Transparency Code (FTC); 2000 Fiscal Responsibility Law (FRL). - Brazil’s net financial worth: –131 percent of GDP (Table 0.2 referenced). - Public pensions liabilities cited: 88 percent of GDP. - Liabilities of private sector employees’ pensions cited: 208 percent of GDP. - Comparative net financial worth examples cited: - Peru: –34 percent of GDP - Philippines: –22 percent of GDP - Russia: –18 percent of GDP - Ireland: –157 percent of GDP - Portugal: –232 percent of GDP - Footnote context: The Instituição Fiscal Independente established by the Federal Senate in November 2016 will have some functions envisaged for a fiscal council but only for the federal government. ### Implementation planning - The report includes a “Fiscal Transparency Action Plan” (Annex 1) that identifies the actions required to implement the principal recommendations and complementary measures to strengthen fiscal transparency. *International Monetary Fund. Brazil: Fiscal Transparency Evaluation. (Preface and Executive Summary; mission June 1-14, 2016; evaluation completed January 2017.)* ### 3. Fiscal Risk Analysis ### 3. Fiscal Risk Analysis ### Summary and institutional context - Brazil’s public sector comprised 7,231 separate institutional entities in 2014. - Subsector counts: - General government: 6,099 entities. - Budgetary central government: 459 entities. - Extrabudgetary units and funds: 43 entities. - State governments: 27 entities. - Local governments: 5,570 entities. - Central Bank: 1 entity. - Nonfinancial public corporations: 1,119 entities. - Other financial public corporations: 12 entities. - Brazil is a decentralized federation: the central government represented less than half of general government expenditures (net of intra-government transfers) in 2014; state governments accounted for around 1/3 and local governments around 20 percent of total general government expenditures. ### Improvements in fiscal reporting and remaining fragmentation - Noted improvements: - Gradual implementation of IPSAS-based accounting standards since 2008 improved accrual-based financial statements. - Introduction of the Fiscal Responsibility Law (FRL) increased the centrality of fiscal reporting in policy discussions. - Treasury began reporting general government data quarterly in April 2016, following G20 Data Gaps Initiative recommendations. - Fragmentation: - Brazil publishes a large volume of fiscal data across many documents that cover different institutions, flows, and stocks, use different accounting bases, and classifications, resulting in a fragmented reporting framework. - Many advances have yet to be fully reflected in the main reports used by the public and policymakers (e.g., Treasury report and Central Bank statistics). ### Main summary fiscal reports (topics covered) - Monthly financial statistics: Treasury cash revenue and primary expenditure of the federal government; Central Bank data on financing of the nonfinancial public sector (excluding Petrobras and Eletrobras) and associated stock positions. - Monthly debt management reports: detailed stocks and flows (issuance/redemption) of Treasury securities with breakdowns by residency, interest type, currency, maturity, average cost, and investor groups; primary and secondary market data. - Budget execution reports: bi-monthly update of annual budget estimates; four-monthly assessment of compliance with the fiscal target. - Revenue collection reports: monthly collection of taxes and social contributions; annual estimates of tax burden and revenue loss from tax expenditures. - Annual government finance statistics: most comprehensive data on stock positions of financial assets and liabilities and cash/accrual flows of general government and subsectors, compiled in GFSM 2001/2014 and 2008SNA frameworks; preliminary quarterly version available from the Treasury. - Annual report on public corporations (DEST): budget execution and annual financial statements (individual and aggregated) of non-dependent federal financial and nonfinancial corporations. - Annual financial statements: Federal Government Financial Statements (BGU) and consolidated financial statements (BSPN). ### Coverage of institutions and stocks - Treasury’s annual general government financial statistics accounted for 63 percent of public sector expenditure in 2014. - Expanding coverage from general government to the entire public sector: - Including nonfinancial public corporations would increase the deficit by 1.3 percent of GDP (mainly reflecting Petrobras and Eletrobras). - Including nonfinancial and financial corporations (including the Central Bank) results in a public sector deficit of 5.8 percent of GDP. - BGU (Federal Government annual financial statements) balance sheet (2014): - Nonfinancial assets: 13.5 percent of GDP, including 13.1 percent of GDP in buildings, structures, and land. - Financial assets: 46.1 percent of GDP, including: - 5.4 percent of GDP in shares and equity of corporations, - 18 percent of GDP in currency and deposits, - 19 percent of GDP in loans (mainly to states and municipalities). - Liabilities: 86.5 percent of GDP, including: - 59.1 percent of GDP in debt securities, - 21.3 percent of GDP in pension entitlements of civil servants, - 5.9 percent of GDP in accounts payable. - Overall net worth: -26.9 percent of GDP. - Net financial worth: -40.4 percent of GDP. - Consolidated public sector balance-sheet estimates (IMF staff): - Public sector assets estimated at least 216 percent of GDP in 2014. - Public sector liabilities estimated around 217 percent of GDP in 2014. ### Material unrecognized or undervalued items (2014 staff estimates) - Unrecognized subsoil assets (central government): around 87 percent of GDP (petroleum, natural gas, iron ore, copper, bauxite, niobium, gold, nickel). - Undervalued holdings of land and other nonfinancial assets by states and municipalities: at least 2.8 percent of GDP. - Unreported civil service pension entitlements (armed forces, states, municipalities): around 58.8 percent of GDP accrued to date. - Assets and liabilities under PPPs and concession contracts: 4.6 percent of GDP in 2014 (central government 2.2 percent of GDP; subnational governments 2.4 percent of GDP). - Public corporations (including the Central Bank): 107.2 percent of GDP in non-equity liabilities and 119 percent of GDP in assets. ### Tabulated fiscal aggregates (selected figures from 2014 public sector financial overview, in percent of GDP) - Public Sector (aggregate): Revenue 40.1; Expenditure 45.5; Balance -5.4; Intra-PS expenditure 4.6; Net expenditure 40.9; Percent net expenditure 70.3. - General government: Revenue 40.1; Expenditure 45.5; Balance -5.4. - Central government (consolidated): Revenue 27.8; Expenditure 32.5; Balance -4.6; Intra-PS expenditure 11.9; Net expenditure 20.6; Percent net expenditure 35.3. - Budgetary central government: Revenue 25.2; Expenditure 30.4; Balance -5.2; Intra-PS expenditure 12.1; Net expenditure 18.3; Percent net expenditure 31.4. - Extrabudgetary central government: Revenue 2.8; Expenditure 2.3; Balance 0.5; Intra-PS expenditure 0.0; Net expenditure 2.3; Percent net expenditure 3.9. - State governments: Revenue 12.0; Expenditure 12.9; Balance -0.9; Intra-PS expenditure 0.9; Net expenditure 12.0; Percent net expenditure 20.6. - Local governments: Revenue 8.7; Expenditure 8.5; Balance 0.1; Intra-PS expenditure 0.2; Net expenditure 8.3; Percent net expenditure 14.3. - Central Bank: Revenue 3.5; Expenditure 3.4; Balance 0.1; Intra-PS expenditure 1.3; Net expenditure 2.0; Percent net expenditure 3.5. - Nonfinancial public corporations: Revenue 11.2; Expenditure 12.5; Balance -1.3; Intra-PS expenditure 2.2; Net expenditure 10.3; Percent net expenditure 17.7. - Other financial public corporations: Revenue 7.0; Expenditure 6.2; Balance 0.8; Intra-PS expenditure 1.3; Net expenditure 4.9; Percent net expenditure 8.5. ### Reporting coverage caveats and data gaps - Some elements of the accrual basis are still not incorporated in statistics: - Accrual of pension entitlements related to civil servants’ pension schemes (RPPS) is not fully included. - Recognition of transactions related to government-controlled assets constructed through PPP arrangements is incomplete. - Time adjustment of taxes and social contributions is not fully implemented. - STN and IBGE are developing compilation procedures to incorporate these elements in future vintages. - The BSPN consolidated financial statements prior to 2015 did not fully eliminate intragovernmental transactions for all reporting units; coverage gaps existed in 2014 (5 states and 1,353 municipalities not covered) and some municipalities remained uncovered in 2015 (1,070 municipalities). *Source: IMF staff, “3. Fiscal Risk Analysis,” Brazil: Fiscal Transparency Evaluation (2017).* ### 10. Expanding the coverage of the public sector balance sheet in accordance with ### 10. Expanding the coverage of the public sector balance sheet in accordance with international statistical standards ### Estimated public sector net worth and assets - Initial estimates suggest a public sector net worth in 2014 of about -0.9 percent of GDP, 33 percent of GDP higher than currently reported. - The increase in estimated net worth derives mainly from: - Inclusion of unreported subsoil assets and revaluation of land (assets). - These asset additions are larger than additional liabilities from civil service pension entitlements. - Asset estimates for Brazil are particularly difficult and subject to large year-to-year fluctuations reflecting commodity price volatility. - Brazil’s overall public sector net worth is comparable to the average of other countries with available net worth estimates, but significantly lower than other resource-rich countries (Figure 1.4). ### Treatment of pensions and impact on net worth - If private sector employees’ pension entitlements were included in public sector liabilities, overall public sector net worth would decrease to -209 percent of GDP. - Current treatment: financial assets of RGPS are included on the statistical balance sheet of general government, while the system’s liabilities are not—an asymmetric treatment that follows international statistical standards but presents the government’s fiscal position as better than it really is. ### Coverage of flows (basic) and reports - Monthly Central Government Primary Balance Bulletin: - Covers most cash inflows and outflows of the federal government. - Flows between the Treasury and the Central Bank are disclosed only as memorandum items. - Implementation of IPSAS broadened coverage of flows in annual financial statements to include: - Full cash flows and most accrual data (accounts payable/receivable, depreciation, revaluations of assets including equity holdings and liabilities, accrual of civil servant pension entitlements). - Central Bank financing reports: - Present comprehensive cash data; accrual information limited to accrual of interest and a subset of other economic flows whose classification is not always in line with GFSM 2014. - IMF fiscal statistics for Brazil: - Recently improved with adoption of a modified-cash basis for reporting expenditure data. - Revenue continues to be reported only on a cash basis. ### Significant accrued flows missing from comprehensive fiscal reports - Most relevant unreported flow: unreported annual net accrual of pension liabilities. - Staff estimates (based on limited data) indicate these transactions were 4.7 percent of GDP in 2014, but could vary significantly year-to-year. - Annual investments in PPPs and concessions estimated at 1.1 percent of GDP. - These accrued expenses are not reflected in statistics or accounts because IPSAS 32 has not yet been adopted. - Reports exclude depletion of subsoil assets, which would neutralize net worth increases from royalties received from extracting corporations. ### Cash-to-accrual adjustments and expanded fiscal balances (2014, in percent of GDP) - NFPS Primary balance (below-the-line, cash) 1/: -0.4 - Net interest expenditure (accrual): -5.5 - NFPS Overall balance (modified cash) 1/: -6.0 - Coverage adjustments: 0.1 - Cash-Accrual adjustments on recognized transactions: 0.1 - NFPS Net Lending/Borrowing (modified accrual): -5.8 - Adjustment for missing public enterprises: - Petrobras: -1.2 - Eletrobras: -0.1 - NFPS (expanded) Net Lending/Borrowing: -7.1 - Other adjustments: 0.4 - Public Financial Sector balance: 0.9 - Public Sector Net Lending/Borrowing: -5.8 - Additional accrual adjustments: - PPP Investment: -1.1 - Accrual of pension entitlements: -4.7 - Augmented Public Sector Net Lending/Borrowing FTE: -11.6 (1/ Based on authorities reports (RTN, Nota Imprensa Bacen).) ### Net fiscal impact of recognizing additional accrued revenues and expenses - Including estimated accrual adjustments and broader coverage adjustments for 2014 would yield an estimated public sector net lending/borrowing around -11.6 percent of GDP. - The nonfinancial public sector (NFPS) deficit would be 5.8 percentage points higher than currently reported in official documents. - Key drivers of the difference: accrued pension entitlements of public servants and accrual of PPP investments. - Including deficits of the two largest nonfinancial public corporations adds about 1⅓ percent of GDP to the reported deficit. - The financial public sector has a positive effect on the balance. ### Recent developments in coverage of accrued liabilities - Federal government financial statements (BGU) prior to FY 2015 did not reflect significant accounts payable to public financial corporations and use of extra-budgetary funds accumulated from overdue compensation for quasi-fiscal activities (“pedaladas”). - Following the TCU recommendation on the 2014 financial statements, the federal government recognized the associated liabilities and subsequent payments in 2015, but did not restate previous years (2014 stock positions revised only in disclosure of the opening balance sheet for FY 2015). - Joint Treasury/IBGE GFSM 2014/2008SNA-based data have retroactively recorded accrual of missing expenditure. - The BCB now regularly compiles operations between the Treasury and extra-budgetary funds. ### “Restos a Pagar” (RAP) and transparency concerns - RAP (unpaid commitments) increased markedly between 2007-14, including some liabilities from more than a decade ago. - RAP grew from around 5 percent of the central government budgetary expenditures to 13.4 percent at end of 2014 (close to 4 percent of GDP). - In 2015 RAP remained high at 12.3 percent of budgetary expenditures. - The large size and age of some RAP items suggest need for more transparency to ensure appropriate classification between accrued and non-accrued liabilities and disclosure on processing delays. ### Box: Relations between the Treasury and public banks — “pedaladas” (unreported liabilities) - In 2015, the government settled a series of unreported liabilities (“pedaladas”) involving BNDES, Banco do Brasil, Caixa Econômica Federal, and FGTS. - Examples of pedaladas: - Arrears on payments to BNDES for subsidies related to the BNDES PSI. The Treasury extended about R$ 500 billion in loans to BNDES since 2008 to boost lending capacity and committed to subsidize loans under PSI. The government delayed recognition of liabilities to BNDES by up to 24 months until the TCU ruling. - Arrears to Banco do Brasil to compensate for subsidies related to agricultural/rural credit lines (Safra Agrícola). - Arrears with Caixa Econômica Federal and FGTS: FGTS extended cash advances to the Union for the Minha Casa Minha Vida housing program and covered delays on social contributions; delays in compensating Caixa for social benefits payments. - Economic effect: these delays functioned as a source of financing for central government activities by public banks and reduced public banks’ capacity to lend to the private sector. - Settlement: Treasury payments at end of 2015 amounted to R$ 72.4 billion or 1¼ percent of GDP (included interest). - The Central Bank has released historical time series from 2002 on accrual and clearance of these delays; Treasury now produces bi-monthly reports on future payments due to BNDES following TCU request. ### Coverage of tax expenditures (good practices) - Annual detailed report on estimated central government revenue foregone from tax expenditures is attached to the PLDO and the PLOA. - Article 14 of the FRL requires an annex to the PLDO (Annex IV.11) listing tax expenditures for the next budget year and two forward years, with aggregates by geographical area, sector, and tax. - Ex post estimations of individual impacts of central government tax expenditures are published on the Federal Revenue Authority website. - State tax expenditures are covered in states’ respective LDOs; consolidated subnational data not fully available. - No strict limits on tax expenditures, but Article 14 requires either proof that a tax expenditure does not affect LDO targets or a compensatory tax measure. - An annex to the PLDO (Annex IV.12) reports compensatory tax measures implemented for previous budget years. - Compensatory system has had only a partial effect; central government tax expenditures expanded while the fiscal deficit deteriorated and fiscal target was missed. - Magnitudes: - Central government tax expenditures averaged 4.1 percent of GDP over the period 2011-2016. - Subnational tax expenditures could represent as much as 1 percent of GDP. - Taking central and subnational tax expenditures together, Brazil ranks similar to the regional average and below advanced economies such as the United Kingdom or the United States. ### Frequency and timeliness of fiscal reporting - In-year frequency: - Federal government financial statistics are produced monthly with a 30-day lag. - Central Government Primary Balance Bulletins (cash-based) produced monthly within 30 days of month end; cover budgetary central government (~45 percent of total general government expenditure, excluding intragovernmental interest and grants). - Since April 2016, Treasury publishes quarterly general government data on a modified cash basis (revenue on cash basis; expenditure in cash and modified-cash bases) in GFSM 2014 format for IMF IFS dissemination with a lag of 90 days after quarter end. - Timeliness of annual financial statements: - TCU opinion on the “Accounts of the President” (PCPR) is usually published within six months of fiscal year end. - Constitutional timetable: PCPR submitted to Congress no later than 60 days after beginning of the first Congressional session; TCU then has 60 days to provide an opinion. - Timetable of PCPR transmission and TCU publication: - Fiscal Year 2015: Transmission to Congress April 1, 2016; Publication of the TCU’s Opinion October 5, 2016. - Fiscal Year 2014: Transmission to Congress April 4, 2015; Publication of the TCU’s Opinion October 7, 2015. - Fiscal Year 2013: Transmission to Congress April 3, 2014; Publication of the TCU’s Opinion May 28, 2014. - Fiscal Year 2012: Transmission to Congress April 9, 2013; Publication of the TCU’s Opinion May 29, 2013. - Delays and political timing: - TCU’s opinion on the 2014 PCPR was delayed due to additional investigations; TCU recommended rejecting the 2014 accounts on October 7, 2015—the first such recommendation since 1937. - Similar reasons explain the delay and recommendation to reject the 2015 accounts in October 2016. - Final approval of the accounts by Congress is not timely; last accounts approved by both the Chamber of Deputies and the Senate are those from 2001. *Source: IMF staff estimates and Brazil: Fiscal Transparency Evaluation.* ### 24. The key internal consistency checks called for under the FTC are provided on a ### 24. The key internal consistency checks called for under the FTC are provided on a regular basis in the public fiscal reports ### Internal consistency checks and reporting practices - The above-the-line central government fiscal balance is computed by the Treasury; the below-the-line calculation is provided by the Central Bank. - The Treasury reconciles both calculations in the primary balance tables it publishes every month. - The resulting discrepancy is broken down between: - a methodological adjustment (amortization of specific contracts), and - a statistical component. - Monthly debt reports published by the Treasury contain consistent information on public debt transactions and variations in public debt holdings from a unique database on securities held by the Central Bank. - On a monthly basis, the Central Bank updates the breakdown of the explanatory factors behind the change in the general government gross debt stock. ### Discrepancies, stock-flow adjustments, and recent performance - Differences between above- and below-the-line calculations of the central government primary balance have been small, with an average absolute deviation of 0.1 percent of GDP (Figure 1.7). - Stock-flow adjustments have averaged around 0.2 percent of GDP over the 2007-2015 period, mostly driven by the effects of exchange rate movements (including related to FX swaps) on the stock of debt (Figure 1.8). - Figure 1.7 timeframe: 1997–2015. - Figure 1.8 timeframe: 2007–2015. ### Historical revisions (Good) - All revisions to fiscal statistics and reports are applied retroactively, with changes qualitatively explained. - Online databases of the monthly reports produced by both the Treasury and the Central Bank are updated retroactively whenever any change occurs to sources and methods. - An archive of old published reports remains available at those institutions’ websites. - Fiscal statistics disseminated for publication in the IMF’s Statistical Department databases always contain an entire time series, fully updated to reflect the latest compilation procedures. - All major changes are explained in the metadata accompanying the first release of revised data. - Information on major revisions does not usually include bridging tables between the old and new time series. The only case where a bridging table was disclosed was the change in the Central Bank’s compilation of the General Government Gross Debt. - For broader revisions, no bridging table was published (example: the recent change in the sources and methods for compilation of GFSM data, disclosed in the new joint Treasury/IBGE publication). ### Integrity of fiscal reports - Fiscal statistics have been disseminated according to international dissemination standards since 2001; Brazil subscribed to the SDDS on March 14, 2001 and met all SDDS requirements at the time of subscription. - Since 2009, the Treasury has gradually improved compilation procedures, allowing disclosure of quarterly general government operations on both cash and modified-cash bases and a financial balance sheet in the GFSM 2014 reporting format. - Brazil complied with the dissemination requirements under the G20 Data Gaps Initiative. #### Areas for improvement in methodological implementation (Basic) - Treasury’s compilation procedures are still significantly bound to source data, constraining reclassifications for alignment with GFSM 2014 (e.g., classification of units or statistical treatment of operations). - The Treasury’s mandate to align fiscal statistics to both international best practices and local requirements results in fragmentation of the reporting framework. - There is no systematic analysis of consistency with methodological guidelines; statistical classifications follow legal form rather than economic substance. - Verification of fiscal statistics against external sources could be strengthened (e.g., cross-checks with external sector and monetary statistics, results from TCU audits, financial statements of public corporations). - Past efforts at inter-agency coordination (temporary working group: Treasury, IBGE, Central Bank) were not fully institutionalized. #### External audit (Good) - The TCU is the Supreme Audit Institution auditing the federal government’s financial statements; it operates on a judicial model with constitutional protections aiming to ensure independence. - The TCU opinions on the last three fiscal years’ accounts include major qualifications: - Fiscal Year 2014: Qualified opinion (16 major issues identified and 2 limitations of the audit scope). - Fiscal Year 2013: Qualified opinion (13 major issues identified and 3 limitations of the audit scope). - Fiscal Year 2012: Qualified opinion (4 major issues identified). - The TCU is strengthening its audit methodology through implementation of international audit standards: “Brazilian Standards for the Audit of the Public Sector - Level 1” (NBASP), based on ISSAI Levels 1 and 2, published in 2015; a “Manual of the Financial Auditor” based on international standards was prepared and subject to public consultation in June 2016. #### Comparability of fiscal data (Basic) - The breakdown table of the primary balance of the central government is the key presentation format provided across budget documents, in-year financial statistics, and budget execution reports. - The Central Government Primary Balance Bulletin (“Resultado do Tesouro Nacional” (RTN)) was revamped in 2015 to allow comparability with budget documents. - Other FRL-mandated presentations distinguishing current and capital revenue and expenditure are consistently used in budget documents and final accounts published by the Presidency. - Bridging tables that could explain differences in scope or coverage across documents are not provided, making it difficult for the public to understand differences across documents. - Budget outturns have been slightly different from one report to another in recent years and are not reconciled with fiscal statistics or final accounts; no bridging tables explain differences between RTN, GFS, or BGU formats. - Discrepancies are described as quite limited (Table 1.6) but should be accounted for in fiscal reports to allow transparent understanding of outturns. ### Key statistics and examples of discrepancies - Average absolute deviation between above- and below-the-line central government primary balances: 0.1 percent of GDP. - Average stock-flow adjustments over 2007-2015: around 0.2 percent of GDP. - Public corporations excluded from fiscal statistics: expenditures of 22.1 percent of GDP (referenced in Conclusions and Recommendations). - General government balance sheet exclusions noted: - Government employees’ pension entitlements of around 59 percent of GDP. - Subsoil assets of approximately 89.7 percent of GDP. - Table 1.6 sample discrepancies (in R$ million) for 2013 and 2014 outturns show minor percentage differences between report dates (examples: Discrepancy between 08/2014 and 04/2016: 0.5% net primary revenue; 0.5% primary expenditure; 0.0% primary balance. Discrepancy between 08/2015 and 04/2016: 0.8% net primary revenue; 0.7% primary expenditure; 0.0% primary balance). ### Conclusions and priority recommendations - Overall assessment: fiscal reporting meets good and advanced practices in most areas; coverage of the general government sector and recognition of most assets and liabilities; frequent and timely reporting; annual financial statements audited by an independent supreme audit institution. - Remaining gaps and priorities for improving transparency: - Recommendation 1.1: Expand institutional coverage of fiscal reports by incorporating all public corporations and public banks to provide an overview of the fiscal performance of the entire public sector; this would better account for quasi-fiscal operations by public corporations and public banks. - Recommendation 1.2: Expand coverage of: - (a) balance sheets to reflect the full market value of government infrastructure, subsoil assets, and pension entitlements of all public employees; and - (b) flow statements to capture the associated expenses; to provide a comprehensive view of government net worth and associated costs. - Recommendation 1.3: Enhance integrity of fiscal statistics by: - a. Setting up a permanent inter-agency committee for harmonized classifications in macroeconomic statistics to ensure economic substance prevails over legal form. - b. Recording Treasury–Central Bank transactions according to the most recent international statistical standards, allowing separate reporting of transactions and balance sheets of the BCB and the central government. - c. Conducting regular consistency checks between different macroeconomic datasets to detect misclassifications or inconsistent recording. - d. Including reconciliations of key fiscal aggregates within and between different fiscal reports to explain apparent inconsistencies (e.g., stock-flow adjustments or differences in coverage or accounting basis) as convergence to GFSM 2014 standards proceeds. *Source: Brazil: Fiscal Transparency Evaluation (IMF), extracted from the chapter covering internal consistency checks, historical revisions, integrity of fiscal reports, conclusions and recommendations.* ### 41. Three-year forecasts for key macroeconomic indicators are provided in several ### cr17104 - 41. Three-year forecasts for key macroeconomic indicators are provided in several ### Macroeconomic forecasts: coverage and presentation - The PLDO and the PLOA (and the PPA before them) include, at a minimum, forecasts of: - real GDP growth, inflation, the real/dollar exchange rate, and short-term interest rates. - Time coverage: - Forecasts cover the budget year and between one and three years forward. - Variations across documents (selected indicators and horizons as reported): - PPA 2016-2019 (Presidential Message): Nominal and real GDP growth (with supply breakdown), inflation, short-term interest rates, exchange rate, minimum wage, working population, total investment. Time Horizon: 4 years (2016-2019). - PLDO 2016 (Annex IV.1 – Annual fiscal objectives): Real GDP growth, inflation, short-term interest rates, exchange rate. Time Horizon: 3 years (2016-2018). - PLOA 2016 (Presidential message): Real GDP growth, inflation, short-term interest rates, exchange rate. Time Horizon: 3 years (2015-2017). - PLOA 2016 (Complementary Information–Vol. III, Section XXI): Nominal and real GDP growth (with supply breakdown), industrial activity (2015-18), wage bill growth and levels, oil prices, importations, short-term interest rates, exchange rate. Time Horizon: 2 years (2015-2016). - Bimonthly execution reports: Nominal and real GDP growth, inflation, short-term interest rates, exchange rate, oil prices, minimum wage, nominal wage bill. Time Horizon: 1 years (current year). - The PLOA complements annual forecasts with monthly projections of imports, total wages, price indexes, and oil prices for the budget year. - The Presidential message attached to the PLOA contains fairly detailed analysis of recent outturns and provides a demand and supply breakdown of GDP over the past few years; however, only a short explanation of the macroeconomic scenario is provided to support forecasts. - Forward year forecasts are described as indicative and rely on extrapolation methods rather than detailed analysis. - Forecasts of different components of GDP are not published in budget documents (except the Presidential message contains historical breakdowns). ### Forecast accuracy, bias, and assumptions - Recent performance and bias: - The average deviation between one-year-ahead GDP forecasts and outturns was commensurable with independent forecast practice over the 2000s, but has been systematically negative since 2011. - Deviation reached -3.9 percentage points over the period 2011-2015 (Figure 2.1 referenced). - Comparative benchmarks and context: - The average deviation between real GDP growth one-year-ahead WEO forecasts for G20 countries and outturns reached -0.5 percentage point over the 1990-2011 period (IMF Internal Evaluation Office estimate). - The deviation between MoF forecasts for Brazil and outturns over the 2001-2010 period is slightly larger, at -0.7 percentage point. - The Central Bank’s Focus reports show that the average deviation between the real GDP growth one-year-ahead forecasts at the end of August and outturns over 2011-2015 was -2.7 percentage points; this compares with the -3.9 percent deviation between projected and actual growth in budget documents over this period. - Implications and recommendations: - More extensive discussion of the assumptions underlying the macroeconomic projections could improve their credibility. - Explaining the assumptions and choices leading to the forecast presented in the budget could help inform the public. - The assumptions regarding new fiscal policy measures (especially tax measures) should be communicated because they can have a significant impact on the economy. - There is only a very brief mention of the expected impact of global economic developments on the Brazilian economy in the budget materials. ### Medium-Term Budget Framework (MTBF) and policy anchors - MTBF structure and limitations: - The Brazilian budget system does not include a rolling medium-term budgetary framework. - The PPA is prepared in the first year of a government and defines strategic targets and programs for the next four years, including the first year of the next government. It includes main economic assumptions and fiscal targets for the primary budget balance, debt levels, and nominal deficit. - The PPA covers all central government activities and provides broad estimates of resources allocated to each activity or project during the four-year period, but is described as a strategic planning tool relying on optimistic assumptions regarding resource availability and implementation capacity. - As a consequence, the PPA does not effectively provide a policy anchor for the annual budget process. - Annual guidance: - Annual budget preparation is informed by the LDO submitted every year to Congress. The LDO includes economic assumptions, fiscal targets for the primary budget balance, debt levels, and revenue forecasts for the year of the budget and two years forward. - Neither the PPA nor the LDO presents expenditure estimates at the program or ministry level. - Fiscal objectives and reporting: - The PPA and the LDO set numerical fiscal objectives and regularly report on performance against them. - The PPA contains macroeconomic forecasts and indicative fiscal objectives for the primary balance, the nominal balance, and debt levels; the Ministry of Planning releases an annual evaluation report updating forecasts and targets. - LDO sets fiscal objectives for year t in Annex IV.1 (drafted in April t-1) and compares with outturns in Annex IV.3 (drafted in April t+1). - The key fiscal target is the primary balance of the non-financial public sector (excluding Petrobras and Eletrobras). Targets for primary revenue and expenditure, the nominal balance and net debt are also set but are secondary in practice. - The LDO provides objectives for two forward years, but these are mostly rough indicative objectives and are not backed by robust economic and fiscal projections in published documents. - Shortcomings in strategy communication: - Budget documents do not provide a clear picture of fiscal strategy or show how policy measures will achieve fiscal objectives. - Descriptions of policy intentions for the budget year and medium-term, and explanations accompanying targets, remain limited. - In-year large revisions to targets through supplementary revisions and large adjustors to the main fiscal target undermine the role of the LDO as providing clear guidance to fiscal strategy. ### Investment projects: execution, disclosure, and appraisal - Execution performance: - On average, about two thirds of the investment budget has been executed over the past three years. - Execution of investment budget (LOA planned vs executed): - 2013: Planned investment spending (LOA) R$ bn 107.5; Executed investment spending R$ bn 82.8; Ratio 77%. - 2014: Planned investment spending (LOA) R$ bn 103.0; Executed investment spending R$ bn 75.1; Ratio 73%. - 2015: Planned investment spending (LOA) R$ bn 99.3; Executed investment spending R$ bn 48.2; Ratio 48.5%. - Macroeconomic significance: - Shortfalls are macroeconomically important as Brazil’s public investment is lagging behind other emerging market economies, both in quantitative and qualitative terms (Figure 2.2 referenced). - Brazil’s public investment rate has been consistently below the average of emerging market economies, leading to a relatively low level of capital stock. - The perceived quality of infrastructure is also inferior to the average for emerging economies and for countries in the Latin America and Caribbean region. - Project information and multiyear commitments: - Detailed information on major investment projects is available online (PPA lists ongoing and pre-selected projects with overall cost projections and planned dates), but total amounts of multiyear commitments attached to them are not published. - The PLOA provides aggregate and individual information on planned investment spending, but only amounts to be appropriated for the budget year are disclosed—multiyear commitments are not available in budget documents. - There is separation between investment project expenditure and maintenance/operational costs, but maintenance and operational costs are not presented in a project-specific manner. - Projects under the Programa de Aceleração do Crescimento (PAC) account for approximately two-thirds of federal government investment spending and are subject to deeper scrutiny, including publication of total overall costs, monthly disbursement reports and regular information on expected and realized outputs, and sometimes outcomes. - Appraisal, selection, and procurement transparency: - Investment projects do not systematically go through cost-benefit analyses before selection; when they do, analyses are not made public and do not follow a common standard methodology. - Public procurement procedures are regulated by Law No. 8.666, June 21, 1993, which emphasizes open and competitive public tender; most tenders are available online via the government’s Portal da Transparência. - Ongoing judicial investigations (e.g., “Lava Jato”) indicate past weaknesses in procurement processes and frequent cost overruns. - Reforms: The new Public Companies General Law (June 30, 2016) clarifies procurement rules and procedures for public enterprises; the government has issued directives to improve governance, procurement rules, and controls of SOEs. ### Fiscal transparency, fiscal risks, and public enterprises (Petrobras and Eletrobras) - Exclusion and transparency effects: - Petrobras and Eletrobras, the two largest nonfinancial public corporations, have been excluded from fiscal targets since 2009 to give them flexibility for investment plans; they were also removed from fiscal statistics of the public sector (deficit, debt), weakening fiscal transparency. - Petrobras has been exempted from several public sector procurement, borrowing, and personnel rules. - Fiscal impact if included: - If included in fiscal accounts, they would have caused a further deterioration of the primary surplus of around ½ percent of GDP yearly on average during 2009-14. - Corruption investigations and financial effects: - “Lava Jato” investigations revealed collusion and overcharging in Petrobras contracts with affected contracts valued at about R$ 200 billion; Petrobras estimated overcharging represented about 3 percent of contract value (R$ 6.2 billion). - Petrobras’ net debt almost quadrupled since 2011 to 6½ percent of GDP. - Neither company paid dividends in 2015 (after paying as much as 0.3 percent of GDP in 2009); problems contributed to the recession and fall in tax revenues as they curtailed investment plans. - Both companies represent risks to public banks that have granted them considerable loans and have equity participation. - Response measures: - Both companies adopted measures to improve procurement practices and internal controls, including an anticorruption plan at Eletrobras. - The government approved a new law for public enterprises (2016) and issued directives to improve governance (including strengthening Boards), procurement rules, and controls of SOEs. ### Orderliness: legal framework, timetable, and budget timing - Legal framework and timetable: - The Federal Constitution, Law No. 4320 of 1964, and the FRL set the budget timetable and content. - Article 165 of the Constitution requires the executive prepare draft PPA, LDO, and LOA; Article 35 of the Temporary Constitutional Provisions Act sets deadlines for transmission to Congress and return to the executive. - Table of deadlines (as reported): - PPA: Deadline for Transmission to the Legislative Branch: August 31 of the first year of the presidential term; Deadline for Return to the Executive Branch: December 22. - LDO: Deadline for Transmission: April 15; Deadline for Return: July 17. - LOA: Deadline for Transmission: August 31; Deadline for Return: December 22. - Law No. 4320 provides general rules for preparation, execution, accounting, and reporting of budgets for the three levels of government. - Congressional amendments and implementation gaps: - Article 166 of the Constitution requires amendments to the budget proposals to be compatible with the PPA and the LDO and specify funding from cancelled expenditure or higher revenue; this obligation is not always implemented. - Examples of incomplete identification of costs or funding: - Modification of the social security factor (fator previdenciário) in 2015: both cost and offsetting measures were not identified. - Increase of net revenue allocated to health expenditure: offsetting measures were not identified. - Fragmentation and call for consolidation: - The legal framework is fragmented (Constitution, 1964 law, FRL, and annual LDOs); a consolidated modern organic law would increase transparency and reduce legal uncertainties arising from extensive use of LDOs to set new procedures and rules annually. - Timeliness of budget documents and recent practice: - The enacted budget has been published after the beginning of the fiscal year for the last two years. - The last three budgets were submitted to Congress four months before the beginning of the fiscal year. - 2014 and 2016 budgets were approved by Parliament in December. - The 2015 budget approval and publication were delayed due to the October 2014 general elections. - The 2016 budget was published in January 2016. - Dates of Budget Submission, Approval, and Publication (2014-2016) as reported: - 2014 Budget: Transmission to Congress August 28, 2013; Approval by Congress December 18, 2013; Publication December 30, 2013. - 2015 Budget: Transmission to Congress August 28, 2014; Approval by Congress March 17, 2015; Publication April 22, 2015. - 2016 Budget: Transmission to Congress August 31, 2015; Approval by Congress December 17, 2015; Publication January 15, 2016. *Source: Ministry of Planning; Brazil: Fiscal Transparency Evaluation (excerpts).* ### 53. The three last LDOs have been approved by Congress more than six months after ### cr17104 - 53. The three last LDOs have been approved by Congress more than six months after ### Timeliness and Role of the LDO - Finding: "The three last LDOs have been approved by Congress more than six months after the release of the drafts, highlighting the limits of the framework in a fast-changing macroeconomic environment." - Finding: "While the LDO is supposed to be approved by Congress before the draft budget (PLOA) is released in August, the LDO was approved just before the LOA for the last three budgets." - Finding: "Each time, the adopted LDO has been substantially different from the PLDO, with targets set to match the appropriations and forecasts of the LOA." - Conclusion: "The LDO has thus not acted as a guide for the preparation of the budget, but rather as a legal formality which has not constrained the level of spending." ### Performance Information (Good) - Finding: "For more than a decade, the Brazilian government has been developing performance indicators and evaluations through its planning process and the PPA." - Finding: "The PPA includes for each of its programs high-level performance indicators, objectives, and output targets. All programs in the PPA are required to be evaluated each year." - Finding: "Program managers report on progress against PPA targets, using an online system (SIOP)." - Finding: "Since 2011, the PPA has been significantly revised and streamlined. The number of programs in the plan was reduced from over 300 to 54 thematic programs, covering policy areas." - Finding: "Outcome targets have been de-emphasized in favor of more output and activity based targets." - Finding: "There have been efforts to improve monitoring and reporting on output indicators included in budget documents." - Caveat: "Despite the progress made with reporting performance information, its use in the budget decision-making process is reportedly still limited." - Finding: "The PLOA presents the outputs expected for each governmental programs at the detailed policy measure ('action') level and links it with the budget allocation." - Finding: "An online register of the actions, the Cadastro de Ações, aims at providing qualitative information on the actions planned in the budget of each year." - Finding: "It comprises 54 thematic programs, 42 management and support programs, and 12 special operations programs." ### Public Participation (Good) - Finding: "Since 2010, the government has published a Citizens Budget. It is published alongside the PLOA." - Finding: "It presents, in a non-technical and visual manner, the core information expected from a citizens’ budget, as defined by the International Budget Partnership." - Finding: "It also includes information about the budget preparation and execution process." - Finding: "It provides information on key inputs, outputs, or outcomes of policies per sector and clarifies the funding source of these policies." - Caveat: "The implications of the budget proposal are presented from the point of view of a typical citizen, but the proposal does not provide detailed information for different demographic groups (for example, low-income households or indigenous populations)." - Finding: "An e-learning system, Escola Virtual SOF, provides on-line training and information to all interested citizens for free." - Finding: "A comic book, 'Sofinha and her gang,' presents in a very accessible language the key information on the budget institutions and concepts." - Finding: "A radio program, Budget Time, provides information to the listener in a simple and direct language." - Finding: "The Intercouncil Forum (Forum Interconselho) comprises elected representatives of National Councils and committees and representatives of civil society. It aims at formally incorporating policy experts in the preparation of the PPA." - Finding: "The budget preparation benefits from the expertise of the National Councils, composed of civil society organizations (CSOs) and government representatives, that are in charge of formulating the budget within their policy area." - Finding: "CSOs and citizens can contribute to the legislative process through their participation in public hearings." ### Credibility: Independent Evaluation (Not Met) - Finding: "There is no independent evaluation of the government’s macroeconomic and fiscal forecasts and performance." - Finding: "There is no independent fiscal institution that examines the accuracy of fiscal projections." - Finding: "No budget document provides a comparison of the government’s forecasts with those of independent or consensus forecasts." - Recommendation implication: "Greater comparison of the authorities’ macroeconomic assumptions and fiscal projections with those done outside of government could help improve the quality of fiscal forecasts." ### Credibility: Supplementary Budget (Basic) - Legal framework: "The legal framework clearly mandates that substantial modifications of the budget or increases in the total level of expenditure needs to be approved by Congress." - Three options to modify the enacted budget during the fiscal year: - "Supplementary budget appropriations (créditos orçamentários suplementares) can be enacted through presidential decrees during the fiscal year, as long as the expenditure increase is backed up by identified funding and does not exceed a percentage approved in the LOA (a supplementary budget proposal must be approved by Congress to exceed this limit). During fiscal year 2015, 21 decrees increased budgetary credits for a total of R$ 116 billion." - "Special budget appropriations (créditos orçamentários especiais) are approved by Congress, for new expenditures which are not included in the enacted budget. They must also identify the funding source. During fiscal year 2015, Congress approved 28 laws, increasing budgetary credits by R$ 40 billion." - "Extraordinary budget appropriations (créditos orçamentários extraordinários) cover unforeseen and urgent expenditures. These may be enacted by a provisional executive measure and should be approved by Congress ex post. During fiscal year 2015, six provisional executive measures made available additional budgetary credits for a total of R$ 116 billion." - Practice issues: - "Over the last several years, budget modifications have been approved after, rather than before, their implementation." - Two key deviations from legal requirements: - "Regarding the investment budget for federal public enterprises, in several cases public corporations have modified significantly their investment plans from the budget before authorization from Congress. This is usually resolved before the end of the year, but not always." - "Regarding the 'fiscal' budget (central government), the key issue has been the need to change the fiscal target before implementing changes to budget allocations (as required by law). This has become a crucial issue in recent years, as the initial fiscal targets were based on projections that were too optimistic." - Example: "In some cases, the authorities decided to execute modifications of the budget prior to approval of Congress of the change in the fiscal target. This happened as recently as 2015, when the requested modifications were approved by Congress before the end of the fiscal year." - Oversight: "The TCU recently stressed that these practices were not according to the law, and as a result stricter adherence to the legal framework for supplementary appropriations is expected." ### Credibility: Forecast Reconciliation (Basic) - Finding: "Macroeconomic and fiscal forecasts are revised from one budget stage to another, with little explanation for the reasons for the changes." - Finding: "Changes in one-year-ahead real GDP forecasts from one vintage to another have been especially significant in the past few years, due to the slowing growth of the Brazilian economy (Figure 2.3). Consequently, total revenue projections have also been significantly revised at every new official step." - Finding: "Forecast revisions from one LDO to the next or between a LDO and a LOA are not explained in budget documents. In particular, tables presenting the new forecasts do not contain a reference to the previous forecasts." - Contrast: "In-year forecast revisions introduced in the bimonthly execution reports of the Treasury are better documented." - Legal note: "Article 9 of the FRL states that if after a period of two months, the government is off track to meet its fiscal targets, it should take measures to meet the LDO’s targets." - Practice: "The FRL has made it compulsory to publish bimonthly reports which update the macroeconomic and fiscal forecasts, if deemed necessary by outturns in the first months of the year or by the macroeconomic environment." - Documentation detail: "Tables compare the fiscal forecasts (primary revenue and expenditure, detailed by tax or spending type, and primary revenue) from the previous bimonthly report and the new ones. The reports also provide details of the updated underlying assumptions to each forecast. However, they do not provide a comparison with the assumptions that had been used in the previous report." ### Conclusions and Key Reform Recommendations - Overall conclusion: "Brazil’s budgeting and forecasting practices are basic or good for most principles set by the FTC, but critical weaknesses remain." - Strengths: "Areas of particular strength are the unity of the budget and public participation in the budget process (Table 2.5)." - Key weakness: "The policy intentions for fiscal policy are not discussed in budget documents, nor is the outlook for key fiscal variables such as the budget deficit, primary balance, and public debt ratios." - Recommendation 2.1. Publish a full-fledged medium-term fiscal policy statement. - Purposes and content to include: - "A concise (no more than a few pages) overall view of the government’s economic and fiscal strategy for the medium term;" - "Detailed information on the medium-term macroeconomic scenario, including an analysis of the international macroeconomic environment, an explanation of the assumptions underlying the GDP forecast (which could be broken down according to supply or demand), specific analyses on employment, inflation, the wage bill, and at least a few alternative scenarios to assess the level of uncertainty surrounding the forecasts;" - "A qualitative discussion of the government’s fiscal objectives, as well as a quantitative distinction between the baseline scenario and the impact of new measures;" - "An account of the revision of forecasts and objectives compared with the previous LDO, with a quantitative breakdown of the key revision factors." - Additional note: "Elaboration of a medium-term fiscal policy statement would also help prepare the government and the public for an eventual shift to an MTEF. Preferably indicative and limited in scope at first, an MTEF would require, among other things, a clear distinction between the baseline and the impact of new measures, and include an evaluation of the multiyear commitments the budget is facing due to ongoing investment projects." - Recommendation 2.2. Create an independent fiscal council. - Role and functions: - "A fiscal council is a permanent independent entity with a statutory or executive mandate to assess government’s fiscal policies and performance, and promote sustainable public finances." - "Such a council could at least express a judgment on the realism of macroeconomic and fiscal forecasts, provide ex ante and ex post evaluation of fiscal policy, and assess compliance with the fiscal rules. It could also assess how well different states are complying with their adjustment programs and requirements under the FRL. In addition, the council could provide an assessment on long-term fiscal sustainability." - "For the fiscal council to be effective, it needs a high degree of independence and be appropriately staffed." - Interim step: "The government could at least compare and disseminate its forecasts with the ones published by independent analysts, and provide ex post analyses of differences between forecasts and outturns." - Recommendation 2.3. Initiate a full review of the existing legal framework and prepare a modern organic budget law. - Rationale: - "A consolidation of the legal framework into a single law would increase the overall transparency of the budget process. A modern organic budget law in line with best international practices, which was envisaged in the Constitution, is long overdue. It would also facilitate broader reform of the public financial management system." - "Many emerging market economies have focused in recent years on strengthening fiscal rules, medium-term fiscal frameworks, and management of fiscal risks. Most advanced economies have adopted these reforms after revising their basic budgeting framework, including a modern organic budget law." ### Key statistics and factual points (preserved verbatim) - "The number of programs in the plan was reduced from over 300 to 54 thematic programs." - "It comprises 54 thematic programs, 42 management and support programs, and 12 special operations programs." - "During fiscal year 2015, 21 decrees increased budgetary credits for a total of R$ 116 billion." - "During fiscal year 2015, Congress approved 28 laws, increasing budgetary credits by R$ 40 billion." - "During fiscal year 2015, six provisional executive measures made available additional budgetary credits for a total of R$ 116 billion." - Legal reference: "Article 9 of the FRL states that if after a period of two months, the government is off track to meet its fiscal targets, it should take measures to meet the LDO’s targets." *BRAZIL: FISCAL TRANSPARENCY EVALUATION — Excerpts and findings from the provided content unit.* ### 4. Credibility ### 4. Credibility ### Credibility assessment summary - Independent Evaluation: Not Met. "There is no independent evaluation of the government’s economic and fiscal forecasts and performance." High risk: "Weak credibility of the macro-fiscal forecasts could justify setting up an independent fiscal council." Score/reference: 2.2. - Supplementary Budget: Basic. "Substantial modifications of the budget were frequently implemented prior their formal approval by Congress." Low risk: "Budget execution is actively monitored to not exceed the expenditure ceilings set by the LOA." - Forecast Reconciliation: Basic. "Differences with previous forecasts are mostly discussed on a qualitative basis, except for in-year revisions in the bimonthly execution reports." Medium risk: "Revisions of forecasts have been significant in the recent years." ### III.Fiscal risks — disclosure and analysis - Scope assessed against the Fiscal Transparency Code: - General arrangements for disclosure and analysis of fiscal risks. - Reporting and management of risks from specific sources (government guarantees, public-private partnerships, financial sector). - Coordination of fiscal decision making between central government, subnational governments, and public corporations. - Key government reports that provide information on fiscal risks include PLDO Annex V (Fiscal Risks), Report of the Accounts of the President of the Republic (Prestação de Contas da Presidenta da República, including Balanço Geral da União), Accounts of the National Public Sector (Balanço do Setor Público Nacional), Statistics on the Finances of General Government (Estatísticas de Finanças Públicas do Governo Geral), Reports on Fiscal Management (Relatórios de Gestão Fiscal), Public Federal Debt: Annual Report (Dívida Publica Federal: Relatório Anual), Fiscal Indicators and Indebtedness of States and Municipalities (Indicadores Fiscais e de Endividamento de Estados e Municípios), Bulletin on Finances of Subnational Governments (Boletim de Finanças Públicas dos Entes Subnacionais), Report on Financial Stability (Relatório de Estabilidade Financeira), Profile of Federal State Enterprises (Perfil das Empresas Estatais Federais), and PLDO reports on long-term actuarial projections of the social security systems. 3.1. Disclosure and Analysis - Macroeconomic Risks (Basic) - Macroeconomic uncertainty creates high uncertainty on fiscal outturns; forecasting complicated by revenue earmarking, mandated spending, and indexation (e.g., minimum pensions). - The annual statement of fiscal risks (Annex V of the PLDO) provides sensitivity analyses for: - impact of a 1 percentage point change in GDP, inflation, the exchange rate, policy interest rate, and the wage bill on total tax revenue and total social security revenue; - impact of a 1 percent change in the exchange rate, inflation rate, and policy interest rate on expenditure and debt. - PLDO 2017 introduced an alternative macroeconomic scenario (stress test) for 2016 and 2017 with consequences for selected revenues and expenditures. - Gaps: sensitivity analysis does not cover the budget balance and gross financing needs. - Specific Fiscal Risks (Basic) - The annual fiscal risks statement discusses government financial assets, public banks, public debt, and lawsuits, but does not comprehensively cover: - risks from subnational governments, public corporations, government guarantees, private banks, natural disasters, and concessions/public-private partnerships; - volatility of commodity prices (more relevant to some subnational governments). - When risks are discussed, the relationship to fiscal targets and forecasts is sometimes unclear; correlations among risks (e.g., low growth associated with financial system and SOE risks) are not addressed. - Long-Term Sustainability of Public Finances (Not Met) - No information on medium- or long-term sustainability of key aggregates such as gross debt in budget documents; LDO projects debt only for the budget year and indicatively two forward years. - No analysis of medium- and longer-term economic trends (e.g., demographic developments) on fiscal accounts, nor assessment of available fiscal space or legal constraints that rigidify fiscal balances. - Long-term actuarial projections for social security and pensions exist: - RGPS projects annual balance over the next 45 years. - Civil servants’ pension scheme projected over 75 years. - Military pensions projected in separate reports. - Example projection/result: "under present policies, spending related to the RGPS is projected to increase by almost 9 percentage points of GDP between 2014 and 2060." - Table of long-term pension sustainability (from Fiscal Monitor database, IMF): - Brazil: Pension spending Change 2015-50 (% GDP) 10.2; Accrued Pension Liability (% GDP) 296 - Advanced average: Change 2015-50 (% GDP) 1.0; Accrued Pension Liability (% GDP) 220 - Emerging average: Change 2015-50 (% GDP) 3.0; Accrued Pension Liability (% GDP) 125 - Gaps remain in coverage of long-term spending pressures: pension funds at subnational level, public enterprises, and public healthcare spending. ### 3.2. Risk management — specific topics and indicators - Budgetary Contingencies (Good) - Article 5 of the FRL requires the LOA to contain a contingency reserve aimed at meeting contingent liabilities and unforeseen events. - LDO for 2016 provided that the budgetary contingency would at least represent, respectively, 2 and 1 percent of the net revenue in the PLOA and the LOA. - The contingency reserve was not used during fiscal years 2013 to 2015. - Presidential decrees set ministry expenditure ceilings at the start of each fiscal year, typically below amounts voted by Congress; subsequent decrees may increase expenditures if resources permit. - Bimonthly limits for commitments and cash disbursements are issued by the Federal Budget Secretariat and National Treasury Secretariat. - Requirement to meet the primary surplus target set by the LDO reinforces short-term budget management and limits strategic medium-term budget management. - Management of Assets and Liabilities (Good) - At end-March 2016: - Gross debt of the general government: 73.6 percent of GDP. - Financial assets of general government: 34.1 percent of GDP. - Deposits at the Central Bank: 16.5 percent of GDP. - Loans to BNDES: 8.5 percent of GDP. - Both assets and liabilities have grown in recent years. - Salient risks: higher interest rates on debt and decline in BNDES creditworthiness reducing value of government loans to the bank. - Disclosures of debt portfolio and foreign reserves occur in the statement of fiscal risks; credit risk of other financial assets is reported in a separate section. - Guarantees (Good) - Stock of recorded government guarantees at end-2014: R$ 224 billion (3.9 percent of 2014 GDP). - Much relates to borrowing by states, municipalities, and state-owned enterprises already included in headline public sector debt. - Guarantees to parties whose debts are not included in headline measures include export-credit guarantees and guarantees to Eletrobras, Petrobras, and public banks. - Guarantees disclosure and control by law: - New guarantees, beneficiaries, outstanding stock, and guarantee calls disclosed in Accounts of the President (Sections 1.9.2–5 in the 2014 accounts). - Information also available in quarterly Reports on Fiscal Management. - Guarantees above limits set by the Senate are null and void (FRL Art. 40(5)); federal government limit is 60 percent of net current revenues. - Public-Private Partnerships, Including Concessions (Not Met) - PPPs widely used, especially concessions; World Bank database records 494 projects in transport and water/sewerage (1995–2014) with total estimated investment $133 billion. - Concessions transfer most ordinary risks to concessionaires; government bears policy-change, force majeure, and extraordinary economic-change risks. - Government also bears indirect risk via ownership of BNDES, which finances many projects. - Transparency: - Contracts are generally available on contracting agencies’ websites. - No consolidated report summarizes governments’ total obligations; projects are not recorded on contracting governments’ balance sheets. - Off-balance-sheet assets and liabilities estimated at about 5 percent of GDP. - Legal limits on government payments in PPPs: - Federal government: limited to 1 percent of government revenue. - Subnational governments: limited to 5 percent. - Financial Sector (Not Met) - Aggregate liabilities of all financial institutions supervised by the Central Bank (March 2016): R$ 7,673 billion (130 percent of 2015 GDP). - Of which deposits: 35.4 percent of 2015 GDP. - Of which guaranteed: 17.1 percent of 2015 GDP. - Of which owed by public banks: 61.7 percent of 2015 GDP. - Six largest banks’ deferred-tax assets (December 31, 2015): R$ 233 billion (3.8 percent of 2015 GDP). - Public banks’ aggregate liabilities (March 2016): R$ 3,641 billion (61.7 percent of 2015 GDP); 95 percent owed by Banco do Brasil (BB), Caixa Econômica Federal (Caixa), and BNDES. - Banks’ oversight and soundness: - Central Bank’s Relatório de Estabilidade Financeira notes "solvency of the banking system remained at a high level in the second half of 2015." - Banks’ capital ratios exceed regulatory minimums. - Recession increasing problems for many borrowers; nonperforming loans low but rising. - Fiscal risks related to banks: - Public banks used to carry out government policy, creating fiscal risks via high-risk lending and below-risk pricing. - Public banks more leveraged than private counterparts; combination of large liabilities, low equity, and rapid public-policy-driven expansion in weak economy suggests important fiscal risks. - Central government does not disclose contingent liabilities related to BNDES, Caixa, and deferred-tax assets. - Other institutional details: - Credit Guarantee Fund (Fundo Garantidor de Crédito) guarantees deposits up to certain limits but is not government-guaranteed and is too small for a systemic crisis. - The government explicitly stands behind liabilities of BNDES and Caixa; Caixa and BNDES have been supported through recapitalizations and ad hoc measures (e.g., Empresa Gestora de Ativos (EMGEA) bought bad loans from Caixa with a face value of about RS 7 billion in 2014). - Coordination note: Management of fiscal risks from banks may warrant closer coordinated attention by the Central Bank and the Treasury. - Natural Resources (Not Met) - Natural capital per World Bank (2005): about $15,000 per capita (26th highest out of 152 countries). - Volume of known oil and gas reserves increased by 42 percent since 2005; in 2014 reported at 15 billion barrels (0.9 percent of world total). - Federal government has stakes via Petrobras and royalties; fiscal importance mainly via general tax revenues; for some states (e.g., Rio de Janeiro) commodity-linked royalties and indirect revenues are especially important. - Transparency: ANP publishes annual statistical reports on reserves, production, prices, and royalties but does not provide an assessment of the value of hydrocarbon reserves; similar gaps for mineral reserves and price information. - Environmental Risks (Basic) - Droughts and environmental problems frequently affect public finances; 2014–16 drought caused losses for Eletrobras and the government; 2015 Samarco dam collapse had severe local effects. - The 2015 World Risk Report ranked Brazil 123rd out of 171 countries in exposure to risk to natural disasters (higher ranking = higher risk). - Government publishes extensive information on natural disasters and industrial accidents but not much on their possible fiscal costs; the statement of fiscal risks does not mention environmental risks. ### 3.3. Fiscal coordination - Subnational Governments (Good) - Several states and municipalities are financially troubled; some are not servicing debts to the federal government from earlier bailouts; some failing to fully pay wages and salaries (e.g., Rio de Janeiro missed payments to Agence Française de Développement and Inter-American Development Bank in early 2016). - Underlying causes: falling revenue (commodity-dependent states), rising salary and pension costs. - Subnational debt: - Total subnational debt about 13 percent of GDP. - For states: 11 percent of GDP at end-2015. - For municipalities: 1.8 percent of GDP at end-September 2015. - Three-quarters of municipal net debt is owed by the city of Sao Paulo. - Congress debating a proposal to restructure states’ debt with the federal government. - Most subnational debt is owed to the federal government; debt to parties outside general government is limited. *Source: cr17104 - 4. Credibility (PDF chapter).* ### 4.1 percent of GDP. ### cr17104 - 4.1 percent of GDP. ### Subnational governments: reporting, limits, and risks - States have asked for some debt relief from the federal government; the option under consideration in Congress involves an extension in maturities and some relief in debt service over the next years. - The FRL requires subnational governments to publish quarterly information on their finances (Articles 54–55); some also publish monthly data. Summary information, including some aggregate or consolidated data, is available from the Central Bank and the National Treasury. - Statutory limits: - States must keep the ratio of their net debt to their net current revenue below 2. - Municipalities must keep the ratio of their net debt to their net current revenue below 1.2. - Subnational spending on personnel is limited to 60 percent of net current revenue. - Adjustment programs between the federal government and states impose additional, generally tighter, limits. - Management weaknesses and reporting shortfalls: - The debt limits in adjustment programs have not always been enforced, partly because the looser limits under the FRL have undermined them in practice; some states were allowed to increase borrowing with federal guarantees despite technical assessments highlighting risks. - Not all states and municipalities comply with reporting obligations; subnational information is generally less timely and comprehensive than central government data. - The absence of a fiscal council (as envisaged in the FRL) makes enforcing reporting standards and effective monitoring of fiscal statistics more difficult. - Reporting on the wage bill is inconsistent: personnel spending is measured in different ways in different states, allowing some to circumvent personnel spending limits. - Breaches and liquidity problems: - At end-2015, six states had breached the personnel spending limit: Rio Grande do Sul, Mato Grosso do Sul, Minas Gerais, Paraíba, Goiás, and Rio de Janeiro. - Rio Grande do Sul had also breached the debt limit; Rio de Janeiro and Minas Gerais were close to doing so. - Arrears reported in Amapá, Amazonas, and Roraima despite very low reported debt for several northern states. - In some cases, borrowing rules have exacerbated liquidity problems by limiting borrowing even for governments with low debts. - Key statistic: Gross debt of subnational governments is about 13 percent of GDP. ### Public corporations: scale, disclosure, and quasi-fiscal risks - The three federal public banks are among the public-sector entities with the largest liabilities. - Major nonfinancial corporations not consolidated in fiscal accounts: - Eletrobras: gross liabilities of 1.9 percent of GDP. - Petrobras: gross liabilities of 11.4 percent of GDP; net debt almost quadrupled since 2011. - Drivers of financial stress: - Petrobras: financial stress due in part to corruption, but mainly because of quasi-fiscal activities (principally selling petrol at less than the market price) and heavy borrowing during the oil price boom to develop pre-salt oil fields. - Eletrobras: stressed partly because of obligations to provide subsidized public services without compensation (quasi-fiscal activities), drought effects, and possibly corruption. - Both companies are highly leveraged and viewed by credit-rating agencies as benefitting from implicit government guarantees. - Public banks have high exposure to these companies; example: BNDES exposure to Petrobras exceeded prudent limits and has been gradually reduced. - Disclosure practices: - Transfers between the government and public corporations are disclosed. - The Ministry of Planning and Budget publishes an annual report and website with data on corporation finances; the report is not very timely but corporations publish their own financial statements generally in a timely manner. - No disclosure of quasi-fiscal activities of public corporations—identified as a significant shortcoming given their size and complexity in the case of public banks. - Investigations of corruption have delayed publication of financial statements (e.g., Eletrobras); BNDES’ audit opinion was qualified for not recognizing full loss on its shares in Petrobras; Petrobras reports unresolved problems with internal financial controls. - Key statistics: - Debt of general government is 74 percent of GDP. - Guarantees amount to 4 percent of GDP. - Total off-balance-sheet liabilities (PPPs/concessions) are estimated to amount to about 5 percent of GDP. - Banks have aggregate liabilities of 130 percent of GDP. - Liabilities of Eletrobras and Petrobras combined are 13 percent of GDP (Eletrobras 1.9 percent; Petrobras 11.4 percent). ### Conclusions and recommendations (priorities and specific actions) - Overall assessment: - Brazil meets the standard of good or basic practice on 7 of the 12 principles assessed. - Good information exists on government guarantees, governments’ financial assets and liabilities, and finances of subnational governments and public corporations. - Disclosure and management of fiscal risks remain the weakest area of fiscal transparency. - Transform the statement of fiscal risks: - The statement should focus on large risks and their possible effects on the deficit, the debt, and other fiscal aggregates. - Convert the current collection of largely unrelated and sometimes excessively detailed discussions into a shorter, simpler, better integrated report explaining how and why fiscal outcomes could differ from forecasts. - Establish a risk group to lead centralized monitoring, analysis, and assessment of fiscal risk management. - Dissemination of long-term fiscal projections is a high priority: - Publish a periodic report projecting the government’s primary balance, nominal balance, and debt over at least 10 years—and ideally much longer—under continuation of current tax and spending policies. - Complement projections with a fiscal policy statement indicating medium-term steps to slow and eventually reverse public debt growth. - Fiscal significance of federal public banks: - Additional disclosures needed in the statement of fiscal risks and in the annual report on public corporations (or a separate publication). - Disclose and quantify quasi-fiscal activities of the banks, Eletrobras, and Petrobras. - Explicit prioritized recommendations (with timing preserved exactly as in source): - Recommendation 3.1. Create a risk group to provide a centralized overview of fiscal risk management (identify, monitor, and mitigate). - Recommendation 3.2. Improve the disclosure of fiscal risks in budget documents: - a. Present in the statement of fiscal risks a comparison of past forecasts with fiscal outcomes (April 2017) and then develop fan charts based on stochastic analysis (2018 or 2019)—in both cases to give an indication of the extent of fiscal uncertainty; - b. Ensure that sensitivity analyses show the effect of the changes in the underlying assumptions on total government spending and revenue, the primary and nominal balances, and government debt (April 2017) and, in the longer term, present more fully worked out alternative scenarios (April 2018); - c. Add disclosures of the government’s explicit support of the financial sector and of the risks related to public corporations and subnational governments (April 2017); - d. Ensure that all sections of the statement make clear how the risks under discussion relate to the budget and medium-term fiscal forecast (April 2017); and - e. Include in the annual report on public corporations produced by the Ministry of Planning and Budget, in collaboration with the National Treasury, a chapter on the financial relationships of the government with each of the federally-owned banks and on the quasi-fiscal activities carried out by the banks and other public corporations (2017). - Recommendation 3.3. Improve reporting on the long-term sustainability of public finances: - a. Publish a periodic report on the long-term sustainability of public finances that includes projections of the government’s primary and nominal balances and debt, under current government policy, over the next 20 years at least; - b. Expand long-term sustainability analyses of the social security and public pension schemes provided in the PLDO with further sensitivity analyses and alternative scenarios; expand the methodology to include pension funds not yet covered, such as pension funds of public enterprises; and include projections of expected increases in health care expenditure; and - c. Complement the fiscal policy statement (Section II) with a section on the policy changes envisaged in the medium term by the government to improve Brazil’s long-term fiscal sustainability. ### Summary evaluation: selected principle outcomes and importance (key table highlights) - 3.1.1 Macroeconomic Risks: Basic. Importance: High. - 3.1.2 Specific Fiscal Risks: Basic. Importance: Medium. - 3.1.3 Long-Term Fiscal Sustainability: Not met. Importance: High. - 3.2.1 Budgetary Contingencies: Good. Importance: Low. (2016 LOA ceiling of 1 percent of net revenue; reserve unused 2013–2015.) - 3.2.2 Asset-and-Liability Management: Good. Importance: High. - 3.2.3 Guarantees: Good. Importance: Low. (Guarantees 4 percent of GDP.) - 3.2.4 Public-Private Partnerships: Not met. Importance: Low. (Off-balance-sheet liabilities about 5 percent of GDP.) - 3.2.5 Financial Sector: Not met. Importance: High. (Banks’ aggregate liabilities 130 percent of GDP; public banks large, highly leveraged, used for policy.) - 3.2.6 Natural Resources: Not met. Importance: Medium. - 3.2.7 Environmental Risks: Basic. Importance: Low. - 3.3.1 Subnational Governments: Good. Importance: Medium. (Gross debt about 13 percent of GDP; most owed to federal government.) - 3.3.2 Public Corporations: Good. Importance: Medium. (Liabilities of Eletrobras and Petrobras 13 percent of GDP combined.) *Source: cr17104 - 4.1 percent of GDP.* ### Annex 1. Fiscal Transparency Action Plan ### Annex 1. Fiscal Transparency Action Plan ### 1. Institutional and Statistical Coverage - Recommendation 1.1: Expand the institutional coverage of fiscal reports to incorporate all public corporations and provide an overview of the fiscal performance of the entire public sector. - 2016: Consolidate all missing units (Sistema S, Conselhos Profissionais, Reclassified PCs) into CG fiscal statistics. - 2017: Consolidate Petrobras and Eletrobras into nonfinancial PS (incomplete) fiscal statistics. - 2018: Consolidate BB, CEF, BNDES, and BCB into PS (incomplete) fiscal statistics. - 2019: Consolidate remaining nonfinancial public corporations into PS (incomplete) fiscal statistics. - 2020: Consolidate remaining financial public corporations into PS fiscal statistics. - Recommendation 1.2: Expand the coverage of balance sheets and flow statements. - a. Expand the coverage of balance sheets to reflect the full market value of government infrastructure, subsoil assets, and pension entitlements of all government employees. - 2016: Estimate pension entitlements of military and subnational RPPS based on actuarial studies. - 2016: Recognize market value of government property holdings in GG balance sheet. - 2017: Adopt IPSAS 32-like recording of PPPs/concessions in accounting and statistics. - 2018: Recognize subsoil assets in GG and PS balance sheet. - b. Recognize flows associated with missing assets and liabilities. - 2016: Estimate annual accrual of pension liabilities to civil servants. - 2017: Recognize annual accrual of pension liabilities to civil servants. - 2018: Recognize flows associated with PPPs/concessions. - 2019: Recognize depletion and valuation changes in subsoil assets. - Recommendation 1.3: Introduce reassurances of integrity in the compilation of fiscal statistics. - a. Setting up a permanent inter-agency committee for harmonized classifications in macroeconomic statistics. - 2016: Sign MOU between STN, BCB, and IBGE. - 2016: Hold first meeting of the permanent inter-agency committee (ordinary meetings on a quarterly basis). - 2016: Review the statistical treatment of relationship between federal government and PCs (nonfinancial and financial). - 2016–2020: Disclose information on quasi-fiscal activities (explicit and implicit, including subsidized lending). - b. Record Treasury-Central Bank transactions according to best international practice. - 2016: Recognize Treasury-BCB relationship in fiscal statistics, according to international standards. - 2017–2020: Revise all other fiscal reports, getting them in line with the fiscal statistics. - c. Conduct regular consistency checks between different macroeconomic datasets. - 2016: Develop data model to check consistency between GFS and BOP/IIP, and MFS. - 2017–2018: Implement consistency checks, and disclose summary results in the national publication of GFSY data. - d. Include reconciliations of key fiscal aggregates within and between the different fiscal reports. - 2016: Include reconciliation between RTN and GFSY submission in the national publication of GFSY data; include table with GFSM 2014 data in the RTN, including reconciliations table. - 2017–2018: Include reconciliation between RTN and GFSY submission in the national publication quarterly GFS data. - 2018–2019: Include reconciliation between BGU’s main financial statements and GFSY submission in the national publication of GFSY data. - 2019–2020: Publish the RTN in full compliance with GFSM 2014. Responsible agencies noted in the plan: STN, BCB, IBGE, and other fiscal reporting entities as indicated. ### 2. Fiscal Policy Framework and Institutions - Recommendation 2.1: Publish a full-fledged medium-term fiscal policy statement. - a. Publish a fiscal policy statement to disclose the government’s fiscal strategy for the budget year and the medium term and the fiscal space available to implement new policies. - 2017: Add to the Presidential message attached to the 2017 PLOA a concise (no more than a few pages) overall view of the government’s economic and fiscal strategy for the medium term. - 2018: Annex to the 2018 PLDO a full-fledged fiscal policy statement, including an overview of the government’s economic and fiscal strategy for the medium term and a detailed presentation of the medium-term macroeconomic scenario and its alternatives. - Responsible agencies: STN, SOF. - b. Develop a Medium-Term Budget Framework (MTBF). - 2016: Prepare a first assessment of the medium-term expenditure baseline based on a bottom-up analysis of policies’ costs; evaluate multiyear commitments related to long-term contracts and investment operations. - 2017: Develop an internal MTBF to prepare the 2018 PLDO. - 2019: Publish a detailed and indicative MTBF as an annex to the 2019 PLDO. - 2020: Submit to Congress approval, as part of 2020 PLDO documentation, a detailed MTBF setting mandatory budget ceilings to prepare the LOA. - Responsible agencies: SOF, STN. - Recommendation 2.2: Create a fully functioning independent fiscal council. - a. Create a permanent independent institution to assess government’s fiscal policies and performance, and promote sustainable public finances. - 2016: Create a high-level group in charge of designing the independent institution. - 2017: Integrate findings of the high-level group into the draft organic law for public finances. - 2018: Operationalize the institution. - 2019: Publish the institution’s first reports. - b. Improve the credibility of the government’s fiscal forecasts. - 2017: Set up an internal working group in charge of reviewing the credibility of fiscal forecasts and compare the government’s fiscal forecasts with the ones published by independent and/or market analysts in the Presidential message attached to the 2017 PLOA. - 2018: Compare the government’s fiscal forecasts with the ones published by independent and/or market analysts as part of the fiscal policy statement. - 2019: Publish a comparison of previous forecasts with outturns and explain the gap between them. - Responsible agencies: SOF, STN. - Recommendation 2.3: Initiate a full review of the existing legal framework and prepare an organic budget law. - a. Consolidate the legal framework into a single law to increase the overall transparency of the budget process. - 2016: Initiate a full review of the legal framework for public finances, including an analysis of its gaps with international standards and good practices. - 2017–2018: Prepare a draft organic law for public finances and submit it to an extensive public debate. - 2019–2020: Adopt the new legal framework. ### 3. Fiscal Risk Management and Long-Term Sustainability - Recommendation 3.1: Create a risk group to provide a centralized overview of risk management. - 2016: Create a risk group. - 2017: Form risk group to improve management (identify, monitor, and mitigate) and disclosure of fiscal risks. - 2018–2020: Put the risk group in charge of preparation of statement of fiscal risks. - Responsible agencies: MoF, Min Planning. - Recommendation 3.2: Improve the disclosure of fiscal risks in the budget documents. - a. Enhance the contents of the statement of fiscal risks. - 2018 LDO: Include in the statement of fiscal risks (2018 LDO): (i) a comparison of past forecasts with fiscal outcomes; (ii) sensitivity analyses on key fiscal aggregates. - Ensure all sections make clear how risks under discussion relate to the budget and fiscal forecasts. - Disclose the support for banks and risks from public corporations and subnationals. - 2019 LDO: Include fan charts and fully developed alternative scenarios in the statement of fiscal risks. - Responsible agencies: SOF, STN. - b. Improve the annual report on public corporations. - 2018: Add to the annual report on public corporations a chapter on the financial relationships of the government with federally owned banks and on the quasi-fiscal activities. - Responsible agencies: DEST, STN. - Recommendation 3.3: Improve reporting on the long-term sustainability of public finances. - a. Publish a periodic report on the long-term sustainability of public finances. - 2018: Add to the Presidential message attached to the 2018 PLOA a section on long-term sustainability of public finances, including a projection of the government’s debt under current government policy over the next 10 years at least. - 2019: Attach to the 2019 PLDO a new full-fledged report on the long-term sustainability of public finances that includes projections of the government’s primary and nominal balances and debt, under current government policy, over the next 20 years at least. - Complement the fiscal policy statement (see 2.1.) with a section on the policy changes envisaged in the medium term by the government to improve Brazil’s long-term fiscal sustainability. - Responsible agencies: STN, SOF. - b. Expand long-term sustainability analyses of the social security and public pension schemes provided in the PLDO. - 2018: Include new sensitivity analyses and alternative scenarios to the 2018 PLDO existing annexes on long-term projections of social security and public pensions schemes. - 2019: Attach to the 2019 PLDO a new report on long-term projections of health care expenditure. - 2019: Attach to the 2019 PLDO a new report on long-term projections of the fiscal impact of pension funds of public enterprises. - Responsible agencies: Ministry of Social Security, STN, SOF. *Annex 1. Fiscal Transparency Action Plan — Responsible agencies: STN, SOF, BCB, IBGE, MoF, Min Planning, DEST, Ministry of Social Security as indicated in actions above.* --- ### Annex 2. Transactions Between the Treasury and Central Bank ### Key features of the Treasury–BCB relationship - The institutional relation between the Central Bank of Brazil (BCB) and the National Treasury is characterized by distinctive features that have sizable impacts on balance sheets and fiscal flows: - More than 20 percent of public debt has been issued for monetary policy purposes. - At end 2015, about 20 percent of public debt was used as collateral for repurchase agreements, or repos (compromissadas). - The high balances of the government deposits at the Central Bank partly reflect large unrealized profits of the BCB. - The interest bill of the central government reflects costs of the BCB interventions in the foreign exchange markets. - The public sector debt statistics of the BCB consider the Central Bank to be part of the central government, a feature dating back to 1991. - Since 2008, public debt securities held by the Central Bank under outright ownership are not considered as central government (or general government, GG) debt; only those used as collaterals for repos (compromissadas) are included in debt statistics. - This contrasts with the GFSM treatment where the Central Bank is considered a public financial institution and its entire Treasury securities holdings are considered a liability of the GG. ### Asymmetric treatment of BCB gains and losses - Losses are covered through bond issuances by the Treasury, while profits are credited into the TSA. - Law provides for possibility to retain up to 25 percent of profits; this has been done occasionally (e.g., in 2013). - Profits credited to the Treasury are earmarked and can only be used to pay debt, preferably the debt held by the BCB. - Results of the BCB are separated into those from foreign exchange operations and those from other operations (Law 11.803, 2008); the two are not consolidated. - With large FX reserves accumulation, BCB results became more volatile: - Since 2010, profits averaged about 1½ percent of GDP per year, a great part composed of volatile unrealized gains from revaluation of FX assets. - Valuation gains from FX reserves vary widely, ranging from plus 4 percent of GDP to -4 percent of GDP. ### Fiscal and debt dynamics implications - The treatment of transactions between the BCB and the Treasury complicates assessment of the fiscal position and debt dynamics of the central government (CG): - Many effects of BCB operations are immediately reflected in the interest bill of the central government, complicating assessment of debt dynamics and cost of public debt. - Distribution of unrealized BCB profits can cause net debt of the CG to fall sharply as cash deposits increase, producing fluctuations in CG assets and liabilities not linked to CG fiscal balances. - Asymmetry between instruments to compensate losses (issuance of debt securities) and to absorb gains (deposits in the TSA) has resulted in an increasing stock of gross government debt. - Authorities are considering changes to the relationship between the Treasury and the Central Bank. ### Quantitative instances and episodes - Net exposure through FX swaps in 2015: USD 110 billion, or about 30 percent of international reserves. - Total cost of the FX swaps in 2015: 1½ percent of GDP. - In 2016, net FX exposure reduced to below USD 30 billion and gains from FX swaps amounted to about 1⅓ percent of GDP (through mid-December). ### Transparency and reporting differences with international standards - Treasury reports (RTN): - Present limited information on impact of transactions (e.g., interests paid by BCB on government deposits and transfers related to gains/losses of FX derivatives). - A memorandum table presents more details on accrual and transfers of BCB profits. - BCB fiscal statistics: - Reflect treatment that the BCB is part of the CG; most BCB operations are reflected in the central government interest bill and not as non-interest transactions, differing from international statistical standards. - Transfer of unrealized gains/losses from exchange rate valuation associated with international reserves is treated as other economic flows. - Balance Sheet of the Union (BGU): - Records all flows between the Treasury and the BCB as cash flows and accrued changes in net worth; however, accounting classification does not permit disclosing the split between revenue and financing components of those transactions. - GFS yearbook data submissions: - Reflect some aspects of the relationship (e.g., interests on government deposits, interests paid by Treasury on securities held by BCB). - Do not reflect stocks or flows related to profits or losses of the Central Bank in accordance with international statistics standards. - Under GFSM 2014: profits due to current operations of central banks transferred to government units should be recorded as dividends; compensation of losses due to current operations should be recorded as subsidies to public corporations. - GFSM 2014 prescribes that one-off payments based on holding gains should be recorded as withdrawals of equity (and analogously, compensations for holding losses as equity injections), a treatment differing from current practice in Brazil. ### Annex 2.1 — Treatments of BCB Results in Fiscal Statistics (summary) - BCB accounting result: - BCB reports: Affects interests of Central Government (CG); impacts primary balance of CG via dividends to CG (gains) and subsidies from CG (cover losses). - SNA/GFSM 2014: FX swaps operations affect interests of CG; carrying cost of international reserves affects interests of CG; valuation changes in IR do not affect fiscal results (only other economic flows) and have no impact on primary balance of CG—treated as withdrawal of equity by CG (gains) or capital injection from CG (losses). ### Overall conclusion from Annex 2 - The complex institutional and accounting relationship between the Treasury and the BCB, and its divergence from international practices, requires greater transparency to better inform policymakers and the public, and to improve comparability of key fiscal aggregates such as public debt and primary/overall fiscal balances. *Annex 2. Transactions Between the Treasury and Central Bank — descriptions and numeric values drawn from the source material above.* ### Annex 2. Figure A2.1. How Fiscal, Monetary and Exchange Rate Policies Affect Public Debt ### Annex 2. Figure A2.1. How Fiscal, Monetary and Exchange Rate Policies Affect Public Debt ### Fiscal Responsibility Law: Personnel Spending Limits and Enforcement - Limits for the spending on personnel (in percent of net current revenue): - Federal: Legislative 2.5; Judicial 6.0; Executive 37.9; Other 3.6; Total 50.0 - State: Legislative 3.0; Judicial 6.0; Executive 49; Other 2.0; Total 60.0 - Municipalities: Legislative 6.0; Judicial - ; Executive 54.0; Other - ; Total 60.0 - Definitions and scope: - Total personnel expenditure is defined as the sum of expenditures incurred for both active and inactive workers, and thus includes expenditures for pensions, in-kind benefits, and social security contributions. - Enforcement mechanism: - If any of these limits are reached, subnational governments (SNGs) have a period of eight months to bring spending back within the limit. Otherwise, they lose all of their voluntary federal transfers and permission to contract credit from either the private or public sector. - Two exceptions: credit operations to refinance existing securities debt and credit operations that assist in reducing personnel expenditures. - Practical compliance issues (court of accounts interpretations that affect compliance): - Removal of the income tax in workers’ wages as an expense/revenue (some states do not take retained income tax into account as expense or revenue). - Exclusion of social security and pensions as an expense (some states do not compute expenditure with social security and pensions as personal spending). - Example: In the state of Rio de Janeiro, revenue from royalties directed to the state pension fund are recorded as revenue while the fund covers payments, so those payments are not recorded as spending on personnel. - In some states, legislative and judicial branches’ social security and pensions are reclassified as nonwage spending for the executive branch. - Exclusion of in-kind benefits and outsourcing (some states exclude certain in-kind benefits such as meals and housing, and do not record spending with outsourced workers and contracts with individual service providers). ### Differences Across States in Reporting Personnel Spending (Annex 3, Table A3.2) - Table A3.2 presents Spending on Personnel (PAF) (A) and Spending on Personnel (RGF) (B) for 2015 and the Ratio (A)/(B) in percent. Selected state-level figures (all amounts in reais 2015; Ratio in percent): - Acre: (A) 2,382,171,622; (B) 2,296,412,536.87; Ratio 103.73 - Alagoas: (A) 3,715,295,962; (B) 3,259,335,787.91; Ratio 113.99 - Amazonas: (A) 6,161,007,733; (B) 6,161,062,233.18; Ratio 100.00 - Amapá: (A) 2,047,454,408; (B) 2,052,589,230.35; Ratio 99.75 - Bahia: (A) 15,787,409,427; (B) 15,630,199,957.79; Ratio 101.01 - Ceará: (A) 8,201,595,203; (B) 8,209,276,700.78; Ratio 99.91 - Distrito Federal: (A) 9,114,724,532; (B) 9,100,834,330.54; Ratio 100.15 - Espírito Santo: (A) 6,564,010,145; (B) 6,398,808,182.52; Ratio 102.58 - Goiás: (A) 10,016,772,150; (B) 8,751,032,554.98; Ratio 114.46 - Maranhão: (A) 5,929,303,346; (B) 5,680,808,489.96; Ratio 104.37 - Minas Gerais: (A) 33,985,829,223; (B) 29,603,664,704.24; Ratio 114.80 - Mato Grosso do Sul: (A) 5,663,188,098; (B) 4,591,452,093.61; Ratio 123.34 - Mato Grosso: (A) 6,714,438,202; (B) 6,880,997,277.77; Ratio 97.58 - Pará: (A) 10,251,636,584; (B) 9,114,453,990.36; Ratio 112.48 - Paraíba: (A) 5,158,535,325; (B) 4,931,629,953.74; Ratio 104.60 - Pernambuco: (A) 10,670,615,247; (B) 10,957,956,177.56; Ratio 97.38 - Piauí: (A) 4,699,266,820; (B) 3,466,201,841.26; Ratio 135.57 - Paraná: (A) 17,996,421,695; (B) 16,249,955,649.22; Ratio 110.75 - Rio de Janeiro: (A) 31,681,147,761; (B) 21,396,958,206.76; Ratio 148.06 - Rio Grande do Norte: (A) 4,908,300,201; (B) 4,624,510,839.68; Ratio 106.14 - Rondônia: (A) 3,310,441,104; (B) 3,140,028,449.74; Ratio 105.43 - Roraima: (A) 1,648,690,541; (B) 1,509,903,446.15; Ratio 109.19 - Rio Grande do Sul: (A) 21,814,228,213; (B) 17,513,207,540.70; Ratio 124.56 - Santa Catarina: (A) 11,597,122,693; (B) 11,288,613,294.59; Ratio 102.73 - Sergipe: (A) 3,758,298,332; (B) 3,037,924,179.50; Ratio 123.71 - São Paulo: (A) 71,202,978,692; (B) 75,034,692,688.29; Ratio 94.89 - Tocantins: (A) 3,997,579,616; (B) 3,974,965,747.80; Ratio 100.57 - Observations: - Different interpretations regarding reporting on personnel spending create sizeable differences in assessing SNG compliance with the FRL. - The table indicates that in some states the difference in 2015 was more than 140 percent (example: Rio de Janeiro Ratio 148.06; Piauí Ratio 135.57; Rio Grande do Sul Ratio 124.56). ### Methodological Framework (Annex 4): GFSM 2014 Basis and Primary Sources - Presentation approach: - Estimates compiled in accordance with the GFSM 2014, adopt accrual basis for transactions and market valuation for stocks to the extent possible. - Net operating balance = revenue minus expense (excludes transactions in nonfinancial assets). - Net investment in nonfinancial assets (acquisitions less disposals less consumption of fixed capital) is subtracted from the net operating balance to calculate net lending/borrowing (fiscal balance). - Primary sources: - Transactions: noncash data disclosed in joint STN/IBGE publication “Government Finance Statistics and Government Sector Account, 2014.” - Stocks (assets and liabilities): STN’s data submission for IMF’s Government Finance Statistics Yearbook 2014 (currency and deposits, debt securities and loans), and financial statements of federal government (BGU) and general government (BSPN) for all other assets and liabilities. - FGTS, “Sistema S” units and professional councils: financial statements for extrabudgetary central government subsector. - Public corporations (central level, excluding Central Bank): DEST’s database; Central Bank: its financial statements. - Subnational public corporations: financial statements of the largest corporations. ### Coverage Adjustments and Reclassifications - Institutional coverage differences from main fiscal reports: - Administrative functions (“autarquia” component) of the Central Bank excluded from central government; Central Bank as a whole included in public corporations’ subsector. - FGTS, “Fundo Remanescente do PIS/PASEP”, “Sistema S” units and Professional Councils added to extrabudgetary central government subsector. - Reclassifications into central government: Casa da Moeda do Brasil, DATAPREV, SERPRO, CODERN, TELEBRAS, EMGEA. - Petrobras and Eletrobras added to nonfinancial public corporations’ subsector. - Public financial corporations, central and subnational, added to complete public sector coverage. ### Staff Estimates: Key Components and Assumptions - 1. Subsoil assets: - Oil and gas reserves valuation: volumes × reference prices × estimated government share of 60 percent (government share assumed 60 percent). - Metals (iron ore, copper, bauxite, gold, niobium): reserve data from DNPM (Sumário Mineral 2015); prices from WEO, Bloomberg, and USGS; assumed government take 40 percent. - 2. Pension entitlements and related transactions: - Primary data for civil servants’ pension entitlements: “Prestação de Contas da Presidenta da República” (provision in BGU’s balance sheet for federal; note for subnational). - Military pension entitlements estimated using actuarial projections published in annexes to the PLDO. - Formula for accrual of pension entitlements in 2014: - (1) Accrual of pension entitlements in 2014 Equals - (2) Change in stocks of pension entitlements between 2013 and 2014 Plus - (3) Benefits paid in 2014 Minus - (4) Actual contributions received in 2014 Minus - (5) Actuarial gains and losses in 2014 - Treatment under GFSM 2014 for unfunded employment-related defined benefit pension schemes: - Actual contributions received by the scheme treated as an increase in pension entitlement liabilities (below-the-line transaction). - Actual benefits paid treated as a decrease in pension entitlement liabilities (below-the-line transaction). - “Service” costs (increase in pension entitlements associated with wages and salaries earned in the current period) treated as compensation of employees, broken into: - Actual employer social contributions (paid to the scheme). - Imputed social contributions (residual: total service costs net of actual contributions). - “Financing” costs (increase in pension entitlements because benefits are one period closer to settlement) treated as property expense. - Adjustments performed to convert existing cash-based recording into GFSM 2014-compliant recording: - Exclude actual contributions from revenue. - Exclude payments of social benefits from expense. - Add to expense the difference between the accrued pension entitlements (item 1) and the value currently recorded as social contributions. - 3. Government-controlled PPP assets and related liabilities: - Data source: World Bank’s Private Participation in Infrastructure database (as of May 31, 2016). - Only projects described as concessions and greenfield projects considered. - Classification as government assets when government bears majority of risks (government considered to bear substantial financial risk as owner of BNDES). - GFSM 2014 treatment: when government bears majority of PPP risks, record the investment in assets and impute a liability of the same size. - 4. Relations between the Treasury and the Central Bank: - Explanatory notes to the BGU and Central Bank financial statements provide detailed information on main operations between National Treasury and Central Bank; Table 0.2 reflects these transactions and stock positions according to GFSM framework. - 5. Value of land owned by states and municipalities: - Mission added an estimate of undervaluation equivalent to 2.8 percent of GDP to the stock of land (described as rough but conservative), noting that given extensive ownership by subnational governments this estimate is likely underestimated. ### Elimination of Intra-Public Sector Transactions and Stock Positions (Annex 4, Table A4.1) - Consolidation eliminations described by level (transactions and stocks): - Central government transactions eliminated include: Interest paid by Treasury to FGTS; Treasury grants received by reclassified SOEs; Treasury bonds held by FGTS; Treasury accounts payable to FGTS (“pedaladas”). - General government transactions eliminated include: Interest paid by states and municipalities on Treasury loans; Interest paid by Treasury to states; Treasury grants to states and municipalities; Treasury loans to states and municipalities; Treasury bonds held by states. - Public sector transactions/stocks eliminated include: Taxes paid by public corporations; Interest paid by Treasury to the Central Bank and public banks holding Treasury bonds; Interest paid by BNDES to Treasury, FAT, and FGTS; Interest paid by other public corporations to FGTS; Interest paid by public nonfinancial corporations to public banks; Dividends paid by public corporations, including the Central Bank; Treasury bonds held by the Central Bank; Government’s equity stake at public corporations; Treasury Single Account; Government units deposits at public banks; Treasury, FAT, and FGTS loans to BNDES; Loans from public banks to nonfinancial public corporations; Treasury accounts payable to public banks (“pedaladas”). ### Reconciliation between FTE and National Fiscal Reports (Annex 4, Table A4.2) — Selected Figures (in percent of GDP) - Notes: STN’s Central Government Primary Balance and BCB’s Press Release on Fiscal Policy adopt cash basis for revenue, expenditure and financing (except interest on accrual), institutional coverage follows national definition not fully compliant with 2008 SNA and GFSM 2014. - Key reconciliation line items and values: - Primary balance (above-the-line, cash): -0.3 - Statistical discrepancy: -0.1 - Primary balance RTN, NotImp Bacen (below-the-line, cash): -0.4 0.0 -0.4 -0.2 0.1 -0.5 -0.1 -0.6 - Net interest expenditure (accrual): -4.4 0.0 -4.4 -0.8 -0.2 -5.4 -0.1 -5.5 - Overall balance RTN, NotImp Bacen (modified cash): -4.8 0.0 -4.8 -1.0 -0.1 -5.9 -0.1 -6.0 - Coverage adjustments: -0.4 0.5 0.1 0.0 0.0 0.1 0.0 0.1 - Cash-Accrual adjustments on recognized transactions: -0.4 0.0 -0.4 0.1 0.2 0.0 0.1 0.1 - Net Lending/Borrowing EFP (modified accrual): -5.5 0.5 -5.0 -0.9 0.1 -5.8 0.0 -5.8 - Petrobras: 0.0 0.0 -1.2 -1.2 - Eletrobras: 0.0 0.0 -0.1 -0.1 - Net Lending/Borrowing FTE (with expanded NFPS): -5.5 0.5 -5.0 -0.9 0.1 -5.8 -1.3 -7.1 - Other adjustments: 0.4 0.0 0.4 0.0 0.0 0.4 0.0 0.4 - Public Financial Sector: 0.8 0.1 0.9 - Public Sector Net Lending/Borrowing FTE: -5.2 0.5 -4.6 -0.9 0.1 -5.4 -1.3 -6.7 0.8 0.1 -5.8 - Additional accrual adjustments: -1.2 0.0 -1.2 -3.4 -1.2 -5.8 0.0 -5.8 0.0 0.0 -5.8 - PPP Investment: -0.6 -0.6 -0.5 0.0 -1.1 -1.1 -1.1 - Accrual of pension entitlements: -0.5 -0.5 -2.9 -1.2 -4.7 -4.7 -4.7 - Augmented Net Lending/Borrowing FTE: -6.3 0.5 -5.8 -4.3 -1.1 -11.2 -1.3 -12.5 0.8 0.1 -11.6 *International Monetary Fund — Brazil: Fiscal Transparency Evaluation (selected annexes and tables).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17104.pdf_