Brasília, Brazil
November 3, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
United States of America

Dear Mr. Köhler:

In its letter of November 13, 1998, the government of Brazil requested support from the Fund in the form of a stand-by arrangement (SBA) for a period of 36 months. That letter, and our subsequent letters requesting the completion of the periodic reviews under the SBA—the fifth of which was completed by the IMF Executive Board on May 31, 2000—had attached a Memorandum of Economic Policies (MEP) describing the government's program of economic policies that has been supported under the SBA. The government remains fully committed to the thrust of that program. The MEP attached to this letter outlines the progress to date in implementing the government's economic policies and discusses its current economic program and the economic outlook for the remainder of this year. As usual, also attached is a Technical Memorandum of Understanding that sets out the specific quantitative targets (in the form of performance criteria, indicative targets, and structural benchmarks) through the end of this year, that are to be observed under the SBA.

Reflecting the success of the policies that have already been implemented, Brazil's economy has continued to perform strongly this year, with the economic recovery accelerating, inflation declining, the external accounts improving, and the fiscal performance strengthening further. We believe that the reforms that are currently underway and which are detailed in the attached MEP will be instrumental in promoting sustainable, noninflationary economic growth, lead to further improvements of Brazil's external accounts, and help to address Brazil's priority social needs. The government stands ready to take additional policy measures, as needed to ensure the achievement of its overall objectives. We look forward to continued support from the Fund to these policies.

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

Yours sincerely;

Brazil—Memorandum of Economic Policies

Brazil has successfully completed the first five reviews under the Three-Year Stand-By Arrangement (SBA) from the International Monetary Fund (the Fund) that was approved by the Fund's Executive Board on December 2, 1998. This Memorandum of Economic Policies (MEP) reviews the performance of the Brazilian economy so far in 2000, and outlines the proposed program framework for the remainder of this year, in light of the updated economic and policy outlook.

Economic Performance to Date in 2000

Brazil's economy continued to perform strongly to date in 2000, with the economic recovery accelerating, inflation declining, the external accounts improving, and the fiscal performance strengthening further. Gross domestic product (GDP) grew by 3.6 percent on average in the first half of 2000, compared with the same period in 1999, reflecting a seasonally adjusted annualized growth rate of 4.8 percent compared with the second half of 1999. Employment expanded by 5.1 percent in the 12 months to September 2000. Due to significantly improved prospects for finding a job, the increase in employment was accompanied by strong reentry into the labor market. Nevertheless, the unemployment rate declined from 7.4 percent in September 1999 to 6.7 percent in September 2000.

Inflation remained subdued, with consumer prices, as measured by the broadest national index (IPCA) that is the yardstick for the inflation targeting framework, increasing by just 1.6 percent in the first half of the year. It accelerated temporarily in July and August, reflecting increases in administered prices and the effects of adverse weather condition on food prices, but has resumed a clear downward trend since September. The 12-month rate of increase in the IPCA declined from 8.9 percent in December 1999 to 6.5 percent in June 2000—significantly below the 7.0 percent central target for that month in the program—, picked up in July–August, but slowed down again to 7.7 percent in September, 0.2 percentage points above the upper limit of the inner band in the program. The general price index (IGP-DI), in which prices of tradable goods have a substantially larger weight than in the IPCA, rose by 8.1 percent in the first nine months of 2000, reflecting a further increase in the relative prices of those goods.

Brazil's external trade performance continued to improve, albeit at a somewhat slower pace than initially projected. The trade balance shifted into a surplus of 0.7 billion in the first three quarters of 2000, from a deficit of US$0.8 billion during the same period of 1999, with exports rising by 18.2 percent in value terms, well in excess of the 13.6 percent growth in imports during the same period. The strong export performance was led by manufacturing exports, which grew by almost 23 percent in volume terms in January–September 2000, compared with the same period in 1999. Average export prices grew by 2.6 percent over the same period. The recent increase in imports mainly reflected a strong rebound in the volume of intermediate good imports and the high international prices of oil products, which account for over 10 percent of total imports. By contrast, imports of consumer durables and capital goods declined in volume terms in the first nine months of 2000, compared to the same period in 1999, pointing to continued import substitution.

The services account of the balance of payment posted a cumulative deficit of US$18.0 billion in the first three quarters of 2000, only marginally lower than in the same period of 1999, with a small increase in net interest payments abroad and a decline in net transfers from abroad being more than offset by lower profit and dividend remittances. As a result of these developments, the current account deficit of the balance of payments declined to US$15.9 billion in January–September 2000, from around US$17.3 billion in the same period of last year. The deficit was more than fully financed by net foreign direct investments (FDI), which reached US$21.3 billion during the first nine months of 2000, notwithstanding a slowdown in the pace of privatizations.

The continued strengthening of market confidence in Brazil's economic performance was also reflected in improved access to foreign financing, with net issues of medium- and long-term debt inflows reaching a total of about US$5.7  billion through September. Sovereign debt issues in international capital markets, at declining spreads, amounted to US$11.4 billion—of which US$6.1 billion reflected exchanges to retire outstanding Brady bonds—in the first three quarters of the year. The total external debt has declined to US$232 billion (40.8 percent of estimated GDP) in August 2000, from about US$241 billion (45.6 percent of GDP) at end-1999, also reflecting the repayment (partly ahead of schedule) of most of the international support package of 1998. Only 12 percent of this debt, consisting mostly of trade financing, is of original maturity of one year or less. All the quarterly ceilings in the program on the external debt of the nonfinancial public sector were observed with ample margins.

Fiscal developments at all three levels of government have been substantially better than programmed through the first nine months of this year. The accumulated primary surplus of the consolidated public sector in January–September 2000 amounted to R$35.3 billion (4.4 percent of estimated period GDP). In the 12 months to September, the primary surplus reached a record R$35.8 billion (3.4 percent of estimated period GDP), compared with a program target for the year as a whole of R$36.7 billion, equivalent to 3.4 percent of projected GDP. As a result of the substantial primary surplus, the declining trend of domestic interest rates, and a relatively stable exchange rate, the public sector borrowing requirement (PSBR) declined from 10 percent of GDP in 1999 to 3.8 percent of GDP in the 12 months to September 2000. The net public debt at end-September 2000 stood at R$548 billion (equivalent to 48.5 percent of estimated GDP), marginally above the indicative target in the program.

At the central government level—defined to include the treasury, the social security system and the central bank (BCB)—the strong performance in the first nine months of the year (a primary surplus, measured above the line, equivalent to 2.6 percent of the estimated period GDP) mainly reflected the maintenance of tight limits on discretionary expenditures. Despite continued growth in the combined revenue from taxes and social security contributions, overall central government revenues declined slightly in relation to GDP, reflecting, among others, reduced receipts from concessions, reductions in the rate of the financial transactions tax (CPMF), and the disappearance of the surplus in the petroleum account of the Treasury. In order to arrest the erosion of the surplus of the petroleum account, the government increased in July the ex-refinery prices of gasoline and diesel oil by 15 percent, and reduced the subsidy to liquefied gas (GPL). The deficit of the public social security system for private sector workers (INSS) has remained basically unchanged in nominal terms in the first nine months of 2000, compared with the same period in 1999, reflecting the favorable impact of the strong growth of formal employment on social security contributions, improved enforcement, and the initial effects of the social security reforms enacted in recent years.

The consolidated primary surplus of the states and municipalities in the first nine months of 2000 rose significantly, to the equivalent of 0.7 percent of estimated period GDP, from 0.4 percent of GDP in the corresponding period of 1999. The financing constraints embedded in the debt agreements negotiated with the federal government, as well as a strong revenue performance, contributed to the improvement in the finances of the states. The federal government has recently concluded similar debt restructuring agreements with about 180 municipalities, including the largest ones. The public enterprises also performed strongly in the first nine months of 2000, posting a primary surplus equivalent to 0.9 percent of period GDP, led by the federal enterprises, in particular the state oil company (Petrobrás), which has benefited from the continued high level of international oil prices, since its production is equivalent to three quarters of the domestic consumption of petroleum products.

The government has also made significant further progress in structural fiscal reform. As a major step toward fiscal sustainability, the Fiscal Responsibility Law was enacted in early May, after being approved by congress with a large majority. This law, among other things, prohibits financial support operations among different levels of government; sets limits on personnel expenditures of federal and local governments; and requires that limits also be set by the senate, upon proposal by the President, on the indebtedness of each level of government. Such limits have been proposed by the President. The law also requires substantial improvements in transparency and accountability for the management of public resources. Complementary legislation on penalties for violations of the requirements of the law by public officials (the "fiscal crimes" law) has also been approved by congress recently. In June, the senate approved the Multi-Year Plan for 2000–03 (PPA), which outlines the government's strategy for allocating federal budget resources among spending programs over the same period, and aims at enhancing predictability, accountability, and efficiency in federal budgetary spending.

The government's efforts to protect core social programs and improve the quality and efficiency of social spending in recent years have begun to bear fruit, as reflected in the improvements in social indicators that were revealed by the preliminary results of the 1999 household survey (PNAD99) that were released by the National Institute of Statistics (IBGE) in July 2000. The PNAD99 showed, among other things, important advances in education and health care, and some improvement in income distribution.

In recent months, the privatization of the three large electricity generation companies has been delayed by the need to modify their respective privatization models, and that of the former state bank of São Paulo (BANESPA) by repeated judicial challenges. However, several state energy companies (CELPE, CEMAR), a state gas company (Gás Sul), a state sanitation company (Manaus Saneamento), and the state bank of Paraná (BANESTADO) were successfully privatized this year, generating total receipts of R$4.7 billion. In addition, substantial private sector involvement in the energy sector is already being achieved through joint ventures, with minority participation of Petrobrás and Eletrobrás, for the new thermoelectric power plants and electricity transmission lines. Also, the government carried out as scheduled the sale of a large noncontrolling stake of Petrobrás, for a price of R$7.2 billion.

The BCB has continued to successfully implement its inflation targeting framework for monetary policy, with a view to anchoring price expectations to a gradually declining target path for inflation. As reported in the BCB's quarterly inflation report of September 2000, on the basis of the interest rates that prevailed at the time, annual inflation was projected at 6.7 percent by end-2000 (slightly above the 6 percent central target, but well within the 4–8 percent target range for end-2000), and at 3.7 percent by end-2001 (compared with a central target of 4 percent). To minimize risks of a more significant excess over the target for end-2000, the BCB has kept the annualized overnight interest rate (SELIC) unchanged at 16.5 percent since July 19, 2000.

The BCB also has continued its efforts to improve the functioning of credit markets, and facilitate a narrowing of intermediation spreads in the banking system. From October 1999 to September 2000, average spreads have been reduced by 15.5 percentage points. In part, this reflects the lowering of minimum reserve requirements for demand deposits, from 65 percent in October 1999 to 45 percent as from June 2000. This has promoted a sustained recovery in bank credit to the private sector in recent months. In addition, the regulatory prudential framework has continued to be improved, particularly through the implementation of a forward looking loan classification system and of a new system of capital charges related to interest rate risk. The capital base of domestic banks has also been strengthened, a fact which has supported the recovery of credit to the private sector in recent months. The BCB has further strengthened banking supervision, including through the creation of separate departments for onsite and offsite supervision, and the hiring and training of new staff.

Continued efforts to improve public debt management and the secondary market for government debt, together with the strengthened market confidence and declining inflation expectations, have allowed the government to increase the average maturity of total domestic securitized federal debt outstanding in the market to 29.3 months (14.3 months for securities placed through auctions) at end-August 2000. The average maturity of new issues has also increased from 16.8 months in February 2000 to 24.8 months in August 2000. At the same time, the share of fixed-rate securities has risen from 9.2 percent at end-1999 to 15 percent at end-August 2000.

Policies and Prospects for the Remainder of 2000

In view of the sustained and broad-based strengthening of economic activity, GDP growth is expected to reach 4 percent on average in 2000, and to accelerate further in 2001. Assuming continued moderation in wage adjustments, the strong growth of output should be reflected in a sustained further growth of employment, and a continued decline in unemployment in the rest of this year and beyond. Following the above-mentioned temporary acceleration in the third quarter, the rate of inflation is expected to resume its downward trend in the fourth quarter, to 6½–6¾ percent by year-end.

The external trade balance is projected to be in broad equilibrium for the year as a whole, as the continued strong growth of manufacturing exports is expected to be offset by the persistence of high international oil prices, relatively depressed prices of some important agricultural exports, and the pickup in imports. The current account deficit is likely to rise slightly in value terms from the US$25 billion recorded in 1999, but to decline in relation to GDP, from 4.7 percent of GDP in 1999 to under 4½ percent of GDP in 2000. This deficit is projected to continue to be fully financed by FDI.

Other medium- and long-term (MLT) capital inflows are expected to show a sizable positive net balance, reflecting, in particular, a decline of MLT debt amortizations, and improved access to international capital markets by both official and private borrowers. Overall, Brazil's external public debt at year-end is projected to be well under the US$95.5 billion proposed ceiling in the program, of which at most US$4.0 billion would be of original maturity of one year or less.

The overall balance of payments is expected to show a moderate surplus, allowing some rebuilding of net international reserves (NIR), which will therefore remain comfortably above the US$25 billion floor in the program for the rest of this year. On the assumption that, as is the government's intention, no further purchases are made under the SBA, gross international reserves at end-2000 are projected to be equivalent to 5.3 months of imports of goods and nonfactor services, and to over 56 percent of short-term debt on a residual maturity basis (about 140 percent if trade credits are excluded).

For 2000, the program envisaged an increase equivalent to about 0.2 percent of GDP in the primary surplus of the consolidated public sector from its 1999 level (equivalent to 3.2 percent of GDP). It is therefore proposed that the cumulative primary surplus target for 2000 in the program be set at R$36.7 billion, equivalent to about 3.4 percent of projected GDP. Given the current prospects for the finances of state and local governments and their enterprises (see below), this target appears to be consistent with the revised budget framework law for 2000, approved by congress in June, which mandates a combined primary surplus of the central government and the federal enterprises of at least R$30.5 billion for this year.

Current projections put the central government surplus at around R$23.5 billion (2.2 percent of GDP). A reduction in revenues relative to GDP—partly reflecting the disappearance of once-off revenues recorded last year—will be largely compensated by the ongoing efforts to contain and rationalize primary spending, while safeguarding priority programs, especially in the social areas. The decline of the central government primary surplus in the latter part of this year reflects a number of factors, in particular the 0.08 percentage points reduction in June in the rate of the CPMF; higher expenditures on pensions, following the adjustment of minimum pensions in April and of other benefits in June; and an acceleration of spending on current and capital goods and services, following the approval of the budget in May.

The good performance of the states' and municipalities' finances so far in 2000 is expected to be largely sustained in the rest of the year, reflecting the effects of the debt restructuring agreements mentioned above, and also continued strength in revenues. Current projections put the consolidated primary surplus of these governments at around R$5.6 billion (0.5 percent of GDP) in 2000. The fiscal performance of the public enterprises is also expected to remain strong, with a projected primary surplus of around R$7.6 billion (0.7 percent of GDP) for the year. This reflects in particular, the favorable impact of still relatively high international oil prices on the finances of Petrobrás. Taken together, these projections lend confidence that the targeted primary surplus for the consolidated public sector in 2000 will be achieved.

Under the working assumptions of a broad stabilization of the overnight interest rate and the exchange rate around their current level, the PSBR is projected to decline to 4.6 percent of GDP, and the net public debt not to exceed R$584.5 billion (about 50 percent of GDP), after allowance for privatization revenues and the planned recognition of previously unrecorded liabilities and other debt adjustments, as set out in the attached Technical Memorandum of Understanding (TMU). The government also intends to continue its efforts to increase the share of fixed-rate securities in the domestic public debt, further raise the average maturity of its domestic debt, and gradually reduce the foreign-exchange indexed debt outstanding. The government is also improving the composition of its external debt by extending duration, smoothing the amortization profile, and diversifying the currency mix.

The government intends to sustain its structural fiscal reform effort in the rest of this year and into 2001. Efforts will continue to be made in particular to secure as early as possible approval of the last two remaining pieces of implementing legislation for the administrative reform; the pending bills for complementary pension funds for private and public employees; and the proposed social contribution for retired civil servants.

The government is also continuing its efforts to secure the necessary political support for reforms of the tax system. These reforms include: (i) a bill to modify the existing bank secrecy legislation, aimed at facilitating tax enforcement; this bill has been approved in the senate and is now being considered in the Lower House of Congress; (ii) a new tax code, including provisions to limit the scope for tax avoidance, erosion of the tax base, and excessive tax litigation; (iii) a bill transforming the rural property tax into a special contribution to finance land reform; and (iv) a new proposal for the reform of indirect taxation, that envisages, inter alia, the unification across the federation of the base and the rate structure of the state-level VATs (ICMS), a provision which will help end the current proliferation of tax incentives under this tax; and the progressive replacement over a three-year period of the current cascading social contributions (COFINS and PIS-PASEP) with single-stage ones, or the introduction of deductions or credit mechanisms aimed at eliminating the cascading and its attendant distortions. The government has also recently submitted to congress a proposed constitutional amendment establishing an explicit system for taxing oil products, to replace the current cross-subsidy arrangement embodied in the petroleum account of the federal government, and to offset the potential adverse impact on federal revenues of the scheduled liberalization of the oil market, at the end of 2001.

Despite the above-mentioned delays, for the most part outside the government's control, the government will continue its privatization efforts in the remainder of this year and in 2001. In particular, it will press ahead with its efforts to privatize BANESPA, the sale of which is scheduled to take place on November 20, 2000, and the national reinsurance company (IRB), and will also continue preparations for the privatization of the remaining state banks in 2001 and the privatization of the large electricity generation companies.

The government submitted to congress in August a budget proposal for 2001 envisaging a central government primary surplus of R$28.1 billion, which would facilitate the achievement of a consolidated public sector primary surplus equivalent to at least 3.0 percent of projected GDP. At the same time, and with a view to signaling its commitment to sustained fiscal discipline through the end of the current administration, the government announced a target of 2.7 percent of GDP for the consolidated public sector primary surplus for 2002. The proposed budget for 2001 will allow the federal government to address priority spending needs, especially in the social areas, while safeguarding fiscal sustainability, as the public sector net debt is expected to continue to decline. Among recent initiatives in the social areas are intensified expenditure efforts in health, education, and income support programs in regions with social development indices below the national average (Programa Alvorada), and in anti-crime and civil protection (Plano Segurança).

Monetary policy will continue to be conducted within the inflation targeting framework, the institutional basis of which the government intends to strengthen in the course of next year by proposing to congress a revised organic law for the central bank. In this context, the actions of the BCB, and, in particular, changes in the SELIC will continue to be guided by the inflation outlook. The inflation target for 2002, which was announced in June, envisages a further decline in consumer price inflation to 3.5 percent, again with a tolerance interval of ±2 percentage points. On the basis of the periodic discussions between the BCB and the Fund staff, the latter will report to the Executive Board of the Fund on the conduct of monetary policy and its assessment thereof during each scheduled review of the program. These discussions supplement the consultation mechanism on deviations of the actual 12-month rate of inflation from the target path established in the context of the fourth review of the program, and together they replace the traditional ceilings in the program on net domestic assets (NDA) in the BCB.

The BCB is setting up a real-time gross settlements system to improve payments arrangements and significantly reduce default risks. The BCB will also continue its efforts to further strengthen its banking supervision functions, in cooperation with the various supervisory authorities; improve the functioning of domestic financial and capital markets; and further enhance transparency of its own operations. The BCB is also carrying out an in-depth audit of the federal banks, which follows an assessment made by external consultants that has been made available to the public; these inputs will be used to define, as rapidly as possible, an appropriate strategy for strengthening these banks.

Substantial further steps were taken to promote dialogue, and enhance macroeconomic and policy convergence within Mercosur. The 3 percent temporary surcharge on the common external tariff that was agreed in 1997 is envisaged to be eliminated in 2001, and a number of items that have been kept in exception lists will converge to the common external tariff. Only a limited group of items will remain in exception lists and full convergence will occur gradually until 2005. As a first step in improving macroeconomic coordination within the region, efforts are being made by the Mercosur members to harmonize macroeconomic and fiscal statistics. Mercosur member countries have also agreed to announce harmonized fiscal targets by March 2001. The government remains committed to further multilateral trade liberalization, in the context of negotiations that include agricultural products. It is already pursuing discussions with a number of countries and regional blocks toward mutual reductions of trade barriers.

Progress continues to be made in the statistical improvements that are needed for Brazil's subscription to the Special Data Dissemination Standard (SDDS), which is planned by end-2000. The publication, for the first time in early October, of quarterly estimates of nominal GDP through the second half of the year 2000 represents an important step in this direction; these quarterly estimates will be updated each quarter.

In sum, Brazil has continued its successful economic performance into the second year of the program. The government remains fully committed to the policies and targets in the program for this year, but is requesting some modifications in the timetable for certain structural benchmarks of the program, to reflect delays, largely out of government control, in some of the envisaged structural reforms and in the privatization program. The policies and targets for the third year of the program supported under the Stand-By Arrangement will be discussed early in 2001.

Brazil—Technical Memorandum of Understanding

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

I.  Phasing of Purchases and Reviews

The general phasing of purchases and reviews through 2001 is shown in Table 1 below. Accordingly, after completing the sixth review, which will make available to Brazil a purchase under the credit tranches (CT), there will be two more reviews and four more purchases under the CT in the year 2001. Performance criteria (PCs), indicative targets (ITs), structural and statistical benchmarks, and other relevant program parameters for 2001 will be established during the seventh review under the arrangement.

Table 1. Brazil: Phasing of Purchases and Reviews

II. Quantitative Targets

1.  Fiscal Targets

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

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

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

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

b.  Indicative target on the net debt of the consolidated public sector ¹

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

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

Deviations of the net debt of the consolidated public sector from the above ITs will be taken into account during the relevant reviews in setting or revising the PCs for the primary balance of the consolidated public sector for subsequent periods.

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

2.  External Sector Targets

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

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

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

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

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

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

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

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

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

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

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

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

After June 30, 2000, any increases in foreign currency-denominated claims (both spot and forward) against residents, or against foreign branches or subsidiaries of Brazilian institutions, do not count toward NIR in the BCB.

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

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

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

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

3.  Monetary Targets

a.  Consultation mechanism on the 12-month rate of inflation

The quarterly consultation bands for September-December 2000 around the target for the 12-month rate of inflation in consumer prices (as measured by the Indice de preços ao consumidor ampliado (IPCA)), remain as specified under the fifth review (EBS/00/82):

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

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

III.  Structural and Statistical Benchmarks

A. Structural Benchmarks

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

• Substantial progress in implementing the government's privatization plans for the year 2000, including the privatization of BANESPA.

• Development of a new off-site banking supervision system.

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

In 2001²

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

• Resolution of most of the state-owned banks to be completed, including the privatization of the state banks of Amazonas (BEA), Ceará (BEC), Goiás (BEG), Maranhão (BEM), Piauí (BEP), and Santa Catarina (BESC).

• Implementation of the new off-site banking supervision system.

• On the basis of the new off-site banking supervision system, development of a rating system for banks that will serve as a basis to determine the frequency of global consolidated inspections (GCIs).

• Implementation of methodologies and programs to evaluate the performance of the banks' own internal risk measurement models for analyzing market risk.

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

B.  Statistical Benchmarks

By end-December 2000

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

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

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

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

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

IV.  Disclosure of Specific Information

Specific data to be provided by the authorities to the Fund staff include the following (at the indicated frequencies, and lags):

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

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

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

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

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

• Outstanding stocks of US$-indexed federal debt by instrument, showing auction values (preço de lastro) and updated nominal values (valor nominal atualizado), as well as information on rollovers of these instruments, showing the face value of the amounts falling due, and new placements of this debt (following each auction, with a one-day lag);

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

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

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

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

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

V.  Program Assumptions for Selected Variables

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