News Brief No. 99/3

1. The Central Bank issued this morning a communiqué announcing that the exchange rate will now be determined by market forces. Monetary policy will aim at preserving low inflation achieved under the Real Plan and, in the short term, will respond promptly to significant movements of the exchange rate. Central bank interventions in the foreign exchange markets will be occasional, limited, and designed to counter disorderly market conditions.

2. In the new exchange rate regime, fiscal and monetary policies will have to play an even more crucial role in ensuring price stability and conditions for sustained growth.

3. Fiscal consolidation is our first and foremost priority, to which the Brazilian government remains fully committed. No efforts will be spared to reduce the fiscal deficit at all levels of government and produce the fiscal results announced for 1999–2001 in the Fiscal Stability Program. Additional measures will be adopted, as appropriate, to deal with the fiscal impact of the exchange rate devaluation. The Federal Government is enforcing the agreements concluded with the Brazilian States and has already activated the guarantees contained in those agreements as appropriate.

4. The support of Congress has been essential. Congress has already voted on the majority of the proposals submitted by the Executive branch, including a comprehensive social security reform. New measures were approved by Congress just last Wednesday to compensate for the delay in revenues from the financial transaction tax still under consideration. On January 6, the Senate approved, in a first round, the proposed increase in the financial transactions tax. The second and final vote by the Senate is scheduled to take place this week and will be immediately sent to the House. An increase in civil servants’ pension contributions is expected to be voted on by Congress possibly this week and in any case before the end of this month, following an agreement reached by party leaders. A joint meeting of President Cardoso, Senator Antonio Carlos Magalhães, President of the Senate, and Representative Michel Temer, President of the House, is expected to be held today to consider ways of further accelerating the schedule of votes in Congress.

5. As noted in paragraph 1, monetary policy in the near future will promptly respond to significant depreciation of the exchange rate and ensure low inflation. In this connection, I am recommending that the Committee on Monetary Policy (COPOM)discuss a widening of the interest rate band to allow the active use of the interest rate with an initial upward bias that may be required to maintain low inflation.

6. President Cardoso will chair a meeting of the National Privatization Council (CND) today with a view to accelerating the privatization program, especially in the areas of electricity, water supply, and sanitation.

7. Brazil will intensify its dialogue with all those who have been supporting the Brazilian Stabilization Program: the Fund, the World Bank, the IDB, the BIS, and governments that have provided direct bilateral support. The Brazilian authorities will establish new and more intensive procedures of continuous consultation with the Fund’s management and staff, including the proposed opening of an IMF resident representative office in Brasilia in the near future similar to those of the World Bank, the IDB and other international organizations.