As of January 1999, Banco Central do Brasil will present fiscal data in two different forms: the traditional form already well-known to those who monitor the evolution of public sector accounts, and the alternative form, involving a distinct methodology that treats the internal debt indexed to exchange according to the cash criterion.

Both forms of calculating fiscal indicators will be announced in such a way that the impact of the January 1999 exchange devaluation on consolidated public sector accounting will become absolutely transparent to society.

It is important that one perceive that abrupt changes in the rate of exchange generate one-time-only impacts on public sector accounts. The early months of a devaluation process are generally marked by an overdevaluation of the currency (an exacerbated process of devaluation that occurs when a country chooses to replace its exchange regime). However, as time passes, the relative prices of the economy tend to settle back and the currency begins revaluating once again, thus attenuating the original costs of the devaluation process on public finance. For this reason, from the methodological point of view, the correct thing to do would be to deal with internal accounts indexed to exchange in the same way the foreign debt is treated. In other words, the impact of the devaluation is perceived under the prism of the cash concept - in this way, the outlay is considered at the moment in which the liability is effectively paid. When viewed on an accrual basis - the manner in which traditional accounting has dealt with internal liabilities tied to exchange indexing - the appropriation of the expenditure occurs at the precise moment in which it is generated.

The fiscal projections embedded in the agreement with the International Monetary Fund (IMF) indicate a process of convergence between these two methodologies for 1999. Calculations indicate that, at the end of this fiscal year, the public deficit as analyzed by traditional accounting will come to 10.3% of Gross Domestic Product (GDP), when viewed in the broader concept (nominal), as compared to 6.9% of GDP when analyzed according to the alternative methodology. These calculations are founded upon the same effort at generating a primary surplus equivalent to 3.1% of GDP that, in its turn, is consistent with the goal of reducing the net public sector debt to a level of less than 46.5% of GDP in 2001.

No alterations are being introduced into the calculation of the primary result which, strictly speaking, is the most relevant indicator in the framework of public finance and a performance criterion used in the agreement with the IMF. The net public sector debt continues being calculated on an accrual basis and is not affected by the use of the alternative methodology which is designed exclusively to provide distinct treatment only for the financial component of these debts.

I - Traditional Methodology

The fiscal indicators calculated by Banco Central do Brasil correspond to the "below-the-line" concept. In other words, the public sector fiscal result is measured by alterations in the stock of the net indebtedness of the nonfinancial public sector.

With this, the net public sector debt (DLSP) and public sector borrowing requirements (NFSP) are calculated and correspond to the nominal change in this debt. Furthermore, the primary result is also calculated and excludes interest flows appropriated in the period from borrowing requirements. And it is precisely this indicator that reflects the government's fiscal effort with the greatest clarity.

The net public sector debt represents the balance of the debts and credits of the nonfinancial public sector plus Banco Central. It is calculated on an accrual basis according to the fundamental principles of accounting.

The internal federal securities debt, which is an integral part of the net debt, is also measured on an accrual basis and, in the case of postset securities, includes changes in the indexing factor.

In nominal terms, the flows of internal borrowing requirements correspond to the variation that occurred between the balance of the internal net debt of the month in question and that of the previous month. The interest flow, calculated on an accrual basis, is excluded from this variation and, in this way, one arrives at the residual figure that is the primary result.

A different type of treatment is adopted for changes in the net external debt. In this case, the calculation method utilized is the conversion of foreign currency flows according to the average rate of exchange in the period. This is a debt denominated in foreign currency and, therefore, changes in the stock of this liability expressed in national currency and generated by fluctuations in the rate of exchange have no economic implications for the foreign party involved. The greater or lesser cost generated at the time of acquisition of exchange resources by the public sector produces an impact only at the time of the foreign payment or, in other words, in the cash concept, and is made explicit at the time of conversion of the flows on the basis of the average rate of exchange.

II - Alternative Methodology

With implementation of the freely floating rate of exchange in January of this year, the rate of exchange (R$/US$) went through a period of intense volatility and, at the end of February, had climbed to a level of R$ 2.0648 per dollar, an obvious example of the phenomenon of overdevaluation.

In the traditional method of calculating the NFSP, this volatility produces fluctuations in internal nominal interest, with impacts on the nominal concept of borrowing requirements. This movement results from changes in the balances of market held federal public securities indexed to exchange variations. However, the immediate impact on the rolling of this debt is only slight, since the average maturity term of papers indexed to exchange corresponded to 13 months and 28 days in the month of January, with 48% of the total scheduled to mature during the course of 1999.

For all of the above stated reasons, Banco Central do Brasil will announce the fiscal results according to two distinct methodologies as of January 1999: i) the traditional methodology, in which the accrual effect of the devaluation will be dealt with as an interest expenditure and, ii) the alternative methodology, in which the impact of the devaluation will be calculated according to the cash concept. In this way, the same treatment that is already given to the foreign debt, will be extended to internal accounts indexed to exchange variations.

Economic Department

Brasília, 4.12.1999