RESULTS REAL PLAN

Since the beginning of the Real Plan, there has been a profound change in exchange rate policy. Previously, the policy was to maintain a fixed real rate with the Central Bank buying exchange in order to ensure a monthly devaluation equal to the difference between domestic and foreign inflation. This policy caused: 1) excessive control of the exchange market by the monetary authorities, inhibiting the development of a market equilibrium, and 2) an increase in domestic debt in order to sterilize the monetary expansion generated by the Central Bank's purchase of foreign exchange.

At the start of the Plan, the Central Bank stopped intervening in the exchange market, letting the market set the rate each day. The rate was to fluctuate freely as long as it did not exceed the ceiling of US$1/R$1. During the first three months of the Real Plan, the Central Bank stayed out of the market, allowing an appreciation of the exchange rate (Graph 9).

Beginning in October 1994, the Central Bank began to intervene in order to avoid wide swings in the exchange rate. It should be noted that the Bank intervened both to buy and to sell in order to keep the rate within a band, but did not announce the upper and lower limits of the band.

Given the continuous appreciation of the exchange rate and its depressive effect on exports, the government decided as of October 1994 to adopt measures that would increase the demand for foreign currency and, thus, reduce the excess offering responsible for the appreciation of the exchange rate. The measures were designed to balance the exchange flow and to avoid the need for Central Bank intervention. Among the measures designed to stimulate the demand for dollars were:

On the other hand, the principal measures taken to diminish the supply of dollars were:

Meanwhile, two new developments toward the end of 1994 damaged Brazil's external position: 1) imports rose massively; and 2) the Mexican financial crisis sharply diminished foreign capital flows to Brazil.

Last December, because of the Mexican crisis, foreign investors became very cautious in dealing with all emerging markets. As regards Brazil, capital inflows fell and remittances rose. This sudden change in the international scene affected the first half of this year significantly. The Mexican crisis and Brazilian uncertainties sparked the outflow of some $3.7 billion from Brazil. At the same time, the current account deficit was about $5.4 billion in the first quarter of the year.

Beginning in March 1995, when there was a gradual recovery of the exchange rate (Graph 9), the limits of the band were expressly stated. Adoption of the exchange bands, by limiting the exchange rate fluctuations around the short-term equilibrium, diminished fluctuations due to changes in foreign exchange supply and demand. At the same time, as basic conditions change, modifying the long-term exchange equilibrium, the limits of the band are reviewed to avoid a misalignment of the exchange rate.

During the second quarter of 1995, a more favorable picture developed on the international scene, a change that was readily apparent from the strong flow of external resources to Brazil. These inflows reached a record peak in July and August (Graph 10). Thus, international reserves are already higher than they were prior to the Mexican crisis, rising from US$31.8 billion in April to US$41.8 at the end of July.

As regards the massive expansion in imports, beginning in the second half of 1994, the demand for raw materials, intermediate goods and capital goods, whether domestic or imported, reached record highs. The demand for imported consumer goods rose even faster. Several factors, in addition to the increased level of economic activity, contributed to the rise in imports. During the second half of 1994, the exchange rate fell about 16% and the average import duty was reduced two percentage points. The tariff reduction was even larger for such items as automobiles, appliances and toys (11%), and for some chemical inputs (18%).

In July 1995, the trade balance (Graph 11) again showed a surplus, ending the series of deficits that had been occurring since the previous November. Exports in July totaled US$4.004 billion, an increase of 7.1% over July 1994. With imports at US$4.002 billion, the trade surplus was only US$2 million.

During January-July 1995, exports totaled US$25.453 billion and imports were US$29.718 billion, producing a deficit of US$4.265 billion. The total foreign trade during this period was US$55.171 billion, or 39.1% greater than that of the same period last year (US$39.677 billion).

	July			January/July
	1995	1994	% Var. 95/94	1995	1994	% Var. 95/94
Export	4,004	3,738	7.1	25,453	23,839	6.8
Import	4,002	2,514	59.2	29,718	15,838	87.6
Balance	2	1,224	-99.8	-4,265	8,001	-153.3
Total Trade	8,006	6,252	28.1	55,171	39,677	39.1

In the first seven months of the year, exports expanded only 6.8% whereas imports practically doubled, indicating that there might be a deficit for all of 1995. The July results were positive, but it would be premature to make a definitive comment on the government measures designed to produce a trade surplus.

Maintaining the trend of the first half of the year, exports of semi-manufactured goods in July rose 51.2% compared to that of July 1994. This increase represented an additional US$302 million in receipts (Table 8).

	July					June
	1995	1994	% Var. 95/94	% Part. 95		1995	% Var. July/June
1. Basic Products	1,026	1,047	-2.0	25.6	28.0	1,100	-6.7
2. Industrial Products	2,887	2,631	9.8	72.1	70.4	2,892	-0.2
2.1 Semi-manufactures	892	590	51.2	22.3	15.8	739	20.7
2.2 Manufactures	1,995	2,041	-2.3	49.8	54.6	2,153	-7.3
3. Special Products	91	60	51.7	2.3	1.6	128	-28.9
Total	4,004	3,738	7.1	100.0	100.0	4,120	-2.8

Table 9 shows that this year's results are related to the high growth of semi-manufactured exports (+ 30%), which reached a record high of US$4.696 billion.

	January-July
	1995	1994	% Var. 95/94	% Part.
	1995	1994	% Var. 95/94	95	94
1. Basic Products	6,283	5,943	5.7	24.7	24.9
2. Industrialized Products	18,630	17,542	6.2	73.2	73.6
2.1 Semi-manufactures	4,696	3,612	30.0	18.5	15.2
2.2 Manufactures	13,394	13,930	0.03	54.7	58.4
3. Special Products	540	354	52.5	2.1	1.5
Total	25,453	23,839	6.8	100.0	100.0

Exports of commodities should continue to show excellent results until the end of the year because of favorable international prices. At the same time, sales of manufactured products, responsible for 50% of exports, have grown only slightly in 1995. This trend indicated the need for measures to promote manufactured exports. Such measures were adopted in April when taxes were reduced on manufactured exports.

Imports in July were US$4.002 billion, or 18.2% less than in June. Relative to July 1994, however, they were 57.9% higher. Table 10 shows imports during the first seven months of this year, highlighting the increase over 1994.

	January-July		Growth			Participation %
Category	1995 1/	1994 1/	Absolute	Relative	Weight	Jan-Jul 1995	Jan-Jul 1994
1. Primary Materials/ Intermediate Goods	13,776	7,840	5,936	75.7	42.8	46.4	49.5
2. Fuels/Lubricants	3,144	2,136	1,008	47.2	7.3	10.6	13.5
3. Capital Goods	6,528	3,695	2,833	76.7	20.4	22.0	23.3
4. Consumer Goods	6,269	2,168	4,101	189.2	29.5	21.1	13.7
4.1 Non-durables	2,740	965	1,775	184.0	12.8	9.2	6.1
4.2 Durables	3,529	1,203	2,326	193.3	16.8	11.9	7.6
4.2.1 Passenger Autos	2,505	498	2,007	403.3	14.5	8.4	3.1
4.2.2 Others	1,024	706	319	45.2	2.3	3.4	4.5
Total	29,718	15,838	13,880	87.6	100.0	100.0	100.0

Source: SRF; Prepared by SPE
1/ Preliminary numbers or numbers under revision

Over the course of the year, imports of consumer goods grew the fastest (+189.2%). Durable consumer goods were up 193.1% while non-durable goods were up 184%.

Imports were rather high in July, indicating that this variable is neither under control nor at a desirable level. Although the government's restrictive measures have had some effect, it is too early to project that monthly imports will fall to a satisfactory level. At the same time, it is hoped that the measures taken to constrain demand and to achieve balance of payments equilibrium over the medium term will continue to affect the trade balance positively. The principal measures taken to reduce imports were: