Dear Mr Köhler:

1. Since the last review of the program, Brazil has continued to make important progress in several areas. Indicators of both inflation and inflation expectations are converging to the government’s targets, allowing monetary policy to be eased. Thanks to the government’s policy efforts, the economy has clearly turned a corner, and we anticipate a return to economic growth on a sound basis. The external sector continues to perform strongly, with increasing diversification of export markets, goods and services despite the weak international environment.
   
   

2. The government’s structural reform agenda is proceeding expeditiously through Congress; the pension reform was approved in a first vote on August 6, and progress is being made in congressional discussion of the tax reform. Progress also continues to be made on the bankruptcy reform, and the lower house is expected to vote on the draft bill very soon. Fiscal policy is on track and the share of  the public debt maturing in 12 months continues to drop, while domestic debt service costs have fallen. Decreased vulnerability of the economy has also allowed the central bank to advance in the process of reducing exposure to foreign exchange-linked debt.
   
   

3. On June 25 the National Monetary Council set the midpoint of the inflation target for 2004 at 5.5 percent (the operational target adopted by the central bank in January) and established the midpoint of the 2005 target at 4.5 percent. While both targets are surrounded by a range of ±2.5 percent, monetary policy will aim squarely at the midpoints of these ranges. The reaffirmation of the 2004 target assures that monetary policy will continue to be directed toward creating a stable environment for the making of economic decisions, while avoiding the unduly large output costs that a more rapid disinflation would entail.
   
   

4. The legislation to create complementary pension funds has been incorporated into the broader pension reform package. We anticipate that the overall pension reform will be approved by Congress before the end of the year, following which we will submit enabling legislation creating these complementary funds for civil servants as envisioned in the structural benchmark related to this issue. We believe, therefore, that this benchmark is no longer necessary.
   
   

5. Despite its importance, the sale of the federalized state banks has moved more slowly than expected, due mainly to legal issues. We anticipate greater progress on this issue later this year, however, including a new round of evaluations to determine the minimum price for sale, and therefore propose that this benchmark be reset for end-September.
   
   

6. As usual, we will maintain a close policy dialogue with the Fund and stand ready to take additional measures, as necessary, to achieve the objectives of the program.

Yours Sincerely