Brazil's central bank says forgotten bank funds can't help meet fiscal target

By Marcela Ayres

BRASILIA (Reuters) - Brazil's central bank said that forgotten funds held by financial institutions could not be classified as primary revenue, marking a setback for the government's efforts to use them to meet this year's fiscal target.

In a Senate-approved bill, which still requires approval from the Lower House, the allocation of these funds to the Treasury was proposed as one of the compensatory measures by government leader in the Upper House, Senator Jaques Wagner, to offset costly tax exemptions for companies in certain sectors and small municipalities.

Treasury Secretary Rogerio Ceron recently estimated that these forgotten funds could amount to around 8 billion reais ($1.42 billion).

In a technical note sent to lawmakers seen by Reuters, the central bank says that incorporating these funds into federal government accounts would constitute a transfer of financial assets from the private sector to the public sector without a standard transaction between the two sectors.

"Thus, the incorporation of these private deposits ... should be recorded as an asset adjustment, reducing net debt and, all else being equal, gross debt, but with no impact on the primary result," the note added.

The bill explicitly proposed that the Treasury should appropriate these unclaimed funds "as primary budgetary revenue for all purposes of fiscal statistics and the calculation of the primary result."

In the note, the central bank recommended completely rejecting this part of the proposal, arguing that it would force policymakers to record a primary surplus in clear contradiction to its statistical methodology.

This year’s fiscal target is a zero primary deficit, with a tolerance margin of 0.25% of gross domestic product (GDP), meaning the government could record a deficit of about 29 billion reais and still meet the goal.

The central bank’s methodology is used to verify the target's compliance.

According to the central bank’s note, other compensatory measures in the bill would count as primary revenue, such as transferring judicial deposits from public bank Caixa Economica Federal, public funds and agencies to the Treasury.

($1 = 5.6198 reais)

(Reporting by Marcela Ayres)