Gasoline prices are expected to rise by up to 6% after the elections.

By Luciana Otoni, (Reuters) - The federal government is expected to raise gasoline prices at refineries by 5,5 to 6 percent this year after the October elections, a government source close to the Executive branch told Reuters on Monday.

The calculation of the price adjustment is still preliminary and will serve to provide some relief to prices for Petrobras, according to the source. The state-owned company has been working with prices that are outdated compared to the international market, which is causing losses in its supply area.

The decision to raise prices now takes into account the expected cooling of inflation in the second half of the year, the need to strengthen the company's cash flow, and the rule requiring annual increases in fuel prices.

Last week, in an interview with Reuters, Finance Minister Guido Mantega had already indicated that gasoline prices would rise in 2014.

The last time there was an adjustment in gasoline prices was in November of last year, when Petrobras announced an average increase of 4 percent for gasoline and 8 percent for diesel at refineries. At the time, experts calculated that the increase in gasoline for the final consumer would be around 3 percent.

"This year's increase will give Petrobras a cushion so that, in the event of a surge in the price of oil abroad, it will not need to make abrupt price movements in the domestic market. Similarly, it will not need to deal with price distortions if there is a downward movement in international prices," the source said.

In July, the price of gasoline sold by Petrobras in Brazil was, on average, 14 percent below international prices, according to a survey by GO Associados.

PRIMARY

The source, who spoke on condition of anonymity, also reported that the government "already knows" that it will not meet this year's primary surplus target of 99 billion reais, equivalent to 1,9 percent of Gross Domestic Product (GDP), due to lower revenue growth, hampered by weak economic activity.

"Revising the target is on the government's agenda. The government already knows it will not meet the surplus target (this year)," he said, adding that the assessment already takes into account the extraordinary revenues from the refinancing of tax debt (Refis), of 18 billion reais, and 8 billion reais from the auction of 700 MHz licenses for fourth-generation mobile cellular telephony.

"The problem is the low growth in revenue and the high tax exemptions," he added.

Also speaking to Reuters last week, Mantega left open the possibility of a further reduction in the primary surplus target for 2014.

This year, through June, the primary surplus stood at 1,36 percent of GDP over 12 months.

In 2013, despite the government adjusting the primary surplus target, it failed to reach its objective. The savings for interest payments by the consolidated public sector stood at 1,9 percent of GDP, the worst historical result and below the target of 2,3 percent of GDP.