Brazil's economy is expected to contract less than expected this year as moderate inflation and falling interest rates help it rebound from a currency devaluation, the International Monetary Fund said.

The IMF's management endorsed the Brazilian government's progress to halt the slide in the country's economy and cut spending to reduce its burgeoning budget deficit.

That move is likely to clear the way for the IMF executive board to release a $2.3 billion installment of a $41.5 billion IMF-led aid package cobbled together last year to shore up the country's foreign currency reserves.

The IMF said the Brazilian economy should decline about 1 percent this year, an improvement from the fund's March forecast of a contraction of 3.5 percent to 4 percent. The economy should grow 4 percent in 2000, the IMF predicted.

The inflation rate will also beat early estimates, rising 12 percent this year, not the 17 percent forecast, the IMF said.

The revised figures underscore how Brazil has recovered from the devaluation of its currency, the real, in January. The recovery was ascribed to an already sluggish economy, which kept inflation in check, helping preserve workers' wages and paving the way for the central bank to slash interest rates by more than one half.

The trade surplus should be lower than expected, at $4 billion, down from an estimate of $11 billion. Foreign direct investment should reach $18 billion this year.

The new figures are part of a revised economic agreement Brazil has signed with the IMF, ensuring continued loans from the three-year, $41.5 billion international aid package. Brazil has already received more than $18 billion under the accord.

Brazil may not take the money though. It has begun paying back loans already made under the program, as capital has flowed back in the country as the currency steadies.

Two weeks of talks in Brasilia between officials from the IMF and the Brazilian government ended 10 days ago. The two sides needed to revise the targets set out in February because the economy has rebounded faster than expected.

The IMF team -- headed by Teresa Ter-Minassian, deputy director of the Western Hemisphere department -- arrived at the beginning of June for the second quarterly revision of Brazil's economic program.