(Recasts with official confirmation of cut in funds)
By Alonso Soto
BRASILIA, Oct 23 (Reuters) - Brazil slashed by more than half funds earmarked for a capital spending loan program known as PSI, underscoring government efforts to roll back public subsidies after years of costly aid to local companies.
In a statement released late on Friday, the National Monetary Council, the country's main economic policymaking body, known as CMN, set the limit for PSI lending at 19.5 billion reais ($5 billion), down from 50 billion reais. An unnamed government official had announced the decision earlier in the day at a briefing with reporters in Brasilia.
The interest rate on PSI loans will remain unaltered, the statement said. Under the PSI program, state development bank BNDES extends to local producers long-term credit for their purchases of capital goods and machinery and to finance exports.
The program had been extended repeatedly in recent years in an attempt to prop up dwindling investment. Slowing demand for the program's credit lines was also one of the reasons for the drastic cut, the official said.
"In a context in which a realignment of relative prices and borrowing costs is taking place, the reassessment of the convenience of renewing PSI at fixed-rate terms is one more step in the government's plan to rebalance public finances," the statement said.
Although the reduction will have no immediate impact on the government's accounts, it will trim the cost of future subsidies.
President Dilma Rousseff is struggling to rebalance public accounts as a deepening political and economic crisis drags down revenues and hurts investors' confidence in Latin America's largest economy.
The government is expected to announce next week a 2015 primary budget deficit of more than 70 billion reais, the biggest ever for a country that until recently was seen as an example of prudent fiscal management. As part of her plan to rebalance public finances after years of budget profligacy, Rousseff has started to cut subsidies and current expenditures.
In December, the administration raised for the first time in almost two years the interest rate at which the BNDES pegs its loans, known as TJLP. (Reporting by Alonso Soto; Writing by Walter Brandimarte; Editing by Guillermo Parra-Bernal, James Dalgleish and Leslie Adler)