(Adds comments from central bank chief)
By Alonso Soto and Luciana Otoni
BRASILIA, March 18 (Reuters) - The Brazilian central bank has little room to continue with its currency swap program because it is running out of ammunition to counter a weakening real, a senior government official told Reuters on Wednesday.
The weaker real is a key factor supporting the economy, which could very well contract this year as investments dwindle, said the official, who is directly involved in economic policymaking but declined to be identified because he was not authorized to speak publicly.
"They (at the bank) don't have many options to continue with the swaps policy for very long," said the official.
He added that the bank has already sold the equivalent of 40 percent of its foreign reserves, which is weighing on its credibility with the market to continue effectively battling a weaker real.
The swap program, which started in August 2013, is scheduled to end on March 31, but investors believe the central bank could opt to again reduce the scope of the program in a new extension.
The central bank chief, Alexandre Tombini, said later Wednesday that the swap program has a "significant size," hinting that the daily sale of swaps could be reduced or even halted.
Uncertainty over the continuation of the program helped the real soften in recent weeks, making it the worst performer among 152 currencies tracked by Reuters.
The real erased early losses and gained 0.15 percent on Wednesday afternoon after the U.S. Federal Reserve signaled it could wait longer than investors expected to raise interest rates.
The program provides investors with a daily supply of currency swaps, derivatives that offer protection against currency losses.
The central bank declined to comment for this story.
The senior official also said the government plans to freeze about 60 billion reais ($18 billion) in expenditures this year in an effort to reach its key fiscal savings goal. The freeze is part of an annual fiscal exercise designed to limit inflation and signal the government's commitment to austerity.
Last year the government froze about 40 billion reais.
"We need to make a strong adjustment in our accounts, tighten the belt," said the official. ($1 = 3.2590 Brazilian reais) (Additional reporting by Flavia Bohone; Editing by Jeffrey Benkoe)