- George Mackenzie, and Peter Stella
- Published Date:
- October 1996
1995, “Exchange Market Reform, inflation, and Fiscal Deficits,” IMF Working Paper 95/78 (Washington: International Monetary Fund,August).
1995, “Record of Fiscal Adjustment,” in IMF Conditionality: Experience Under Stand-By and Extended Arrangements. Part II: Background Papers, ed. by SchadlerSusan, (ed)Occasional Paper 129 (Washington: International Monetary Fund, September), pp. 6-35.
1950, “Some Economic Aspects of Multiple Exchange Rate,” Staff Papers.International Monetary Fund. Vol. 1 (September), pp. 224 –37.
1989, “Financial Regulation. Implicit Taxes, and Fiscal Adjustment in Italy.” in Fiscal Policy. Economic Adjustment, and Financial Markets, ed. by MarioMonti (ed) (Washington: International Monetary Fund), pp. 197–230.
1991, “Taxation of Financial Assets in Developing Countries,” World Bank Economic Review. Vol. 5 (September), pp. 513–33.
1993, Limiting Central Bank Credit to the Government: Theory and Practice.Occasional Paper 110 (Washington: International Monetary Fund.December).
1992, “Fiscal and Economic Impact of Federal Credit Programs,” in The United States Economy: Performance and issues, by a staff team headed by Yusuke Horiguchi (Washington: International Monetary Fund), pp. 192–217.
1993, “The Fiscal Abuse of Central Banks,” IMF Working Paper 93/58 (Washington: International Monetary Fund,July).
1993, “Government Revenue from Financial Repression.” American Economic Review, Vol. 83 (September), pp. 953–63.
International Monetary Fund, 1986, A Manual on Government Finance Statistics (Washington: International Monetary Fund).
International Monetary Fund, 1995, Annual Report on Exchange Arrangements and Exchange Restrictions (Washington: International Monetary Fund).
1995, “Deposit Protection Arrangements: A Survey.” IMF Working Paper 95/134 (Washington: International Monetary Fund.December).
1994, “Institutional and Operational Aspects of Central Bank Losses,” in Frameworks for Monetary Stability: Policy Issues and Country Experiences, ed. by Tomás J.T.Baliño and CarloColtarelli (ed) (Washington: International Monetary Fund), pp. 738–55.
1993, “Deposit Insurance Reform: A Functional Approach.” in Carnegie-Rochester Conference Series on Public Policy, ed. by A.H.Meltzer and C.I.Plosser, (ed) Vol. 38 (June), pp. 1–34.
1992, “Reserve Requirements on Bank Deposits as Implicit Taxes: A Case Study of Italy,” IMF Working Paper 92/18 (Washington: International Monetary Fund,February).
1991, “Liberalization and Financial Crisis in Uruguay, 1974-87,” in Banking Crises: Cases and Issues, ed. by V.Sundararajan and Tomás J.T.Baliño (ed) (Washington: International Monetary Fund), pp. 276–375.
1993, “Amalgamating Central Bank and Fiscal Deficits,” in How to Measure the Fiscal Deficit, ed. by Mario I.Blejer and AdrienneCheasly (ed) (Washington: International Monetary Fund), pp. 236–58.
1956, “Revenue Features of Multiple Exchange Rate Systems: Some Case Studies,” Staff Papers.International Monetary Fund, Vol. 5 (February), pp. 74–107.
1990, “Deposit Insurance in Developing Countries,” World Bank Staff Working Paper 548 (Washington: World Bank,November).
1993, “The Budget Deficit in Transition.” Staff Papers.International Monetary Fund. Vol. 40 (September), pp. 647–707.
1995, “Government Role and the Efficiency of Policy Instruments.” IMF Working Paper 95/100 (Washington: International Monetary Fund,October).
1993, “Effects of Inflation on Measurement of Fiscal Deficits: Conventional Versus Operational Measures.” in How to Measure the Fiscal Deficit.” ed. by Mario I.Blejer and AdrienneCheasty (ed) (Washington: International Monetary Fund), pp. 175–204.,
1989, “Central Bank Losses: Origins, Conceptual Issues, and Measurement Problems,” Policy. Planning, and Research Working Paper WPS 293 (Washington: World Bank, October).
1993, “Government Contingent Liabilities and Measurement of Fiscal Impact,” in Haw-in Measure the Fiscal Deficit, ed. by Mario I.Blejer and AdrienneCheasty (ed) (Washington: International Monetary Fund), pp. 363–89.
United Nations, Economic Commission for Latin America and the Caribbean, and United Nations Development Program, 1991a, “El déficit cuasifiscal de la Banca Central en Costa Rica: 1985-1989.” Serie Política Fiscal, No. 19 (Santiago de Chile).
United Nations, Economic Commission, 1991b, “Macroeconomía de las operaciones cuasifiscales en Chile,” Serie Política Fiscal, No. 21 (Santiago de Chile).
U.S. Congress, Congressional Budget Office, 1990, “The Federal Deficit: Does It Measure the Government’s Effect on National Saving?” (Washington, March).
U.S. Office of Management and Budget, 1995, Budget of the United States Government: Analytical Perspectives. Fiscal Year 1996 (Washington: U.S. Government Printing Office).
The acronym QFA will be used both for quasi-fiscal activity in general and for a specific quasi-fiscal activity.
These revenues are normally included in the nontax revenue of the central government.
For a more condensed and informal treatment of these issues, see Mackenzie (1994).
Only if the cost were fully and promptly passed on to the treasury—that is, only if a reduction in central bank income entailed an equal and contemporaneous reduction in profit transfers from the central bank to the treasury—would this not be the case.
Such QFAs often figure as important determinants in the movement of the “other items net” (OIN) account in the monetary survey for the country. Extraction of QFAs can reduce the extent to which financial programming relies on highly aggregative projections of OIN movements.
These definitional issues are explored further in Appendix I.
An overdraft with a below-market rate of interest has no effect on the treasury’s deficit when the marginal rate of transfer of central bank net income is 100 percent. In this case, the decline in the treasury’s interest bill will be exactly offset by a decline in transfers from the central bank (a part of nontax income) or an increase in transfers from the treasury to cover a loss. The treasury’s overall balance is affected when the marginal rate of transfer is less than 100 percent. But even in the first case, the practice of interest-free overdrafts results in an understatement of the opportunity costs of central bank lending.
Tanzi (1993) has discussed the QFAs of state-owned enterprises of economies in transition.
Tanzi (1995, page 5) made a similar point when he wrote that “… often, governments that cannot raise a desired level of tax revenue do not scale down their role in the economy, but, rather, they attempt to pursue that role through nonfiscal instruments … largely, but not exclusively, quasi-fiscal activities and quasi-fiscal regulations.”
Appendix I discusses a variety of measurement issues in more detail.
See International Monetary Fund (1995). This figure comes from the table entitled “Summary Features of Exchange and Trade Systems in Member Countries.” These statistics reflect the existence of multiple official exchange rates, not necessarily parallel exchange rates.
A regime like this applied in Egypt before the exchange system reforms of 1991 (see Appendix II).
If the central rate is 10 local currency units (LCUs) per U.S. dollar, the mining sector rate is LCU 6 per dollar, and the special import rate is LCU 7 per dollar, then the central bank has net income from the purchase and resale of $1 million of (7 - 6) × $1 million, or LCU 1 million. Alternatively, with reference to the central rate, the bank makes a profit of LCU 4 on each purchase of foreign currency from the mining sector, and a loss of LCU 3 on each sale to the privileged import sector.
The fiscal costs entailed by the unification of the exchange rate regime (that is, devaluation of the official rate to eliminate a parallel exchange market) are very carefully analyzed in Agénor and Uçer (1995).
These and most of the other country examples mentioned in this section are discussed at greater length in Appendix II.
In the case of a guarantee than fixes the exchange rate at the rate prevailing at the time the loan was contracted, an estimate of the total value of the subsidy could be made by discounting the stream of loan repayments by a rate of interest on a long-term local-currency-denominated security, and subtracting the result from the initial value of the loan. If the local rate equals the interest rate on the loan, there is no subsidy element (because the initial value of the loan will by definition be equal to the present discounted value of the repayments stream using the rate of interest at which the loan was contracted). The higher the local rate, the greater is the subsidy element.
The Federal Credit Reform Act of 1990 now requires that the U.S. budget include allocations to cover the present value of expected net cash outflows from loan and loan guarantee programs (see U.S. Office of Management and Budget, 1995). In New Zealand, there is a requirement that all fiscal risks facing the overall government be disclosed in the budget and quantified where possible.
In this case, it may be private financial institutions, rather than PFIs, that are effectively obliged to act as fiscal agents. Moreover, there may be no direct effect on the financial operations of PFIs. Even for the private financial institutions in the case just described, the implicit tax imposed on their depositors is offset by the subsidy the private institutions are obliged to grant to their borrowers. That said, their profitability may be affected by the impact of the interest rate regulations on the volume of their business.
If loans of a similar degree of risk are extended by the private financial system, a measure of the subsidy element of loans from PFIs can be derived from the relationship between the interest rate charged by the private sector and that charged by the government. Appendix I discusses a way of calculating the subsidy element entailed by a loan guarantee that also can be applied to poorly secured and below-par loans.
See Watanagase (1990) for a description of how poor credit practices associated with directed lending created a “latent” banking crisis in Bangladesh. This case is also discussed briefly in Appendix II.
Appendix I describes one method of calculation.
That burden should be shared by the banks (that is, their shareholders), their depositors, and their borrowers. By making certain assumptions about the loan and deposit markets it is possible to estimate each group’s share. But these assumptions will inevitably be somewhat arbitrary. Molho (1992) presented an illuminating discussion of this issue; see also Appendix I.
The treatment of the implicit tax revenue generated by reserve requirements is discussed in Appendix I.
Bruni, Penati, and Porta (1989) have discussed the role of administrative controls in sustaining demand for public sector bonds in Italy at various times.
These operations would, nonetheless, give the PFI more assurance that its operations would not be wound up in the near future.
This analogy was drawn by Talley and Mas (1990).
See, for example, Merton and Bodie (1993) for a discussion of possible reforms of deposit insurance schemes in the United States.
The use of a deposit insurance system to promote a particular class of institution (for instance, savings banks) has been discussed by Kyei (1995).
The true budget deficit is not understated if the cost of QFA is borne by the budget, as it is if transfers from the central bank to the budget are automatically adjusted to reflect quasi-fiscal losses. Put another way, the budget deficit will not be misrepresented by the conventional measure when the central bank engages in QFA if the marginal rate of transfer of profits (and losses) is 100 percent. Typically, the marginal rate of transfer is not 100 percent.
One of the exceptions to the cash-based measurement of the financial operations of the NFPS is interest payments, which for the NFPS are normally measured on an accrual basis. To avoid artificial increases in a central bank’s cash income and to ensure consistency with the accounting of interest payments in the NFPS, the central bank’s interest earnings would have to be measured on an accrual basis as well. In addition to the adjustments noted above, adjustments may also be necessary to compensate for deficiencies in the accruals-based accounting of central bank operations. That said, the accounts of the central bank are normally in better shape than those of the central government and, a fortiori, those of the NFPS. These issues are explored at greater length in Appendix I. On general issues in amalgamating central bank and fiscal deficits, see Robinson and Stella (1993).
This approach changes the distribution of the financial balance of the overall public sector between the NFPS and the public financial sector, although not its total.
As an example, a budget consisting of those items for which specific allocations will be made could he constructed, including the central bank’s own operating expenditures as well as expenditures for subsidized lending and any other QFAs. Separate projections could be made for monetary operations, which would not need to be published. Nonetheless, it would be expected that the results of such operations would be reflected in the transfer of central bank profits or budgetary provision for losses.
The implicit taxes and subsidies entailed by QFAs are not necessarily undesirable—as taxes and subsidies. The subsidy created by an appreciated exchange rate could conceivably play a role in a social safety net, for example.
The central bank’s income declines when it engages in open market operations selling bonds because it exchanges interest-bearing assets (bonds) for non-interest-bearing liabilities (money).
It can be argued that to the extent that a depositary institution has access to central bank borrowing at more favorable terms than it could obtain from the market, the institution receives a subsidy that compensates it in some measure for the reserve requirement.
Regulations can, in principle, have macroeconomic consequences that public policy should take into account: a significant wealth effect, for example, could depress consumption.
The issues this section discusses are also addressed by Leone (1994).
The preferred accounting treatment requires that if the balance of the revaluation account becomes negative (if accumulated losses exceed accumulated gains), the loss should be charged against the profit and loss account.
This will be the case if the marginal rate of transfer of central bank profits is positive.
The valuation of the cost of a loan guarantee was discussed by Fries (1992). The issue of the treatment of loan guarantees and other contingent liabilities in the budgetary accounts was also discussed in U.S. Congress (1990).
On the general issue of the impact of inflation on the fiscal deficit, see Tanzi, Blejer, and Teijeiro (1993).
Conventional accounting would place nominal revaluation gains in a revaluation account. This is, in effect, an inflation adjustment for foreign assets. Here the adjustment applies to the whole of the bank’s operations, and it is therefore acceptable to include nominal revaluation gains in the rest of the bank’s nominal income.
A constant real exchange rate requires that pw + d = pd.
For the purposes of the subsidy, a maximum of C 15 per U.S. dollar was set on the parallel market rate deemed to have been paid by importers without access to foreign exchange at the official rate, which was C 8.60 per U.S. dollar.
By withdrawing and redepositing, the banks were able to increase the value of their interest-bearing assets while continuing to benefit from the difference between the interest rates on their domesticcurrency-denominated assets and the rates on their foreign-currency-denominated liabilities.
The experience of Uruguay is discussed further in Appendix III.
The Central Bank of Kenya has also designated certain other instruments as constituting part of a bank’s liquid assets. The minimum assets ratio for commercial banks and other nonbank financial institutions is currently fixed at 25 percent, except in the case of mortgage finance companies, where the ratio is set at 20 percent. The requirement regarding treasury bill holdings was eliminated for nonbank financial institutions at the end of 1995, and that for commercial banks in early 1996.
See Pérez-Campañero and Leone (1991) for further discussion.
The conventional open market operation would have exchanged an interest-bearing asset for a non-interest-bearing liability (reserves at the central bank), while the issue of CDs results in a replacement of a non-interest-bearing liability by an interest-bearing one.
This operation came in conjunction with a World Bank enterprise and financial sector adjustment loan.
Interest forgone through subsidization of credits was close to 1 percent of GDP during the 12 months from August 1992.
State enterprises not destined for eventual privatization were converted into public enterprises (régies autonomes) that report directly to line ministries.
Recent Occasional Papers of the International Monetary Fund
142. Quasi-Fiscal Operations of Public Financial Institutions, by G.A. Mackenzie and Peter Stella. 1996.
141. Monetary and Exchange System Reforms in China: An Experiment in Gradualism, by Hassanali Mehran. Marc Quintyn. Tom Nordman, and Bernard Laurens. 1996.
140. Government Reform in New Zealand, by Graham C. Scott. 1996.
139. Reinvigorating Growth in Developing Countries: Lessons from Adjustment Policies in Eight Economies, by David Goldsbrough, Sharmini Coorey, Louis Dicks-Mireaux, Balazs Horvath, Kalpana Kochhar, Mauro Mecagni, Erik Offerdal, and Jianping Zhou. 1996.
138. Aftermath of the CFA Franc Devaluation, by Jean A.P. Clément, with Johannes Mueller, Stéphane Cossé, and Jean Le Dem. 1996.
137. The Lao People’s Democratic Republic: Systemic Transformation and Adjustment, edited by Ichiro Otani and Chi Do Pham, 1996.
136. Jordan: Strategy for Adjustment and Growth, edited by Edouard Maciejewski and Ahsan Mansur, 1996,
135. Vietnam: Transition to a Market Economy, by John R. Dodsworth, Erich Spitäller, Michael Braulke, Keon Hyok Lee, Kenneth Miranda. Christian Mulder, Hisanobu Shishido, and Krishna Srinivasan, 1996.
134. India: Economic Reform and Growth, by Ajai Chopra, Charles Collyns, Richard Hemming, and Karen Parker with Woosik Chu and Oliver Fratzscher, 1995.
133. Policy Experiences and Issues in the Baltics, Russia, and Other Countries of the Former Soviet Union, edited by Daniel A. Citrin and Ashok K. Lahiri, 1995.
132. Financial Fragilities in Latin America: The 1980s and 1990s, by Liliana Rojas-Suárez and Steven R. Weisbrod. 1995.
131. Capital Account Convertibility: Review of Experience and Implications for IMF Policies, by staff teams headed by Peter J. Quirk and Owen Evans. 1995.
130. Challenges to the Swedish Welfare State, by Desmond Lachman, Adam Bennett, John H. Green, Robert Hagemann, and Ramana Ramaswamy. 1995.
129. IMF Conditionality: Experience Under Stand-By and Extended Arrangements. Part II: Background Papers, Susan Schadler, Editor, with Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni. James H.J. Morsink, and Miguel A. Savastano. 1995.
128. IMF Conditionality: Experience Under Stand-By and Extended Arrangements, Part I: Key Issues and Findings, by Susan Schadler. Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni, James H.J. Morsink, and Miguel A. Savastano. 1995.
127. Road Maps of the Transition: The Baltics, the Czech Republic, Hungary, and Russia, by Biswajit Banerjee, Vincent Koen. Thomas Krueger, Mark S. Lutz, Michael Marrese, and Tapio O. Saavalainen. 1995.
126. The Adoption of Indirect Instruments of Monetary Policy, by a Staff Team headed by William E. Alexander, Tomás J.T. Baliño, and Charles Enoch, 1995,
125. United Germany: The First Five Years—Performance and Policy Issues, by Robert Corker. Robert A. Feldman, Karl Habermeier, Hari Vittas, and Tessa van der Willigen. 1995.
124. Saving Behavior and the Asset Price “Bubble” in Japan: Analytical Studies, edited by Ulrich Baumgartner and Guy Meredith, 1995.
123. Comprehensive Tax Reform: The Colombian Experience, edited by Parthasarathi Shome. 1995.
122. Capital Flows in the APEC Region, edited by Mohsin S. Khan and Carmen M. Reinhart. 1995.
121. Uganda: Adjustment with Growth. 1987-94, by Robert L. Sharer, Hema R. De Zoysa, and Calvin A. McDonald. 1995.
120. Economic Dislocation and Recovery in Lebanon, by Sena Eken, Paul Cashin, S. Nuri Erbas, Jose Martelino, and Adnan Mazarei, 1995.
119. Singapore: A Case Study in Rapid Development, edited by Kenneth Bercuson with a staff team comprising Robert G. Carling, Aasim M. Husain. Thomas Rumbaugh, and Rachel van Elkan. 1995.
118. Sub-Saharan Africa: Growth. Savings, and Investment, by Michael T. Hadjimichael. Dhaneshwar Ghura, Martin Mühleisen, Roger Nord, and E. Murat Uçer. 1995.
117. Resilience and Growth Through Sustained Adjustment: The Moroccan Experience, by Saleh M. Nsouli, Sena Eken, Klaus Enders, Van-Can Thai, Jörg Decressin, and Filippo Cartiglia. with Janet Bungay. 1995.
116. Improving the International Monetary System: Constraints and Possibilities, by Michael Mussa. Morris Goldstein, Peter B. Clark, Donald J. Mathieson, and Tamim Bayoumi. 1994.
115. Exchange Rates and Economic Fundamentals: A Framework for Analysis, by Peter B, Clark. Leonardo Bartolini, Tamim Bayoumi, and Steven Symansky. 1994,
114. Economic Reform in China: A New Phase, by Wanda Tseng, Hoe Ee Khor, Kalpana Kochhar, Dubravko Mihaljek, and David Burton. 1994.
113. Poland: The Path to a Market Economy, by Liam P. Ebrill, Ajai Chopra. Charalambos Christofides, Paul Mylonas, Inci Otker, and Gerd Schwartz. 1994.
112. The Behavior of Non-Oil Commodity Prices, by Eduardo Borensztein, Mohsin S. Khan, Carmen M. Reinhart, and Peter Wickham. 1994.
111. The Russian Federation in Transition: External Developments, by Benedicte Vibe Christensen. 1994.
110. Limiting Central Bank Credit to the Government: Theory and Practice, by Carlo Cottarelli. 1993.
109. The Path to Convertibility and Growth: The Tunisian Experience, by Saleh M. Nsouli, Sena Eken, Paul Duran, Gerwin Bell, and Zühtü Yücelik. 1993.
108. Recent Experiences with Surges in Capital Inflows, by Susan Schadler, Maria Carkovic, Adam Bennett, and Robert Kahn. 1993.
107. China at the Threshold of a Market Economy, by Michael W. Bell, Hoe Ee Khor, and Kalpana Kochhar with Jun Ma. Simon N’guiamba, and Rajiv Lall. 1993.
106. Economic Adjustment in Low-Income Countries: Experience Under the Enhanced Structural Adjustment Facility, by Susan Schadler. Franek Rozwadowski, Siddharth Tiwari, and David O. Robinson. 1993.
105. The Structure and Operation of the World Gold Market, by Gary O’Callaghan. 1993.
104. Price Liberalization in Russia: Behavior of Prices. Household Incomes, and Consumption During the First Year, by Vincent Koen and Steven Phillips. 1993.
103. Liberalization of the Capital Account: Experiences and Issues, by Donald J. Mathieson and Liliana Rojas-Suárez. 1993.
102. Financial Sector Reforms and Exchange Arrangements in Eastern Europe. Part I: Financial Markets and Intermediation, by Guillermo A. Calvo and Manmohan S. Kumar. Part II: Exchange Arrangements of Previously Centrally Planned Economies, by Eduardo Borensztein and Paul R. Masson. 1993.
101. Spain: Converging with the European Community, by Michel Galy. Gonzalo Pastor, and Thierry Pujol. 1993.
100. The Gambia: Economic Adjustment in a Small Open Economy, by Michael T. Hadjimichael, Thomas Rumbaugh, and Eric Verreydt. 1992.
99, Mexico: The Strategy to Achieve Sustained Economic Growth, edited by Claudio Loser and Eliot Kalter. 1992.
98. Albania: From Isolation Toward Reform, by Mario I. Blejer, Mauro Mecagni, Ratna Sahay, Richard Hides, Barry Johnston, Piroska Nagy, and Roy Pepper. 1992.
97. Rules and Discretion in International Economic Policy, by Manuel Guitián, 1992.
Note: For information on the title and availability of Occasional Papers not listed, please consult the IMF Publications Catalog or contact IMF Publication Services.