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Working Paper Summaries (WP/94/1 - WP/94/76)
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Working Paper Summaries 94/13: The Payments Systems Reforms and Monetary Policy in Emerging Market Economies in Central and Eastern Europe

Author(s):
International Monetary Fund
Published Date:
August 1994
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This paper discusses the experience of four countries in Central and Eastern Europe (Bulgaria, the former Czechoslovakia, Poland, and Romania) in adapting their payments systems to the requirements of an emerging market economy.

An efficient and reliable payments system is crucial for the development of modern money and foreign exchange markets, which require timely execution of operations. Moreover, interbank settlement in the books of the central bank is a prerequisite for the central bank to be able to manage monetary policy through indirect monetary instruments.

Central banks in Central and Eastern Europe have been key players in reforming the payments system in each country. They faced enormous challenges, not only because of the great changes that the whole banking system was experiencing at the time, but also because of difficulties in communications and lack of modern technology. Initially, commercial banks had to hold large reserve balances or obtain on-demand accommodation from the central bank in order to meet their settlement obligations. Large and volatile floats made it difficult for both banks and the monetary authorities to manage liquidity. As a result, central banks resorted to credit ceilings as a key tool for implementing monetary policy.

Progress in reforming payments systems made it possible to introduce market-based instruments, such as treasury bills or central bank securities. Interbank transactions, initially limited only to deposits of relatively long maturities started to provide short-term liquidity. Central banks began to experiment with indirect monetary policy instruments to replace credit ceilings. They also began to tighten access to their overdrafts, in order to improve control over monetary policy. Progress in monetary policy implementation and in the development of money markets created a demand for faster and more reliable payments systems. Central banks not only introduced more modern technology but also revised payments regulations and abandoned practices, such as the obligation for banks to meet reserve requirements on a branch-by-branch basis, that forced banks to immobilize large amounts of funds in excess reserves.

Despite starting with basically the same institutional arrangements, the countries considered in this study have had different experiences in reforming their payments systems. The following lessons can be drawn from the study: first, technology available early on in the reform can improve accounting rules and transportation and processing procedures enough to reduce significantly the level and variability of the float. Second, central banks should play a key role in managing the credit and liquidity risks in payment systems. Third, commercial banks holding accounts with the central bank should settle balances among themselves through those accounts. Fourth, early establishment of a large-value payments system will help in developing money and foreign exchange markets.

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