Chapter

Appendix III Central Bank Credit to the Government in 57 Countries

Author(s):
Carlo Cottarelli
Published Date:
September 1993
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This appendix presents some factual information on how formal constraints on central bank credit to the government are regulated in a sample of 57 countries. The sample includes all major industrial countries, as well as a sample of other industrial and developing countries, including all those grouped in the three currency unions (the West African Monetary Union, the Central African Monetary Union, and the Eastern Caribbean Currency Area).81 The available information for each of these countries/ areas is presented in the individual country tables at the end of this appendix (whose exact content is described below). This information is not intended to describe completely how the formal constraints on central bank credit to the government are regulated throughout the world but to single out some relevant features of these constraints and, with the help of Tables A2 and A3, to compare them with some of the suggestions discussed in this paper.

Country Tables

The information presented in the country tables at the end of this appendix reflects the formal arrangements regulating central bank credit to the government (the latter defined as including extrabudgetary funds and local governments) that were in place on December 31, 1992. “Formal arrangement” is intended to cover any relevant provision included in the constitution (C), or in laws (L), government decrees (D), or formal agreements (A) between the central bank and the government (these codes are used in the second column of the tables to identify the source of the provision). Additional information referring to other constraints on central bank credit to the government that arise from other sources (such as tradition and informal agreements), as well as other useful information, is reported in footnotes.

The first column of the tables reports the financial instruments for which information is provided. Four credit instruments are singled out: (1) Overdraft on current account refers to any line of credit granted by the central bank to the government without a specified maturity; (2) Fixed-term loans and advances refers to any nonsecuritized credit with fixed maturity; (3) Purchase of securities (primary market) refers to purchases made directly from the government; and (4) Purchase of securities (secondary market) refers to purchases from other agents. The tables do not distinguish between outright purchases and repurchase agreements (repos), because, with one exception (Hungary), repurchase agreements are always treated in the same way as outright purchases. (In Hungary, repos are not included in the ceiling applied to other forms of central bank credit.) The tables also provide information on the regulations affecting government deposits at the central bank.

The second column refers to the degree of control that the central bank has over the above instruments. For each of them, one of the following codes is used: M (mandatory), if the central bank is forced to provide credit to the government; D (discretionary), if the central bank is allowed to provide credit to the government on a voluntary basis; P (prohibited), if central bank credit to the government is prohibited. For government deposits at the central bank, the code M is used if the central bank is mandated to keep government deposits; D is used if it is allowed to receive deposits from the government; and P if government deposits at the central bank are prohibited.

The third column refers to the existence of constraints on the maturity of the corresponding instrument, whereas the fourth column refers to the existence of quantitative ceilings.

The fifth column refers to the constraints on the rate of interest on the corresponding instrument. The term “market rates” is used if there is a formal requirement that the credit is extended at market rates.

Summary Tables

This section summarizes the information detailed in Tables A2 and A3 concerning (1) the tightness of the constraints on different types of central bank credit to the government; and (2) the form in which the credit constraints are expressed.

On the first aspect, Table A2 summarizes how the four main types of central bank credit to the government (overdraft facilities, fixed-term loans and advances, purchases of government paper on the primary market, and purchases of government paper on the secondary market) are regulated. More specifically, the table indicates what is the percentage of countries in which each form of credit is prohibited, constrained, or left unconstrained (and whether credit is discretionary or mandatory). The breakdown between discretionary and mandatory is not presented for overdraft facilities (for which, regardless of the law, once the credit facility is opened, the government can borrow at its will up to the existing ceiling), nor for the purchase of government paper on the secondary market (as in all countries this operation is left to the discretion of the central bank). Also, in computing the percentages, the countries belonging to a monetary union are counted as individual countries.

Table A2.Regulation of Central Bank Credit to the Government for Different Types of Credit(Percentage composition)
Industrial CountriesDeveloping CountriesTotal
Overdraft facility
Prohibited43.856.152.6
Constrained43.836.638.6
Unconstrained12.47.38.8
Total100.0100.0100.0
Fixed-term loans and advances
Prohibited43.822.028.1
Constrained (discretionary)25.070.757.9
Constrained (mandatory)2.41.8
Unconstrained (discretionary)18.84.98.8
Unconstrained (mandatory)12.43.4
Total100.0100.0100.0
Purchase of government paper (primary market)
Prohibited25.019.521.1
Constrained (discretionary)6.258.643.9
Constrained (mandatory)6.22.43.5
Unconstrained (discretionary)56.419.529.8
Unconstrained (mandatory)6.21.7
Total100.0100.0100.0
Purchase of government paper (secondary market)
Prohibited19.514.0
Constrained (discretionary)26.819.3
Unconstrained (discretionary)100.053.766.7
Total100.0100.0100.0

This information is provided separately for industrial and developing countries, and for the total. However, as recalled in Section IV, the distinction between industrial and developing countries is not necessarily the most relevant, nor should the latter be identified with countries in which all the deviations from the ideal model discussed in Section III apply. With this caveat, Table A2 highlights some patterns, corroborating the suggestions presented in this paper.

One clear pattern is that for all countries the constraints imposed on central bank credit are more binding for “more direct” forms of credit. Overdraft facilities are prohibited in 53 percent of the countries, but only 28 percent of the countries prohibit fixed-term loans, and only 21 percent prohibit the purchase of government paper on the primary market. Finally, purchases on the secondary market are prohibited by only 14 percent of the sample countries. When they are allowed, the more direct forms of credit are more likely to be constrained. Instead, in two-thirds of the sample countries the purchase of government paper on the secondary market is left entirely unconstrained.

But the above pattern is much more evident for the group of industrial countries. About 44 percent of industrial countries prohibit both overdraft facilities and fixed-term advances. However, only one-fourth of the industrial countries prohibit the direct purchase of government paper from the government, and none prohibit the purchase on the secondary market.82 This is consistent with the view, discussed in Section III, that credit granted through open market operations (in both the primary and the secondary market) in countries in which government and private securities are substitutes can be left unconstrained.

The share of developing countries prohibiting overdraft facilities is also high (56 percent). However, contrary to industrial countries, other forms of credit are not distinguished: about 20 percent of developing countries prohibit all other forms of credit, including purchases on the secondary market. Moreover, the percentage of developing countries that leave such purchases unconstrained is relatively low (54 percent). Thus, the form in which credit is granted in developing countries seems to be less relevant than in industrial countries. Indeed, among developing countries, it is more common to find polar cases in which either all credit to the government is unconstrained (India and Indonesia), or all credit is constrained (Chile and Argentina). The less marked differentiation between different forms of credit has been explained in Section IV by two factors. First, excessively tightening direct central bank credit in countries in which financial markets are not well developed would be too costly for the government.83 On the other hand, it may be necessary to constrain also indirect credit, which may be as appealing to the government as direct credit. Thus, for both direct and indirect credits, there is a tendency to introduce some form of intermediate constraint.

Table A2 also shows that, at least in principle, discretionary intervention prevails in both industrial and developing countries. Of course, the actual use of the discretion formally attributed to the central bank will depend on a host of factors, some of which have been discussed in the paper.

On the issue of the form in which the constraint is expressed, Table A3 shows that the most frequently used reference aggregate is past revenue (36 percent), followed by current revenue (25 percent).84 The use of revenue as a reference aggregate (supported by the discussion in Section IV) dominates other alternatives in developing countries. However, almost 60 percent of the constraints imposed in industrial countries are set in nominal terms (and at fairly low levels).85 On the contrary, no developing country uses this form of constraint.

Table A3.Alternative Ways of Expressing Constraint on Central Bank Credit to the Government
Industrial

Countries
Developing

Countries
Total
Fixed in nominal terms58.313.2
In percentage of current revenue8.229.324.6
In percentage of past revenue16.741.435.8
In percentage of current expenditure16.77.39.4
Fixed growth rate4.93.8
Other17.113.2
Total100.0100.0100.0

Finally, there are still some countries in which government expenditure in the current year is used as a reference aggregate, despite the shortcomings of this solution.

Country Tables

Argentina
InstrumentDegree of ControlAllowed MaturityQuantitative CeilingInterest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)D(L)UnconstrainedPurchases must be at market prices
Purchase of securities (secondary market)D(L)Unconstrained1Purchases must be at market prices
Government deposits at central bankD(L)UnconstrainedNoneUnconstrained
Source: Carta Orgánica del Banco Central (Ley 24. 144; October 1992).

The overall holdings of government securities in nominal terms cannot increase by more than 10 percent a year. Moreover, the stock of government securities held by the central bank cannot exceed one-third of the monetary base.

Source: Carta Orgánica del Banco Central (Ley 24. 144; October 1992).

The overall holdings of government securities in nominal terms cannot increase by more than 10 percent a year. Moreover, the stock of government securities held by the central bank cannot exceed one-third of the monetary base.

Australia
InstrumentDegree of

Control
Allowed

Maturity
Quantitative

Ceiling
Interest

Rate
Overdraft on current accountD(A)1Not applicable1Market rate1
Fixed-term loans and advancesP(A)
Purchase of securities (primary market)D(L)UnconstrainedNoneUnconstrained2
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)3UnconstrainedNoneMarket rate
Sources: Reserve Bank Act No. 4, 1959 of April 23, 1959, and following amendments, and Commonwealth Inscribed Stock Act (1911).

The Reserve Bank Act obliges the Bank to act as the Commonwealth’s banker and financial agent insofar as the Commonwealth requires it to do so. Details of these banking arrangements are formally agreed between the Bank and the Department of Finance.

The interest on the securities purchased directly from the Government is a weighted average of the interest on the securities sold to the public.

The Audit Act (1901) allows the Commonwealth to keep deposits with any bank. In practice, Commonwealth cash balances are held almost exclusively with the Reserve Bank.

Sources: Reserve Bank Act No. 4, 1959 of April 23, 1959, and following amendments, and Commonwealth Inscribed Stock Act (1911).

The Reserve Bank Act obliges the Bank to act as the Commonwealth’s banker and financial agent insofar as the Commonwealth requires it to do so. Details of these banking arrangements are formally agreed between the Bank and the Department of Finance.

The interest on the securities purchased directly from the Government is a weighted average of the interest on the securities sold to the public.

The Audit Act (1901) allows the Commonwealth to keep deposits with any bank. In practice, Commonwealth cash balances are held almost exclusively with the Reserve Bank.

Austria
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest

Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesP(L)1
Purchase of securities (primary market)M(L)Short-term5 percent of the Federal Republic’s gross annual tax receipts2Discount rate
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankD(L)3UnconstrainedNoneZero
Sources: Statute of the Austrian National Bank and National Bank Law, No. 184/1955, as amended by Federal Laws Nos. 200/1967 and 276/1969.

Unless the countervalue in gold or foreign assets is provided.

According to latest published provisional budget results.

The Government is allowed to keep deposits outside the central bank.

Sources: Statute of the Austrian National Bank and National Bank Law, No. 184/1955, as amended by Federal Laws Nos. 200/1967 and 276/1969.

Unless the countervalue in gold or foreign assets is provided.

According to latest published provisional budget results.

The Government is allowed to keep deposits outside the central bank.

Belgium 1
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountM(L)Not applicableBF 15 billion to the state plus BF 5 billion to the Securities Regulation Fund2Rate on current account advances
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)P(L)3
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained4
Government deposits at central bankM(L)5UnconstrainedNone6Unconstrained7
Sources: Organic Law and Statute of the National Bank of Belgium. Agreement between the Minister of Finance and the National Bank dated January 22, 1991, and Agreement between the National Bank and the Securities Regulation Fund dated January 23, 1991.

As for all other countries, the table refers to the situation at end-1992. In March 1993, the Belgian Parliament approved a draft bill prohibiting the granting of direct credit to public authorities (including the direct purchase of securities).

The Securities Regulation Fund (Fonds des Rentes) is a public institution in charge of regulating the secondary market for ordinary government bonds. The reported ceilings on the overdraft were lowered on January 29, 1991.

The only exception is the acquisition of government securities up to an amount corresponding to the National Bank’s capital reserves and depreciation accounts.

In practice at market rates.

The Government is allowed to keep deposits outside the central bank.

Under the new regime (see footnote 1), the central bank and the Government have agreed to introduce a ceiling on government deposits at the central bank.

At present the interest rate is zero. Under the new regime (see footnote 1). market rates will apply.

Sources: Organic Law and Statute of the National Bank of Belgium. Agreement between the Minister of Finance and the National Bank dated January 22, 1991, and Agreement between the National Bank and the Securities Regulation Fund dated January 23, 1991.

As for all other countries, the table refers to the situation at end-1992. In March 1993, the Belgian Parliament approved a draft bill prohibiting the granting of direct credit to public authorities (including the direct purchase of securities).

The Securities Regulation Fund (Fonds des Rentes) is a public institution in charge of regulating the secondary market for ordinary government bonds. The reported ceilings on the overdraft were lowered on January 29, 1991.

The only exception is the acquisition of government securities up to an amount corresponding to the National Bank’s capital reserves and depreciation accounts.

In practice at market rates.

The Government is allowed to keep deposits outside the central bank.

Under the new regime (see footnote 1), the central bank and the Government have agreed to introduce a ceiling on government deposits at the central bank.

At present the interest rate is zero. Under the new regime (see footnote 1). market rates will apply.

Bolivia
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountD(L)Not applicableUnconstrainedUnconstrained
Fixed-term loans and advancesD(L)110 percent of government expenditure, plus any amount included in the annual monetary program1Unconstrained
Purchase of securities (primary market)D(L)UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)UnconstrainedNoneUnconstrained
Source: Ley Orgánica del Banco Central de Bolivia (Decree Law No. 14791).

The 10 percent ceiling refers to the credit granted to cover temporary deficits. This credit cannot exceed 90 days and must be repaid by the end of the fiscal year. In addition, the central bank can grant credit based on the monetary program (programa monetario) prepared by the central bank every year.

Source: Ley Orgánica del Banco Central de Bolivia (Decree Law No. 14791).

The 10 percent ceiling refers to the credit granted to cover temporary deficits. This credit cannot exceed 90 days and must be repaid by the end of the fiscal year. In addition, the central bank can grant credit based on the monetary program (programa monetario) prepared by the central bank every year.

Brazil
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(C)Not applicable
Fixed-term loans and advancesP(C)
Purchase of securities (primary market)D(C)UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(C)UnconstrainedNoneUnconstrained
Government deposits at central bankM(C)UnconstrainedNoneDaily reference rate on central bank credit
Source: 1988 Constitution.
Source: 1988 Constitution.
Bulgaria
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesD(L)Less than three months, but repayable not later than the end of the year5 percent of annual revenue of state budget1Unconstrained
Purchase of securities (primary market)D(L)2UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)UnconstrainedNoneUnconstrained
Source: Law on the Bulgarian National Bank, June 6, 1991.

In addition, the amount of outstanding credit shall not exceed the paid-in statutory fund and the reserve funds.

Direct purchases are allowed only as part of a public emission.

Source: Law on the Bulgarian National Bank, June 6, 1991.

In addition, the amount of outstanding credit shall not exceed the paid-in statutory fund and the reserve funds.

Direct purchases are allowed only as part of a public emission.

Canada
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)1Not applicable
Fixed-term loans and advancesD(L)Three months after the end of the fiscal year33 percent and 25 percent of estimated revenue, respectively, to central and provincial governments2Market rates
Purchase of securities (primary market)D(L)UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankD(A)3UnconstrainedNoneZero
Sources: Bank of Canada Act (R.S., 1985, c.B-2, amended by R.S., 1985, c. 18); Financial Administration Act.

Granting credit to the Government through an overdraft facility is not listed among the operations that the Bank of Canada is authorized to perform.

The last time the Bank of Canada made an advance to the Federal Government was in 1961. The Bank of Canada has made an advance to a provincial government on only one occasion (in 1936).

The Government holds deposits both at the central bank and at commercial banks, but the central bank can control their distribution.

Sources: Bank of Canada Act (R.S., 1985, c.B-2, amended by R.S., 1985, c. 18); Financial Administration Act.

Granting credit to the Government through an overdraft facility is not listed among the operations that the Bank of Canada is authorized to perform.

The last time the Bank of Canada made an advance to the Federal Government was in 1961. The Bank of Canada has made an advance to a provincial government on only one occasion (in 1936).

The Government holds deposits both at the central bank and at commercial banks, but the central bank can control their distribution.

Central African Monetary Area1
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountD(L)Less than 12 monthsThe total amount of credit to the Government cannot exceed 20 percent of revenue in the preceding year2Discount rates determined by the board of directors of the bank
Fixed-term loans and advancesD(L)3As aboveAs above
Purchase of securities (primary market)D(L)3As aboveAs above
Purchase of securities (secondary market)D(L)4Less than six monthsNoneUnconstrained
Government deposits at central bankM(L)5UnconstrainedNoneBelow the discount rate
Source: Articles of the Bank of Central African States, approved in November 1972.

Comprises Cameroon, the Central African Republic, Chad, the Congo, Equatorial Guinea, and Gabon.

The 20 percent ceiling applies to all forms of credit including the discount of government paper from the banking system. The ceiling has sometimes been exceeded. It was exceeded, for example, in 1990 when the ceiling was reduced on account of falling revenue. A penalty rate of 1 percent above the discount rate was applied, and a timetable for absorbing the overruns was defined. The ceiling includes not only the government paper actually discounted at the central bank, but also the bonds held by the banking system that are potentially discountable.

Without organized markets for government paper, these items include the purchase from banks of public securities with a maturity of one year or less and the discount of public securities with a maturity of 10 years or less to finance development projects.

Practically no open market operations take place. However, based on Article 17 of the Bank statute, the Bank could in principle buy government paper in the secondary market as long as this is not effected for the benefit of the treasuries.

The governments can keep deposits outside the central bank.

Source: Articles of the Bank of Central African States, approved in November 1972.

Comprises Cameroon, the Central African Republic, Chad, the Congo, Equatorial Guinea, and Gabon.

The 20 percent ceiling applies to all forms of credit including the discount of government paper from the banking system. The ceiling has sometimes been exceeded. It was exceeded, for example, in 1990 when the ceiling was reduced on account of falling revenue. A penalty rate of 1 percent above the discount rate was applied, and a timetable for absorbing the overruns was defined. The ceiling includes not only the government paper actually discounted at the central bank, but also the bonds held by the banking system that are potentially discountable.

Without organized markets for government paper, these items include the purchase from banks of public securities with a maturity of one year or less and the discount of public securities with a maturity of 10 years or less to finance development projects.

Practically no open market operations take place. However, based on Article 17 of the Bank statute, the Bank could in principle buy government paper in the secondary market as long as this is not effected for the benefit of the treasuries.

The governments can keep deposits outside the central bank.

Chile
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(C)1Not applicable
Fixed-term loans and advancesP(C)1
Purchase of securities (primary market)P(C)1
Purchase of securities (secondary market)P(C)1
Government deposits at central bankM(L) 2UnconstrainedNoneTo be determined exclusively by central bank
Sources: 1979 Constitution and 1989 Central Bank Law (Law No. 18840 published on October 10, 1989).

Except in case of war, when the central bank may grant credit to the Government.

The Government can also keep deposits in other banks.

Sources: 1979 Constitution and 1989 Central Bank Law (Law No. 18840 published on October 10, 1989).

Except in case of war, when the central bank may grant credit to the Government.

The Government can also keep deposits in other banks.

Czech Republic
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)D(L)Less than three months5 percent of revenue of the previous yearUnconstrained
Purchase of securities (secondary market)D(L)Less than one yearNoneUnconstrained
Government deposits at central bankM(L)1UnconstrainedNoneUnconstrained
Source: Act on the Czech National Bank of December 17, 1992.

The Government can decide to keep its deposits at other banks.

Source: Act on the Czech National Bank of December 17, 1992.

The Government can decide to keep its deposits at other banks.

Eastern Caribbean Currency Area1
InstrumentDegree

of Control
Allowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesD(L)Temporary advances to meet seasonal needs at conditions decided by central bank5 percent of average annual recurrent revenue over the three preceding financial yearsConditions to be decided by central bank
Purchase of securities (primary market)D(L)2Less than 91 days for treasury bills; less than 15 years for other securitiesThe holding of treasury bills of any government can never exceed 10 percent of the estimated recurrent revenue3As above
Purchase of securities (secondary market)D(L)2As aboveFor the current year; the holding of other securities can never exceed 15 percent of the currency and other demand liabilities of central bank3Unconstrained
Government deposits at central bankM(L)UnconstrainedNoneConditions are to be agreed between the central bank and the participating governments
Source: Eastern Caribbean Central Bank Agreement of July 5, 1983.

Comprises Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

Only publicly issued securities can be purchased.

The above ceilings include the bills acquired as collateral for advances to banks. The foreign assets of the central bank must be at least equal to 50 percent of currency and other demand liabilities. The ceilings do not include the non-interest-bearing, nonnegotiable securities that the governments have to transfer to the central bank to cover any excess of currency and demand liabilities over foreign and domestic assets.

Source: Eastern Caribbean Central Bank Agreement of July 5, 1983.

Comprises Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

Only publicly issued securities can be purchased.

The above ceilings include the bills acquired as collateral for advances to banks. The foreign assets of the central bank must be at least equal to 50 percent of currency and other demand liabilities. The ceilings do not include the non-interest-bearing, nonnegotiable securities that the governments have to transfer to the central bank to cover any excess of currency and demand liabilities over foreign and domestic assets.

Egypt
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesD(L)End of fiscal year10 percent of average public revenue during the preceding three years1Fixed by agreement between the Government and the bank according to money and credit prevailing conditions
Purchase of securities (primary market)D(L)UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)2UnconstrainedNone2 percentage points below the three-month treasury bill rate
Sources: 1957 Central Bank Law and its amendments.

According to the Central Bank Law, the bank can advance loans to the Government that must be repaid within 12 months. In practice, at the beginning of each fiscal year the bank extends a line of credit for an overdraft that has to be repaid by the end of the fiscal year. This is done by selling bonds to the banking system. However, the central bank has an obligation to buy them back from banks at face value at any time. In addition, the exchange losses or gains of the Government are debited or credited to a special account monthly, not included in the above ceilings. This account is also securitized by the end of the fiscal year along with the overdraft account and is interest free.

The Government can also keep deposits with commercial banks.

Sources: 1957 Central Bank Law and its amendments.

According to the Central Bank Law, the bank can advance loans to the Government that must be repaid within 12 months. In practice, at the beginning of each fiscal year the bank extends a line of credit for an overdraft that has to be repaid by the end of the fiscal year. This is done by selling bonds to the banking system. However, the central bank has an obligation to buy them back from banks at face value at any time. In addition, the exchange losses or gains of the Government are debited or credited to a special account monthly, not included in the above ceilings. This account is also securitized by the end of the fiscal year along with the overdraft account and is interest free.

The Government can also keep deposits with commercial banks.

France
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountM(L)1Not applicableF 20.5 billion plus the revaluation of the foreign reserves held by the Foreign Exchange Stabilization Fund2Zero
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)P(L)
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)3UnconstrainedNone“Taux des appels d’offres”4
Source: Agreement of September 17, 1973, approved by Law of December 21, 1973.

The maximum amount of mandatory credit is subject to an agreement between the Ministry of Economics and Finance and the Governor with the authorization of the General Council of the Banque de France and approval of Parliament (Law of January 3, 1973). The current agreement was signed on September 17, 1973.

The reason for this provision is that, as explained by Eizenga (1990). “Any losses suffered by the Fund are borne by, and any profits made by it accrue to, the Government. In order to offset the financial consequences for the Government’s cash position [of the foreign exchange gains or losses], the ceiling applicable to the Bank lending to the Government is raised by an amount equal to the losses suffered by the Fund or lowered by an amount equal to the profits. If the ceiling is increased the additional permissible lending is free of interest; if the ceiling is lowered, the reduction in permissible lending is deduced from the amount available for non-interest-bearing lending.” The ceiling is revised twice a year (in January and July).

The Government is not allowed to keep deposits outside the central bank.

This is the lowest of the intervention rates of the Banque de France.

Source: Agreement of September 17, 1973, approved by Law of December 21, 1973.

The maximum amount of mandatory credit is subject to an agreement between the Ministry of Economics and Finance and the Governor with the authorization of the General Council of the Banque de France and approval of Parliament (Law of January 3, 1973). The current agreement was signed on September 17, 1973.

The reason for this provision is that, as explained by Eizenga (1990). “Any losses suffered by the Fund are borne by, and any profits made by it accrue to, the Government. In order to offset the financial consequences for the Government’s cash position [of the foreign exchange gains or losses], the ceiling applicable to the Bank lending to the Government is raised by an amount equal to the losses suffered by the Fund or lowered by an amount equal to the profits. If the ceiling is increased the additional permissible lending is free of interest; if the ceiling is lowered, the reduction in permissible lending is deduced from the amount available for non-interest-bearing lending.” The ceiling is revised twice a year (in January and July).

The Government is not allowed to keep deposits outside the central bank.

This is the lowest of the intervention rates of the Banque de France.

Germany
InstrumentDegree

of Control
Allowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesD(L)Up to three monthsDM 10.5 billion1Lombard rate
Purchase of securities (primary market)P(L)
Purchase of securities (secondary market)D(L)UnconstrainedNoneMarket rates
Government deposits at central bankM(L)2UnconstrainedNoneZero
Sources: Deutsche Bundesbank Act of July 26, 1957. and later amendments.

Including treasury bills outstanding that the Bundesbank bought or promised to buy. Out of the total, DM 7.3 billion can be granted to the Federal Government and its special funds (federal railways, federal post office, etc.), and DM 3.3 billion to Lãnder governments (the latter ceiling increases according to the size of the population).

According to Article 17 of the Bundesbank Act. the central government, the Lãnder governments, and some government agencies are obliged to deposit their funds at the central bank. However, the Lãnder governments have been granted an exemption by the central bank to deposit their funds at other banks; moreover, to influence the money market, the Bundesbank Act enables the Bundesbank, acting in conjunction with the public authorities, to shift public funds temporarily to commercial banks.

Sources: Deutsche Bundesbank Act of July 26, 1957. and later amendments.

Including treasury bills outstanding that the Bundesbank bought or promised to buy. Out of the total, DM 7.3 billion can be granted to the Federal Government and its special funds (federal railways, federal post office, etc.), and DM 3.3 billion to Lãnder governments (the latter ceiling increases according to the size of the population).

According to Article 17 of the Bundesbank Act. the central government, the Lãnder governments, and some government agencies are obliged to deposit their funds at the central bank. However, the Lãnder governments have been granted an exemption by the central bank to deposit their funds at other banks; moreover, to influence the money market, the Bundesbank Act enables the Bundesbank, acting in conjunction with the public authorities, to shift public funds temporarily to commercial banks.

Greece
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountD(L)Not applicableFor 1993 the balance cannot exceed the amount outstanding at the end of 1992 by more than 5 percent of the increment of budgeted government expenditures in 1993. As of 1994 no overdraft facility will be allowed1.5 percent for the amount exceeding Dr 100 million
Fixed-term loans and advancesD(L)UnconstrainedNoneTo be agreed between the Bank of Greece and the Government (10 percent in the latest agreement)
Purchase of securities (primary market)D(L)UnconstrainedIt cannot exceed an upper limit set by the General Council of the Bank (currently Dr 250 billion)Unconstrained
Purchase of securities (secondary market)D(L)1UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)Not applicableNoneZero
Sources: Presidential decree of August 21/22, 1931, regarding code of provisions concerning the Bank of Greece, and later amendments. The most recent amendments concerning central bank credit to the Government were enacted with Law 1266 of 1982 and Law 2076 of 1992.

Purchases of securities on the secondary market are not used in practice; repurchase agreements have been used infrequently.

Sources: Presidential decree of August 21/22, 1931, regarding code of provisions concerning the Bank of Greece, and later amendments. The most recent amendments concerning central bank credit to the Government were enacted with Law 1266 of 1982 and Law 2076 of 1992.

Purchases of securities on the secondary market are not used in practice; repurchase agreements have been used infrequently.

Hungary
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesD(L)UnconstrainedThe total stock of

credit cannot increase

by more than 3 percent of

planned revenue1
Basic interest rate2
Purchase of securities (primary market)D(L)UnconstrainedUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedUnconstrained
Government deposits at central bankM(A)3UnconstrainedNone40 percent of the basic rate4
Source: Central Bank Law (Law LX of 1991).

Excluding privatization revenue. The limits will be operational only in 1995. No limit was set for 1992. The limits for 1993 and 1994 are 5 percent and 4 percent, respectively. The ceiling applies to the total stock of loans and securities, excluding those acquired through repurchase agreements.

According to Article 19, section 4 of the Central Bank Law, the interest rate “shall be guided by the basic interest rate.” This is the main posted rate of the National Bank of Hungary. In recent budget laws, the rate on new credit has been set at the same level of the basic rate. However, this rate applies only to new credit. The stock of long-term state debt held by the National Bank of Hungary pays an interest of 40 percent of the basic rate.

The central government has to keep all its deposits at the central bank. However, the so-called central budgetary institutions, which in Hungary intermediate a large share of central government expenditure, are allowed to keep deposits outside the central bank.

Based on a bilateral agreement between the National Bank of Hungary and the Ministry of Finance, confirmed, for 1993, in the 1993 budget law.

Source: Central Bank Law (Law LX of 1991).

Excluding privatization revenue. The limits will be operational only in 1995. No limit was set for 1992. The limits for 1993 and 1994 are 5 percent and 4 percent, respectively. The ceiling applies to the total stock of loans and securities, excluding those acquired through repurchase agreements.

According to Article 19, section 4 of the Central Bank Law, the interest rate “shall be guided by the basic interest rate.” This is the main posted rate of the National Bank of Hungary. In recent budget laws, the rate on new credit has been set at the same level of the basic rate. However, this rate applies only to new credit. The stock of long-term state debt held by the National Bank of Hungary pays an interest of 40 percent of the basic rate.

The central government has to keep all its deposits at the central bank. However, the so-called central budgetary institutions, which in Hungary intermediate a large share of central government expenditure, are allowed to keep deposits outside the central bank.

Based on a bilateral agreement between the National Bank of Hungary and the Ministry of Finance, confirmed, for 1993, in the 1993 budget law.

India
InstrumentDegree

of Control
Allowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesD(L)1Three months or lessNoneUnconstrained
Purchase of securities (primary market)D(L)UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)2UnconstrainedNoneZero
Sources: Reserve Bank of India Act, 1934, with amendments.

Advances can be made to central and state governments. In addition, securitized loans not exceeding 90 days can be made to local authorities.

The central government can keep deposits outside the central bank only in places where the central bank does not operate. The central bank may also collect deposits from state governments.

Sources: Reserve Bank of India Act, 1934, with amendments.

Advances can be made to central and state governments. In addition, securitized loans not exceeding 90 days can be made to local authorities.

The central government can keep deposits outside the central bank only in places where the central bank does not operate. The central bank may also collect deposits from state governments.

Indonesia
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountM(L)1Not applicableDetermined in the state budget approved by the House of Representatives23 percent3
Fixed-term loans and advancesP(L)4
Purchase of securities (primary market)D(L)UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)5UnconstrainedNoneUnconstrained
Source: Central Bank Law (Act No. 13 of 1968).

The credit on the current account must be collateralized by treasury notes.

According to Article 35 of Act No. 130 of 1968, “The Bank will grant credit on current account to the Government in order to support the Treasury when necessary as determined in the State Budget.”

The rate can, however, be modified by the Monetary Council of the Bank “in accordance with the developments of the situation.”

Advances or loans to the Government other than those on the current account are not listed among the operations that the central bank can perform.

With some exceptions, the Government is not allowed to keep deposits outside the central bank. The exceptions are some overnight deposits related to tax collection and some deposits held in certain government banks to finance expenditure in areas where the central bank does not have branches.

Source: Central Bank Law (Act No. 13 of 1968).

The credit on the current account must be collateralized by treasury notes.

According to Article 35 of Act No. 130 of 1968, “The Bank will grant credit on current account to the Government in order to support the Treasury when necessary as determined in the State Budget.”

The rate can, however, be modified by the Monetary Council of the Bank “in accordance with the developments of the situation.”

Advances or loans to the Government other than those on the current account are not listed among the operations that the central bank can perform.

With some exceptions, the Government is not allowed to keep deposits outside the central bank. The exceptions are some overnight deposits related to tax collection and some deposits held in certain government banks to finance expenditure in areas where the central bank does not have branches.

Ireland
InstrumentDegree

of Control
Allowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountD(L)Not applicableNoneUnconstrained
Fixed-term loans and advancesD(L)UnconstrainedNoneUnconstrained
Purchase of securities (primary market)D(L)UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankD(L)1UnconstrainedNoneUnconstrained
Source: 1989 Central Bank Law.

The central bank can also keep deposits at commercial banks.

Source: 1989 Central Bank Law.

The central bank can also keep deposits at commercial banks.

Israel
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesM(L)1Advances must be repaid by the end of the financial year1.6 percent of budgeted expenditure except in two quarters in each financial year when the ceiling is raised to 3.2 percent2, 3Unconstrained
Purchase of securities (primary market)M(L)1UnconstrainedThe excess of expenditure in foreign currency over revenue in foreign currencyUnconstrained
Purchase of securities (secondary market)D(L)4UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)UnconstrainedNoneUnconstrained
Source: Bank of Israel Law No. 5714-1954, as amended in August 1985.

According to the law, the Bank of Israel may make advances to the Government at the Government’s request.

In addition, the stock of central bank credit to the Government outstanding when the new Central Bank Law was introduced can be refinanced by a loan whose maturity and interest rate are to be fixed by agreement between the Minister of Finance and the Governor. In this respect, it was agreed that, taking interest payments into account, the nominal stock of loans would remain constant in nominal terms.

The choice of the quarters is at the option of the Government. The 1.6 percent ceiling, however, cannot be exceeded for more than 30 days.

Purchases and sales on the market can involve only securities bearing a fixed interest rate.

Source: Bank of Israel Law No. 5714-1954, as amended in August 1985.

According to the law, the Bank of Israel may make advances to the Government at the Government’s request.

In addition, the stock of central bank credit to the Government outstanding when the new Central Bank Law was introduced can be refinanced by a loan whose maturity and interest rate are to be fixed by agreement between the Minister of Finance and the Governor. In this respect, it was agreed that, taking interest payments into account, the nominal stock of loans would remain constant in nominal terms.

The choice of the quarters is at the option of the Government. The 1.6 percent ceiling, however, cannot be exceeded for more than 30 days.

Purchases and sales on the market can involve only securities bearing a fixed interest rate.

Italy
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountM(L)Not applicable14 percent of budgeted expenditure1 percent
Fixed-term loans and advancesM(L)11None1
Purchase of securities (primary market)D(L)UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)UnconstrainedNoneUnconstrained
Sources: 1936 Statute of the Bank of Italy (Royal Decree of June 11, 1936, No. 1067) and 1947 amendment (Decree Law of December 24, 1947, No. 1490, and Decree Law of May 7, 1948, No. 544).

Fixed-term loans must be authorized by Parliament, which also decides the terms under which loans are granted. This happened only once since the 1947 stabilization, in 1983.

Sources: 1936 Statute of the Bank of Italy (Royal Decree of June 11, 1936, No. 1067) and 1947 amendment (Decree Law of December 24, 1947, No. 1490, and Decree Law of May 7, 1948, No. 544).

Fixed-term loans must be authorized by Parliament, which also decides the terms under which loans are granted. This happened only once since the 1947 stabilization, in 1983.

Japan
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)D(L)1Short-term1NoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)2UnconstrainedNoneZero
Sources: Finance Law, Bank of Japan Law, Accounting Law.

The Finance Law prohibits the underwriting of government bonds, except for special reasons and with the authorization of the Diet. Under this provision the central bank is allowed to underwrite government bonds, refinancing those coming to maturity that had previously been purchased from the private sector. Although no prohibition exists on underwriting the so-called financing bills (issued by the Government for short-term financing), purchases of these bills are limited to the balances unsold after public offerings.

The Ministry of Finance cannot hold deposits at commercial banks. However, the Foreign Exchange Fund Special Account is allowed to keep deposits with commercial banks under the name of the Minister of Finance.

Sources: Finance Law, Bank of Japan Law, Accounting Law.

The Finance Law prohibits the underwriting of government bonds, except for special reasons and with the authorization of the Diet. Under this provision the central bank is allowed to underwrite government bonds, refinancing those coming to maturity that had previously been purchased from the private sector. Although no prohibition exists on underwriting the so-called financing bills (issued by the Government for short-term financing), purchases of these bills are limited to the balances unsold after public offerings.

The Ministry of Finance cannot hold deposits at commercial banks. However, the Foreign Exchange Fund Special Account is allowed to keep deposits with commercial banks under the name of the Minister of Finance.

Malaysia
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountD(L)Not applicableNoneDetermined by central bank
Fixed-term loans and advancesD(L)Advances must be repaid within three months after the end of the fiscal year12.5 percent of government revenue in the current yearDetermined by central bank
Purchase of securities (primary market)D(L)130 yearsNoneUnconstrained
Purchase of securities (secondary market)D(L)130 yearsNoneUnconstrained
Government deposits at central bankM(L)UnconstrainedNoneUnconstrained
Source: 1958 Central Bank of Malaysia Ordinance.

Although purchases of treasury bills are unconstrained, the central bank can purchase securities only if they have been publicly offered for sale or form part of an issue that is being made to the public.

Source: 1958 Central Bank of Malaysia Ordinance.

Although purchases of treasury bills are unconstrained, the central bank can purchase securities only if they have been publicly offered for sale or form part of an issue that is being made to the public.

Mexico
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountM(L)Not applicable1 percent of budgeted revenue for the current year1Equal to the treasury bill rate of the latest auction
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)P(L)2
Purchase of securities (secondary market)D(L)UnconstrainedSet by central bank at the beginning of the year3Unconstrained
Government deposits at central bankM(L)4UnconstrainedUnconstrainedEqual to the treasury bill rate of the latest auction
Source: 1985 Central Bank Law (Ley Orgánica del Banco de Mexico), published on December 31, 1984.

However, this ceiling can be exceeded if the difference between revenues and expenditures increases substantially because of “extraordinary circumstances.”

Direct purchases from the Government are allowed only if the counterpart is frozen in deposits at the central bank.

By the end of January the central bank has to set a ceiling on total domestic financing to be provided during the year to the Government and the banking system. This ceiling, which does not include the financing through the overdraft facility, has to be set taking into account the overall macroeconomic objectives. Purchases under this ceiling have been classified as “discretionary” (first column) because the ceiling is formally set by the central bank. The ceiling does not include the purchase of government paper directly from the Government for monetary purposes (for resale on the market to mop up liquidity), whose counterpart is frozen in deposits at the central bank (see footnote 2).

The Government can keep deposits outside the central bank.

Source: 1985 Central Bank Law (Ley Orgánica del Banco de Mexico), published on December 31, 1984.

However, this ceiling can be exceeded if the difference between revenues and expenditures increases substantially because of “extraordinary circumstances.”

Direct purchases from the Government are allowed only if the counterpart is frozen in deposits at the central bank.

By the end of January the central bank has to set a ceiling on total domestic financing to be provided during the year to the Government and the banking system. This ceiling, which does not include the financing through the overdraft facility, has to be set taking into account the overall macroeconomic objectives. Purchases under this ceiling have been classified as “discretionary” (first column) because the ceiling is formally set by the central bank. The ceiling does not include the purchase of government paper directly from the Government for monetary purposes (for resale on the market to mop up liquidity), whose counterpart is frozen in deposits at the central bank (see footnote 2).

The Government can keep deposits outside the central bank.

Morocco
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)1, 2Not applicable
Fixed-term loans and advancesD(L)1240 days during the same calendar year10 percent of ordinary budget revenue of the previous yearUnconstrained
Purchase of securities (primary market)P(L)2
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)UnconstrainedNoneUnconstrained
Source: Law No. 1-61-258 of December 30, 1962.

The advances are granted in the form of overdraft facilities.

No financial assistance other than that specified by the law can be granted except by an agreement between the state and the bank.

Source: Law No. 1-61-258 of December 30, 1962.

The advances are granted in the form of overdraft facilities.

No financial assistance other than that specified by the law can be granted except by an agreement between the state and the bank.

Namibia
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesD(L)Up to six monthsThe total amount of advances to the Government and of government securities held by the central bank cannot exceed 25 percent of the Government’s average ordinary revenue for the three preceding financial years2Related to the current treasury bill rate
Purchase of securities (primary market)P(L)1
Purchase of securities (secondary market)D(L)UnconstrainedUnconstrained
Government deposits at central bankM(L)3UnconstrainedNoneUnconstrained
Source: Bank of Namibia Act (Act 8 of 1990).

The bank can buy only securities that “formed part of a public issue” (Article 46 of the Bank of Namibia Act).

Including the government securities discounted from banks. The ceiling, however, does not include the transfer of nonnegotiable securities from the Government for recapitalization owing to central bank losses (and, separately, for foreign exchange losses when accumulated reserves are not sufficient). In “exceptional circumstances” the Minister of Finance can call on the bank to allow the total ceiling to be raised to 35 percent.

The Government can keep deposits also with other banks.

Source: Bank of Namibia Act (Act 8 of 1990).

The bank can buy only securities that “formed part of a public issue” (Article 46 of the Bank of Namibia Act).

Including the government securities discounted from banks. The ceiling, however, does not include the transfer of nonnegotiable securities from the Government for recapitalization owing to central bank losses (and, separately, for foreign exchange losses when accumulated reserves are not sufficient). In “exceptional circumstances” the Minister of Finance can call on the bank to allow the total ceiling to be raised to 35 percent.

The Government can keep deposits also with other banks.

Netherlands
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountM(L)Not applicablef. 150 millionZero
Fixed-term loans and advancesD(A)1Unconstrained3 percent of budgetary revenue of the preceding yearDiscount rate on bills of exchange
Purchase of securities (primary market)
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)2UnconstrainedNoneZero
Sources: Netherlands Bank Act of April 23, 1948, as last amended by act of October 30, 1985.

Based on a skeleton agreement concluded in 1975, and last amended in 1984, annual finance arrangements have been renewed every year since 1979. The loans are extended through the purchase of treasury bills. The 3 percent ceiling cannot be exceeded at any point. However, the average holding of treasury bills during the year cannot exceed one-third of the maximum ceiling. The average use of this facility in 1992 was f. 1,816.5 million with a maximum drawing of f. 5,750 million. In addition to the Central Government, two other government bodies have access to central bank credit: the Social Security Bank (up to f. 1 billion, but on average not more than f. 40 million per quarter) and the City of Amsterdam (up to f. 22.5 million, but on average not more than f. 7.5 million per quarter). As indicated in a memorandum to Parliament in the summer of 1992, all the above credit facilities will have to be eliminated to comply with Article 104 of the Maastricht Treaty.

The Government can keep deposits outside the central bank but it does so only to a limited extent.

Sources: Netherlands Bank Act of April 23, 1948, as last amended by act of October 30, 1985.

Based on a skeleton agreement concluded in 1975, and last amended in 1984, annual finance arrangements have been renewed every year since 1979. The loans are extended through the purchase of treasury bills. The 3 percent ceiling cannot be exceeded at any point. However, the average holding of treasury bills during the year cannot exceed one-third of the maximum ceiling. The average use of this facility in 1992 was f. 1,816.5 million with a maximum drawing of f. 5,750 million. In addition to the Central Government, two other government bodies have access to central bank credit: the Social Security Bank (up to f. 1 billion, but on average not more than f. 40 million per quarter) and the City of Amsterdam (up to f. 22.5 million, but on average not more than f. 7.5 million per quarter). As indicated in a memorandum to Parliament in the summer of 1992, all the above credit facilities will have to be eliminated to comply with Article 104 of the Maastricht Treaty.

The Government can keep deposits outside the central bank but it does so only to a limited extent.

Peru
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)P(L)1
Purchase of securities (secondary market)D(L)UnconstrainedThe increase in the stock of government bonds cannot exceed in one year 5 percent of the stock of monetary base at the end of the previous year.Unconstrained
Government deposits at central bankD(L)2UnconstrainedNoneUnconstrained
Source: Ley Orgánica del Banco Central de Reserva del Perú, published on December 30, 1992.

Excluding the government bonds transferred from the Government to the central bank to cover its losses.

The Central Bank Law does not prohibit government deposits at the central bank. However, in Peru the role of government agent, including the holding of government deposits, is performed by the Banco de la Nación.

Source: Ley Orgánica del Banco Central de Reserva del Perú, published on December 30, 1992.

Excluding the government bonds transferred from the Government to the central bank to cover its losses.

The Central Bank Law does not prohibit government deposits at the central bank. However, in Peru the role of government agent, including the holding of government deposits, is performed by the Banco de la Nación.

Philippines
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(A)Not applicable
Fixed-term loans and advancesD(L)Advances must be repaid before the end of the first quarter following the end of the fiscal year20 percent of average revenue of the last three preceding fiscal yearsDetermined by the monetary authorities1
Purchase of securities (primary market)P(L)
Purchase of securities (secondary market)D(L)UnconstrainedCentral bank has to refrain from open market purchases in periods of inflation or as long as inflationary dangers existUnconstrained2
Government deposits at central bankM(L)3UnconstrainedNoneUnconstrained2
Sources: Central Bank Act (Republic Act No. 265 as amended by P.D. No. 72 and No. 1007 and No. 1282, PD. Dlg No. 67 and P.D. No. 1771 and No. 1827).

Since 1984 the rates are based on treasury bill rates.

Generally at market rates.

The Government is allowed to keep deposits with government-owned banks.

Sources: Central Bank Act (Republic Act No. 265 as amended by P.D. No. 72 and No. 1007 and No. 1282, PD. Dlg No. 67 and P.D. No. 1771 and No. 1827).

Since 1984 the rates are based on treasury bill rates.

Generally at market rates.

The Government is allowed to keep deposits with government-owned banks.

Portugal
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)1Not applicable
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)D(L)Short term2NoneTerms must be agreed between the Finance Ministry and the Bank
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(A)3UnconstrainedNoneUnconstrained
Sources: Lei Orgánica of the Bank of Portugal (Decree-Law No. 337/90 of October 30, 1990) and amendments introduced with the 1992 budget law.

To comply with the Maastricht Treaty, the 1992 budget law abolished the automatic access to overdraft facility with the central bank (which was free of interest). The outstanding stock of credit has been replaced by a 10-year loan at below-market rates, gradually converging to market rates. Based on a specific protocol in the Maastricht Treaty, the Autonomous Regions of Azores and Madeira will be allowed to maintain the current overdraft facility, but Portugal is committed to remove this facility as soon as possible.

Only the underwriting of treasury bills, whose maturity in Portugal does not exceed 12 months, is allowed.

The law allows the Bank of Portugal to take demand deposits from the state. However, following a bilateral agreement with the Government, the Bank of Portugal is mandated to keep some government deposits. The Government is allowed to keep deposits outside the central bank.

Sources: Lei Orgánica of the Bank of Portugal (Decree-Law No. 337/90 of October 30, 1990) and amendments introduced with the 1992 budget law.

To comply with the Maastricht Treaty, the 1992 budget law abolished the automatic access to overdraft facility with the central bank (which was free of interest). The outstanding stock of credit has been replaced by a 10-year loan at below-market rates, gradually converging to market rates. Based on a specific protocol in the Maastricht Treaty, the Autonomous Regions of Azores and Madeira will be allowed to maintain the current overdraft facility, but Portugal is committed to remove this facility as soon as possible.

Only the underwriting of treasury bills, whose maturity in Portugal does not exceed 12 months, is allowed.

The law allows the Bank of Portugal to take demand deposits from the state. However, following a bilateral agreement with the Government, the Bank of Portugal is mandated to keep some government deposits. The Government is allowed to keep deposits outside the central bank.

Romania
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesD(L)Not exceeding December 3110 percent of total budget revenue and twice the sum of capital and reserve fundZero
Purchase of securities (primary market)P(L)1
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)2UnconstrainedNoneZero
Source: Law concerning the Statute of the National Bank of Romania, promulgated on March 29, 1991.

The direct purchase of securities from the Government is not listed among the operations that the central bank can implement.

The Government is allowed to keep deposits outside the central bank.

Source: Law concerning the Statute of the National Bank of Romania, promulgated on March 29, 1991.

The direct purchase of securities from the Government is not listed among the operations that the central bank can implement.

The Government is allowed to keep deposits outside the central bank.

Slovak Republic
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)D(L)Less than three months5 percent of revenue of the previous yearUnconstrained
Purchase of securities (secondary market)D(L)Less than one yearNoneUnconstrained
Government deposits at central bankM(L)1UnconstrainedNoneUnconstrained
Source: Act on the National Bank of Slovakia of November 18, 1992.

The Government can decide to keep its deposits at other banks.

Source: Act on the National Bank of Slovakia of November 18, 1992.

The Government can decide to keep its deposits at other banks.

Spain1
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountM(L)2Not applicableFixed in nominal terms at Ptas 1156 billion3Zero
Fixed-term loans and advancesM(L)4Regulated by law4NoneRegulated by law4
Purchase of securities (primary market)D(L)UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)2, 5UnconstrainedNoneZero
Sources: Decree Law 18/1962 on the nationalization of the Bank of Spain; 1987 Budget Law (Ley de Presupuestos Generales des Estado); Law 1091/1988 (Ley General Presupuestavia); and 1990 Budget Law.

Based on a bill recently presented to Parliament, all forms of direct credit to the Government would be prohibited.

The Bank of Spain acts as government cashier. With the exception reported below, all payments and receipts are registered in a current account that can be overdrawn. The exception is an account used for debt service payments, which is traditionally kept in balance but which, in principle, could also be overdrawn. The latter account is not subject to a ceiling.

The ceiling must be met only at year-end.

Fixed-term loans must be authorized by law.

The Government can keep deposits outside the central bank only in exceptional circumstances. Deposits, however, are not maintained in separate accounts but flow into the current account, which may show positive balances.

Sources: Decree Law 18/1962 on the nationalization of the Bank of Spain; 1987 Budget Law (Ley de Presupuestos Generales des Estado); Law 1091/1988 (Ley General Presupuestavia); and 1990 Budget Law.

Based on a bill recently presented to Parliament, all forms of direct credit to the Government would be prohibited.

The Bank of Spain acts as government cashier. With the exception reported below, all payments and receipts are registered in a current account that can be overdrawn. The exception is an account used for debt service payments, which is traditionally kept in balance but which, in principle, could also be overdrawn. The latter account is not subject to a ceiling.

The ceiling must be met only at year-end.

Fixed-term loans must be authorized by law.

The Government can keep deposits outside the central bank only in exceptional circumstances. Deposits, however, are not maintained in separate accounts but flow into the current account, which may show positive balances.

Switzerland
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesD(A)1One day2Sw F 1 billionLombard rate3
Purchase of securities (primary market)D(L)1UnconstrainedNoneUnconstrained
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(A)4Below two yearsNoneSight deposits: overnight rate up to Sw F 500 million; no remuneration for further deposits. Time deposits: money market rates
Source: Swiss National Bank Law.

The Swiss National Bank Law mentions only that the government current account cannot be overdrawn. In theory, the Swiss National Bank could provide unlimited credit to the Government by purchasing government securities or by granting Lombard rate credit based on collateral in the form of government securities. In practice, central bank credit to the Government is an insignificant phenomenon in Switzerland.

The existing Lombard facility, based on a bilateral agreement, aims at providing overnight liquidity to the Government. In practice, Lombard credit to the Government is insignificant (one overnight credit in 1991 and two in 1992).

The Lombard rate is equal to the average of overnight money market rates of the previous two days plus 200 basis points.

All government deposits with maturity below two years must be kept at the central bank.

Source: Swiss National Bank Law.

The Swiss National Bank Law mentions only that the government current account cannot be overdrawn. In theory, the Swiss National Bank could provide unlimited credit to the Government by purchasing government securities or by granting Lombard rate credit based on collateral in the form of government securities. In practice, central bank credit to the Government is an insignificant phenomenon in Switzerland.

The existing Lombard facility, based on a bilateral agreement, aims at providing overnight liquidity to the Government. In practice, Lombard credit to the Government is insignificant (one overnight credit in 1991 and two in 1992).

The Lombard rate is equal to the average of overnight money market rates of the previous two days plus 200 basis points.

All government deposits with maturity below two years must be kept at the central bank.

Turkey
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountM(L)1Not applicable15 percent of current year’s general budget expenditure1To be decided between the Ministry of Finance and the bank2
Fixed-term loans and advancesD(L)3Nine months or less3To be decided by the board of the bankTo be decided by the board of the bank
Purchase of securities (primary market)D(L)Between 3 and 12 monthsAs aboveUnconstrained
Purchase of securities (secondary market)D(L)Below one yearAs above4Unconstrained
Government deposits at central bankM(L)5UnconstrainedNoneZero
Source: Central Bank Law (Law No. 1211 of January 19, 1970).

The proportion of the overdraft to be utilized is decided jointly by the Ministry of Finance and the bank. In addition to this ceiling the state recognizes as its own debt the foreign exchange losses on foreign loans (devaluation account). No interest is paid on this account.

The current interest rate is 4 percent.

Credit to state enterprises. Credit is extended through the discount of bills.

The total amount of open market operations (or both private and public securities) cannot exceed five times the total of the bank’s capital and reserve funds.

The Government can keep deposits outside the central bank, but only in places where the central bank does not have branches.

Source: Central Bank Law (Law No. 1211 of January 19, 1970).

The proportion of the overdraft to be utilized is decided jointly by the Ministry of Finance and the bank. In addition to this ceiling the state recognizes as its own debt the foreign exchange losses on foreign loans (devaluation account). No interest is paid on this account.

The current interest rate is 4 percent.

Credit to state enterprises. Credit is extended through the discount of bills.

The total amount of open market operations (or both private and public securities) cannot exceed five times the total of the bank’s capital and reserve funds.

The Government can keep deposits outside the central bank, but only in places where the central bank does not have branches.

United Kingdom
InstrumentDegree

of Control
Allowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountD1Not applicableNoneMarket rate
Fixed-term loans and advancesD1UnconstrainedNoneMarket rate
Purchase of securities (primary market)M2UnconstrainedNoneUnconstrained3
Purchase of securities (secondary market)DUnconstrainedNoneUnconstrained3
Government deposits at central bankM1, 4UnconstrainedNoneMarket rate
Sources: Various bills, bilateral agreements, and “tradition.”

There are two main current accounts: the Consolidated Fund (for current expenditure and revenue) and the National Loan Fund (for debt management operations). To ensure that the accounts are not overdrawn, the Bank of England grants short-term advances (ways and means advances). This procedure is not legally required but it is traditionally implemented whenever needed. Surplus funds are used to reduce short-term debt. Once the debt is extinguished, further funds are placed on deposit.

Government paper is routinely purchased by the Bank of England for subsequent sale to the market. Purchases are mandatory as long as the Bank underwrites gilt issues.

Money market rates apply by tradition.

The Government is allowed to keep deposits at commercial banks.

Sources: Various bills, bilateral agreements, and “tradition.”

There are two main current accounts: the Consolidated Fund (for current expenditure and revenue) and the National Loan Fund (for debt management operations). To ensure that the accounts are not overdrawn, the Bank of England grants short-term advances (ways and means advances). This procedure is not legally required but it is traditionally implemented whenever needed. Surplus funds are used to reduce short-term debt. Once the debt is extinguished, further funds are placed on deposit.

Government paper is routinely purchased by the Bank of England for subsequent sale to the market. Purchases are mandatory as long as the Bank underwrites gilt issues.

Money market rates apply by tradition.

The Government is allowed to keep deposits at commercial banks.

United States
InstrumentDegree

of Control
Allowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)1Not applicable
Fixed-term loans and advancesP(L)1
Purchase of securities (primary market)P(L)2
Purchase of securities (secondary market)D(L)UnconstrainedNoneUnconstrained
Government deposits at central bankM(L)3UnconstrainedNoneZero
Sources: Federal Reserve Act (1913) and its amendments.

These operations are not explicitly prohibited, but they are not listed as operations that the central bank can implement.

The prohibition of direct purchases applies to obligations that are direct obligations of the United States. Federal Reserve Banks are, however, allowed to buy direct from the issuer obligations with maturity not exceeding six months issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by local authorities (including states), based on the rules prescribed by the Federal Reserve. Moreover, based on the act of May 12, 1933, restated and recodified by act of September 13, 1982 (96 Stat. 993), 31 U.S.C. No. 5301, the President, when foreign commerce is adversely affected, may direct the Secretary of the Treasury to make an agreement with the Federal Reserve, under which Federal Reserve Banks are permitted to buy direct and to hold S3 billion of government obligations.

The Treasury may keep deposits at commercial banks as well.

Sources: Federal Reserve Act (1913) and its amendments.

These operations are not explicitly prohibited, but they are not listed as operations that the central bank can implement.

The prohibition of direct purchases applies to obligations that are direct obligations of the United States. Federal Reserve Banks are, however, allowed to buy direct from the issuer obligations with maturity not exceeding six months issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by local authorities (including states), based on the rules prescribed by the Federal Reserve. Moreover, based on the act of May 12, 1933, restated and recodified by act of September 13, 1982 (96 Stat. 993), 31 U.S.C. No. 5301, the President, when foreign commerce is adversely affected, may direct the Secretary of the Treasury to make an agreement with the Federal Reserve, under which Federal Reserve Banks are permitted to buy direct and to hold S3 billion of government obligations.

The Treasury may keep deposits at commercial banks as well.

Venezuela
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountP(L)Not applicable
Fixed-term loans and advancesP(L)
Purchase of securities (primary market)P(L)
Purchase of securities (secondary market)D(L)UnconstrainedNoneMarket rates
Government deposits at central bankM(L)UnconstrainedNoneTo be agreed with the Government
Source: Ley de Reforma Parcial de la Ley del Banco Central de Venezuela, published on December 4, 1992.
Source: Ley de Reforma Parcial de la Ley del Banco Central de Venezuela, published on December 4, 1992.
West African Monetary Union1
InstrumentDegree of ControlAllowed

Maturity
Quantitative

Ceiling
Interest Rate
Overdraft on current accountD(L)Not applicableThe total amount of credit to the Government cannot exceed 20 percent of revenue in the preceding year2Discount rate
Fixed-term loans and advancesD(L)3As aboveDiscount rate
Purchase of securities (primary market)D(L)33As aboveDiscount rate
Purchase of securities (secondary market)P(L)4
Government deposits at central bankM(L)UnconstrainedNoneBelow the discount rate
Source: Charter of the Central Bank of West African States.

Comprises Benin, Burkina Faso, Côte d’Ivoire, Mali. Niger, Senegal, and Togo.

The 20 percent ceiling applies to all forms of credit including the discount of government paper from the banking system. This ceiling is computed net of the deposits held by the Government with the central bank.

In the absence of organized markets and/or government paper, these items include the purchase from banks of public securities with a maturity of one year or less and the discount of public securities with a maturity of 10 years or less to finance development.

The prohibition is not explicit. Article 10 of the central bank statute gives the central bank the possibility to acquire credits to the Governments of the union. However, the list of credit operations of the central bank toward the Governments, detailed in Articles 13-15, does not include the purchase of securities.

Source: Charter of the Central Bank of West African States.

Comprises Benin, Burkina Faso, Côte d’Ivoire, Mali. Niger, Senegal, and Togo.

The 20 percent ceiling applies to all forms of credit including the discount of government paper from the banking system. This ceiling is computed net of the deposits held by the Government with the central bank.

In the absence of organized markets and/or government paper, these items include the purchase from banks of public securities with a maturity of one year or less and the discount of public securities with a maturity of 10 years or less to finance development.

The prohibition is not explicit. Article 10 of the central bank statute gives the central bank the possibility to acquire credits to the Governments of the union. However, the list of credit operations of the central bank toward the Governments, detailed in Articles 13-15, does not include the purchase of securities.

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1The quotation is reported by von Bonin (1979), p. 48.
2The Brussels conference of September 24-October 8, 1920, and the Geneva conference of May 1922 were particularly important. See, for information on these conferences and on the activity of the League of Nations in this area, Ulrich (1931) and Kisch and Elkin (1932).
3However, if some central bank credit to other government levels is allowed, the constraints discussed in Sections III and IV should refer to credit to all government levels and agencies, excluding the financial intermediaries owned by the government (see “Circumventing Formal Constraints” in Section IV).
4Unless otherwise indicated, the term “government” is used here to cover not only the executive but also the legislative power. The issue of whether central bank independence should be weakened for the latter is discussed in Section III.
5Nor will this paper discuss to what extent assigning monetary policy responsibilities to an independent central bank is consistent with maintaining exchange policy responsibilities under government control. In principle, there seems to be no rationale for separating monetary and exchange policy responsibilities. However, even in countries that have attributed monetary policy responsibilities to an independent central bank, exchange rate policy is still under government control.
6See Swinburne and Castello-Branco (1991) for a more detailed discussion of these issues. Those who believe that the statutory definition of a mandate and of accountability rules are not sufficient to guarantee anti-inflationary policies have proposed alternative institutional solutions. Free banking, that is, replacing the central bank with many competing banks (see Dowd, 1989, for a recent restatement), has been considered an alternative solution by those who believe that independent central bankers not subject to market discipline would not faithfully pursue the mandated goal of price stability. A different, and for some aspects opposite, solution is the replacement of the central bank with a currency board, that is, an institution that only issues domestic currency in exchange for foreign currency at a fixed rate and on demand (see Liviatan, 1993).
7The latter condition is very likely. Indeed, as noted by Klein and Neumann (1990), even when the law stipulates that central bank profits should be transferred to the government, a relatively large share of the seigniorage is usually retained by the central bank, for example, by inflating its costs.
8An extreme (and admittedly simplified) example illustrating this point is that of a cash-constrained government that is unable to sell securities on the market (perhaps because of a very high default risk). Borrowing 100 currency units from the central bank would allow the government to raise expenditure by 100 units in the current year, whereas, even if all central bank profits were transferred to the budget, an equal growth of central bank credit to the private sector would loosen the cash constraint by only iP*100 (iP being the rate charged by the central bank on private sector credit). Of course, if the government could borrow from the market against the collateral of the transfer of central bank profits, its preference for central bank credit would disappear (as long as all central bank profits were transferred to the government). But this possibility is of more theoretical than practical interest. This example applies also to cases in which a government paper market does not exist (which is equivalent to an “infinitely high” premium), or is very limited, as in many developing countries. In these cases, borrowing from the central bank may be the only possibility of financing the fiscal deficit.
9Most of these features arise from Article 104 of the treaty, whose paragraph 1 stipulates: “Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as “national central banks”) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.”
10Grilli, Masciandaro, and Tabellini (1991) and Padoa-Schioppa and Saccomanni (1991) see discretionary control of monetary tools as a component of independence. Full discretion in the control of base money creation is one of the features of the Deutsche Bundesbank and appears to be highly valued: “The Bundesbank had no objections to the raising of the ceilings provided that the definition and declared purpose of these credits, which are provided to bridge short-term cash deficits, remained unchanged and that the Bundesbank, with regard to the granting of such credit, retained full power of discretion” (emphasis added) (Deutsche Bundesbank, 1986, p. 23, in referring to the increase introduced in 1967 in the ceiling on central bank credit to the Government in Germany).
11Including outright open market operations, repurchase agreements, and the acquisition of government paper as collateral for the refinancing of the banking system.
12Clearly budgetary autonomy must be tempered by the principle of accountability, which must be applied not only to monetary policy decisions but also to central bank budgetary decisions. Budgetary profligacy at the central bank (such as excessively high wages) could eventually lead to public criticism, and to a loss of credibility and independence.
13As long as some central bank liabilities pay a zero or less than market rate (for example, currency or bank reserves), the central bank could charge the government below market rates without incurring any losses. However, seigniorage is likely to decline in the EC owing to the decline in inflation, the trend decline in the use of cash as a payment instrument, and the pressures to reduce the implicit taxation of reserve requirements.
14Fiscal discipline is one of the requirements of stage III of EMU.
15If government and (first-class) private assets are not perfect substitutes, for example, for the existence of a default risk premium on government paper, a purchase of government paper in the open market by the central bank, even if implemented through standard auction procedures, will favor the government as it will reduce the market spread paid over private paper.
16The extent of actual central bank independence in performing open market operations is subject to much debate even in countries that recognize formal independence. See, with reference to the United States, Buchanan and Wagner (1977), Demopoulos, Katsimbris, and Miller (1987), and Mayer (1990). See Waller (1987) for a theoretical discussion.
17An additional consideration is that the conduct of monetary policy in the EC countries, as well as in other countries with developed financial systems, typically involves the acquisition of government paper. Therefore, restraining government credit would imply a substantial reduction of monetary policy flexibility. However, this is not an overriding problem as in principle open market operations could still occur through the purchase of private paper (for example, issued by banks). Moreover, a limited ceiling on credit to the government would still leave some room for open market operations in government paper.
18As argued by Holtfrerich (1988), on Germany: “The role of the German parliament has changed in the last century. In the constitutional monarchy until the end of World War I, parliament controlled and checked the fiscal behavior of the government and usually had a restraining influence on the government’s expenditures. In parliamentary republics, like the Germany of Weimar or Bonn, parliaments tend to be prodigal, especially before and with regard to elections. An autonomous central bank in a parliamentary republic is therefore as useful for checking the growth of fiscal expenditures as a parliament was in a monarchy…” (p. 153).
19Of course, central bank independence is strengthened if the constraints on credit to the government are set by a constitutional law (or in an international treaty such as the Maastricht Treaty), which can be changed by parliament only with a qualified majority. This is true, for example, in Chile, in the Central and West African Monetary Unions, and in the Eastern Caribbean Monetary Area. However, the constraints set by ordinary laws, although removable by parliament with a simple majority, are far from irrelevant, as amending a central banking law is a more difficult political process than routinely authorizing additional credit based on an existing law.
20With such a ceiling, the central bank could automatically use additional treasury liquidity to reduce the floating debt (as in the United Kingdom) or deposit it at commercial banks.
21A separate issue is whether the central bank should be given control over government deposits as an additional monetary policy tool, as in Germany or Canada. Quintyn and McAuliffe (1993) argue that this may be appropriate in countries in which other monetary control instruments are insufficient owing to limited financial market development.
22On the other hand, concentrating all public sector deposits in a single account at the central bank may improve government liquidity management. The relevance of this factor will of course have to be assessed on a case-by-case basis, that is, by looking at the practical difficulties that the government might face in managing more than one bank account. What is certainly crucial to improve liquidity management is that only the treasury be allowed to keep deposits with financial institutions (including the central bank), so that the management of all liquidity sources is centralized.
23In almost all the countries included in the sample in Appendix III the constraints on central bank credit to the government are defined in gross terms.
24This role is distinguished from that of government treasurer, which is the agent (usually a section of the ministry of finance) in charge of issuing payment orders.
25About 70 percent of central banks included in the sample in Appendix III act as government cashier, 80 percent promote the sale of government paper, and 60 percent perform both activities.
26This role is played by the Bundesbank as head of the Federal Bond Consortium, the consortium of banks that intermediates the sale of securities issued by the German Government. As head of the consortium the Bundesbank takes up 20-25 percent of each government issue for later resale on the market. This arrangement is not inconsistent with prohibiting the direct purchase of government paper because the Government is credited the countervalue of the purchase only when the paper is actually sold by the Bundesbank on the market.
27Intervention to smooth fluctuations of security prices may, of course, be required to maintain orderly conditions in the financial markets, but discretion should be left to the central bank on the amount and the timing of such intervention.
28As already noted, even in this case, the government would benefit from central bank credit because the T-bill rate would be lower (and less volatile) than without such credit, and because part of the interest payments made to the central bank would be returned to the budget as transferred central bank profits.
29Centralizing all government revenue and expenditure in a single account at the central bank, as is done in Brazil and Spain, is recommended by Martínez Méndez (1993).
30If the ceiling is set annually and the purchases are made quarterly, the allowed increase would have to be prorated, possibly taking seasonality into account.
31A third possibility is that securitization occurs ex post (for example, at quarter-end or year-end, as is done in Angola). Ex post securitization leaves, of course, some uncertainty on the actual timing.
32Government deposits not generated by the purchase of securities during the current period by the central bank are referred to here. If such purchases are the only source of government deposits, the ceiling expressed in terms of net credit would necessarily also be met in terms of gross credit.
33Many central bank laws stipulate that the ceiling can never be exceeded. In practice, this stipulation usually means that compliance is required daily when central bank accounts are closed. Less than daily breaching of the ceiling is not usually considered relevant.
34The traditional solution to this problem has been to stipulate that the central bank can make only short-term (for example, three-month) advances to the government. This solution has not proved very effective as short-term advances are often routinely rolled over.
35The ceiling on direct purchases of government securities would instead be monitored continuously.
36This approach is followed in the Netherlands. One alternative, which is less stringent, is to introduce, in addition to a regular ceiling, a tighter ceiling that should not be exceeded on specific dates. For example, the Reichsbank statute introduced after the 1923 inflation stipulated that the amount of advances that the Reichsbank was authorized to grant to the government could never exceed 100 million Reichsmark and that no loan should be outstanding on July 15 of each year (Ulrich, 1931, p. 123). A similar, albeit more complex approach, is followed in Israel.
37About 60 percent of the constraints on central bank credit in the industrial countries considered in Appendix III are expressed in fixed nominal terms.
38Currency is not directly controlled by the central bank, but can be more easily influenced than other variables. For example, if the nonbank public holds in cash a fixed amount of total monetary holdings, an increase in the money supply would also raise the amount of currency that the public willingly holds. Somewhat paradoxically, using currency as a reference aggregate may have some advantages when the currency/GDP ratio is unstable (see below).
39It could be argued that setting the ceiling as a percentage a of expenditure does not create a serious macroeconomic problem, as long as a is relatively contained. To expand base money by aX (where X is expenditure), the government would still have to finance an amount equal to (l-a)X by raising taxes or selling securities. This argument, however, does not consider that an increase in base money by aX raises total bank credit, including the purchases of government securities by banks, by a multiple of aX (depending on the value of the money multiplier), which may further substantially reduce the problem of financing the additional expenditure.
40See, for example, Liviatan (1993). If the stock of the foreign component of base money is used, a devaluation implies a potential increase in domestic base money creation, which may not be appropriate. To avoid this, the ceiling could be linked to the flow in the foreign component of base money.
41A ceiling in terms of revenue can indeed provide an additional incentive for the government to increase its tax effort. A more “academic” reason for using government revenue as a reference aggregate is that the optimal seigniorage theory prescribes that seigniorage should increase in line with other government revenue (Mankiw, 1987).
42Equation (2) is derived from equation (1) under the assumption that the tax rate t is constant in time and the ceiling is binding at the beginning of the period, that is, that the government has exhausted its borrowing facility. The actual allowed increase of credit will depend on the stock of credit at the beginning of the period. This feature, which pertains to any ceiling expressed in terms of stocks, may create some problems for monetary control (see below).
43When the ceiling is expressed as a percentage of revenue in the current year the solution for E can be derived by multiplying the right-hand side of equations (4) and (5), respectively, by (1+ g) and 1/(1 + g).
44Of course, a high reserve requirement remunerated at less than market rates imposes a large tax on the banking system, which may not be sustainable in the long run as it may lead to bank disintermediation.
45The ranges covered by the cash and deposit to GDP ratios used in the tables (2-18 percent, and 20-100 percent, respectively) include, respectively, about 90 percent and 80 percent of a random sample of 55 industrial and developed countries. In the sample, the cash ratio in 1988 averaged 7.2 percent and the deposit ratio 39.8 percent. As to the “policy parameters” k and t, the values used in the tables are illustrative of countries with low, medium, and high reserve coefficients (5-10-20 percent) and low, medium, and high tax pressure (15-25-35 percent).
46One can think of this value as corresponding to half of a nominal GDP growth of 7 percent (which is also used as a parameter in equation (4)), resulting from a “desirable” real growth of 4-5 percent, in the presence of a “moderate” inflation of 2-3 percent a year. The remaining 3.5 percent may be provided by other base money sources.
47The range is computed for d = 0.4, as are all other figures reported in Table 4. If d is allowed to vary from 20-100 percent (as in Table 3), the contribution would range from 0.5-15.3 percent.
48One difficulty is that the effects of changes in the composition of domestic base money creation depend on several assumptions on the behavior of the banking system (for example, to what extent the behavior of the banking system is affected by whether its reserves are borrowed or not). Also, in this context the crowding-out argument cannot be applied, because central bank credit is only a small percentage of total credit. Indeed, to have crowding-out, the increase of credit to the government must be accompanied by a rise in real interest rates. The latter, however, may be affected by total base money creation (and possibly only in the short run), but not by its composition.
49This does not contradict the principle that the reference aggregate should not be total base money. Here, total base money enters the computation only in terms of initial stock. Its dynamics would still be irrelevant for determining the allowed growth of central bank credit to the government.
50This solution admittedly dodges the main issue, as it would be appropriate only if the initial composition of central bank credit was optimal. However, this solution could be followed if, from an empirical point of view, the initial composition of central bank credit appeared broadly satisfactory.
51The ratio between maximum and minimum contribution tends to one as the GDP growth rate increases, because the larger g is, the less relevant the initial condition becomes with respect to the increase in the ceiling owing to GDP growth.
52Ceilings expressed in terms of flow are featured in the recent central banking laws of Argentina, Hungary, and Peru.
53The system is stable, however, in the sense that an initial monetary expansion can never bring about an increase in nominal GDP high enough to allow an ever-increasing expansion of credit. More specifically, if it is assumed that g = E (that is, that money velocity is constant and that credit to the government is the only source of base money), equation (4) becomes a first-order difference equation of the form:g=fg1/(1+g1).where f = αt/(c + kd). Therefore, g−1 increases if f > 1 + g−1 This condition, even if initially holding, would eventually be reversed (as g increases), so that at a certain point g stops rising. However, it may happen that, purely as a result of an initial increase in the allowed government expansion, g increases for a number of years.
54The problem would be mitigated, but not eliminated, if the reference aggregate was computed as a moving average.
55The link between Tables 4 and 6 is straightforward. The relation between a and B that would yield the same contribution to base money growth is given byβ=αg1/(1+g1).Thus, for example, for a growth of the nominal reference variable of 7 percent, the seemingly low B coefficient of 3 percent (as in Hungary) corresponds to an a coefficient as high as 45.9 percent.
56The two ceilings on direct and indirect credit should of course be set consistently. For example, the ceiling on direct credit can be tighter if that on indirect credit is more relaxed.
57An example is given by the loans granted by the Central Bank of Peru to the government-controlled Banco de la Nación (Hamann, 1985). The mechanism, however, does not necessarily involve a bank. For example, in Senegal, a member the West African Monetary Union, the ceiling was circumvented by making state enterprises, which had access to central bank credit, responsible for some budgetary expenditures (Bhatia, 1985).
58Even in the Maastricht Treaty, government-owned banks are explicitly excluded from the ban on central bank credit to government agencies (Art. 21.3 of the statute of the European Central Bank System).
59This operation would not be very effective if the government could ask the intermediary to sustain its cost, or if a large share of central bank revenues was transferred to the government.
60The case is similar to a credit guarantee provided by the central bank, which should also be avoided (see Section III). In none of the countries included in the sample in Appendix III does the central bank formally guarantee government debt.
61Whether the legislation should force the government to cover all central bank losses, regardless of the source, is of course debatable. Such a provision may encourage the mismanagement of central bank resources, which would eventually undermine public support for its monetary policies. If the government is considered liable for any central bank losses, safeguards must be put in place to avoid budgetary excesses by central bank managers. These safeguards may include the publication and the review by a parliamentary committee of the central bank budget, some form of veto power by government representatives in the bodies in charge of the internal administration of the central bank, or auditing the budget by external public bodies.
62A case in point is the low profit position of the Bank of Portugal in recent years. In 1990-91, with limited exchange rate depreciation, the Bank of Portugal had to face a large inflow of foreign capital (thus accumulating reserves yielding a low interest rate in foreign currency), whose monetary impact had to be sterilized by offering the banking system sufficiently high interest rates in escudos. However, the Bank of Portugal’s profit and loss account was further weakened by the low yield of a large stock of nonsecuritized credit to the Government.
63For example, when the government is legally the owner of the foreign reserves of the country.
64All this applies to the case of borrowing against the existing stock of gold or of reserves. The case in which the government borrows from abroad and asks for central bank credit using the foreign currency as collateral is not different from the sale of foreign currency to the central bank.
65In IMF institutional vocabulary, performance criteria are quantitative targets whose attainment is requested to gain access to Fund resources.
66In the last few years Argentina, Chile, Peru, and Venezuela enacted legislation prohibiting any form of direct central bank credit to the government. In none of these countries did the prohibition of monetary financing of the deficit involve any change in the terms of the outstanding stock of credit to the government, except for Argentina, and then only for the foreign exchange component: the entire stock of credit to the Government granted in foreign currency was canceled, but at the same time the Government acquired the foreign liabilities of the central bank. As that institution had always acted as a pure intermediary of foreign loans (the burden of the debt had always been sustained by the Government), the operation did not have any effect on the profit and loss accounts of the two institutions. As to the outstanding stock of credit in domestic currency, it was frozen at the level of the time the new legislation was enacted, and at the original interest rate.
67As already argued, the government is likely to suffer some loss even if central bank profits have to be formally retransferred to the government.
68A decline in the stock of central bank credit to the government might also allow an expansion of credit to the private sector (the banking system), for given total base money. However, this would have monetary effects only if the banking system was sensitive to the mix between borrowed and unborrowed reserves.
69The Maastricht Treaty does not clearly indicate what countries should do with their stocks of credit to the government outstanding at end-1993. Although a decision in this area is expected, many EC countries have already opted for the repayment of the outstanding stock of debt, but with widely divergent amortization periods. In Portugal, based on the 1993 budget bill, the stock of the overdraft credit outstanding at end-1992 has been converted to a 10-year loan, at rates gradually converging to market levels. In Italy, based on the current draft bill presented in Parliament, the outstanding stock of credit on the overdraft facility will be replaced by government bonds yielding an interest rate of 1 percent (equal to the current interest on the overdraft). The maturity and the other features (amortization schedule) of the bond issue will be set by government decree. In Spain, the draft bill presented in Parliament stipulates that the stock of overdraft credit will be amortized in 40 years, with repayments starting only after the fifth year. Meanwhile the credit will remain unremunerated. In all these countries the stock of central bank credit to the government is fairly large. However, countries in which the stock is modest have also adopted a relatively long amortization plan. The current reform project in France involves, for example, a 10-year repayment schedule. On the other hand, in Belgium, the outstanding credit was repaid during 1993. In some countries the problem does not even arise: in Ireland, the only substantial form of direct central bank credit to the Government was granted through the purchase of some special government bonds. As this credit is securitized, it already has an amortization schedule.
70Throughout this appendix, the “opportunity cost” concept of seigniorage is used (as in Gros, 1989, and Klein and Neumann, 1990), which looks at the interest rate saving arising from the central bank’s ability to issue liabilities bearing a zero (for currency) or below market (for bank reserves) interest rate. The alternative concept of seigniorage (the purchase of goods made by issuing base money) is equivalent to the present value of the opportunity cost concept, under the assumption that no interest is paid on the monetary base.
71Recall that, even if bank reserves pay a market interest rate, cash bears a zero interest rate.
72In this case the government is better off because it shifts from a lender that is sensitive to the default risk (the market) to one that is not (the central bank).
73 The government may have to pay an interest premium (to offset the default risk) even under free capital mobility and fixed exchange rates.
74Recall that in most countries, even when the central bank is independent, the decision on the exchange rate regime is attributed to the government.
75However, as noted above, the relevant market rate is the one that would prevail if the central bank had not shifted toward government paper. Thus the equal sign in the third entry of the second column of Table A1 is unlikely to hold, and thus the government would benefit from a shift from private to government assets in the portfolio of the central bank.
76It is important to stress that the table results are derived under the assumption that the market interest rate on government paper cannot be lower than the rate paid on central bank credit to the private sector. This assumption seems to be reasonable if the governments concerned are facing budgetary problems, involving some default risk premiums.
77One prominent example is the Reichsbank after the First World War. At the time, Reichsbank credit to the government was constrained by a provision stating that one-third of note circulation had to be covered by gold or foreign currency. As discussed by Holtfrerich (1988), this constraint was first modified to allow its circumvention, and finally removed. Credit to the government could in this way become uncontrolled and was one of the factors behind the 1923 hyperinflation. In May 1922, long before the worst phase of hyperinflation began, the Reichsbank was formally declared independent of government.
78See Bank for International Settlements (1992) for a recent survey of the practical constraints set by fiscal policy on monetary policy in industrialized countries.
79For example, in countries where “common law” rather than “Roman law” applies, the need for written guarantees of central bank independence may be reduced. An example is the recent central banking law approved in New Zealand, which has been unanimously heralded as guaranteeing central bank independence (see The Economist, February 2, 1991, p. 77), despite its lack of explicit constraints on central bank credit to the government. “Tradition” is also another important factor. For example, the alleged ban on any form of credit from the Federal Reserve to the U.S. Government is as much a matter of legal prohibitions as of tradition. Indeed, as documented in Appendix III, a 1933 law, never abrogated, would allow the President to authorize the granting of direct credit to the Treasury, “when foreign commerce is adversely affected.” This provision has never been applied.
80The prototype of these studies is Bade and Parkin (1980), which however does not examine the role of institutional constraints on central bank credit to the government. Other related studies include Alesina and Summers (1990), who find evidence that central bank independence does not imply relevant costs in terms of output variability, and Parkin (1986), who finds that institutional independence may effectively constrain fiscal deficits. All these studies focus on industrial countries.
81The classification of countries into industrial and developing is the one used in the International Monetary Fund’s International Financial Statistics. Based on this classification, the sample comprises 16 industrial countries and 41 developing countries.
82Within the operations allowed, the more direct forms of credit are more frequently constrained. In 80 percent of industrial countries, overdraft facilities, when allowed, are constrained (and with fairly tight ceilings; see below).
83Some of the developing countries included in the sample have a very sophisticated financial structure. In some (Chile and Argentina), automatic access to central bank credit has indeed been prohibited.
84The table refers to the percentage composition of all existing constraints. If two different types of constraints are in place in a country, they are counted separately.
85For example, the ceiling on fixed-term loans to the Federal Government in Germany amounts to less than 1 percent of its 1991 revenue. In the same year, the ceiling on the government overdraft at the central bank in France was equivalent to 0.7 percent of government revenue, and to less than 0.1 percent in the Netherlands.

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