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Chapter VIII. ISIMP Results and Analysis for the MENA Region

Author(s):
Simon Gray, and Philippe Karam
Published Date:
May 2013
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A. Background Information

Drawing from the IMF survey of CB monetary policy instruments (ISIMP)72 in 2008 and 2010, this section analyzes the use of monetary policy instruments in the MENA countries, and compares the results with those in other regions.73 Monetary policy instruments in the survey comprise direct instruments, reserve requirements, statutory liquidity requirements, standing facilities, government activities for monetary purposes and open market operations. Information on interbank market activities is included to reflect partially the state of development of domestic money markets.

Results from the 2010 survey illustrate the implementation of monetary instruments in 121 jurisdictions—of which 15 are from the MENA region—representing 81 percent of the IMF member countries and distributed evenly across regions. (Table 16: the CB participation increased considerably from the previous survey in 2008.)

Table 16.Central Bank Responses by Region
Number2008

%
Number2010

%
Additional

Responses
AFR16172520.7+9
APD2324.52722.3+4
EUR2021.32218.2+2
MCD1920.22520.7+6
MENA1010.61512.4+5
WHD16172218.2+6
Total9410012110027
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

B. Direct Instruments

Direct instruments of monetary policy in the ISIMP database include interest rate controls, credit ceilings, directed credit and specific lending requirements.74 Overall, specific lending requirements were implemented by more CBs in 2008 and 2010, while there was an increase in the use of directed credits in 2010.

In 2008, some of the MENA CBs imposed interest rate controls, credit ceilings and specific lending requirements on the banking system (Tables 17 and 18). The use of interest rate controls and specific lending requirements decreased in 2010 while credit ceilings and directed credits became more common, consistent with trends in the Middle East and Central Asia. It should be noted that the MENA CBs have made uses of the direct instruments partly because most have implemented the exchange rate pegged regime. Under such policy framework, CBs do not have monetary independence while the use of direct instruments could prove useful in helping to manage domestic monetary conditions.

Table 17.Direct Instruments of Monetary Policy(Number of Responses and Percent of Total Responses)
20082010
Number%1%
Interest Rate Control1313.81310.7
Credit Ceilings1212.81411.6
Directed Credit44.3129.9
Specific Lending Requirements1718.12117.4
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).
Table 18.Uses of Direct Instruments by Region(Percent of Responses by Region)
20082010
Interest

Rate

Controls
Credit

Ceilings
Directed

Credits
Specific

Lending

Requirements
Interest

Rate

Controls
Credit

Ceilings
Directed

Credits
Specific

Lending

Requirements
AFR06.306.31220416
APD21.717.44.334.822.211.17.418.5
EUR51005009.519
MCD15.815.85.326.3416812
MENA2020020026.76.713.3
WHD2512.512.512.5138.717.421.7
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

C. Reserve Requirements

More than half of the CBs in survey implemented reserve requirements (RRs) with a single ratio; however, the number of CBs using a range of RR ratio increased significantly in 2010. Regarding the RR ratio, a majority of CBs imposed a ratio in a band of 6–15 percent, although this trend declined somewhat with the number of CBs in the 0–5 percent band increasing (Tables 19 and 20, and Figure 20). These changes contrasted to RR ratio in the MENA region (Box 7) where more CBs imposed a ratio in a band of 6–15 percent in 2010.

Table 19.Reserve Requirements(Number of Responses)
20082010
None99
Single Rate6865
Range1747
Total94121
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).
Table 20.Regional Representation in the Use of Reserve Requirements in 2010(Percent of Responses by Region)
No RR0.5%6-15%>=16%
AFR0403624
APD11.155.625.97.4
EUR18.25027.34.5
MCD0325612
MENA033.346.720
WHD9.19.168.213.6
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

Figure 20.Levels of Reserve Requirements

(Percent of Total Responses)

Source: IMF ISIMP Survey (2010).

Box 7.Reserve Requirements in the Region1

The use of RR is a common monetary policy instrument in the MENA region, as in other regions. Most of the central banks impose RR on both domestic and foreign currency deposits of the banking system, with exceptions in Algeria, Bahrain, Morocco and Tunisia where RR are applied only to domestic currency deposits. Around half of the former group require that banks maintain reserves denominated in foreign currency against foreign currency deposits. Banks are obliged to hold required reserves in their current accounts at the central banks in order to meet the specified RR ratio. Other types of assets cannot fulfill the required reserve threshold, with the exception of Iraq, which counts cash in vault as part of banks’ eligible assets (but this cannot exceed 20 percent of the total RR).

The majority of the regional central banks impose a required reserve ratio of 5–10 percent and a maintenance period of one month. The RR ratio in Kuwait, Iraq, and Lebanon fall into the higher-than-15-percent category, while those in Qatar, Oman, and Bahrain are among the lowest level, at 4.75–5 percent. Approximately two-thirds of the MENA central banks implement a one-month maintenance period, and allow for reserve averaging. Saudi Arabia on the other hand stipulates that banks maintain RR on a daily basis.

Most MENA countries do not remunerate banks’ required reserves. Only three central banks; namely Algeria, Morocco, and Kuwait,2 pay remuneration on RR balances. The remuneration rates in these countries are set separately from the key interest rates, and the two rates do not have a standard relationship. Every central bank imposes a penalty on banks’ reserve deficiency, should one arise. Around half of the group set the penalty rates as spreads over the policy interest rates or, in some instances, the penalties are set as margins on interbank interest rates.3

In addition to its main role in the monetary policy context, some central banks use RR as a supplementary tool to stimulate growth in particular sectors. For example, banks in Egypt are exempted from the statutory reserve requirement on liabilities equivalent to the amount lent directly to SMEs. Lebanon exempts banks from the legal reserve for loans denominated in Lebanese pounds which are extended to production, microfinance, housing and education sectors. Syria lowers the reserve requirement ratio imposed on domestic banks in proportion to a share of SMEs credit in the credit portfolio. It also reduces the required ratio in relation to a portion of deposits devoted to financing investment and tourism projects.

Reserve requirement ratio was also adjusted to help manage capital inflows. During the fourth quarter of 2007 and 2008, Saudi Arabia raised a required reserve ratio to mob up parts of excess domestic liquidity stemmed from a large amount of capital inflows. The increase in RR also led to a reduction in bank deposit rates discouraging episodes of capital inflows. This consequently helped the authorities lean against capital inflows without weakening the monetary policy impact.

1 Country responses to the 2010 ISIMP survey include Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, Unite Arab Emirates, and Yemen.2 Kuwait remunerates KWD RR, but not foreign-currency RR.3 In the latter case, it is unlikely that this would create an upward spiral effect on the prevailing domestic interbank rates as the penalties are based on offshore interest rates, or average interbank rates in the previous periods.

As for remuneration on RRs, a majority of CBs in all regions did not remunerate banks’ required reserves (Table 21). In case of CBs that pay remuneration, most of the remuneration rates were below the policy interest rate. The most common reserve maintenance periods were 15 days or longer (Table 22).

Table 21.Remuneration Rates on Reserve Requirements in 2010(Number of Responses and Percent of Total Responses)
All RegionsMENA Central Bank
Number%Number%
At Policy Rate75.800
Fixed Margin Below32.516.7
Policy Rate
Below Policy Rate2520.7213.3
No Remuneration8671.11280
Total12110015100
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).
Table 22.Reserve Maintenance Period in 2010(Number of Responses and Percent of Total Responses)
All regionsMENA Central Bank
Number%Number%
No RMP86.600
1-7 days2520.7320
8-14 days2722.3320
>=15 days5747.1960
Varies43.300
Total12110015100
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

D. Statutory Liquidity Requirements

Statutory Liquidity Requirements (SLRs) are primarily imposed by CBs for prudential purpose, and not for monetary policy. Approximately 38 percent of all CBs use SLRs of 20 percent or higher; and 20 percent use SLRs of less than 20 percent. Among the MENA CBs, 60 percent imposed the SLRs of 20 percent or higher (Table 23).

Table 23.Liquidity Ratio in 2010(Number of Responses and Percent of Total Responses)
All regionsMENA Central Bank
Number%Number%
>=204638960
<202419.816.7
0 percent5142.1533.3
Total12110015100
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

E. Standing Facilities

Two main types of CB standing facilities are SCF and SDF. While a higher proportion of CBs have made used of SCF since 2008 (Table 24), both SCF and SDF were made available by more CBs in 2010 (Figure 21). In the MENA region, the use of SDF increased substantially, which may in part reflect an increase in the number of participating banks. Around 67 percent of the

Table 24.Regional Distribution of Central Banks that Have SCFs(Number of Responses and Percent of Responses by Region)
20082010
Number%Number%
AFR15942496
APD19832593
EUR18902091
MCD17892496
MENA9901493
WHD15891986
Total848911293
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

Figure 21.Standing Facilities

(Percent of Total Responses)

Source: IMF ISIMP Survey (2010).

MENA CBs had SDF in place in 2010, increasing from 30 percent in 2008. There was an increase in the number of CBs that used more than one SCF.

Collateralized loans, repo transactions and outright purchase of FX were common instruments for the SCF in the MENA countries, as elsewhere (Figure 22). The use of outright FX transactions were considerably higher than other regions, reflecting a currency peg regime implemented by most of the MENA CBs.

Figure 22.Instruments of Standing Credit Facilities in 2010

(Percent of Responses)

Source: IMF ISIMP Survey (2010).

F. Government Activities for Monetary Purposes

Overall, less than half of the CBs in survey reported involvement in government activities for monetary policy purposes; 32 percent engaged in the sale of government securities and 44 percent involved in the transfer of government deposits to/from the CBs. Around 40 percent had government deposit accounts at the CBs which were used to sterilize the proceeds of the primary auction.

Among those involved in government activities for monetary purposes, CBs from the Middle East and Central Asia represented the highest proportion in 2008, while the African CBs took over in 2010 (Table 25). During 2008–2010, the shares of the MENA CBs decreased for both types of government activities. There were 4 MENA countries that had government term deposit account at the CB to sterilize liquidity injecting transactions (Figure 23).

Table 25.Involvement in Government Activities for Monetary Purposes(Percent of Central Banks that Responded ‘Yes’)
CBs Sale of

Government Securities
Transfer of Government

Deposits to/from CBs
2008201020082010
AFR19.430.817.834.0
APD22.623.122.222.6
EUR9.77.711.17.5
MCD35.525.626.718.9
MENA16.112.813.37.5
WHD12.912.822.217.0
Total100.0100.0100.0100.0
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

Figure 23.Government Term Deposit Accounts at the Central Banks

Source: IMF ISIMP Survey (2010).

G. Open Market Operations

(i) Outright Sale/Purchase of Securities and Foreign Exchange

Around two third of the CBs in survey conducted outright sale and purchase of securities and FX in 2010. Securities outright transactions were likely conducted at higher frequencies,75 whereas FX outright transactions were executed more at lower frequencies.76

In terms of shares by region, the MENA countries constituted a higher ratio for FX outright transactions in 2010, largely reflecting exchange rate arrangements in the region. Within the MENA countries, a slightly lower proportion of the CBs carried out securities outright transactions in 2010, contrasting with other regions where more CBs engaged in this type of operations (Table 26). As for FX outright, a higher portion of the MENA CBs engaged in the sale and purchase operations during 2008–2010 (Table 27).

Table 26.Outright Sale/Purchase of Securities and Foreign Exchange by Region(Percent of Central Banks that Responded ‘Yes’)
SecuritiesForeign Exchange
2008201020082010
AFR16.419.323.519.8
APD27.926.521.617.3
EUR16.414.517.618.5
MCD23.020.525.525.9
MENA9.812.09.813.6
WHD16.419.311.818.5
Total100.0100.0100.0100.0
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).
Table 27.Outright Sale/Purchase of Securities and Foreign Exchange within Each Region(Percent of Central Banks that Responded Yes Within each Region)
SecuritiesForeign Exchange
2008201020082010
AFR62.5647564
APD73.981.547.851.9
EUR5054.54568.2
MCD73.76868.484
MENA63.662.554.575
WHD62.572.237.568.2
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

(ii) Reverse Transactions of Securities Repo and Foreign Exchange Swap

Around 67 and 32 percent of the CBs conducted securities repo and FX swap in 2010, increasing slightly from 60 and 29 percent in 2008, respectively. Of all CBs that reported securities repo and FX swap operations, CBs from the MENA region represented a higher proportion for securities repo transactions while their shares among CBs conducting FX swap declined considerably (Table 28).

Table 28.Reverse Transactions of Securities Repo and Foreign Exchange Swap by Region(Percent of Central Banks that Responded Yes)
Securities RepoForeign Exchange Swap
2008201020082010
AFR17.92122.225.6
APD28.627.222.228.2
EUR23.218.522.220.5
MCD17.917.314.817.9
MENA7.111.118.55.1
WHD12.51618.57.7
Total100100100100
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

(iii) Collateralized Lending and Deposit Taking

Approximately 56 percent of the CBs used collateralized lending while 44 percent took deposits for monetary policy purposes. A classification by region shows that proportions across regions including the MENA countries did not change significantly during 2008–2010 (Table 29).

Table 29.Collateralized Lending and Deposit Taking by Region(Percent of Central Banks that Responded ‘Yes’)
Collateralized LendingDeposit Taking
2008201020082010
AFR19.422.115.922.6
APD16.716.220.520.8
EUR22.219.122.720.8
MCD2522.122.718.9
MENA11.113.211.413.2
WHD16.720.618.217
Total100100100100
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

(iv) Uses of Collateral

The CBs in survey were closely split between those that used the same list of eligible collateral for open market operations and standing facilities, and those that did not. There were 6 out of all MENA CBs that applied the same list in 2010 (Table 30).

Table 30.Central Banks that Used the Same List of Eligible Collateral for OMOs and SFs by Region(Number of Responses and Percent of Central Banks that Responded ‘Yes’)
20082010
Number%Number%
AFR10221524
APD11241423
EUR15321423
MCD5111118
MENA12610
WHD511813
Total4610062100
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

(v) Central Bank Bills

The majority of CBs which issued CB bills did not have restrictions on ownership. However, an increased proportion of CBs in Africa, the Middle East and Central Asia and Western Hemisphere reported such restrictions in 2010 (Table 31). Out of 6 MENA CBs that issued CB bills, there were 5 CBs that had restrictions on ownership.

Table 31.Central Banks that Had Restrictions on the Ownership of Central Bank Bills by Region(Number of Responses and Percent of Central Banks that Responded ‘Yes’)
20082010
Number%Number%
AFR415922
APD622718
EUR726820
MCD7261128
MENA415512
WHD311512
Total2710040100
Source: IMF ISIMP Survey (2010).
Source: IMF ISIMP Survey (2010).

H. Interbank Market Activities

Almost half of the CBs indicated that interbank activities were at the level between active and inactive (Table 32). Of the 19 CBs reporting an inactive interbank market, 8 were in Africa, 5 in the Middle East, and 4 in Asia and the Pacific. In addition, 70 percent of all CBs reported that the interbank market was not collateralized.

Table 32.Interbank Market Activities(Percent of Total Responses)
20082010
Active34.033.9
Inactive10.615.7
In Between48.947.9
No Answer6.42.5
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.
72ISIMP: Information System for Instruments of Monetary Policy.
73Data and information on monetary policy instruments in other regions are from an unpublished IMF paper by Simon Gray and Claudia Jadrijevic (December 2010). In this paper, countries are categorized into five regions in accordance with the IMF’s area departments; namely, Africa (AFR), Asia and the Pacific (APD), Europe (EUR), the Middle East and Central Asia (MCD) and Western Hemisphere (WHD).
74In some countries, commercial banks are required to fulfill sector-specific lending requirements.
75Higher frequencies are defined as daily, weekly and every other week.
76Lower frequencies are defined as less frequency and irregularly.

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