In addition to facilitating exchanges of goods, services, and financial assets, effective payment systems play a major role in ensuring the soundness of financial systems by limiting the possibility of systemic crises, which could undermine confidence in financial institutions and markets. In the early 1990s, the 15 countries under review were beset with a number of payment system problems. Besides slowness of payment processing, there were, in particular, large interenterprise arrears, defaults, and fraud. A farther complication was the breakdown of the ruble area, which caused cash shortages in some countries and excess cash in others, depending on the timing of the introduction of national currencies. The final step in the breakup of the ruble zone occurred in June 1993 when Russia demonetized all pre-1993 ruble bank notes, expediting the departure of the zone’s last seven non-Russian members.

In addition to facilitating exchanges of goods, services, and financial assets, effective payment systems play a major role in ensuring the soundness of financial systems by limiting the possibility of systemic crises, which could undermine confidence in financial institutions and markets. In the early 1990s, the 15 countries under review were beset with a number of payment system problems. Besides slowness of payment processing, there were, in particular, large interenterprise arrears, defaults, and fraud. A farther complication was the breakdown of the ruble area, which caused cash shortages in some countries and excess cash in others, depending on the timing of the introduction of national currencies. The final step in the breakup of the ruble zone occurred in June 1993 when Russia demonetized all pre-1993 ruble bank notes, expediting the departure of the zone’s last seven non-Russian members.

Recent Developments

Progress on improving the functioning of domestic payment systems in these countries has subsequently been quite impressive, and in 1997 a number of the countries made concrete progress toward improving their handling of high-value payments.1 Further progress is needed, however, to bolster financial system stability through the introduction of systemic risk controls and, in particular, real-time gross settlement systems. Also, much remains to be done before the majority of consumers in these countries have a variety of payment methods at their disposal—such as checks, credit cards, debit cards, charge cards, automated clearinghouses, and giro services—and have a choice of competing service providers comparable to those available in mature market economies.

Payment System Risk Management

Since the beginning of the structural transition, most of the countries in this study have focused their efforts involving payment systems on building a risk management framework to encourage sound banking practices and to support the development of financial markets. The quality and degree of commitment to these strategies vary. The development of a reform strategy has suffered for a number of reasons, including the fact that the reforms themselves have only been recently implemented and need to be further developed, as in Azerbaijan, Uzbekistan, and Turkmenistan, or the lack of commitment of the central bank to reform of the payment system. Where a strategy is not solidly supported at senior levels of the central bank, attention tends to shift toward efficiency of payment systems at the expense of risk management objectives, so that the implicit guarantee from the central bank to underwrite bank settlement obligations is confirmed and the associated moral hazard issues are aggravated.

For central banks, a key objective is to ensure that commercial banks have incentives to limit and control their payment exposure to reduce credit risks, and to reduce liquidity risks. Meeting this objective requires that banks settle for their own obligations at regular intervals (at least once a day) and that in doing so they stay within the level of reserves provided by the central bank to the market without recourse to credit from the central bank.

Countries that do not enforce strict discipline at settlement weaken the soundness of their banking sectors because weak banks are not detected early enough and the central bank and commercial banks may incur substantial credit exposures to them. Sound settlement policies help to expose weak banks, limit the systemic impact of a single bank’s failure, and thus provide a framework in which exit policies for weak banks can be enforced with the least cost to the public purse.

Countries where settlement discipline needs improvement include Tajikistan and Turkmenistan, where banks may still overdraw their settlement accounts without prior contact with the central bank. These overdrafts occur despite policies in place to prevent banks’ automatic access to overdrafts, and despite ex post penalties for overdrawings. The countries under currency board arrangements—Estonia and Lithuania—are constrained by these arrangements to offer only limited credit to banks for settlement purposes, with the total amount of available credit depending on the amount of foreign exchange in excess of the central bank’s monetary liabilities.

The countries in this study are now well aware that international best practice in mature market economies is to develop specialized large-value transfer systems to handle the bulk of a country’s high-value payments and that most of these systems are designed to operate as real-time gross settlement systems under the control of the central bank. Discussions on the specific form that such systems should take are still ongoing in most of the countries.

Systems similar to real-time gross settlement systems for large and time-sensitive payments are already operating in Belarus and Kazakhstan, while in Russia an embryonic real-time gross settlement system limited to a few banks is being tested. Eight other countries (Armenia, Estonia, Georgia, Kyrgyz Republic, Latvia, Lithuania, Moldova, and Ukraine) are planning real-time gross settlement systems.

Real-time gross settlement systems allow intraday settlement, and the development of such systems can facilitate more efficient delivery-versus-payment arrangements through links to securities transfer systems. This allows a considerable reduction in the risks attached to securities trading and is a priority area for reform in countries with developing securities markets. The countries that are operating delivery-versus-payment systems are: Estonia, Kazakhstan, the Kyrgyz Republic, Latvia, Lithuania, Russia, and Uzbekistan.

Liquidity Management

Settlement policies may help banks to better manage liquidity, in addition to supporting risk management objectives. In support of improved liquidity management, most central banks have adopted the objective of account consolidation, both conceptually and physically. In Armenia, Belarus, Estonia, the Kyrgyz Republic, Latvia, Lithuania, Moldova, Turkmenistan, and almost all banks in Kazakhstan and Ukraine, commercial banks have a single national settlement account with the central bank, while in Georgia, Russia, and Tajikistan banks have, or are moving toward, one account per region. Account holding is still highly dispersed in Azerbaijan, with each branch of every bank having an account with the central bank’s head office, and in Uzbekistan bank branches hold accounts with regional offices of the central bank. Plans to farther rationalize account holdings are being implemented in Azerbaijan, Kazakhstan, Russia, and Uzbekistan.


In some of the 15 countries under review, the ratio of currency to GDP (Table 5.1) appears to have declined, suggesting that the noncash payment system is increasingly used to make payments.2

Table 5.1.

Currency-to-GDP Ratios in Selected Countries

(In percent)

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Source: Country authorities; and IMF.

Reduced delays and variability in clearing times also indicate an improvement in payment system efficiency. This boost in efficiency has led to the increased use of payment orders. Central banks have automated payment order processing, and clearing times in eight of the countries—Belarus, Estonia, Kazakhstan, Latvia, Lithuania, Moldova, Ukraine, and Uzbekistan—are now short and predictable. In Ukraine and Uzbekistan, the majority of payments are cleared within one day—a remarkable achievement and encouraging contrast to their performance in 1993 when the ruble zone broke up and clearing times often extended to a week or more. Countries that continue to experience delays in clearing are Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Russia, Tajikistan, and Turkmenistan. In Russia and Kazakhstan, the delays mostly reflect the difficulties of processing payments from and between remote areas and do not appear to affect the bulk of payments that are undertaken within the major business areas of the countries.

In the absence of any initiatives from commercial banks to develop payment services, central banks have taken a lead role in offering improved clearing services in most of the countries under review. In an attempt to stimulate private sector involvement in clearing, some of the central banks in these 15 countries have begun to price their services. In Russia, the pricing of central bank services is also seen as providing an appropriate incentive to commercial banks to develop such services as private clearinghouses and to seek improvements to existing and proposed central bank services. Kazakhstan and Ukraine are also pricing central bank services to encourage private sector involvement in the provision of payment services.

Legal Issues

A particular concern in many of the countries in this study is the failure to reap all the efficiency gains expected from the introduction of electronic processing of payment orders. Countries have been thwarted by the continued need to produce paper documents as evidence of transactions. Paper records are necessary in the event of disputes because current laws require that payments be in writing to be enforceable in court. Countries that are currently running parallel paper and electronic payments because of legal uncertainties surrounding electronic payments include Belarus, Russia, and Ukraine. Countries that have dispensed with parallel paper processing include Estonia and Kazakhstan.

Increasingly, the 15 countries are introducing public or private clearinghouses that rely on multilateral netting of clearing obligations. This innovation allows for a single settlement entry for each party to the netting agreement. As in market economies, the legal status of netting agreements will need to be specifically dealt with in law to avoid the danger that a failed participant, or its liquidator, could try to set aside the netting and accept the fall amounts of incoming transfers, while treating the full amounts of outgoing transfers as unsecured obligations. Bankruptcy laws and laws on collateral must also be carefully drafted to avoid undermining payment systems arrangements (see Chapter 7).

Country Rankings

The most advanced countries—Belarus, Estonia, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Russia, and Ukraine (Group III)—have made substantial progress in all the major reform areas and have a strong core of payment system expertise within their central banks. In these countries, strategic issues have largely been resolved and problems of implementation and of a technical and operational nature remain. The Group III countries (Table 5.2) have by and large developed enough contacts with central banks and others outside the 15 countries under review to pursue farther reforms by making only selective calls for highly focused and specialized technical assistance. They have implemented significant reforms across all areas of their payment systems and have a strong core of personnel capable of guiding future payment system development. Russia has made considerable progress over the past year. A reform strategy was released to the public in April 1997 and, as an interim measure before the introduction of a real-time gross settlement system, Russia has moved to increase the frequency of settlements of payments (the so-called session-settlement model) and introduced several supporting reforms to help banks manage liquidity and risk. Also, as a precursor to a full-scale realtime gross settlement system some Moscow banks have begun operations through the central bank. In Kazakhstan, there has been progress in developing the risk management framework for such an electronic payment system, consolidating accounts held by banks with the central bank, pricing services, and encouraging private sector participation in payment system development.

Table 5.2.

Progress in Payment System Policy

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Group II countries—Armenia, Azerbaijan, Georgia, Moldova, Turkmenistan, and Uzbekistan—have made substantial progress in several of the major areas of reform and have generally identified the appropriate objectives for further payments reform. Most of the advice that these countries need is more practical than strategic and will often be available from experts who are helping with specific projects that are being, or are soon to be, implemented. Some important decisions on strategy are still required before the final shape of the payment system is consolidated in these countries. While Moldova had made good early progress in 1993 and 1994 and has a working payment system, there is no explicit strategic framework to drive plans for an electronic large-value transfer system or to improve risk management in existing systems. In Georgia there are plans to introduce a platform for processing payments electronically, but the plans to develop this system as a specialized high-value payment system are still under review.

The only country where there has clearly been little progress over the past five years is Tajikistan, where security and political developments have hindered any substantive initiatives.

Priorities for Reform

Payment system reform is an ongoing process in countries throughout the world, and the accepted standards of best practices for payment systems have changed significantly as the awareness and understanding of payment system issues has grown. In the years that the economies of these 15 countries have been in transition from centrally planned to marketbased economies, payment reforms in the mature market-based economies have been considerable, with the development of real-time gross settlement systems being a widespread response to the need to reduce risks in the face of growing globalized financial markets.

For the 15 countries in this study, the reform agenda needs to take account of the developments that are driving priorities in the rest of the world, such as improvements to foreign exchange settlement practices and the development of electronic money. Clearly, however, there are more fundamental developmental objectives that need to be met in these countries in addition to the objectives that are relevant in the mature market economies.

The experience of the countries under review since 1992 suggests that developmental reforms tend to proceed in stages. For a country at the beginning of the reform process, as Tajikistan is now, the first priority is to develop an institutional framework to support reform and to use this framework to develop a reform strategy. These steps require developing the central bank’s policymaking capabilities and strengthening its link with the private sector through forums such as national payment system councils. At this stage, experts from central banks are the most appropriate source of advice.

The initial goals of reform will normally give priority to amending the existing payment system structure after it has been thoroughly analyzed and the main shortcomings exposed. At this stage most of the countries reviewed in this volume have started to embark on automation projects to support processing of payment orders, and restructured the central bank and its payment operations. The six countries in Group II have reached this phase, but they have not committed to reforms that will be needed to support financial stability once financial markets and the banking sector start to grow significantly. In this phase central bank experts from countries with reform experience are very helpful.

The countries in Group III for the most part now operate reasonably efficient payment systems and have committed to such important reforms as real-time gross settlement systems, which will support growth in financial markets as it occurs. For these countries, the expertise required tends to become specific and technical as individual projects are implemented. At this point, there is less certainty that central bank “policy experts” will have all the necessary technical expertise required by the countries in this study, although such experts may still be useful in coordinating different projects and in explaining the implications and overlaps of payment system changes for the whole range of the central bank’s activities.

Underlying this sequence of reforms is the need for fundamental changes in legal infrastructure and in the skills of the finance industry, which may take time and patience to develop. To see this take place, two deep-rooted changes must occur—the private sector should develop to a level where it can provide high-quality retail and wholesale payment services and the legal system must reach a level where there is a satisfactory degree of certainty attached to payment transactions. Not surprisingly, the existing legal systems in the countries under review are not yet well adapted to supporting modern payment systems, with the result that there is a considerable task ahead. In developed market economies, payment system rules have developed over many years from private agreements to detailed statutory rules. It may be a mistake for a country that has just recently developed as a market economy to establish detailed statutory rules before the needs of the participants are clearly understood.

Initially, rules for payment systems may best be located in interbank agreements rather than in statutes. These agreements may be replaced by regulations or a statute as the size and importance of the payment system increase and stabilize. Ultimately, the rules for a mature payment system may best be established by statute.

Countries where these more fundamental and intractable issues are moving to the forefront are more likely to find answers from their own central banks rather than outside experts as they continuously monitor emerging trends and develop understanding of the particular problems faced in their own countries. In terms of technical assistance needs, the only country that still needs the type of extensive advice offered to the countries at the start of their transition toward market-based economies is Tajikistan. There, the fundamentals of allocating staff in the central bank to payment issues, starting consultations with banks, and developing an understanding of what may be involved in payment system reform are still priorities.

Some of the Group II countries are close to achieving significant efficiency gains through electronic processing of payment orders, and have largely completed account consolidation projects and established reasonable central bank discipline over the credit facilities available to banks. These countries now need to develop forward-looking plans to provide upgraded risk management to support expanded financial and other market activities. There are sufficient staff in the central banks of these countries to do this job themselves, but they are still likely to benefit from regular exposure to the experiences of the 15 countries and mature market economies. One model for encouraging exposure to outside experiences is through regular forums such as the payment system workshops organized by the IMF’s Monetary and Exchange Affairs department. Another possibility is to establish a panel of outside advisors, as has been done in Russia in the form of the International Steering Committee. In addition, various countries may need outside experts to provide specific technical advice as general proposals need to be turned into concrete projects.

For those countries where progress with reform has been only a relatively recent development—such as Azerbaijan, Georgia, and Turkmenistan—certain strategic issues, while apparently resolved, may still need to be reaffirmed by outside experts on a continuing basis to prevent backtracking.

The remaining challenges for all 15 countries are the development of policies that encourage the growth of competition and innovation in private sector provision of payment services. Central banks will need to encourage commercial banks to play an increasing role in the payment system, and the legal and regulatory framework must be modified to promote confidence in payment instruments and clearing and settlement arrangements.


Details on the features of the payment systems in individual countries are provided in Chapter 8, Table 8.9.


Data on foreign currency deposits do not indicate an increase in dollarization.