Summary of WP/92/95
Author: Andrew T. Hook

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Summary of WP/92/95

“Managing Payment System Risk During the Transition From a Centrally Planned to a Market Economy” by Andrew T. Hook

This paper reviews the objectives and functions of payments systems in centrally planned economies and provides a framework for managing payment risk as these economies move toward market-based systems. It focuses on the payments systems of a number of centrally planned economies, where risks that had not existed under the previous regime came into play as the economies started to liberalize. The older arrangements for clearing and settlement still existed but were no longer adequate for monitoring new risk, particularly credit and liquidity risk.

Essentially, a payments system is a set of rules governing the clearing and settlement of payments. An ideal payments system should be reliable and sound, efficient, and fair; these qualities can serve as guidelines for the specific rules, which must be widely accepted if the system is to function.

In market economies, commercial banks have typically developed the rules and penalties so as to facilitate their own payments. In many of the centrally planned economies, banks in the private sector are just beginning to function as profit-maximizing entities and face a major restructuring of their operations. Even where the private banks have the financial and operating capabilities, as well as the desire, to lead the reform, the central bank should play a vital role overseeing the risk management of the system, expediting agreement on the rules that will govern the payments, and ensuring that the rules are fair.

This paper argues that a clear distinction should be drawn between short- and long-term strategies for dealing with payments problems. Although, in the short term, there is no alternative to the existing arrangements, they can be significantly improved precisely because little attention was paid to efficiency or reliability under the previous regime. The paper outlines specific recommendations in accounting, clearing, settlement, netting, and standardization.

A long-term strategy for reforming and modernizing the payments system should be developed jointly by users, commercial banks, and central banks. The central bank should establish a small team to be responsible for designing and implementing payments reforms. This team will liaise with the commercial banks, ideally in the framework of a national payments council, and help formulate the long-term strategy. Because of the large number of participants, the heavy demand for resources, and the need to gain familiarity with payments in a market system, the transforming economies should allow at least a year to develop the long-term strategy.