## _wp1216 ## Source details **Canonical URL:** [_wp1216](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1216.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1216.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1216.pdf.json) --- ### Introduction, key findings, and purpose - During the last two decades, many countries have reformed their central bank legislation to defeat inflation, with one pillar being restrictions on central bank financing of the government. - Purpose: document and analyze worldwide institutional arrangements governing central bank lending to the government using a new database of central bank laws covering more than 150 countries (focus on laws and relevant constitutional excerpts). - Scope and limitations: - Analysis conducted from a central bank perspective; does not address fiscal policy or unconventional monetary policy involving purchases of government bonds for non-monetizing purposes. - Based on de jure information only; de facto divergences are not incorporated. - Interest in central bank lending rose during the “great recession” as governments faced larger liabilities, lower tax revenues, and expensive/limited market financing. ### Modalities of lending (legal clusters) and parameters examined - Five legal provision clusters: - Full prohibition (including bans on primary-market financing and unsecuritized loans; may also restrict secondary-market purchases; sometimes permit financing only under extraordinary circumstances). - Short-term access / advances (overdrafts to compensate seasonal shortfalls; ceilings and repayment within the same fiscal year; ceilings as cash value, percentage of revenues/expenditures, or proportion of central bank liability). - Long-term financing / primary market credit (maturities > one year; purchase in primary market; may include powers to pay foreign debt or require transfer of reserves). - No legislation on central bank lending to the government. - Other forms (lending to state-involved activities, financing deposit insurance, transfer of unrealized exchange rate profits). - Parameters examined in legislation: - Maximum amount (caps in cash or relative to base money/central bank liability or government revenues/expenditures). - Authority deciding loan conditions (central bank board, government, negotiation, or silence). - Beneficiaries (central government only, local governments, public enterprises). - Maximum maturity (threshold: one year differentiates short-term vs long-term). - Exclusions: - Central bank purchases in the secondary market treated as monetary operations and not categorized as central bank lending to the government in the modal clusters. - Financing to private corporations or development purposes not addressed. ### Data, sample, and classifications - Data source: IMF’s Central Bank Legislation Database (CBLD). - Sample: 152 countries, including 4 currency unions. - Regional coverage: 38 Africa; 19 Asia and the Pacific; 41 Europe; 25 Middle East and Central Asia; 29 Western Hemisphere. - Additional classifications: level of development (industrial/advanced, emerging markets, developing); exchange rate regime (based on IMF’s 2010 AREAER). - CBLD capabilities: classifies laws into more than 100 categories; searchable by exchange rate regime and monetary union. ### Key empirical findings — regional and institutional patterns - Overall pattern: - More than two-thirds of countries either prohibit central banks from extending credit to governments or only allow advances for temporary revenue shortfalls. - Geography: - Europe: most restrictive legal provisions (driven by treaty establishing the European Community, Article 101). - Africa and Asia & the Pacific: more lenient; almost no full prohibitions; most empower central banks to grant advances and sometimes loans. - Middle East & Central Asia and Western Hemisphere: mixed legal frameworks. - Three countries silent in legislation: Australia, New Zealand, United Kingdom. - Level of development: - Two-thirds of advanced countries: central banks cannot finance the fiscal deficit. - Almost one-half of emerging market economies: prohibition proportion falls to almost one-half. - One-fifth of developing countries: prohibition proportion falls to one-fifth; more than half of developing countries commonly allow advances. - Exchange rate regime: - Flexible exchange rate regimes and inflation-targeting regimes: typically strong limits on central bank financing. - Intermediate regimes and some conventional pegs: around one-half maintain lax conditions allowing central bank financing. - Currency boards: intrinsic limitation on monetizing fiscal deficits. ### If lending is allowed — specific legal conditions observed - Beneficiaries: - Vast majority: financing benefits the central government only. - Exceptions exist where local governments or public enterprises may borrow in law. - Interest rate determination: - Western Hemisphere and Africa: majority empower central banks to set or link rates to market; some allow negotiation. - Asia & the Pacific and Middle East & Central Asia: several countries specify negotiated rates (examples: India, Japan, Malaysia). - Instances of zero-cost advances cited (Jamaica, Jordan, Mozambique, Syria, Uganda, United Arab Emirates). - Policy concern: government role in rate-setting undermines central bank autonomy. - Amount limits: - Common legal limit: advances and loans cannot exceed 10 percent of government revenues of the previous fiscal year or an average of the last three fiscal years (Africa sometimes higher). - Alternative measures observed: - 5 percent of government expenditures (Costa Rica). - 25 percent of national budget (Bahrain). - 12 percent of money base / central bank liability (Argentina). - Three times capital and reserves (Serbia). - Capital & reserves plus one-third of liabilities (South Africa). - Other arrangements: negotiation-dependent limits (Barbados); congress approval (Korea); fixed nominal limits (Papua New Guinea). - Maturity: - Tend to be concentrated up to 180 days. - Some jurisdictions: maturity not defined. - Some African and Caribbean countries: maturities up to one year. - Operational recommendations observed: - Require market interest rates for central bank advances. - Require loans repaid within the same fiscal year. ### Credit to the government index — construction and empirical regularities - Index construction: - Based on adjusted CWN index with six criteria: (i) limitations on advances; (ii) limitations on credit; (iii) who decides loan conditions; (iv) beneficiaries; (v) maturity; (vi) interest rate charged. - Weights between zero and one as in CWN; index ranges continuously from zero to six (higher = greater restrictions). - Summary statistics (Table 5): - Full sample of countries: Mean 4.52; Median 4.5; Stand. Dev. 1.33; Min 1.5; Max 6. - Advanced countries: Mean 5.41; Median 6; Stand. Dev. 1.15; Min 2.5; Max 6. - Emerging market countries: Mean 4.51; Median 4.84; Stand. Dev. 1.68; Min 1.5; Max 6. - Developing countries: Mean 4.29; Median 4.17; Stand. Dev. 1.14; Min 1.83; Max 6. - Pair-wise correlations (Table 6) — notation: upper triangle = full sample; lower triangle = developing and emerging market countries: - Inflation vs Credit to govern. index: - Upper triangle correlation: -0.239 (significance 0.005). - Lower triangle correlation: -0.186 (significance 0.092). - Inflation vs Real GDP growth: - Upper triangle correlation: 0.485 (significance 0.000). - Lower triangle correlation: 0.367 (significance 0.001). - Credit to govern. index vs Real GDP growth: - Upper triangle correlation: -0.074 (significance 0.375). - Lower triangle correlation: 0.211 (significance 0.045). - Interpretation: index negatively correlated with inflation (statistically significant in full sample and developing/emerging subsample); index positively correlated with real GDP growth in developing and emerging markets but not in advanced countries. ### Multivariate evidence and regression findings (Appendix I summary) - Methodology: - Cross-sectional regressions of average inflation (log (1 + p_i)) on the credit to the government index. - Samples: full sample and sub-sample of developing and emerging market countries for 2004–2008. - Controls: real GDP growth (averaged 2003–2007), Dummy Peg (conventional pegs or currency boards per AREAER), real credit growth (not significant), increase in public debt (not significant). - Robustness: two- and three-year lags for GDP growth and extended time windows; main results robust though significance weakened when extending backwards. - Key estimated effects: - Raising the restrictions to central bank lending to the government by one additional point in the credit index would cause a decrease of approximately 1.1 percent in inflation in the developing world. - Corresponding effect in the full sample: decrease of 0.8 percent in inflation. - Credit index has stronger explanatory power for developing and emerging market countries. - Central banks’ political independence is significant for explaining inflation in both full and developing-country samples. - Including both credit index and political independence: credit index becomes insignificant in full sample but remains strongly significant in developing-country sub-sample. - Selected coefficients and statistics from Table 7 (OLS): - Credit to government index coefficients across columns shown: -0.78**, -0.92***, -0.76**, -1.09***, -0.45, -0.82**. - Dummy: Peg coefficients across columns shown: -2.85***, -2.39***, -4.83***, -2.09***, -4.61***, -2.22***, -4.70***. - Real GDP growth coefficients across columns shown: 0.69***, 0.42**, 0.74***, 0.39**, 0.73***, 0.45**. - Central banks’ political independence coefficients shown: -3.58***, -4.61***, -2.47*, -3.01*. - Intercept examples: 10.10***, 11.57***, 6.90***, 11.66***, 5.01***, 9.23***, 6.52***, 11.70***. - Number of observations reported across columns: 138, 138, 138, 83, 135, 80, 135, 80. - R^2 examples: 0.06, 0.14, 0.33, 0.49, 0.36, 0.50, 0.37, 0.53. - Significance: * 10 percent; ** 5 percent; *** 1 percent. - Interpretation: credit restrictions and political independence relate to lower inflation; credit restrictions are particularly policy-relevant in developing and emerging market countries. ### Policy recommendations and good practices - First best: - Central banks should not finance government expenditure; they may purchase government securities in the secondary market for monetary policy purposes only. - Restrictions are more compelling under fixed or quasi-fixed exchange regimes to avoid fueling traumatic exits from pegs. - Second best (temporary financing): - Temporary financing may be allowed to smooth tax revenue fluctuations until tax reform or deeper markets provide stable revenue smoothing. - Financing of subnational governments and public enterprises should not be allowed. - Legal terms and conditions for short-term loans: - Central bank financing should be capped at a small proportion of annual government revenues (case-by-case). - Loans should be priced at market interest rates. - Loans should be repaid within the same fiscal year. - Communication between government and central bank for disbursement and cancellation is necessary for systemic liquidity management. - Transparency: - Transactions involving central bank financing to the government should be disclosed regularly, including amount and financial conditions. - Operational safeguards recommended in law when lending warranted: - Central bank empowered to debit government account or issue marketable securities on behalf of government if repayment fails. - Government should be prohibited from borrowing again while in arrears. - Only central government should be eligible to borrow from the central bank. - Disclosure of amount, interest rate, and maturity for market monitoring. ### Appendix I — Credit index scoring rules (summary) - 1. Rules for advances: - Prohibited — 1 - Limited by small percentage or monetary program — 0.67 - Allowed under lax limits (> 15 percent of government revenues) — 0.33 - Allowed without limits — 0 - 2. Credit to the Government (primary market / other): - Not Allowed — 1 - Indirect lending to pay government debt abroad — 0.67 - In the primary market with limits (< 15 percent) — 0.33 - In the primary market with lax limits (> 15 percent) — 0 - 3. Who decides loan conditions: - Central Bank or market conditions — 1 - Defined by law — 0.67 - No specification / negotiable — 0.33 - Executive branch decides independently — 0 - 4. Beneficiaries: - Only the government — 1 - Government plus local government — 0.67 - Plus public enterprises — 0.33 - Plus non-financial private sector — 0 - 5. Maturity: - Max 6 months — 1 - Max 1 year — 0.67 - More than 1 year — 0.33 - No upper bound — 0 - 6. Interest rates: - At market rate or defined by central bank — 1 - Not specified (negotiable) — 0.50 - Below market rates — 0 ### Selected country legal provisions and numeric limits (selected excerpts) - South Africa: Bank may grant loans and advances; may not hold government stocks acquired directly from Treasury exceeding paid-up capital and reserve fund plus one-third of liabilities to the public. - Uganda: temporary advances limited to "eighteen percentum" of recurrent revenue; Bank shall charge market rates unless Board decides otherwise; reporting if breaches occur. - Tanzania: advances repayable within one hundred and eighty days; securities maturing not later than 12 months; aggregate limit not exceed one-eighth of average budgeted revenues. - Zambia: Bank shall not give credit exceeding "15 percent" of ordinary revenue of Government in previous financial year; remedial reporting every six months if limit likely to be exceeded. - Cambodia: temporary credit at refinancing rate with maturity not exceeding three months; aggregate limit "10% (ten percent) of the ordinary domestic budget revenues". - Israel: provisional advance total not exceeding "1.6 percent" of total ordinary annual budget; in two periods of Government choice total may reach "3.2 percent" during up to 30 days each. - Morocco: overdraft facility limited to "five per cent of the fiscal revenue of the preceding fiscal year"; total duration "120 days" in any one fiscal year; interest at the base rate for banks refinancing with the Bank. - Bahamas: outstanding advances shall not exceed "ten per centum" of average ordinary revenue or estimated ordinary revenue, whichever is less; securities maturing within "twenty years" may be held; concentration limit "twenty per centum of the demand liabilities". - Canada: loans/advances "for periods not exceeding six months"; outstanding federal loans not to exceed "one-third" of estimated revenue; provincial loans not to exceed "one-fourth"; repayment required "before the end of the first quarter after the end of the fiscal year." - Mexico: negative current account balance must never exceed "1.5 percent" of Federal Government's expenses; if exceeded, Bank must place securities within fifteen business days and may extend that term up to three months in exceptional cases. - United Kingdom: State overdrafts must be repaid "on the same day as that on which they are granted." - Azerbaijan: loans limited to six months and not higher than "3 percent" of state budget average revenues for the past three years. - Brazil: Constitution forbids central bank to grant, directly or indirectly, loans to the National Treasury and non-financial bodies. ### Final remarks (policy synthesis from Chapter IV and IV final remarks) - General principle: central banks should refrain from lending to the government; feasibility and exceptions depend on level of development and exchange rate regime. - Industrial and emerging market governments: recommended no access to central bank money; developing countries may warrant short-run financing to smooth seasonal revenue fluctuations. - Central bank secondary-market purchases should be exclusively for monetary policy; limits and transparency required when used in extreme circumstances. - When lending permitted, best practice legal design includes short maturity, market pricing, upper bounds typically expressed as a proportion of tax revenues (most countries limit to "10–20 percent" of government revenues of previous fiscal year), repayment within the same fiscal year, legal protection for central bank against nonpayment, and transparency of conditions. *Source: _wp1216 — IMF Central Bank Legislation Database analysis (provided content unit).* ### References ............................................................................................................. ### References ### Introduction, key findings, and purpose - During the last two decades, many countries have reformed their central bank legislation with the objective of defeating inflation. One pillar of this reform was restricting central bank financing of the government, as this was considered a chronic source of inflation and critical for building central bank credibility and monetary policy effectiveness. - This paper documents and analyzes worldwide institutional arrangements governing central bank lending to the government to identify practices and provide policy recommendations. It uses a new database of central bank laws covering more than 150 countries, focusing exclusively on central bank laws and relevant excerpts from constitutions. - The analysis is conducted from a central bank perspective and does not address fiscal policy considerations or any form of unconventional monetary policy that involves purchasing government bonds for purposes such as reducing the cost of private sector funding during financial distress or avoiding sharp declines in government debt prices. - The analysis is based on de jure information and does not incorporate de facto practices that diverge from legal provisions; such divergences are typically observed in countries with weak institutional foundations. - Interest in central bank lending to the government increased during the “great recession,” as several governments turned to central banks for money when government liabilities increased, tax revenues declined, and market financing was expensive or unavailable. ### Review of the literature (Box 1) - Central bank lending to the government has received little attention in the literature, particularly since the early 1990s. - Historical studies: - Leone (1991) surveyed legal restrictions on central bank lending to the government in more than 100 countries and explored macroeconomic consequences in a group of 44 industrial and developing countries. - Cottarelli (1993) examined appropriate models for constraining central bank lending to the government at the time of drafting legislation that created the ECB. - Grilli et al. (1991) and Cukierman (1992) incorporated restrictions on central bank lending to the government into indices of central bank independence used to measure effects on inflation. - Recent guidance: - Rules governing central bank lending to the government have been revisited in the design of good practices for central bank governance (Bank of International Settlements, 2009), with a basic recommendation to establish explicit restrictions to avoid disrupting central banks’ objective of preserving price stability. ### Key empirical findings - About two-thirds of the countries in the sample either prohibit central bank lending to the government or restrict it to short-term loans. - Most advanced countries and a large number of countries with flexible exchange rate regimes feature strong restrictions on government financing by the central bank. - When short-term loans are permitted: - In most cases market interest rates are charged. - The amount is limited to a small proportion of government revenues. - Only the national government typically benefits from this financing. - Despite these practices, there remains room for improvement in a large number of countries because extensive reliance on central bank money to finance public expenditure undermines central banks’ political and operational autonomy and their capacity to preserve price stability. ### Policy recommendations and good practices - First best: - Central banks should not finance government expenditure. The central bank may be allowed to purchase government securities in the secondary market for monetary policy purposes. - Restrictions to monetizing the fiscal deficit are even more compelling when countries feature fixed or quasi-fixed exchange regimes to avoid fueling a possible traumatic exit from the peg. - Second best (temporary financing): - Financing to the government may be allowed on a temporary basis to smooth out tax revenue fluctuations until either tax reform yields a stable revenue stream or markets are deep enough to smooth revenue fluctuations. - Financing other areas of the state, such as provincial governments and public enterprises, should not be allowed. - Terms and conditions for short-term loans should be established by law: - Central bank financing should be capped at a small proportion of annual government revenues (on a case-by-case basis). - Loans should be priced at market interest rates. - Loans should be paid back within the same fiscal year. - Communication between the government and the central bank for disbursement and cancellation of these loans is necessary to facilitate the central bank’s systemic liquidity management. - Transparency: - Transactions that involve central bank financing to the government should be disclosed on a regular basis, including the amount and financial conditions applied to these loans. ### Structure of the paper (as presented) - The rest of the paper is structured to describe the data and the method of analysis, including the various criteria used to evaluate central banks’ government financing. *Source: _wp1216 - References* ### Section III takes stock of these legal provisions across the world, in a sample of 152 ### _wp1216 - Section III takes stock of these legal provisions across the world, in a sample of 152 ### II. Characterizing central bank lending to the government - Paper focus: monetary aspects of central banks’ financing of the government; does not address fiscal considerations. - Relationship dimensions in central bank charters: central bank ownership; political autonomy; central bank capital and distribution of profits; central bank credit to the government. - Concern: large and long-term central bank lending to the government may undermine central banks’ autonomy and/or credibility and distort monetary operations and liquidity management. ### A. Modalities of lending (legal clusters) - Five legal provision clusters (ad hoc criteria): - Full prohibition. - Prohibitions include bans on financing government expenditures in the primary market or providing unsecuritized loans. - May also restrict purchases of government securities in the secondary market (caps on relative amount held). - Includes laws permitting financing only under extraordinary circumstances (war, natural disasters). - Short-term access to central bank financing, or advances. - Typically advances or overdrafts on the government account at the central bank to compensate seasonal shortfalls. - Legislation typically imposes a ceiling and requires repayment within the same fiscal year. - Ceiling may be an absolute cash value, a percentage of government revenues/expenditures, or a proportion of a central bank liability. - Interest rates charged may or may not be defined in law. - Long-term financing or credit in the primary market. - Allows lending at more than one-year maturity or purchase of securities in the primary market. - May include powers to pay foreign debt on behalf of the government or require transfer of reserves to the government. - Note: excludes purchases in primary market for monetary policy purposes where purchases are only to roll over portfolio (example noted in source). - No legislation on central bank lending to the government. - A handful of countries have no legal provisions that prohibit central bank lending to the government. - Other forms of central bank financing. - Includes lending to specific state-involved activities, financing deposit insurance institutions, or transfer of unrealized profits associated with exchange rate adjustments in international reserves. - Scope exclusions: - Central bank purchases of government securities in the secondary market treated as monetary operations (not included in the above categories). - Paper does not address financing to private corporations or for development purposes. ### B. Parameters for lending (criteria examined in legislation) - Main criteria examined: - The maximum amount for loans or advances permitted in the law (caps expressed in cash or relative to base money/central bank liability or government revenues/expenditures). - Authority responsible for deciding loan conditions, especially the interest rate (central bank board, government, negotiation, or silence in law). - Beneficiaries of central bank lending (central government only, local governments, public enterprises). - Maximum maturity of central bank loans (threshold: one year differentiates short-term vs long-term). ### C. Data (sample and classification) - Data source: IMF’s Central Bank Legislation Database (CBLD). - Sample: 152 countries, including 4 currency unions. - Regional coverage: 38 countries from Africa, 19 from Asia and the Pacific, 41 from Europe, 25 from the Middle East and Central Asia, and 29 from the Western Hemisphere. - Additional classifications: - Level of development: industrial (advanced), emerging markets, developing (classification sources: IMF World Economic Outlook; Standard and Poor’s Emerging Market Database). - Exchange rate regime: based on IMF’s 2010 AREAER. - CBLD features: classifies laws into more than 100 categories; capability to search text by exchange rate regime and monetary union. ### III. Central bank lending to the government: the facts — regional and institutional patterns - Overall pattern: - More than two-thirds of countries either prohibit central banks from extending credit to governments or only allow advances for temporary revenue shortfalls (Figure 1 summary). - Geography: - Europe: most restrictive legal provisions (driven by treaty establishing the European Community, article 101). - Africa and Asia & the Pacific: more lenient legislation; almost no full prohibitions; most empower central banks to grant advances and sometimes loans. - Middle East and Central Asia and Western Hemisphere: mixed—some countries forbid central bank credit, others allow advances or loans. - Latin America (within Western Hemisphere): more stringent restrictions vis-à-vis Caribbean; some constitutional bans exist (country examples cited in source). - Note: three countries where legislation is silent: Australia, New Zealand, and the United Kingdom. - Level of development: - Two-thirds of advanced countries: central banks cannot finance the fiscal deficit. - Almost one-half of emerging market economies: prohibition proportion falls to almost one-half. - Only one-fifth of developing countries: prohibition proportion falls to one-fifth. - More than half of developing countries: allowing central bank advances is common. - Explanation: tax systems, shallow capital markets, need to smooth seasonal revenue fluctuations. - Exchange rate regime: - Flexible exchange rate regimes: most restrictive provisions for central bank financing. - Inflation targeting regimes: typically include strong limits on central bank financing. - Intermediate regimes and some conventional pegs: almost one-half maintain lax conditions allowing central bank financing. - Currency boards: intrinsic limitation on monetizing fiscal deficits. ### B. If lending is allowed: specific conditions - Beneficiaries: - Vast majority: financing benefits central government exclusively. - Exceptions: financing extended to public corporations and local/provincial governments in specified countries (examples listed in source). - Policy implication: restricting to central government facilitates limiting monetization and systemic liquidity management. - Interest rate decisions: - Regional variation: - Western Hemisphere and Africa: majority empower central banks to set interest rates or link to market rates; some allow negotiation. - Asia & the Pacific: several important countries where interest rate is negotiated between central bank and government (India, Japan, Malaysia). - Middle East & Central Asia: interest rates often negotiated. - Europe: few countries allow monetizing; Israel example where minister of finance negotiates rates. - Instances of zero-cost advances in some countries (Jamaica, Jordan, Mozambique, Syria, Uganda, United Arab Emirates). - Concern: government involvement in setting interest rates undermines central bank autonomy and encourages reliance on central bank financing. - Amount of financing: - Common legal limit: advances and loans cannot exceed 10 percent of government revenues of the previous fiscal year or an average of the last three fiscal years (but Africa sometimes higher). - Alternative relative measures observed: - Proportion of government expenditures (5 percent in Costa Rica). - Proportion of national budget (25 percent in Bahrain). - Proportion of central bank liability (12 percent of money base in Argentina). - Proportion of capital and reserves (three times in Serbia). - Combination of capital & reserves plus one-third of liabilities (South Africa). - Other arrangements: negotiation-dependent limits (Barbados), congress approval (Korea), fixed nominal limits (Papua New Guinea). - Consensus: central banks should be allowed only limited credit to avoid undermining operational autonomy. - Maturity of loans: - Tend to be concentrated on periods up to 180 days. - Some countries: maturity not defined in law. - Some African countries and some Caribbean countries: maturities up to a year. - Operational recommendations drawn from observed gaps: - Require governments to borrow from central banks at market interest rates. - Require loans be paid back within the same fiscal year. ### C. Basic empirical regularities (credit to the government index and correlations) - Credit to the government index: - Based on adjusted CWN index: six criteria—(i) limitations on advances; (ii) limitations on credit; (iii) who decides loan conditions; (iv) beneficiaries; (v) maturity; (vi) interest rate charged. - Weights assigned between zero and one as in CWN; index ranges continuously from zero to six (higher = greater restrictions). - Summary statistics (Table 5): - Full sample of countries: Mean 4.52; Median 4.5; Stand. Dev. 1.33; Min 1.5; Max 6. - Advanced countries: Mean 5.41; Median 6; Stand. Dev. 1.15; Min 2.5; Max 6. - Emerging market countries: Mean 4.51; Median 4.84; Stand. Dev. 1.68; Min 1.5; Max 6. - Developing countries: Mean 4.29; Median 4.17; Stand. Dev. 1.14; Min 1.83; Max 6. - Pair-wise correlations (Table 6) — notation: upper triangle = full sample; lower triangle = developing and emerging market countries; significance levels in parenthesis. - Inflation vs Credit to govern. index: - Upper triangle correlation: -0.239 (significance 0.005). - Lower triangle correlation: -0.186 (significance 0.092). - Inflation vs Real GDP growth: - Upper triangle correlation: 0.485 (significance 0.000). - Lower triangle correlation: 0.367 (significance 0.001). - Credit to govern. index vs Real GDP growth: - Upper triangle correlation: -0.074 (significance 0.375). - Lower triangle correlation: 0.211 (significance 0.045). - Interpretation: - Credit to the government index is negatively correlated with inflation (lower central bank credit associated with lower inflation) with significance in full sample and in developing/emerging subsample. - Index positively correlated with real GDP growth in developing and emerging market countries, but not in advanced countries. - Multivariate evidence: - Cross-sectional regressions on inflation controlling for macro and institutional variables produce a statistically significant negative coefficient for the credit to the government index in the sub-sample of developing and emerging market economies (preliminary evidence). ### IV. Final remarks — findings and policy recommendations - General principles: - Central banks should refrain from lending to the government, though feasibility depends on level of development. - Industrial and emerging market governments should have no access to central bank money (they can access capital markets). - Full prohibition is common in industrial countries (notably Europe); emerging markets sometimes allow short-term lending. - Developing countries: short-run central bank financing may be warranted to smooth seasonal revenue fluctuations; prohibition is exceptional. - Exchange rate regime matters: conventional pegs and intermediate regimes should be compelled to limit central bank financing; currency boards have intrinsic monetization limits. - Central bank secondary market purchases should be exclusively for monetary policy purposes; limits on amounts should be used only in extreme circumstances and be transparent. - Operational principles when central bank lending is warranted: - Loans should be provided at short-run maturity and repaid within the same fiscal year. - Cost of lending should be established by law and be based on market interest rates; avoid negotiated rates that invite government interference. - Central bank loans should have an upper bound, typically expressed as a proportion of tax revenues; most countries limit to 10–20 percent of government revenues of previous fiscal year. - The law should protect the central bank if government does not pay on time: central bank empowered to debit government account or issue marketable securities on behalf of the government; government should not be allowed to borrow again while in arrears. - Only the central government should be allowed to borrow from the central bank; excluding local governments and public enterprises reduces macro risks. - Conditions of lending should be disclosed transparently, including amount, interest rate, and maturity, to allow market monitoring of systemic liquidity impact. *Source: IMF Central Bank Legislation Database analysis as summarized in the provided content unit.* ### Appendix I. Credit Index ### _wp1216 - Appendix I. Credit Index ### Credit index: rules for advances and lending (scoring) - 1. Rules for advances - Advances to government prohibited — 1 - Limited by small percentage of government revenues or expenditures or by the monetary program — 0.67 - Allowed under lax limits (more than 15 percent of government revenues) — 0.33 - Allowed without limits — 0 - 2. Credit to the Government - Not Allowed — 1 - Indirect lending to pay government debt abroad — 0.67 - In the primary market with limits (< 15 percent) — 0.33 - In the primary market with lax limits (> 15 percent) — 0 - 3. Who decides conditions of the loans - Central Bank defines terms and conditions or under market conditions — 1 - Defined by law — 0.67 - No specification or the law allows negotiations between Government and Central Bank — 0.33 - Executive branch decides independently — 0 - 4. Beneficiaries of Central Bank lending - Only the government — 1 - Government plus local government — 0.67 - All of the above plus public enterprises — 0.33 - All of the above and to the non-financial private sector — 0 - 5. Maturity of loans or advances - Limited to a maximum of 6 months — 1 - Limited to a maximum of 1 year — 0.67 - Limited to a maximum of more than one year — 0.33 - No legal upper bounds specified — 0 - 6. Interest rates for advances or loans - At market rate or defined by the central bank — 1 - Interest rates not specified in law (negotiable) — 0.50 - At below market rates — 0 ### Empirical analysis: regression results linking credit restrictions to inflation - Methodology summary - Cross-sectional regressions of average inflation (log (1 + p_i)) on the credit to the government index. - Samples: full sample of countries and sub-sample of developing and emerging market countries for the period 2004–2008. - Controls included: real GDP growth (averaged 2003–2007), Dummy Peg (conventional pegs or currency boards per IMF’s AREAER), real credit growth (not significant), and increase in public debt as proxy for fiscal deficit (not significant). - Robustness checks: two- and three-year lags for GDP growth and extending the period backwards; basic results unchanged though significance weakened when extending backwards. - Key findings - Raising the restrictions to central bank lending to the government by one additional point in the credit to the government index would cause a decrease of approximately 1.1 percent in inflation in the developing world. - The corresponding effect in the full sample of countries is a decrease of 0.8 percent in inflation. - The credit to the government index has stronger explanatory power for developing and emerging market countries (both statistical significance and size of coefficient). - Central banks’ political independence is significant for explaining inflation performance in both the full sample and the developing country sub-sample. - When including both the credit index and the political independence index, the credit index becomes insignificant in the full sample but remains strongly significant in the developing country sub-sample—suggesting the credit index is an important component of central bank independence in developing and emerging market countries. - Selected coefficients and statistics from Table 7 (Ordinary Least Squares regressions) - Credit to government index coefficients across columns shown: -0.78**, -0.92***, -0.76**, -1.09***, -0.45, -0.82**. - Dummy: Peg coefficients across columns shown: -2.85***, -2.39***, -4.83***, -2.09***, -4.61***, -2.22***, -4.70***. - Real GDP growth coefficients across columns shown: 0.69***, 0.42**, 0.74***, 0.39**, 0.73***, 0.45**. - Central banks’ political independence coefficients shown: -3.58***, -4.61***, -2.47*, -3.01*. - Intercept estimates (examples across columns): 10.10***, 11.57***, 6.90***, 11.66***, 5.01***, 9.23***, 6.52***, 11.70*** (standard errors reported in table). - Number of observations reported across columns: 138, 138, 138, 83, 135, 80, 135, 80. - R^2 values reported (examples across columns): 0.06, 0.14, 0.33, 0.49, 0.36, 0.50, 0.37, 0.53. - Significance notation: *Significant at 10 percent; ** significant at 5 percent; *** significant at 1 percent. - Interpretation - The credit to the government index and central bank political independence both relate to lower inflation, with a particularly strong and robust role for credit restrictions in developing and emerging market countries. - The credit index retains explanatory power for inflation in developing countries even after controlling for political independence, indicating it is a substantive policy-relevant component of central bank independence. ### Selected country legal provisions and numeric limits on central bank credit to government (sample excerpts) - South Africa (South African Reserve Bank Act 90 of 1989; Last Amendment: Exchange Control Amnesty and Amendment of Taxation Law Act 12 of 2003) - Powers: the Bank may grant loans and advances; may buy, sell, discount or re-discount bills of exchange or exchequer bills of the Government. - Prohibition: The Bank may not hold in stocks of the Government of the Republic acquired directly from the Treasury a sum exceeding its paid-up capital and reserve fund plus one-third of its liabilities to the public in the Republic. - Uganda (The Bank of Uganda Statute, 1993) - Temporary advances: Bank may make temporary advances to the Government and local governments for temporary deficiencies of recurrent revenue. - Identification: Treasury shall identify and submit at the beginning of each financial year all requirements for temporary advances. - Limit: The total amount of advances shall not at any time exceed eighteen percentum of the recurrent revenue of the Government. - Interest: The Bank shall charge market rates of interest on any advance unless the Board determines otherwise. - Reporting: Breaches trigger reports and cessation of powers to grant additional financing until rectified; reports at intervals not exceeding six months. - Tanzania (The Bank of Tanzania Act, 2006) - Direct advances and short term credit: Bank may make direct advances to Governments to offset fluctuations and purchase Treasury bills maturing not later than 12 months. - Repayment and maturity: Advances repayable within one hundred and eighty days; securities mature not later than 12 months. - Interest: Advances and securities shall bear interest at market rates as determined by the Bank. - Aggregate limit: Total amount outstanding of advances and Treasury bills and other securities shall not exceed one-eighth of the average budgeted revenues of each Government as defined in section 36. - Definition: Average budgeted revenues = average of actual collected revenues of the previous three fiscal years; collected revenues exclude loans, grants and other forms of economic aid and all borrowing. - Prohibition: Except as provided, the Bank shall not extend any credit directly or indirectly to the Governments or any public authority. - Monetary policy operations: Bank may purchase, hold and sell securities for monetary policy purposes on the secondary market at market rates, not to finance government budget deficits. - Zambia (The Bank of Zambia Act No. 43 of 1996) - Advances: The Bank shall not advance funds to the Government except in special circumstances on agreed terms. - Limitation on lending: The Bank shall not directly or indirectly give credit to the Government that exceeds 15 percent of the ordinary revenue of Government in the previous financial year. - Reporting requirements and remedial reporting at intervals not more than six months if limit is likely to be exceeded or exceeded. - Transactions: The Bank may underwrite, purchase, sell, or deal in securities issued or guaranteed by the Government which form part of a public issue. - Cambodia (Law on the Organization and Functioning of the National Bank of Cambodia - Kram dated January 26, 1996) - Prohibition: Central Bank shall not directly or indirectly extend to the Royal Government by purchase in a primary issue except in accordance with Title VI. - Temporary credit: Central Bank may temporarily extend credit to the National Treasury at the refinancing rate and a maturity not exceeding three months. - Requirements: Each extension requires a credit agreement specifying amount, maturity, interest rate; extensions certificated by negotiable government securities delivered to the Central Bank. - Aggregate limit: Outstanding extensions of credit and holdings of securities shall not exceed 10% (ten percent) of the ordinary domestic budget revenues, excluding grants and proceeds from the sale of assets, for the previous financial year. - Consultation: The Royal Government shall consult the Central Bank yearly before the budget is finalized to establish the total amount of credit within prescribed limits. - China - Title cited: Law of the People's Republic of China on the People's Bank of China, December 27, 2003 (Last Amendment: December 27, 2003) — law title and date included in excerpts. *Source: _wp1216 - Appendix I. Credit Index (selected appendices and excerpts).* ### Chapter IV: Business Operations ### Chapter IV: Business Operations ### China — People's Bank of China (selected provisions) - Article 29 - The People's Bank of China shall not provide overdraft for government or directly subscribe to or underwrite treasury bonds and other government securities. - Article 30 - The People's Bank of China shall not lend to local governments and government agencies at various levels, or to nonbank financial institutions, other organizations and individuals. - Exception: in exceptional cases, it may lend to non-bank financial institutions deemed eligible by the State Council for such lending. - The People's Bank of China shall not provide guarantee for any institutions or individuals. - Chapter VII: Legal Liabilities — Article 48 - Managers and other persons directly responsible shall be subject to administrative sanctions, and if the case constitutes a crime, criminal responsibility shall be investigated, for: - (1) Providing lending in violation of the provisions in the first paragraph of Article 30; - (2) Providing guarantee for an institution or individual. - Article 49 - If a local government, a government department at any level, a public organization or an individual forces the People's Bank of China or its employees to provide a loan or a guarantee in violation of Article 30: - Managers and other persons directly responsible shall be subject to administrative sanctions; if the case constitutes a crime, criminal responsibility shall be investigated. - If losses are incurred, the offenders shall be liable to partial or full compensation of the losses. ### India — Reserve Bank of India Act, 1934 (Act No. 2 of 1934) (selected provisions) - Chapter II: Incorporation, Capital Management, and Business — Section 17 (Business which the Bank may transact) - The Bank shall be authorized to carry on and transact the several kinds of business specified, namely: - (5) the making to the Central Government and State Governments of advances repayable in each case not later than three months from the date of the making of the advance; - (8) the purchase and sale of securities of the Central Government or a State Government of any maturity or of such securities of a local authority as may be specified in this behalf by the Central Government on the recommendation of the Central Board: - Provided that securities fully guaranteed as to principal and interest by any such Government or authority shall be deemed for the purposes of this clause to be securities of such Government or authority; - [(12AA) lending or borrowing of securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government or foreign securities; - (12AB) dealing in repo or reverse repo: - Provided that lending or borrowing of funds by way of repo or reverse repo shall not be subject to any limitation contained in this section. - Explanation.—For the purposes of this clause: - (a) “repo” means an instrument for borrowing funds by selling securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government or foreign securities, with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed; - (b) “reverse repo” means an instrument for lending funds by purchasing securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government or foreign securities, with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent;] ### Indonesia — Act Number 23 of 1999 and Act Number 3 of 2004 (selected provisions) - Chapter VIII Relationship with the Government — Article 56 - (1) Bank Indonesia shall not provide any credit to the Government. - (2) In the event that Bank Indonesia violate the provision as referred to in paragraph (1), the agreement to extend credit to the Government shall be null and void. - Article 76 - (1) The provision which prohibits Bank Indonesia to purchase for itself the state debt securities as referred to in Article 55 paragraph (4) shall be effective at latest January 1, 2000, except for the financing of banking restructuring. - (2) Bank Indonesia may, for any claims on the state debt securities which have been directly purchased by Bank Indonesia and still have not reached the maturity period, extend the term of the claims at a maximum of 10 (ten) years since the maturity date if it is deemed necessary by the Government upon the approval of the House of Representatives. - (3) The Government shall, in the event that the term of the claims has to be extended, propose the application of the term extension of such claims at the latest 30 (thirty) days prior to the due date of such claims. - Act Number 3 of 2004 — Article 55 - (1) In the event that the Government intends to issue government securities, the Government shall hold prior consultations with Bank Indonesia. - (2) Prior to the issuance of government securities as referred to in paragraph (1), the Government shall be required to hold consultations with the House of Representatives. - (3) Bank Indonesia may provide assistance in the issuance of government securities issued by the Government as referred to in paragraph (1). - (4) Bank Indonesia is prohibited from buying government securities as referred to in paragraph (1) on the primary market for its own account, except in the case of short-term government securities needed by Bank Indonesia for monetary control operations; - (5) Bank Indonesia may buy government securities on the primary market as part of the provision of the emergency financing facility as referred to in Article 11 paragraph (4). ### Japan — Bank of Japan Act (selected provisions) - Chapter IV Business — Article 33 (Regular Business) - (1) In order to achieve the purpose prescribed in Article 1, the Bank of Japan may conduct the following business: - (iii) Buying and selling of commercial bills and other negotiable instruments (including those drawn by the Bank of Japan in this item), national government securities and other bonds, or electronically recorded claims; - Article 34 (Loans, etc. to the National Government) - As the central bank of Japan, the Bank of Japan may, in addition to the business prescribed in paragraph 1 of the preceding Article, conduct the following business with the national government: - (i) Making uncollateralized loans within the limit decided by the Diet as prescribed in the proviso of Article 5 of the Fiscal Act (Act No. 34 of 1947); - (ii) Making uncollateralized loans for the national government's temporary borrowing permitted under the Fiscal Act or other acts concerning the national government's accounting; - (iii) Subscribing or underwriting national government securities within the limit decided by the Diet as prescribed in the proviso of Article 5 of the Fiscal Act; - (iv) Subscribing or underwriting financing bills and other financing securities; - (v) Taking safe custody of precious metals and other articles. ### Korea — Bank of Korea Act and Enforcement Decree (selected provisions) - Chapter II. The Monetary Policy Committee — Article 28 (Decisions on Monetary and Credit Policies) - The Monetary Policy Committee shall deliberate and decide on clauses on monetary and credit policies including: - 6. Basic matters concerning the purchase and sale of Government bonds, securities guaranteed by the Government, and so forth in the open market; - Chapter IV. Operations of the Bank of Korea — Section 5. Business with the Government and Government Agencies - Article 75 (Credit to the Government, etc.) - (1) The Bank of Korea may render credit to the Government on overdrafts or in other forms, and may directly subscribe to Government bond issues. - (2) The aggregate of all loans and direct subscriptions to Government bonds specified in Paragraph (1) shall not exceed the amount of the indebtedness which, together with any borrowing by the Government from other banking institutions and the public, has been authorized by the National Assembly. - (3) The interest rates and other terms of the credit as provided for in Paragraph (1) shall be determined by the Monetary Policy Committee. - Article 76 (Direct Subscription to Securities Guaranteed by the Government) - (1) The Bank of Korea may directly subscribe to securities whose redemption in full and interest payments are guaranteed by the Government. - (2) The interest rates and other terms of the subscription to such securities as specified in Paragraph (1) shall be determined by the Monetary Policy Committee. - Article 77 (Deposits from and Loans to Government Agencies) - (1) The Bank of Korea may accept deposits from, and make loans to, government agencies. - (2) “Government agencies” are defined as juridical persons designated by the Government to execute on its behalf projects or functions of a public character in fields of production, purchase, sale or distribution. - (3) The redemption in full and interest payments of the loans stipulated in Paragraph (1) shall be guaranteed by the Government. - (4) The Monetary Policy Committee shall determine the interest rates and other terms of loans by the Bank of Korea to government agencies. - Article 78 (Restrictions on Credit to Government Agencies) - The Bank of Korea shall, in periods of monetary expansion, endeavor to restrict its credit to government agencies and to contract the outstanding volume of such credit. - Enforcement Decree of the Bank of Korea Act — Article 15 (Designation of Government Agencies) - (1) The government agencies prescribed in Article 77 shall be designated by the Minister of Finance and Economy after consultation with the ministers concerned, subject to the approval of the President of the Republic of Korea upon deliberation by the State Council. - (2) The Minister of Finance and Economy may, after consultation with the ministers concerned, rescind the designation of the government agencies, subject to the approval of the President of the Republic of Korea upon deliberation by the State Council. ### Europe — European Treaty, Protocol, and selected national statutes (selected provisions) - Treaty Establishing the European Community — Article 101 - 1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States in favor 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. - 2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions. - Protocol (No. 18) on the Statute of the ESCB and of the ECB (1992) — Article 21. Operations with public entities - 21.1. In accordance with Article 101 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the national central banks in favor 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. - 21.3. The provisions of this Article shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions. - France — Statute of the Bank of France (Monetary and Financial Code) — Article L141-3 - The Bank of France is prohibited from authorizing overdrafts or granting any other type of credit to the Treasury or to any other public body or undertaking. - The direct acquisition of their debt instruments by the Bank of France is also prohibited. - Agreements between the Government and the Bank of France determine, when necessary, the terms of repayment of the advances granted to the Treasury by the Bank of France prior to January 1, 1994. - The provisions do not apply to public credit institutions which enjoy the same treatment as private credit institutions with regard to provision of liquid assets by the Bank of France. - Germany — Bundesbank Act — Part V: Scope of business — Section 20 Transactions with public authorities - The Deutsche Bundesbank shall be entitled to conduct the transactions specified in section 19, numbers 2 to 7, with the Federal Republic of Germany, the Federal special funds, the federal states (Länder) and other public authorities; for this purpose, the Bank may grant intraday credit. - With regard to such transactions the Bank may not charge the Federal Republic of Germany, Federal special funds or the federal states for any expenses incurred or levy any fees. ### Israel — Bank of Israel Law, 5714-1954 (selected provisions) - Chapter Seven: Foreign Exchange Operations — Section 38. Power to borrow and guarantee - (a) The Bank may, with the approval of the Government, borrow from a foreign government, a banking or financial institution outside Israel or an international financial institution and to pledge assets held by the Bank as security for the repayment of the loan. The Government may, with the approval of the Finance Committee of the Knesset, guarantee on behalf of the State a loan as aforesaid. - (b) The Bank may, with the approval of the Government, lend money to a foreign institution. - (c) The Bank may, with the approval of the Government, guarantee a loan granted to the State or any person in Israel by a foreign institution if, in the opinion of the Governor, such loan is in the public interest. - Chapter Eight: Credit Operations of the Bank — Section 45. Loans to Government - (a) The Bank shall not make a loan to the Government to finance its expenditure. - (b) Notwithstanding subsection (a), the Bank may make to the Government, at its request: - (1) a provisional advance to bridge temporary gaps in the Government's cash flow in the implementation of the budget, provided that the total of the provisional advance shall not exceed, at any time, 1.6 percent of the total ordinary annual budget at that time; however, during two periods of the Government's choice in the course of the fiscal year, neither of which shall last longer than 30 days, the total provisional advance may reach 3.2 percent of the total ordinary annual budget at that time; - (2) a loan by way of acquiring bonds issued by the Government to finance the excess of its expenditure in foreign currency over its revenue in foreign currency; - (3) a loan for the purpose of paying debts incurred by it to the Bank under law, other than debts under paragraph (1); the conditions of the loan and the times for its repayment shall be fixed by agreement between the Minister of Finance and the Governor. - (c) Bonds sold to the Bank in accordance with subsection (b)(2) shall be of one of the negotiable categories sold to the public under the State Loan Law 5739–1979, as the Minister of Finance shall determine in consultation with the Governor; the bonds shall be sold at market price as will be agreed by the Minister of Finance and the Governor. - (d) The Minister of Finance may prescribe, in consultation with the Governor, additional provisions and conditions for the implementations of subsection (c). *Source: _wp1216 - Chapter IV: Business Operations (PDF chapter content provided).* ### 1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of ### _wp1216 - 1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of ### EU-level prohibition and statute language - Treaty/Protocol provisions prohibit overdrafts or any other type of credit facility with the ECB or with the national central banks in favor 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" - Prohibition also covers "the purchase directly from them by the ECB or national central banks of debt instruments." - Exception: "Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions." - Protocol (No. 18) on the Statute of the European System of Central banks and of the European Central Bank (1992), Chapter IV, Article 21 echoes Article 101 of the Treaty and repeats: - 21.1 — prohibition text as above. - 21.3 — the exception for publicly owned credit institutions receiving the same treatment as private credit institutions in supply of reserves. ### National implementing laws and specific exceptions (selected jurisdictions) - United Kingdom — Bank Act 1998 (Last Amendment: 2004) - Section 8.3: "At the request of Our Minister ... the Bank shall grant the State ... unsecured overdraft facilities subject to a rate of interest to be agreed ... The State shall be obliged to repay these overdrafts on the same day as that on which they are granted." - Norway — The Norges Bank Act, September 9, 1985 (Last Amendment: Act No. 11 of March 16, 2007) - Section 18: "The Bank may not extend credit directly to the government." - Spain - Treaty and Protocol provisions (see EU-level prohibition above) are reproduced. - Law of Autonomy of The Banco de Espana - Law 13/1994 of June 1, 1994 (Last Amendment: November 18, 2005) - Article 13.2: "Overdraft facilities or the granting of any other type of credit by the Bank to the central government, Comunidades Autónomas, local authorities or any other of the authorities or entities referred to in article 104 of the Treaty ... are prohibited." - Exceptions listed: - a. "Public credit institutions, which may receive liquidity from the Bank on the same terms as other credit institutions, and Deposit Guarantee Funds in credit institutions, when relevant." - b. "Financing by the Bank of obligations incurred by the government with the International Monetary Fund, or arising from the implementation of the medium-term financial assistance facility of the European Community." - Article 14.2: "The Bank may not directly acquire from issuers any type of public debt. It may only acquire it in markets, in the exercise of the functions assigned to it." - Second Transitory Provision: transitional arrangements to continue providing cash management and public debt services until agreements are approved. - Sweden — The Sveriges Riksbank Act, 1988 (Last Amendment: January 1, 2007) - Art. 1: "The Riksbank shall not extend credit to or purchase debt instruments directly from the state, another public body, or an institution of the European Union." - Riksbank may "grant intraday credit to the state" pursuant to Chapter 6, Article 7 paragraph 2; may grant credit to and purchase debt instruments from financial institutions owned by the state. - Turkey — Law on the Central Bank of the Republic of Turkey. Law No. 1211 (Last Amendment: 2008) - Article 56: "The Bank shall not, grant advance and extend credit to the Treasury and to public establishments and institutions, and shall not purchase debt instruments issued by the Treasury and public establishments and institutions in the primary market." - Additional limits on unsecured advances and guarantees. - Azerbaijan — Law of the Republic of Azerbaijan on the National Bank - Article 16.1: "The National Bank shall not loan to the state directly for the purposes of funding the state budget deficit." - Article 16.2: "the National Bank may extend a six-month loan to the government ... against collateral of interest-bearing government securities and on condition of repayment by the state budget for the current year." - "The total amount of the loans issued and of their unpaid part cannot be higher than 3 percent of state budget average revenues for the past three years." - Article 16.3–16.4: purchases of government securities treated as credit to the state unless conditions apply; monetary policy exceptions for secondary market operations. - Provision 49-1-2: central bank may acquire securities in the primary market with consent in specific state-guarantee situations. - Morocco — Statutes of Bank Al-Maghrib (Dahir No. 1-05-38 of chaoual 1426 / November 23, 2005) - Article 27: "The Bank may only grant financial assistance to the State, or guarantee commitments entered into by the State, in the form of the overdraft facility contemplated in paragraph 2 of this Article." - Limits: - "The overdraft facility is limited to five per cent of the fiscal revenue of the preceding fiscal year." - "The total duration of use of this facility may not exceed 120 days, whether consecutive or not, in any one fiscal year." - "The amounts actually used under this facility shall pay interest at the base rate for banks refinancing with the Bank." - Bank may suspend use when money market conditions warrant. - Bank may not grant financial assistance to public enterprises or agencies; exception for public lending institutions licensed as banks. - Article 62 (Transitory): requires an agreement within three months to set remuneration, duration and procedures for repayment of assistance granted as at law date. - Saudi Arabia — Charter of the Saudi Arabian Monetary Agency (Royal Decree No. 23 dated 23-5-1377 / December 15, 1957) - Article 6(c): The Agency shall not undertake "Making advances to the Government or private parties;" - Bahamas — Central Bank of The Bahamas Act, 2000 - Part VII, Section 28: "Subject to the provisions of this section, the Bank may make temporary advances to the Government on such terms and conditions as may be agreed between the Minister and the Bank." - Repayment: "Every such advance ... shall be repaid by the Government as soon as possible." - Limit on outstanding advances: "shall not exceed ten per centum of the average ordinary revenue of the Government or ten per centum of the estimated ordinary revenue of the Government, whichever is the less." - Definitions provided for "ordinary revenue", "average ordinary revenue", and "estimated ordinary revenue." - Part VIII, Section 29: Bank powers to "buy, hold and sell securities issued or guaranteed by the Government" with maturity and concentration limits: - securities maturing within twenty years may be held; total amount maturing beyond five years shall not exceed twenty per centum of the demand liabilities of the Bank. - Loan/security rules: advance maturities and loan-to-value limits include "ninety-three days" and "eighty-five per centum of the market value." - Brazil - Constitution (Last Amendment: March 8, 2006) — Article 164.1: "It is forbidden for the central bank to grant, either directly or indirectly, loans to the National Treasury and to any body or agency which is not a financial institution." - Law No. 4595 of December 31, 1964 (Last Amendment: 1998) - Article 10.XII: "Purchase and sell federal public securities, as an instrument of monetary policy;" - Article 12: "The Central Bank of Brazil shall operate solely with public and private financial institutions and is prohibited from engaging in banking operations of any nature with other entities under public or private law except as expressly authorized by law." - Canada — Bank of Canada Act (Last Amendment: August 5, 2008) - Section 18(i): "make loans or advances for periods not exceeding six months to the Government of Canada or the government of a province on taking security in readily marketable securities issued or guaranteed by Canada or any province;" - Section 18(j): "make loans to the Government of Canada or the government of any province, but such loans outstanding at any one time shall not, in the case of the Government of Canada, exceed one-third of the estimated revenue of the Government of Canada for its fiscal year, and shall not, in the case of a provincial government, exceed one-fourth of that government’s estimated revenue for its fiscal year, and such loans shall be repaid before the end of the first quarter after the end of the fiscal year of the government that has contracted the loan;" - Chile - Constitution of the Republic of Chile 1980 (Last Amendment: 20.050, September 17, 2005) - Article 109: "The Central Bank may only perform transactions with financial institutions, either public or private." - "No public expenditure or loan may be financed with direct or indirect credits of the Central bank." - Exception in case of "a foreign war or the menace of such a war, as determined by the National security Council," when the Central Bank may secure, grant, or finance credits to the State and public or private entities. - Law 18,840 Basic Constitutional Act of the Central Bank of Chile (Last Amendment: January 2006) referenced for authority and operations. ### Key numeric limits and temporal constraints cited in selected laws - Azerbaijan: "six-month loan" limit; "3 percent of state budget average revenues for the past three years." - Morocco: overdraft facility limited to "five per cent of the fiscal revenue of the preceding fiscal year"; total duration "120 days" in any one fiscal year. - Bahamas: outstanding advances shall not exceed "ten per centum of the average ordinary revenue of the Government or ten per centum of the estimated ordinary revenue of the Government, whichever is the less." - Bahamas: purchase/safe-keeping of government securities—may hold securities maturing within "twenty years"; concentration limit "twenty per centum of the demand liabilities" for those maturing beyond five years. - Bahamas: loan maturities and collateral rules include "ninety-three days" and loan-to-value "eighty-five per centum of the market value." - Canada: loans/advances "for periods not exceeding six months"; outstanding loans limited to "one-third" (federal) and "one-fourth" (provincial) of estimated revenue; repayment required "before the end of the first quarter after the end of the fiscal year." - United Kingdom (Bank Act 1998): State overdrafts must be "repaid ... on the same day as that on which they are granted." - Morocco: interest on overdraft use equals "the base rate for banks refinancing with the Bank." *Source: Excerpted text from the provided IMF content unit.* ### Section 27 ### Section 27 ### Scope and general prohibition - The Bank may grant financing or refinancing to banking entities and financial institutions only. - Under no circumstances shall the Bank grant to such entities and institutions its guarantee, nor acquire securities issued by the state, its agencies, or enterprises. - No public expenditure or credit of whatsoever nature may be financed either directly or indirectly with loans granted by the Bank. - Exception: In the event of foreign war or threat of foreign war, to be qualified by the Council on National Security by means of a secret resolution, the Bank may obtain, confer, or finance credits to the state and to public or private entities. ### Honduras — Special Credit to the Public Sector (Article 40) - The Central Bank of Honduras (BCH) may only extend loans to the government and to official agencies by buying securities on the secondary market. - Such loans may not exceed the limits unanimously approved by the Board of Directors. - Securities so bought by the Central Bank may be traded with the public and with financial system institutions. - Exception for emergency situations and serious government crises: - Loans in these cases require unanimous approval by the Board of Directors and ratification by Decree issued by the President of the Republic in the Council of Ministers. - The National Congress shall be notified immediately of any such Decree. - Seasonal liquidity loans: - Restrictions do not apply for BCH loans to the government to cover seasonal fluctuations in revenues and expenditures. - Terms: no longer than six (6) months. - Pricing: at market rates. - Limit: ten percent (10 percent) of total tax revenues for the prior fiscal year. - Approval: must be unanimously approved by the Board of Directors. - Repayment: loans shall be repaid in the same fiscal year in which they are applied for. ### Mexico — Banco de México Law (Articles 7, 9–12, 46) - Article 7, II: Banco de México may grant credit to the Federal Government, to credit institutions and to the Institute for Protection of Bank Depositors. - Article 9: Banco de México shall not lend securities to the Federal Government nor purchase securities from it, except when purchases comply with one of the two conditions: - I. Purchases covered by cash deposits made by the Government in the Bank with proceeds of the placement of said securities; deposits may not be withdrawn before their maturity date; amounts, terms and yield on these deposits must be equal to the amounts, terms and yield of the securities being traded. - II. Purchases resulting from bids by the Bank in primary auctions of said securities. The amount of these purchases may under no circumstance exceed the amounts of securities payable by the Government, owned by the Bank and redeemable on the same date of placement of the securities being auctioned. - Article 10: Only the Central Bank may act as the Federal Government's agent in issuing, placing, purchasing and selling Government domestic debt securities and, in general, in servicing said debt. - Article 11: Banco de México may grant credit to the Federal Government only through the current account the Federal Treasury holds in the Bank, and subject to provisions of Article 12. - For the purposes of this Law, securities payable by the Federal Government and owned by the Central Bank are not considered as credit. - Article 12 — Current account management provisions: - II. Banco de México may, without authorization of the Federal Treasurer, charge the account in order to cover the service on the domestic debt of the Federal Government. - III. No checks or any other documents payable to third parties may be drawn on this account. - IV. Should the Federal Government's balance in the current account be negative, said balance must never exceed the equivalent of 1.5 percent of the Federal Government's expenses as laid out in the Federal Expense Budget for the corresponding year, not taking outlays destined to amortize the Government's debt into consideration; this provision may be void if, due to extraordinary circumstances, the temporary differences between public revenues and expenses increase considerably. - If the negative balance exceeds the aforementioned limit: - The Bank must proceed to place securities payable by the Federal Government on the market, on behalf of the Government and for an amount equivalent to the balance in excess of the limit. - If necessary or appropriate, the Bank shall issue securities payable by the Government and place them on the market on behalf of the Federal Government. - The Bank must place the aforementioned securities within fifteen business days from the date on which the limit is exceeded, and offset the excess credit with the proceeds of the corresponding placement. - In exceptional cases, to prevent disruptions in the financial market, the Board of Governors of the Bank may extend that term, in one or more instances, for a total duration of no longer than three months. - Article 46, IV: The Board of Governors shall be empowered to decide on the granting of the Bank's credit to the Federal Government. ### United States — Federal Reserve statutory provisions - Section 14(b) of the Federal Reserve Act (12 USC Sec. 355): - Every Federal Reserve bank shall have power: - (1) To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 1463 of this title and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, and obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System. - Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market. - (2) To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States. - Section 12A of the Federal Reserve Act (12 U.S.C. 263(b)): - No Federal Reserve Bank shall engage or decline to engage in open-market operations under Section 14 of this Act except in accordance with the direction of and regulations adopted by the Committee. - Title 31, Sec. 5301 — Buying obligations of the United States Government: - (a) The President may direct the Secretary of the Treasury to make an agreement with the Federal reserve banks and the Board of Governors of the Federal Reserve System when the President decides that the foreign commerce of the United States is affected adversely because: - (1) the value of coins and currency of a foreign country compared to the present standard value of gold is depreciating; - (2) action is necessary to regulate and maintain the parity of United States coins and currency; - (3) an economic emergency requires an expansion of credit; or - (4) an expansion of credit is necessary so that the United States Government and the governments of other countries can stabilize the value of coins and currencies of a country. - (b) Under an agreement under subsection (a), the Board shall permit the banks (and the Board is authorized to permit the banks notwithstanding another law) to agree that the banks will: - (1) conduct through each entire specified period open market operations in obligations of the United States Government or corporations in which the Government is the majority stockholder; and - (2) buy directly and hold an additional $3,000,000,000 of obligations of the Government for each agreed period, unless the Secretary consents to the sale of the obligations before the end of the period. - (c) With the approval of the Secretary, the Board may require Federal Reserve banks to take action the Secretary and Board consider necessary to prevent unreasonable credit expansion. *Source: Central Bank Legislation Database; content extracted from the provided IMF PDF section.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1216.pdf_