Posted by Ian Lienert.
During the current crisis of the financial system, central banks have not only been playing their traditional role of providing liquidity to banks, but some have been playing non-conventional roles, including: exchanging liquid assets for illiquid assets such as mortgage-backed securities, accepting unusual or no collateral, or directly purchasing and guaranteeing bank issued debt. These activities carry considerable risks. Will these risks eventually be a cost to government?
If central banks carry out quasi-fiscal activities, would it not make sense to consolidate the balance sheets of the central bank with that of the government? Such consolidation would make it easier to ascertain which institution -- the central bank or the government -- is bearing the quasi-fiscal risks of the sovereign. There is often reluctance to consolidate, given central bank independence. However, a few countries, mainly in Latin America, but also Australia and New Zealand, buck the usual practice and consolidate central bank balances into fiscal accounts.
For financial reporting purposes, “general government” – which includes all institutional units of central and local government and all extrabudgetary funds controlled by them – could be used. However, this coverage is too limited in countries where public enterprises or banks are involved in quasi-fiscal activities. For this reason, the IMF’s Government Financial Statistics (GFS) Manual 2001 proposes broader definitions for the “public sector”. Starting with “general government”, if one adds nonfinancial public corporations, the “nonfinancial public sector” is obtained; if, additionally, state-owned banks (or more precisely, nonmonetary financial public corporations) are consolidated as well, , the “nonmonetary public sector” is obtained (see paragraph 2.62 of GFS Manual 2001). However both of these two GFS concepts exclude the central bank.
As a matter of principle, quasi-fiscal activities (QFAs) should be shown transparently in government accounts. If the central bank is running losses because it is performing QFAs the resulting losses should be added to fiscal balances (1). Consolidation of central banks’ balance sheets with government balance sheets would also be helpful for analytical reasons.
In a survey in 2005, Mr. Paulo Medas of the IMF’s Fiscal Affairs Department (FAD) identified a number of countries where central bank operations are integrated into the fiscal accounts. The consolidation was done by one of two methods:
• Integrating the net impact of central bank QFAs into the overall balance of government.
• A detailed line-by-line consolidation of the central bank and government accounts.
In the first method, this was usually done by adding the central bank balance to government revenues, with corresponding impact on domestic financing (e.g., increase in government deposits due to profits transferred from the central bank).
Four Latin American countries practiced this method: Bolivia, Brazil, Peru and Uruguay. In the case of Uruguay, the consolidated fiscal accounts added the central bank to the balance of the nonfinancial public sector. However, the authorities opted to exclude public banks, even though they had been involved in significant QFAs.
Few countries have opted for line-by-line consolidation, as it requires standardized accounting rules for all public institutions including the central bank and a well-defined method for consolidation. Australia is one exception. It has made considerable efforts to prepare financial statements for government operations on a consolidated basis. The objective is to have a more accountable and effective public sector, as well as getting an overall perspective of the financial position of the government. The consolidated accounts include the federal government (but not State governments), national agencies, and public corporations, including the central bank. Australia has established broad consolidation and accounting rules that are consistent across all public agencies and corporations.
Specific operations—such as the restructuring of banks, including the central bank—are sometimes accounted for as a separate operation in the fiscal accounts. This was the case for the Philippines and Uruguay.
The note also discusses the definition of public debt used for debt sustainability analysis, observing that it varies among countries. As with fiscal operations, the central bank’s debt is generally excluded from the definition of public debt. However, if the central bank owns government debt, it tends to be included in the public debt definition when it is sizable, e.g., in Georgia and Egypt.
(1) Central banks can provide directed credit. Alternatively they provide credit to support state-owned banks that are instructed by the government to provide credit to particular sectors of the economy irrespective of financial return. This was the case, for example, in some former Soviet Union countries in the early 1990s. In countries where QFAs were large, in the 1990s, it was not unusual for IMF Staff Reports to report fiscal deficits inclusive of the losses resulting from QFAs, e.g., in some Latin American or former Soviet Union countries.
For more details, see the attached note.
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