I do not know where they got the wrong notion that IMF is totally against Central Bank’s lending to government in exceptional circumstances. The IMF recommends direct central bank lending to government as a last-resort mechanism, considered only where it is not possible to obtain enough financing from any other source. “Moreover, it should be on market terms, restricted in time, and with an explicit repayment plan over the medium term. “ Please note- an explicit repayment plan ! A grant is a grant ! So !
The other confusion is that we have been carrying out the same type of unconventional monetary measures as other central banks namely quantitative easing (QE) - QE can be described simply as a large-scale purchase by central banks of Govt securities on secondary markets . Yes, most of the Central Banks in the developed economies and elsewhere have been implementing QEs. We, instead of this type of QE, we have had recourse to an extreme form of monetary policy - unbridled debt monetization by the BoM -money creation or printing money by crediting Rs 60 billion to the Govt’s account at the central bank . The central bank can thus print money for Govt by just adding an entry on the asset side of its balance sheet, or, by holding a zero-coupon non-repayable or perpetual bond issued by Govt. Spending by the Govt will thus inject this money in the financial system.
Why is the IMF against our monetary deficit financing ? (the only two other countries in Sub-Saharan Africa that carried out such CB financing were Democratic Republic of the Congo and Ghana). Because the monetizing of deficits risks undermining “the long-term independence and effectiveness of the central bank, since concerns may arise about its ability to keep inflation under control in the future. This would unanchor inflation expectations and add to pressures on the currency (Zimbabwe).”
On the MIC issue , it’s only now that our analysts are coming out of their cocoons. ( Did u ever hear from them before on that BOM’s concoction? ). They are suddenly wiser after the event .
Contrary to our opportunist-analysts, we did not wait to get the green light from the IMF; at the time of creation of the MIC , we had highlighted this IMF note entitled “Unconventional Monetary Policy in Emerging Market and Developing Economies(EMDEs)” by David Hofman and Gunes Kamber where the authors warn about the risks of central banks creating special purpose vehicles to extend direct credit to the private sector.
‘Central banks in some EMDEs may additionally consider providing direct credit to nonfinancial firms. However, such lending could easily lead to credit misallocation, especially in countries particularly prone to connected lending and political-economy distortions. As highlighted in the previous section, it is generally also not desirable for central banks in EMDEs to take on substantial credit risk, and direct lending faces many associated governance challenges (for example, difficulty reversing such policies and compromising central bank independence).
Therefore, such a policy will be generally undesirable except in dire circumstances. In any event, support should aim at solvent firms. Indeed, equity injections by the government, rather than loans from the central bank, may be needed to tackle insolvency, and the fiscal costs and risks should be properly recognized. Moreover, given that it is difficult to determine whether firms are insolvent or illiquid at the time of the crisis, the governments should be ready to help cover potential credit losses to central bank balance sheets arising from any such support schemes.”
Equally confusing is the stance of the representative of the MMM- He is alerting us to the fact that Govt has only two choices : “1) présenter un budget reponsable en éliminant les gaspillages et les dépenses excessives sur des projets comme Côte-d’Or, Safe City ou ; 2) financer son budget par ’emprunt ou la taxe.” But at the same time , he takes the opposite position that “Le Ministre a une marge de manoeuvre comfortable”. Which is which ?
His statement that “Il y a donc encore Rs 60 milliards” is inexact. That amount has already been allocated to Budget 2020-21 and that’s why the IMF provided them with a face-saving compromise- that an amount of Rs 32 billion be written off from the Special Reserve Fund and the remaining balance of Rs 28 billion to be treated as advance against future profits distributable to Govt. This was accompanied by a severe warning that such policies should be discontinued and the BoM law be amended to prevent such exceptional transfers in future.
If there are many projects that have not been implemented in Budget 2020-21, these will be reflected in lower capital expenditures and a lower budget deficit- unless they maintain the budget deficit as its present high level and transfer some of savings to Special Funds ,outside the budget, as it was being done by the Sithanen-Mansoor tandem, but was disapproved by the IMF.
For those, who still have some doubts, please see :The Monthly Statement of Govt Operations" Table, below -Rs 33 bn & Rs 7 bn in Aug 2020 and Rs 20 bn in Sept 2020.
