Jacek Cukrowski. Financing Budget Deficit by Central Bank Seigniorage in Selected Transitional Economies: A Comparative Study

Transcription

1 37 Jacek Cukrowski Financing Budge Defici by Cenral Bank Seigniorage in Seleced Transiional Economies: A Comparaive Sudy W a r s a w,

2 Responsibiliy for he informaion and views se ou in he paper lies enirely wih he auhor. The auhor graefully acknowledges financial suppor from he ACE PHARE Program in he framework of research grans P R, P R, KBN in he framework of research gran 1H02C , and OSI in he framework of grans #: 9198/1 and 9198/2. This paper was prepared for he advisory projec "Suppor for Economic Reform in Kyrgyzsan", financed by he Open Sociey Insiue in Budapes. Graphic Design: Agnieszka Naalia Bury DTP: CeDeWu Sp. z o.o. ISSN , ISBN Publishers: CASE Cener for Social and Economic Research ul. Sienkiewicza 12, Warsaw, Poland el.: (4822) , , fax (4822) case@case.com.pl

3 Conens Absrac 5 1. Inroducion 6 2. The Concep of Seigniorage 8 3. The Disribuion of Toal Seigniorage 9 4. Empirical Analysis Comparaive Analysis Conclusions 41 References 43

4 CASE-CEU Working Papers Series No. 37 J. Cukrowski Jacek Cukrowski Jacek Cukrowski (born 1960) received his M.Sc. degree in Sysems Engineering in 1985, Ph.D. in Compuer Science in 1990, Posgraduae Diploma in Sociology and Poliics in 1993, Ph.D. in Economics in In 1997 he defended Habiliaion Thesis in Economics. In he worked as a researcher in he Economics Insiue in he Academy of Science of he Czech Republic. Since 1998 he has been a docen of Charles Universiy (Czech Republic), and Professor of Universiy of Finance and Business (Poland), since 1997 wih CASE Foundaion. 4

5 CASE-CEU Working Papers Series No. 37 Financing Budge Defici... Absrac The paper presens a comparaive sudy of he creaion and disribuion of cenral bank seigniorage in seleced Cenral European counries (Poland, Czech Republic) and seleced Commonwealh of Independen Saes counries (Georgia, Kyrgyzsan, Belarus) in he period of ransiion o marke economy. A comprehensive framework for measuremen of seigniorage revenues is presened and esimaes of is sources and uses are compued and analyzed. I is shown ha convenional concep of moneary seigniorage does no reflec governmen gains from money creaion in ransiional economies. The sudy also reveals sources of fiscal seigniorage in he period of macroeconomic sabilizaion accompanied by igh moneary policy. In paricular, conrary o he common view, he analysis showha ypically revenues from he money creaion has no been exensively used as a ool for financing governmen expendiures in non of he analyzed ransiional economies. Neverheless, he research showha in CIS counriehe flow of he resources from he cenral bank o he budge remains significan mainly due o he reducion of he porfolio of non-governmen deb and quasifiscal operaions of cenral banks. Key words: Seigniorage, cenral banks, economies in ransiion, Naional Bank of Poland, Czech Naional Bank, Naional Bank of Georgia, Naional Bank of he Kyrgyz Republic, Naional Bank of he Republic of Belarus. 5

6 CASE-CEU Working Papers Series No. 37 J. Cukrowski 1. Inroducion Over decades all cenrally planned economies were ruled by means of he plan which se oupu goals for all secors of he economy. Wages and prices were also se by cenral planner. Money supply wao adjus o ensure meeing he planned equilibrium. This sysem, mainained arificially for years, brough all relaed counrieo serious economic crisis. Poliical and marke reforms inroduced in hese counries in he early 1990s changed he siuaion drasically, however, hey were accompanied by a sharp decline in economic aciviy, an increase in inflaion raes [1] and significan fiscal problems. In he firs years of ransiion in mos counriehe huge jump of inflaion came from a combinaion of price liberalizaion on he one hand, and large fiscal defici on he oher (largely due o he collapse of he ax base and he exended social duies of he sae). The absence of oher sources of financing led o he moneary financing of budge deficis, and hence rapid inflaion. In he middle of nineies, however, inflaion had came down significanly in all ransiion counries. Neverheless, in subsequen years, due o a variey of facors, including he degree of indusrializaion, he geographical locaion and orienaion of inernaional rade, he exen of iniial economic imbalances and he legacy of sae insiuions, hree disinc clusers of counries emerged: Cenral and Easern European (CEE) counries on one end, he wesern Commonwealh of Independen Saes (CIS) [2], and Balic counries in he middle, and he Caucasus and Cenral Asian saes a he oher end. In more advanced CEE counries rapid liberalizaion and susained macroeconomic sabilizaion have laid he basis for he gradual developmen of marke economy. In he less advanced counries (in Caucasus and Cenral Asia) progress in liberalizaion has been slow and uneven. Moreover, macroeconomic sabilizaion in hese counries has been jeopardized by he persisence of large budge deficis. I hao be sressed, however, ha all ransiion counries, have faced and sill mee he problem of significan fiscal imbalances. This is closely relaed boh o he oupu collapse and o process of srucural reform in he public secor (on he revenue side) and exended social duies of he sae (on he expendiure side). Consequenly, in mos counries large public secor deficis deermine mos of macroeconomic indicaors (moneary growh, inflaion raes, ineres raes, ec.). According o a common opinion seigniorage revenue and he inflaion ax play an imporan role in financing large fiscal deficis in all ransiion counries. [1] Excep Czechoslovakia. [2] Excep Belarus. 6

7 CASE-CEU Working Papers Series No. 37 Financing Budge Defici... In advanced economies seigniorage is usually no a ool for financing a governmen's expendiures bu raher a consequence of induced changes in he moneary policy (he range usually being beween % of GDP). In oher counries, however, seigniorage revenues are considered an imporan source of governmen financing [see, e.g., Drazen, 1989; Bruni, Penai and Pora, 1989, Grilli, 1989, and Gross, 1997]. Recen research showha he size of he seigniorage in several Souhern EU counries repored as a share of GDP or GNP varies beween 2 and 4% [Horrendorf, 1997]. The imporance of he seigniorage as a revenue insrumen in Cenral and Easern European counries has been also frequenly analyzed [see, for example, Oblah and Valeninyi, 1994; Koulan, 1995; Hochreier, Rovelli and Winckler, 1996; and Budina, 1997]. The resuls indicae ha, similar o Wesern Europe, he experience of collecing seigniorage revenues differs across counries. Hochreier, Rovelli and Winckler (1996), for example, show he resuls of he compuaion of cenral bank seigniorage for five counries: Romania, Hungary, he Czech Republic, Ausria and Germany. Their findings (base on opporuniy cos and inflaion ax definiions of seigniorage) [3] indicae ha cenral bank seigniorage in 1993 was abou 30% of GDP in Romania (due o he high inflaion rae), and 4% of GDP in Hungary (due o he high raio of cenral bank asseo GDP in Hungary). Seigniorage in he Czech Republic was around 1% of GDP (similar o ha of Ausria and Germany). Budina (1997) showha he level of seigniorage in Poland in he period oscillaed beween 1.55% 2.91% of GDP [4]. This could sugges ha he revenues from he creaion of money play very differen budgeary roles acrosransiion counries. However, as indicaed by Klein and Neumann (1990) and Neumann (1996), o compare seigniorage revenues in various counries properly, one hao ake ino accoun a number of counry-specific feaures, alhough his requires a more deailed analysis of he mechanism underlying he process of seigniorage formaion. This paper focuses exclusively on counries in ransiion o marke economy. The sample analyzed includewo counries coming from he cluser of counries mos advanced in marke reforms (CEE counries): Czech Republic and Poland, wo counries from group of he less successful counries (Caucasus and Cenral Asian counries): Georgia and Kyrgyzsan, and Belarus as an example of he counry, in which real marke reforms have no been sared ye. The aim of he sudy io reveal sources and he magniude of he oal ransfers from he cenral bank o he budge in differen ransiion economies. Since he saring period of he ransiion in many counries (Poland, Georgia, Kyrgyzsan, Belarus) has been [3] See Secion 2. [4] These resuls are based on he esimaion of moneary seigniorage only, and consequenly are no precise (see Secions 2 and 3). 7

8 CASE-CEU Working Papers Series No. 37 J. Cukrowski associaed wih hyperinflaion we focus on he four years period following a moderae macroeconomic sabilizaion (when he inflaion in all counries considered did no exceed 35%). More precisely, in each counry we analyze he ime period from he 5h unil he 8h year since he beginning of economic ransformaion [5]. In paricular, in CEE counries we sudy he period from 1994 unil 1997 [6], in Caucasus and Cenral Asian counries we analyze he period from 1996 unil 1999, and in Belarus, due o non availabiliy of daa we focus on he hree years period from 1997 unil Following Neumann (1996), we define seigniorage in he broades possible sense as he sum of all revenues resuling from he monopoly power o issue money. Unlike exising empirical sudies we ake ino accoun he imporan fac ha seigniorage depends also on legal, insiuional and operaional deailha are relevan for he creaion of base money in each paricular counry [see Klein and Neumann, 1990; and Neumann, 1996]. This approach no only allows proper esimaion of he seigniorage revenues in subsequen years, bu also shows how he size of seigniorage revenues should be compued for he purpose of iner-counry comparisons. The paper is organized as follows. In he nex secion we discuss issues relaed o he economic undersanding of he erm seigniorage, presen alernaive definiions, and describe he sources of oal gross seigniorage. In he hird secion we consider possible uses of oal gross seigniorage. In he fourh secion, we show he measuremen framework, describe he daa sources and presen empirical resuls for he counries analyzed. In he fifh secion we make iner-counry comparison and discushe resuls. The las secion conainhe main conclusions. 2. The Concep of Seigniorage The concep of seigniorage can be defined in a few differen ways. In he classical heoreical lieraure [see e.g., Drazen, 1985] hree basic definiions of seigniorage are used. The firs defines seigniorage as inflaion ax. The second defines seigniorage as opporuniy cos of holding money he privae secor's loss of foregone ineres revenue from holding non-ineres bearing cash balances insead of earning asses. The hird and he mos [5] Fisher, Sahay and Vegh (1996) sressed ha due o he ime differences in he saring poin of marke reforms i make sense o compare he counries in he same years since he sar of ransiion raher hen he same ime periods. [6] See Cukrowski and Janecki (2000) for he analysis of he Naional Bank of Poland seigniorage revenue and is componens in he period

9 CASE-CEU Working Papers Series No. 37 Financing Budge Defici... general defines seigniorage aoal revenues associaed wih money creaion. I has been shown [see Drazen, 1985] ha he firs wo definiions are special cases of he las one. As wih mos concepual issues, here is no clear indicaion which definiion of seigniorage ihe bes. In he analysis which follows we adop he concep of gross seigniorage, proposed by Klein and Neumann, (1990) and Neumann (1996), which encompasses all oher conceps [7]. In paricular, we define oal gross seigniorage ahe real gross resource flow associaed wih base money creaion [Neumann, 1996]. Formally, we specify oal gross seigniorage s as P P F F M i A + i A G s = s + + (1) p p where s M is moneary seigniorage defined as a change in base money sock M deflaed by he general price level p: s M = M p = M m M (2) A P and A F denoe a privae secor deb and foreign deb, respecively; i P and i F sand for corresponding nominal ineres raes; G denoes revenue from cenral bank's operaions. Moneary seigniorage s M measurehe acual wealh ransfer which he privae secor hao make in order o receive base money in he amoun of M from he cenral bank. The second erm in expression (1) describehe flow of ineres revenue on he sock of non-governmen deb ha he cenral bank bough in he pas in exchange for nonineres bearing base money (he deb service on he cenral bank's sock of governmen deb is no included here because i is merely an inside ransacion beween he governmen and he cenral bank). The hird erm in expression (1) describes seigniorage revenue from cenral bank's operaions. 3. The Disribuion of Toal Seigniorage Mos empirical lieraure presens a proxy for acual seigniorage flow o he governmen based on wo implici assumpions: he governmen receivehe seigniorage [7] See Neumann (1996) for a deailed explanaion of how he concep of oal gross seigniorage fis he definiion (3) presened above. 9

10 CASE-CEU Working Papers Series No. 37 J. Cukrowski revenues regardless of he legal and insiuional regulaions governing he relaionship beween he governmen and cenral bank; and he amoun of seigniorage revenue ransferred o he governmen does no depend on he specific ways and means in which he creaion of seigniorage is induced by he cenral bank. This is a simplificaion which does no ake ino accoun he cos of money producion and he exisence of he cenral bank in general. Noe ha he cos of he cenral bank could be significan (e.g., Klein and Neumann (1990) show ha in he period , abou 16.9% of German moneary seigniorage was used o cover he Bundesbank s operaing coss). A more precise analysis presened by Neumann (1996) showha oal seigniorage is used for covering he cos of money producion and cenral bank operaion s C, for ne invesmen in non-governmen deb by he cenral bank sni, for replacemen invesmen o make up for he exchange rae induced loss of asses (in erms of domesic currency) s RI, for budge finance s G [8], and for he increase of he cenral bank capial (and/or is ransferred o he hird paries) s O. Thus, where C NI RI G s = s + s + s + s + s C = C p Coin C + CB s O (3) (4) C Coin denoehe cos of coinage, and C CB sands for he cenral bank's cos of prining noes and mainaining operaions; s NI = A P + A p F (5) A P and A F denoe privae secor deb and foreign deb, respecively; s RI F L e A = = p ep L denoes a book loss (defined as a posiive number), and e is an exchange rae; s G = A G + (R G p i G A G A G denoes governmen deb and R G appropriaed profi; s O = O R, p ) (6) (7) (8) [8] In he case of a fixed exchange rae regime, s RI equals zero (see Neumann,1996; for deails). 10

11 CASE-CEU Working Papers Series No. 37 Financing Budge Defici... R O denoes profi ransferred o he hird paries or used for capial accumulaion. Par of he seigniorage ransferred o he cenral governmen budge s G (specified by expression (7)) is called fiscal seigniorage [see Klein and Neumann, 1990; and Neumann, 1996]. In general, here should be wo addiional erms in he numeraor of he expression (7): R Coin revenue from coinage (in he case where he governmen has righo issue coins as in Germany, for example); and T B axes on cenral bank's propery and income (when he cenral bank hao pay axes on propery and income as, for insance, in Japan). In he case of he counries analyzed he governmen receives fiscal seigniorage hrough wo channels: (1) ne borrowing from he cenral bank ( A G ), and (2) appropriaion of he cenral bank's profi, ne of ineres paymens on he cenral bank's sock of governmen deb (R G - i G A G ). Thus, fiscal seigniorage is fully deermined by expression (7). 4. Empirical Analysis The empirical analysis of sources and uses of seigniorage revenues presened in his secion is based on daa from he cenral banks balance shees and heir saemens of income and expendiures and profi disribuion (he main daa sources are he cenral banks annual repors). The sample period in he Czech Republic and Poland is , in Georgia and Kyrgyzsan i covers years , and in Belarus All he daa are repored annually and denoed in he analysis which follows by subscrip. We begin wih he disribuion of he oal gross seigniorage. The oal seigniorage ihe sum of he following sources: s = s + s + s M I A (9) where he moneary seigniorage M is compued as M M s = (10) p seigniorage revenue from he sock of ineres-earning foreign and domesic privae asses s I is deermined as I IR IE s = p (11) 11

12 CASE-CEU Working Papers Series No. 37 J. Cukrowski where IR and IE correspond o ineres revenues and ineres expendiures, respecively; and seigniorage revenue from cenral bank's operaions s A is compued as s A RE IR = p where RE denoehe oal revenue of he cenral bank. The oal seigniorage is allocaed o he following uses: (12) where s = s + s + s + s + s s C C C = NI Co& Bn + C p RI CB G C CB coss of mainaining operaions of cenral bank, C Co&Bn coss of coinage and prining banknoes, s s s G RI O G G G G A + (R i A ) = p F L A 1 = = e p e p G Π (R i = p 1 A ), G G O where Π denoehe oal profi of he cenral bank in he period considered. Invesmen seigniorage can be compued as a residual, i.e., NI C RI G s = s ( s + s + s + s O ) (13) (14) (15) (16) (17) (18) In Table 1 and Table 2 presen, respecively, he esimaed values of sources and uses of seigniorage for he seleced CEE (he Czech Republic and Poland) [9] and Caucasus and Cenral Asian (Georgia and Kyrgyzsan) [10] counries in he corresponding sample [9] See Cukrowski, Janecki (1998) for deails of compuaions of he seigniorage revenues in Poland and Cukrowski, Savrev (1999) in he Czech Republic. [10] See Cukrowski, Bushman (2000) for deails of compuaions of he seigniorage revenues in he Kyrgyz Republic and Cukrowski (2000) in Georgia. 12

13 ^ Toal Sources Moneary Ineres Revenues Revenues from CB operaions Uses Coss Invesmen Ne Invesmen Replacemen Fiscal Increase in CB capial Sources Moneary Ineres Revenues Revenues from CB operaions Uses Coss Invesmen Ne Invesmen Replacemen Fiscal Increase in CB capial T M I A C NI + RI NI RI F O M I A C NI + RI NI RI F O * Minus denoeha he iem is a use of he oal seigniorage Czech Republic Billion of CZK * * ** ** Per cen of oal CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 13

14 14 Table 1. Sources and disribuion of seigniorage in seleced CEE counries (in 1994 prices) coninued Toal Moneary Ineres Revenues Revenues from CB operaions Coss Invesmen Ne Invesmen Replacemen Fiscal Increase in CB capial Moneary Ineres Revenues Revenues from CB operaions Coss Invesmen Ne Invesmen Replacemen Fiscal Increase in CB capial T M I A C NI + RI NI RI F O M I A C NI + RI NI RI F O ** Minus denoeha he iem is a source of he oal seigniorage Poland million of PLN Sources * Uses ** ** ** ** Per cen of oal Sources Uses CASE-CEU Working Papers Series No. 37 J. Cukrowski

15 Table 2. Sources and disribuion of seigniorage in seleced Caucasus and Cenral Asian counries (in 1996 prices) Toal Moneary Ineres Revenues Revenues from CB operaions Coss Invesmen Ne Invesmen Replacemen Fiscal Increase in CB capial Moneary Ineres Revenues Revenues from CB operaions Coss Invesmen Ne Invesmen Replacemen Fiscal Increase in CB capial T M I A C NI + RI NI RI F O M I A C NI + RI NI RI F O ** Minus denoeha he iem is a source of he oal seigniorage Georgia million of GEL Sources Uses ** ** ** ** 33.4 Per cen of oal Sources Uses CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 15

16 16 Table 2. Sources and disribuion of seigniorage in seleced Caucasus and Cenral Asian counries (in 1996 prices) coninued Kyrgyzsan million of Som Toal T Sources Moneary M Ineres Revenues I -1.9 * Revenues from CB operaions A * * Uses Coss C Invesmen s NI RI ** ** ** Ne Invesmen NI Replacemen RI Fiscal F Increase in CB capial O Per cen of oal Sources Moneary M Ineres Revenues I -0.2 * Revenues from CB operaions A * * Uses Coss C Invesmen s NI RI ** ** ** Ne Invesmen NI Replacemen RI Fiscal F Increase in CB capial O * Minus denoeha he iem is a use of he oal seigniorage ** Minus denoeha he iem is a source of he oal seigniorage CASE-CEU Working Papers Series No. 37 J. Cukrowski

17 17 Table 3. Sources and disribuion of seigniorage in Belarus (in 1997 prices) Toal Moneary Ineres Revenues Revenues from CB operaions Coss Invesmen Ne Invesmen Replacemen Fiscal Increase in CB capial Moneary Ineres Revenues Revenues from CB operaions Coss Invesmen Ne Invesmen Replacemen Fiscal Increase in CB capial * Minus denoeha he iem is a use of he oal seigniorage ** Minus denoeha he iem is a source of he oal seigniorage Belarus million of Rubels T Sources M I * * A Uses C s NI RI NI RI ** * ** ** F ** O Per cen of oal Sources M 62,4 33,4 70,9 I -0,4* * 0,2 3,5 A 20,6 3,9 21,6 Uses C 3,0 1,2 4,5 s NI RI + 55,8 15,7 25,1 NI 72,8 70,5 29,1 RI -17,0** -54,8** -4,0** F 8,2-7,7 ** 58,8 O 15,6 28,3 7,6 CASE-CEU Working Papers Series No. 37 Financing Budge Defici...

18 CASE-CEU Working Papers Series No. 37 J. Cukrowski periods. Similarly, esimaed values of sources and uses of seigniorage for Belarus are presened in Table 3 [11]. All flows are represened in naional currency in prices of he firs year of he sample period. Noe ha due o he policy of Naional Bank of Georgia and Naional Bank of he Kyrgyz Republic ne invesmen is negaive, so ha i should be considered as a source of he seigniorage revenues raher han ahe use, as in he case of CEE counries. The year by year developmens of he oal gross seigniorage and is sources as a fracion of GDP in analyzed CEE counries are presened in Figure 1, in Caucasus and Cenral Asian counries in Figure 2, and in Belarus in Figure 3. The disribuion of he oal gross seigniorage in subsequen years as a fracion of GDP in he analyzed CEE counries, Caucasus and Cenral Asian counries and Belarus are presened in Figure 4, 5 and 6, respecively. The counry resuls are shorly discussed below. Czech Republic In he beginning of he nineies, Czechoslovakia and laer he Czech Republic implemened a successful macroeconomic program. The auhoriies managed o keep inflaion relaively low (immediaely afer he ransformaion owards a marke economy, in 1991, Czechoslovakia experienced around 57 per cen inflaion, which was reduced o 20 per cen in 1993 and kep down below 10 per cen in he yearhereafer). Budge deficis in he period did no exceed 1 % (acually ill 1995 he governmen budge was in surplus ¾ in 1994 he budge surplus was abou 0,9 % and in 1995 abou 0,5 %; for 1996 and 1997, he budge defici was -0,1 % and -1 % per cen respecively). Therefore, here was no grea pressure o use seigniorage revenues for fiscal purposes. Moreover, in he considered period he governmen had significan revenues from privaizaion. Ahe resul, as shown in Figure 3 (a), in he years seigniorage was no used for governmen purposes (resources flowed from he governmen o he cenral bank). In his period mos of he cenral bank revenues were used for he invesmen in non-governmen deb. In 1997, ahe resul of economic disurbances, a change in he previously observed paern of fiscal seigniorage developmen occurred (his change is in line wih he developmen of he budge defici in he Czech Republic) [12]. We should noe, however, ha in 1997 fiscal seigniorage was sill much below 1 % of GDP. Furhermore, i is worh menioning ha an increase in fiscal seigniorage has been accompanied by a significan decrease in he moneary base (srong moneary resricions have been imposed in [11] See Cukrowski (2001) for deails of compuaions. [12] In 1997 he balanced observed in previous years budge was replaced by relaively high budge defici. 18

19 Figure 1a. Sources of he cenral bank seigniorage in analyzed CEE counries in he period (as % of GDP) - Czech Republic Moneary seigniorage 5.0% Ineres seigniorage Seigniorage revenues from cenral bank's operaions Seigniorage as % of GDP 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% ; Years CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 19

20 20 Figure 1b. Sources of he cenral bank seigniorage in analyzed CEE counries in he period (as % of GDP) Poland Moneary seigniorage Seigniorage as % of GDP 5.0% Ineres seigniorage Seigniorage revenues from cenral bank's operaions 4.0% 3.0% 2.0% 1.0% CASE-CEU Working Papers Series No. 37 J. Cukrowski 0.0% -1.0% Years

21 Figure 2a. Sources of he cenral bank seigniorage in analyzed Caucasus and Cenral Asian counries in he period (as % of GDP) - Georgia Moneary seigniorage Seigniorage as % of GDP 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0% Ineres seigniorage Seigniorage revenues from cenral bank's operaions Years CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 21

22 22 Figure 2b. Sources of he cenral bank seigniorage in analyzed Caucasus and Cenral Asian counries in he period (as % of GDP) Kyrgyzsan 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% Moneary seigniorage Ineres seigniorage Seigniorage revenues from cenral bank's operaions ;; CASE-CEU Working Papers Series No. 37 J. Cukrowski -1.5% -2.0% -2.5% Years

23 Figure 3. Sources of he Naional Bank of Belarus seigniorage in he period (as % of GDP) Moneary seigniorage Ineres seigniorage 4.00% Seigniorage revenues from cenral bank's operaions Seigniorage as % of GDP 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% Years CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 23

24 CASE-CEU Working Papers Series No. 37 J. Cukrowski response o he high curren accoun defici) [13] wih a relaively small decline in he oal gross seigniorage. The increase in he scope of he budge defici financing accompanied by a decrease in moneary base can be explained by he aciviies of he Czech Naional Bank (CNB) during he period of exchange marke disurbances and he change of he exchange rae regime (he firs par of 1997). For 1997, Figures 1 (a) and 4 (a) show huge revenues from cenral bank operaions and more or leshe same level of he cenral bank operaion coss as in he preceding years. This suggesha in 1997 he CNB accumulaed foreign asses before devaluaion and sold hem jus afer devaluaion wih a big profi (he ne invesmen in non-governmen asses was sill posiive bu raher modes). A large profi from financial operaions allowed he CNB o reduce he moneary base and a he same ime o increase he flow of resourceo he budge, i.e., fiscal seigniorage (see Figure 4 (a)). Poland The process of he ransformaion o he marke economy in Poland sared in The main economic reforms iniiaed a ha ime included: marke liberalizaion, privaizaion of he sae properies, and macroeconomic sabilizaion. The firs indicaors of macroeconomic sabilizaion appears in In he period posiive rends acceleraed (he rae of economic growh in 1995 amouned o 7%, expor increased, and privae secor has been developed). In 1997, he rae of economic growh was again close o 7% (6,9%), GDP per capia reached he level of 3500USD, privae secor produced 65% of GDP, and annual average inflaion decreased o 13,2%. Good economic resuls have been magnified by high domesic demand, and relaively good financial condiions of enerprises and households. Seleced economic indicaors from he period are presened in Table 4. Table 4. Seleced economic indicaors ( ) Real GDP growh (year o year) 5.2% 7.0% 6.1% 6.9% Inflaion (CPI) 29.5% 21.6% 18.5% 13.2% Trade balance (USD bn) Curren accoun balance (USD bn) Budge defici ( % GDP) -2.8% -2.6% -2.5% -1.4% Inernaional reserves (USD bn) [13] Curren accoun defici in 1997 was abou 7.9% 24

25 Figure 4a. Disribuion of he oal gross seigniorage in analyzed CEE counries in he period (as % of GDP) Czech Republik % GDP 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% ; ; ;;; Years Fiscal seigniorage Invesmen seigniorage Cos seigniorage Increase in CB capial CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 25

26 26 Figure 4b. Disribuion of he oal gross seigniorage in analyzed CEE counries in he period (as % of GDP) Poland % GDP 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% ; ; Fiscal seigniorage Invesmen seigniorage Cos seigniorage Increase in CB capial CASE-CEU Working Papers Series No. 37 J. Cukrowski 0.0% -1.0% % -3.0% Years

27 Figure 5a. Disribuion of he oal gross seigniorage in analyzed Caucasus and Cenral Asian counries in he period (as % of GDP) Georgia 5.0% Fiscal seigniorage Invesmen seigniorage Cos seigniorage % GDP 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Increase in CB capial Years CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 27

28 28 Figure 5b. Disribuion of he oal gross seigniorage in analyzed Caucasus and Cenral Asian counries in he period (as % of GDP) Kyrgyzsan % GDP 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% Fiscal seigniorage Invesmen seigniorage Cos seigniorage Increase in CB capial ;; ; ; CASE-CEU Working Papers Series No. 37 J. Cukrowski -5.00% Years

29 Figure 6. Disribuion of he oal gross seigniorage in Belarus in he period (as % of GDP) % GDP 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% -1.50% ; ; ;;; Years Fiscal seigniorage Invesmen seigniorage Cos seigniorage Increase in CB capial CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 29

30 CASE-CEU Working Papers Series No. 37 J. Cukrowski In spie of he fac ha in he firs half of nineies cerain macroeconomic sabilizaion was achieved, he large defici of he public secor sill deermined moneary growh and relaively high inflaion raes. Moreover, alhough, a hiime, he sysem in Poland has been already reformed [14] (in paricular, Naional Bank of Poland changed adminisraive decisiono moneary policy insrumens), in common opinion, seigniorage revenues and he inflaion ax played an imporan role in financing large fiscal deficis. Our esimaions show (see Table 1, and Figures 1 and 4), ha in conras o he common belief ha in mos ransiional economies revenues from money creaion play a significan budgeary role [see, e.g., Budina 1997], in Poland seigniorage revenues have no been exensively used as a ool for financing governmen expendiures (in paricular, in 1995 and 1996 values of fiscal seigniorage have been negaive). I hao be noiced ha even if in 1995 he value of moneary seigniorage increased, he value of he fiscal seigniorage decreased (due o significan increase of foreign asses). This is because moneary seigniorage correspondo fiscal seigniorage only if invesmen seigniorage is close o zero (as in 1994). In all oher years, posiive values of invesmen seigniorage were accompanied by smaller values of fiscal seigniorage (years 1995 and 1996). Noe, ha in boh cases moneary seigniorage does no reflec he flow of seigniorage revenues. Georgia In he afermah of he breakdown of he Sovie Union, inernal armed conflic and he war in Abkhazia, during he firs years of independence Georgia experienced significan economic crisis. In GDP reduced almos by 70%. The economy shifed o he shadow secor. The governmen unable o collec axes had o ge exernal deb resuling in significan foreign ousanding arrears. In he same ime huge moneary emissions caused hyperinflaion (percenage change in end-year consumer prices amouned abou 7488% in 1993 and 6474% in 1994). In 1994 governmen iniiaed he process of inensive sysem ransformaion based on, in general erms, a ransiion o a marke economy and involved economic liberalizaion accompanied by he privaizaion of he sae-owned secor. In 1995 naional currency lari (GEL) was inroduced and a number of reforms were implemened o sabilize and liberalize he Georgian economy. Subsequen [14] Reform of he Polish banking sysem began in 1989, when he basis for wo-ier sysem (he cenral bank and commercial banks) was inroduced. In 1989 he Sejm adoped a new Banking Ac and he Naional Bank of Poland Ac. These wo acs were replaced in 1997 wih a new legislaion which adoped banking regulaiono he new environmen in which banks now have o operae and prepared he banking secor o he fuure accession o he European Union. In paricular, he Naional Bank of Poland Ac of Augus 1997 specifiehe organisaion and responsibiliies of he cenral bank and is agencies. 30

31 CASE-CEU Working Papers Series No. 37 Financing Budge Defici... macroeconomic reforms aimed a srenghening he budge, enforcing naional currency sabiliy, reducing inflaion rae and ensuring economic growh. In he following years significan progress has been achieved in esablishing macroeconomic sabiliy. Inflaion has sharply fallen and reached he level of 10.9% in Afer a massive oupu decline, real GDP sared o increase, showed solid growh in 1996 and 1997 (11,2% and 10,8%, respecively) and sabilized a he level of abou 3% in 1998 and Defici of he sae budge decreased from 6,8% of GDP in 1996 o 3,7% of GDP in 1999 (3,9% of GDP in 1998). Reforms of ax legislaion, and as a resul, improvemen of he ax base played a subsanial role in realizaion of ax and fiscal program. However, nowihsanding he rae of improvemen in budgeary revenue collecion, here are sill serious difficulies. The main reasons for budge revenues shorfall are: The shadow economy, ax evasion, low level of regisraion, as well ahe poor financial condiions of enerprises and organizaions. Defici financing in Georgia is carried ou mainly hrough loans from he Naional Bank of Georgia (by direc borrowing) and loans from abroad (mainly from inernaional organizaions). We have o noe ha he credis from NBG are criical for financing he defici of he sae budge. In paricular, in 1996 abou 73% of he budge defici (5,2% of GDP) has been financed by NBG. In subsequen years budgeary revenues from NBG decreased bu sill remained significan (abou 3,0%, 1,4% and 2,7% of GDP, respecively). On he oher hand in he period considered he moneary policy of he Naional Bank of Georgia, aimed o achieve economic growh wih minimal inflaion, was raher sric. As a resul of very igh moneary policy, in las few yearhe Naional Bank of Georgia has mainly been supplying money hrough direc credio he governmen and very rarely played a role of a lender of las resor. In 1998, ou of he oal credis of 294,1 million GEL 97,6% represened credio he governmen and only 2,4% wen o commercial banks. In 1999 he oal credio commercial banks were even lower (i.e., in 1999 of 147,2 million GEL oal credi, 146,7 million lari (99,7%) was issued o he governmen, and only 0,5 million GEL (0,3%) o commercial banks). On he oher hand he minimum reserve requiremen increased in 1998 from 12% o 16%. In 1999 he sock of ne claims on he governmen and is growh exceeded corresponding arges defined by IMF. As menioned above, alhough he main policy insrumen used by he NBG was direc lending o he governmen his pracice did no have much influence on he yearly inflaion. This is because, only par of he ransfers from he Naional Bank of Georgia o he governmen resuled from relaively resriced money supply. Taking ino accoun ha he NBG s flow balance shee can be wrien as 31

32 CASE-CEU Working Papers Series No. 37 J. Cukrowski A F + A P + A G + A fixed = M + K (19) where he lef hand sumhe changes in ne foreign asses ( A F ), in loano he privae secor ( A P ), loano he governmen (ne of governmen deposis, A G ) and fixed asses of NBG ( A fixed ); he righ hand side sums changes in he moneary base ( M ) and he NBG oal capial accouns( M ); and presened as in Table 5, i becomes clear ha he oher par of an exensive credis o governmen was financed by he reducion in of ne asses of NBG (mainly ne inernaional asses). The shares of hese wo sources in he financing of he budge defici in he subsequen years of he period considered are presened in Table 6 (he moneary seigniorage and he revenues from he reducion of ne asses are definiely he main sources of he financing of he budge defici, moreover, in some years, e.g., 1998 and 1999, revenues from hese sources have been used for he financing of oher expenses of NBG). Table 5. Flow balance shee of Naional Bank of Georgia for he period (in million GEL) Change in ne foreign asses Change in loano he privae secor + Change in loano he governmen (ne of governmen deposis) + Change in fixed asses of NBG = Change in moneary base Change in capial and reserves As shown in Table 5, in he whole period considered revenues from NBG were significanly used for governmen purposes. Fiscal seigniorage in he considered period amouned abou 5,2% of GDP in 1996, 3% in 1997, 1,4% in 1998 and 2,7% of GDP in 32

33 CASE-CEU Working Papers Series No. 37 Financing Budge Defici... Table 6. The shares of he moneary seigniorage and revenues from he reducion of ne asses in he financing of he budge defici Defici of he sae budge (% of 6.8% 6.1% 3.9% 3.7% GDP) Fiscal seigniorage (in % of GDP) 5.2% 3.0% 1.4% 2.7% Share of NBG in financing budge 76% 49% 36% 72% defici Moneary seigniorage as a 26% 57% 11% 46% percenage of fiscal seigniorage Share of he revenues from he reducion of ne asses as a percenage of fiscal seigniorage 70% 16% 104% 100% Reducion of he non governmen deb hold by NBG wahe main source of he budgeary revenue from he cenral bank [15]. In 1996 abou 70% of he budgeary revenues from cenral bank was financed by he decrease in non governmen deb hold by NBG. In 1998 NBG used resources from he reducion of he domesic privae secor and foreign deb no only o increase credi o he governmen bu also o cover oher losses (in 1998 he decrease in non governmen deb hold by NBG amouned exceeded he budgeary revenues from cenral bank by 15%). We have o sresha, he exended financing of he defici of he sae budge by he NBG is sill cosly. I does no resul in higher inflaion (because of resriced money supply), bu i mainly reduces ne asses of he Naional Bank of Georgia. Since he sock of inernaional and privae domesic asses hold by NBG is limied, in long run he only way how NBG can finance he defici of he sae budge o he similar exend io use moneary seigniorage. This, however, will have o be accompanied by significan growh of moneary base and will cause a danger of large inflaion. Kyrgyzsan Kyrgyzsan was considered as one of he poores republics in he former Sovie Union. In ha ime i's economy o large exend was dependen from he subsidies from Moscow. Break down of he USSR and i's cenral planning sysem caused breaks of cooperaive links beween republics and enerprises, wha resuled in significan fall of producion, fiscal problems and inflaion. In he firs years of independence (unil 1995) [15] I hao be menioned ha he reducion in he non governmen deb has been esimaed as a residual, and consequenly, i accommodaes all possible errors in he daa used. Neverheless, we believe ha he numbers presened are significan enough o represen an acual rend. 33

34 CASE-CEU Working Papers Series No. 37 J. Cukrowski GDP of he Kyrgyz Republic decreased on abou 50%. Budge defici increased o 13,4% of GDP in 1992, 13,6% in 1993, and o 7,7% and 11,8% of GDP in subsequen years. As a resul inflaion reached he level of 178,9% in 1991, 1258,7% in 1992, 1491,7% in 1993, and 87,2% and 31,9% in wo following years. Significan fall in inflaion in 1995 resuled mainly from successful implemenaion of he program of marke reforms (igh moneary and fiscal policy, economic liberalizaion, legal changes supporing he developmen of he privae secor, ec.). As menioned in he inroducion, in common opinion seigniorage revenues from Naional Bank of he Kyrgyz Republic (NBKR), play significan role in he financing of he budge defici. However, ou esimaions presened in he Table 7 show ha saring from 1997 budge revenues from NBKR have no exceed 1,7% of GDP (1,5% of GDP in 1997, 1,1% in 1998, 1,7% of GDP in 1999). Table 7. Fiscal seigniorage, budge defici and inflaion in Kyrgyzsan in he period Fiscal seigniorage (% GDP) 4.3% 1.5% 1.1% 1.7% Budge defici (% GDP) 5.4% 5.2% 3.0% 2.5% Inflaion (% o previous year) 34.6% 13.0% 16.8% 39.9% Moreover, he daa presened in Table 7 do no show any link beween he level of inflaion and fiscal seigniorage (i.e., he amoun of he resourceransferred from NBKR o he budge). In he period , for example, relaively low inflaion correspondo higher amouns of he resourceransferred o he budge. The opposie siuaion has been observed in 1996 and 1999 when higher inflaion was associaed wih lower amouns of fiscal seigniorage. Consequenly, one can conclude ha fiscal seigniorage o large exend depends on he cenral bank policy and no always is linked o he inflaionary increase in moneary base. In paricular, as i follows from he figure 5(b), in he years 1996, 1997, 1999 he large par of he resourceransferred from NBKR o he budge came from he reducion of he invesmen expendiures. Belarus Afer break down of he USSR, similar o oher former sovie republics, economic siuaion in Belarus, was no good a all. One reason for his was an economic specializaion of sovie republics, which resuled in he Belarussian indusry srucure dominaed by enerprises producing low qualiy producs or semi-producs sold o oher republics or o oher communis counries (large par of all enerprises produced for 34

35 CASE-CEU Working Papers Series No. 37 Financing Budge Defici... needs of he miliary secor). Slow reforms a he beginning of nineies did no change he siuaion inheried from sovie era. I hao be menioned, ha in he period small progress in macroeconomic sphere was observed. However, real poliical and economic liberalizaion, similar o ha in Cenral European counries, has never occurred in Belarus. Moreover, in he las few years under he leadership of he presiden Lukashenka significan regress in poliical and economic reforms was observed. On he oher hand, afer serious fall in GDP during he period (on abou 40%), saring from 1996 official saisics show economic growh (he growh rae of real GDP in 1996 amouned o 2,8%, in %, in %, and 3,4% in 1999). I hao be menioned ha during his period sae engagemen ino economics (sae subsidies, credis, ec.) increased significanly. Budge revenues afer significan fall in (o 40% of GDP) increased in he period o he level of 45% GDP (Anczak e al. 2000). A he same ime governmen expendiures afer iniial fall o he level 42 43% of GDP increased o he level of 46 47% GDP in he years Budge defici in he period amouned abou 3% of GDP [16]. As shown in Table 3, only in 1999 revenues from Naional Bank of Belarus were significanly used for governmen purposes (fiscal seigniorage in he considered period amouned abou 0,5% of GDP in 1997, -0,8% in 1998 and abou 2,5% of GDP in 1999). In he same ime, however, he scale of he moneary seigniorage was quie significan, i.e., abou 3,5% of GDP in year 1997 and 1998, and abou 3% in Thus, only small par of he cenral bank revenues from money creaion has been used for he financing of he budge defici. On he oher hand, we have o sresha in he period considered according o he official daa here was no need for exended financing of he budge defici (defici of he sae budge was abou 0,7% in 1997, 0,3% in 1998, and 3,3% in he firs quarer of 1999) [17]. I follows from Figure 6, ha he bigges par of he cenral bank revenues in he period analyzed has been used for he increase of he cenral bank credi o he privae (i.e., non governmenal) secor of he economy. However, aking ino he definiion of privae secor in Belarus is raher vague (i includes boh sae-owned enerprises and households), herefore, we may suppose ha majoriy of financial resources iransferred o broadly defined public secor. Thus, one hao be very careful wih making simple conclusion abou limied financing of he public secor from he sources of he Naional Bank of Belarus. Since he cenral bank wih limied auonomy is required o exend credi direcly o he enerprises or o he commercial banking secor on he reques of he governmen, real financing of he public secor (using so called quasi-fiscal operaions) is much higher (see Markiewicz (2000) for deails). We have o [16] See"Republic of Belarus: Recen Economic Developmen" IMF Saff Counry Repor No. 99/143 [17] Quasi-fiscal defici in Belarus amouned o 2,9% and 3,0% of GDP in 1997 and 1998, respecively. 35

36 CASE-CEU Working Papers Series No. 37 J. Cukrowski menion ha according o he official documens of he Naional Bank of Belarus in he period considered cenral bank has been expeced o provide direced credio "privae secor" according o requess of he sae organizaions, for such purposes as, for example, housing, developmen of agriculural secor, suppor of agriculural producion, seeds purchasing, paymen of he salaries for workers of sae enerprises, sae emergency, rade, ec [18]. Obviously, revenues from money creaion are no enough o cover fiscal and quasi-fiscal (invesmen) expendiures of he Naional Bank of Belarus. The remaining par is covered from he oher sources of cenral bank revenues, i.e., financial operaions and book gains from exchange rae changes. Comparison of he oal seigniorage wih he sum of he fiscal seigniorage and ne invesmen of he cenral in non governmenal deb (which resuls from quasi-fiscal operaions of Naional Bank of Belarus) is presened in Figure Comparaive Analysis Toal revenues of he cenral banks in he counries under sudy in he period considered (as a per cen of GDP) are presened in Figure 8. Figure 9 showhe scale of he budge financing from he cenral bank in each counry analyzed (in per cen of GDP). The scale of moneary seigniorage in he counries under sudy as a per cen of GDP (i.e., cenral bank revenue from he increase of moneary base) is presened in Figure 10. Daa presened in Figure 8 confirm a common opinion, ha in he mos ransiion counriehe scale of cenral bank revenues associaed wih he monopoly power for moneary policy and moneary emissions is significan. Esimaed values sugges ha hese revenues are usually much higher han 2% of GDP, and in exreme cases (see e.g., Belarus) hey reach he level of 10% of GDP. I hao be sressed however, ha he cenral banks seigniorage revenues decrease from year o year in all counries considered (accompanying he developmen of he ransiion process). Moreover, i hao be noiced (see Figure 9) ha revenues from cenral banks have no been widely used ahe source of financing of he deficis of he public secor (wih he excepion of Belarus, where marke reforms have no been sared ye). In he counries advanced in marke reforms (Czech Republic, Poland) budgeary revenues from he cenral banks in he second and he hird year of he ransformaion have been negaive, and in he nex year relaively low. I hao be menioned ha in he counries [18] Esimaion of he scale of quasi-fiscal operaions of he Naional Bank of Belarus is beyond he scope of he presen analysis. 36

37 Figure 7. Toal seigniorage of he Naional Bank of Belarus and he scale of public secor financing in he period Toal seigniorage % GDP 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% ;;; ; ; Years Fiscal and invesmen seigniorage CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 37

38 38 Figure 8. Revenues of he cenral banks (oal gross seigniorage) in he counries under sudy (as % of GDP) 12.0% 10.0% % GDP 8.0% 6.0% 4.0% ; y ;; yy; y;y CASE-CEU Working Papers Series No. 37 J. Cukrowski 2.0% 0.0% Is year IInd year IIIrd year IVh year Czech Republic Poland Georgia Kyrgyzsan Belarus

39 Figure 9. Scale of he budge financing from he cenral banks in he counries analyzed (% of GDP) 8.0% % GDP 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% ; y ;y ; y;; ;y Is year IInd year IIIrd year IVh year Czech Republic Poland Georgia Kyrgyzsan Belarus CASE-CEU Working Papers Series No. 37 Financing Budge Defici... 39

40 40 Figure 10. The scale of moneary seigniorage in he counries under sudy as % of GDP % of GDP 5.0% 4.0% 3.0% 2.0% 1.0% ;;; y ; y ; y ;;; ; y ; y;; y CASE-CEU Working Papers Series No. 37 J. Cukrowski 0.0% Is year IInd year IIIrd year IVh year -1.0% Czech Republic Poland Georgia Kyrgyzsan Belarus

41 CASE-CEU Working Papers Series No. 37 Financing Budge Defici... less advanced in marke reforms (Georgia, Kyrgyzsan) he scale of he resource ransfer from cenral bank o he budge has been relaively higher, however, i also falls down from year o year. Furhermore, i hao be sressed (see Figure 10) ha in all counries considered he scale of he moneary seigniorage (resuling direcly from he exension of he moneary base) was relaively large (up o 4% of GDP). The highes values of moneary seigniorage were observed in he firs hree years of ransformaion in he Czech Republic, where inflaion was always relaively low. In he fourh year of he period analyzed, when some indicaors of economic crisis sared o be observed, moneary seigniorage in Czech Republic was negaive. On he oher hand, in Georgia and Kyrgyzsan, as a resul of sabilizaion programs designed by inernaional organizaions (World Bank, and IMF) he amoun of cenral bank revenues resuling direcly from he creaion of moneary base (moneary seigniorage) was relaively low (i did no exceed 2% of GDP). We have o noice ha moneary seigniorage correspondo he revenues of he cenral bank from he exension of he moneary base only, and does no reflec he flow of resourceransferred from he cenral bank o he budge (see Figure 9 and 10). The values of he moneary seigniorage and fiscal seigniorage are equal o each oher only if ne invesmen and oher expendiures (e.g., ne credio privae secor) are close o zero. Since such siuaion is no ypical for counries in ransiion, in ransiional economies moneary seigniorage definiely does no reflec he flow of he resources from he cenral bank o he budge (i.e., fiscal seigniorage). 6. Conclusions The analysis above presenhe new view on he formaion of he cenral banks revenues and ransfers from he cenral banko he budge in he seleced ransiion counries. In paricular, in conrary o oher empirical sudies, in he presen analysis we have no relied on he simple concep of moneary seigniorage which measurehe flow of he addiional moneary base he governmen can issue, bu insead we have used (1) a new concep of oal gross seigniorage which measurehe oal flow o he governmen secor and (2) fiscal seigniorage which measurehe porion of seigniorage received for budge financing. Empirical analysis of sources of seigniorage revenues in he Czech Republic, Poland, Georgia, Kyrgyzsan and Belarus, presened in he paper has revealed ha he moneary auhoriies' ineres earnings on non-governmen deb (ineres revenues) and revenues 41