Fiscal Consequences of Monetary Integration within a Common Economic Area: The Case of Belarus, Kazakhstan and Russia

Abstract

This article analyses the possible impact of planned monetary integration on public sector revenue from seigniorage in Belarus, Kazakhstan and Russia. Using the concept of total gross seigniorage, we investigate the main sources and uses of the central bank revenue in these countries. Special attention is given to the role of seigniorage revenue in financing public sector expenditure. Amounts of yearly transfers from central banks to the state budget in Belarus, Kazakhstan and Russia are evaluated, and the size of potential gains and losses in seigniorage revenue under different scenarios of monetary integration are estimated.

Notes

 1. The average size of the black market in 2000–01 was about 47% of GDP in Belarus, 42% of GDP in Kazakhstan and 45% in Russia (Schneider, 2002).

 2. The sample covers the former Soviet countries Armenia, Belarus, Estonia, Georgia, Kyrgyzstan, Latvia, Lithuania, Moldova, Russia and Ukraine and the Central European countries Albania, Bulgaria, Croatia, Czech Republic, Hungary, Macedonia, Poland, Romania, Slovakia and Slovenia.

 3. The index of political and economic independence ranges from 2 to 9 in this study. The index of political independence is determined by the relationship of the central bank with its government, the procedure of appointing the board of the central bank, and the formal goal of the central bank. In countries with sound political independence of the central bank, this index is high (e.g. 8 in Kyrgyzstan and the Czech Republic and 7 in Poland).

 4. Δ denotes change within a year.

 5. As Klein & Neumann (1990) showed, from 1974 to 1987 about 16.9% of German monetary seigniorage was used to cover the Bundesbank's operating costs.

 6. Click (1998) investigated seigniorage in a cross-section of 90 countries over 1971–90. The countries with the largest seigniorage were Israel with 14.8% of GDP, Yugoslavia with 11.9% of GDP, Chile with 10.3% of GDP, Argentina with 9.7% of GDP and Nicaragua with 7.9% of GDP.

 7. The relatively small share of monetary seigniorage in total seigniorage revenue in Kazakhstan in 1999 was due to a large increase in the book gain component of seigniorage (it reached 52.8% of total seigniorage). This resulted from strong exchange rate depreciation.

 8. See EBRD, Transition Report, 2004.

 9. See ‘Banking Code of the Republic of Belarus’, passed by the House of Representatives on 3 October 2000 and approved by the Council of the Republic on 12 October 2000.

10. See Law of the Republic of Belarus ‘On the Budget of the Republic of Belarus’, for 1998–2003.

11. See Annual Report of the NBRB for 1998–2003.

12. The quasi-fiscal deficit, which reflects large directed credits to the public sector and state enterprises, reached 11.1% of GDP in 1999 (Markiewicz, 2000).

13. According to the International Monetary Fund, the size of quasi-fiscal operations has been high in recent years too; however, information on the deficit of public enterprises is under the direct control of the presidential administration and not publicly available (see IMF, Country Report No.04/141, May 2004).

14. See Law ‘On the National Bank of the Republic of Kazakhstan’, No. 2155, 30 March 1995.

15. The practice of extending direct credits to the government for financing the budget deficit was banned in 1998.

16. See, for example, Annual Report of the NBK for 2000, 2001 and 2002.

17. The volume of credits extended by commercial banks to the real sector increased by 77.3% in 2001, reaching 14% of GDP, of which 3.6% of GDP was directed to small and medium-sized enterprises (see Annual Report of the NBK for 2001).

18. See Article 36-2 of Law ‘On the National Bank of the Republic of Kazakhstan’, No. 2155, 30 March 1995.

19. The members of the collegiate body, except the chairman of the CBR, are prohibited from working in the CBR on a full-time basis and, consequently, being paid for their work in the body. The members of the board of directors, in turn, are prohibited from participating in political parties, religious organisation, the civil service, parliament, legislative and government bodies.

20. Article 22 of the Law on the CBR stipulates: ‘The Bank of Russia shall not be entitled to extend loans to the Russian Federation Government to finance the federal budget deficit and buy securities at their primary placement, except for those cases stipulated by the federal budget law’.

21. Short-term government bonds (GKO) and federal loan bonds (OFZ).

22. The government securities such as short-term bonds (GKO) and federal loan bonds (OFZ) issued in July 1998 were converted into eurobonds (see Annual Report of the CBR for 1998).

23. These obligations included government loan bonds issued in foreign currency (OVGVZ), eurobonds issued in 1996–98 and bonds issued by the MFRF for GKO restructuring.

24. See the CBR Annual Report for 1999.

25. Seigniorage wealth is determined as the difference between the monetary base, which contains cash money circulating in the economy and central bank reserves held by the private banking system, and the portion of private bank reserves on which the central bank pays interest.

26. The distribution of seigniorage wealth generated by the EMU among its member states is regulated by the Protocol on the ‘Statute of the European System of Central Banks and the ECB’, articles 32.2 and 32.5.

27. In more liberal banking systems the reserve–deposit ratio usually does not exceed 2% (Sinn & Feist, 1997).

28. See Concept on the Establishment of the Common Economic Area, 19 September 2003 (draft, in Russian).