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Five Myths on the Impact of Public Debt on Central Banking in Africa

This article explores five common myths surrounding the impact of public debt on central banking in Africa. It provides insights into the challenges faced by central banks and suggests policy actions to mitigate risks.

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Five Myths on the Impact of Public Debt on Central Banking in Africa

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  1. Five Myths on the Impact of Public Debt on Central Banking in Africa July 2019 Abebe Aemro Selassie Director, African Department

  2. Public debt has increased across the world General Government Gross Debt-to-GDP and Interest Bill-to-Tax Revenue Ratios, 2007–18 Advanced Economies Emerging Market and Middle-Income Economies Low Income Developing Countries Source: IMF, World Economic Outlook database.

  3. In Africa the debt increase has been most pronounced in oil exporters Africa: Total Public Debt, 1976–2018 Source: IMF, World Economic Outlook database.

  4. The debt increase is concerning, as debt servicing capacity has deteriorated sharply Africa:Interest Payments Source: IMF, World Economic Outlook database.

  5. Myth 1: Fiscal dominance is a preoccupation of the past

  6. Direct financing of the budget deficit by central banks above legal limits has declined over time Sub-Saharan Africa:Outstanding Central Bank Claims on Government Above Legal Limits, 2001–17 Sources: CBLD; IMF, Monetary and Financial Statistics database; National authorities; and IMF staff calculations.

  7. Yet, high public debt can increase the risk of‘soft’ fiscal dominance • Examples of soft fiscal dominance: • Pressures to contain domestic borrowing costs. • Fear of floating magnified when foreign currency debt is high. • Quasi-fiscal operations and expansion of the central bank mandate

  8. Myth 2:As long as public debt is sustainable, its level is irrelevant for monetary policy and financial supervision

  9. High public debt, even if it is sustainable, can complicate the work of central bankers • High public debt… • … weakens the transmission of monetary policy. • … generates complicated tradeoffs between exchange rate and growth objectives, at least when foreign currency debt is high. • … can create financial stability risks.

  10. Government arrears to suppliers translate into rising non-performing loans Sub-Saharan Africa: Stock of Arrears, 2012–18 Sources: Country authorities; and IMF, staff calculations..

  11. African banks are well exposed to sovereign securities Commercial Banks' Holdings of Government Debt, 2018 Source: IMF, Monetary and Financial Statistics database; and IMF, World Economic Outlook database.

  12. Myth 3:There is little that central banks can do to protect themselves and the financial sector

  13. Central banks can take some actions to manage the spillovers of high public debt • Continue to strengthen the monetary policy framework. • Step up communication on the role of the central bank and the impact of policy measures. • Address the bank-sovereign nexus. • Improve debt data collection.

  14. Myth 4:There is a still clear delineation of roles between monetary and fiscal policy

  15. The dividing line between monetary and fiscal policy has become more and more fuzzy • Monetary Policy Fiscal sustainability & allocation & redistribution Price stability & economic stabilization Fiscal Policy

  16. Myth 5:Central banks can help governments alleviate the public debt burden

  17. The scope for central banks to lower the debt burden seems very limited in Africa • Three main ways monetary policy could reduce public debt: • Generating a surprise in inflation? • Transferring seigniorage revenues to the budget? • Introducing financial repression regulations?

  18. Seigniorage revenues are small compared to the debt burden Seigniorage Revenues, Average 2010–18 Source: IMF, Monetary and Financial Statistics database; and IMF, World Economic Outlook database. Note: Seigniorage is calculated as change in monetary base divided by GDP.

  19. Thank you

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