OF NEW YORK 133

New Central *

The Central Sixteen new central banks have opened their doors since as the Equatorial African .) the States of West Africa serves Dahomey, Ivory the beginning of 1959—the Central Bank of the States of Bank of Africa and of , the Central Bank of Coast, , , , , and Upper Equatorial Afri- the States of West Africa, the Bank of Morocco, and the Volta. (This bank, which will here be termed West served until Both of Central Bank of in 1959; the Bank of , the can central bank, also 1962.) Bank of the of , and the Somali National these institutions were organized under French auspices Republic After Bank in 1960;the Bank of , the Malagasy Bank of before the independence of the countries concerned. these countries Issue, and the Bank of the Republic of Mali in 1962; the becoming independent in 1960-61, signed with 1960-62) under which all Central Bank of and the Central Bank of agreements (during in the Bank of the National Bank of (except Mali) have continued to use the facilities of the 1963; Lebanon, and , the Bank of the Kingdom of , and the existing central banks, whose organization power National Bank of the Congo (Leopoidville) in 1964. The have been considerably modifiedto conform to the changed central banks of Morocco, Nigeria, Sudan, andGuinea were situation. the twelve new described in a previous article in this Review:' the other All but two of the countries served by twelve newcentral banks willbe discussedhere.2 central banks had a monetary authority or board the The Central Bank of the States of Equatorial Africa prior to the establishment of the new banks; excep- and where and of Cameroon serves the newly independent states of tions were the Malagasy Republic Lebanon, been held Cameroon, the , , Congo the note-issuing privilege had in each case by a banks retain (Brazzaville), and . (This bank will be referred to commercial bank. While all the new central some of the attributes of the institutions they replace, they have generally been given a wide variety of additional monetary control powers. 'Dorothy B. Christelow had primary responsibility for the prepa- The countries served by the new central banks vary ration of this article. considerably with respect to the degree of their financial I See "International Development?', this Review. October 1960, and economic development. In some of the new states pp. 181-83. The articic also treated the Bank of . established economic transactions take outside the monc- in 1957. and the Central Bank of Malaya and the Central Bank of many place ,established in 1958. tary sphere, while in others such as Lebanon and Jamaica 2Aiothergroup of new central banks—nothere discussed—will the banking systems are highly developed. The share of beginoperations in the near future. These includecentral banks for in the total money supply—a rough inverse , . and . Furthermore,with currency the into being of the Federation of in 1963, the measure of the use of banks in a country—varies from coming the Central Bank of Central Bank of Malaya became Malaysia, roughly 30 per cent in Lebanon and Jamaica to around40 with responsibility for the entire new country. Conversely, the breakup of the Federation of and Nyasalandinto three per cent in Cyprus and Senegal, 50 per cent in , countries will lead to the emergenceof three separate central banks and reaches about 65 per cent in Mali and Upper Volta. to replace the Bank of Rhodesia and Nyasaland. One of these,the Rescrvc Bank of Rhodesia (for Southern Rhodesia), has already (The United States figure is about 20 per cent.)3 There opened its doors. White its powers and functionsresemble those of is also considerable variation in the degree to which finan- the predecessor institution in most respects, it has been given the added power to require banks to maintain cash reserves against cial institutions other than commercial banks have taken advancesrather than against deposits. In another group of countries—including , . Iraa, Nicaragua,and the United Arab Republic—where the central banks had exercised both central banking and commercial banking func- tions, these institutions have in recent years been converted into 3 The uniform definition of the money supply used for this com- centralbanks proper and their commercial bankingoperations trans- parison is that of the International Monetary Fund in its Interna- ferred to existing or newly established commercial banks. These tional Financial Statistics: currency outsidebanks, demand deposits, central bank reforms and conversionsare also outside the scope of post office checkingdeposits, and private-sector deposits with the this article. central bank where these exist; governmentdeposits are excluded. 134 MONTHLY REVIEW, JULY 1964

root. On the other hand, almost all the countries con- policy-making body. In Lebanon, two high government cerned display certain common characteristics: they are officials are minority members of the central bank's gov- notably dependent on international trade; foreign capital erning board; in Algeria, the law is sufficiently flexible to has played or is expected to play a considerable role in allow the chief of state to appoint government ollicials to their economic development; and foreign commercial a minority or majority position on the governing board. banks are a major element in their banking systems. In Mali, five of the ten-member governing board represent The objectives of the new central banks as set out in government departments and two represent the national their statutes are to assure the external and internal stabil- assembly. Other statutes provide for government approval ity of the currency and to foster a monetary environment or supervision of certain aspects of central banking. In conducive to cconornic development. To this end, all the Cyprus approval by the finance minister is required, if com- central banks are given the exclusive right of note issue, mercial bank reserve requirements are to he raised above a the obligation to act as fiscal agent and banker for the certain level. In Jamaica, the finance minister may 'from government, the power to buy and sell and foreign time to time after consultation with the governor give to the exchange, and the authority to discount, purchase, and sell bank inwriting suchdirections of a general nature as appear specified types of financial obligations. In addition, most to the minister to be necessary in the public interest". In of the new banks have at least some of the following Somalia, a committee consisting of the prime minister and powers of control and supervision over commercial banks: key cabinet members is designated to supervise the opera- to establish minimum cash reserve requirements, to set tions of the central bank. In Burundi, major policy deci- limits on lending and deposit rates, to prescribe the asset sions of the central bank must be approved by the finance distribution and the total volume of credit outstanding, to minister. In the Congo, a representative of the ministry of examine the books and to require statistical reports, and financeattends meetings, but is not a member, of the bank's to set minimum capital requirements. governing board. At the same time, a majority of the statutes limit cen- CENTRALBANK-GOVERNMENT RELATIONS tral bank financing of their governments; the limitations typically apply to direct financing (i.e., through short- All the new banks are owned by the respective govern- term advances or direct purchases of securities) and to ments (except that the French government still holds all indirect financing (i.e., through open market purchases or the capital of the Equatorial African central bank and discounting of government securities offered by banks or half the capital of the Malagasy bank). In most cases, others). Algeria, the West African countries, and Mala- the presiding officer and the boards of management are gasy all limit the total volume of government indebtedness appointed by the respective governments for a fixed pe- that may be held by the central banks to a specified pro- riod and arc subject to reappointment. The exceptions are portion (varying from 10 per cent to 15 per cent) of the three central banks whose member countries—all for- ordinary government revenues (luring the previous fiscal mcr French colonies—belong to the African Financial year. In the Congo, direct and indirect advances may each Community. The West African central bank's administra- equal 20 per cent of average government receipts over a tive council includes a minority appointed by the French past three-year period. Cyprus and Jamaica set more com- government, and its presidency rotates every two years plex limits. Thus, in Cyprus the government's total direct among council members representing the member states. and indirect indebtedness to the central bank may amount Half the council members of the Malagasy Bank of Issue to 20 per cent of annual revenues plus 6 per cent of the are appointed by France, and the president is chosen by bank's sight liabilities plus the government securities the the council, subject to the approval of the governments of bank took over from a note security fund. In Jamaica, in the Malagasy Republic and France. The French govern- addition to central bank short-term advances up to 15 per ment also appoints one half the members of the governing cent of annual government revenue, 50 per cent of the council of the Equatorial African central bank and, in assets backing the currency may be in securities of the addition, the President of the French Republic appoints Jamaican government; moreover, the bank may hold gov- the president of that institution. ernment securities in amounts up to seven times the bank's Many of the new central bank statutes include further capital (which itself may be increased by the bank's board provisions to assure the harmonization of central bank of governors with approval of the Jamaican House of Rep- action with the government's general economic policy. resentatives). The Rurundi bank's limit is an absolute Some statutes provide that government officials or their amount. The Somali National Bank is limited only with representatives are to be members of the central bank's respect to direct short-term advances to the government, FEDERAL RESERVE BANK OF NEW YORK 135 while the Bank of Lebanon and the National Bank of The Mali central bank's claims on private borrowers are Rwanda are subject to limits that may be exceeded in cir- approximately four times as large as those of commercial cumstances of "exceptional gravity". The remaining two banks, and it also discounts heavily for the commercial central banks (namely, the Bank of the Republic of Mali banks. In many countries where the central bank has and the Equatorial African central bank) are not limited not been given such broad powers to (teal directly with as to the total government indebtedness they may hold. the public, as well as in some of the countries where the central bank has such powers, separate governmcnt de- DEVELOPMENT OF THE FINANCIALSECTOR velopment banks tend to perform some of the same func- tions. All the new central banks have been given a general The specific types of paper eligible for discounting, re- mandate for promoting economic development—often in- discounting, loan collateral, or outright purchase are in eluding special responsibilities for developing financial themselves of considerable importance in the process of institutions, credit instruments, and domestic money mar- financial development, as already noted. In addition to dis- kets. For this reason, these banks tend to have at their counts of and loans against government securities, all the disposal legal powers going beyond the traditional tools of central banks here discussed may discount or loan against rediscounting and open market operations, which them- first-class paper drawn to finance trade, industry, and selves can of course also be used to promote certain types agriculture. The maximum allowable maturity of the un- of credit instruments and to encourage specific types of derlying paper is 90 days in Lebanon, but more usual loan transactions by increasing the liquidity of the instru- limits range from I 0 days to one year. ments involved. A number of statutes also provide for longer term corn- Thus, central bank powers to prescribe the distribution mitnlents on the part of central banks to assist in the of assets in commercial bank portfolios may be of con- growth of negotiable securities markets and to finance siderable importance: the Bank of Jamaica has the power economic development. Following the French tradition, to prescribe a minimum ratio of domestic assets to total the Central Bank of Algeria, the Equatorial African and commercial bank deposit liabilities; the central banks of West African central banks, and the Malagasy bank may Cyprus and the Congo have the broaderpower to prescribe extend credit to commercial banks and other financial in- the purposes for which commercial bank advances and in- stitutions for as long as five years in order to finance in- vestments may be made; and the Rwanda central bank is dustrial exports, housing, or other projects included in empoweredto enterinto agreementswith commercialbanks national development plans. Cyprus permits central hank in this same regard. investment in first-class, fixed-maturity, fixed-interest Furthermore, where the existing financial sector is rela- securities in amounts up to 5 per cent of the bank's liabili- tively small, it may be deemed advisable—indeed neces- ties (exclusiveof government deposits). The central bank sary—for the central bank to be able to deal directly with of Mali has taken over the functions of the government- the borrowing and depositing public. This power has owned Popular Bank of Mali for Development. The Bank been a feature of the early years of many established cen- of Jamaica may, with the approval of the finance minister, tral banks. Limited direct central bank contact with the buy and sell shares of companies specially authorized by borrowing public through discounting and advances on the government to develop a local money or securities mar- government securities is provided by all the statutes dis- ket or to improve "the financial machinery for financing af cussed here, except those for Lebanon and Cyprus. And economic development". The Burundi bank may commit the Algerian and West African central banks may accept amounts equal to the sum of its capital, reserves, and amor- noninterest-bearing deposits from the public in certain tization accounts to the purchase of long-term obligations cases, although such deposits have in fact been smaH. issued or guaranteed by the government and, with agree- Broader powers have been given the central banks ment of two thirds of the bank's governing board, of long- of Jamaica, Somalia, Mali, and Burundi—namely to dis- term obligations of other borrowers and shares in newly count for and make advances to, as well as to accept organized government-sponsoredfinancial institutions. deposits from, nonfinancial customers. The Bank of Jamaica, to be sure, has indicated its intention to abstain CREDITCONTROL from such commercial banking operations. But, in Somalia, the central bank's claims on the private sector are about The new central bank statutes suggest the existence of two-thirds as large as similar commercial bank claims, several distinct although overlapping approaches to the while its rediscounts for commercial banks arc negligible. problem of general monetary control. In those countries 136 MONTHLY REVIEW. JULY 1964 that were formerly French colonies, primary reliance is required reserve ratio is 25 per cent for demand deposits placed on variation in central bank credit to banks and and 15 per cent for time deposits. As for direct controls, other financial institutions, mainly through changes in the the Bank of Jamaica may set limits both upon the over- discount rate and through variable ceilings on the over-all all volume of commercial bank credit outstanding and volume of such credit. The West African central bank and upon specific types of credit; the Cyprus and the Congo the Equatorial African central bank determine the dis- banks have the same power with respect to commercial count rate and the credit ceilings for each state, while banks and other designated financial institutions; and the national monetary committees are responsible for the dis- Rwanda bank may accomplishthe same end through agree- itibution of credit among the commercial banks and other ments with commercial banks and other financial institu- eligible credit institutions in the individual states. it is tions. The Lebanon bank may set variable liquidity ratios therefore possible for these central banks to pursue differ- and other asset-liabilityrelationships for commercial banks ential credit policies in the individual member states, as and other financial institutions. The central banks of circumstances may require, although the freedom of pay- Cyprus and the Congo also may set commercial bank lend- ments among these countries would tend to complicate such ing and deposit rates. differential policies and, in fact, makes a concerted - Central banks which make substantial use of their nomic and highly desirable. In all these powers to deal with the nonbank public—those in Soina- former French colonies, commercial bank reliance on cen- ha, Mali, and Burundi—posscssan additional instrument tral bank credit is very heavy: the central banks tend to of monetary control. By altering the volume of central refinance from 30 per cent to 60 per cent of bank credit bank credit to the nonbank public, these banks have a outstanding, there being of course considerable variation direct means of influencing the liquidity of the nonhank from country to country and over time. Changes in thecorn- sector as well as that of the bank sector of the economy. niercial banks' external indebtedness to their French head offices or parent banks or to other French banks can, to be INTERNATIONAL FINANCIALRELATIONS sure, offset changes in central bank credit to some limited extent. The statute creating the Burundi central bank, Many of the statutes specify the form in which the cen- which commenced operations very recently, suggests a tral banks' international reserves are to be held, as well as similar approach to creditcontrol, although the concept of the minimum level to which these reserves may fall. These setting ceilings on the availability of central bank credit provisions are, of course, influenced by the special rela- does not appear inthe Burundi statute. tion to a major currency area a country may have. The new central banks in Lebanon, Somalia, Jamaica, Jamaica and Cyprus are members of the sterling area Cyprus, Rwanda, and the Congo rely for purposes of credit and as such have generally tended to hold the bulk of control largely on a combination of variations in commer- their reserves in short-term sterling assets in . cial bank rcscrve requirements, the rediscount mechanism, Funds are freely transferable within the sterling urea. and open market operations, plus a varying array of direct while the sterling balances held by the area's monetary controls. One reason for the addition of directcontrols to authorities are convertible into other in ac- the traditional central bank arsenal in less developed cordance with each country's exchange regulations and money markets is usually the problem of dealing with general sterling-area policy. In Jamaica, the central bank potentially large inflows of funds from abroad. These in- law requires that reserves be held in the form of gold, tiows can be offset by changes in required reserve ratios sterling notes and coin, balances or money at call with only within the limits set by law, while large central bank banks in the , United Kingdom Treas- sales of commercial paper or government securities might ury bills, or other securities issued or guaranteed by a prove unduly disruptive or altogether impossible in thin government or territory of the British Commonwealth. financial markets. The provisions in the central bank statute of Cyprus The statutes of five of the six central banks discussed specify only that the bank's foreign assets are to consist in the foregoing paragraph specify the range or upper of gold and such foreign exchange and foreign securities limit of permissible variations in reserve ratios. In Ja- as the governing board shall from time to time designate. maica, the ratio may be varied from 5 per cent to 15 per The statutory minimum level of foreign exchange reserves cent of deposit liabilities. The upper limit in Cyprus, at the Jamaica central bank is stated in terms of its rela- Rwanda, and the Congo is 20 per cent of deposit liabilities, tion to the currency circulation. This reflects the practice with an additional 10 percentage points permitted inCyprus of the former British-administered currency board which in exceptional circumstances. In Lebanon, the maximum this new bank succeeds; but, whereas the currency board FEDERAL RESERVE BANK OF NEW YORE 137

be reduced 10 cent.' generally aimed at maintaining 100 per cent sterling cover outstanding, the ceiling is to by per Somalia, for currency outstanding, the new central bank statute The remaining five new banks—in Lebanon, members of neither provides for 50 per cent cover in gold or eligible foreign the Congo, Rwanda, and Burundi—are assets. in reserves must be 30 per cent the sterling area nor the French franc zone, although the exchange Cyprus, of the of currency and central bank sight liabilities. These two three last-named countries were members Belgian is statutes make no specific provision as to how and when monetary area until 1960. The Lebanon bank required the banks are to act to maintain these ratios. to hold gold and foreign exchange reserves equal to 30 Algeria, Mali, the countries of Equatorial and West per cent of its currency and sight liabilities or 50 per cent Somali Africa, and the Malagasy Republic are members of the of the currency issue, whichever is larger. The cur- French franc zone. With some exceptions, zone members bank must hold a reserve of gold and convertible hold most of their foreign exchange reserves in the form rencies equal to 100 per cent of currency outstanding. in the event these of French franc liquid assets. Algeria and Mali, whose Neither statute provides for special action maintain central bank laws do not specify the form or size of their ratios are not maintained. The Congo bank must international reserves, may also hold gold and nonfranc gold and foreign exchange reservesequal to 40 per cent of be foreign exchange. The countries served by the Equatorial currency and sight liabilities, but this requirement may of the bank for the first African, West African, and Malagasy central banks, how- suspended by the governing board Rwanda bank is ever, maintain their foreign exchange reserves in the form five years of the bank's operations. The form of ac- of "operations accounts" at the French Treasury, or they to hold foreign exchange reserves in the gold, marketable may hold French govermnent securities. These members of counts with foreign central banks, or in readily them at the African Financial Community (CFA)have in exchange securities, but is under no obligation to maintain The Burundi statute does not mention been given the guarantee of unlimited conversion of CFA any specific level. currencies into French francs. The technical arrangement international reserves, although the bank has sufficient involves automatic overdraft facilities when a country's powers to acquire and maintain foreign exchange reserves. operations account shows a deficit. These accounts may be debited by CFA central banks for the purchase of CONCLUDIHQ REMARKS nonfranc currencies residents of CFA countries in by as conformance with these countries' exchange regulations, The broadeningof the financial structure a pre- economic is one of the which generally resemble those of France. requisite for sustained development central banks. Such Frenchwillingness to assure convertibilityof CFA francs prime tasks of virtually all these new of cases accom- is related to the French voice in the management uf the a broadening must in a number necessarily three above-named banks and to certain additional safe- pany the effective exercise of central bank credit control. have to be guards. For example, the statute for the West African The tools given these institutions will, therefore, ccntral bank provides that an increase in thc bank's dis- uscd not only to encourage pricc and balance-of-payments count rate and a reduction in rediscount ceilings must be stability, but also to promote the growth of sound and financial institutions and to foster confidence in considered when foreign exchange reserves remain for diversified will in turn aid economic thirty days below 20 per cent of sight liabilities (currency money and banks—efforts which be that all the and deposits combined); if the ratio falls below 10 per growth in general. It may thus expected will broaden their cent for the same period of time, these measures must be banks here discussed gradually potential for and flexible uscof central instruments. adopted immediately.Also, an agreement between the West judicious banking (the group of states served by the West African central bank) and the French Treasury pro- vides if the account of the area as a whole that, operations It will be understood that ties concerningcentral banking arc is in debit for sixty consecutive days, the central bank'sdis- only one aspect of the continuing financial cooperation between count rate must be raised by 1 percentage point. For an France and her former African colonies. Thus, bcside grants. thc French also make loans, through the Cais.se Centraie de Coopóra- individual countrywith a net debtor position in the opera- tion (CCCE), to CFA-areadevclopmcnc banks, public tions account, the discount ceiling must be reduced by 20 corporations, and private enterprise. The CCCE is financed by French Treasury advances. It also serves as note.issuing authority per cent, while for a country whose operations-account for Saint-Pierre-et.Miquclonand in this connection maintains an credit amounts to less than 15 per cent of its currency operationsaccount at the FrenchTreasury.