Opinion of the European Central Bank of 18 December 2020 on a bilateral borrowing agreement between the Central Bank of Malta and the International Monetary Fund (CON/2020/34)

OPINION OF THE EUROPEAN CENTRAL BANK of 18 December 2020 on a bilateral borrowing agreement between the Central Bank of Malta and the International Monetary Fund (CON/2020/34) Introduction and legal basis

On 4 December 2020 the European Central Bank (ECB) received a request from the Central Bank of Malta (CBM) for an opinion on two draft laws concerning a bilateral borrowing agreement with the International Monetary Fund (IMF) (hereinafter the ‘draft laws’) . The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC , as the draft laws relate to the CBM. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft laws

1.1 In March 2020, the IMF Executive Board approved a new round of bilateral borrowing to supplement the more permanent quota resources. Such borrowing will help maintain the IMF’s overall lending capacity and thus preserve the IMF’s ability to support its members, especially in the current environment of global challenges arising from the COVID-19 pandemic. Subsequently, in April 2020, the IMF’s Managing Director sought Malta’s participation in this new round of the 2020 Bilateral Borrowing Agreements, and Malta agreed to participate. 1.2 By virtue of the draft laws, Malta will enter into a bilateral borrowing agreement whereby CBM will initially lend to the IMF a special drawings rights (SDR)-denominated amount up to the equivalent of EUR 260 000 000. This credit will be automatically reduced to EUR 112 000 000 once the IMF’s primary source for temporary resources, namely, the New Arrangements to Borrow (NAB), is doubled. Malta does not participate in the NAB. The term of this agreement will end on 31 December 2023, and it is provided that the IMF may extend the term for one further year through 31 December 2024 by a decision of the Executive Board of the IMF and with the consent of the CBM, taking into account the IMF’s overall liquidity situation and actual and prospective

borrowing requirements. The ECB understands that Malta’s participation in a bilateral loan agreement will result in an SDR-denominated claim of the CBM against the IMF. 1.3 The legal basis for the bilateral borrowing agreement is Article VII, Section 1(i), of the IMF’s Articles of Agreement, which authorises the IMF to propose borrowing from its members if it deems such action appropriate to replenish its holdings.

2. Monetary financing prohibition

2.1 Article 123(1) of the Treaty prohibits the national central banks from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Member States. The monetary financing prohibition is however subject to certain exemptions laid down in Council Regulation (EC) No 3603/93 . In particular, Article 7 of Regulation (EC) No 3603/93 provides that the financing by national central banks of obligations falling upon the public sector vis-à-vis the IMF is not regarded as a credit facility within the meaning of Article 123(1) of the Treaty. Recital 14 of Regulation (EC) No 3603/93 clarifies the rationale behind this exemption, stating that it is appropriate to authorise the financing by the central banks of obligations falling upon the public sector vis-à-vis the IMF because such financing ‘results in foreign claims which have all the characteristics of reserve assets’. Therefore, the exemption in Article 7 of Regulation (EC) No 3603/93 must be interpreted in line with this rationale . 2.2 Reserve assets are defined as those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for interventions in exchange markets to affect the currency exchange rate, and for other related purposes, such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing . Under this definition, reserve assets must be foreign currency assets and, except in the case of gold bullion, must be claims on non-residents . 2.3 The ECB notes that under the Malta Membership of the International Monetary Fund Act it is the function of the CBM to (1) pay the amounts from time to time payable to the IMF on Malta’s account, (2) perform all of Malta’s rights, obligations and functions ensuing from Malta’s participation in the Special Drawing Account, and (3) issue to the IMF non-interest bearing and non-negotiable notes or other obligations as provided for by the IMF’s Articles of Agreement. 2.4 The ECB considers that the financing by the CBM of Malta’s obligations under the bilateral borrowing agreement with the IMF, as set out in the draft laws, falls within the exemption of Article 7 of Regulation (EC) No 3603/93 because this financing results in SDR denominated-claims

of the CBM against the IMF that have all the characteristics of reserve assets. Therefore, the draft laws are compatible with the monetary financing prohibition. This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 18 December 2020. [signed]

The President of the ECB

Christine LAGARDE