Opinion of the European Central Bank of 28 December 2021 on Italy’s participation in the International Monetary Fund programmes: Poverty Reduction and Growth Trust and debt relief for Sudan (CON/2021/39)

OPINION OF THE EUROPEAN CENTRAL BANK of 28 December 2021 on Italy’s participation in the International Monetary Fund programmes: Poverty Reduction and Growth Trust and debt relief for Sudan (CON/2021/39) Introduction and legal basis

On 13 December 2021, the European Central Bank (ECB) received a request from the Italian Ministry of Economy and Finance for an opinion on draft legislative provisions (hereinafter the ‘draft legislative provisions’) included in the Italian Law on the budget for the year 2022 and for the multi-year period 2022-24 (hereinafter the ‘2022 Law on the budget’). The 2022 Law on the budget must be approved by the end of December 2021. 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 legislative provisions relate to the Banca d’Italia. 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 legislative provisions

1.1 Background context The draft legislative provisions make provision for new arrangements in relation to the Poverty Reduction and Growth Trust (PRGT) between Italy and the International Monetary Fund (IMF), first in the form of loan agreements and, second, in the form of donations. The renegotiation of the loan and donation arrangements under the PRGT is part of the IMF’s effort to support global liquidity, especially in the poorest countries, in the light of the changing global environment arising from the economic and social consequences of the COVID-19 pandemic . The draft legislative provisions also aim at providing reimbursement to the Banca d’Italia of a sum equal to the resources of the Banca d’Italia used for the Italian share of participation in the Heavily Indebted Poor Countries (HIPC) initiative in favour of Sudan. The draft legislative provisions are accompanied by an explanatory memorandum and a technical report (‘relazione tecnica’) which provide additional operational and timing details on these arrangements.

1.2 New contribution to the PRGT in the form of a loan agreement The draft legislative provisions authorise the Banca d’Italia to enter into a new loan agreement to contribute to the IMF’s PRGT, for an amount of 1 billion special drawing rights (SDR). The new loan agreement is in addition to the existing PRGT loans of 400 million and 1 billion SDR . The draft legislative provisions further provide for a State guarantee to the Banca d’Italia in respect of the reimbursement of principal and interest due on the new PRGT loan . 1.3 New contribution to the PRGT in the form of subsidies In addition, the draft legislative provisions authorise the Banca d’Italia to provide subsidies, in the form of donations, to the PRGT, for an amount up to EUR 101 million, equivalent to 83 million SDR, over a period of five years starting from 2022. The draft legislative provisions, read in conjunction with the explanatory memorandum and technical report, further provide for the pre-funding by the Ministry of Economy and Finance of the subsidies to be made to the PRGT by the Banca d’Italia . 1.4 Participation in the HIPC initiative in favour of Sudan The draft legislative provisions authorise the Ministry of Economy and Finance to reimburse the Banca d’Italia the sum of EUR 49 million, equivalent to the amount of 40,46 million SDR. The sum was paid by the Banca d’Italia on 29 June 2021, in connection with the Italian share of participation in the HIPC initiative in favour of Sudan. The reimbursement will be made in 2022, with the value date set at the date of payment made by the Banca d’Italia (i.e. 29 June 2021). According to the explanatory memorandum, the reimbursement is intended to comply with the prohibition of monetary financing as set out in Article 123(1) of the Treaty .

2. Monetary financing prohibition

2.1 Article 123(1) of the Treaty prohibits the national central banks (NCBs) from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Member States. This prohibition is however subject to certain exemptions contained in Council Regulation (EC) No 3603/93 . In particular, Article 7 of Regulation (EC) No 3603/93 provides that the financing by NCBs 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 of the Treaty. The fourteenth recital of Regulation (EC) No 3603/93 clarifies the rationale behind this exemption, stating that it is appropriate to authorise the financing by the NCBs 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 have been 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, other than gold bullion, must be claims on non-residents . The need for availability on demand to meet balance of payments financing needs and other related purposes implies that the credit quality and liquidity of the claims must be ensured. 2.3 The ECB understands that the draft legislative provisions are accompanied by, and must be read in conjunction with the explanatory memorandum and technical report which provide additional operational and timing details on these arrangements. These documents provide an interpretation of how the draft legislative provisions must be understood.

Contribution to the PRGT in the form of a loan

2.4 For the exemption laid down in Article 7 of Regulation (EC) No 3603/93 to apply to the new PRGT loan envisaged by the draft legislative provisions, the terms and conditions of the agreement with the IMF must provide for a potential early repayment of the principal amount of the borrowed resources. Under this arrangement, the SDRs channelled by the Banca d’Italia to the PRGT would be readily repayable, to meet balance of payments and reserve needs, so that the liquidity of the claims of the Banca d’Italia is safeguarded with a view to ensuring their reserve asset status. 2.5 Subject to the above arrangement, the ECB considers that the Banca d’Italia’s additional loan to the IMF’s PRGT set out in the draft legislative provisions is compatible with the monetary financing prohibition, as it results in SDR-denominated claims of the Banca d’Italia against an IMF-administered trust that have all the characteristics of reserve assets .

Contribution to the PRGT in the form of subsidies

2.6 With regard to the new PRGT subsidies envisaged by the draft legislative provisions, the ECB understands that they are pre-funded by the Ministry of Economy and Finance, such that the contribution to the PRGT subsidy resources is in fact not financed by the Banca d’Italia. The Banca d’Italia is only executing the transfer of funds on the Ministry’s behalf. In such case, the transfer of funds to the IMF by the Banca d’Italia would not give rise to a credit facility within the meaning of Article 123(1) of the Treaty and Article 1(1)(b)(ii) of Regulation (EC) No 3603/93, irrespective of whether the conditions for the application of Article 7 of Regulation (EC) No 3603/93 are met . 2.7 In this respect the ECB notes, first, that according to the draft legislative provisions the Banca d’Italia

is authorised, not required, to provide the new subsidies . Second, according to a combined reading of the draft legislative provisions and the explanatory memorandum and technical report, as described in paragraph 1.3, the transfers to the IMF are to be made by the Banca d’Italia only after the receipt of an equal amount of funds from the Ministry of Economy and Finance. 2.8 Without prejudice to the above interpretation, the ECB recommends that the draft legislative provisions are clarified to explicitly state that the Banca d’Italia is to provide the new PRGT subsidies to the IMF only after it has received the necessary funds from the Ministry of Economy and Finance. Reimbursement in connection with the HIPC Initiative in favour of Sudan 2.9 Where Member States are invited by the IMF to contribute non-refundable resources to a debt relief programme, such as the debt relief programme for Sudan, the financing of their contribution by the NCBs will not result in any foreign claims. Consequently, the NCBs’ financing does not fall under the exemption laid down in Article 7 of Regulation (EC) No 3603/93 and is therefore not compatible with the prohibition of monetary financing. 2.10 Against this backdrop, the ECB welcomes the fact that the draft legislative provisions aim to take corrective action by way of the reimbursement to be made by the Ministry of Economy and Finance to the Banca d’Italia of the resources contributed in connection with Italy’s participation in the debt relief program for Sudan.

3. Financial independence

3.1 From the perspective of the financial independence required of an NCB in the European System of Central Banks under Article 130 of the Treaty , the ECB takes note of the guarantee provided by the State under the draft legislative provisions with respect to the reimbursement of principal and interest on the Banca d’Italia’s new loan to the PRGT. Also, from that perspective, the ECB welcomes the pre-funding by the Ministry of Economy and Finance of the new subsidies to be provided to the PRGT.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 28 December 2021.

[signed]

The President of the ECB

Christine LAGARDE