Opinion of the European Central Bank of 21 July 2023 on Malta’s participation in the International Monetary Fund’s Resilience and Sustainability Trust (CON/2023/23)

OPINION OF THE EUROPEAN CENTRAL BANK of 21 July 2023 on Malta’s participation in the International Monetary Fund’s Resilience and Sustainability Trust (CON/2023/23) Introduction and legal basis

On 23 June 2023 the European Central Bank (ECB) received a request from the Central Bank of Malta (CBM) on behalf of the Maltese Minister for Finance, for an opinion on draft subsidiary legislation entitled the Malta Membership of the International Monetary Fund (Contribution Agreement) Order. On 5 July 2023 the ECB received from the CBM an updated version of that draft subsidiary legislation (hereinafter the ‘draft order’). 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 order relates 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 order

1.1 The main purpose of the draft order is to authorise the CBM to enter into a bilateral agreement (hereinafter the ‘draft 2023 Contribution Agreement’) with the International Monetary Fund (IMF) for the purpose of lending a special drawing rights (SDR)-denominated amount to the Resilience and Sustainability Trust (RST) of the International Monetary Fund. 1.2 As noted in the consultation request accompanying the draft order, the RST is a new trust intended to complement the IMF’s existing lending toolkit by focusing on urgent, macro-critical and longerterm structural challenges that are not covered by the IMF’s Poverty Reduction and Growth Trust (PRGT). To date, the IMF has identified pandemic-related and climate-related challenges as the RST’s main intended areas of operation . The funding of the RST will require a total of SDR 33 billion in contributions from IMF member countries . Thirty-five countries, including Malta, have been approached by the IMF to provide such funding. 1.3 The draft order provides that: (1) the draft 2023 Contribution Agreement will consist of three parts, namely a borrowing agreement, a deposit agreement and a reserve contribution agreement; (2) to finance loan disbursements under the RST, the IMF may make drawings at any time from the

effective date of the draft 2023 Contribution Agreement until 30 November 2030; and (3) the maturity date for repayment of the contribution paid under the deposit agreement is 30 November 2050. 1.4 The draft order specifies that the CBM will provide the contribution to be made under the reserve contribution agreement following receipt of the necessary funds from the Government. 1.5 The draft order would be adopted by the Minister for Finance pursuant to his powers under Article 8 of the Malta Membership of the International Monetary Fund Act , which empowers the Minister to enact orders to bring into force any of the provisions of the Articles of Agreement of the International Monetary Fund.

2. General observations

2.1 The ECB notes that under the Malta Membership of the International Monetary Fund Act the functions of the CBM are to: (1) pay the amounts payable from time to time to the IMF on Malta’s account , (2) exercise Malta’s rights, and perform Malta’s obligations and functions ensuing from its 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 Articles of Agreement of the International Monetary Fund . 2.2 The ECB understands that the draft order must be read in conjunction with the draft 2023 Contribution Agreement and the information provided by the CBM in its request for an opinion. To enable the contributions to the RST, the draft 2023 Contribution Agreement provides that the CBM will conclude (1) a borrowing agreement under which the CBM will lend to the IMF an SDRdenominated amount up to the equivalent of EUR 25 000 000 by means of a transfer to the loan account of the RST, which functions as the RST’s conduit for lending operations; (2) a deposit agreement under which the CBM will deposit an SDR-denominated amount equivalent to EUR 5 000 000 in the deposit account of the RST, which holds additional reserves and thus endows the RST with sufficient gross reserves; and (3) a reserve contribution agreement under which the CBM will contribute an SDR-denominated amount equivalent to EUR 500 000 to the reserve account of the RST, which contains the reserves that form the RST’s principal financial buffer to cover operational costs while also managing credit and liquidity risk.

3. Specific observations

3.1 Monetary financing prohibition 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 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 . 3.2 Contribution to the RST loan and deposit accounts 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, 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 . 3.2.1 For the exemption laid down in Article 7 of Regulation (EC) No 3603/93 to apply to the CBM’s contributions to the RST loan and deposit accounts envisaged by the draft order, the terms and conditions of the agreement with the IMF must provide for a potential early repayment of the principal amount of the resources borrowed from the CBM. Under the draft 2023 Contribution Agreement the CBM will have the right to seek early repayment of all or part of the principal amount of its outstanding claims on the RST's loan and deposit accounts if the CBM represents that Malta’s balance of payments and reserve assets position justifies early repayment. Under this arrangement, the SDRs channelled by the CBM to the RST would be readily repayable, to meet balance of payments and reserve needs, so that the liquidity of the claims of the CBM is safeguarded with a view to ensuring their reserve asset status . 3.2.2 Subject to the above arrangement, the ECB considers that the CBM’s loan to the IMF’s RST loan and deposit accounts is compatible with the monetary financing prohibition, as it results in SDRdenominated claims of the CBM against the RST that have all the characteristics of reserve assets .

3.3 Contribution to the RST reserve account Regarding the CBM’s contribution to the RST reserve account, the draft order specifies that the reserve contribution is to be provided by the CBM (only) once it has received the necessary funds from the Government. On this basis, the ECB considers that the transfer of funds to the IMF by the CBM 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 since the contribution to the RST reserve account is in effect financed by the Government and not by the CBM .

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 21 July 2023.

[signed]

The President of the ECB

Christine LAGARDE