metadata: authors: 0: author: Teijeiro, Mario O.
docna: 0: docna: Central bank losses : origins, conceptual
            issues, and measurement problems
docty: Policy Research Working Paper
subtopic: Public Sector Administrative & Civil
            Service Reform,Legal Institutions of the Market Economy,Capital Markets and Capital Flows,Capital Flows,Inflation,Financial Structures,Democratic Government,Public Sector Administrative and Civil
            Service Reform,De Facto Governments
teratopic: Finance and Financial Sector Development
abstracts: cdata!: Central bank losses usually originate,
            the author explains, when a bank takes on other functions
            besides its normal role, such as subsidized loans to
            priority sectors, rescues of troubled financial
            institutions, or takeovers of private or public debt. This
            paper attempts to review the issues related to Central
            Banks' quasi fiscal deficits. In the first section, a
            taxonomic description of origins of quasi fiscal deficits is
            made. The second section explores the relation between
            economic and accounting losses. The third section analyzes
            inflation adjustment and net lending treatment which are
            relevant to the definition of non financial public sector
            deficits. Finally, alternative ways of calculating the
            central banks' quasi fiscal losses are reviewed.
repnme: repnme: Central bank losses : origins, conceptual
            issues, and measurement problems
display_title: Central bank losses : origins,
            conceptual issues, and measurement problems
listing_relative_url: /research/1989/10/700428/central-bank-losses-origins-conceptual-issues-measurement-problems
topicv3: Inflation m1326709 0870F4727ACED1CF8525815C00471347,Capital Markets m1326967 332,Central Banks m1327453 1235,Public Administration m1327723 723,Financial Institutions m1505015 3797
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: Policy Plan & Prog Review Dept
no_of_pages: 28
model_extractions: **Plc.Planning, and Research**

**Mcocnomic Adjustmen and Growth**

Under normal conditions, central banks will be profitable, since they have access to zero-cost financing (the monetary base) and probably some financing at below-market interest ratesand are able to invest these funds at market rates.

institutions, or takeovers of private or public debt.

The losses are difficult to measure, however, because of inconsistencies between central bank and nonfinancial public sector accounting.

In his analysis of central bank losses, Teijeiro assumes that these sources of cheap financing have been exhausted, so that at the margin any asset yielding below market rates will produce a loss.

Measurements that cause difficulty involve, for example, the central bank treatment of nominal capital gains on foreign exchange dealings, accounting for loans, and adjustin^; operating results for the effect of inflation.

Central bank losses usually originate, he says, when the bank takes on other functions besides its normal role, such as subsidized loans to priority sectors, rescues of troubled financial Teijeiro recommends a method for dealing with these problems. In many cases, he admits, data problems may necessitate the shortcut of calculating the central bank deficit from changes in its assets and liabilities.

This paper is a product of the Macroeconomic Adjustment and Growth Division, Country Economics Department. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Raquel Luz, room NI I- 057, extension 61588 (23 pages).

The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy, Planning, and Research Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. ! he findings. interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank.

Produced at the PPR Dissemination Center
# Central Bank Losses Origins, Conceptual Issues, and Measurement Problems

by Mario 0. Teijeiro

# Table of Contents

|I.|Most Important Sources of Central Bank's Quasi<br>Fiscal Deficits|1|
|---|---|---|
|II.|Deviations of Accounting from Economic Losses|4|
|III.|Summary of Issues|9|
|IV.|Measuring Central Bank'a Financing Needs|15|
|V.|Conclusion|17|
|Appen|dix|18|
This paper attempts to make **a** condensed but still comprehensive review of the issues related to Central Bank's quasi-fiscal deficits. In the first section a taxonomic description of origins of quasi-fiscal deficits is made. In the second section, the relation between economic and accounting losses is explored; potential problems of consoltdation with the non-financial public sector are highlighted; in the third section issues like adjustment for inflation and net lending treatment, which are also relevant to the definition of non financial pubAic sector deficits, are considered. In the last section, alternative ways of calculating the Centra' Bank's quasi fiscal losses are suggested.

# I. Most important sources of Central Bank's quasi fiscal deficits

Under normal conditions Central Banks will be profitable, the reason being that they have access to zero cost financing (namely, the monetary base) and probably some financing at below market interest costs (for example, below market remunerated commercial bank's deposits); while being able to invest these funds at rmarket rates. Moreovt. profits may originate in financial investments funded with its own liquid net worth. In what follows it will be assumed that these sources of cheap financing have been exhausted and therefore on the margin any asset yielding below market rates will originate a loss. While describing sources of Central Bank's losses, a distinction is made between cash flow losses and accruid capital gains/losses. Sources of cash-flow losses The most common source of Central Bank losses is lending to the nonfinancial publiz sector at no or very low interest. In many countries lending to the central government is done at a very low nominal rate by law. These loans may be taken to finance regular (above the line) operations or they may originate in central bank's assumptions of government domestic or foreign
debt. Argentina is a case of legislated forced lending to the government at very low nominal interest; it was originally intended to pass on to the central government the benefits of the zero cost financing through money base issuance; but lending to the government has many times exceeded the monetary base, originating therefore not only a marginal but a total loss to the Central Bank. In other cases. for example Mexico, the interest the government pays to the Central Bank is determined ex-post, once the actual average cost of Central Bank funding is knownl ; in this case the benefits of cheap financing will be fully passed to the government but the Central Bank will incur no losses. Both methodologies deviate from the guidelines provided by the IMF Manual of Government Statistics which recommends charging the government a market rate for the entire debt and later transferring the Central Bank's profits to the government. This recommendation would in principle not change the central government deficit as resulting from the Mexican approach but would improve the account classification: Central Government interest service would fully reflect market rates and Central Bank's profits would be accounted as non-tax revenue.<sup>2</sup>

- l.Lending to the government is assumed to be financed first by the (noninterest bearing) monetary base, and the excess that cannot be funded in this way, is assumed to be funded by remunerated reserve requirements. Therefore the government is charged with a market rate at the margin.

- 2.However, the results arising from these apparently equivalent approaches would not be identical for several reasons: a) Central Bank's profits could be distributed with a lag of one calendar period; b) Central Bank's statutes may prevent a lOOZ distribution of profits; c) in some circumstances not all 10OZ of profits may belong to the central government.
Another major source of losses is subsidized lending; the Central Bank is regularly involved in funding special lines to priority sectors like housing, agriculture, strategic industries, non-traditional exports, etc. In some cases these lines can be made available through the commercial banking system; in other cases however the Central Bank may be directly involved in development lending.

Rescue of troubled financial institutions is another source of cash flow losses either because: a) the troubled institution is granted a rediscount at subsidized rates or b) the Central Bank takes over "bad" (r.oninterest accruing) assets.

Holding of both foreign assets and liabilities may also rciult in cash flow losses if the return on assets is lower than the interest cost on liabilities. There are also circumstances in which a (positive) net foreign asset position is marginally financed through interest bearing domestic liabilities, producing a loss if foreign interest rates are lower than domestic ones.<sup>3</sup> The practice of multiple exchange rates opens the possibility of exchange rate losses (as well as gains). Economic (cash flow) losses in exchange intermediation arises whenever foreign exchange is sold (bought) at prices below (above) the market price.

Finally, the accumulation of past losses (either of a cash flow or of a capital nature) may eventually move the Central Bank bal3nce sheet to a position of negative liquid net worth. The interest bearing financing of such position is frequently another source of cash flow losses.

3.We are ignoring for the time being the existence of foreign and domestic inflation, implicitly comparing real (domestic and foreign) interest rates.
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Sources of capital gains/losses Capital gains/losses are common in Central Bank's activity; among the more frequent ones are the following: Central Bank assumption of private or public debt usually involves an immediate capital loss; that happens for example when an artificial exchange rate is used to assume foreign debt. Arrangements to rescue troubled financial institutions may involve that the Central Bank buys bad assets as if they were good ones. Regular (subsidized or not) rediscount facilities or development lending may be uncollectable from the very beginning or they may become uncollectable over time.

When the Central Bank intervenes in forward exchange markets, granting for example exchange guarantees, capital losses may result. Holdings of foreign assets and liabilities may be denominated in more than one currency; if so, fluctuation of foreign exchange parities may produce capital losses. Finally, capital gains and losses may result from changes in the real exchange rate in the presence of a net foreign asset position (reserves minus foreign liabilities).

# II. Deviations of accounting from economic losses

This section reviews treatments that explain differences between economic and accounting results of Central Banks. In doing so, it is assumed that the desirable benchmark is one in which the income/loss statement reflects all true cash-flow results of the Central Bank, while accrued capital gains and losses are fully reflected in a reserve (net worth) account. This convention would allow consolidation of public sector results, since nonfinancial public sector deficit accounting is done on a cash basis.
-5-

Problems derived from inconsistent accountiri In theory, full consistency between l'entral Bank and non financial public sector accounting should be expected rince all transactions between them should be accounted with similar criteria. However, major discrepancies may exist. In some cases, Central GoverNments delay payment of accrued interest to the Central Bank, therefore reducing its cash domestic interest service; Central Banks may at the same time compute that interest as income on an accrual basis, debiting a special central government account that is not properly consolidated. Another potential source of inconsistency is the use of different exchange rates; while the central government may use a special exchange rate to make foreign payments, the Central Bank may compute the corresponding exchange sale at market prices; again a non-consolidated lending to the central government will explain the difference.4 Another source of consolidation problems is the distribution of Central Bank profits; Central Governments usually record Central Bank dividends as (genuine) non-tax revenue, while Central Banks do not record them as an expense but as a profit distribution item.

# Accounting of exchange rate intervention

The accounting of exchange rate losses is one major source of discrepancy between economic and accounting results. Assuming that in a market of multiple exchange rates we can define which is "the" market rate, there are two basic approaches to follow in a non inflationary context.<sup>5</sup>

- 4.Improper consolidation is facilitated when the financial relations between the Central Bank and the Central Government are channeled through multiple accounts.

- 5.When a regime of multiple exchange rates exists, there will always be a degree of arbitrariness in defining "the" market rate. But what is of the essence is that all transaction results be accounted with reference to a single rate.
One approach would revalue every day the stock of reserves (and liabilities). using the daily market rate; the revaluation would be credited to a reserve account. The exchange losses that would affect the income and loss statement would be calculated by the product between the amount of foreign exchange sold (bought) times the difference between the daily rate and the average price of the exchange sold (bought).

An alternative approach would not make any daily revaluation of the stock of foreign exchange. Instead it may recalculate on a daily .asis what is the historical or accounting cost of the marginal unit of foreign exchange the Central Bank would sell; for that, different criteria would be used (FIFO, LIFO, average price). The Central Bank would generate profits (losses) only when it sells foreign exchango. And the profit will be determined as the difference between the actual average price of the forei,n exchange sold and the historical cost imputed to it.

The first approach accounts capital gains/losses on an accrual basis, but they are not incorporated in the income/loss statement; rather they are part of the net worth position in a special account; only pure intermediation (flow) results in foreign exchange dealings would enter in the income/loss statement. The second approach instead, never computes capital gains or losses on an accrual basis. Capital gains or losses however determine the income statement as they are 'realizedw (foreign exchange held in inventory at a historical cost of acquisition is sold at current prices). The 'realization" of capital gains (arbitrarily) depends upon the cost criteria utilized. The 'realization' is larger if FIFO is used and it is the smailest if LIFO is used.

The second approach is most used. It follows the accounting principle that, while capital gains or losses are part of true income,
prudence advises to reflect them only as they are realized. The meaning of the exchange results derived from the application of this approach can therefore be completely obscure and unrelated to the true economic cash-flow result. The problems of this accounting approach are seriously compounded in an inflationary context, since *nominal" capital gains are potentially much more important than real capital gains. It is even possible that the Central bank can "profit, (in an accounting sense) while selling foreign exchange at a highly subsidized rate, provided inflation was important enough since the moment the unit of currency sold, was bought.

# Accounting of interest on bad assets

When the Central Bank holds bad assets, mar, outcomes are possible. Most likely bad loans will continue to be treated as good ones, recording as income accrued interest that is not received but is capitalized. In this case Central Bank profits (losses) will be overestimated (underestimated). Another approach would be not to accrue interest at all, which would be coherent with the economic cash flow if bad assets were truly uncollectable.

A special case arises when a pri ate financial institution is in trouble. The troubled entity may initially use general rediscount facilities, allowing the central bank to record as income high interest charges and penalties. When a legal agreement is reached to reorganize the financial institution, past exceptional charges and penalties may be waived retrospectively producing a once and for all downward adjustment in the income/loss statement.

# Accounting of capital gains/losses

It was argued at the beginning of this section that, for purposes of more meaningful consolidation with the non financial public sector deficit, the Central Bank's income/loss statement should only reflect true economic -ash results. _ncome/loss statements usually deviate from this benchmark when
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capital gains or losses enter into its determination. Traditional accounting of foreign exchange dealings was mentioned as a case in which (even nominal) 'realized, capital gains or losses may affect income/loss statements. Another relevant case appears when Central Bank lending to the private sector is written off or contingent reserves built against current results.

Impact of inflation on income/loss statements Inflation is another major source of discrepancy between economic and accounting results. Accounting conventions wuuld include in income/loss statements all flow receipts avd payments, but will not include nominal revaluation of assets and liabilities. For example, a domestic liability whose interest service rise with inflation will increase accounting losses by the full extent of its nominal interest service while a foreign liability would increase accounting losses only by the extent of the foreign exchange interest service; the devaluation impact on the principal, which is conceptually similar to the inflationary component of a domestic interest service, will be excluded. A symmetrical argument applies to foreign assets vis-a-vis domestic ones. Finally, a similar argument is applicable when a domestic financial asset (liability) is balanced with liquid net worth (negative net worth, usually "other assets net"). While domestic assets increase accounting income by the full extent of the nominal interest, the liquid net worth that backs those assets does not z:iginate any accounting cost. Accounting profits (losses) therefore include the inflationary component of interest income.(payments)

# Other issues

To bring full consistency between accounting of Central Bank losses and non-financial public sector deficits, it must be taken into account that public sector deficits are intended to measure financing needs rather than economic results. Consequently, investment expenditure is considered as
**-9-**

deficit spending while amortization of fixed assets is excluded. Central Bank's income/loss statements, to the contrary, include amortization of fixed **ass-ts and** exclude new gross investments. Moreover, development lending is considered as deficit determining when it is done by the non-financial public sector; Central Bank accounts however would treat such lending initially as an asset rather than as an expense; write offs may follow later.

# III. Summary of issues

After this taxonomic review, it is possible to make a more conceptual classification of sources of problems in Central Banks' income/loss accounting. Corrections to traditional accounting may be necessary because ofr:

- a) Problems originating in improper consolidation or asymmetrical treatment of transections between the Central Bank and the non financial public sector.

- b) Different nature of fiscal deficit measures and income/loss statements; while the first aims at obtaining a measure of financing needs, the second one is supposed to be a measure of income. This difference shows up particularly in the treatment of capital gains and (net) development lending to the private sector.

- c) Distortions introduced by inflation.

A more conceptual discussion of some of these issues follows. The underlying position of this paper is that meaningful consolidation of deficits requires full consistency of treatment; that such consistency should be achieved adjusting the Central Bank's results for what is necessary to become a measure of financing needs; and finally, that distortions originating in inflation should be dealt with.
- 10

_ The treatment of capital gains Should an accrued capital loss (for example originating in an exchange rate guarantee not mature yet) be treated as a loss of the Central Bank? If we stick to the idea that the deficit should be a measure of financing needs, then the answer is no. Should the same capital loss be treated as a deficit determining expenditure when it is realized (the contract matures and an exchange differential has to be paid). The answer now seems to be yes, as a financing need is ^reated, but a strong case can be made to exclude even this realized loss. The proper analogy is the treatment of amortization payments in the non-financial public sector; not all financing needs are part of the deficit: amortization payments are excluded even when they have to be financed; the reason for their exclusion is that bondholders are expected to reinvest those funds in the capital market and therefore amortization payments are not supposed to create a new pressure on capital markets (and interest rates). So the generation of a financing need is a necessary condition for an expense to be considered as deficit determining but it is not sufficient; a presumption that the expense will not be reinvested in capital markets but rather spent is also required. Amortization payments are always assumed to be reinvested, even when they involve a capital loss/gain; for example, a large (real) devaluation may originate a capital loss when the government owes foreign debt; such capital lcss is realized when the debt is amortized; however, no part of the amortization service is computed above the line as a capital loss. It is not clear whether this treatment is correct or not; most likely, what is more appropriate would depend on cases and circumstances; what is argued however is that if realized capital losses are not deficit determining for the non financial public sector, they cannot be treated as deficit determining when the Central Bank is involved.
> - 11 -

This argument supports the idea that adjustment of Central Banks' incomelloss statements should aim at eliminating all items that involve capital gains or losses. There are circumstances however in which capital gains and losses may be quite important and relevant for private behavior, in which case an analysis of the evolution of the inflation adjusted financial net worth of the entire public sector may become a necessary complement. The treatment of net lending Much controversy still exists regarding proper treatment of development lending to the private sector. The argument in favor of including it as a deficit determining expenditure is due to the fact that it has to be financed. As we argued before, this condition is necessary but not sufficient; it can also be argued that net or development lending satisfies part of the private sector demand for credit that otherwise would have put pressure on capital markets. This argument is yet not conclusive, since it will not hold when development lending finances spending that would not have been made without government financing. This is likely to be the case when development lending is highly subsidized and it is tied to a particular investment. The more subsidized and the more project specific, the stronger the case for including (net) development lending above the line.

The nature of development lending can differ significantly across countries and circumstances; there is therefore no single answer to the net lending controversy. Moreover there are some practical problems related to this issue. Development lending may also be channeled through other public financial institutions whose results may not be consolidated with the nonfinancial public sector and the Central Bank; shuffling around net lending will jeopardize any meaningful interpretation of the evolution of fiscal deficits over time. Another source of problems for deficit interpretation arises when the public sector influences private decisions not only through
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lending and borrowing, but also through granting guarantees and **subsidiuing** project speclflc private borrowing. While the formor would be treated **as** deficit spending, the second wouldn't; **a** change **in** the form in whLch the government supports private investment will jeopardize any Lnterpretation of fiscal deficits that included net lending above the line. What is recommended then is to rely simultaneously on two deficit definitions. One is supr^sed to exclude development lending to the private sector from expenditures, leaving only cashed interest income **an** genuine revenue. To adjust the Central Bank's income and lose statement to this approach will imply elLminating al) non cash (capitalized) interest income, and any write offs or contingent reserves originating in bad loans to the private sector. The second definition will include net lending **as** deficit spending. To move to this second definition it will suffice to add the difference between new lending and amortization and non-cashed interest income on lending to the private sector. The treatment of inflation Whether inflation adjusted or non-adjusted public sector deficits are a better measure of fiscal pressure has been a largely debated issue. The position of this paper is that having both measures will provide more information than any of the two alone and therefore both measures should be attained. The appendix elaborates on the adjustments necessary to adjust Central Banks' results for inflation. In summary the required adjustment me is A . (MB -NCPS)r - (MB + DL - CPS)F

# where A - inflationary adjustment MB - monetary base

NCPS - net credit to the private sector
# a 13 -

# DL * domestic interest bearing liabilities vith the prLvate

sector

# CPS * domestic interest bearing credit to the private sector

Conceptually, this formula involves two element; MB3.1, which is the accrued inflation taxi and (DL - CPS)r, which is equivalen **t** o the inflationary component of (net) domestic interest payments. Sven after accepting that inflation adjustment is meaningful and necessary, a controversy has developed whether inflation adjustment should be limLted to correct for the inflationary component of domestic interest or whether it should go one **step** further to incorporate the (accrued) inflation tax **as** genuine revenue above the line.

The consequences of considering _MB.1_ **as** genuine income can be illustrated assuming that: a) the non-financial public sector is in equilibrium; b) the only asset of the central bank is non-interest bearing credit to the government; c) that its only liability is the monetary base and d) that inflation reaches 1002 but that the demonetization process keeps the monetary base constant at its original nominal lovel. Under this set of assumptions, there are no flow results in the Central Bank, since neither assets nor liabilities yield any nominal interest. There are also no changes in assets and liabilities, even when inflation is supposed to be lOOZ. Application of the previous formula in these circumstances yields a Central Bank surplus equivalen **t** o 100 of the monetary base that has no financial counterpart. We'll be in the presence of a pure capital gain vis a vie the private sector that would be accounted as cashed income. But the "cashed in" inflation tax cannot be larger than the actual nominal increase of the money base (which was assumed to be zero). A similar case exists when nominal interest income or payments are negativo in real terms; in this case, the
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inflationary component of interest income or payments cannot be more than the actual interest income or payments; using inflation (I) **as** the adjustment factor would incorporate in the estimation of Central Banks results a capital gain element without a financing counterpart. A deficit measure that is intended to be a financing needs concept should not incorporate items that have no financing counterpart.

At this stage two options are left open; if the correction is limited to the inflationary component of (actual) interest income or payments, the applicable formula is 6 A - (DL - CPS )r for r < i or A - (DL - CPS)i for r > i Alternatively, if the inflation tax were to be treated as genuine revenue, the 'cashed in inflation tax should be incorporated by adding just the actual increase in the monetary base (AI).

The position of this paper is that inflation adjustment should be limited to the inflationary component of (actual) interest income or payments, because fiscal deficits are supposed to explain the government contribution to inflation, among other consequences. Treating the inflation tax as genuine revenue would on the contrary assume inflation away from public sector influence.

- 6.A subtle, but potentially important issue arises if while the Central Bank's liabilities yield negative interest in real terms, the non-financial public sector domestic debt yields positive interest rates in real terms; in these circumstances if inflation adjustment in Central Bank and government accounts is made independently, the inflation adjustment will be underestimated. Prior consolidation of domestic interest payments seems preferable,
- 15 -

# IV. Measuring Central Bank's financing needs

The previous discussion leads to a summary of adjustments required to arrive at a deficit definition of Central Bank's activities compatible with a financing needs concept, starting from an accounting income/loss statement; adjustments should be made as:

- a) To eliminate those items related to development lending to the private sector or bad loans absorbed from rescue of financial institutions that may mean either capitalized interest income, write-offs or contingent reserve building. In principle only cashed interest income should remain. However, to obtain a second deficit definition that includes net lending as deficit spending, all new lending should be included as expenditure; and amortization as well as capitalized interest related to previous development lending should be included as income.

- b) Eliminate amortization allowances; instead gross investment in fixed assets should be incorporated as an expense.

- c) Eliminate any item that represents the impact of revaluation of any asset or liability; or a capital loss vis a vis the private sector originating in exchange guarantees or assumption of liabilities.

- d) Correct any improper consolidation of transactions between the Central Bank and the non financial public sector; furthermore any dividend distribution to the Central Government should be included as an expenditure.

- e) Correct the foreign exchange intermediation item as to only reflect pure intermediation results.
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- f) The results obtained muit finally be adjusted for inflation aa explained in the appendix.

A shortcut of last resort There are circumstances however in which the described adjustments may not be feasible. A lot of additional information is required but may not be available; it is usual for example to find global accounts that collect results of a very different nature for which disaggregated information is not available or it may be very difficult to prepare.

When that is the case, an alternative option is to estimate the Central Bank's results through changes in foreign and domestic assets and liabilities, using

- a) the flow change in foreign assets and liabilities as prepared to produce the balance of payments statistics, converted to the domestic currency. When changes in the exchange rate are important enough, monthly data has to be used to avoid major discrepancies.

- b) the nominal increase in net domestic indebtedness as results from comparing the initial and final balance sheet of the Central Bank. Care has to be taken that the increase in credit to the government corresponds to what the government records as financing from the Central Bank. Regarding credit to the private sector, all increases in lending that represent a mere capitalization of interest should be excluded; when it is the case to obtain a deficit definition that includes net lending as deficit spending, any increase in lending to the private sector has to be excluded.
- 17 -

An item by item correction of accounting income and loss statements is preferable, since it allows for an item by item consolidation with n^n financial public sector deficits which is required for a meaningful analysis of the overall deficit composition. The suggested shortcut is therefore appropriate as a consistency check of above the line estimates or as a final global estimate of the Central Bank's results when above the line corrections are not feasible.

# V. Conclusion

This paper has examined the complex issues involved in the analysis of central bank losses. These losses usually originate when the central bank takes on other functions besides its normal role, such as subsidized lending to priority sectors, rescue of troubled financial institutions, or the takeover of private or public debt. However, the losses are difficult to measure because of inconsistencies between central bank and nonfinancial public sector accounting. Issues that cause difficulty include the central bank treatment of nominal capital gains on foreign exchange dealings, accounting of loans, and adjusting operating results for the effect of inflation. We recommend a methodology for dealing with these problems. However, in many cases data problems may force the shortcut of calculating the central bank deficit from the changes in its assets and liabilities.