ΙΜF update

 

Dear maria, We just published a new blog—please find the full text below.  Making Electronic Money Safer in the Digital Age (LJUBAPHOTO/ISTOCK BY GETTY IMAGES) By José Garrido and Jan Nolte  As e-money use grows, regulators need to focus on consumer protection and the integrity of the overall payments system. Imagine you go to pay for your morning coffee and your stored-value card returns an error message, or the wallet in the payments app on your phone isn’t opening because the company providing the payment service has gone bankrupt. Worse, what if you live in a rural area and the e-money service provided through your mobile phone was the only access you have to the financial system? Or your government now relies on the e-money system to transfer benefits or collect taxes on a large scale? Digital forms of money—including central bank digital currencies, privately issued stable coins, and e-money—continue to evolve and find new ways to become more integral in people’s day-to-day lives. In essence e-money is a digital representation of fiat currency guaranteed by its issuer. Customers exchange regular money into e-money, which they can use to make payments through an app on their cellphone to individuals and businesses alike with ease and immediate effect. Compared to other recently developed forms of digital money, such as stablecoins, e-money has been around for some time and its customer base continues to rapidly increase. Unlike most privately issued stablecoins, e-money operates in a regulated framework. For regulators and supervisors charged with protecting consumers and ensuring a level playing field for all financial intermediaries, keeping pace with new developments can be challenging. Regulators and supervisors need to consider how to best protect customers from the failure of (potentially systemic) e-money issuers, including preventing the loss of their funds. A new IMF staff paper considers these and other scenarios that may put consumers and—potentially—entire e-money systems at risk. We examine how regulatory practices are evolving on a country-by-country basis and put forward a set of policy recommendations on regulating e-money issuers and safeguarding their customers’ funds. E-money offers payment solutions for the unbanked We can think of e-money as an electronic store of monetary value on a prepaid card or an electronic device, often a mobile phone, that may be widely used for making payments. The stored value also represents an enforceable claim against the e-money issuer, by which its customers can demand at any time to be repaid the funds they used to purchase e-money. E-money is already a vital part of daily life for billions of people, especially in many developing countries, where many lack access to the banking system. As shown in the chart below, a high percentage of the population across a number of East African countries now use e-money, making it important from a macro-financial perspective. It is estimated, for instance, that two-thirds of the combined adult population of Kenya (where M-PESA has reached a high degree of market penetration), Rwanda, Tanzania, and Uganda use e‑money regularly. Many of these people do not have bank accounts or other access to the formal financial system, so they store significant shares of their disposable funds in e‑money wallets and access them using mobile phones or computers. Protecting financial systems and consumers alike With the growing importance of e-money issuers, a comprehensive, robust framework for regulation and safeguarding customer funds is critical. Issuers should be subject to proportionate prudential regulatory requirements. For example, they should establish operational risk governance and management systems to identify and limit risks. They should also be prohibited from retail lending. And, in order to protect consumers who may be less sophisticated than bank customers, rules should be put in place governing how issuers disclose fees, protect consumer data, and handle complaints. One of the most important regulatory measures identified in our paper is that in order to protect customers’ money, all e-money issuers need to implement mechanisms to safekeep and segregate those funds. Issuers need to maintain a secure pool of liquid funds that is equivalent to the amounts of customers’ balances, and which is kept separate from the issuer’s own funds. This is a fundamental safeguard against misuse of the funds and should allow, in principle, for recovery of those funds in the event of bankruptcy of an issuer. Keeping the customers’ funds segregated, however, does not resolve all the problems if a potentially systemic issuer were to fail. In the absence of specific bankruptcy rules, segregation by itself does not ensure that the customers would get quick access to their funds, and this discontinuity may create severe problems if the issuer plays a potentially systemic role in the payments system and in day-to-day transactions of the country. Potentially systemic, potentially problematic Regulators and supervisors may need to significantly strengthen prudential oversight and user-protection arrangements, depending on the business model and size of the e-money system. In countries with a potentially systemic e-money issuer or sector, the protection in place should seek to preserve customers’ funds and ensure continuity of critical payment services. While some countries have sought to extend deposit insurance to e-money, further efforts may be needed to operationalize such protection and ensure that it would work effectively in practice. In particular, customers should not lose access to their funds and, therefore, services should be restorable or replaceable quickly, preferably within hours. But putting e‑money deposit insurance into practice remains untested so far—at least in practical terms. The costs and benefits of extending deposit insurance coverage effectively to e-money should be carefully considered. As with many issues in the fintech sphere, best practices are still taking shape, making policy decisions challenging. However, the pandemic has only increased the importance of prudent e-money frameworks, as the number of online transactions and e-money’s growth has accelerated. For regulators and supervisors, the time for action is now. ***** Related links: Global Crypto Regulation Should be Comprehensive, Consistent, and Coordinated Public and Private Money Can Coexist in the Digital Age Legally Speaking, is Digital Money Really Money? You’ve Got Money: Mobile Payments Help People During the Pandemic Glenn Gottselig Managing Editor IMF Blog ggottselig@IMF.org

Well-crafted tax reforms can support growth while helping countries maintain fiscal sustainability

Latin America and the Caribbean How Taxes Can Support Growth and Reduce Inequality in Latin America and the Caribbean Photo: aldomurillo/iStock by Getty Images By Santiago Acosta Ormaechea and Samuel Pienknagura Loor Western Hemisphere Department   Public debt ratios in Latin America and the Caribbean (LAC) increased by about 10 percentage points of GDP in 2020. With debt service costs rising, countries in the region are under pressure to cut public spending and/or raise taxes, even in the face of widespread needs to respond to the pandemic. Our latest Regional Economic Outlook shows that well-crafted tax reforms can support growth while helping countries maintain fiscal sustainability. Importantly, these reforms can help reduce income inequality—an important objective in one of the most unequal regions in the world. Tax structures in Latin America Most LAC countries have a large tax collection gap relative to their potential, which can be explained only partially by the region’s level of development. LAC countries raise 13 percentage points of GDP less in tax revenue than the average OECD country, a gap that remains even after controlling for GDP per capita levels—which partly corrects for differences in informality, tax design and enforcement capacity. Since several LAC countries are, or are likely to become OECD members, OECD country averages are a natural benchmark.  There are also important differences in how LAC countries tax. The main tax revenue source in LAC is the value-added tax (VAT). Its collection tends to be broadly aligned with the region’s level of development and is comparable to that of OECD countries (except for Mexico), but there is still room for improvement.  The share of corporate income tax (CIT) revenues in the region, however, is higher than in OECD countries and above what income levels would predict. Relying largely on corporate taxes negatively affects growth by discouraging investment. Conversely, the share of personal income tax (PIT) revenues in the region is low (but with promising results from reforms in Mexico and Uruguay that other countries could follow).  When designed right, raising revenue through the PIT has a similar impact on growth as with the VAT (as seen in the OECD) and could help improve equity. More use of personal income taxes, combined with credits to incentivize labor force participation, and possibly fewer corporate taxes, could boost growth. A better way to tax Our analysis points to specific reforms that could help LAC countries tackle their fiscal, growth, and equity challenges. On the PIT front, there are clear design flaws in the region—low statutory rates, excessively high income thresholds, and widespread and regressive deductions (which tend to benefit the rich). These erode the tax base and worsen income distribution. A worker in one of the five largest LAC economies (LA5)—Brazil, Chile, Colombia, Mexico and Peru— would have to earn 10 times the country’s GDP per capita to pay the maximum statutory rate for personal income taxes. By comparison, that same worker living in an OECD country needs to earn an income of just 3.5 times the country’s GDP per capita to face the maximum PIT rate, which is on average significantly higher than that of LAC countries. Reducing PIT deductions in LA5 countries would simplify the system, increase revenue, and make taxation more progressive—so an individual who earns more also pays more taxes—without levying additional taxes on low- or middle-income formal workers. Leaving other parameters unchanged, if personal income tax deductions were eliminated (stripping the PIT system down to its statutory rates), the average LA5 country would see a twofold increase in PIT revenues, by raising the effective rate faced by the top 10 percent of wage earners. Importantly, this would also increase equity, since deductions disproportionally benefit rich households in LAC. Providing well-targeted incentives to low-wage earners, through for example an earned-income tax credit (EITC), could encourage their participation in the labor market and help reduce the gender gap. It could also incentivize labor formalization by partially compensating social security contributions, helping improve revenue collection. Reforms to the CIT could also be implemented. Aligning rates could help attract investment and alleviate profit shifting, while reducing tax benefits and deductions could level the playing field. Ongoing global corporate income tax reforms provide an important opportunity to revisit corporate taxation in LAC. To address equity concerns, LAC countries could strengthen the VAT by tackling reduced rates and exemptions combined with well-targeted transfers that encourage the use of electronic payment methods (e.g. the social card program in Uruguay). The digital economy—further expanded due to the pandemic—should be taxed with the VAT the same way as other sectors in the economy to avoid tax base erosion. Public support and timing are key Public support is essential when implementing tax reforms. In a region where the perception and confidence that taxes are well spent is low, tax reforms would need to be accompanied with improvements in the quality and composition of public expenditure and in the overall fairness of fiscal policy. Timing is also key. Until the pandemic is brought under control, it is important to continue supporting livelihoods to secure a robust recovery. Countries with tighter fiscal space may need to reform their tax systems earlier, which may help boost confidence in their medium-term fiscal frameworks. ***** Santiago Acosta Ormaechea is a Senior Economist in the IMF Western Hemisphere Department Samuel Pienknagura Loor is an Economist in the IMF Western Hemisphere Department