Government Cash Management Framework and Associated Banking

Arrangements

Sailendra Pattanayak, FAD

Overview of presentation

Definitions of Cash Management Outline of a modern cash management

framework and its objectives Cash rationing vs. cash management Benefits of an efficient cash management system Prerequisites for effective cash management

Banking and payment arrangements Cash forecasting Institutional framework

Managing cash balances-the basic requirements Coordination between government cash

managers, debt managers and Central Bank

Cash Management Definition

“Having theright moneyin the right placeat the right timeto meet government’s obligations in the most cost-effective way”

“The strategy and associated processes for managing cost-effectively the government’s short-term cash flows and cash balances, both within government, and between government and other sectors”

Ian Storkey (2003)

Mike Williams (2004)

Cash management framework

Debt Mgmt.

Revenues Payments

Cash manager

Monetary policy

Spending units

Short-term Investments

Short-termBorrowings

Treasury system

Central bank

Financial markets

dev.

Banks

Policy Interaction

Cash Balance (TSA)

Tax etc inflows

Expenditure, other outflows

1. Budget Executi

on

2. Targetin

g Balances

Debt redemptions, less capital receipts

Debt issuance

6. Debt Management Policy (and

Govt Balance Sheet)

4. Cash Flow

Management in Money

Market

3. Monetary

Policy

5. Market Developm

ent

Cash Flow

Forecasting

Two Key Policy Objectives

Fiscal To ensure that line

ministries or departments and government agencies manage their cash balances effectively so that the government does not have “surplus” cash on hand

Monetary To neutralize the

impact on the domestic banking sector of the government’s cash flows, ensuring that: there are no large and

unpredictable changes in liquidity in the banking system

monetary policy is not undermined

Objectives of Cash Management

• Economising on cash within government– saving costs and reducing risk– to borrow only when needed

• Managing efficiently the government’s aggregate short-term cash flows– both cash deficits and cash surpluses– maximize returns on idle cash

• In such as way as to also benefit– debt management – monetary policy– financial markets (market liquidity and infrastructure)

Other Objectives: must be subject to overriding objective

Overriding Objective: Ensuring cash is available to meet Government

obligations/commitments

Budget Control v Cash Management

Budget & Financial Control

Revenue and expenditure budgeting

Control against budget appropriation and warrants

Comptrollership or financial control over payments and receipts

Government accounting Financial reporting

--IFMIS--

Cash Balance Management Cash flow forecasting Maintenance of bank

accounts and relationships Efficient and timely

processing of payments and receipts

Management of government float and working capital

Minimization of transaction and interest costs

Main building blocks for cash management

Control over receipts and expenditures.

Forecasting cash requirements.

Managing government cash balances –surpluses/deficits.

Cash rationing(sometimes called cash budgeting)

Last resort liquidity management Limits ability to commit until sufficient funds

are available (delays implementation) No forward cash planning Disruptive to programs, vendors High corruption potential Likely to undermine budget priorities

Benefits of efficient cash management

Ensure obligations can be met as they fall due

Minimize idle balances and associated costs Conduct cost-effective borrowing operations

Contributes to development of short-term money markets

Reduce liquidity impact from budget deficits/surpluses

Separation of cash management from monetary policy

Enhanced transparency of government cash flows

Features of Cash Management: Advanced

Countries Fundamental features centralisation of government cash balances and establishment of a

Treasury Single Account (TSA) structure clear understandings on the coverage of the cash planning

framework ability to make accurate projections of short-term cash inflows and

outflows an adequate transaction processing and accounting framework timely information sharing between the central Treasury, revenue-

collecting agencies, spending ministries and/or Treasury branch offices

appropriate institutional arrangements and responsibilities Desirable features

utilization of modern banking, payment and settlement systems use of short-term financial market instruments for cash management integration of debt and cash management

Common issues in developing countries/LICs

Budget execution focused on compliance with annual budget law rather than efficiency of resources.

Fragmented treasury system with many separate bank accounts-both in commercial banks and Central Bank. Daily balances in all government accounts are

unknown Accumulation of expenditure arrears Cash rationing is the main expenditure control system-

creates uncertainty of resource availability for BI’s. Unnecessary borrowing occurs - Spending units not

concerned with borrowing costs. Cash flow forecasts are not prepared Daily cash needs met by the central bank-lack of

transparency in borrowing from Central Bank. Liquidity management problems (due to unexpected and

volatile government cash flows). Lack of personnel with skills for modern cash

management and understanding of importance of cash planning

Prerequisites for cash management

Awareness within the government of the opportunity cost of money

Consolidation of government cash balances in a Treasury Single Account (TSA) Fund and accounting controls through

treasury ledger system Developed expenditure and commitment

controls Well developed cash planning and

forecasting function Efficient payment system to sustain cash

balances at optimum level Such as centralized payments processing

Prerequisites for cash management – contd.

Realistic budget Adequate accounting framework

Tailor-made cash forecasting modules can be part of IFMIS, whose accounting module can provide daily data on inflows and outflows.

Access to financial markets and use of modern instruments for cash management

Cash management separated from, but linked to, monetary policy

Integration of cash and debt management

Single Treasury Account All revenues and expenditures go through

TSA The consolidation of government cash

resources through a TSA should be comprehensive

Budget institutions (BI) do not have separate bank accounts. BIs’ transactions managed through the

treasury ledger system Where transactional accounts are necessary,

balances are swept up into TSA periodically (preferably daily)

All monies seen as fungible to prevent inefficient use of public cash resources.

The cash balance in the TSA is maintained at a level sufficient to meet daily operational requirements of the government

Typical Payment System with Many Bank Accounts

SpendingMinistry

Ban

k A

ccou

nts

SU

SU

SU

SU

SU

SU

SU

SU

MoF/Treasury

SpendingMinistry

SpendingMinistry

SU = Spending Units

SU

Banking Arrangements under TSA Regime

Debt administration

Subsidies

Local governments

Suppliers

Wage earners

Daily settlement with TSA

Current / deposit bank account(s) of the Treasury (TSA)

Transit / zero-balance bank accounts of the

Treasury/BI

Tax payersGovernment Borrowings

Safe haven for government cash deposit.

Aids the efficient management of liquidity in the economy.

Cost effective banking arrangements.

No better alternative for economies in transition/LICs

Reasons For TSA To Reside At Central Bank

Management of Receipts through TSA

System Collection through commercial banks Alternatively through treasury system

Impose penalties on late remittances Framework agreements between the

MoF/Treasury and agency banks Standardized services and transparent fees Penalties for delays and under-performance Monitoring

Detailed information available to MoF and agencies

Management of Payments through TSA

System Agencies submit payment requests Covered from TSA after control and

verification Clarify roles and responsibilities between

ministries, agencies, banks, central bank and MoF

Maximize use of direct bank transfers Use checks, credit and debit cards when

efficient Minimize imprest accounts and cash

payments Ensure that payments are made on due date Eliminate layered cash flows

TSA interface with transaction processing and

accounting systems TSA with centralized payment and accounting controls Payment requests are prepared by individual budget

agencies and sent to a centralized Treasury for payment

Treasury manages the float of outstanding invoices Might lead to inefficiencies and high transaction

costs (particularly with manual processing) TSA with deconcentrated payment and

accounting controls Individual budget agencies process and make

payments directly to suppliers (and account for these transactions)

MoF sets the cash disbursement limits (monthly or quarterly)

Requirements for an efficient TSA

Political support is essential (such as for closure of agency a/cs)

Legal and regulatory requirements E.g. authority to open bank accounts should vest with the

MoF/Treasury Technological requirements

Adequate transaction clearing and inter-bank settlement systems

Development of an RTGS at the CB for high value transactions Major commercial banks and treasury connected to the RTGS

Framework agreements between the Treasury, TSA Bank (Central Bank) and Banks providing retail banking services

Revisiting the chart of accounts for coverage of non-bank expenditure transactions

Capacity development of TSA users

Management of Cash Balances of TSA

Define separate pools of funds within TSA system, for instance: Liquidity, Deposit and Investment

Differentiation based on liquidity needs, level of uncertainty, costs of alternative sources, etc.

Select instruments that match expected cash needs (i.e. manage both cash surpluses and deficits). T-Bills, Repo’s/reverse repo’s, Short-term facilities with

commercial banks, Deposits-term and overnight (with CB and with commercial banks)

Impact on domestic financial markets will be relevant (large stocks or flows) Coordination with monetary authorities essential

Key elements of a Cash Management Framework

Annual plan, 3-month rolling projections, monthly operational plan, and frequent forecasts A good cash forecasting system should

provide for daily forecasts that are updated frequently

A team led by official with authority to collect information from various departments

Plan prepared by competent staff and based on a realistic budget, following clear funds release procedures and budget execution rules

Cash Balance Forecasting

Line MinistriesAdvise on

Expected and Actual Flows

Historical Patterns,Models etc

Budget, Allotment,

Cash Ceilings

Banking Data

Debt Issuance,

Redemption Payments

Aggregate Revenue &

Expenditure Forecasts

Cash Balance

Forecasts

Budget & Financial Control

Cash Balance Management

Key RelationshipsMinistry of Finance

Overseeing tax and spending

Forecasting fiscal position and daily cash flows

Sets debt and cash management policy

Debt and cash manager

Managing daily cash flows

Borrowing to meet short/medium term needs

Investing surplus assets

Encouraging strong secondary market in government securities

Central Bank

Government’s banker

Manages monetary policy

Cash Management Unit - Functions

Coordinate submission of monthly cash flow projections by budget institutions (spending units and revenue agencies)

Prepare (consolidated) cash flow projections on a rolling basis

Monitor cash inflow/ outflow outturns and identify seasonal/monthly patterns

Monitor major receipts and payments and the daily cash position, including government bank balances

Prepare and analyse revenue / expenditure reports and update cash projections as appropriate

Make proposals to Exchequer / Liquidity Committee for adjusting cash flows as the need arises

Keep the central bank fully informed of projected cash flows

Core elements of cash planning

Comprehensive information network Regular, reliable estimates of future cash flows

Determine and implement strategy for matching cash flows with fiscal operations plan, e.g. delay commitments speed up revenue mobilization borrow from the market (short or long-term) invest surplus balances optimally (short or

long-term) Review and update financial plans

refine forecasting techniques/set performance targets

Cash Forecast and Balances

Revenues

1 2 3 4 5 6 7 8 9 10 11 12

Spending

Central Forecasts

Agency Financial Plans/Allotments

Balance

Seasonalrevenue

fluctuation, spending patterns

Structuralrevenue

fluctuation, spending patterns

Arrears

Over-commmitment

Random revenue shocks

Annual predictable pattern

Corrective Measures:Smoothing cash flows

Cash Balance

Seasonal:1. Keep allotments or

commitments below revenue, build balances

2. Short-term debt3. Limit cash payments to

cash balances (arrears)4. Accelerate receivables

collection

Structural:1. Budget retrenchment2. Long-term debt3. Allow commitment/spending

only if revenues actually received

4. Contingent liability management

5. Comprehensiveness6. Commitment controls

Coordination between cash managers and debt

managers Government cash management and debt management objectives may potentially conflict Major preoccupation of cash managers is to

maximize returns on idle cash balances and minimize borrowing costs on a daily basis (active short-term operations in financial markets)

Government debt managers want to see that government borrowing plans are orderly

Need for a very close coordination and exchange of information

Have been situations in some countries where lack of communication between cash and debt units has led to over/under issuance of debt in times of surplus/deficit.

Coordination between government cash manager

and Central Bank The cash manager/government is often the largest transactor in the domestic banking market and significantly affects the operation of monetary policy

Advice on this issue needs to flow both ways Aggregate government cash forecasts are needed

by the Central Bank to determine their effect on banking sector liquidity and inflation targeting

The Central Bank needs to tell the cash manger about the state of system liquidity to inform decisions regarding planned cash investments/borrowings