government cash management framework and associated banking arrangements sailendra pattanayak, fad
TRANSCRIPT
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