Government Cash Management Framework and Associated Banking Arrangements

1. Government Cash Management Framework and Associated Banking Arrangements Sailendra Pattanayak, FAD

2. 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

3. 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)

4. Cash management framework Spending units Banks Payments Revenues Debt Mgmt. Treasury system Central bank Monetary policy Cash manager Financial markets dev. Short-term Borrowings Short-term Investments

5. Policy Interaction 3. Monetary Policy Cash Flow Forecasting 2. Targeting Balances 4. Cash Flow Management in Money Market 5. Market Development 1. Budget Execution Debt redemptions, less capital receipts Expenditure, other outflows Cash Balance (TSA) 6. Debt Management Policy (and Govt Balance Sheet) Debt issuance Tax etc inflows

6. 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

7. Objectives of Cash Management Overriding Objective: Ensuring cash is available to meet Government obligations/commitments Other Objectives: must be subject to overriding objective • 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)

8. 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

9. Main building blocks for cash management • Control over receipts and expenditures. • Forecasting cash requirements. • Managing government cash balances –surpluses/deficits.

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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 anduse of modern instruments for cash management • Cash management separated from, but linked to, monetary policy • Integration of cash and debt management

16. 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

17. Typical Payment System with Many Bank Accounts SU Spending Ministry Bank Accounts SU SU MoF/Treasury SU Spending Ministry SU SU SU Spending Ministry SU SU SU = Spending Units

18. Transit / zero-balance bank accounts of the Treasury/BI Current / deposit bank account(s) of the Treasury (TSA) Daily settlement with TSA Tax payers Government Borrowings Banking Arrangements under TSA Regime    Debt administration   Subsidies  Local governments   Suppliers  Wage earners

19. Reasons For TSA To Reside At Central Bank • 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

20. 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

21. 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

22. 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)

23. 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

24. 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

25. 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

26. Cash Balance Forecasting Historical Patterns, Models etc Budget, Allotment, Cash Ceilings Line Ministries Advise on Expected and Actual Flows Budget & Financial Control Aggregate Revenue & Expenditure Forecasts Banking Data Debt Issuance, Redemption Payments Cash Balance Management Cash Balance Forecasts

27. Key Relationships Ministry 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

28. 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

29. 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

30. Cash Forecast and Balances 1 2 3 4 5 6 7 8 9 10 11 12 Revenues Central Forecasts Spending Agency Financial Plans/Allotments Balance Seasonal revenue fluctuation, spending patterns Structural revenue fluctuation, spending patterns Arrears Over-commmitment Random revenue shocks Annual predictable pattern

31. Corrective Measures:Smoothing cash flows Cash Balance • Structural: • Budget retrenchment • Long-term debt • Allow commitment/spending only if revenues actually received • Contingent liability management • Comprehensiveness • Commitment controls • Seasonal: • Keep allotments or commitments below revenue, build balances • Short-term debt • Limit cash payments to cash balances (arrears) • Accelerate receivables collection

32. Coordination betweencash 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.

33. 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

34. Thank you