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

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Presentation on theme: "Government Cash Management Framework and Associated Banking Arrangements Sailendra Pattanayak, FAD."— Presentation transcript:

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

2 Overview of presentation Definitions of Cash Management Definitions of Cash Management Outline of a modern cash management framework and its objectives Outline of a modern cash management framework and its objectives Cash rationing vs. cash management Cash rationing vs. cash management Benefits of an efficient cash management system Benefits of an efficient cash management system Prerequisites for effective cash management Prerequisites for effective cash management Banking and payment arrangements Banking and payment arrangements Cash forecasting Cash forecasting Institutional framework Institutional framework Managing cash balances-the basic requirements Managing cash balances-the basic requirements Coordination between government cash managers, debt managers and Central Bank Coordination between government cash managers, debt managers and Central Bank

3 Cash Management Definition “Having the right money in the right place at the right time to meet government’s obligations in the most cost- effective way” “Having the right money in the right place at the right time to 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” “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 Debt Mgmt. Revenues Payments Cash manager Monetary policy Spending units Short-term Investments Short-term Borrowings Treasury system Central bank Financial markets dev. Banks

5 Policy Interaction Cash Balance (TSA) Tax etc inflows Expenditure, other outflows 1. Budget Execution 2. Targeting 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 Development Cash Flow Forecasting

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 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 handMonetary To neutralize the impact on the domestic banking sector of the government’s cash flows, ensuring that: 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 there are no large and unpredictable changes in liquidity in the banking system monetary policy is not undermined monetary policy is not undermined

7 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

8 Budget Control v Cash Management Budget & Financial Control Revenue and expenditure budgeting Revenue and expenditure budgeting Control against budget appropriation and warrants Control against budget appropriation and warrants Comptrollership or financial control over payments and receipts Comptrollership or financial control over payments and receipts Government accounting Government accounting Financial reporting Financial reporting--IFMIS-- Cash Balance Management Cash flow forecasting Cash flow forecasting Maintenance of bank accounts and relationships Maintenance of bank accounts and relationships Efficient and timely processing of payments and receipts Efficient and timely processing of payments and receipts Management of government float and working capital Management of government float and working capital Minimization of transaction and interest costs Minimization of transaction and interest costs

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

10 Cash rationing (sometimes called cash budgeting) Last resort liquidity management Last resort liquidity management Limits ability to commit until sufficient funds are available (delays implementation) Limits ability to commit until sufficient funds are available (delays implementation) No forward cash planning No forward cash planning Disruptive to programs, vendors Disruptive to programs, vendors High corruption potential High corruption potential Likely to undermine budget priorities Likely to undermine budget priorities

11 Benefits of efficient cash management Ensure obligations can be met as they fall due Ensure obligations can be met as they fall due Minimize idle balances and associated costs Minimize idle balances and associated costs Conduct cost-effective borrowing operations Conduct cost-effective borrowing operations Contributes to development of short-term money markets Contributes to development of short-term money markets Reduce liquidity impact from budget deficits/surpluses Reduce liquidity impact from budget deficits/surpluses Separation of cash management from monetary policy Separation of cash management from monetary policy Enhanced transparency of government cash flows Enhanced transparency of government cash flows

12 Features of Cash Management: Advanced Countries Fundamental features Fundamental features centralisation of government cash balances and establishment of a Treasury Single Account (TSA) structure centralisation of government cash balances and establishment of a Treasury Single Account (TSA) structure clear understandings on the coverage of the cash planning framework clear understandings on the coverage of the cash planning framework ability to make accurate projections of short-term cash inflows and outflows ability to make accurate projections of short-term cash inflows and outflows an adequate transaction processing and accounting framework an adequate transaction processing and accounting framework timely information sharing between the central Treasury, revenue-collecting agencies, spending ministries and/or Treasury branch offices timely information sharing between the central Treasury, revenue-collecting agencies, spending ministries and/or Treasury branch offices appropriate institutional arrangements and responsibilities appropriate institutional arrangements and responsibilities Desirable features Desirable features utilization of modern banking, payment and settlement systems utilization of modern banking, payment and settlement systems use of short-term financial market instruments for cash management use of short-term financial market instruments for cash management integration of debt and 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. 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. Fragmented treasury system with many separate bank accounts-both in commercial banks and Central Bank. Daily balances in all government accounts are unknown Daily balances in all government accounts are unknown Accumulation of expenditure arrears Accumulation of expenditure arrears Cash rationing is the main expenditure control system-creates uncertainty of resource availability for BI’s. 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. Unnecessary borrowing occurs - Spending units not concerned with borrowing costs. Cash flow forecasts are not prepared Cash flow forecasts are not prepared Daily cash needs met by the central bank-lack of transparency in borrowing from Central Bank. 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). 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 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 Awareness within the government of the opportunity cost of money Consolidation of government cash balances in a Treasury Single Account (TSA) Consolidation of government cash balances in a Treasury Single Account (TSA) Fund and accounting controls through treasury ledger system Fund and accounting controls through treasury ledger system Developed expenditure and commitment controls Developed expenditure and commitment controls Well developed cash planning and forecasting function Well developed cash planning and forecasting function Efficient payment system to sustain cash balances at optimum level Efficient payment system to sustain cash balances at optimum level Such as centralized payments processing Such as centralized payments processing

15 Prerequisites for cash management – contd. Realistic budget Realistic budget Adequate accounting framework Adequate accounting framework Tailor-made cash forecasting modules can be part of IFMIS, whose accounting module can provide daily data on inflows and outflows. 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 Access to financial markets and use of modern instruments for cash management Cash management separated from, but linked to, monetary policy Cash management separated from, but linked to, monetary policy Integration of cash and debt management Integration of cash and debt management

16 Single Treasury Account All revenues and expenditures go through TSA All revenues and expenditures go through TSA The consolidation of government cash resources through a TSA should be comprehensive The consolidation of government cash resources through a TSA should be comprehensive Budget institutions (BI) do not have separate bank accounts. Budget institutions (BI) do not have separate bank accounts. BIs’ transactions managed through the treasury ledger system BIs’ transactions managed through the treasury ledger system Where transactional accounts are necessary, balances are swept up into TSA periodically (preferably daily) 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. 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 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 Spending Ministry Bank Accounts SU MoF/Treasury Spending Ministry Spending Ministry SU = Spending Units SU

18 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 payers Government Borrowings

19 Safe haven for government cash deposit. Safe haven for government cash deposit. Aids the efficient management of liquidity in the economy. Aids the efficient management of liquidity in the economy. Cost effective banking arrangements. Cost effective banking arrangements. No better alternative for economies in transition/LICs No better alternative for economies in transition/LICs Reasons For TSA To Reside At Central Bank

20 Management of Receipts through TSA System Collection through commercial banks Collection through commercial banks Alternatively through treasury system Alternatively through treasury system Impose penalties on late remittances Impose penalties on late remittances Framework agreements between the MoF/Treasury and agency banks Framework agreements between the MoF/Treasury and agency banks Standardized services and transparent fees Standardized services and transparent fees Penalties for delays and under-performance Penalties for delays and under-performance Monitoring Monitoring Detailed information available to MoF and agencies Detailed information available to MoF and agencies

21 Management of Payments through TSA System Agencies submit payment requests Agencies submit payment requests Covered from TSA after control and verification Covered from TSA after control and verification Clarify roles and responsibilities between ministries, agencies, banks, central bank and MoF Clarify roles and responsibilities between ministries, agencies, banks, central bank and MoF Maximize use of direct bank transfers Maximize use of direct bank transfers Use checks, credit and debit cards when efficient Use checks, credit and debit cards when efficient Minimize imprest accounts and cash payments Minimize imprest accounts and cash payments Ensure that payments are made on due date Ensure that payments are made on due date Eliminate layered cash flows Eliminate layered cash flows

22 TSA interface with transaction processing and accounting systems TSA with centralized payment and accounting controls TSA with centralized payment and accounting controls Payment requests are prepared by individual budget agencies and sent to a centralized Treasury for payment Payment requests are prepared by individual budget agencies and sent to a centralized Treasury for payment Treasury manages the float of outstanding invoices Treasury manages the float of outstanding invoices Might lead to inefficiencies and high transaction costs (particularly with manual processing) Might lead to inefficiencies and high transaction costs (particularly with manual processing) TSA with deconcentrated payment and accounting controls TSA with deconcentrated payment and accounting controls Individual budget agencies process and make payments directly to suppliers (and account for these transactions) Individual budget agencies process and make payments directly to suppliers (and account for these transactions) MoF sets the cash disbursement limits (monthly or quarterly) 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) Political support is essential (such as for closure of agency a/cs) Legal and regulatory requirements Legal and regulatory requirements E.g. authority to open bank accounts should vest with the MoF/Treasury E.g. authority to open bank accounts should vest with the MoF/Treasury Technological requirements Technological requirements Adequate transaction clearing and inter-bank settlement systems Adequate transaction clearing and inter-bank settlement systems Development of an RTGS at the CB for high value transactions Development of an RTGS at the CB for high value transactions Major commercial banks and treasury connected to the RTGS Major commercial banks and treasury connected to the RTGS Framework agreements between the Treasury, TSA Bank (Central Bank) and Banks providing retail banking services 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 Revisiting the chart of accounts for coverage of non-bank expenditure transactions Capacity development of TSA users 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 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. 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). 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 (w ith CB and with commercial banks) T-Bills, Repo’s/reverse repo’s, Short-term facilities with commercial banks, Deposits-term and overnight (w ith CB and with commercial banks) Impact on domestic financial markets will be relevant (large stocks or flows) Impact on domestic financial markets will be relevant (large stocks or flows) Coordination with monetary authorities essential 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 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 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 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 Plan prepared by competent staff and based on a realistic budget, following clear funds release procedures and budget execution rules

26 Cash Balance Forecasting Line Ministries Advise 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

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) Coordinate submission of monthly cash flow projections by budget institutions (spending units and revenue agencies) Prepare (consolidated) cash flow projections on a rolling basis Prepare (consolidated) cash flow projections on a rolling basis Monitor cash inflow/ outflow outturns and identify seasonal/monthly patterns Monitor cash inflow/ outflow outturns and identify seasonal/monthly patterns Monitor major receipts and payments and the daily cash position, including government bank balances 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 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 Make proposals to Exchequer / Liquidity Committee for adjusting cash flows as the need arises Keep the central bank fully informed of projected cash flows Keep the central bank fully informed of projected cash flows

29 Core elements of cash planning Comprehensive information network Comprehensive information network Regular, reliable estimates of future cash flows Regular, reliable estimates of future cash flows Determine and implement strategy for matching cash flows with fiscal operations plan, e.g. Determine and implement strategy for matching cash flows with fiscal operations plan, e.g. delay commitments delay commitments speed up revenue mobilization speed up revenue mobilization borrow from the market (short or long-term) borrow from the market (short or long-term) invest surplus balances optimally (short or long-term) invest surplus balances optimally (short or long-term) Review and update financial plans Review and update financial plans refine forecasting techniques/set performance targets refine forecasting techniques/set performance targets

30 Cash Forecast and Balances Revenues Spending Central Forecasts 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 Seasonal: 1.Keep allotments or commitments below revenue, build balances 2.Short-term debt 3.Limit cash payments to cash balances (arrears) 4.Accelerate receivables collection Structural: 1.Budget retrenchment 2.Long-term debt 3.Allow commitment/spending only if revenues actually received 4.Contingent liability management 5.Comprehensiveness 6.Commitment controls

32 Coordination between cash managers and debt managers Government cash management and debt management objectives may potentially conflict 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) 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 Government debt managers want to see that government borrowing plans are orderly Need for a very close coordination and exchange of information 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. 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 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 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 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 The Central Bank needs to tell the cash manger about the state of system liquidity to inform decisions regarding planned cash investments/borrowings

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