John Zohrab Fiscal Affairs Department, IMF Consolidating Government Banking Arrangements John Zohrab Fiscal Affairs Department, IMF FAD Mission to Iran Tehran, July 2015

Outline of Presentation Legacy Banking Arrangements TSA system Introduction Challenges of Introducing TSA system TSA Structure Illustrative Options Conclusion

I. Legacy Banking Arrangements Typical Structure SU Spending Ministry Accounts Bank SU SU Ministry of Finance SU Spending Ministry SU SU SU Spending Ministry SU SU SU = Spending Units

I. Legacy Banking Arrangements Typical disadvantages Fragmented banking structure Multiple government bank accounts exist making treasury oversight difficult Daily balances in bank accounts essentially unknown to Treasury No timely aggregation of information on balances No rigorous bank reconciliation At spending unit level Unnecessary disbursement of cash to these accounts even when there is unspent balance Cash not allocated to highest priorities or unnecessary debt Cannot make aggregate cash flow forecasts Forecasts can only be of disbursements from Treasury to spending units

II. TSA System Introduction Key features of TSA system TSA system is a unified structure of bank accounts Can be single bank account or set of linked bank accounts Only one account - the main or top account - has a positive or negative balance at the end of each day’s operations Other linked accounts are zero-balance accounts - their balances are eliminated by replenishment, sweeping or set-off at the end of each day’s operations All accounts are in national currency Foreign currency accounts usually not considered part of the TSA system The MoF/Treasury has full control over all accounts Opening, closing, access to transaction data, ability to intervene But regular day-to-day operations by spending units and revenue agencies

II. TSA System Introduction Typical structure    Daily Settlement with TSA TSA Transit zero-balance bank accounts Taxpayers Borrowings  Debt servicing   Subsidies Local governments   Suppliers  Wage earners

II. TSA System Introduction International trend Strong international trend to consolidate banking arrangements OECD, middle income, transition and developing countries Nearby countries with TSAs include Russia, Ukraine, Turkey, Kazakhstan, Uzbekistan, Armenia, Azerbaijian, Georgia and Tajikistan Process of establishing and expanding TSAs still continuing, e.g. Azerbaijan and Uzbekistan have nearly finished TSA establishment Tajikistan is committed to expand TSA to cover pension fund Georgia is committed to expand TSA to cover all extra-budgetary central government entities Kyrgyz Republic is committed to establish TSA in near term TSA proved its value again in 2008-09 global financial crisis Some countries believe that they would not have coped without the TSA It enabled them to maintain control of cash even under great stress

II. TSA System Introduction Advantages No idle cash Available cash can be allocated to highest priority use Borrowing minimized and surplus cash invested to best effect Up-to-date information and reporting on all cash flows and balances Ability for Treasury to execute cash management decisions quickly Reduced operational risk Facilitating daily reconciliation between bank accounts and ledger accounts Allowing Treasury intervention to prevent suspicious transactions Strengthening control over transactions by providing the Treasury with more direct, timely and comprehensive information Control of credit risk Controlling counterparty risk in investment of surplus cash Maintaining the government’s creditworthiness by timely payment

III. Challenges of Introducing TSA System Institutional Coverage Extra-budgetary entities, special funds, local government, public corporations Political economy Benefits of not ceding control of cash to the center Efficiency and improved accountability claims Monetary policy Transparency and predictability in the government’s cash flows Daily interbank settlement wash-up Implications of membership of interbank payments system Correspondent account at the central bank Increased internal control responsibilities for the Treasury

III. Challenges of Introducing TSA System Technical Accounting system Required for reconciliation with bank accounts Needs an adequate chart of accounts with ledger accounts reflecting bank accounts Reconciliation requires independence between accounting and banking procedures Coding structure Need to compensate for loss of information associated with separate bank accounts For example: type of tax, regional and local tax office, source of funding (budget, earmarked fund, loan, transfer), administrative unit responsible for expenditure Requires expanded coding structure

IV. TSA Structure Illustrative Options Summary Centralized The Treasury’s regional and local offices are able to send payment orders securely to its head office, and via it settle transactions with the central bank’s head office Decentralized The commercial bank sector systems are reliable and advanced, and so spending units may settle via the commercial banks without regional and local Treasury offices Hybrid The Treasury’s regional and local offices cannot send payment orders securely to its head office, and so they have to settle transactions via the central bank’s regional branches Main factor determining choice of TSA system structure Quality of available ICT systems

IV. TSA Structure Illustrative Options Centralized TSA structure Spending Unit Advanced Treasury Information and Communication Systems Central Bank Payment order Reconc. Settlement Treasury Head Office Treasury Regional Office Treasury Local Office (2a)

IV. TSA Structure Illustrative Options Centralized transactional banking

IV. TSA Structure Illustrative Options Decentralized TSA structure Spending Unit Commercial Bank Regional Branch Head Office Payment Order Very Reliable and Advanced Systems Central Bank Recon. Settlement Treasury

IV. TSA Structure Illustrative Options Decentralized transactional banking

IV. TSA Structure Illustrative Options Hybrid TSA structure Treasury Head Office Treasury Regional office Treasury Local office Central Bank Central Bank Regional branch Spending Unit Payment order Reconc. Settlement Limited Treasury Information and Communication Systems

IV. TSA Structure Illustrative Options Hybrid transactional banking

V. Conclusion Implementation challenges Timetable Minimum time seems to have been three years Delays caused by being linked with other reforms, FMIS, political economy Connectivity Making payments from the center requires reliable and secure electronic communications Zero-balance arrangements Clear agreements with commercial banks Procedures Numerous changes that should be reflected in regulatory framework Accounting Changes to chart of accounts