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Cash Management Training

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Presentation on theme: "Cash Management Training"— Presentation transcript:

1 Cash Management Training
Decentralization Support Activity Project THE NETHERLANDS MINISTER FOR DEVELOPMENT COOPERATION Cash Management Training Addis Ababa 1 – 3 February 2006 Implemented by Harvard University and funded by Development Cooperation Ireland (DCI), the Royal Netherlands Embassy and the United States Agency for International Development (USAID)

2 Introducing Training Participants
Introduction by Ato Mamo Gito, MoFED Ian Storkey Cash Management Advisor-Trainer Training Course Participants

3 Outline of Training Program
Day 1: Framework for Government Cash Management overview of government cash management international practices and experiences Day 2: Cash Management Operations forecasting of government cash flows banking arrangements disbursements and revenue collection Day 3: Integrating Cash and Debt Management domestic debt and cash management liquidity management and monetary policy Cash Management in Ethiopia assessment of cash management practices reform of cash management – short, medium, long-term

4 Structure for Training Program
Morning Session 1: 09.00—10.20 tea/coffee break Session 2: 10.40—12.00 Afternoon Session 3: 13.30—14.50 Session 4: 15.10—16.30 Questions/Discussion: 16.30—17.00

5 Course Material and Documentation
Training material PowerPoint presentations for each day supporting documents (6) relevant website addresses CD soft copy of training material additional documents (8) course photos and video

6 Framework for Government Cash Management
Decentralization Support Activity Project THE NETHERLANDS MINISTER FOR DEVELOPMENT COOPERATION Day 1: 1st February 2006 Framework for Government Cash Management Implemented by Harvard University and funded by Development Cooperation Ireland (DCI), the Royal Netherlands Embassy and the United States Agency for International Development (USAID)

7 Day 1 Outline Part 1: Overview of cash management
defining cash management importance of cash and liquidity management improving cash management in government Part 2: International practices and experiences Australia, New Zealand and USA South Africa and Thailand Part 3: Questions and discussion

8 Part 1 Overview of Cash Management

9 Introducing Cash Management
Many governments see cash management as an accounting, budgeting and/or financial control function It is NOT accounting, budgeting or financial control We will see from the definitions and throughout the training program that it is quite different

10 First Key Public Policy Objective
To ensure that government ministries, departments and agencies manage their cash balances effectively so that the government does not have “surplus” cash on hand

11 Second Key Public Policy Objective
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

12 Public Financial Management
At the heart of government cash management is: an efficient government accounting system sound procedures for monitoring and controlling government spending sound procedures for forecasting government revenue

13 Government Cash Management
Definition 1: “The strategy and associated processes for managing cost-effectively the government’s short-term cashflows and cash balances, both within government, and between government and other sectors” Source: Williams (2004)

14 Government Cash Management
Definition 2: “Having the right money in the right place at the right time to meet government’s obligations in the most cost-effective way” Source: Storkey (2003)

15 Objectives of Efficient Cash Management
Keeping to a minimum the volume of idle balances held in the banking system Reducing risk—operational, credit and market risk Adding flexibility to the ways in which the timing of government cash inflows and outflows can be matched Supporting other financial policies

16 Guidelines for Public Debt Management
Debt managers should convey to fiscal authorities their views on the costs and risks associated with government financing requirements and debt/cash levels Source: IMF/World Bank Guidelines for Public Debt Management (2003)

17 Guidelines for Public Debt Management
Debt management, fiscal, and monetary authorities should share information on the government’s current and future liquidity (including cash) needs Source: IMF/World Bank Guidelines for Public Debt Management (2003)

18 Risk Management Concepts
Market risks currency interest rate commodity Funding/rollover/ refinancing risk Credit risk Liquidity risk Portfolio concentration risk Operational risks audit, compliance & controls business continuity legal key person reputation security systems transaction & settlement Very Important but Difficult to Quantify

19 Cash Management Policy Interaction
Monetary Policy Debt Mgmt Policy CASH MANAGEMENT POLICY Management of flows Management of balances Targeting a balance Balance Sheet Policy Financial Market Policy Systems Source: Williams (2004)

20 Segregation of Functions
Debt Management Cash Management Budget & Financial Control Drivers of Change: Public sector financial management reform Banking and cash management technology Sound practice in government debt management

21 Budget and Financial Control
Budget & Financial Control Revenue & expenditure budgeting Control against appropriation & warrants Comptrollership or financial control Accounting Reporting Cash Management Cash flow forecasting Maintenance of bank accounts Efficient and timely processing of payments and receipts Management of government float and working capital Minimization of transaction and interest costs

22 International Trends Clear separation of open market operations and debt/cash management Integration of cash and debt management Target close to zero float Greater autonomy and incentive regimes Greater use of commercial banks Use of electronic processing for payments and receipts

23 Improving Cash Management
Make people aware that cash has a value Move to a Treasury Single Account (TSA) Move to electronic processing Innovate payment and collection methods Make full use of banking systems and services as these develop Introduce performance and cost monitoring systems

24 Improving Cash Management ..ctd
Reduce cash holdings and idle balances Reduce the number of transactions by aggregating and netting Reduce the cost of processing Create greater certainty through better cash forecasting and timing of cash flows Integrate debt and cash management

25 Benefits of Efficient Cash Management
Efficient cash handling and control systems: increase certainty that: payments are made by due date receipts are passed without delay to the responsible bodies reduce operational risk and the scope for mismanagement or fraud

26 Benefits of Efficient Cash Management
By minimizing idle cash balances and reduce payment authorities in transit, there is a direct saving in form of borrowing that is no longer needed to finance that cash

27 Benefits of Efficient Cash Management
Setting up a Treasury Single Account (TSA): reduces gross balances across government accounts improves visibility of flows reduces risk to banking system and financial market movements

28 Benefits of Efficient Cash Management
Link of cash with debt management: enables active use of domestic debt instruments gives greater flexibility to manage financing requirements avoids the risk of high borrowing costs associated with less flexible arrangements

29 Benefits of Efficient Cash Management
Active cash management policies: removes one of the major influences on short-term changes in bank liquidity reduces uncertainty in central bank liquidity forecast makes monetary policy interventions less problematic

30 Benefits of Efficient Cash Management
contributes to the development of an efficient short-term securities markets: enhances primary market issuance develops secondary market activity facilitates development of Repurchase Agreement (Repo) market facilitates improvements to settlement and clearing systems

31 Inhibitors of Reform Institutional rigidities across government
Willingness for reform Inconsistency with other initiatives in public sector financial reforms Lack of domestic banking, settlement and clearing systems Limited range of banking products Limited IT & communication infrastructure

32 Summary – Financial Benefits
Minimize idle balances and government float More accurate & timely forecasts of cash flows & balances Greater certainty of the timing of cash flows Benefits: Improved controls Lower costs Improved visibility of flows Lower level of public debt Reduction in risk Assisting monetary policy Integration of cash and debt management

33 Summary – Institutional Benefits
Making full use of banking systems and services Greater transparency Clearer responsibilities and greater accountability Benefits: More skilled staff Reduced number of transactions Platform for ongoing improvements Better performance and cost monitoring Greater awareness that cash has a value

34 Summary Efficient and sound practice government cash management involves: accurate and timely cash flow forecasting good banking relationships, facilities and services integration of cash & debt management NB. Each of these will be covered in detail on Thursday & Friday

35 Part 2 International Practices and Experiences

36 Australia

37 Australia – Cash Management
Transaction processing through commercial banks or Reserve Bank of Australia (RBA) Government agencies select their own commercial bank or RBA Bank accounts: administered receipts administered payments departmental receipts and payments (funded 1/26th of budget every two-weeks) Sweeping of commercial bank accounts to the RBA each night

38 Australia – Cash Management
Incentive regime with interest payable on deposits placed with the RBA and on overnight balances in agency bank account Use electronic processing where possible Weekly cash flow forecasts submitted to Department of Finance & Administration Government aims for zero float AOFM manages aggregate cash balances

39 Australia – Role of AOFM
A Prescribed Agency within the Treasury portfolio Australian Office of Financial Management (AOFM) is responsible for Commonwealth debt management Management of the Commonwealth’s aggregate cash balances is a key task

40 Australia – Commonwealth Cash
Revenues Paying Agencies eg Health Dept Education Dept Program Expenditure Collecting Agencies eg Tax Office, Customs Service Revenues Interest & Appropriations Dividends, CUC, CN Agency Overnight Balances Loans Repayment Official Public Account (OPA) Interest & Appropriations Agency Term Deposits AOFM Commonwealth Cash Borrowings Investments

41 New Zealand

42 New Zealand – Cash Management
Government tendered and selected a single commercial bank in early 1990’s transaction processing through Westpac Bank accounts: receipts on behalf of the Crown (ROBOC) payments on behalf of the Crown (POBOC) departmental receipts & payments Sweeping Westpac accounts to RBNZ each night Use electronic facilities where possible

43 New Zealand – Cash Management
Initial incentive regime with interest payable on deposits placed with NZDMO Daily cash flow forecasts submitted to NZDMO NZDMO operates own account at Westpac and at commercial banks abroad Government aims for zero float RBNZ manages aggregate cash balances (as agent for NZDMO)

44 New Zealand – Role of NZDMO
An Operating Unit within the ALM Branch of the Treasury New Zealand Debt Management Office (NZDMO) is responsible for managing the Crown’s debt, overall cash flows and interest-bearing deposits Government banking and cash management is a key task

45 New Zealand – Banking Arrangements

46 New Zealand – Transitional Approach
Transition to new banking and cash management regime was managed by NZDMO Cash management forum was used to manage the process including training – NZDMO, government agencies & Westpac Process was phased with a group of government agencies making the transition over 3 consecutive six-monthly intervals Timing for the agencies was based on their own preparedness for the transition

47 Cash Management Handbook
Section 1: Overview Section 2: Banking Arrangements Section 3: Processing Arrangements for Government Agencies Section 4: Forecasting for Government Agencies Section 5: Incentives and Sanctions for Government Agencies Section 6: Reporting for Government Agencies Section 7: Other Operations

48 United States of America

49 USA – Vision and Purpose
Financial Management Service vision is: to move toward an all electronic treasury, maximizing the use of technology and providing Federal agencies with comprehensive electronic commerce solutions Purpose of cash management to eliminate idle cash balances to deposit collections timely to properly time disbursements

50 USA – Cash Management Operations
Treasury Single Account (TSA) Interest incentives and penalties Transaction processing through FRBNY, other FRBs, and commercial banks where necessary FRBNY manages net position in TSA Treasury aims for float of US$5 billion (US$7 billion during volatile tax flows)

51 USA – Cash Management Practices

52 South Africa

53 South Africa – Cash Management
Responsibility for cash management rests with Asset and Liability Management Branch of National Treasury all surplus cash is deposited in investment accounts on a daily basis with the four major banks to manage credit risk exposure, interest bearing deposit accounts are also held with the Reserve Bank and the Corporation for Public Deposits National Treasury uses treasury bills and borrowing from the Corporation for Public Deposits as instruments to smooth cash flow peaks Efficient cash management has reduced government’s daily non-interest bearing liquidity buffer with the Reserve Bank from R100 million to R50 million

54 South Africa – Cash Management

55 Thailand

56 Thailand – Budget Agencies
National Economic and Social Development Board (NESDB) macroeconomic modelling Bureau of Budget (BOB) preparation of Budgets with Agencies Agencies – Head Office preparation of Budgets with BOB allocation of Budget to regional offices

57 Thailand – Regional Offices
Agencies – Regional Offices monthly allocation of revenue and expenditure for Provincial Treasury Office (PTO) approve invoices for payment by PTO lodge receipts and advise PTO liaise with PTO on cash forecasting

58 Thailand – Provincial Treasuries
PTO (including CGD Bangkok) consolidate monthly cashflows from Agencies authorize payments and effect transactions report to agencies payments made on their behalf manage bank relationships

59 Thailand – Provincial Treasuries ..ctd
PTO (including CGD Bangkok) maintain bank accounts including reconciliations maintain accounts payable ledgers provide cash forecasts to CGD perform general ledger accounting

60 Thailand – Comptroller General
Comptroller General’s Department, CGD (Head Office) authorize disbursements aggregate cash forecasts and cash positions for PDMO (and BOT) produce consolidated government accounts

61 Thailand – Comptroller General ..ctd
Comptroller General’s Department, CGD (Head Office) manage bank relationship with BOT maintain bank accounts at BOT including reconciliations perform general ledger accounting for BOT accounts

62 Thailand – PDMO Public Debt Management Office (PDMO)
receive cash forecasts from CGD establish debt programmes manage government accounts and position at BOT (and any other bank accounts)

63 Thailand – Bank of Thailand
Bank of Thailand (BOT) macroeconomic modelling disburse funds to PTOs (as agent for CGD) liquidity management open market operations debt transactions as agent for PDMO

64 Thailand – Regional Structure
Agency Region 1 Region 2 Region 3 Region 78 A PTO1/A1 PTO2/A2 PTO3/A3 PTO78/A78 B PTO1/B1 PTO2/B2 PTO3/B3 PTO78/B78 C PTO1/C1 PTO2/C2 PTO3/C3 PTO78/C78 D PTO1/D1 PTO2/D2 PTO3/D3 PTO78/D78 Z PTO1/Z1 PTO2/Z2 PTO3/Z3 PTO78/Z78 PTO: Provincial Treasury Office

65 Part 3 Questions and Discussion


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