The Challenges of Efficient Government Cash Management Gemloc Peer Group Discussion March 2013 Mike Williams mike.williams@mj-w.net
Today’s Discussion Cash management – what it is and the characteristics of good practice The development process… • The Treasury Single Account • Cash flow Forecasting • Rough Tuning • Fine Tuning …and the challenges faced by countries at different phases of this process 2
To Recall the Objectives of Cash Management…. Ensuring cash is available to meet commitments Overriding objective – other objectives must be subject to it But other objectives are important Economising on cash within government • Saving costs • Reducing risk Managing efficiently the government’s aggregate short-term cash flow • Both cash deficits and cash surpluses In such a way as also to benefit • Debt management • Monetary policy • Financial markets (market liquidity and infrastructure) 3
Approaches to Cash Management Cash management is: “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.” Modern (Active) Approach Traditional (Passive) Approach • Managing cash more actively • Essentially passive • Trying to smooth weekly or daily • Monitoring cash balances, cash flow by more active maintaining cash buffer to borrowing and lending in money handle both volatility and market unanticipated outflows • Allows lower average cash buffer • If necessary restraining / – with benefits to other policies slowing expenditures or delaying bill payments - cash • Gives tools to protect “rationing” not cash expenditure plans from cash flow management volatility Most OECD and many middle income countries 4
The Policy Challenges are Inter-related… 3. Monetary Cash Flow 2. Targeting Policy Forecasting Balances 4. Cash Flow 5. Market Management in 1. Budget Development Money Market Execution Debt redemptions, Expenditure etc outflows less capital receipts 6. Debt Management Cash Policy (and Gov Balance Balance Sheet) Tax etc inflows (TSA) Debt issuance 5
Characteristics of Good International Practice - 1 1. Efficient internal payment processing • A minimum of intermediate handling steps • Increased reliance on electronic transactions 2. Account aggregation and minimisation of idle balances • Minimising the level of idle balances held by other government bodies • A MoF account at the central bank (i.e. the TSA) • All government cash balances are held in the central bank overnight. (Variety of techniques including ZBAs) 3. Internal systems to forecast receipts and payments, and hence the MoF’s account at the central bank • Forecasts of future changes in the TSA to devise the strategies that would have the effect of smoothing those changes. 6
Characteristics of good international practice - 2 Characteristics of Good International Practice - 2 4. Agreements between the MoF and central bank covering: • The flow of forecast information from the MoF • Information from the central bank on actual changes in the TSA balance • How MoF’s operations interact with the bank’s monetary policy operations • Remuneration, of the balance, preferably at a market-related interest rate. 5. Integration of (or at least co-ordination between) government debt and cash management functions • Allows debt decisions to be taken in the context of government’s cash flows • Ensures management of government cash flows supports debt management 6. The use of short-term borrowing instruments to help manage the timing mismatch between inflows and outflows • Most countries use Treasury bills; some also use repo and reverse repo 7. Efficient infrastructure for payment and settlement, with securities typically being held in dematerialised form 7
Cash Management is a Project Most of the actions are for the Treasury function to take forward, with support as necessary from others in MoF But effective cash management also needs: • A supportive central bank (CB) • Competent finance functions in spending units (SUs) and the tax administration to supply good cash flow forecasts – and see that as part of their responsibilities • A flexible banking system and a developed money market. Development of cash management is therefore best thought of as a project • Dependencies, bottlenecks and a need to prioritise • Needs also to link with money market development 4 streams of work • Within MoF; with SUs and Tax admin; with CB; and with market 8
Typical Phases of Development Phase 1: Treasury Single Account • integration of government accounts • sweeping of overnight balances into single MoF account at central bank Phase 2: Forecasting capability • the development of a capability within MoF to monitor and forecast flows in and out of government – i.e. changes in MoF balances at central bank Phase 3: Rough tuning • the issue of Treasury bills (or other instruments) – in a pattern designed to offset the liquidity impact of net daily cash flows, i.e. to smooth the change in MoF’s balance at the central bank • separate management of structural surpluses Phase 4: Fine tuning • more active policies, drawing on a wider range of instruments or institutional options, to smooth more fully MoF’s balance at central bank 9
The Treasury Single Account Aggregate all Government cash balances in TSA at CB • Facilitates monitoring and control, also fiscal and financial planning. • Allows Treasury to minimise the volume of idle balances in the banking system with consequent cost savings TSA can work with variety of payments systems • Payments approvals centralised in MoF/ Treasury or dispersed to spending agencies • Processing of payments centralised within MoF/ Treasury/ Central Bank or dispersed to the banking sector Any balances left with the banking system should be swept overnight back into the TSA – next slide 10
TSA Mechanisms Subsidiary accounts can be notional (ledger accounts) • Still able to track, account for, and report on specific flows • Can maintain distinct accounting identity of spending units or extra- budgetary funds (EBFs); allow separate legal entities to retain self- generated funds; (or ring-fence donor funds) All cash should be in TSA overnight • Mechanism depends on whether centralised or dispersed payment authority • Zero Balance Accounts (ZBAs) – Sweeping cash – Disbursement or credit limit – can be enforced against ledger accounts – “Just in time” transfers Also depends on • Technological development of banking sector and government, including information systems and reliable communications network • Internal accounting arrangements (and incentives) to minimise level of idle balances and reduce timing uncertainties 11
TSA Challenges Too many accounts under control of spending units • Often many thousands • Reluctance to repatriate balances to TSA Extra budgetary funds – also donor funds • Policy resistance – who controls the cash • If not in TSA, Treasury should still be able to borrow from EBFs Prefunding (seed funds) • Should be avoided (unless subject to sweeping) Collection funds or collection lags • Abolish in favour of transaction fees Technology challenges • Poorly integrated domestic banks • Lack of an integrated financial management information system (IFMIS) as facilitator 12
Cash Flow Forecasting: the Aim Objective is to anticipate cash needs of government Forecasts needed of total net cash flow (hence also cash balance) • Receipts and payments (above the line); and • Financing transactions (below the line) - debt redemptions, new borrowing, also eg asset sales • May need to identify foreign currency and donor project flows separately (depends on structure of TSA) Forecast information is needed for some period ahead • Timing of future peaks and troughs must be identified to make decisions about the maturity of required borrowing or lending Ideally • Daily (if necessary weekly) some 3 months ahead • Rolled forward regularly (weekly) 13
Key Features of Forecasting Framework What matters is cash flow • Separation of permission to spend from actual spending • Tax in TSA not in banking system Monitor actual changes in close to real time • Analyse divergences – and forecast errors Information flow from those in spending units and tax departments closest to cash flows • Add information on large payments Concentrate on major inflows and outflows • Focus on largest spending units [80/20 rule] Emphasis on history and experience • Not econometrics Separate forecasting from budget execution • Need unbiased estimates – what is going to happen, not what “should” happen 14
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