Government Cash Management
Framework and Associated
Banking Arrangements
Sailendra Pattanayak, FAD
Overview of presentation
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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
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Banking and payment arrangements
Cash forecasting
Institutional framework
Managing cash balances-the basic requirements
Coordination between government cash managers, debt
managers and Central Bank
Cash Management Definition
“Having the
right money
in the
right place
at the
right time
to meet government’s
obligations in the most costeffective way”
Ian Storkey (2003)
“The strategy and associated
processes for managing costeffectively the government’s
short-term cash flows and
cash balances, both within
government, and between
government and other
sectors”
Mike Williams (2004)
Cash management framework
Spending
units
Banks
Debt Mgmt.
Treasury system
Central bank
Cash
manager
Short-term
Borrowings
Monetary
policy
Financial
markets
dev.
Short-term
Investments
Policy Interaction
Cash Flow
Forecasting
4. Cash Flow
Management in
Money Market
1. Budget
Execution
Expenditure,
other outflows
Tax etc inflows
3. Monetary
Policy
2. Targeting
Balances
Cash
Balance
(TSA)
Debt redemptions,
less capital receipts
Debt issuance
5. Market
Development
6. Debt
Management Policy
(and Govt Balance
Sheet)
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:
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there are no large and
unpredictable changes in liquidity
in the banking system
monetary policy is not
undermined
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)
Budget Control v Cash
Management
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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--
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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
Main building blocks for cash
management
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Control over receipts and expenditures.
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Forecasting cash requirements.
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Managing government cash balances –
surpluses/deficits.
Cash rationing
(sometimes called cash budgeting)
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Last resort liquidity management
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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
Benefits of efficient cash
management
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Ensure obligations can be met as they fall due
Minimize idle balances and associated costs
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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
Features of Cash Management:
Advanced Countries
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Fundamental features
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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
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utilization of modern banking, payment and settlement systems
use of short-term financial market instruments for cash management
integration of debt and cash management
Common issues in developing
countries/LICs
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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
Prerequisites for cash management
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Awareness within the government of the opportunity
cost of money
Consolidation of government cash balances in a
Treasury Single Account (TSA)
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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
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Such as centralized payments processing
Prerequisites for cash management – contd.
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Realistic budget
Adequate accounting framework
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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
Cash management separated from, but linked to,
monetary policy
Integration of cash and debt management
Single Treasury Account
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All revenues and expenditures go through TSA
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Budget institutions (BI) do not have separate bank
accounts.
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The consolidation of government cash resources through a
TSA should be comprehensive
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
Typical Payment System with
Many Bank Accounts
Spending
Ministry
Bank
Accounts
SU
SU
SU
SU
MoF/Treasury
Spending
Ministry
SU
SU
SU
Spending
Ministry
SU
SU
SU = Spending Units
Banking Arrangements under TSA
Regime
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Transit / zero-balance
bank accounts of the
Treasury/BI
Debt administration
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Current / deposit
bank account(s) of
the Treasury (TSA)
Subsidies
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Daily settlement
with TSA
Local governments
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Suppliers
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Wage earners
Government Borrowings
Tax payers
Reasons For TSA To Reside At
Central Bank
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Safe haven for government cash deposit.
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Aids the efficient management of liquidity in the
economy.
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Cost effective banking arrangements.
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No better alternative for economies in
transition/LICs
Management of Receipts
through TSA System
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Collection through commercial banks
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Impose penalties on late remittances
Framework agreements between the MoF/Treasury
and agency banks
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Alternatively through treasury system
Standardized services and transparent fees
Penalties for delays and under-performance
Monitoring
Detailed information available to MoF and agencies
Management of Payments
through TSA System
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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
TSA interface with transaction
processing and accounting systems
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TSA with centralized payment and accounting controls
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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
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Individual budget agencies process and make payments directly to
suppliers (and account for these transactions)
MoF sets the cash disbursement limits (monthly or quarterly)
Requirements for an efficient TSA
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Political support is essential (such as for closure of agency
a/cs)
Legal and regulatory requirements
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Technological requirements
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Adequate transaction clearing and inter-bank settlement systems
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Development of an RTGS at the CB for high value transactions
Major commercial banks and treasury connected to the RTGS
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E.g. authority to open bank accounts should vest with the MoF/Treasury
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
Management of Cash Balances of
TSA
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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).
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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)
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Coordination with monetary authorities essential
Key elements of a Cash Management
Framework
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Annual plan, 3-month rolling projections,
monthly operational plan, and frequent forecasts
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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
Cash Balance Forecasting
Line Ministries
Advise on
Expected and
Actual Flows
Budget,
Allotment,
Cash Ceilings
Historical Patterns,
Models etc
Budget & Financial Control
Aggregate
Revenue &
Expenditure
Forecasts
Banking Data
Cash Balance Management
Cash Balance
Forecasts
Debt
Issuance,
Redemption
Payments
Key Relationships
Ministry of Finance
Debt and cash manager
Overseeing tax and spending
Managing daily cash flows
Forecasting fiscal position and
daily cash flows
Borrowing to meet short/medium
term needs
Sets debt and cash
management policy
Investing surplus assets
Encouraging strong secondary
market in government securities
Central Bank
Government’s banker
Manages monetary policy
Cash Management Unit - Functions
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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
Core elements of cash planning
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Comprehensive information network
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Determine and implement strategy for matching cash
flows with fiscal operations plan, e.g.
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Regular, reliable estimates of future cash flows
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
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refine forecasting techniques/set performance targets
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
Annual
predictable
pattern
Seasonal
revenue
fluctuation,
spending
patterns
Structural
revenue
fluctuation,
spending
patterns
Arrears
Overcommmitment
Random
revenue shocks
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
Coordination between cash
managers and debt managers
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Government cash management and debt
management objectives may potentially conflict
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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.
Coordination between government
cash manager and Central Bank
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The cash manager/government is often the largest
transactor in the domestic banking market and significantly
affects the operation of monetary policy
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Advice on this issue needs to flow both ways
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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