The Challenges of Efficient Government Cash Management
Gemloc Peer Group Discussion March 2013
Mike Williams [email protected]
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
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Today’s Discussion
To Recall the Objectives of Cash Management….
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)
Ensuring cash is available to meet commitments
Overriding objective – other objectives must be subject to it But other objectives are important
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Approaches to Cash Management
Traditional (Passive) Approach
• Essentially passive • Monitoring cash balances,
maintaining cash buffer to handle both volatility and unanticipated outflows
• If necessary restraining / slowing expenditures or delaying bill payments - cash “rationing” not cash management
Modern (Active) Approach • Managing cash more actively • Trying to smooth weekly or daily
cash flow by more active borrowing and lending in money market
• Allows lower average cash buffer – with benefits to other policies
• Gives tools to protect expenditure plans from cash flow volatility
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.”
Most OECD and many middle income countries 4
The Policy Challenges are Inter-related…
Cash Balance (TSA) Tax etc inflows
Expenditure etc outflows
1. Budget Execution
2. Targeting Balances
Debt redemptions, less capital receipts
Debt issuance
6. Debt Management Policy (and Gov Balance Sheet)
4. Cash Flow Management in Money Market
3. Monetary Policy
5. Market Development
Cash Flow Forecasting
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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.
Characteristics of Good International Practice - 1
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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
Characteristics of Good International Practice - 2
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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
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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
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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
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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
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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
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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)
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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
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Forecasting: the Challenges
Volatility and uncertainty of cash flow • Lack of past data; unreliability of historical patterns
Poor information flows from agencies • No incentive to cooperate - develop carrots and sticks – may need
legislation • Avoid information going up hierarchy, across and down; develop
personal contacts with opposite numbers in major SUs and tax admin Too much focus on short term
• Cash tomorrow is important – but must have a longer term perspective to plan ahead – otherwise forced into rationing
Too bound up with budget execution • Budget-constrained profiles are not forecasts • Emphasis on targets detracts from unbiased forecasting • Involvement of budget department risks game playing by SUs
Forecast database should usually be separate from IFMIS
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The Instruments for Managing Cash
Borrowing Treasury bill usually main
instrument in moving to more active cash management
• TBill has different roles as instrument of
– debt management – cash management – monetary policy • Emphasis on shorter-term (e.g. 1
month) bills for cash management Some EU countries issue
commercial paper (CP) Repo usually used for fine
tuning – but requires liquid market
Lending (Reverse) repo preferred
instrument if market sufficiently liquid
• Secured and flexible Many countries use bank deposits
• Lend at market rates – term or overnight
• Competitive process (by tender if no transparent prices)
• But must be collateralised – reduce credit risk
Consider (remunerated) deposits with central bank if important to underpin monetary policy stance
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Rough Tuning: Example
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Cumulative Daily Cash Flow
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1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101 105
Cumulative Daily Cash Flow
Cum Daily Cash Flow after Bill Issuance
Rough Tuning with weekly issue of Treasury Bills only
Converts this profile to this profile [Fine tuning makes it flat]
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Management of Cash Balances Separately identify • Management of day to day cash, including the cash buffer • Management of a structural surplus (net of any debt repayment)
Structural surplus: distinguish between
• Cash that might be needed one day [eg in 6 months] – usually managed by cash managers alongside the cash buffer
• Longer-term funds – Sovereign wealth funds, funds for
future generations, fiscal stabilisation funds, pension liability funds etc
– Managed separately – in context of government’s whole balance sheet
Governments need access to liquidity
• Implies some cash balances • How do you decide the minimum?
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1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100103106
Working Days
bn
Ring fenced balances (donor funds, stabilisation fund etc) = 2 billion
Cash Buffer = 6 billion
Target: keep cash flows in range of +/- 3 billion, i.e. TSA in range 8-14 billion
The Minimum Cash Balance
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What Determines the Cash Buffer?
1. The volatility of daily cash flows 2. The ability to forecast those cash flows
• The standard deviation of errors in the forecast will [should] be much less than standard deviation of outturn – error analysis is important
• Key area for policy focus – Treasurers have less leverage over other determinants
3. The scope to manage unanticipated fluctuations and the timescale over which they can be managed
• How soon can additional TBills be issued?
4. Safety nets • Emergency credit facilities or cash reserves • End of day borrowing from commercial banks • [Short-term borrowing from central bank]
Suggested minimum cash balance • Maximum cumulative forecasting error over policy reaction period (plus a
precautionary balance; may also need to add an allowance for expected outflow if flows cannot be smoothed in the first instance)
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Moving to more Active Cash Management: Some challenges
Lack of money market development • Weak demand for bills; lack of secondary market • Undeveloped repo market (legislation may not be in place) • How to ensure a competitive process for deposits (and manage collateral)
Tension between the MoF and the central bank • Central bank concerned about monetary policy impact. [But active management
offsets government impact on banks’ liquidity – facilitates monetary policy; if CB needs government’s deposits, it should pay market-related interest]
• Interaction with Central Bank Bills • Requires understanding about policy approach - cover in MoU
Effective interaction with debt managers • Issuance decision take account of seasonality of cash flow • In time allows pre-announced bond programme independently of cash volatility • Essential there is a single point of contact with the market – avoid 2 Front Offices
Implications for minimum cash balance • Identify safety nets – and the policy reaction time
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The Growth of Fine Tuning
Use of “cash management bills” • 2 weeks in USA; 1 month bills in many countries • Bills geared to days of cash outflow (Italy, New
Zealand, Sweden) Several developed countries active in the repo
market • 13/18 in recent survey by Italian Treasury • Includes repo activity in debt market (to facilitate
market making) • Very high volumes in some countries (more than £2
trillion in UK in 2011-12) Facilitated by active central bank
• ECB’s expectations in Eurozone
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Fine Tuning: Challenges
What impact has the financial crisis had on liquidity and the repo markets?
Interbank market • Credit concerns
Repo market • Shortening of maturities • Bigger haircuts – although an irrational response to liquidity constraints? • Emphasis on clearing
Shortage of good quality collateral • Basel III • Downgrades of government bonds – and the flight for quality • Requirements of CCPs • Restrictions on short selling
Implications for debt market; repo needed to unwind squeezes
But fewer problems in selling Treasury bills?
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