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INTRODUCTION TO PUBLIC FINANCE
MANAGEMENT
Module 4.2 Treasury Management Module map Treasury Appetizer Game
Requirements: •- 4 players (Treasury and 3 line ministries), One table •- budget size €119 billion, paid in quarterly tranches
Rules: •- Each line ministry spends according to approved budget •- Line ministries can put left over funds on a bank account
Three simulations: •1. ‘Standard’ developing country (no TSA and no transparency) •2. one Treasury Single Account (+ full transparency) •3. also a domestic capital market (interest rate 25%) Module Outline
unpredictable & shortfalls lead to in-year budget cuts Unpredictable in-year reallocations between MDAs Payments arrears accumulate, as MDAs enter into spending commitments that may be consistent with approved budget, but not supported by cash availability
10 2. Problems with poor cash management
“Cash rationing” accompanied by commitment
controls used as a means of controlling expenditure according to cash availability
Budget support from donors useful if it is
predictable. Unpredictable budget support leads to same problems as unpredictable revenues
11 2. Problems with poor cash management Cash rationing opposite of efficient cash management. Will have adverse impact on service delivery
Danger is ”institutionalisation” of cash
rationing, after need for IMF programs and cash rationing has gone
14 3. Efficient cash management Principles of Cash Management
One Account
Idle cash On time
Efficient Cash deposite payment management d s
Donor funding Cash Invested on time (short term deposits) 3. Efficient Cash Management
How to do this? A pre-condition: sound budget preparation discussed in previous units Weekly/monthly cash flow forecasting (revenue & donor funding, spending) One unit in charge - cash management unit Treasury Single Account (TSA) Recording, monitoring and management of debt 16 Module Outline
A bank account or a set of linked bank accounts used
for all/most government transactions • In case of linked bank accounts it are “zero” balance accounts: any balances “swept” back into TSA each day.
23 5. Treasury Single Account
• Advantages • No more idle balances in MDAs' bank accounts • Idle cash balances in TSA invested in interest earning financial assets • TSA facilitates accounting control through bank reconciliations • TSA facilitates timely & comprehensive accounting statements/reports, which, in turn, facilitate cash flow forecasting
24 5. Treasury Single Account
Different types of Treasury Single Account
•The Treasury releases funds into MDA sub-accounts in central bank or treasury-controlled MDA accounts in commercial banks which are the Treasury’s fiscal agent
•The MDA bank provides to the MDA overdraft
facilities up to a cash limit notified by the Treasury. The MDA bank is reimbursed daily by the Treasury (Sri Lanka –Colombo) 25 5. Treasury Single Account Case 1. Payment via centralised Treasury Banking system Check
Fiscal Central Spending Payment Treasury Transfer Banking Supplier Agent Bank order Daily Agency system TSA
Payments Case 2. Payment via spending agencies' bank accounts Receipts
Retail Spending Banking Supplier Bank Agency System Supplier Account
Clearance Ceilings
Treasury 5. Treasury Single Account
Not common in all countries
In many countries there are still hundreds of MDA bank accounts
Idle cash balances may lie in these accounts, resulting
in lower interest earnings and higher interest expenses through unnecessary borrowing
27 5. Treasury Single Account Not common in all countries: Even if centralised TSA, donor-funded projects accounts are often kept outside the TSA and the Treasury controls
There is domestic resistance to the implementation of
the TSA. Multiple bank accounts facilitate budget ring- fencing and potentially corrupt behaviour Establishing TSA may require strong political leadership
with cash management: • Do not borrow unnecessarily if have liquid assets • Debt management unit in same department as cash management unit
30 6. Debt Management
• Only borrow: • When no grant-financing alternatives available • For medium/long term borrowing
• Best loan financing option selected:
• Take into account floating/fixed rate interest rate options, maturity, grace period, currency • Use concessional (e.g. IDA) debt options if available low interest rate, long grace and repayment periods 31 6. Debt management
• Good debt management information
system: comprehensive, accurate, timely • Use IT packages, for example:
• DMFAS (UNCTAD)
• CS-DRMS (CommonWealth) 6. Debt Management
Loan Guarantees Government needs clear strategy for issuing guarantees to guard against contingent liabilities becoming actual liabilities Includes guarantees to sub-national governments, state owned enterprises & private companies Key Messages
• Efficient cash management recognises the
opportunity costs of cash • minimise idle cash held by government bodies • increase certainty that payments are made properly by the due date • Should avoid recourse to cash rationing Key Messages
• Directions for improving cash management
• Preparing regularly cash forecasts • Moving to a Treasury Single Account
