Cash Management Framework and its Integration with Debt Management Professional Development Seminar on Debt Management December 10, 2008 Sailendra Pattanayak and Brian Olden, FAD
Definitions of Cash Management Outline of a modern cash management framework Cash rationing vs. cash management Benefits of an efficient cash management system Prerequisites for effective cash management
Banking and payment arrangements Cash forecasting Institutional framework
Managing cash balances-the basic requirements Issues surrounding integration of cash and debt management
Discussion on appropriate institutional framework
Some definitions of cash management
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. (Williams 2004)
Having the right money in the right place at the right time to meet the government’s obligations in the most cost-effective way. (Storkey 2001)
Cash management framework
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Financial markets dev. Short-term Investments
Main building blocks for cash management
Control over receipts and expenditures.
Forecasting cash requirements.
Managing government cash balances – surpluses/deficits.
(misnomer cash budgeting)
Last resort liquidity management
Limits ability to commit until sufficient funds are available (delays implementation)
No forward cash planning Disruptive to programs, vendors High corruption potential
Need transparent ex ante rules Public procedure
Likely to undermine budget priorities
Benefits of efficient cash management
Ensure obligations can be met as they fall due Minimize idle balances and associated costs
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 flows
Common issues in transition and developing countries/LICs
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 CB. Cash rationing is the main expenditure control system-creates uncertainty of resource availability for BI’s. Spending units not concerned with borrowing costs. Daily cash needs met by the central bank-less of an issue with EU applicant countries due to prohibition on CB borrowing. Liquidity managed for monetary policy purposes.
Prerequisites for cash management
Awareness within the government of the opportunity cost of money Consolidation of government cash balances in a TSA
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
Such as centralized payments processing
Prerequisites for cash management – contd.
Realistic budget Adequate accounting framework
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
All revenues and expenditures go through TSA
The consolidation of government cash resources through a TSA should be comprehensive
Budget institutions (BI’s) do not have separate bank accounts.
BI’s transactions managed through the treasury ledger system Where transactional accounts are necessary, balances are...
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