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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
y Pa m s nt e

Spending units

s ue en ev R

Treasury system

Debt management

Central bank

Monetary policy

Cash manager

Financial markets dev. Short-term Investments

Short-term Borrowings

Main building blocks for cash management

Control over receipts and expenditures.

Forecasting cash requirements.

Managing government cash balances – surpluses/deficits.

Cash rationing
(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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