CASH MANAGEMENT AND THE TREASURY FUNCTION1
THE TREASURY FUNCTION
Governments need to ensure both efficient implementation of their budgets and good management of their financial resources. Spending agencies must be provided with the funds needed to implement the budget in a timely manner, and the cost of government borrowing must be minimized. Sound management of financial assets and liabilities is also required.
Financial management within the government includes various activities: formulation of fiscal policy; budget preparation; budget execution; management of financial operations; accounting; and auditing and evaluation. Within this broad financial management function, the Treasury function is to achieve the set of specific objectives mentioned above. It covers the following activities:2 • • • • • •
Management of government bank accounts;
Financial planning and forecasting of cash flows;
Public debt management;
Administration of foreign grants and counterpart funds from international aid;
Financial assets management.
The government’s strategy to manage its moneys to maximize financial return s a critical part of overall cash management. The accent of this chapter, however, is on control of cash flows and on the efficiency of payments’ arrangements, in keeping with the expenditure focus of this entire book. 2 Cf, Teresa Ter-Minassian, Pedro P. Parente, and Pedro Martinez-Mendez, "Setting up a Treasury in economies in transition," IMF, 1995.
To carry out these activities, organizational arrangements and distribution of responsibilities vary considerably according to countries. In some countries, the Treasury Department focuses only on cash and debt management functions (which are reviewed in this section). In a few countries, debt management is performed by an autonomous agency. In other countries, the Treasury Department performs budget execution controls (which are reviewed in chapter 6) and/or accounting and budget execution reporting activities (which are reviewed in chapters 10 and 11). CASH MANAGEMENT3
Cash management has the following purposes: controlling spending in the aggregate, implementing the budget efficiently, minimizing of the cost of government borrowing, and maximizing the opportunity cost of resources (the last two purposes yielding interest). Control of cash is a key element in macroeconomic and budget management. However, as emphasized in chapter 5, it must be complemented by an adequate system for managing commitment. For efficient budget implementation, it is necessary to ensure that claims will be paid according to the contract terms and that revenues are collected on time. It is necessary to minimize transaction costs; and to borrow at the lowest interest rate or to generate additional cash by investing in revenue-yielding paper. It is also necessary to avoid paying in advance and to track accurately the dates on which payments are due.4
In developing countries, governments often do not pay attention to issues related to cash management. Budget execution procedures and the management of cash flows focus on compliance issues, while daily cash needs in are met at low cost by the Central Bank. Spending units are not concerned with borrowing costs since their interests are already taken account in the budget prepared by the Ministry of Finance.
However, the costs of borrowing, the fact that the credit granted to the government by the banking system is a key macroeconomic target and a performance 3
The relationship between the Treasury and the Central Bank in this and other respects is briefly discussed in section.
criterion in IMF-supported financial programs, and the increasing separation between the activities of the Central Bank and the government budget make cash management more important. Performance concerns have also had an impact on cash management and some countries have implemented...