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8. Treasury Core Functions
Marco Cangiano
Rome, February 6-8, 2017
Outline
• Theroleofthetreasury
• Budgetexecutionandexpenditurecontrol
• Cashmanagementandlinktodebtmanagement
• TheTreasurySingleAccount
• Conclusions
<<CourseAcronym>>
Theroleandfunctionsofthetreasury
Treasury’sroleinthebudgetcycle
4Source:TheWorldBank,“PublicExpenditureManagementHandbook”,1998
Treasury’sDomain
Traditionalroleoftreasury
• Paymentprocessing- cashandcheques• Revenuecollectionandrecording• Maintainingpublicbankaccount(s)- theTreasurySingleAccountconcept
• Sometreasuriesperformedapre-auditfunction(andstilldoinsomecountries)- Thismayhavebeenassimpleasappropriationcontroloralsoinvolvedreviewofwhetherpaymentsrepresentedtheproperuseofpublicmoney
5
Evolvingroleoftreasuries
• Automatedaccountingsystemshavemademanyofthetraditionalactivitiesredundant– Electronicpaymentsandcollectionofrevenues–oftenrealtime
– Replacementofthepre-auditfunctionwithsystembasedcontrolsinaccountingsystems
– Thetraditionalpaymaster(processing)functionlargelynolongerrequired
– MuchofthetraditionalroleoftheTreasuryhaseitherbeendevolvedtoMDAsorautomated
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Evolvingroleoftreasuries(2)
• ProvisionofamodernIFMISorcentralaccountingsystem- ThisbringswithittheneedforaneffectiveCoAsupplementedwithclearaccountingpolicies
• Shiftfrompassivetoactivecashmanagement• DecentralisedcontrolsisafeatureofmanymodernTreasury
systems• Anenhancedreportingandaccountingfunction• Greateremphasisoncompliancewithaccountingstandardsand
competentfiscalandstatisticalreporting
7
Coretreasuryfunctions• Processingofpayments• Accountingforgovernmenttransactionsandpreparingconsolidatedfiscalstatements
ofgeneralgovernment• Managinggovernmentpayroll• Applyinginternalcontrolregulations,bothontransactionsandcommitments• CashmanagementandoversightofTSA• Managingthegovernment’se-Treasurysystem
Andinsomecountries:
• Settingaccountingstandards• Undertakinginternalaudit• Conductingdebtmanagementoperations• Managementofexternalgrantsandcounterpartfunds;• Managingpublicprocurement• Monitoringgovernmentguaranteesandothercontingentliabilities• Monitoringoffinancialoperationsofextra-budgetaryfunds,SOEsandsub-national
governments.
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TreasuryfunctionsPFMFunction Allocationto
MoF Treasury Agency Line Ministries
Macro-fiscal analysisandforecasting x
Budgetpreparation x x
Publicinvestmentplanningandmanagement
x x
Debtmanagementstrategy x x x
Taxpolicy x
RevenueandCustomsAdministration x x
Monitoring ofbudgetexecution x x x
Consolidatedfiscal reporting x x x
Cashforecasting andcashmanagement,TSA
x x
Riskmanagementandguarantees x x
Regulation ofbanksandfinancialinstitutions
x x9
TreasuryfunctionsPFMFunction Allocationto
MoF Treasury Agency Line Ministries
Oversightoffinancialmanagement,ITsystems
x x
Accountingstandardsandpolicies x x x
Paymentprocessing, internalcontrol,commitmentcontrol
x x x
Internalaudit x x x
Public procurementpolicy x x
Management ofpublicassets,liabilitiesandPPPs
x x
Oversight ofstate-ownedenterprises x
International financialrelations x
Inter-governmentalfiscalrelations x
Note:Theentriesinthistablerepresent therangeofpracticesacrossdevelopedandmiddle-incomecountries.Wheremultipleentriesareshowninarowthismayindicatethateither(i)practicesvaryamongcountries,or(ii)responsibilityforthefunctionissharedacrossdifferententities. 10
Treasurymodels• Twomainmodels:
– Centralized – alltreasuryfunctions,includingpaymentandcontrolfunctions,arecentralizedinthefinanceministry(heavilyinFrance,lesssoinSpain).
– Decentralized – operationalfunctions(typicallypaymentprocessingandcontrols)aredecentralizedtolineministriesbutcentralpolicyandoversightfunctionsarelocatedeitherinthefinanceministry(UK)oranarms’-lengthagency(Ireland,Scandinaviancountries).
• Withineachofthesebroadcategories,therearesubstantialvariationswithdifferingcontrolframeworksdependingon:– legalandadministrativeframework;– sizeofthecountryandthatofthegovernment;– degreeofcentralizationofgovernmentdecision-making;– reliabilityoffinancialdataandaccounting/reportingsystems;and– capacityatthecentervs.lineministries.
• Inpractice,thedistinctionbetween“centralized”and“decentralized”systemsisincreasinglygettingblurredwithmodernIT/TSAsystemswherecontrolsandpaymentfunctionsareautomated. 11
Alternativeorganizationalstructures
• Departments/directoratesofthefinanceministry(e.g.,Australia,France,UK)
• Aseparateministry(e.g.,Brazil,Indonesia,Turkey)• Anarms’-lengthagencyundertheMoF (e.g.,Ireland,Scandinaviancountries)
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CentralizationandorganizationalCountry Centralized/DecentralizedModel Central
Organization
Centralized Decentralized Hybrid MoFDirect.
Agency
Bulgaria x x
Denmark x x
Estonia x x x
France x x
Finland x x
Hungary x x
Ireland x x
Netherlands x x
Poland x x
Serbia x x
Sweden x x
UnitedKingdom x x x13
Budgetexecutionandexpenditurecontrols
Objectivesofbudgetexecution1. Ensureseconomicandefficientimplementationofbudgetdecisions;
optimizetheuseofavailablebudgetresources
2. Promotesintegrityinmanagingpublicfunds– especiallylegality,financialresponsibility,transparencyandaccountability
3. preventunauthorizedspendingandpaymentarrears;(ii)improvebudgetcredibility;and(iii)promotefinancialintegrity.
4. Assistsintheidentificationofopportunitiesformoreeffectivebudgetinterventionsandimprovedrevenueandexpenditureperformance
5. Encouragesthedevelopmentofmodernandprofessionalfinancialmanagementskills,systemsandproceduresinthepublicsector
Tenstagesinbudgetexecution(1)•
ExpenditureAuthorization:Provideallrevenueandexpendituredepartmentswithappropriateauthoritytocommencebudgetaryoperations(“warrants”)accordingtoagreedspendinglimitsandplans
• Apportionment/allocationofauthorizationforspecificperiodsandspendingunits.Thepurposeofapportionmentistopreventspendingagenciesfromincurringobligationsataratewhichwouldrequiretheauthorizationofadditionalfundsforthefiscalyearinprogress.Thisauthoritytospendisreleasedtothespendingunitsthroughtheissueofwarrants/allotments/décretderépartition.
• Reservation.Oncetheapportionmentofexpenditureauthorizationismadeandthespendingauthorityhasbeenreleased,somecountries’PFMsystemsincludeastageatwhichfundsarereservedforaspecificknownexpensebutforwhichnocontracthasyetbeenissued.
• Commitment:Initiateexpendituredecisions,includingpurchasingandpaymentsoperationsandpayrolldisbursements
• Verification:Establishthatcorrectgoodsandserviceshavebeenreceivedandthattheyhavebeencorrectlyinvoiced
Authorization for Public Expenditure
Limit on amount of expenditure. Government’s expenditure must be within the amounts that the budget appropriations have established, with some flexibility allowed through virements and contingency reserve mechanisms. The nature of those expenditure limits depends on the accounting basis (cash, commitment, or accrual) used in the budget (see Section III). • Limit on time horizon of expenditure. The expenditure must occur within the time limits applicable to the expenditure authorization. Most countries adopt annual budgets authorizing spending for one year; however, some countries authorize multi-year limits for certain types of expenditure (e.g., autorisation d’engagement for multi-year investment projects in France—see Box 3). • Authorized purpose of the expenditure. The authority for expenditure is given for a specific predetermined purpose. The budget classification (which may be organized by programs, sub-programs, projects, economic categories, or line items) usually specifies the purpose for which the expenditure can be made.1 • Administrative unit accountable for expenditure. A unit of government, typically a line ministry, department or agency, is assigned the responsibility to ensure that the appropriated resources are spent as intended within the authorized limits.
10stagesinbudgetexecution(2)• PaymentAuthorization:Initiatepaymentprocessthroughissuanceofappropriate
paymentorder/instructions;Executepayments,includingmanagementofallassociatedtreasuryandbankingarrangementsanddocumentation
• Payment.Onceapaymentorderhasbeenissued,paymentsaremadethroughvariousinstru-ments includingchecks,electronicfundtransfer(EFT),andsometimescash,infavor ofasupplierorotherrecipienttodischargetheliability.
• Accounting:Ensuredetailsofeverytransactionarecorrectlyaccountedfor(manuallyorelectronically);prepareanddistributeperiodicfinancialreportsincludinganalysisonallbudgetexecutionoperations
• FinancialControl/Audit:Operateallpre- andpost-expenditurecontrolsandauditingprocedures
• End-of-YearOperations:Closepaymentoperationsandbudgetaccounts; carryover(unspent)funds,asappropriate,tothenextbudgetyear;meetallstatutoryrequirementsforpresentingafinalreconciliationofbudgetrevenues,expenditures,borrowingandassetchanges(“finalaccounts”).
TABLE 1. TYPES OF CONTROL, THEIR KEY FEATURES AND OBJECTIVES
Type of control Objectives Main features Stage(s) at which applied
Appropriation control Ensures that expenditure is covered in the budget and the proposed amount of expenditure includes all relevant expenses.
Budget cover (against the relevant appropriation) is checked after deducting all expenditures previ- ously approved. The amount should be correctly calculated and there should be no hidden expenses.
Apportionment, reservation, commitment and payment order stages and virements during budget execution.
Aggregate cash control
Minimizes the cost of financing government programs by smoothing the gap between cash inflows and outflows. This control is a key element of the overall cash management system.
Release of spending authority (warrants, notification de crédit, etc.) is controlled against an annual cash plan that is updated on rolling basis. Payments by spending units are coordinated with the cash manager to ensure that sufficient cash is available in the TSA.
Apportionment and payment stages.
Commitment control Ensures that expenditure commit- ments by spending units are fully in line with the expenditure limits and the released spending authority.
Spending units enter into commit- ments only against unencumbered spending authority and the cash plan covers the expected payment profiles of commitments.
Commitment stage.
Control of regularity
Verifies the legal and administrative compliance to ensure that the expenditure operation and related documents/contracts follow the procedure, prescribed in the law and/or financial regulations. /1
Legality of the operation is con- trolled by verifying that the officials approving a transaction have the authority to do so, and that the required supporting documents have been prepared in line with the law/regulations (for audit).
Mainly commitment, verification, payment order and payment stages, but also at other stages.
Accounting control Ensures that transactions are prop- erly recorded and accounted for to produce timely and reliable fiscal reports and financial statements.
Transactions are recognized, clas- sified, and recorded in the books/ general ledger according to a coun- try’s accounting policies/standards and chart of accounts. They are also reconciled with bank statements.
Payment and verification (in case of accrual accounting) stages.
1/ All uses of public funds should be governed by financial regulations. These regulations, among other things, prescribe the establishment of responsibility for financial decisions, the segregation of duties to ensure appropriate checks and balances, and documentation procedures for maintaining a defined audit trail.
Authorization for Expenditure in France Limit on amount of expenditure. Government’sexpendituremustbewithintheamountsthatthebudgetappropriationshaveestablished,withsomeflexibilityallowedthroughvirements andcontingencyreservemechanisms.Thenatureofthoseexpenditurelimitsdependsontheaccountingbasis(cash,commitment,oraccrual)usedinthebudget.
Limit on time horizon of expenditure. Theexpendituremustoccurwithinthetimelimitsapplicabletotheexpenditureauthorization.Mostcountriesadoptannualbudgetsauthorizingspendingforoneyear;however,somecountriesauthorizemulti-yearlimitsforcertaintypesofexpenditure.
Authorized purpose of the expenditure. Theauthorityforexpenditureisgivenforaspecificpre- definedpurpose.Thebudgetclassification(whichmaybeorganizedbyprograms,sub-programs,projects,economiccategories,orlineitems)usuallyspecifiesthepurposeforwhichtheexpenditurecanbemade.
Administrative unit accountable for expenditure. Aunitofgovernment,typicallyalineministry,departmentoragency,isassignedtheresponsibilitytoensurethattheappropriatedresourcesarespentasintendedwithintheauthorizedlimits.
CommitmentandPaymentControlImplementingabudgetlegallyandaccuratelyrequireseffectivecontrolsonexpenditurecommitmentandpayment,includingeffectivesanctionsonunauthorizedactivity:
1. KeyElementsofCommitment Control:
• Statedpurposeandfinanciallimitofapprovedbudgetlines• Clearvirement limitsandprocedures• Commitmentauthorizationproceduresatlineministrylevel• Clearandenforcedprocurementrulesandprocedures
2. KeyElementsofPaymentControl:
• Effectiveproceduresforreceivingandverifyinggoodsandsuppliesasordered,andupdatingrecordsofstocks/inventory
• Clearandenforcedproceduresforissuingofpaymentorders• Effectivesanctionsonincorrectpaymentprocedures/decisions• Educationofregularsuppliersinproceduresandrequirementsofgovernment
purchasing/payment
Nature of expenditure limits • Cash-based budgeting systems primarilyenforcealimitontheaccumulationandliquidationofcashobligationsincurredduringthebudgetyear.Astrictlegalinterpretationofacashappropriationwouldmeanthattheappropriationisutilizedwhenthegovernmentmakesacashpayment.Therefore,enteringintoacommitmentorincurringaliabilityinexcessofthelimitwouldnot,intheabsenceofothercontrols,constituteabreachoflaw.Wherecountrieshavecashappropriationsandaccrualbasedfinancialstatements,thisusuallygivesrisetodifferencesbetweenbudgetexecutionreportsandfinancialstatementsthatrequirereconciliation.
• Commitment-based budgeting systems imposelimitsonbothexpenditurecommitmentsandcashpayments.Commitmentlimitsmaybemulti-yearinnature(usuallyforcapitalprojects)andcarriedoverfromonefinancialyeartothenext,whilecashexpenditurelimitsareusuallysetforthebudgetyear.
• Accrual-based budgeting systems enforcelimitsontheincurrenceofliabilities,expensesorexpenditureevenwhennoimmediatecashtransactionsareinvolved.Inaddition,theymayimposelimitsonaccumulationofcashobligations,multi-yearcommitments,andlong-termobligations(suchaspensions)andcontingentliabilities(suchasguarantees).
• The presence of dual appropriations (either commitment/cash or accrual/cash) can complicate control of budget execution by spending agencies.
• Undercommitment-basedbudgetingsystems,thereisaneedtoseparatelytrackandaccountforbothexpenditurecommitmentsandpayments,liquidatethelatteragainsttheformerduringthecourseofthebudgetyear,andcarryforwardunusedcommitmentappropriationsbetweenyears.
• Underadualaccrualandcashbudgeting/appropriationsframework,thereisaneedforeachagencytomakeprojectionsofbothitsanticipatedcashrequirementsaswellasincurrenceofexpensesandliabilitiesandaccumulation/realizationoflong-termobligationsandcontingentliabilities.
Dualappropriations
• Aspartofthecomprehensivereformofitsbudgetframeworkin2001,Franceintroducedmultiannualcommitmentauthorizationsasameansofcontrollingexpenditureobligationsandassociatedpaymentsforprogramsorprojectsthatspanmorethanoneyear(e.g.,investmentprojects).
• Formultiannualprograms/projects,theapprovedbudgetincludesboththemultiannualcommitmentlimits(autorisations d’engagement or AE)againstwhichitalsosetsannuallimits(crédits de paiement or CP)forcashpaymentsduringtheyear.Assuch,thefocusofexpenditurecontrolatthecommitmentphaseofbudgetexecutionhasmovedfromanannualtoamultiannualbasis,i.e.,thetotalcostofalegalcommitmentintowhichthegovernmentisenteringintoisfullyrecordedagainsttheavailablemultiannualcommitmentauthorizations/AEs.
• Assuch,theAEsareconsumedatthecommitmentstageoftheexpenditureorthelegalactofsigningacontractoftheStatewithathirdparty.
Commitment-basedlimitsinFrance
Authorization. Enhancethecoverageofthebudget,improvingthemethodologyofcostingbudgetpolicies,introducingmedium-termfiscalandbudgetframeworks,andensuringtimelyapprovalofthebudget.
Apportionment.Developexpenditureplansbylineagenciesandsubmissionoftheseplanstotheministryoffinancefordecisiononapportionment,andpreparationofcashflowplans
Reservation/pre-commitment.Streamlinetheprocurementprocesstoreducethetimeofwithholdingthereservedfundsbeforetheyarecommitted,andensuringthatthesereservedfundsareintheTSA.
Commitment.Introduceacomprehensivecommitmentcontrolsystem,includingformulti-yearcommitmentsandstandingcommitments(e.g.,salaries,utilities,subsidies,transfers,etc.).
Verification.Clarifyresponsibilitiesforverificationofdeliveryofgoodsand/orservices,ensuringdocumentaryproofofdelivery,andeliminatinganydelaybetweenverificationandpaymentorders.
Paymentorder.Ensurethatpaymentsaremadewithintheduedatetopreventaccumulationofliabilities/arrears,extendthehorizonofthecashplanwhichalsoreflectsexpectedpayments,andeliminateexceptionalproceduresforpayment.
Payment.Modernizethemodeofpayment(e.g.,throughelectronicfundtransfer),streamliningcheckfloats,introducingactivecashmanagementtoensurecashavailabilityforpayments,andbankreconciliation.
Potentialproblemsandsolutions
ManagingPaymentArrears• Paymentarrearsrefertooutstandingfinancialobligationsforwhichpaymentisconsidered
“overdue”.
• Paymentarrearsmayarisefrom:Ø anunrealisticbudget(incl.overestimationofrevenues),Ø poorcashmanagement,Ø poorcontrolofcommitments,andØ individualorsystemiccorruption.
• PaymentsarrearsshouldalwaysbeaprimaryconcernfortheTreasury;theyindicatethatthegovernmentaccountsareundersubstantialfiscalpressureand/orthatbudgetexecutionandcontrolproceduresarefailing
• Accumulationofarrearsdetrimentallyimpactsonthegovernment’scredibilitywithsuppliersandonbudgetexecutionbydistortingspendingand/orborrowingplans
• Removingarrears– andpreventingfurtheraccumulation– requiresasustainedstrategyfromTreasuryandtherelevantdepartments
TreasuryandBankingArrangementsAdviceoftenneededonkeychoices:
– Treasury(Government)Accounting&PaymentsSystems:• Manual,interfaced,orintegratedITsystems– “GFMIS”• Centralized(MoF)vs.decentralized(lineministry-based)controls
– BankingArrangements:• CentralBankbasedgovernmentaccountsvs.privatesectorbankingproviders
• TreasurySingleAccount(TSA)vs.devolved(multi-account)systems
1. Treasuryandbankingarrangementsforbudgetexecutiondependsignificantlyonacountry’scommercialbankingsectordevelopment,theavailabilityanduseofrelevanttechnologiesandthequalityofICTinfrastructure
2. ModernizationoftreasuryandbankingsystemsforPFMofteninvolvesincreasinglydecentralizedcontrols,intandemwithaTSA
3. However,thereisnosingle,bestprescription;goodfinancialaccountingandcontrolcanstillbemaintainedinlessdevelopedenvironments
FinancialControlandAudit“Financialcontrol”referstotheregulationsandproceduresthatensuretheintegrityofbudgetoperations.
Therearethreebroadsystems(ormechanisms)offinancialcontrol:
§ Pre-commitmentandpre-paymentcontrols(aparticularemphasisinFrenchPFMadministrativesystems)
§ Post-paymentcheckingandreview- i.e.,“internalaudit”byspecializeddepartmentand/orTreasury-managedagency,focusingonbothtransactionsandsystems
§ FinancialInspectionand/orExternalAudit– thirdparty(independent)authoritynotanswerabletoTreasury/MoF
FinancialReportingandAccounting• The“accountingsystem”providesthefinancialmanagement
“template”forrecording/reportingallbudgetallocations,revenueandexpendituredecisions/actions.
• BudgetClassificationandtheChartofAccounts definehowthisinformationwillberecorded,presented,reportedandanalyzed.
• Financialregulationsdefineandcontrolallaccountingandreportingoperations;ensureaccuracy,transparency,consistencyandlegitimacy
• Accountingandreporting practicesvarywidely;increasingconvergencetointernationalmethodsandstandards (e.g.IPSASandGFSM)
• Accountingsystemsarenotstatic;constantdevelopmentandimprovementintheconcepts,methods,standardsandtechnologies
Cashmanagement
TheObjectivesofCashManagementOverridingobjective:
Ensuringcashisavailabletomeetcommitmentsjustintime
Ø Economisingoncashwithingovernment• Savingcosts• Reducingrisk
Ø Managingefficientlythegovernment’saggregateshort-termcashflow• Bothcashdeficitsandcashsurpluses
Ø Insuchawayasalsotobenefit• Debtmanagement• Monetarypolicy• Financialmarkets(marketliquidityandinfrastructure) 31
Approachestocashmanagement
• Traditional(Passive)Approach
• Essentiallypassive• Monitoringcashbalances,
maintainingcashbuffertohandlebothvolatilityandunanticipatedoutflows
• Ifnecessaryrestraining/slowingexpendituresordelayingbillpayments- cash“rationing”notcashmanagement
• Modern(Active)Approach
• Managingcashmoreactively• Tryingtosmoothweeklyordailycash
flowbymoreactiveborrowingandlendinginmoneymarket
• Allowsloweraveragecashbuffer–withbenefitstootherpolicies
• Givestoolstoprotectexpenditureplansfromcashflowvolatility
32
OECDandmanymiddle-incomecountries(especiallyinEuropeandLatin-America)movingtowardmoreactiveapproach
FiscalObjective
v Ensurecashisavailabletolineministries andspendingagenciestomeetbudget obligationsandcommitments,whendue
v Managebalancesingovernmentbankaccounts effectivelyby:
(i)borrowingtocoverexpectedcashshortfalls,andavoid“idle”balances(ii)investingduringperiodsofsurplus,and(iii)minimizingborrowingcosts
MonetaryObjective
v Neutralizetheimpactonthedomesticbankingsectorofthegovernment’scashflows,ensuringthat:
(i)therearenolargeandunexpectedchangesinliquidityinthebankingsystem
(ii) overallmonetarypolicy(incl.monetarygrowthandinflationtargetsetc.)isnotundermined
KeyPolicyObjectives
Cashflowforecasting
Ø EfficientcashmanagementrequiresabilitytoforecastdailycashflowsacrosstheTSA• Tofacilitateorderlyachievementofbudgettargets;andto
ensurethatbudgetedexpenditureissmoothlyfinanced• Todevisethestrategiesforsmoothingthecashflowprofile
Ø Asmoothercashflowmeans:• Loweraveragecashbalances• Reducedborrowingcosts• Interestoncashbalancesalwayslessthaninterestonmarginalborrowing
• Lesspressureoncentralbanks’monetarypolicyoperations
34
Cashflowforecasting:theaim
Ø ObjectiveistoanticipatecashneedsofgovernmentØ Forecastsneededoftotalnetcashflow(hencealsocashbalance)
• Receiptsandpayments(abovetheline);and• Financingtransactions(belowtheline)- debtredemptions,new
borrowing,assetssales• Focusisdomesticcurrency
Ø MayneedtoidentifyFXflowsseparately(dependsonTSAstructure)
Ø Forecastinformationisneededforsomeperiodahead§ Timingoffuturepeaksandtroughsmustbeidentifiedtomake
decisionsaboutthematurityofrequiredborrowingorlendingØ Ideally
• Daily(ifnecessaryweekly)some3monthsahead• Rolledforwardregularly(weekly)
35
KeyFeaturesofForecastingFramework
Ø Frameworkmustbecomprehensive
Ø Whatmattersiscashflow• Separationofpermissiontospendfromactualspending• TaxrevenueinTSAnotinbankingsystem
Ø Monitoractualchangesinclosetorealtime• Analysedivergences
Ø Forecastingreliesheavilyonthoseinspendingunitsandtaxdepartmentsclosesttocashflows
Ø ConcentrateonmajorinflowsandoutflowsØ Emphasisisonhistoryandexperience
• Noteconometrics
36
ToolandTechniques- 1Ø Atstartofyear,forecastsconsistentwithannualbudget
• Butneedunbiasedestimates– whatisgoingtohappen,notwhat“should”happen;donotconstrainbudgetasyearprogresses
• Mayhelptoseparateforecastingfrombudgetexecutionprocesses
Ø Revenueforecastsfromthetaxdepartments• Monthlytotalsoftaxreceipts,bytaxforxxmonthsahead• Daily[weekly]taxreceiptsfornextmonth,1-3monthsifpossible• Taxusuallymorevariableandmoreunpredictable
Ø Expenditureforecastsfromspendingagenciesorunits• Expectedexpenditure(cashnotcommitments)byday/weekforxxmonthsahead• Focusonlargestspendingunits[80/20rule]• Requirepre-notificationofmajorexpenditures• Manycountrieshaveanend-yearsurgeinexpenditure– avoidrulespreventing
end-yearcarryoverofunusedappropriations
37
ToolandTechniques- 2Ø Identifyseasonality
• Monthlysalarypayments;regularsocialwelfareorpensionpayments• Someotherexpenditures– e.g.agriculturalsupport– maybeseasonal• Taxpaymentdays(geartaxpaymentdaystodaysofexpenditureoutflow)
Ø Identifymajorindividualflows– manyarepreciseandpredictable• Debtissuanceandredemption;interestongovernmentdebt(avoidredemptions
ondaysofheavyexpenditure)• Transferstolowerlevelsofgovernment• Receiptsfrommajorassetsales• Lesspredictablebutimportanttoidentify:
- Paymentsonmajorpublicprojects- Taxpaymentsbythelargestcompanies
Ø Particularproblemswithdonorgrantsanddisbursements• Highlyuncertain,difficulttoforecast,dependsonprojectprogress• Maybepossibletoassumethatprojectspendingandproject-relatedfundingnet
tozero– butdoesnotcopewithlumpyflows• InflowsmayalsogotoseparateaccountsnotTSA
38
MakingforecastingworkinpracticeØ Importantthatspendingunitsandtaxdepartmentscooperate
• Insistonprofilesandforecasts,andreportsonwhyvariationstoforecastsoccurred• Goodadministrativepracticeshouldbeenough;butifnecessarylegislate
Ø CarrotsandSticks• Rewardgoodforecasting:greaterdelegatedauthority,easiervirement,roll-over
unusedappropriations(financialpenaltiesforpoorforecasting)• Ensurethereisnoincentivetohoardcash
Ø Dailymonitoring• MonitoractualtransactionsacrossTSA• Outturnforthedaymustbeknownnolaterthanfollowingmorning• Analyseexperience:e.g.doforecasterrorsimplytimingchangeswithinthemonth
orchangesinthelevelofactivity?
Ø Personalcontacts• Avoidrequests/informationgoinguphierarchy,acrossanddown• Cashforecastersintreasurymusthavedirectcontactwithoppositenumbersin
majorspendingunitsandtaxdepartments39
ManagingforecastdataØ Cashflowforecastingusuallyrequiresdevelopmentofasinglecentral
databaseindependentoftheIFMIS.Reflectsdifferentpurposes:• Cashflowdataareneededtosupportimmediateoperationaldecisions• Theydonothavetobeof“accounting”qualityorprecision
• NotallaccountingchangesrepresentcashflowsØ Cashmanagersneedadatabasethatis:
• Flexibleandundertheircontrol• Allowspreparationofscenarios,what-ifsetc• Abletoholdoutturninformationforanalyticalpurposes
Ø ManycountriesuseExcel,atleastinitially
40
WhodoesWhat?Ø Variousnationalmodels– no“right”approach– butemergingbestpracticeØ Spendingunitsandtaxdepartments– provideabovethelinedataØ InMoF/Treasury/DebtManagementOfficedistinguishbetween:
• Whoaggregates‘abovetheline’forecasts;andtakesresponsibilityfortheprojectionofthetotal
• Whoadds‘belowtheline’transactions– willoftenbedebtmanagers• Whoisresponsiblefortakingdecisionsaboutinvestmentofsurplusesorissuanceof
T-BillstomanagecashflowØ Centralbank– providesbankingservicesandinformationflows
• MayprovidedetailsofactualflowsordisbursementsØ Goodpracticeguidance
• Identifywhoisresponsibleforwhat– othersshouldnotsecondguess• Singlefocusforfinalcompilationanddecisionmaking– onecashmanager• Regular[weekly]meetingsofthoseresponsibleinMoFtoreviewforecastupdates,
decideoninvestment/issuancepolicies,establishriskparameters
41
PuttingtheforecasttoworkØSmoothingthenetcash- Distinguishbetween:
• “Roughtuning”– issuingTreasurybills(orothershort-terminstruments)toapatterndesignedtooffsettheimpactonbankingsectorofnetcashflowsinandoutofgovernment,ietosmoothsomewhatthechangesintheTSA
• “Finetuning”– moreactivepolicies,awiderrangeofinstruments,tosmooththetreasury’sbalancemorefully– technicallymoredemanding
Ø IdentifyresponsibilitywithinMoF/Treasury/DMO• IncreasinglygiventoDMOorsimilar,inconsultationwithothers,
becauseofthebenefitsofintegrationbetweendebtandcashmanagement
• Butdifferentinternationalmodels
42
RoughTuning:Example
43
-25000
-20000
-15000
-10000
-5000
0
5000
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
-25000
-20000
-15000
-10000
-5000
0
5000
10000
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
RoughTuningwithweeklyissueofTreasuryBillsonly
Convertsthis profiletothis profile[Finetuningmakesitflat]
Puttingtheforecasttowork
ManagementofCashBalancesØ Separatelyidentify
• Managementofdaytodaycash,includingthecashbuffer• Managementofastructuralsurplus(netofanydebtrepayment)
Ø Structuralsurplus:distinguishbetween• Cashthatmightbeneededoneday
[egin6months]– usuallymanagedbycashmanagersalongsidethecashbuffer
• Longer-termfundso Sovereignwealthfunds,fundsfor
futuregenerations,fiscalstabilisationfunds,pensionliabilityfundsetc
o Managedseparately– incontextofgovernment’swholebalancesheet
Ø Governmentsneedaccesstoliquidity• Impliessomecashbalances• Howdoyoudecidetheminimum? 44
0
2
4
6
8
10
12
14
16
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
WorkingDays
bn
Ringfencedbalances(donor funds,stabilisationfundetc) =2billion
CashBuffer =6billion
Target:keepcashflowsinrangeof+/- 3billion,i.e.TSAinrange8-14billion
WhatDeterminestheCashBuffer?1.Thevolatilityofdailycashflows2.Theabilitytoforecastthosecashflows
– Thestandarddeviationoferrorsintheforecastwill[should]bemuchlessthanstandarddeviationofoutturn
– Keyareaforpolicyfocus– treasurershavelessleverageoverotherdeterminants
3.Thescopetomanageunanticipatedfluctuationsandthetimescaleoverwhichtheycanbemanaged– HowsooncanadditionalT-Billsbeissued?
4.Safetynets– Emergencycreditfacilitiesorcashreserves– Endofdayborrowingfromcommercialbanks– [Short-termborrowingfromcentralbank]
45
CashBuffersinPracticeØ SeveralnorthernEuropeancountriesoperatewithcashbalancesinthecentralbank<0.1%
annualcentralgovernmentexpenditure
• Buttheyhaveliquidmoneymarkets,sophisticatedactivecashmanagement.Someplantobelongofcashandon-lendonlywhenpositionissecure
• Dryingupofliquidityledsometobemorecautious
Ø Someotherapproaches– theimportanceofsignallingprudence:
• Targetbalancecalculatedasasafetyreserveineventofadversemarketconditions–dependsonexpectedtimetoreturntonormality
• Maintainingbalancesasleastasgreatasthedebtredemptionsdueinthefollowingmonth,implicitlyallowingforafailedauction
• Toguaranteebudgetexecutionordebtservicefor[X]months
Ø Recommendedbufferinabsenceofdevelopedcashmanagement:
• Cumulativeforecasterrorsoverpolicyreactionperiodcoupledwithacautionarybalanceformarketdisruptionorauctionfailure
• Butthebufferhasanopportunitycost– thereisatrade-offwithcaution
46
CashFlowBuffer:Illustration
-6000
-4000
-2000
0
2000
4000
6000
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49
CumulativeForecastCumulativeActualCumulativeError
Mns
Days
Deterioration 4.9 bn over 4 days
Deterioration 5.8 bn over 6 days
Buffer=Cumulativeforecasterroroverreactionperiod,plus
precautionarybalance
Thefinancialcrisis:somelessons?Ø TheCashManagementReformProgram
• Morefocusonliquidityrisks=>highercashbuffer!• Importanceofimprovedcashflowforecasting
Ø Strongcaseforclosecoordination(orintegration)ofcashanddebtmanagement• Moneymarketisanadditionalshort-noticesourceoffunds– huge
increaseinT-Billissuanceinmanycountries• Bothdebtmanagersandcashmanagersneedaliquidmoneymarket
Ø Developmechanismstocooperatewithcentralbank• Essentialwhenbankingsectorunderstress• Mutualinterestinmoneymarketdevelopment– developrepomarket• Cooperationdoesnotjeopardisepolicyindependence
Ø Developa“financingcontinuityplan”• Greatercautioninrespectofcash,somefront-endloadingofauctions;
proceduresforshort-noticeissuance/[tapping]ofT-Bills,TBonds• Developcashmanagementsafetynets– alongsidethecashbuffer 48
WhatisReducingtheEffectivenessofTreasuryandCashManagement?
Ø PoorCoADesignØ ToomanybankaccountsØ LackofconsolidationofbudgetexecutionprocessesØ Cashadvances/cashfloatsØ PrepaymentsØ Paymentsbychequeinlieuofbanktransfers
49
WhatisReducingtheEffectivenessofTreasuryandCashManagement?
ØNocommitmentcontrolovercapitalandrecurrentspending
ØCapitalcashflowsnotprovidedØRevenuesnotbroughttoaccounteachdayØSpendingdecisionsneedtobeanchoredintheoriginalbudget
ØNewspendingrequests- Remember,approvalofsomethingnewmaymeanyoucannotpayexistingcommitments– medicines,salaries,etc.
50
Conclusions
Ø Growinginternationalappreciationoftheimportanceofactivecashmanagement• Reducesdebtinterestcosts• Contributestootherpolicies
Ø Underpinnedbycashflowforecasts• Anticipatecashflowneedsofgovernment• Dependentoncentralisinginformationfrommanysources
Ø UseofT-Bills,collateraliseddepositsandothershortterminstruments(repoandreverserepo)totunecashflows• Identifykeyresponsibilities• Focusonmoneymarketdevelopment
Ø Identifytargetcashbalances– butincludeabuffer51
TreasurySingleAccount(TSA)
DefinitionsandJustification
ATreasurySingleAccount(TSA)isa
“Unifiedstructureofgovernmentbankaccounts” that…..involvesatop(or“parent”)account,usuallyatthecentralbank,throughwhichthegovernmenttransactsallitsreceiptsandpaymentsandgetsaconsolidatedviewofitscashpositionattheendofeachday.”
Source:PattanayakandFainboim,2011,IMFTechnicalNotesandManuals
TypicalBankingArrangement
MultiplicityofBankAccounts(NoCashConsolidation)
SpendingMinistry
Bank
Accounts
SU
SU
SU
SU
SU
SU
SU
SU
Ministryof
Finance
SpendingMinistry
SpendingMinistry
SU = Spending Units
SU
CommonProblemsinBankingArrangements
1. Multiplebankaccounts:partialornocashconsolidation
2. Idlecashonbankaccountsnotremuneratedwhileaccountsindeficitattractinterest(additionalborrowingcosts)
3. Lowcollectionefficiency– floats rangefromafewdaystomonths
4. Noformalspecificationofserviceexpectations
5. Difficulttoestablish“fullcashposition”ofthegovernment,hence:
§ impossibletoprioritizeandcontrolexpendituredisbursements.§ bankreconciliationresponsibilitiesdispersedandoftenneglected.§ relianceonbankingratherthanaccountingsystemsforbudgetperformance
information.
6. AcomplexstructureofTreasurybankaccountsinthecentralbankandcommercialbanks:differentaccountsfordifferenttypesofexpendituresandrevenues,fewautomatedlinkages
TSA:SummaryofBenefits1. Ensurescomplete,real-timeinformationongovernmentcash
resources(withsupportofaGFMIS)§ enablesefficientcashmanagement§ helpspreparationofaccurateandreliablecashflowforecasts§ optimizesthecostofgovernmentoperations:includes
minimizingthevolumeandcostofgovernmentborrowingandloweringliquidityreserveneeds
§ increasesthereturnonexcesscash
2. Facilitatesefficientcollectionandpaymentmechanisms
3. Improvesoperationalandappropriationcontrolduringbudgetexecution
4. Enhancesefficiencyandtimelinessofbankreconciliation
5. Facilitatestimelyandmorecompleteaccountingstatements/reports,including sourcesandusesofcash
GuidingPrinciples1. Unifiedstructure
§ “Completefungibility”ofallcashresources(inrealtime,ifelectronicbankingisinplace)
2. OversightbytheTreasury
§ Noothergovernmentagencyoperatesbankaccountsoutsidetreasurycontrol/supervision
§ CashbalanceintheTSAismaintainedatalevelsufficienttomeetdailyoperationalrequirements(linkagestodebtmanagement)
3. Comprehensivecoverage
§ Fullconsolidationofcashbalancesofallgovernmententities(budgetaryandextra-budgetary)
BankingArrangementsunderaTSA
58
Debt repayments/interest payments
Subsidies
Transfers (e.g. to local governments)
Payments to suppliers
Payment of wages and salaries
ØØ
ØØ
ØÚ
ÚØ
Ø
Daily settlement with TSA
Bank account(s) of the treasury
Transit / zero-balance bank accounts of the
treasury
Tax payersGovernment Borrowings
TSAStrategy:FocusonCashConsolidation
1. DefinethescopeoftheTSAinapolicydocument2. Developastrategywithprioritizedactions:
§ firstfocusonpotentiallyriskyaccountswithsignificantbalances§ potentiallytargetcommercialbankaccountsofspendingagencies,
extra-budgetaryfunds,anddonorprojectsinthatorder3. Distinguishbetweentheauthoritytospendandphysicallocationofcash:
§ developanaccountingsystemthatclearlyandaccuratelyidentifiescashbalancesofeachentity;
§ developafunctionalityinGFMIStomaintainledgersub-accountswithcorrespondingcreditlimits;
§ establishlegalauthoritytopoolcash(couldinfringeonfiscalautonomyofsub-nationalgovernments)
4. Assurespendingagenciesthatcashwillbeavailablewhenneeded:§ developsuperiorcashforecastingandmanagementcapabilitiesto
meetcashneedsofallentities
TSAStructure:Options1. Acentralized bank account structure:
§ typicallyasinglebankaccount (possibly with sub-accounts)generallymaintained atthe centralbank
§ usuallymanagedwithinwelldevelopedaccountingsystemandaGFMIS§ typicallyRTGS-basedpayments(oftenwithtreasuryasadirectparticipant)
2. Adistributed bank account structure:§ severalindependentbankaccounts(generallyZBAsopenedwithcommercial
banks)operatedbylineagencies/spendingunitsfortheirowntransactions,withpositiveandnegativebalancesintheseaccountsnettedintotheTSAmainaccount
3. Acombination ofcentralizedanddistributedfeatures4. Atthecentralbank:
§ safehavenforgovernmentcashdeposits,minimizescreditriskexposure§ facilitatesthecentralbank’smonetarypolicyoperations§ canfacilitatecost-effectivebankingarrangementsandspeedysettlements§ oftenalegalrequirement
5. Atcommercialbanks – muchlesscommon(Peru,Argentina)
BudgetAuthority/TransactionsProcessing
1. Thedecisionastowhether– andtowhatextent-budgetauthorityshouldbedelegatedtolineministriesisindependentoftheTSAstructure.
2. ATSAcanoperatewithbothcentralizedanddecentralizedtransactionprocessingandaccountingcontrolsystems.
TSAstructureTransactionProcessingSystemCentralized Decentralized
Centralized FranceBrazil
India
Distributed UnitedKingdom Sweden
AdvancedOrganizationalFeatures1. Aninterbanksettlement/clearingsystem
2. Arealtimegrosssettlementsystem(RTGS)atthecentralbankforhighvaluetransactions
3. MajorcommercialbanksandTreasuryconnectedtoRTGS
4. Developmentofasmallpaymentsclearingsystem
5. Electronictransactionprocessingandpaymentsystem(e.g.,GFMIS)withinterface/connectivitytothebanks
6. ATreasurygeneralledgersystemtokeeptrackofcashflowsthroughtheTSA
7. FrameworkagreementsbetweenTreasury(MoF)andbanks
§ Standardizedservicesandtransparentfees§ Penaltiesfordelaysandunder-performance§ Monitoringaccounts/balances
8. AnMoUbetweentheMoF/TreasuryandtheCentralBank 6262
MultipleBankAccounts:AnExample
AccountsinCommercial
Banks
AccountsintheCentral
BankTotal
CentralGovernment
Governmentdepartmentsandagencies
8,003 8,003
PrimarySchools 34,400 34,400Treasury 245 78 323Off-budgetaccounts 367 367TotalCentral Government 42,939 78 43,093
Localgovernmentunits 48,745 48,745
Government-ownedenterprises 3,800 3,800
63
MultipleBankAccounts– IdleCash…
64
TSACoverage
• Budgetarycentralgovernment– Oftendonorfundedprojectsgetexcluded
• Centralgovernment,including:– Autonomousgovernmententities– Extra-budgetaryfunds– Social-securityfundsandothertrustfunds(Brazil)
• Distinguishbetweentransferprogramsandpensionfunds
• Centralandsub-nationalgovernments– EitherunderasingleTSA(France)orseparateTSAs(China)
• Publiccorporations(generallynotincluded)– Shouldincludethoseactingasgovernmentagencies.
6565
InstitutionalChallengesforTreasuryReforms(thesevenCs)
• Consistency withinternationalstandards• Compliance byspendingagenciesandunits• Coverageofthebudgetandreportingframework• Consolidation ofcash• Complexity – ensurethebasicsareinplacebeforemovingtoimplementmorecomplexreforms
• Cost – beforeembarkingonanyreformacost/benefitanalysisshouldbeundertaken
• Capacity – developingcapacitytoimplementthenewreformsiscritical
Selected references
67
• Pattanyak,S.,ExpenditureControl:KeyFeatures,Stages,andActors,IMFTechnicalNotesandManuals, May2016,availableat:http://blog-pfm.imf.org
• Pattanyak,S.andI.Fainboim,TreasurySingleAccount:AnEssentialToolforGovernment,IMFTechnicalNotesandManuals, August2011,availableat:www.imf.org/external/pubs/ft/wp/2010/wp10143.pdf
• Saxena,Sandeep,andSamiYläoutinen,ManagingBudgetaryVirements,IMFTechnicalNotesandManuals, May2016,availableat:http://blog-pfm.imf.org
• WilliamsM.,on“TheTreasuryFunctionandtheTreasurySingleAccount”inAllenR.,HemmingR.,andB.Potter,InternationalHandbookonExpenditureManagement,Chapter16,Macmillan.2013.
