Local Government Cash Management - PFM blog

Local Government Cash Management –
International Experience and Options
International Seminar on Local Government Treasury
Cash Management - December 10-11, 2009
International Monetary Fund
Fiscal Affairs Department
Holger van Eden
Deputy Division Chief
Public Financial Management Division II
Fiscal Affairs Department
E-mail: [email protected]
Sanya, Hainan Province,
People’s Republic of
What is Government Cash Management?
The Treasury Single Account: a key component
How have countries developed Cash
How can central and local governments
coordinate development of cash management?
What model does international experience
suggest for China?
Factors to consider
Questions and Discussion
1. What is Government Cash
Formal Definition: Government Cash Management is:
“the strategy and associated processes for managing costeffectively the government’s short-term cash flows and
cash balances, both within government, and between
government and other sectors” [1]
Informal Definition: cash management is the neglected “little
brother” of debt management >>> often seen as less
urgent, significant costs to implement well, benefits
broader than just lower cost
[1]Government Cash Management, Good –and bad – practice, Mike Williams,
Why is Cash Management
Without it:
 Budget execution can be disrupted by lack of funds
 Excess liquidity - idle balances – can accumulate at nontreasury units and spent inappropriately
 Payments can be delayed, revenues held up, benefitting
mainly the banking sector
 Cash shortages can exist while overall government has a
cash surplus, requiring unnecessary borrowing
>>>inefficient use of cash resources
 Cost of cash accumulation can be substantial>>> it is
financed implicitly by government debt, and/or the
remuneration is very low (opportunity costs)
 Short-term borrowing and investment of cash can be very
risky (interest rate risk, roll-over risk, investment risk,
credit risk, non-availability risk)
Two objectives of cash
Ensure availability of cash resources at all times for
efficient and unconstrained) implementation of the
annual budget
Use available cash with the least cost and risks
>>> Developing countries usually initially focus on the
first objective; first task of government is to
provide public goods and services to citizens
Main elements of Modern
Government Cash Management
A Treasury Single Account (TSA) for pooling liquidity, held
preferably at the central bank
A government direct payments system, centralized
through a Treasury-managed TSA, or decentralized
payment by ministries and agencies through zerobalanced bank accounts connected to the TSA
Immediate transfer of all government revenues to TSA,
including of so-called “own-revenues” of line ministries
and agencies
Policies for better matching expenditure and revenue
flows, including timing of higher-level government grants
A cash flow forecasting system
Targeting of a remunerated TSA balance (usually slightly
Use of appropriate short-term financial instruments, both
at the liability and at the asset side
Why is Cash Management
difficult? (1)
A comprehensive payment and related accounting system needs
to be developed (either fully centralized in MOF, or decentralized
with zero-balancing of commercial accounts overnight to TSA)
Setting up a comprehensive TSA can be politically difficult and
technically a lot of work; is seen to infringe on line ministry,
agency, or local government independence
>>> message: control over cash is not the same as control over the
Commercial banks need the capacity to provide electronic
payments services, and perform sweeping with central bank
Cash forecasting is inherently difficult (economic uncertainties,
lots of information needs, an IFMIS is required)
Why is Cash Management
difficult? (2)
Financial markets need certain level of development
to offer required financial instruments
Central bank may resist remuneration of cash
balances and/or government using commercial
banks or financial markets
Capacity (systems and staffing) constraints in
Coordination needs (with debt management, Central
Bank, other parts of government)
Central bank and commercial banks may resist
structural decrease of cash holdings
2. TSA central element of
government cash management
“ a unified, hierarchical structure of government bank
accounts that provides a consolidated framework for
government cash management”
Three essential elements:
1. Allows full fungibilty of government cash resources
(at a the level of government the TSA deals with);
2. No bank accounts outside supervision and (ultimate)
control of Treasury;
3. Comprehensive consolidation of cash resources
(both budgetary and extra-budgetary)
Characteristics of TSA
TSA balance almost always held at central bank (no
credit risk, usually cost-effective, CB acts as bank
clearing house)
Payment transactions often channeled through
banking system, not central bank (depends on
development of banking system)
Bank accounts of ministries are usually transformed
into ledger accounts, that is accounting identities;
cash balance is transformed into drawing rights on
TSA, up to budget allocation
TSA arrangements generally ensure that revenue
and disbursement floats are minimized >>> direct
payments, electronic transfers, sweeping
Objectives of a TSA
Aggregate control over government cash resources
>>> pre-condition for active cash management
>>> does not detract from budget authority of ministries
and agencies
Maximizes use of cash resources; minimizes idle balances
 Minimizes borrowing costs
 Minimizes transaction costs, i.e. the float, and allows
central negotiation of banking services
 Provides control and monitoring of payments and
revenues of government agencies
 Facilitates reconciliation between banking and accounting
>>> provides essential information for cash forecasting
Who to include in TSA?
Ministries, agencies, all budget units
Extra-budgetary funds such as social insurance
funds , health funds, road funds, etc.
Donor funds, debt financing
Local government ??? In some cases....
Not: public enterprises, civil service pension funds that
invest, other investment vehicles
If not included: set up own TSA to enable cash
Two types of TSA
Centralized: all payments executed by Treasury
through TSA held at central bank
Decentralized: most payments executed through
ministries and agencies through commercial bank
accounts (and possibly, central bank bank accounts)
which are swept overnight in main TSA account
>>> centralized model includes centralized accounting,
>>> decentralized model requires adequate
commercial banking infrastructure, and linkage of
central and ministry accounting systems
>>> various decentralized models
TSA rarely one account !
Main TSA account at central bank operated by
TSA sub-accounts or ledger accounts for all
ministries and agencies (cash is usually not actually
held in these accounts)
Zero-balanced transaction accounts at commercial
banks held by ministries/agencies
Imprest accounts for petty cash, held by
Transit accounts held for bookkeeping purposes,
either at CB or commercial banks
To monitor revenue flows
To facilitate revenue sharing among levels of government
>>> should be swept in main account daily
TSA and automated systems
TSA can be established with manual payment and
accounting system, but an integrated financial
management information system enhances
efficiency greatly
A treasury ledger system is essential in keeping
track of cash flows over the TSA
Automated systems allow daily reporting of
expenditure and revenues transacted over the TSA
In both centralized and decentralized payments
systems Treasury control is largely automated.
Spending limits are set per agency and line item,
per time period (month, quarter, or year)
Modern treasuries perform only limited transaction
3. Phases in Cash Management
Development (1)
Not necessarily exactly in this order:
Ad hoc cash rationing and/ or resort to central bank
Orderly cash rationing through budget and cash
Cash pooling through initial TSA development, limited
More efficient payment mechanisms and revenue
collection (direct payment mechanism)
Basic cash monitoring and cash flow pattern analysis
Cash matching through adjustment of timing revenue
intake, transfers and expenditure flows – measures that
are not detrimental to budget execution
Remuneration of TSA balance
Phases in Cash Management
Development (2)
Smoothing of major fluctuations in TSA balance; use of treasury
bills and (collateralized) term deposits for rough tuning
Completion of TSA, comprehensive sweeping arrangements
Development of more sophisticated forecasting casting capacity,
based on pattern analysis, IFMIS and notification system
Deepening of T-bill and term deposit market, development of
repo market
Fine-tuning: targeting of TSA balance, at slightly positive level
Coordination with debt management
Improvements to departmental, and lower level of government
cash management >>> incentives
Improved information exchange and coordination with central
No government impact on money markets/monetary policy
Characteristics of Underdeveloped
Cash management
Recurring cash shortages; cash determines budget
execution, does not facilitate it
Multitude of departmental and MOF bank accounts,
quite a few unused
Uncertainty over timing MOF transfers, both to the
same and lower levels of government
Use of advances, instead of direct payments
Delays in payments and in receipt of revenues
Retention of own revenues at line ministries and
Use of central bank for short-term financing and
investment needs, at non-market rates
Impact of government cash flows on monetary
4. Cash Management and lower
levels of government
International experience is quite divers
Lower levels of government have developed cash
management usually after central government
Local government is constrained by more limited
market access, and by more limited capacity, and by
Some countries have chosen full integration with
central government, some full autonomy for local
Intermediate models are also possible, and most
In almost all countries local government borrowing
and short-term borrowing is regulated
Full integration with central
Used in France, and in many smaller transition and
developing countries
Requires integration, or at least linkage of payment
and accounting systems between levels of
Implies integration of local government bank
accounts in TSA, both at CB and commercial banks
Requires separation of authorization and control
functions from payment mechanisms (centralized or
decentralized) – France exception
Often makes use of decentralized treasury offices
Use of commercial banks for payments essential,
unless very large central bank network
Benefits of full integration
 Minimizes cash needs of general government
 Provides control and transparency of government
cash flows;
avoids misuse of funds
simplifies overall fiscal policy control
provides insight for higher levels of government on lower
level budget execution
Addresses low systems and staff capacity concerns
at lower levels of government
Utilizes capital market access at center
Coordination with central bank easier
Challenges of full integration
 Extremely complex to develop and manage required
payment and accounting system if country is large
>>> example: requires in France 50k staff (on
country of 50 million)
 Consolidation of bank accounts may infringe on
fiscal autonomy, unless central government acts
only as payment facilitator
 Remuneration and interest payment issues for cash
surpluses and shortages, respectively, need to be
sorted out
 Cash forecasting becomes even more complex
 Provides little incentive for lower levels of
government to use cash efficiently
Full autonomy
In many federal governments around the world: US,
Germany, Brazil, Latin America, even smaller
European countries, local government not included
in central TSA
Full autonomy, however often limited by some
regulation and oversight
Local governments need to :
develop own TSA, and payment and accounting systems
develop own cash forecasting cash forecasting capacity
own capital market access
>>> in summary: local governments need to develop
cash management capacities mirroring those of
central government
Benefits and challenges of full
 Enables gradual development of cash management
through the layers of government
 No need for full systems integration/linkage
 Does not infringe on local autonomy
 More difficult for lower levels of government to set
up TSAs, and payment and accounting systems due
to weaker financial management capacity
 Does not provide information and control for central
government over lower levels
 Money market access of lower levels of government
may be very limited >>>will lead to higher cash
balances for general government
Intermediate models for
decentralized cash management
Various dimensions:
Central government facilitates TSA and IFMIS
development >>> sets norms, provides support
Central government provides/intermediates shortterm borrowing and lending >>> Eurozone
members, quite a few developing countries
Partial integration: some layers of general
government are integrated, but perhaps not central
government and 2nd-tier
Central government sets regulatory framework:
limits short-term borrowing, defines norms for
short-term investment, requires reporting
>>> a number of intermediate models possible
Benefits and challenges of
Intermediate models
 Local government can reap synergies from central
government systems experience
 Less complex, more gradual development path
 Control and oversight is improved
 Local government can utilize central government
market access
 There are differences in capacity and needs between
local governments at same level and different levels
>>> makes it complex for central government to
support development and provide regulation
 Oversight and control remains problematic
6. An intermediate model for China? (1)
Assumed starting position:
 TSAs already set up at provincial and larger city
levels (levels 2 and 3), but coverage not complete
 Financial management capacity declines at lower
levels of government, uneven distribution
 Payment and accounting systems in development,
but not standardized over layers of government;
 In-year reporting of expenditures and revenues
between layers of government limited
 Local government cash holdings very large, but
distribution uneven
 No direct access to capital market for local
An intermediate model for China? (2)
Possible model, for discussion:
1. TSA, payment and accounting systems to be standardized at
respective levels of government >>> regulation
2. Higher levels of government to retain independent TSAs; lowest
levels of government to be integrated in provincial or larger city
3. Central government to facilitate inter-provincial cash exchanges
and capital market access for rough-tuning
On voluntary basis only
Remuneration/interest payments at market rates
At risk of provincial governments
Center sets ranges for minimum and maximum cash balances
Approach can be cascaded downward
Gradual development in coordination with PBC
Relaxation of capital market access in medium-term for
provinces, larger cities >>> regulated autonomy in future
An intermediate model for China? (3)
 Solution would not work for fine-tuning
 Cash down- and up-flows could not be avoided due
to lack of oversight on lower level budget execution
 Further development of TSAs at local government
levels is first priority, including sweeping capacity
 May be to restrictive for advanced provinces and
larger cities
Benefits of intermediate option for
 Builds on present developments and provides
reasonable autonomy for stronger levels for local
 Less complex, requires much less central
coordination and management than full integration
 Can be gradually cascaded downward
 Keeps full control on formal borrowing and
investments of local government
Disadvantages of intermediate
option for China
 Will not reduce cash balances as much as centralized
 Will not provide center as much oversight and
control as centralized option
 More advanced provinces, cities may want to opt
out, and gain market access earlier
 Still requires substantial capacity building effort by
central and provincial MOF/finance departments,
including new regulation
8. Factors to consider in model
Development level of existing TSAs and payment
and accounting systems at various levels of
Scope for integration/linkage of automated systems
between levels of government
Capacities of systems and staff at various levels
Available technologies of central bank and banking
sector, and geographical coverage of branch
Capital market development/access of smaller
Level of fiscal transparency and accountability at
lower levels of government
Questions & Discussion
1. What are the most urgent reforms/improvements
necessary for local government cash management?
2. Would an intermediate model (independent TSA for
provinces, capital market access via center, standards
and norms through regulation and support) be
appropriate for China?
3. Is there need for a Local Government Finance Law?
Thank You - 谢谢 !

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