Cash and Debt Management: 20 Years of Organizational Transformations Xavier Rame Fiscal Affairs Department 6th Annual Seminar International Association of Treasury Services “State Accounting Reform and Cash Management” Hammamet, November 16, 2012

Acknowledgement This presentation is based on a chapter authored by John Gardner and Brian Olden in the forthcoming IMF book “Public Financial Management and its Emerging Architecture”, edited by Marco Cangiano, Teresa Curristine and Michel Lazare, to be published on April 2013.

20 years of changes in governments’ financial assets and liabilities management Government banking arrangements and payment systems Development of active cash management Availability of information to improve government cash planning Increased borrowing levels and exposure to financial markets What has changed ?

Sum of All Countries Public Domestic Debt Securities Source: Bank for International Settlements

Cash and debt management: 2 separate functions… Relatively short-term horizon Objectives: Finance expected cash shortages and use expected cash surpluses efficiently within defined risk parameters Cash management Medium to long-term horizon Objectives: Meet government financing needs and its payment obligations at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk Debt management

… Facing specific challenges … Cash Management Challenges Full government coverage Buffer levels Managing credit risks Debt Management Challenges Reducing fragmentation of debt portfolios

… which have to coordinate their actions Debt management focused on the liability side of the balance sheet Cash management carried out by other governmental units or Central Bank Sub-optimal outcomes: uncoordinated operations or objectives pursued not necessarily in line with fiscal policy objectives

Reasons for a Strengthened Coordination of Cash Management and Debt Management Manage government’s financial resources as a portfolio Ensure consistency of signals sent to the market regarding the government’s financial management strategy Optimize the management of assets and liabilities Take debt issuance decisions in the context of the government’s overall cash flows Improve information flow and coordination of strategic debt issuance decisions to ensure that they are made with full knowledge of the government’s net cash flow position Consolidate scarce professional skills Design specific approaches to attract and retain the appropriate set of skills Integrate information systems and transaction processing procedures Streamline the use of IT systems and back-office facilities and procedures

A trend toward the integration of the 2 functions in Debt Management Offices (DMOs) Fragmentation of debt portfolios Creation of DMO DMO in charge of cash management DMO in charge of government financial portfolio

Lessons Learned from Country Experiences: an Evolution to Address a More Complex Environment DMOs typically established with debt management as primary focus Inclusion and integration of cash management Transfer of other functions to debt manager as expertise and specialization needs increase and Government financing operations become ever more complex Current financial crisis has increased profile of public debt and asset management offices as competition for capital in international markets intensifies

Central Government Debt Management Institutional Arrangements The “Independent DMO” Model High degree of delegated authority Comprehensive legal framework regulating their operations Ability to recruit and retain staff outside the civil service constraints

Lessons learned regarding institutional models Parameters to consider in setting the DMO’s level of independence Willingness of the parliament/government to delegate debt management authority to professional debt managers Existence of adequate monitoring, control and audit systems to ensure agent is pursuing the strategic objectives of the principal Capacity of Mof to develop and deliver strategic guidelines to the DMO to meet these objectives Systems in place to enable integration of debt and cash management with other areas of public financial management

Lessons learned regarding institutional models Institutional setting not as important as organizational structure, roles and responsibilities If these conditions not met a DMO within the Mof/Treasury may be the most appropriate solution Allows capacity development in a controlled environment and ensures linkages with other reforms in the PFM area Develops capacity in the MoF

Examples of Central Government Debt Management Institutional Arrangements Separate and independent DMO Separate DMO as agency of Mof DMO within Treasury or Mof DMO within CB Sweden Ireland Germany Hungary Portugal New Zealand Australia Belgium Nigeria UK Netherlands US China Japan Canada (shared with BoC) Chile France Russia Spain Italy Mexico Brazil Turkey Korea Thailand Indonesia Colombia Argentina Denmark India India: External debt is managed by the Ministry of Finance. Possibility of establishment of a new debt management agency is currently under consideration.

Challenges for cash and debt management in developing countries and emerging markets Resistance to change Complexity of setting a TSA Accuracy of cash planning Access to capital markets Capacities Legal framework Integration with the overall PFM system

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