1. 1 Government Cash Management: International Experience Ministry of Economic Affairs and Finance, Tehran, August 2016 Mike Williams mike.williams@mj-w.net

2. 2 Agenda Cash management policy: an overview The Treasury Single Account Cash flow forecasting Cash Management & Debt Management Moving to active cash management

3. 3 What is Cash Management? Internationally, cash management is: –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 “Making sure the right cash is in the right place at the right time – and doing so cost effectively” Cash management is distinct from budget management or budget execution –Budget execution is about ensuring that the budget is managed consistently within agreed financial limits –Cash management is about ensuring that the government has the liquidity to execute its payments; and is able to use surplus cash cost effectively – both of which require planning ahead

4. 4 The Objectives of Cash Management Economising on cash within government –Saving costs –Reducing risk Managing efficiently the government’s aggregate short-term cash flow –Both cash deficits and cash surpluses In such as way as also to benefit: –Debt management –Monetary policy –Financial markets (market liquidity and infrastructure) Ensuring cash is available to meet commitments Overriding objective – other objectives must be subject to it But other objectives are important

5. 5 Approaches to Cash Management Traditional (Passive) Approach Essentially passive Monitoring cash balances, maintaining cash buffer to handle both volatility and unanticipated outflows If necessary restraining / slowing expenditures or delaying bill payments - cash “rationing” not cash management Modern (Active) Approach Managing cash more actively Trying to smooth weekly or daily cash flow by more active borrowing and lending in money market Allows lower average cash buffer – with benefits to other policies Gives tools to protect expenditure plans from cash flow volatility Most developed and many middle-income countries moving toward more active approach; also larger sub-national govs internationally

6. 6 Characteristics of Best International Practice 1.Processing of government transactions with few handling steps – reliance on electronic transactions, centralised systems –Differences between countries in degree to which the payments process is centralised within the Treasury / central bank or reliant on the commercial banking system 2.Treasury Single Account (TSA): all cash balances aggregated in a single account at central bank –Facilitates monitoring and control, also fiscal and financial planning –Allows Treasury to minimise the volume of idle balances in the banking system with consequent cost savings –Structure of the TSA varies internationally

7. 7 Characteristics of Best International Practice 3.Internal systems to forecast daily government flows of receipts and payments –To ensure budgeted expenditure is smoothly financed –To devise strategies for smoothing the cash flow profile, minimising idle cash balances and reducing borrowing costs –To contribute to monetary policy implementation 4.Agreements between MoF/Treasury and central bank on information flows & respective responsibilities –Flow of information from MoF on government's expected cash flows and balance at central bank –Flow of information to MoF on government's actual balance at central bank (in close to real time) –How MoF’s operations interact with the bank’s monetary policy operation –Remuneration of accounts – preferably at market rate

8. 8 Characteristics of Best International Practice 5.Close interaction between government debt and cash management –Debt issuance decisions are taken in the context of the seasonal nature of government’s cash flows –In time, active management of short-term cash position makes it easier to weaken the link between the timing of cash flows and bond issuance - allows pattern of bond sales to be announced in advance 6.Use of financial instruments (Treasury bills, commercial paper, repo and reverse repo) to help manage balances and timing mismatches 7.Efficient payment infrastructure –Securities held in dematerialised form –Same day settlement for money market transactions

9. 9 The Policy Challenges are Inter-related… Cash Balance (TSA) Tax etc inflows Expenditure etc outflows 1. Budget Execution 2. Targeting Balances Debt redemptions, less capital receipts Debt issuance 6. Debt Management Policy (and Gov Balance Sheet) 4. Cash Flow Management in Money Market 3. Monetary Policy 5. Market Development Cash Flow Forecasting

10. 10 The 4 Phases of Development Phase 1: Treasury Single Account –integration of government accounts –Minimising any overnight balances outside the single MoF account at central bank whether by sweeping, direct payments, etc Phase 2: Forecasting capability –the development of a capability within MoF to monitor and forecast (at least 3 months ahead) changes in MoF balances at central bank

11. 11 The 4 Phases of Development Phase 3: Rough tuning –the issue of Treasury bills (or other bills) –issuance pattern designed to offset fluctuations in cash flows, i.e. to smooth the change in MoF’s balance at the central bank –some management of cash surpluses Phase 4: Fine tuning –more active policies, drawing on a wider range of instruments or institutional options, to smooth more fully MoF’s balance at central bank [Emerging Market Countries advised to focus on the first three]

12. 12 The Treasury Single Account

13. 13 The Treasury Single Account TSA = unified structure of government bank accounts to give a consolidated view of government cash resources –Primary objective to ensure effective control over aggregate government cash balances helps the Treasury to plan and implement budget execution efficiently and transparently allows the Treasury to minimize the volume of idle balances in the banking system, with consequent cost savings A fully-fledged TSA shares three essential features: –Government banking arrangement should be unified, to enable Treasury oversight of government cash flows in and out of these accounts. Unified structure allows complete fungibility of all cash resources –No other government agency operates bank accounts beyond Treasury oversight –Consolidation of government cash resources should be comprehensive and include all government cash resources, both budgetary and extra- budgetary

14. 14 The Treasury Single Account TSA = unified structure of government bank accounts to give a consolidated view of government cash resources –Primary objective to ensure effective control over aggregate government cash balances helps the Treasury to plan and implement budget execution efficiently and transparently allows the Treasury to minimize the volume of idle balances in the banking system, with consequent cost savings A fully-fledged TSA shares three essential features: –Government banking arrangement should be unified, to enable Treasury oversight of government cash flows in and out of these accounts. Unified structure allows complete fungibility of all cash resources –No other government agency operates bank accounts beyond Treasury oversight –Consolidation of government cash resources should be comprehensive and include all government cash resources, both budgetary and extra- budgetary

15. 15 The TSA: Objectives The primary objective of a TSA is to ensure effective aggregate control over government cash balances Facilitates monitoring and control, and fiscal and financial planning –Provides complete information about government funds – in modern systems in close to real time –Full information about cash resources helps the Treasury to plan and implement budget execution efficiently and transparently –Facilitates effective reconciliation between the government accounting systems and cash flow statements from the central bank –Facilitates efficient payment systems – giving government full overview –Also minimises transaction costs during budget execution – controlling the delay in remittance of government revenues (tax and non-tax) by collecting banks, and making rapid payments of government expenses Also allows the Treasury to minimize the volume of idle balances in the banking system, with consequent cost savings

16. 16 Note also, the TSA… Is the cash balance which is the relevant variable for effective cash management Can work with variety of payments systems –Processing of payments centralised in MoF/Treasury or dispersed to spending agencies –Approval may be centralised even if processing and accountability is dispersed –Processing of payments centralised within Central Bank or dispersed to the banking sector –A mixture But: any balances left with the banking system should be swept overnight back into the TSA. May also need: –Internal accounting arrangements (and incentives) to minimise level of idle balances and reduce timing uncertainties –Account structures to net transactions and aggregate balances into TSA

17. 17 What should be in the TSA? Should all be swept into TSA (ideally also accounts of extra- budgetary funds). May need to track own resources (discussed below) Policy choice FX accounts not in TSA (may be linked) In Central Bank (CB)

18. 18 TSA: Problems and Choices Extent to which budget units should have bank accounts –Should be limited to necessary transaction accounts –Where transaction accounts are necessary balances are swept up into TSA periodically (preferably daily) [ZBAs] –Can still allow them to retain “permission to spend” eg of own-revenues Balances of extra-budgetary funds (EBFs) preferably included in TSA –International good practice to include as many government-controlled funds and EBFs (social security, pension, and other trust funds) within the TSA –Gives government access to cash – but needs to be properly managed Centralised or Dispersed structure –May depend on whether centralised or dispersed payment authority –Dispersed authority tends to imply separate accounts (in central bank or commercial banks), but linked and zero-balanced by sweeping –But even centralised account may have sub-structure – see below

19. 19 Extending the Coverage Balances of SNGs –Pros and cons of including in TSA – international practice varies –Single TSA for central and subnational governments requires a well developed accounting system Balances of public corporations (or SoEs) –Including more commercial SoEs generally not advised: could limit their operational independence –Include those that are an arm of government Prefunding (seed funds) –Should be avoided (unless subject to sweeping) Collection Funds –Abolish in favour of transaction fees

20. 20 Structure of the TSA – Centralised Centralised payment authority –Implies no need for ministry bank accounts Different structures for the TSA – in the simplest version: –No account sub-structure; all deposit and payment transactions processed through a single bank account –Requires a developed Government Integrated Financial Management Information System (GIFMIS – e-Treasury in Iran) –Classification structure and chart of accounts embedded in GIFMIS used to control payments against released budgets and to account for transactions against specific purposes and funds

21. 21 The Need for Sub-Accounts Without a developed GIFMIS, sub-accounts are needed –to control expenditures of ministries – with cash or credit limits –to allow spending agencies (SAs) with legal authority to retain self- generated funds; or to maintain extra-budgetary funds separately from other funds –TSA subsidiary accounts are not separate bank accounts but are sub-accounts or ledger accounts within the TSA main account –Balances on these accounts may be rolled up to present the single cash position for cash management purposes

22. 22 Structure of the TSA - Dispersed Dispersed Payment Authority Several Models Internationally –Cash releases to individual spending agency (SA) accounts; swept back to TSA at end of day (ZBAs) TSA has use of the cash overnight At the start of the next business day, the unchanged balance is transferred back to the SA account –Credit limit given to the banks for each SA Avoids and cash with commercial banks TSA retains all moneys until required to settle obligations –“Just in time” Cash transferred on days payments to be made

23. 23 Cash Flow Forecasting

24. 24 Cash Flow Forecasting Efficient cash management requires ability to forecast daily cash flows across the TSA –To facilitate orderly achievement of budget targets; to ensure that budgeted expenditure is smoothly financed avoiding delays; and to give early warning of any problems –To devise the strategies for smoothing the cash flow profile A smoother cash flow means: –Lower average cash balances –Reduced net borrowing costs Interest on cash balances always less than interest on marginal borrowing Interest can be earned on any temporary cash surpluses –Less pressure on central banks’ monetary policy operations Characteristic of all modern government cash management systems

25. 25 Financial Programming and Cash Flow Forecasting Financial Programming Linked to budget execution –Forecasts based on budget profiles –Profiles often used as appropriation authority –Revenue forecasts may also be constrained to budget target Two objectives: –Controlling spending profile to ensure cash availability –Identifying short-term cash requirements and surpluses Risk confusing targets/ controls with forecasts Cash Flow Forecasting Forecasts independent of control totals –what “will” happen” not what “should” happen Two objectives –Ensuring that cash is available when required, with no risk of cash rationing –Minimising use of cash over the period ahead Often managed separately from budget execution processes

26. 26 Key Features of Forecasting Framework A comprehensive framework with the focus on cash flow –Separation of permission to spend from actual spending –Tax in TSA not in banking system May need to build an allowance for prudence –But it should be explicit Monitor actual changes in the TSA in close to real time –Analyse divergences between forecast and outturn Forecasting relies heavily on those in spending units and tax departments closest to cash flows –Add information on large payments Concentrate on major inflows and outflows Emphasis on history and experience –Not econometrics

27. 27 How Forecasting Works in Practice Important that Spending Units and Tax Departments cooperate –Insist on profiles and forecasts –Carrots and Sticks? Identify seasonality –Monthly salary payments; regular social welfare or pension payments –Some other expenditures – eg agricultural support – may be seasonal –Tax payment days Identify major individual flows – some are very precise –Tax payments by the largest companies –Debt issuance or servicing –Payments on major public projects –Transfers to lower levels of government Personal contacts –Avoid requests / information going up hierarchy, across and down –Cash forecasters in Treasury must have direct contact with opposite numbers in major spending units and tax departments

28. 28 Cash Management and Debt Management

29. 29 Debt Management Policy Integration of (or close coordination between) cash and debt management functions ensures: –Debt issuance decisions are taken in the context of the seasonal nature of government’s cash flows –MoF has overview of whole market – important when taking decisions about the future balance of short- and long-term debt, including Treasury bills –Active management of the short-term cash position allows pattern of bond sales to be announced in advance [as capacity develops] –Potentially operational and risk management advantages Integration tending to become the norm in OECD and many other countries –Often with the formation of a debt management office or similar

30. 30 Moving to More Active Cash Management

31. 31 Putting the forecast to work… Smoothing the net cash – target a range of fluctuations of the TSA balance The central bank no longer takes responsibility for managing day to day fluctuations in cash balances –Associated with monetary policy independence of central bank (and helps to ensure it) –Major benefits – clarity in financial markets, eases monetary policy operations –But residual cash flow forecasts should be passed to central bank Distinguish between: –“Rough tuning” – issuing Treasury bills (or other short-term instruments) to a pattern designed to offset the impact on banking sector of net cash flows in and out of government, ie to smooth somewhat the changes in the TSA –“Fine tuning” – more active policies, wide on a wider range of instruments, to smooth the treasury’s balance more fully – technically more demanding Identify responsibility within MoF/Treasury/DMO –Increasingly given to DMO or similar, in consultation with others, because of benefits of integration between debt and cash management –But different international models

32. 32 Cash Management Instruments Borrowing Treasury bill usually main instrument in moving towards more active cash management –TBill has different roles as instrument of debt management cash management monetary policy –Emphasis on shorter-term (e.g. 1 month) bills for cash management Some EU countries issue commercial paper (CP) Repo usually used for fine tuning – but requires liquid market Lending (Reverse) repo preferred instrument if market sufficiently liquid –Secured and flexible Many countries use bank deposits –Lend at market rates – term or overnight –Competitive process (by tender if no transparent prices) –But must be colleralised – reduce credit risk Consider (remunerated) deposits with central bank if important for monetary policy purposes

33. 33 Rough Tuning: Example Rough Tuning with weekly issue of Treasury Bills only (in this example) Converts this profile to this profile [Fine tuning makes it flat]

34. 34 What Determines the Cash Buffer? 1. The volatility of daily cash flows 2. The ability to forecast those cash flows –A poor forecast is usually better than no forecast –Key area for policy focus – Treasurers have less leverage over other determinants 3. The scope to manage unanticipated fluctuations and the timescale over which they can be managed –How soon can additional TBills be issued? 4. Safety nets –Emergency credit facilities or cash reserves –End of day borrowing from commercial banks –[Short-term borrowing from central bank]

35. 35 Cash Buffers in Practice Several northern European countries operate with cash balances in the central bank << 0.1% annual central government expenditure. –But they have liquid money markets, sophisticated active cash management. Some plan to be long of cash and on-lend only when position is secure –Drying up of liquidity led some to be more cautious Some other approaches – the importance of signalling prudence: –Target balance calculated as a safety reserve in event of adverse market conditions – depends on expected time to return to normality –Maintaining balances as least as great as the debt redemptions due in the following month, implicitly allowing for a failed auction –To guarantee budget execution or debt service for [X] months –In Italy there is a legal requirement for balances to exceed €10 billion – the peak of cumulative net outflows reached in any period Recommended buffer in absence of developed cash management: –Cumulative forecast errors over policy reaction period coupled with a cautionary balance for market disruption or auction failure –But the buffer has an opportunity cost – there is a trade-off with caution

36. 36 Some Other Issues Arising

37. 37 Cash Management & Monetary Policy The liquidity of the domestic banking sector depends on: –The monetary policy operations of central banks - borrowing or lending to credit institutions, reserve requirements, deposit services, etc. –"Autonomous" Influences - demand for banknotes by the public (predictable), net inflow of foreign currency (which depends on the policy of intervention) and changes in government deposits at the central bank (ie, changes in the balance of TSA) Less fluctuation in cash flows of the government through the TSA, implies less fluctuating monetary liquidity / market banks (other factors being equal) –Less weight should be assigned to monetary operations to control liquidity –Active cash management functions and facilitates the task of central banks

38. 38 The Central Bank’s Balance Sheet

39. 39 Financial Market Development Active cash management links to development of domestic financial market Repo (or similar secured instruments) contributes to money market activity –Makes treasury securities more attractive to banks for liquidity management –Spurs development of infrastructure required for interbank repo market –Also stimulates government bond market Domestic government bonds normally the preferred collateral Benefits government debt and cash management –Reduces risks and consequences of debt auction failure –Providing opportunities to invest excess cash balances Developed money market important both as an objective in itself and through its links to other financial markets Emphasises importance of: –Debt and cash managers working closely together. –Interaction between cash management policies and monetary policy

40. 40 Monetary policy INTERBANK MARKET Clearing / settlement balances OVERNIGHT MARKET Overnight funds Loans / Deposits / Repos TERM MONEY MARKET Maturities 2 days to 1 year TBills, CP, term deposits & Repos PRIMARY T-BILL MARKET PRIMARY GOVERNMENT BOND MARKET BOND MARKET Securities > 1 year to maturity FOREIGN EXCHANGE MARKET MONEY MARKETS Maturities <1 year Cash Management Debt Management Collateral Debt and Money Market Interaction

41. 41 Who does What? Various national models – no “right” approach – but emerging best practice Spending units and tax departments – provide above the line data In MoF/Treasury/Debt Management Office distinguish between: –Who aggregates ‘above the line’ forecasts; and takes responsibility for the projection of the total –Who adds ‘below the line’ transactions – will often be debt managers –Who is responsible for taking decisions about investment of surpluses or issuance of TBills to manage cash flow Central bank – provides banking services and information flows –May provide details of actual flows or disbursements Good practice guidance –Identify who is responsible for what – others should not second guess –Single focus for final compilation and decision making –Regular [weekly] meetings of those responsible in MoF to review forecast updates, decide on investment / issuance policies, establish risk parameters

42. 42 Responsibilities: a Summary

43. 43 Cash Management is a Project Most of the actions are for the Treasury function to take forward, with support as necessary from others in the MoF But effective cash management also needs: –A supportive central bank. –Competent finance functions in SUs and the tax departments to supply good cash flow forecasts - and see it as part of their responsibility to do so. –A flexible banking system and a developed money market. Development of cash management therefore best thought of as a project –Dependencies, bottlenecks and a need to prioritise –Needs also to link with money market development 4 streams of work (next slide)

44. 44 Illustrative Implementation Map Note: although based on work in other countries, this map does not refer to any one country