1. Module 4.2 Treasury Management INTRODUCTION TO PUBLIC FINANCE MANAGEMENT

2. Planning and budgeting 2.4 Budget Execution 1.1 Introduction 2.1 Macroeconomics of the Budget 4.1 Revenue Administration 3.1 Payroll, Procurement & IT 1.4 Budget Classification 4.3 Accounting & Reporting 4.2 Treasury Management 5.3 Assessing & Recapitulation 3.2 Internal Control & Audit 5.1 External Scrutiny & Oversight 2.2 MTEF and performance budgeting 1.3 The Budget and budget preparation 1.2 Budget Cycle Module map

3. Treasury Appetizer Game Requirements: - 4 players (Treasury and 3 line ministries), One table - budget size €119 billion, paid in quarterly tranches Rules: - Each line ministry spends according to approved budget - Line ministries can put left over funds on a bank account Three simulations: 1.1. ‘Standard’ developing country (no TSA and no transparency) 2.2. one Treasury Single Account (+ full transparency) 3.3. also a domestic capital market (interest rate 25%)

4. 1. Definition and objectives 2. Problems with poor cash management 3. Efficient Cash Management 4. Cash flow forecasting 5. Treasury Single Account 6. Debt Management Module Outline 4

5. What is treasury management? Process of efficiently managing the financial resources (cash and debt management) required to execute budget 1. Definitions and objective 5 Treasury Management Debt Management Cash Management

6. Cash management:  Avoid disruptive cash rationing  Avoid payments arrears  Support smooth financing of expenditure plans: use cash and minimize short-term borrowing costs 1. Definitions and objectives 6

7. Smoothing expenditure plans

8. 1. Definitions and objectives Cash Management:  Optimize use of cash resources: surplus cash invested in interest-earning financial assets  Conduct cost-effective borrowing operations  Consistency with the monetary policy

9. 1. Definition and objectives 2. Problems with poor cash management 3. Efficient Cash & Debt Management 4. Cash flow forecasting 5. Treasury Single Account 6. Debt Management Module Outline 9

10.  Macro-economic instability: revenues unpredictable & shortfalls lead to in-year budget cuts  Unpredictable in-year reallocations between MDAs  Payments arrears accumulate, as MDAs enter into spending commitments that may be consistent with approved budget, but not supported by cash availability 2. Problems with poor cash management 10

11.  “Cash rationing” accompanied by commitment controls used as a means of controlling expenditure according to cash availability  Budget support from donors useful if it is predictable. Unpredictable budget support leads to same problems as unpredictable revenues 2. Problems with poor cash management 11

12.  Cash rationing opposite of efficient cash management. Will have adverse impact on service delivery  Danger is ”institutionalisation” of cash rationing, after need for IMF programs and cash rationing has gone 2. Problems with poor cash management 12

14. 1. Definition and objectives 2. Problems with poor cash management 3. Efficient Cash Management 4. Cash flow forecasting 5. Treasury Single Account 6. Debt Management Module Outline 14

15. 3. Efficient cash management One Account Efficient Cash management On time payments Idle cash deposited Cash Invested (short term deposits) Principles of Cash Management Donor funding on time

16. How to do this?  A pre-condition: sound budget preparation discussed in previous units  Weekly/monthly cash flow forecasting (revenue & donor funding, spending)  One unit in charge - cash management unit  Treasury Single Account (TSA)  Recording, monitoring and management of debt 3. Efficient Cash Management 16

17. 1. Definition and objectives 2. Problems with poor cash management 3. Efficient Cash & Debt Management 4. Cash flow forecasting 5. Treasury Single Account 6. Debt Management Module Outline 17

18. 4. Cash flow forecasting 18 Annual budget Ministries Departments Agencies Sub National Monthly Revenue & Expenditure Forecasting Cash Manage ment Unit Cash Manage ment Unit

19. 4. Cash flow forecasting Cash Management Unit Cash Management Unit Warrant

20. A cash plan

21. Cash plans should be updated monthly, but Cash plans should be announced in advance To MDA To the domestic financial market, if used for borrowing Use in preparing borrowing plans or cash rationing Do they take into account effectively procurement plans? Some issues

22. 1. Definition and objectives 2. Problems with poor cash management 3. Efficient Cash & Debt Management 4. Cash flow forecasting 5. Treasury Single Account 6. Debt Management Module Outline 22

23. Definition of Treasury Single account:  A bank account or a set of linked bank accounts used for all/most government transactions In case of linked bank accounts it are “zero” balance accounts: any balances “swept” back into TSA each day. Treasury Single Account (TSA) 23

24. Advantages No more idle balances in MDAs' bank accounts Idle cash balances in TSA invested in interest earning financial assets TSA facilitates accounting control through bank reconciliations TSA facilitates timely & comprehensive accounting statements/reports, which, in turn, facilitate cash flow forecasting 5. Treasury Single Account 24

25. Different types of Treasury Single Account The Treasury releases funds into MDA sub- accounts in central bank or treasury-controlled MDA accounts in commercial banks which are the Treasury’s fiscal agent The MDA bank provides to the MDA overdraft facilities up to a cash limit notified by the Treasury. The MDA bank is reimbursed daily by the Treasury (Sri Lanka –Colombo) 5. Treasury Single Account 25

26. 5. Treasury Single Account

27. Not common in all countries  In many countries there are still hundreds of MDA bank accounts  Idle cash balances may lie in these accounts, resulting in lower interest earnings and higher interest expenses through unnecessary borrowing 5. Treasury Single Account 27

28. Not common in all countries:  Even if centralised TSA, donor-funded projects accounts are often kept outside the TSA and the Treasury controls  There is domestic resistance to the implementation of the TSA. Multiple bank accounts facilitate budget ring- fencing and potentially corrupt behaviour  Establishing TSA may require strong political leadership 5. Treasury Single Account 28

29. 1. Definition and objectives 2. Problems with poor cash management 3. Efficient Cash & Debt Management 4. Cash flow forecasting 5. Treasury Single Account 6. Debt Management Module Outline 29

30. Debt management coordinated with cash management: Do not borrow unnecessarily if have liquid assets Debt management unit in same department as cash management unit 6. Debt Management 30

31. Only borrow: When no grant-financing alternatives available For medium/long term borrowing Best loan financing option selected: Take into account floating/fixed rate interest rate options, maturity, grace period, currency Use concessional (e.g. IDA) debt options if available low interest rate, long grace and repayment periods 6. Debt Management 31

32. 6. Debt management Good debt management information system: comprehensive, accurate, timely Use IT packages, for example: DMFAS (UNCTAD) CS-DRMS (CommonWealth)

33. Loan Guarantees  Government needs clear strategy for issuing guarantees to guard against contingent liabilities becoming actual liabilities  Includes guarantees to sub-national governments, state owned enterprises & private companies 6. Debt Management

34. Key Messages Efficient cash management recognises the opportunity costs of cash minimise idle cash held by government bodies increase certainty that payments are made properly by the due date Should avoid recourse to cash rationing

35. Key Messages Directions for improving cash management Preparing regularly cash forecasts Moving to a Treasury Single Account Cash and debt management should be closely coordinated