Government Cash Management: Its Interaction with Other Financial Policies
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This note offers guidance on policy, institutional and practical issues for governments looking to develop a more sophisticated cash management function, specifically to move towards more active cash management. This involves financial market intervention by the government cash manager, with the aim of smoothing the projected short-term profile of the government’s net cash balances. The note is particularly relevant to emerging market countries where there are already functioning, if not necessarily well-developed, domestic money and bond markets. It is less immediately relevant for low-income countries that are highly dependent on donor financing and concessional loans or credits, and who lack even a limited domestic financial market.
After a brief overview of good cash management practices, the note focuses on the interaction between cash and debt management, which takes the discussion into the interaction of cash management with monetary policy and financial market development. After discussing policy issues, institutional questions are considered: how should cash and debt managers coordinate; and how should their functions be coordinated with those of the central bank.
In this paper, references to the ministry of finance (MoF) should be taken to include the treasury functions, notwithstanding that some countries have a separate treasury department or agency. A debt management unit (DMU) may also be part of the MoF or separately constituted (e.g., as a debt management office, DMO). The DMU or DMO may perform cash management functions, although these will often be shared with the MoF.
Cash Management and Other Financial Policies
Cash Management: An Overview
There is a general understanding of what constitutes good practice in government cash management, as summarized in Box 1.
Box 1: Key Characteristics of Good Practice in Government Cash Management
Centralization of government cash balances and establishment of a Treasury Single Account (TSA)
Modern systems: an adequate transaction processing and accounting framework (processing government transactions with few handling steps, reliance on electronic transactions); modern banking, payment, and settlement systems
Ability to make accurate projections of short-term cash inflows and outflows
Strong institutional interaction, covering in particular:
• Information sharing between the cash managers, revenue-collecting agencies and spending ministries (and any relevant ministry branch offices)
• Strong coordination of debt and cash management
• Formal agreements between the MoF and the central bank on information flows and respective responsibilities
Use of short-term instruments (treasury bills, repo and reverse repo, term deposits, etc.) to help manage balances and timing mismatches
The Treasury Single Account System
A TSA is a prerequisite for modern cash management. It involves the consolidation of all government cash balances into a single account, usually and preferably at the central bank. This consolidation allows the MoF to minimize the volume of idle balances in the banking system, with consequent cost savings. These derive from the interest saved from using cash surpluses in one area of government activity to cover cash shortages in another. If cash is not consolidated, the extra cash requirement has to be financed by borrowing.
There is no best way in which the TSA interacts with the government invoice processing or payment arrangements. All expenditure transactions of the government may be approved centrally in the MoF. Alternatively, line agencies may be responsible for government payments and they may have separate accounts in the banking system to facilitate that. The central bank (or possibly the MoF directly) may be responsible for processing receipts and payments though the local payments and interbank clearance systems, or the task may be contracted out to the banking sector. Some countries operate a hybrid system under which major receipts and payments flow directly across the TSA, but smaller transactions rely on the commercial banking system. In all these arrangements it is important that any balances left with the banking system are swept overnight back into the TSA. It is then for the government cash managers to decide to what extent any net balance should be lent back to the banking system.
The TSA usually includes multiple subaccounts, for example to maintain the distinct accounting identity or ledger of line ministries, agencies and tax departments. If necessary, a cash disbursement ceiling for each spending entity can be enforced against these ledgers. For cash management purposes, positive and negative balances in these accounts are netted into the main TSA operational account—the top account in a pyramid structure.
This distinction between ledger accounts and actual bank accounts is important. The legal authority to spend of a government spending unit is not represented by actual cash. At any one time the aggregate permissions to spend may greatly exceed the cash held in the top account. This is not a problem so long as cash is available when payments actually need to be made.
The focus here is on domestic currency accounts. A MoF may also hold foreign currency accounts at the central bank to meet its external obligations. In general this is not efficient. It is preferable for the MoF to obtain foreign currency as required, usually from the central bank (which decides whether to purchase from the market or draw on its reserves). Alternatively it may be possible for the MoF to hold foreign currency subaccounts within the TSA, which are managed as accounts fungible with domestic currency accounts.
In some countries, government balances are held outside the central bank, in a government-owned commercial bank. This model potentially weakens the MoF’s policy leverage over the management of its cash flows unless there is a clear agency agreement giving the MoF unambiguous control over all government balances backed by an information flow. This structure exposes the government to moral hazard, particularly in times of financial stress, and possibly also credit risk albeit that the government itself underwrites the banks. There may also be both a lack of financial transparency, with neither interest being paid on balances or fees being paid for services; and cross-subsidies, associated with time lags between the receipt by the bank or banks of tax payments and these receipts being passed to the top-of-the-tier government account. More generally this model adds a layer of complexity to coordination and makes information sharing more cumbersome, potentially adding to operational tensions with the central bank.
