Sequencing Improvements in Cash Management
Posted by John Zohrab
For more than a decade, ministries of finance in the Central Asia and Caucasus region have been making serious efforts to improve government cash management. What are the lessons that can be drawn from these countries about the sequencing of such reforms?
A widely-cited statement of the objective of cash management is having the right amount of money in the right place at the right time to meet government obligations in the most cost-effective way. In other words, governments should try and ensure an acceptable level of risk of not meeting their obligations on time while minimizing overall net costs.
Countries with less developed cash management practices face greater risk of not meeting their obligations on time. However, short-term debt markets are only liquid for highly creditworthy borrowers, i.e., those that can be relied on to meet their obligations on time.
In these less advanced cash management countries, ministries of finance focus on developing their cash planning processes in order to minimize the risk of not meeting obligations on time, without relying on access to short-term debt markets. Once these processes are producing predictable cash flows, short-term government debt markets can be developed to provide additional support. At this point, the risk of not meeting obligations on time is minimized and the focus of cash management turns to the minimization of net interest costs.
Another sequencing issue is the consolidation of government banking arrangements, which tends to be a precondition for effective cash planning. This is because fragmented banking arrangements lead to idle balances in the bank accounts of line ministries and their subordinate institutions. In these circumstances, finance ministries cannot reliably predict the cash flows between the government sector and counterparties - they can only predict the transfers they make to line ministries and their subordinate institutions. A Treasury Single Account (TSA) system, in which all balances in the bank accounts within the system are swept into or set off against a main bank account, is the ultimate consolidation.
The use of electronic payment mechanisms is also, in practice, a precondition for effective cash planning, as they affect the predictability of cash flows. The use of such mechanisms to make payments by bank transfer ensures that the related cash flows are much more predictable than when checks and banknotes are used. It also frees up the resources of finance staff, enabling them to focus more on cash planning. Additionally, the regularization of payment dates goes hand-in-hand with the use of electronic payment mechanisms, thus making cash flows more predictable.
Effective cash planning also requires a sound institutionalization of business processes, which involves: (i) establishing and enforcing a rules-based system for allocating cash in the cash plan; and (ii) ensuring a high degree of co-operation among the agencies involved. (ii) depends on (i), since co-operation will diminish if agencies requiring cash perceive that cash allocation decisions are arbitrary. In particular, agencies could in these circumstances provide inaccurate cash forecasts and unreasonable payment requests. Two preconditions for the sound institutionalization of the process include a comprehensive regulatory framework and an effective communication culture among the agencies. The latter in turn depends on appropriate means of communication including the use of well-designed cash planning software.
Cash management is complex because it requires real-time decision-making, attention to detail, accuracy, understanding of both the budget process and financial markets, together with co-operative and dynamic relationships among a wide range of institutions, and competence in operating the banking system and several ICT systems. Most countries in the Central Asia and Caucasus region have made improvements to their cash management, but progress has sometimes been slow. Further improvements depend partly on reducing institutional and behavioral resistance to change, which remains a challenge for many developing countries.
 John Zohrab is the IMF’s Regional Advisor on Public Financial Management in Central Asia and the Caucasus.
 I. Storkey, Government Cash and Treasury Management Reform, Asian Development Bank Governance Brief, Issue 7, 2003.
 See, for example, J. Gardner and B. Olden, Cash Management and Debt Management: Two Sides of the Same Coin?, in M. Cangiano, T. Curristine and M. Lazare (eds.), Public Financial Management and its Emerging Architecture, 2013.
 A liquid short-term government debt market means in practice a market for treasury bills or similar securities in which there is a spread of investors purchasing bills on the primary market and trading them on the secondary market. Borrowing from the central bank is not equivalent to accessing a liquid debt market as it is in practice constrained by monetary policy considerations. Borrowing from commercial banks could be structured on a basis equivalent to accessing a liquid debt market, but is typically relatively expensive. Holding consistently sufficient stocks of liquid financial assets to cover all likely cash management needs during the year is relatively inefficient, because of the lower risk-adjusted return on assets relative to the cost of borrowing.
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