New FAD Technical Note and Manual: Cash Management and the Relationship Between Treasury and Central Bank

Posted by Renaud Duplay

Cash management is one of the main issues when reforming PFM systems in developing countries. Bad cash management is costly because it hampers budget execution, causes arrears and increases funding costs. For this reason the Fiscal Affairs Department (FAD) has already released two Technical Notes and Manuals (TNMs) on this subject and is now releasing further guidance material. A new TNM, prepared by Mario Pessoa and Mike Williams, expands the review of cash management issues by specifically addressing the relationship between the treasury and the central bank.  

The note was prepared at the request of the Latin American Treasurers' Forum (FOTEGAL) and addresses both institutional and technical issues and is particularly relevant to developing countries. Based on international experience, the TNM describes the modern framework of a formalized relationship between both institutions standing on two key principles:

New PFM Newsletter in Khmer

Posted by Chita Marzan

The IMF Technical Note and Manual on Modernizing Cash Management has recently been translated into Khmer (attached below), and more such translations are now underway. An article on this technical note and manual (TNM) was featured in the first PFM Newsletter in Cambodia (also below) which was launched in May 2012. This newsletter is a joint effort of Mr. Suhas Joshi, PFM Regional Advisor for Southeast Asia of the IMF Fiscal Affairs Department (FAD), and Mr. Seng Sreng, Director of the Economics and Finance Institute (EFI) of Cambodia. Another article focused on gender-budgeting describing the practices in Pacific Island countries.

The PFM Newsletter evolved from an idea to set up a knowledge exchange group which would connect all the participants of joint IMF/EFI lectures on PFM by email and also through a quarterly newsletter. The newsletter is expected to cover developments in the field of PFM and to bring to the recipients improvements in this field from across the world and in Cambodia itself. The newsletter is to be sent out every quarter jointly with the EFI and also aims to establish a forum for PFM practitioners in Cambodia to exchange ideas and knowledge, and to widen the dissemination of available materials that are relevant for the improvement of PFM in the country. Improving cash management is one of the key objectives of the PFM Reform Program (PFMRP) of the Royal Government of Cambodia. The newsletter is available both in Khmer and in English so that country officials have greater access to international developments in the PFM area.

Modernización de la gestión de caja

Juan Ramón Ruiz

¿Cuáles son los principales objetivos de una gestión de caja moderna? ¿Cuáles son las buenas prácticas de gestión de caja en los países desarrollados? ¿Cuáles son las características principales del marco para la planificación de caja a corto plazo? ¿Cuáles son los principales desafíos que se deben abordar para mejorar la gestión de caja en los países de ingreso bajo y mediano? ¿Qué secuencia deberían seguir las reformas de la gestión de caja?

Estas son las preguntas que responde la Nota Técnica elaborada por Ian Lienert. Esta Nota indica que una gestión de caja eficaz contribuye al cumplimiento ordenado de las metas operativas de la política fiscal, la estrategia de gestión de la deuda pública y la política monetaria. Los cuatro objetivos principales de una gestión de caja moderna son: (1) garantizar que se disponga de fondos en efectivo suficientes para pagar los gastos en el momento de su vencimiento; (2) obtener préstamos sólo cuando sea necesario y minimizar los costos del endeudamiento público; (3) maximizar el rendimiento de los saldos de caja inactivos, y; (4) gestionar los riesgos, invirtiendo los excedentes temporales de manera productiva y con garantías adecuadas.

La Nota Técnica distingue nueve características importantes que pueden observarse en  la gestión de caja moderna y eficaz en los países avanzados de la Organización para la Cooperación y Desarrollo Económico (OCDE), de las cuales seis de ellas tienen carácter fundamental, y otras tres son recomendadas. Entre ellas tiene especial importancia la centralización de los saldos de caja del gobierno, estableciendo un sistema de Cuenta Única de Tesorería (CUT).

New Flyer on "Government Finance Statistics: Cash and Accrual Data"

Posted by Claudia Dziobek and Phebby Kufa, Statistics Department, IMF

A state-of-the-art fiscal data presentation should follow a balance sheet approach similar to the private sector accounting. The main principles are laid out in the Government Finance Statistics Manual 2001 (GFSM 2001). Some policy makers and fiscal analysts assume incorrectly that the GFSM 2001 requires only the accrual-recorded data, which may imply substantial reform of the fiscal reporting and government accounting system.

This assumption is only partially true. The GFSM 2001 in fact requires both, cash and accrual-based data. The misconception has contributed to delays in phasing-in the GFSM 2001 framework for various purposes e.g. budgeting, auditing, or macroeconomic analysis.

A new flyer on Government Finance Statistics: Cash and Accrual Data was prepared to address this misconception. It explains why both the cash-recorded and accrual-recorded data are needed for fiscal management. Cash-recorded data are used to produce a cash flow statement, which explains changes in the stock of cash and deposits, helps control payments, and determines the cash-financing gap. Accrual-recorded data are presented in an operation statement, which links in with the balance sheet. These accrual-based data better capture economic events and are needed for macroeconomic analysis.

Cash Management: More Than Just Public Financial Management

 
Posted by Greg Horman

The overriding objective of cash management is to ensure that the government is able to fund its expenditure in a timely manner and meet its obligations as they fall due. Cost-effectiveness, risk reduction, and operational efficiency are also important. Cash management is a critical, albeit not so visible, dimension of effective public financial management, with important linkages to monetary policy implementation. More precisely, cash management encompasses two distinct but related activities: cash flow forecasting and cash balance management. The former is concerned with these questions: (i) Over a given time period (daily, weekly, monthly, and so on), what is the volume of the government’s aggregate cash inflows and outflows? (ii) At the end of each time period, what is the balance of cash at hand? The latter is concerned with this question: (iii) What actions does the government take to ensure that it has the “correct” amount of cash at hand at any point? This posting highlights some of the issues related to managing cash balances, which is not very well covered in the public financial management literature.

Changes in the daily cash balance of the treasury single account (TSA), domiciled at the central bank, are mirrored by changes in banking sector liquidity. Indeed, they may be the most significant autonomous influence on liquidity. The central bank takes these changes into account in its monetary policy operations. Effective cash management is characterized by agreement between the ministry of finance and the central bank on the flow of information from the ministry of finance to the central bank on the likely future size of the TSA. Ideally, this should be provided in real time, or at least before the start of each day. Insofar as the ministry of finance can manage its cash flows reasonably tightly around a target balance for the TSA, the government’s cash balance becomes largely neutral for monetary policy purposes.

How Can Development Partners Decrease Fiduciary Risk in the Caribbean?

Posted by Mark Silins

 
Most agree that moving towards a treasury single account makes sense.[1]  It means countries need to reconcile only one or a small number of accounts, cash balances are consolidated allowing idol positive balances to offset any overdraft, controls are enhanced (as all receipts are collected in a common way), and payments are paid only when consistent with appropriation and warrant authority.

Why then do many development partners insist on new bank accounts for each project?  It is clear that development partners are concerned, particularly in the current cash-challenged times, that their earmarked grants or loans are only used for the purpose prescribed. However, in my opinion, requiring a separate bank account for each project is not the best solution. In fact, in many cases this approach reduces internal controls.

2nd Annual Regional Seminar of the Latin American Treasurers Held in Mexico City (March 16-18, 2011)

Posted by Israel Fainboim

 
An initiative launched by the Fiscal Affairs Department (FAD) of the IMF two years ago and supported by the Inter American Development Bank and the World Bank, to create a forum for the Latin American Treasurers to discuss treasury management issues on a regular basis, organize an annual seminar, and create a web page for exchanging ideas and materials, has been a success.

In April 2010 the Peruvian Treasury, under the direction of Mr. Carlos Diaz, did an excellent job in hosting the first seminar on treasury management. The 2010 seminar discussed cash planning, cash balance targeting, the adoption of a treasury single account (TSA), and the use of information systems for treasury and cash management. During that seminar the treasurers agreed to get organized, to propose an action plan, and to develop a web page. These and other objectives were included in a document signed by all of them, which was called the “Lima Declaration.”

New FAD Technical Note & Manual on the Interaction Between Government Cash Management and Other Financial Policies

Posted by Mike Williams

Good government cash management matters. It matters not only from the fiscal and budgetary perspective of cost effectiveness and efficiency, but also because of the benefits it can bring to other financial policies—in particular to debt management, to monetary policy, and to the development of the local financial markets. This interaction between cash management and other financial policies is the focus of a new IMF Fiscal Affairs Department (FAD) Technical Note and Manual.

There is a growing understanding of what constitutes good practice in government cash management. Guidance is available from FAD on the core components: the development of the Treasury Single Account (TSA) and cash flow forecasting and management. Although this TNM touches on those issues, I have written it primarily for governments and their advisers looking to develop a more sophisticated cash management function, and specifically to move towards more active cash management. 

A Treasury Single Account is an Essential Tool for Consolidating and Managing Governments’ Cash Resources – A New IMF Working Paper

Posted by Sailendra Pattanayak and Israel Fainboim

It is not uncommon to find fragmented government banking arrangements, with multiple bank accounts in commercial banks belonging to different government ministries/agencies, with idle cash sitting there. Such arrangements hinder effective cash management and control over cash balances.

A government that lacks effective control over its cash resources can pay for its institutional deficiencies in multiple ways. First, idle cash balances in bank accounts often fail to earn market-related remuneration. Second, the government, being unaware of these resources (or being unable to use them), incurs unnecessary borrowing costs on raising funds to cover a perceived cash shortage. Third, idle government cash balances in the commercial banking sector are not idle for the banks themselves, and can be used to extend credit. Draining this extra liquidity through open market operations also imposes costs on the central bank.

The Cash Planner, the IFMIS, the Spreadsheet, and the Very, Very Simple Objective

Posted by John Gardner

The principle objective of central government cash flow planning is very, very simple. The aim is to forecast the total liquid cash resource available to the government at a point in time—typically the end of each day for the current month; the end of each week for the next two months; and then the end of each month to the fiscal year-end. This is one single figure per time period; a uni-dimensional time series; the profile of the government bank statement across the year.

It is not the purpose of this piece to go into detailed discussion on the reasons why getting that single number reasonably correct is so difficult for many countries. Neither is it necessary to dwell on the clear sense and benefits for a government to have that single sum held at a single bank account at the central bank—the TSA. It will also not go into why the rest of government—budget departments, spending units, and revenue agencies alike—can rarely understand that there is this one clear objective. Government agencies in many developed, as well as developing, countries often attribute nefarious ulterior motives to these cash flow projections. They believe that the cash manager is given the authority to obtain cash planning data in order to exert secretive powers over the execution of the budget. If provided with true plans of a spending unit, the cash manager will conspire with the budget department to ration the amount of cash available, or somehow manage to control planned procurement policies—steal some of the power of the institution. Such motives would not be very, very simple—but the sole objective of cash planning is.

Prioritizing PFM Reforms: A Robust and Functioning Accounting and Reporting System is a Prerequisite

Posted by Sanjay Vani, Lead Financial Management Specialist, World Bank

Much has been written about prioritizing and sequencing PFM Reforms, including Allen Schick’s often-quoted 1998 article, Why Most Developing Countries Should Not Try New Zealand's Reforms.  While working on the OECD-DAC Report on the Use of Country Systems in PFM a year or two ago, I was struck by how much more we know about what does not work than about what does work. For example, almost all PFM professionals would agree that introducing a medium-term budget formulation or performance budgeting in an environment of poor budget execution is not likely to be effective; and attempting performance audit without agreed performance benchmarks and proper systems to record and track performance is equally unlikely to be effective.

Here I would like to develop a hypothesis that, I am convinced, deserves serious attention from the community of PFM professionals. The hypothesis is this:  NO significant PFM reforms are likely to succeed unless a robust and functioning accounting and reporting system is in place.  In other words, a robust and functioning accounting and reporting system is a prerequisite to other PFM reforms.

China’s Local Government Cash Management – Regulation or Centralization?

Posted by Holger van Eden

Not all governments around the world are anxiously looking at their empty state treasury coffers. The Chinese central and local governments have accumulated large cash reserves over the past decade. In part these accumulations represent continued under-execution of the budget over a number of years, a quite common phenomenon in the developing world. These reserves, however, also reflect the success in setting up Treasury Single Account (TSA) structures by central, provincial, and larger city governments. The liquidity that in the past would have accumulated in line ministry and agency commercial bank accounts at various levels of government–China has 5 distinct layers of government–has in part been brought back into TSA accounts held at the People’s Bank of China (PBoC).

Local government reserves in China represent an estimated 3-4 percent of GDP. This represents a sizable amount by any international standard and raises the question of how these resources should be managed: to what extent should treasury management power of local government be centralized? What sort of autonomy in financial investment management should be granted to local government to maximize financial return while preserving investment security, etc.?

Government Cash Management During Financial Market Turmoil

Posted by Ian Lienert and Alexandre Chailloux[1]

Two important objectives of cash management are to minimize idle balances in government bank accounts and to maximize returns on excess balances in the main treasury operational account held at the central bank. Stabilizing the size of treasury balances also has the merit of simplifying central banks’ liquidity management.[2] To that end, modern cash managers avail themselves of safe financial market instruments, especially reverse repos.

But what happens when financial markets are in turmoil and the repo market evaporates? What should modern cash managers do when one of their main instruments for managing daily surpluses or deficits of government cash becomes unavailable? This blog examines what happened in France during 2008–09 and how the cash management agency (Agence France Trésor or AFT) reacted to the unusual circumstances brought on by financial market turmoil.

Is This Your Rainy Day?—Cash Management in Small Resource Dependent Economies

Posted by Tej Prakash 

Small economies where resource revenues are a significant part of the budget often face volatile inflows due to fluctuations in production, demand, and price. Hence, if the budget is based on a particular reference price for the resource, actual revenues will often over- or under-perform based on the actual resource price. In case of underperformance, the country then faces, the choice of continuing the smooth implementation of the budget, if price movements are only seen as temporary, or adjusting expenditure downward. The question is, are there approaches to insulating the budget from such unpredictable cash flows?

A New IMF Fiscal Affairs Department's Publication: the Technical Notes and Manuals

Posted by Michel Lazare and Richard Allen.

The IMF has just launched a new series called: Technical Notes and Manuals.The first three issues have been authored by the IMF's Fiscal Affairs Department.

They deal with:

1. A Basic Model of Performance-Based Budgeting by Marc Robinson and Duncan Last  Download FAD Technical Manual 1
2. Transition to Accrual Accounting by by Abdul Khan and Stephen Mayes                     Download FAD Technical Manual 2
3. Modernizing Cash Management by Ian Lienert                                                              Download FAD Technical Manual 3

Earlier versions of these Technical Notes and Manuals were previously issued as part of a series of technical notes on our PFM blog.

Future issues will include topics in revenue administration, tax and expenditure
policy, and public financial management. Other IMF departments may also contribute notes to these series.

These notes and manuals aim at raising awareness among practitioners,
officials and academics of contemporary fiscal topics; and improving the dissemination of
FAD's TA advice. In particular, they will allow us to disseminate to a broader audience the advice now included in our TA reports, or provided through other advisory services.

World Bank—Sovereign Debt Management Forum (October 27-29, 2008)

Posted by Brian Olden

The World Bank hosted the Fourth Sovereign Debt Management Forum between October 27–29, 2008 in its Washington, D.C. headquarters. Despite the ongoing turmoil in world financial markets, the event was well attended, with representatives from over 55 advanced OECD, emerging, and low-income countries (LICs), as well as representatives from international institutions, including the IMF and the EU.

The forum was very timely, given the current market turmoil, and naturally much of the discussion centered around the impact of the crises on economies, in general, and on debt management operations, in particular.  Much of the focus was on what the role of debt managers will be in helping to mitigate the effects of the crises on economies in the short and medium-term.

Senior Officials from African Countries Discuss Cash Management Issues in a Workshop Organized by IMF AFRITAC East

Posted by Sailendra Pattanayak

AFRITAC East, the regional technical assistance center of the IMF in east Africa, in collaboration with the Africa Capacity Building Foundation, conducted a workshop on cash management reforms, at the Kenya School of Monetary Studies in Nairobi from September 22–26, 2008. It was attended by 31 mid- and senior-level officials - including Heads of Departments of Treasury, Fiscal Policy Units, Macroeconomic Management Units, Financial Controllers, Senior Economists, Principal Finance and Accounting Officers, and Budget Officers - from 9 countries (Ethiopia, Kenya, Lesotho, Malawi, Mozambique, Namibia, Rwanda, Uganda, and Zanzibar). The workshop was facilitated by AFRITAC East advisors and staff from the IMF Headquarters. It was inaugurated by the Permanent Secretary to the Treasury of the Ministry of Finance of Kenya, and closed by the AFRITAC East Center Coordinator.

During the last few years, AFRITAC East has provided technical assistance aimed at developing and strengthening cash management systems in its member countries. Diagnostic studies have been conducted in all AFRITAC East countries, and provided the basis for formulation of cash management reform strategies and action plans, which are being implemented by several countries. AFRITAC East continues to provide technical assistance on the implementation of these strategies.

IMF’s 8th Debt Managers Forum--Warsaw--July 14-15, 2008

Posted by Brian Olden

The IMF’s Debt Managers Forum, sponsored by the Fund’s Monetary and Capital Markets Department took place in Warsaw on July 14- 15 2008. The National Bank of Poland and the Polish Ministry of Finance acted as co-hosts of the conference (and did an excellent job by the way). The Deputy Managing Director of the Fund, Mr. Murilo Portugal, also attended and chaired the opening session. The conference was well attended by participants from 30 emerging and mature market economies as well as some private sector representatives.

The opening session focused on the global economic and financial market outlook. Consensus opinion from both private and public sector representatives was that claims advanced by some commentators that Emerging Market Countries (EMCs) were decoupling from advanced economies were, greatly exaggerated and that problems in advanced economy financial markets, coupled with the rising trend in inflation, posed considerable risks to the stability of most EMCs.

New EU-Supported Financial Information Management System Public Finance in Serbia

Posted by Michel Lazare

Here is a YouTube video presenting the key features of a new financial management information system introduced in Serbia with the support of the EU-European Reconstruction Agency.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 3)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the third part of this YouTube video; parts 1 and 2 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges ( Video 2)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the second part of this YouTube video; parts 1 and 3 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 1)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the first part of this YouTube video; parts 2 and 3 appear in other posts published today.

Public Financial Management Reform -- Trends and Challenges

Posted by Bill Dorotinsky

On June 18, 2008, I spoke on Public Financial Management Reform: Trends at the the International Consortium on Government Financial Management (ICGFM) monthly speaker series in Washington, D.C.

I took the opportunity to share my personal views on current trends and challenges in public financial management (PFM) reform, drawing on my experience across the globe and multiple institutions. (As I noted, these are not the views of the IMF, or any other institutions with which I have been associated.)

The presentation covered three broad areas:

1. Common PFM reform recommendations, seen across all donors, consultants, etc.
2. Information on what reforms countries have been implementing in recent years
3. Challenges ahead for improving PFM

The PowerPoint can be downloaded here Download public_financial_reform_trends_icgfm_June_2008.ppt

The ICGFM Blog also posted a summary and video of the presentation on their Blog (CLICK HERE).

Exchanging experiences and learning from others: PEM PAL approach

Posted by Urska Zrinski, CEF PEMPAL Secretariat

PEM PAL, the Public Expenditure Management - Peer-Assisted Learning (PEM-PAL) network, is a network of public expenditure management professionals from countries in Central and Eastern Europe (CEE), and Central Asia. The initiative, which was conceptualized in 2005 by the World Bank and the United Kingdom’s Department for International Development, represents an effort to develop capacity and share reform experiences among countries in CEE and Central Asia. At the beginning of 2008, the PEM PAL secretariat has been moved from the World Bank’s headquarters in Washington DC to the Center of Excellence in Finance, Slovenia, thus bringing the network closer to the region. (See a January 25, 2008 blog post for more on the Center.)

Post-conflict PFM -- USAID Paper Summary of Lessons

Posted by Bill Dorotinsky

Public financial management (PFM) has moved onto center-stage in country macroeconomic management, development planning, and international development fora, as has a focus on fragile and post-conflict states. The intersection of these fields has itself become a very current topic, particularly with respect to what specific areas of PFM to address in the short-run and how to sequence reform and capacity-building interventions.

A November 2007, USAID-funded paper, Building Fiscal Infrastructure in Post-Conflict Societies, prepared by Dr. Mark Gallagher, DAI, is worth a read. The paper is a summary of seven country case studies (Afghanistan, Angola, Bosnia and Herzegovina, El Salvador, Guatemala, Kosovo, and Liberia) and some general lessons he draws from them.

Poverty Reduction Budget Support -- A DFID Policy Paper

Posted by Michel Lazare

Further to our March 17 post: Is Providing Budget Support to Developing Countries Effective? -- Evaluation of DFID's Direct Budget Support by UK's National Audit Office, which discussed NAO's assessment of effectiveness of budget support, it is important to note that the UK's Department for International Development (DFID) has recently published a policy paper on budget support.

This paper updates DFID's previous policy (dating back to 2004). It draws on the conclusions of a May 2006 multi-donor Joint Evaluation of General Budget Support -- which provided new evidence about the effectiveness of general budget support -- and on the implications of the 2005 Paris Declaration on aid effectiveness.

It "reaffirms DFID's commitment's to using budget support -- alongside other aid instruments -- where it is appropriate to deliver aid to partner governments to reduce poverty. "

Cash management -- IMF Technical Guidance Note

Posted by Ian Lienert

Do you manage your own cash well? Can you always pay your bills on time? Do you borrow unnecessarily? Do you have balances in bank accounts that are not receiving the best interest rate? Just as individuals are concerned about managing their cash well, so are governments. In practice, however, not all governments manage cash well. Some countries have unremunerated balances in thousands of bank accounts, yet at the same, they are borrowing from domestic or external creditors at market interest rates. Commercial banks and other purchasers of government bonds are very happy with such arrangements.

A new IMF FAD Technical Guidance Note on Cash Management, prepared by Ian Lienert of the Fiscal Affairs Department, explores how countries can improve their cash management practices and eliminate some of the inefficiencies in current practices. [Download cash_management_guidance_note__lienert_.pdf ]

Extrabudgetary Funds -- Removing the 'Extra' and Minimizing the Risks

Posted by Bill Dorotinsky

Extra-budgetary funds (EBFs) are a large and persistent issue in developed and developing countries. An October 26, 2007, blog post highlighted the magnitude of such funds, offered a taxonomy of EBFs, and suggested some questions for evaluating them. This post offers a similar perspective, drawing on a draft World Bank policy note prepared for the Polish authorities in 2001.

Public finance professionals generally oppose creation or continuation of 'extra-budgetary funds' because they undermine comprehensive budgeting, fragment financial reporting and cash management, and frequently there are transparency, oversight, and accountability concerns for the EBF's directly. But there are principles that, if followed, can minimize the risks from EBF’s, effectively removing their ‘extra-budgetary’ character.

The Pile of Books on the “Resource Curse” Just Keep Growing !!!

So, why we should read “Escaping the Resource Curse”?

Posted by Teresa Dabán

Devising policies and institutions for the prevention of the “resource curse”—a term used to describe the surprisingly negative outcomes of resource-rich countries—has been the object of an extensive literature. One of the most recent contributions is Escaping the Resource Curse, a book edited by Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz under the auspices of the Initiative for Policy Dialogue at the University of Columbia. The book reviews the main challenges posed by the management of resource revenues and proposes some interesting ways to address them.

To strengthen resource revenue management, for instance, the book proposes creating innovative budgetary  bodies and management arrangements that would operate in “parallel” to the existing ones. This post definitely recommends reading Escaping the Resource Curse, but argues that the benefits of creating such additional bodies and arrangements need to be carefully weighed against the risk of undermining and alienating existing budgetary institutions and discouraging reform efforts, especially in low-income countries, weakening governance and fragmenting already weak public finance systems.

Automating financial management systems -- it's not just the hardware

Posted by Bill Dorotinsky

As donors and governments spend enormous sums of money on automating financial management information systems in countries around the world, a great deal of attention is paid to the hardware and computer software. Debates over off-the-shelf or customized software, getting the right hardware, and setting up the right procurement arrangements, would fill volumes. But some recent cases illus rate the importance of paying attention to the 'soft' systems that surround the automated system -- the human systems that both serve and are served by the FMIS, the rules and controls embedded in and surrounding the systems.

On February 17, 2007, the Ugandan Daily Monitor broke a story ("Exposed: money racket in government") on an alleged scam being run from the Ministry of Finance and Ministry of Public Works, where fictitious suppliers where created in the computerized database, and payments were made to these suppliers for fictitious goods and services delivered. The article describes some of the means used to skirt what controls did exist, and but also illustrated that there were other controls missing.

A continent away, in Washington, D.C., a similar story unfolded in the District of Columbia tax office, where sham corporations were recorded in the automated information system, and tax refunds approved for these corporations. In some cases, the properties did not even exist, indicating absence of automated data-matching with property records or tax records to help control for such abuses. (See , for example, the November 14, 2007, Washington Post article, "D.C. Tax Scam Could Total $32 million".)

Update on: Public Cash Management and the Subprime Loan Crisis: Be Aware of Financial Investment Risks

Posted by Michel Lazare

Last week, PFM Blog published a post on "Public Cash Management and the Subprime Loan Crisis: Be Aware of Financial Investment Risks."

Since then, PFM Blog learned that limits on cash withdrawals from the Florida investment pool will soon be somewhat relaxed.

The Palm Beach Post reported that "local government officials across Florida were told [on January 3] that by the end of [January] they can expect to freely remove up to 21 percent of their balance from the state-run investment pool that is either frozen or subject to withdrawal penalties."

See the full Palm Beach Post article for further details.

Public Cash Management and the Subprime Loan Crisis: Be Aware of Financial Investment Risks

Posted by Michel Lazare

Effective cash management is one of the basic pillars of sound public financial management. The essence of effective cash management is conservation of cash. This includes minimizing idle cash balances by: (a) keeping on the government's account only the working cash balances needed to face day-to-day routine expenditures and the cash needed to face immediate financial obligations; (b) investing the remaining cash on liquid and interest-earning financial assets.

So far, so good. But, like any other financial investment, investing cash may present risks. A January 1, 2008, article in the New York Times provides a good illustration of the potential risks involved: municipalities in Florida have become victims of the subprime loan crisis.

Automating Public Financial Management Systems for Results

Posted by Bill Dorotinsky

Over the past few decades, governments and development agencies alike have invested enormous financial and human resources into automating public financial management (PFM) systems, and often the results have been less than hoped. Governments have had difficulty implementing systems, and not achieved desired functionality. And development partners have invested large sums of money, only to find systems delayed in implementation, having limited impact, and often with real challenges to the sustainability of the systems. On December 2-4, 2007, the International Consortium of Governmental Financial Management (ICGFM) held a two-day workshop entitled "Use of Financial Management Information Systems (FMIS) to Improve Financial Management and Accountability in the Public Sector".  While the conference title and topic might cause eyes to glaze over with visions of technical issues, the conference was a useful glimpse into current thinking on PFM system automation, and full of practical advice to those concerned with PFM system automation.

Conference presentations from government authorities, international organizations, and consultants covered topics such as how FMIS fits within the over-all PFM reform agenda, planning for FMIS development, FMIS design components, IT alternatives, project management, procurement, and capacity building. The conference program and all the presentations made are available on-line at the ICGFM website under Winter Conference.

7th IMF Debt Management Forum

Posted by Brian Olden

The 7th IMF Debt Managers Forum, hosted by the IMF’s Monetary and Capital Markets Department, was held in the IMF’s HQ building in Washington D.C. between November 5th and 6th. This two day event was attended by leading public debt managers from advanced and emerging market economies, participants from the financial markets, including leading investment banks and hedge funds and other international financial institutions. 

Many interesting topics were discussed including the effects of the recent credit crunch on sovereign debt management and issuance strategies, trends in the composition of public debt portfolios, use of derivatives to assist in the implementation of debt management strategies, asset and liability management strategies and the issue of sub-national and public enterprise debt management.

The involvement of private sector financial market participants was useful as they were able to provide some commentary on the credit crises and their take on how this would affect , issuance spreads for sovereign issuers over the short to medium-term. Most of the participants were relatively optimistic about the prospects for emerging markets but perhaps less so about the more advanced economies. The most interesting message from the Forum was the view that, for once, this was a crisis that had originated in the advanced economies and that the affect on emerging markets was proving much less severe than has been the case in other international financial crises of recent years.  Lack of exposure of domestic financial institutions to the sub-prime mortgage market and the improvement in the fiscal management of emerging markets has insulated these economies from the worst effects and this has been reflected in the relatively mild reaction of investors to EM sovereign debt as evidenced by the relatively mild widening of spreads in binds issued by these countries. 

The attached note highlights the main areas of discussion in more detail. [Download highlight_7th_imf_debt_forum_2007.DOC]

PFM Reforms and Public Expenditure Efficiency: Key PFM Reforms Playing a Role in Effectively Controlling Public Expenditure

Posted by Michel Lazare

There are seven key institutional arrangements for budgeting that play a key role in effectively controlling public expenditures in OECD countries.

This is at least the view presented in 2005 by Jon Blondal (the then Acting Head of the Budgeting and Management Division of the OECD) on the occasion of the 7th Banca d'Italia Workshop on Public Finance. In Jon Blöndal's view, there are three major determinants of the fiscal outcomes of OECD member countries: (1) the general performance of the economy (which is the main driver), (2) the political commitment to fiscal discipline, and (3) the institutional arrangements for budgeting. The presence of the two first factors being insufficient to experience a successful fiscal outcome.

Expenditure Commitment Controls, the essence of fiscal discipline – IMF Technical Guidance Note

Posted by Dimitar Radev and Pokar Khemani

Fiscal discipline, one of the key objectives of good public financial management (PFM), requires a well developed expenditure control framework, including at the commitment level, to prevent accumulation of payment arrears. A July 2006 IMF FAD Technical Guidance Note, "Commitment Controls," by FAD staff members Dimitar Radev and Pokar Khemani, provides technical advice on a number of areas related to commitment controls, including objectives, preconditions for successful implementation, and institutional design. These guidelines are intended to apply primarily to IMF operational work and technical assistance but have also implications for the relevant government departments and agencies within national, provincial/state and local jurisdictions.

Public Investment: Good Project Management is an Issue of ...Capital Importance

"Unexpected changes to payment schedules related to capital projects can create significant difficulties for finance officers responsible for cash management" remarks Steven R. Kreklow (*) in his short article ("Capital Project Cash Flow Management") of the August 2007 issue of the Government Finance Review, the membership magazine of the US-based Government Finance Officers Association.

This adverse impact on cash management and more generally budget execution can be mitigated by good budget and project management techniques described in Steven R. Krelow's article.