From right to left: H.E. Minister of Finance of Peru Ms. Mercedes Araoz, IMF Fiscal Affairs Department Senior Advisor Adrienne Cheasty, and Mexican State Treasurer Ms. Irene Espinosa.
Treasury management is a somewhat neglected topic in the area of PFM reform in the region. A survey of State Treasuries in 12 of the region’s countries prepared by the IMF and World Bank indicated that Treasury Single Accounts (TSAs) had been set up in all but one of the surveyed countries (presentation attached below). However, the coverage of the TSA over central government needs to be extended. Often autonomous agencies, social security funds, and other extrabudgetary funds are not consolidated in the TSA, nor local government. That means that substantial amounts of liquidity is held outside the State Treasury which is costly, because it needs to be funded through debt issuance, and it decreases the availability of cash for other parts of central government. In most Latin American countries, budget execution is cash constrained during most of the year which will have a negative effect on service delivery and timely completion of government investments.
All countries allow departments and agencies to keep bank accounts at commercial banks outside the TSA. Often there are thousands of these accounts. These accounts are again often not monitored and idle funds are not or only infrequently returned to the central treasury. The concept of end-of-day sweeping of bank accounts, so-called zero-balancing, is practiced by only one of the surveyed countries.
On the income side, banks are also the main conduit for collecting tax and non-tax revenues. By retaining moneys for a few days, and sometimes up to two weeks, on their own accounts before transmittal to government, and also charging for transaction processing, banks in the region practice “double-dipping”, earning twice on the collection of government revenues. In Mexico the State Treasury had recently reduced transaction costs by 50 percent by speeding up the collection process considerably.
While cash rationing is still quite prevalent, the use of cash management instruments is not well-developed. Treasury bills are used mostly for funding purposes, not to smooth out the major seasonal fluctuations in the TSA balance. For fine-tuning of the TSA balance most countries still lack adequate cash monitoring and forecasting capacity. Also the money markets in most Latin American countries are not deep and liquid enough for targeting of a low and fixed balance at the end of each day, such as is the case in quite a few OECD countries.
The Treasurers indicated that most of their efforts at the moment are focused on developing centralized payment and accounting systems linked to their TSA structures, and to gradually expanding the coverage of their TSAs. On the former, the introduction of new government integrated financial management information systems was an important element on the seminar’s agenda. The main suppliers of off-the-shelf software applications, SAP, ORACLE, and Free Balance, all gave presentations on the relative merits of their products. A new wave of system automation can be foreseen for the coming years. Seminar participants discussed the relative merits of bespoke versus off-the-shelf packages, with the region becoming somewhat more interested in the latter.
On the issue of TSA coverage, the Treasurers presented interesting examples of the strong political and administrative resistance to pooling government liquidity at the central government level. Often autonomous bodies indicated that they had a legal claim on cash resources, not just a claim on a certain budget appropriation. Hospitals and universities in the region had also been very resistant to giving up their regular cash advances from the budget. Of course such preferential treatment of certain government entities only increases the scarcity of cash for the rest of the public sector. Ecuador indicated recent success of the Minister of Finance in agreeing with the countries’ universities inclusion of their cash resources in the central TSA. In return, the Minister had guaranteed to make cash resources available to universities for payments on an as needed basis.
A final topic covered by the conference was the relationship with the central bank. Treasury reform implies a more independent relationship with the central bank. Debt and cash management services to government have or are gradually being taken over by Debt Management Offices and the Treasury. That provides more scope for central banks to focus exclusively on monetary policy. However, on some issue including the payment system and management of the TSA the central bank will retain an important role. Also, new mechanisms for coordinating monetary policy and debt and cash management need to be further developed.
Download Seminario de Tesoreria Programa
Download Joint Statement
Download Treasury Management
--------------------------------------------------------------------------------
[1] While the international professional association born in Lima is for the time being constituted of regional members only, there seems to be ample room for coordinating its future activities – and maybe merging -- with the other existing international association, the International Association of Treasury Services, which was created at the initiative of the French and Moroccan treasuries and now comprises a sizable number of non-French speaking country treasuries.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
