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January 30, 2014

Effective Cash Management in East Africa

Posted by Guy Anderson and Yasemin Hurcan1

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The East AFRITAC member countries (Eritrea, Ethiopia, Kenya, Malawi, Rwanda, Tanzania and Uganda) have been progressively rationalizing their banking arrangements and strengthening their cash management techniques. These improvements have been enabled by the wider use of financial management information systems (FMIS), improved banking systems and increased connectivity. However, despite some notable successes, the banking and cash management regimes in many of the countries continue to underperform. Problems include: significant government-controlled bank balances outside of the computed cash position; unreliable cash forecasting; and the passive use of cash management instruments. The result has been higher borrowing costs, a reliance on cash rationing techniques to determine budget releases, difficulties in planning and implementing the approved budget, and an increased risk of accumulating payment arrears.

Most countries of the region, nevertheless, are committed to implementing a treasury single account (TSA) and more active cash management. Following requests from some of these countries, AFRITAC East organized a four-day regional workshop on “Effective Cash Management to Support Budget Execution” in Zanzibar during October 2013. Thirty-two participants attended. The workshop sessions were designed around three themes:

(i) Strengthening banking arrangements, using FMIS and other technologies to aggregate government cash balances;

(ii) Establishing a comprehensive cash plan, supported by upgraded revenue and expenditure forecasting capability and strengthened institutional arrangements; and

(iii) Supporting budget execution through improved fund release mechanisms, in-year cash management instruments for smoothing cash flows, expenditure controls, and mechanisms to prevent/manage payment arrears.

The workshop was facilitated by Guy Anderson (East AFRITAC PFM advisor), Yasemin Hurcan (FAD), Megan Gray (US Treasury) and Per-Olof Jonsson (Consultant). It aimed at striking a balance between the theory and practicalities of the three themes. As with all regional PFM workshops, the discussions benefitted from the active participation of the country representatives. Information and knowledge were shared through country team presentations on the three themes, and wide-ranging discussions of how countries had responded to the many challenges they faced. Additionally, each country team completed a self-assessment questionnaire that compared the country’s cash management systems against good international practice. The results of the questionnaire were summarized in a heat map, providing country comparisons.

In general, the discussions during the workshop suggest that, whilst there are reasonable controls over the opening of bank accounts and utilization of technologies to support electronic funds transfers and automated bank reconciliations, the region has been slow in adopting the TSA concept, and assigns little emphasis to cash planning and short term cash flow forecasting. Instead, some of the countries still rely largely on monthly cash rationing techniques to determine fund releases.

The workshop concluded by identifying five areas where the participating countries felt they could benefit from wider understanding of international experience. These were:

1. Cash management lacks priority in PFM reform programs – participants felt that reform efforts tended to concentrate on areas such as budget formulation, procurement, FMIS and oversight arrangements, and yet without effective cash management the approved budgets and procurement plans cannot be executed.

2. Unrealistic budgets require cash management fixes - participants commented that the biggest barrier to improving cash management is lack of credibility in the budget arising from over-optimistic revenue projections, inadequate expenditure provisions and non-mandated expenditures. The problem is compounded through the lack of in-year adjustments to the budget, and reliance on “cash rationing” as the surest way to prevent unplanned deficits.

3. Absence of international data on TSA experiences – whilst the countries are keen to introduce and/or extend their TSA arrangements, they consider that insufficient information is available on the approaches used in other countries, and how practical implementation issues have been dealt with in practice. Such information would be valuable both to guide government officials who are responsible for introducing a TSA, and allay the fears of other stakeholder groups.

4. Limitations of FMIS in reporting on payment arrears – the FMIS in several countries is able to capture in-year purchase orders and prevent these from causing the released budget to be exceeded. These countries are looking to extend the functionality of the FMIS to capture multi-year contract details and controls. Whilst these functions will assist in preventing arrears, they do not help in managing any arrears that actually occur. In particular, invoice “pay by” dates are generally not captured and, more importantly, invoices cannot be posted in FMIS unless sufficient funding exists.

5. The appropriate periods to be covered by budget releases – Whilst best practice in many advanced countries is to make the appropriated annual budget available to budget agencies at the start of the year, so that commitments and payments can be made in accordance with spending agencies’ needs, participants questioned if annual releases are appropriate for developing economies. They expressed concern that annual fund releases would be fully consumed during the early part of the year, putting pressure on the government to supplement the budget with additional resources.

Readers are encouraged to share any comments and relevant experiences on the topics discussed at the workshop, further information on which is available at http://www.eastafritac.org.

 

1 Guy Anderson is a PFM Advisor at East AFRITAC; Yasemin Hurcan is a PFM Advisor in the Fiscal Affairs Department.

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.

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