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January 05, 2021

Two New IMF How-to-Notes on Cash Management

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By Emre Balibek, Yasemin Hurcan and Sandeep Saxena[1]

Managing cash balances is central to the government’s overall approach to cash management. Cash managers seek to maintain an optimal balance in the treasury single account (TSA) to ensure there is adequate liquidity to meet the government’s financial obliga­tions as they fall due. An adequate cash balance provides a cushion against cash flow volatility, especially in developing countries where short-term financing options and market access are limited. Liquidity, however, comes at a cost. Gov­ernments can reduce the cost of maintaining liquidity by proactively managing their cash balance and prudently investing any excess liquidity.

Faced with volatility in cash flows, cash and debt managers often find it challenging to decide what level of the cash balance is adequate to avoid liquidity and refinancing risks, how and where to invest temporary cash surpluses and, while investing, how to balance considerations of safety, liquidity, and return. There is little available guidance on these important issues.  

Two How-to-Notes published by the IMF’s Fiscal Affairs Department (FAD) provide practical guidance to government cash managers on how to set up a cash buffer and how to develop a framework for the investment of temporary government cash surpluses. The notes recognize that an appropriately sized cash buffer helps insulate the government from temporary cashflow mismatches. Governments can also gain by prudently investing temporary cash surpluses—resources beyond those needed for the cash buffer—besides indirectly supporting the central bank’s monetary operations. 

The note on ”How to Set Up a Cash Buffer: A Practical Guide to Developing and Implementing a Cash Buffer Policy” discusses the role of the cash buffer in managing cash balances and mitigating liquidity risk in cash and debt management. The paper offers practical approaches to developing a policy framework, considering the risk mitigation objectives and the cost of carrying the funds. It provides many examples of country practices as well as a set of policy and technical recommendations for setting up a cash buffer target.

The note on “How to Develop a Framework for the Investment of Tempo­rary Government Cash Surpluses” discusses the policy framework and processes that governments should put in place to identify, guide, and govern the investment of their surplus cash resources. The paper discusses the various investment options, their attendant risks and procedural requirements, and chal­lenges in managing cash assets. It also covers how governments should address the main institu­tional, governance, risk management, and coordination issues. The paper provides examples of how countries have established a framework for measuring and monitoring performance against their cash management objectives.   

The two notes are intended to provide guidance to coun­tries who want to improve their frameworks and institutional arrangements for cash investment. They will be particularly useful to emerging market economies, and middle- and lower-income countries that have a well-managed treasury function with a reasonable degree of control over their cash resources and the ability to forecast future cash flows.

 

[1] Senior Economists in the IMF’s 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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