Download Better cash management

Cash Management Reform
The Way Forward in Central Government
Financial Management Resource and Research
Society
November, 2014
WHAT IS CASH MANAGEMENT?
• The strategy and associated processes for managing
cost-effectively the government’s short-term cash
flows and cash balances, both within government, and
between government and other sectors.
(Williams 2004)
• Having the right money in the right place at the right
time to meet the government’s obligations in the most
cost-effective way
(Storkey 2001)
OBJECTIVES OF CASH MANAGEMENT
• To ensure that adequate cash is available to process due payments.
Pooling revenues in a treasury single account (TSA) facilitates this.
• To manage the borrowing so as to minimize government borrowing costs.
• To maximize returns on financial assets (avoid the accumulation of lowyielding government deposits or idle funds).
• To manage risks by appropriate measures such as collateralization of
government deposits.
• To support the implementation of monetary policy at minimum cost to
government.
CASH MANAGEMENT IS DIFFERENT FROM
BUDGET MANAGEMENT
• Budget management ensures that budget is managed within
the appropriated budget and there are no excesses or
shortfalls.
• Cash management ensures that there is enough liquidity for
payments and surpluses/ deficits of cash are optimally
managed.
CASH MANAGEMENT FUNCTIONS AND PROCESSES – AN
OVERVIEW
• TOP DOWN PROCESS
BY MOF INVOLVES
CASH FORECASTING
TO GUIDE QUARTERLY
EXPENDITURE
ALLOCATIONS(QEAs).
MOF- BUDGET
MANAGEMENT
• IN YEAR FINANCING
OF BUDGET
EXECUTION
INVOLVING REVENUE
CONCENTRATION AND
CASH RELEASES
CASH MANAGEMENT
CELL & CONTROLLER
GENERAL OF ACCOUNTSCASH MANAGEMENT
• BOTTOM UP PROCESS
BY GOVT. UNITS TO
DETERMINE AND
UPDATE CASH NEEDS
MINISTRIES- CASH
PLANNING
Cash Management Challenges in India
• Fragmentation of responsibilities for cash management in government
• Poorly defined structural linkages amongst:
Budget Division
- Cash Management Cell
- Middle Office (Debt Management)
Reserve Bank of India
Controller General of Accounts
- Cash Management Unit
- Cash Planning Units in the Ministries
• No cash management handbook or manual
Cash Management Challenges in India (Contd.)
• A heavily compromised Treasury Single Account System in the Central
Government – consequences of pre-funding releases to States
• Problems of parking of funds- delayed tax refunds
• Sporadic implementation of in-year cash management instructions
• No commitment control
• Weak I.T. support
• Classification system weaknesses
• Lack of skills and trained staff and no strategy to address this.
• No incentives for good cash management
STATUS OF CASH MANAGEMENT IN INDIAPEFA INDICATORS 2010
INDIA PEFA MARCH 2010
PI-4: Stock and monitoring of expenditure payment arrears
D
PI-9: Oversight of aggregate fiscal risk from other public sector entities-
C
PI-16: Predictability in the in the availability of funds for commitment of
expenditure
PI-18: Effectiveness of payroll controls
C+
PI-20:Effectiveness of internal controls for non-salary expenditure
D+
PI-24:Quality and timeliness of in-year budget reports
C+
C+
Monthly receipts and expenditure trends
Average monthly receipt and expenditure trends over the period 2009-10 to 2013-14
200000
180000
160000
140000
120000
100000
80000
60000
40000
20000
0
1
2
3
4
5
6
Receipts
7
Expenditure
8
9
10
11
12
Monthly expenditure by main components
Average Monthly Expenditure by main components
180000
160000
140000
120000
100000
80000
60000
40000
20000
0
1
2
3
4
5
Operational expenditure
6
7
Capital expenditure
8
9
Interest
10
11
12
Month-wise fiscal deficit vs issue of domestic
debt
(Expenditure-Receipt) vs Domestic Debt
300000
250000
200000
150000
100000
50000
0
1
2
3
4
5
6
7
-50000
-100000
Domestic Debt
Expenditure-Receipts
8
9
10
11
12
CASH MANAGEMENT IN INDIA – WAY FORWARD
• Need for a dedicated cash management organisation. This
could be a Cash Management Unit in the CGA’s Office and
Cash Planning Units in the ministries.
• Legal and Regulatory Framework needs to be strengthened
through a Cash Management Manual ( the present GFR does
not even mention cash management)
• Instead of the present Cash and Debt Management
Committee, an Asset and Liability Management Committee
should be established with an appropriate composition and
mandate for coordination of cash, debt and monetary issues
WAY FORWARD (contd.)
• Clearly distinguish between the institutional functions related to
budget management and cash management
• Remove the weaknesses of the TSA System by “Just-in-time”
funding of transfers and subsidies. PFMS/ CPSMS System of
the CGA has apparently the capability, which can be
strengthened further
• Improved IT systems for cash forecasting and management
• Skills and capacity building through entry level, in-service
training and special familiarization programs for non-financial
managers.
CASH FLOW FORECASTING
• A key requirement of cash management is the ability to
forecast daily cash inflows and outflows
• Cash forecasts help in the financing of budgeted expenditure
and in developing policy responses for effective cash
management
• In-year cash forecasting information is usually prepared on a
rolling three month basis
• Actuals vs forecasts are monitored on real time basis
• Large Spending Units and Tax Units participate actively in the
forecasting process
SURPLUSES/ DEFICITS AND FINANCING
ROUGH TUNING
- Issue of Treasury Bills
- The issue of bills is based on expected net cash flows
- Management of structural surpluses
- Results in rough smoothing of the cash balance
FINE TUNING
- More Active Cash Management policies
- Wider range of cash management instruments
- Results in finer smoothing of the cash balance
MONETARY POLICY
• Central Bank takes into account in its Monetary Policy
operations, the likely changes in government balances
• Ministry of Finance provides to the Central Bank information on
government’s expected cash flows and balance
• The Central Bank also provides information to the Ministry of
Finance on government’s actual balance on daily basis
• In addition to giving monthly accounts figures of receipts and
expenditure, the Ministry of Finance also gives these forecasts
of the daily cash position of the government.
DEBT MANAGEMENT POLICY
• Integration between cash and debt management ensures:
- Debt issue decisions keep in view the seasonal
nature of government’s cash flows
- An overview of the market is available in deciding the
balance of short and long term debt and treasury bills
- Active cash management
• Integration or a high degree of coordination between cash and
debt management is the norm as far as best practice is
concerned
• The formation of a Debt Management Office separate from the
Central Bank, is also becoming a norm.
CLEAR OUTLINING OF THE ROLE OF CENTRAL BANK,
BUDGET DIVISION, MIDDLE OFFICE (DEBT MANAGEMENT),
CGA AND LINE MINISTRIES
• Cash Management Manual will have to clearly lay down the
role of all the participants. This will generally consist of:
- Central Bank providing banking services and flows
- Spending Agencies and Tax departments providing data
concerning their expenditure and receipts
- CGA/ CCAs aggregating the “above the line” cash
forecasts
- Budget Division/ Debt Office adding “below the line”
transactions and also taking decisions about investments
and issue of Treasury Bills.
THANK YOU