Gemloc Advisory Services Peer Group Dialogue. The Challenges of Efficient Government Cash Management

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Gemloc Advisory Services Peer Group Dialogue The World Bank Group Meeting #11: Minutes The Challenges of Efficient Government Cash Management Date: March 12, 2013 Place: Time: Attendees: Conference

1 Gemloc Advisory Services Peer Group Dialogue The World Bank Group Meeting #11: Minutes The Challenges of Efficient Government Cash Management Date: March 12, 2013 Place: Time: Attendees: Conference call led by the WB/Gemloc Team in DC Supported by GoToMeeting conference tool 8 am- 9:30 am (EST time) Country Participants: Brazil: André Proite, Fabiano Silvio Colbano, Otavio Ladeira de Medeiros, Roger Castro, Leandro Secunho (Brazilian Treasury) Hungary: Zsolt Bangó (Government Debt Management Agency) India: Rabishankar Tavarna (Reserve Bank of India) Poland: Marek Szczerbak, Ewa Wajszczuk (Ministry of Finance) South Africa: Phumzile Maseko, Anne-Lize Van Niekerk (National Treasury) Turkey: M. Tolga Yucel, Gonca Erdener (Undersecretariat of Treasury) World Bank Group Participants: Carlos Senon Benito, Eva Hansen, Thordur Jonasson, Zauresh Kezheneva, Honglin Li, Lois Quinn, Indhu Raghavan, Baudouin Richard, Anderson Silva, Peter Stella, Mike Williams Topic: The Challenges of Efficient Government Cash Management Objectives: Introduction of the topic by the World Bank Discussion and Q&A Issues discussed: Cash Management Objective: To ensure sufficient cash is available for meeting commitments. Effective cash management includes other objectives such as economizing on cash and managing cash flow effectively, in a way that benefits financial markets. The passive approach is to monitor cash balances, restraining or slowing expenditures, and cash rationing. The active approach is to try to smooth weekly or daily cash flows with transactions in the money market, operate with a lower average cash buffer, and reduce volatility in money market liquidity. Most countries are moving to an active approach. The policy challenges in cash management are interrelated where: o Cash balance is affected by budget execution, cash flow forecasting

2 and balance targeting; o Cash flow management in the money market affects monetary policy, market development, and debt management; and o Debt management policy interacts with the cash balance Good international practice in cash management includes: o Efficient internal payment processing o Aggregating cash flows and minimizing idle balances o Effective cash flow forecasting and Ministry of Finance (MoF) balance at the Central Bank (CB) o Agreement between MoF and CB on forecast information, interaction between MoF operations and monetary policy operations, and market-based remuneration of MoF balance at the CB o Coordination between government debt and cash management functions o Use of short-term borrowing instruments to smooth cash flows o Efficient payment and settlement infrastructure, with securities typically held in dematerialized form Treasury Single Account Objective: To aggregate all government cash balances in the treasury single account (TSA), typically at the CB, to help monitor and control cash balances and minimize idle balances in the banking sector. There are different mechanisms to sweep overnight balances into the TSA including: using subsidiary accounts that can be notional (ledger accounts) or zero balance accounts. These mechanisms depend on the technological capacity of the banking sector and government, and internal accounting arrangements. Challenges faced in the implementation of the TSA include: too many accounts controlled by spending units (SUs), extra budgetary funds, prefunding using seed funds, collection funds (collection lags), and technological challenges, such as the lack of an integrated financial management information system (IFMIS). Cash Flow Forecasting Objective: To forecast total net cash flow and cash balance, for both receipts and payments, and financing transactions, ideally with a 3- month horizon to identify peaks and troughs and plan cash management strategies. Within the forecasting framework focus should be on: cash flow (separating the permission to spend from actual spending), gathering information from SUs and the tax department, history and experience (more than econometric models), and separating forecasting from budget execution (to obtain unbiased estimates on what is going to happen and

3 not what should happen). Challenges faced in cash forecasting include: poor information flow from agencies, too much focus on the short-term and on budget execution, and a forecast database that is separate from IFMIS. Active Cash Management Rough tuning and Fine tuning Objective: To smooth the cash flow profile using instruments such as treasury bills (of short-term used for rough tuning), cash management bills (of very short term used for fine tuning), repos and reverse repos (requiring a liquid market, typically used for fine tuning), bank deposits (collateralized to reduce credit risk), and deposits with the CB (paying a market interest rate). The minimum cash balance should be separately identified and managed from any structural surplus. o Even with a structural surplus, some cash balance, and therefore cash management, is important to provide liquidity to the government o The suggested minimum cash balance is the maximum cumulative forecasting error over the policy reaction period plus a precautionary balance The cash buffer is determined by daily cash flow volatility and forecasting ability, the timescale over which additional cash management instruments can be deployed to manage unanticipated fluctuations, and the availability of other safety nets (such as credit facilities, end-of-day borrowing from commercial banks, etc.) Challenges faced in more active cash management include: lack of money market development, misunderstanding between MoF and CB over the impact of cash management activities on systemic liquidity, multiple points of contact with the market at the debt management office. Challenges faced in fine tuning stem from the impact of the financial crisis, including: reduced interbank market liquidity; shortening of maturities, larger haircuts, and higher transaction costs with the emphasis on clearing in repo markets; and shortage of good quality collateral with Basel III regulations and downgrades of government bonds. Country Experiences Hungary has adopted active cash management since Cash and debt management are integrated at the Government Debt Agency (AKK) with a TSA at the National Bank of Hungary. AKK receives the 3-month liquidity plan from the state treasury twice a

4 week and makes a decision on applicable cash management tools that include: o 3-month treasury bills that are auctioned weekly and reopened 6-8 weeks before maturity date. These are used for fine tuning when there are greater short-term cash needs and more intensively when there are large bonds or 12-month bills maturing. o Buybacks of government bonds with remaining maturity less than 1.5 years helps the liquidity position in the TSA around maturity date; typically able to buy back 30-40% of outstanding amount before maturity o Repos with typical tenors of 1-day or 1-week are announced daily for which liquidity forecast team meets at least twice a week o Standby loan facilities with international banks that can be drawn with 2-3 day notice; EUR credit lines can be swapped with the CB for HUF o Large Euro cash balances at CB in anticipation of large international transactions. For example, in February 2013, USD 3 billion was raised in the US market and placed at the CB to finance foreign currency debt maturing later in AKK has a strategic end-of-day benchmark band for the TSA, covering cash needs for six weeks without any government issuance, including the forecast error plus HUF 100 billion. Repos are used to respect this band. AKK faces the challenge of decreased repo market liquidity (from EUR 44 billion in 2008 to EUR 20 billion in 2012), as local banks are flooded with forint liquidity, causing the TSA balance to exceed the upper band often during the last few years. India has a liquidity facility with the CB to smooth out very short term fluctuations under the condition that this facility is not used to fund the deficit. In most countries, borrowing from the CB is either prohibited or ruled out as a matter of policy, with the objective to avoid inflationary borrowing. However, CBs typically welcome government efforts to smooth cash flows since the government is typically a major cause of volatility in money market liquidity. Short-term borrowing from the CB need not have adverse macroeconomic effects. However, the government may consider more direct credit arrangements with commercial banks. Costs of other market-based solutions may become prohibitive particularly in illiquid markets. Poland introduced a consolidation of public finance that allowed it to sweep balances (cash advanced to SUs) into the TSA and maintain the cash balance while issuing fewer treasury bills. Turkey set up an integrated system to obtain expenditure forecasts from SUs, but complements this with direct contact with SUs to get more

5 realistic forecasts. Documents discussed: Brazil issues short-term instruments largely to meet financing needs, and cash management is facilitated using repos and a cash cushion that covers needs for the next three months on average. This supports the current debt management strategy with the objective to lengthen maturities, and so avoid issuing more short-term instruments than necessary to meet financing needs. Cash forecasting is important even with the cash cushion and an integrated system for revenues and expenditures that shows data one day in advance is accessible by the CB. The government s TSA at the CB is remunerated at the market-based overnight interest rate. Debt management instruments and amounts are coordinated with the CB. The current arrangement was devised when the market was less developed and in the context of a high inflation. Since the treasury is able to issue longer-term instruments and maintain the cash cushion it does not consider issuing short-term bills for cash management. However, there may be a cost of carry associated with paying interest on longer-term instruments while being remunerated at the overnight rate on the TSA balance. Still, depth and flexibility in the repo market continues to support current arrangements. Presentation on The Challenges of Efficient Government Cash Management by World Bank and background papers previously distributed Next steps: Continue discussion on World Bank s ecollaborate platform Solicit other topics for discussion in future PGD meetings

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