Debt Management Performance Assessment Tool (DeMPA) Cash Management. DeMPA Workshop with ECCB St.Kitts & Nevis March 25-27, 2009

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1 Cash Management DeMPA Workshop with ECCB St.Kitts & Nevis March 25-27, Outline Why does it matter DeMPA Scoring (DP 11) 2 1

2 Why does it matter? What is the issue at hand? Like in any business, governments need to forecast their cash needs and prepare for any shortfall and/or surplus. Ideally, firms/governments would like to have a perfect match between cash inflows and outflows A shortage of cash implies a financial cost A permanent excess of cash beyond what is recommended for precautionary reasons means leaving money on the table And this must be on a consolidated basis: Poor coordination among government agencies could imply that while some suffer from a cash shortage, others could have excess of cash (the former will borrow while the latter will lend to banks, paying the active-passive spread) 3 Why does it matter? What is the issue at hand? What is needed is a good (accurate and timely) forecasting system of future cash outflows (i.e., when payroll, severance obligations or debt payments will become due) and inflows (i.e., when tax collection proceeds will occur) This may be needed in more than one currency if there are inflows/outflows denominated in several currencies And a good consolidation/aggregation system so that the cash balances and flows in all government agencies are considered. In short, it is a mini debt management system but applied to liquidity management. 4 2

3 One simple example Tax revenues: have a very clear seasonal pattern VAT: due every 12 th of the month Income taxes: due every quarter by firms Wage taxes due every month (withheld by firms) Real Estate taxes due every April, June, September and November April-May: Tax season (reimbursements through mail checks) In September and December the government usually pays a bonus (Independence Day and Christmas, respectively) 5 One simple example All these payments occur through the banking system So, the government knows when its bank accounts will be filled up and when outflows will occur (i.e., payroll every end of month), so it has to manage its liquidity. The government is a liquidity provider A special unit in the Ministry of Finance negotiates with banks the rate at which overnight (and longer term) deposits are made. 6 3

4 The DeMPA scoring methodology (DPI 11) emphasizes three dimensions: Forecasting: the effectiveness of forecasting the aggregate level of cash flows and balances in government bank accounts Forecasts of aggregate cash balances (typically from the Treasury or Budget department) Monthly forecasts of weekly balances Weekly forecasts of overnight balances Rolling 30-day forecasts of overnight balances Investment: the effectiveness of managing the aggregate cash balance in government bank accounts, including the integration with the domestic debt borrowing program Central government cash balance Excess cash invested at a market rate on an ad hoc basis Cash balance managed through weekly transactions through daily transactions 7 The DeMPA scoring methodology (DPI 11) emphasizes Consistency: the frequency of reconciliation of bank accounts in the case where the principal DeM entity(ies) operate(s) its (their) own accounts DeM entity bank account(s) Reconciled monthly Reconciled weekly Reconciled daily 8 4

5 Thank you! 9 5