MACROECONOMICS, TRADE AND INVESTMENT MACROECONOMICS, TRADE AND INVESTMENT EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Cash Management - How do Countries Perform Sound Practices? M. Coskun Cangoz Leandro Secunho ABSTRACT Cash management is simply defined as making the right amount of money available at the right time and the right place to meet the government’s obligations in the most cost-effective way. The main features of modern cash management are centralized government bank accounts and establishment of a Treasury Single Account, ability to make accurate cash flow forecasts, use of short-term financing instruments, and capacity for the investment of excess cash reserves. Establishing a sound cash management framework with the mentioned features is beneficial not only to the governments and public entities, but also to other stakeholders including the beneficiaries of government payments, banks and lenders. Given the recent COVID-19 pandemic and locked-down measures introduced in many countries, governments had to deal with unanticipated revenue decreases, and significantly increased public expenditures due to fiscal stimulus packages and pandemic related health expenditures. Therefore, existence of a well-structured government cash management is now even more important than before. This paper aims to explore cash flow forecasting and cash management practices in 24 countries in various regions, at different income levels and technical capacity, and alignment to good practices based on the information provided at the World Bank workshops on Cash Flow Forecasting and Cash Management held in 2018 and 2019. The paper also draws on experiences and practices from other emerging and advanced countries. Cases from different countries indicate that full implementation of modern cash management is still a challenge, even though the Treasury Single Account system is common in most countries and liquidity buffers were established or increased following the Global Financial Crisis. Cash flow forecasting is an area to improve given the accuracy, horizon and frequency of the projections are frequently limited. Fragmented institutional structure makes cash management even more challenging. Country cases also demonstrate that there is a significant room to strengthen coordination between debt and cash management and the use of short-term instruments to cover cash shortages. Investment of cash balances seems to be a bigger weakness as many countries keep their liquidity buffers in the Central Bank with no remuneration. © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@ worldbank.org. 4 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? >>> Contents Acknowledgements 6 Abbreviations 7 Introduction 9 I. Cash Flow Forecasting 11 A. Governance and Institutional Framework of Cash Flow Forecasting 11 B. Cash Flow Forecasting Practices 13 II. Financing Cash Flow Gaps 19 A. Funding Instruments 20 B. Coordination Between Cash and Debt Management 23 III. Liquidity Buffers and Managing Excess Cash Balance 26 A. Prerequisites of Investing Excess Cash 27 B. Minimizing the Cost of Carry 27 C. Investing Cash Balances in the Market 28 IV. Conclusion 31 References 32 ANNEX: Institutional Arrangement of Cash and Debt 34 Management in Selected Countries Colombia 34 France 35 Hungary 36 The United States of America 37 CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 5 >>> Acknowledgements The authors are grateful to Emre Balibek (IMF), Lars Jessen and Sebastien Boitreaud (World Bank) for their contributions and comments to the earlier versions. All errors, omissions, and inconsistencies that may appear in this work are the authors’ sole responsibility. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organiza- tions, or to members of its Boards of Executive Directors or the countries they represent. 6 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? >>> Abbreviations CB: Central Bank CP: Commercial paper DeMPA: Debt Management Performance Assessment DPI: Debt Management Performance Indicator FX: Foreign exchange GDP: Gross domestic product GG: General government IMF: International Monetary Fund MoF: Ministry of Finance MTDS: Medium-term Debt Management Strategy T-bill: Treasury bill TSA: Treasury Single Account UK: United Kingdom USA: United States of America VAT: Value-added Tax CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 7 2. MTI INSIGHT >>> Cash Management- How do Countries Perform Sound Practices? >> INTRODUCTION Cash management, as a process of collection, distribution and investment of cash, requires projection of cash flows, a mechanism for payments and revenue collection, short-term instruments to finance the gap between cash flows, capacity to generate a return over cash balances and coordination across institutions. Storkey (2001) defines cash management as having the right amount of money in the right place and time to meet the government’s obligations in the most cost-effective way. Williams (2004) further considers cash management as 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. The effectiveness of cash management depends on the provision of reliable data and realistic assumptions in cash flow forecasting, consolidation of cash flows through a centralized system of bank accounts, existence of structured and liquid bond and money markets, and well- defined institutional and legal framework. Lienert (2009) and Williams (2010) identify the main building blocks that countries should look for to establish a sound framework for effective cash management (Table 1). As Williams argued (2004) efficient cash management increases the certainty of government’s payments and reduce operational risks, mismanagement and fraud. It further minimizes idle cash held by government and a direct saving in the form of borrowing that is no longer needed to finance the cash which is unlikely remunerated. Following the Global Financial Crisis, many advanced and emerging countries have either established (e.g. the United States, Canada, Portugal and Hungary) or strengthened liquidity buffers (Cruz and Koc, 2018). The objective of accumulating cash is to provide a buffer for unanticipated cash outflows and to avoid accessing the market for unplanned short-term financing. However, given that the size of a liquidity buffer is linked to, among other factors, the magnitude of cash flow forecasting errors and cash flow volatility, the design of a strategy for building up a cash reserve reflects the significance of the challenges of accurate cash flow forecasting. CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 9 > > > T A B L E 1 - Key Features of Cash Management KEY FEATURES OF MODERN CASH MANAGEMENT (LIENERT, 2009) KEY CHARACTERISTICS OF GOOD PRACTICE IN GOVERNMENT CASH MANAGEMENT (WILLIAMS, 2010) Centralization of government cash balances and establishment of a Centralization of government cash balances and establishment of a Treasury Single Account (TSA) structure TSA Clear understandings on the coverage of the cash planning framework Ability to make accurate projections of short-term cash inflows and Ability to make accurate projections of short-term cash inflows and outflows outflows An adequate transaction processing and accounting framework Timely information sharing between the central treasury, revenue- Information sharing between the cash managers, revenue-collecting collecting agencies, spending ministries, and/or treasury branch agencies and spending ministries (and any relevant branch offices) offices Formal agreement between the MOF and the central bank on Appropriate institutional arrangements and responsibilities information flows and respective responsibilities Modern systems: and adequate transaction processing and accounting framework (processing government transactions with few Utilization of modern banking, payment and settlement systems handling steps, reliance on electronic transactions); modern banking, payment and settlement systems Use of short-term instruments (treasury bills, repo and reverse repo, Use of short-term financial market instruments for cash management term deposits, etc.) to help manage balances and timing mismatches Integration of debt and cash management Strong coordination of debt and cash management On the other hand, there is a trade-off between the size This paper aims to explore cash flow forecasting and cash of the liquidity buffer and the cost of carry1, as keeping management practices in countries in different regions, with cash balance has a cost. Therefore, accuracy of cash different income levels, technical capacity and alignment flow projections and effectiveness of cash management to good practices, based on the information provided by 24 prevent governments to accumulate arrears, help saving countries that participated in World Bank workshops on Cash cost and mitigate risks. Due to the COVID-19 pandemic, Flow Forecasting and Cash Management held in 2018 and many countries introduced lockdowns and economies faced 2019. The participating countries were Albania, Angola, Bolivia, contraction globally. Therefore, governments’ revenues have Brazil, Chile, Colombia, Equatorial Guinea, Eswatini, The decreased, and cash outflows increased because of the fiscal Gambia, Ghana, Honduras, Kosovo, Lesotho, Nigeria, North stimulus packages and pandemic related health expenditures. Macedonia, Peru, Romania, Rwanda, Serbia, Seychelles, Given the increased uncertainty during the COVID-19 crisis, Slovenia, South Africa, Thailand, Uruguay. The paper also managing the cash in the most effective way has become draws on experiences and practices from emerging and even more challenging. In this context, lessons learnt from advanced countries such as France, Hungary, India, Portugal, other countries could be extremely useful. Sweden, Turkey, the UK and the USA. Active cash management allows governments to use wide range of financing instruments which also helps offsetting the cash flows of governments at the central banks and to reduce uncertainty in central banks’ liquidity forecasts. Efficient management of cash further contributes to the development of effective short-term securities market (Williams, 2004). However, there are cases where cash management is used for different purposes such as to maintain fiscal controls through a process called “cash rationing” (Miller and Hadley, 2016). 1. Cost of carry is broadly defined in this paper as the cost of keeping excess of cash in government accounts, given that borrowing cost tends to be higher than the return of the investment of these resources (if any). In a non-strict sense, it could be compared as the opportunity cost of “unused” cash, in net terms. 10 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? > > > F I G U R E 1 - Workshop Participants by Region and Income Level The paper does not intend to revisit all features of effective This paper is comprised of four sections as summarized cash management already explored in the existing literature, in the following: Section I provides a brief overview of the but sheds light on some critical pillars: cash flow forecasting, fundamentals of cash flow forecasting. Section II discusses the use of short-term instruments for closing the cash flow gaps, the funding instruments for financing the gaps between cash investment of excess cash, and the coordination between cash inflows and outflows, and the coordination between cash and and debt management. Practical experiences from a relevant debt management. Section III examines the practices on the sample of countries not segmented by region or income levels liquidity buffer and investment of excess balance of the TSA. bring up how different approaches may be adopted respecting Finally, Section IV summarizes the findings and includes the specificities, limitations and strengthens of each country, policy recommendations. but still be aligned with sound practices. >> I. CASH FLOW FORECASTING Cash management is a process which aims at making the not an easy task. Therefore, cash managers firstly classify right amount of money available at the right time in the right the payments considering the priorities and the due dates. place to execute the government’s payment obligations. This This practice helps cash managers to put payment requests widely accepted definition seems simple but putting it into in an order and to process to make funds available for the practice might be challenging. In case the full amount (right beneficiaries. amount) is not transferred, at the required time (right time) to the beneficiary (right place) the government can face with >>> A. GOVERNANCE AND payment arrears and default. This three-legged process can INSTITUTIONAL FRAMEWORK OF be called as “calibration of 3Rs” where each R represents CASH FLOW FORECASTING a “right” for the amount, the place and the time. Finding the “right” balance of 3Rs is like three-ball juggling, and none of Cash flow forecasting is key to ensure that government’s the balls should drop anytime. Therefore, it requires a strong payment obligations are fully met, and arrears are not cash flow forecasting capacity and the ability to implement accumulated. However, if cash management is not well- cash flow projections. positioned in the government’s planning and resource management cycle and has weak linkages with debt The main objective of cash management is to minimize management, a cash manager will not be able to produce gaps between cash inflows and outflows at any point of time, accurate projections of cashflows and cannot provide reliable ideally in the next 3 months. To this end, in order to determine and timely information to decision-makers, spending agencies, the “right amount” for the required payments, cash managers Central Bank and markets. Therefore, as confirmed by sound need to project expected revenues and payments, and identify practices, setting appropriate institutional arrangements and the gaps. Given that the spending agencies need cash almost identifying the responsibilities across institutions are essential always immediately, and available resources are typically for effective cash management. limited, meeting all the payment requests when asked is CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 11 Cash management, as an element of strong public financial cash rationing to ensure spending agencies stay within the management, helps keeping payments within the budget budget limits and achieve aggregate fiscal targets (Miller and limits, through authorized budget allocations. It can further Hadley, 2016). To this end, some countries consider cash improve realism of fiscal projections and assist decision- management as a part of budget management and position makers to identify corrective fiscal actions. However, cash it either entirely (Chile) or only some of its functions (Ghana, management is not part of the budget cycle and not a tool to Seychelles) within the Budget Department. Besides, some maintain fiscal control. countries carry over cash management fully or partially in the Accountant General’s Office (Eswatini, Lesotho, Nigeria). On the other hand, in countries where budgets are not There are also cases where cash flows are projected by other credible and expenditures cannot be financed within the departments (e.g. Macroeconomic Policy Analysis Unit of The available resource envelope, governments may change Gambia). the priorities during the budget execution and enforce a combination of budget revisions, commitment controls and > > > F I G U R E 2 - Principal Entities in Charge of Cash Management in Workshops’ Participating Countries In a cash rationing environment, spending agencies do secured. Clear definition of responsibilities and workflows not have flexibility to make their own resource planning as within and among the entities in charge of cash management, allocation of cash is unpredictable, and management of well-organized internal controls and existence of analytical financial resources is highly centralized. This makes it difficult capacity indicate that “appropriate institutional arrangements for ministries to plan activities in their sector, with potentially and responsibilities” are in place as defined by Lienert (2009). negative impacts on the delivery of public services. Regardless of the reporting lines, a Treasury Single Account As shown in Figure 2, in most of the assessed countries, (TSA), where all the government revenues are collected and cash management is a function of the Treasury and positioned payments are made, is the main source of actual data for cash either as a dedicated unit (South Africa, Kosovo, Rwanda) or managers. TSA is the common practice across countries and dispersed across divisions. It is also widely reported that cash given the tax revenues and most expenditures are in local and debt management functions are integrated (Colombia, currency, the main account in TSA system is always in local Kosovo, Peru, Romania, Slovenia, South Africa and Thailand). currency. However, there are many cases that countries also This is indeed parallel to the practices in advanced countries, have foreign currency subaccounts in the TSA system, mostly as demonstrated by a recent survey that integrated cash and for the foreign currency transactions (Albania, Angola and debt management is a common practice across the OECD Colombia). Parallel to the general practices, in all countries countries (Cruz and Koc, 2018). On the other hand, there discussed in this paper, if the TSA is in place, it is in the is no specific solution which fits all countries. Therefore, Central Bank and the main account is in local currency, even institutional arrangements may vary across countries as when there are TSA subaccount in foreign currency. Countries long as main features of effective cash management are such as Lesotho and Nigeria recognized the TSA’s pivotal role 12 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? in cash management and recently established their TSA sys- teams meet on weekly basis (e.g. Bolivia, North Macedonia, tems. There are only a few countries that do not have yet a Ghana). system for a centralized bank account (e.g. Equatorial Guin- ea) due to, among other reasons, limited capillarity of central >>> B. CASH FLOW FORECASTING bank branches and insufficient payment and process sys- PRACTICES tems. Gradual implementation of a TSA “system” by consoli- dating government funds in fewer accounts, respecting exist- In the absence of cash flow forecasting and planning, ing country limitation is advisable. governments mostly make the payments in line with the priorities of the political economy, if there is not a sufficiently Although the TSA provides reliable information on the actual large cash balance. In such cases, inefficient allocation of cash flows, cash managers still need to collect information financial resources may result in over or under borrowing from public entities to ensure that cash flow forecasts are that can also lead to increased costs and risks. Lack of consistent with the revenue projections of tax administration accountable and predictable mechanism for the allocation and expenditure plans of the spending agencies. of cash may cause credibility gaps and make government funding more challenging. On the other hand, in cases where Overall, forecasting of cash flows is a collective effort as comprehensive and accurate cash flow forecasting is in place, in the case of Ghana where four different departments of the cash management ensures required funds are transferred Ministry of Finance are involved in the process. In Ghana, to the beneficiary’s account at the right time. Along with the Public Expenditure Management Unit of the Budget Division methodology applied to forecasting cash flows, the coverage, is in charge of cash flow forecasting. The MoF’s Fiscal Unit time horizon and frequency of forecasts are also critical to find provides fiscal data, the Debt Management Division prepares the right balance of 3Rs, as discussed above. information on the debt service, and the External Resource Mobilization Division supplies the information on loans and The Government’s budget is an output of broader national grants. Additionally, Central Bank of Ghana provides actual policy processes and includes directives and limits for the data for revenue and expenditures and Ghana Revenue collection and allocation of public resources. The strategic Authority provides both actual collection and forecast for budgeting phase involves government institutions such as revenues. Furthermore, the Controller and Account General’s finance and planning ministries, sector ministries, large Department projects cash balances of bank accounts. The spending agencies and other entities like the civil society coordination between these entities is underpinned by the groups. Based on the strategic directions set at the policy Cash Management and Treasury Management Committees level, budget officials prepare the formal budget which includes that hold meetings on weekly basis and one generates outputs estimated revenues and expenditures for each budget entity. for the other. Considering that the government budget provides information on the size of the revenues and expenditures and about the As discussed, there are interactions between cash public entities entitled for these transactions, as the first step, management, budget execution, debt management and a cash manager produces an annual cash flow plan based on monetary policy, in addition to the tax authority and spending the budget. This process is simply an application of a top-down agencies. Therefore, coordination within and across the approach: (i) review aggregate budget figures (ii) conversion institutions is essential. On the other hand, in a case where of data from budget to cash-base, (iii) generation of monthly, cash management functions are fragmented, coordination weekly and daily cash flow forecast with application of becomes more challenging and inefficiencies in organizational analytical models on the historical TSA data, (iv) incorporation arrangements may lead to less accurate cash flow projections. of possible changes in government policy and regulations In order to overcome the deficiencies in coordination, many which may affect the collection of revenues and use of public countries have established high and/or technical level resources, (v) addition of contingencies (Figure 3). committees. To this end, there are countries such as Bolivia, Chile, Ghana, North Macedonia and Romania, where both the MoF and Central Bank are the members of the committee. Besides, there are cases where other government entities are also involved (e.g. Bolivia, Ghana). In countries like Albania, Eswatini, The Gambia and Rwanda, coordination committees are comprised just of the MoF units. Typically, the coordination committees meet monthly, but there are cases where technical CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 13 > > > F I G U R E 3 - Cash Flow Forecasting Approaches: Top-down vs. Bottom-up Source: Authors The main output of cash flow forecasting is accurate daily >>> COVERAGE OF CASH FLOW FORECASTS forecasts for at least one month ahead, preferably for the next three months. However, the granularity of the budget data and Cash management is part of the public financial management their frequency do not allow the cash manager to determine the process and directly affected by the effectiveness of budget exact time of cash inflows and required time of the payments. planning and execution. In principle, expected revenues Therefore, in order to find the right balance of 3Rs and produce and expenditure ceilings of central government agencies reliable forecasts, cash managers combine the top-down set in the government budget are the main inputs of cash approach with a bottom-up approach. Given that revenue and flow forecasting. On the other hand, it is a fact that in many spending agencies may provide firsthand information and are countries, in particular in the developing and emerging better positioned to set the priorities for individual transactions, countries, the coverage of state budget could be limited, cash managers can obtain from them day by day information because public funds are utilized through extrabudgetary through bottom-up approach. Furthermore, the coverage of funds (e.g. Vietnam2) and/or earmarked accounts (e.g. Ghana, the government budget may be limited in some countries, South Africa3). However, in case that these entities/accounts especially where the size of extrabudgetary funds/entities collect and spend public resources through Treasury bank are significant and cash managers should obtain missing accounts, they should be included in the cash flow forecasts information directly from these entities, if they are within TSA even if they are not covered by the budget. or under the mandate of cash management. The scope of the TSA is critical to determine the coverage Another channel to collect information in the bottom-up of cash flow forecasts and cash management, which is the approach is the local offices/cashiers that may contribute to central government in most countries. However, depending the accuracy of the projections. Considering that the size of the on the decentralization of government, and the compliance debt is substantial in many countries, government borrowing, of accounting and control systems, the scope of cash and debt service may significantly change the cash flows in management (and of the TSA) can be extended from central local and foreign currency. Therefore, incorporating public government to general government level (e.g. France). debt, expected calls for state guarantees and guarantee fees is also an essential part of the bottom-up approach. 2. IMF Fiscal Monitor, April 2020. 3. Cashin, C., S. Sparkes and D. Bloom (2017). 14 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? In principle, State-owned enterprises (SOEs), in particular yearly cash flow projections with different frequencies such as the public banks and financial institutions, are considered monthly (Kosovo) weekly (Seychelles) and daily projections as accountable to their boards and financially independent. (Bolivia, Colombia, Honduras, North Macedonia, Uruguay). In Therefore, in government cash flow forecasting only the parallel, the periodicity of the revisions of cash flow forecasts capital transfers to the SOEs and dividend payments to the differs across countries. In most cases the projections are government are taken into account. On the other hand, in reviewed and revised weekly or daily. However, there are case an SOE undertakes any functions of government or is countries revising the forecasts just monthly. designated as a government unit and/or included in the budget, the cash manager needs to include the SOE’s financing need in the cash flow forecasts. (See intra-government borrowing in Box 5 for the possible role of SOEs in deficit financing.) >>> BOX 1 - EXTENSIVE CASH FLOW FORECASTING: SOUTH AFRICA According to the IMF’s Government Finance Statistics Manual, debt interest payments and debt service fees are Extended cash flow forecasting enables South Africa considered as above-the-line items, and debt principal to ensure that government manages its cashflow to have payments are not included in the budget. However, in cash sufficient cash to meet its obligations; to neutralize the impact flow forecasting, cash managers need to be sure that all debt of government’s cash flows in the liquidity of the financial related above-the-line and below-the-line items are taken into system; and to maximize returns on surplus cash. One of account. the objectives of extended cash flow projections is to ensure there are no large and unpredictable changes in liquidity in the Contingent liabilities, such as loan guarantees and banking system and monetary policy is not undermined. commitments of public-private-partnership contracts, are classified as off-budget items. These liabilities are monitored by most countries, and paid by the government, when called. In order to avoid any default due to unanticipated payments, potential calls from the contingent liabilities should be included in the cash flow forecasts. >>> HORIZON AND FREQUENCY OF FORECASTS Multi-year budgets have become more common and may provide a longer-term horizon for cash flow projections. However, even for the countries with multi-year budgets, the annual budget that is formally approved by parliament, is still the key document. Accordingly, with some exceptions, the horizon of cash flow forecasts is not going beyond one year. On top of budget estimations, cash flow forecasting and cash management are affected by a number of factors such as the means of payments (e.g. cash, cheque, electronic payments), the payment agents (e.g. Central Bank, commercial banks), the cash management capacity of central government and local government institutions, and the depth and liquidity of Source: National Treasury government bond and money markets (Miller and Hadley, 2016). Therefore, both horizon and frequency of cash flow projections rely on different parameters and show significant In the cash flow projections, National Treasury forecasts variances across countries. There are countries (e.g. South revenues, expenditures, domestic and external debt Africa, Albania) preparing cash flow forecasts for 3-years, redemptions, financing of borrowing requirements and the yearly, monthly, weekly and daily periods, but on the other side, resulting change in cash balances for 3 years with different there are cases where only monthly cash flow forecasts are in frequencies, as shown in the figure above. place (e.g. Angola, Nigeria). Most of the countries are preparing CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 15 The Debt Management Performance Assessment (DeMPA) B and daily estimates for Score A, the highest. As of end- tool of the World Bank evaluates the reliability, horizon and 2019, DeMPA assessments have been implemented in 80 frequency of cash flow forecasting, through Debt Management developing countries, and only 28 percent of them met the Performance Indicator (DPI) 11.14, which requires monthly minimum requirement or above (Figure 4, blue bars). forecasts for getting Score C, weekly breakdowns for score > > > F I G U R E 4 - Share of DeMPA Assessed Countries that Reached Minimum Requirement (Score C or Above) Source: WB DeMPA Reports As prescribed by DeMPA methodology, countries should For the revenues other than tax and customs, such as ideally prepare daily cash flow forecasts, but even when the dividends, grants and receivables from on-lent loans, the breakdown of the estimates is monthly (minimum requirement), best way to produce forecasts is to apply bottom-up approach it is advised to cover the budget year (horizon). On the other which refers to the collection of information from relevant hand, given the budget figures may not be available yet closer institutions as the granularity is not the same and individual to the end of the fiscal year, cash managers should have the flows can be followed. capacity to estimate the cash-flows for the initial months of the following budget year. >>> REVENUE FORECASTING It is the common practice to forecast revenues through the application of a top-down approach considering that (i) main tax items (e.g. income tax, corporate tax and V.A.T.) and customs’ tax and duties comprise the significant part of total collections, which for good estimates is provided by the annual budget’s tax projections, (ii) revenues have strong seasonality and it is practical to generate monthly and weekly breakdowns from annual budget figures by using historical data, and (iii) it captures necessary adjustments due to the changes in government policy and regulation, macroeconomic and financial developments. Accordingly, in most countries, cash managers rely on the projections of the tax administration. On the other hand, there are cases where revenues are projected by the cash management unit (Peru), the fiscal policy office (Thailand), or the macroeconomic forecasting unit (Seychelles). 4. http://www.worldbank.org/en/topic/debt/brief/dempa-2015 16 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? it policy, discretionary expenditures, in particular the goods >>> BOX 2 - PERU’S CASH FLOW FORECASTING services and capital expenditures, show a strong seasonality MODEL due to the weak performance at the beginning of the year and, on contrary, high spending in the last few months. Peru employs a quantitative approach to build the financial programming of the TSA based on cash flow projection Due to the fact that cash managers cannot know the scenarios. As the first step, the cash inflows are classified physical conditions of the infrastructure investments and into five categories as the following, which are later projected are not able to assess the best time the goods and services through different models: are needed, sector-ministries and spending agencies are • Ordinary Resources (e.g. taxes) the best resources to provide information for the projection • Determined Resources of discretionary expenditures which refers to a bottom-up • Donations and Transfers approach. • Directly Raised Resources • Resources for Official Credit Operations Although the quantitative analysis and spending agencies’ inputs are at the core of expenditure forecasting, qualitative Ordinary resources (tax collections) are projected by using judgments contain additional information that cannot be econometric time series models while other revenue sources incorporated into the models. They allow cash managers to are forecasted by applying moving averages and growth rates. adjust forecasts considering the reliability of data collected from different sources and the counterparts’ forecasting Similarly, expenditures are put into categories according performance. to their types (e.g. generic expenditures such as salaries, pensions and other social benefits, and goods and services, current spending, capital spending). Expenditures financed >>> BOX 3 - A TOOL FOR THE IMPLEMENTATION by Ordinary resources are projected using time series OF BOTTOM-UP APPROACH: TURKEY’S CASH econometric models. Other expenditures types are projected REQUEST SYSTEM using moving averages, growth rates and schedules. In 2011, Turkey introduced a web-based portal to collect Source: Ministry of Economy and Finance of Peru data from the public entities on a real-time basis. More than 200 users submit information through the system with different >>> EXPENDITURE FORECASTING frequencies: • Sector ministries and other spending agencies: Given that the government budget imposes expenditure submit their expenditure plans, and expected revenue ceilings through appropriations, and the nature of non- collections every month with a daily breakdown, discretionary expenditures is quite predictable, cash considering the released budget allocations. Public managers are relatively more comfortable for expenditure institutions are asked to identify their requests in a few forecast. However, considering the time lags between the categories. Projections may be revised on a weekly release of appropriations and actual payments from the TSA, basis, during the month. cash managers tend to rely more on the historical TSA data • Regional and central accounting offices: report pending in the expenditure forecasts. Besides, historical data, and the payment orders submitted by the accrual departments laws and regulations may also provide useful information on of sector ministries and other spending agencies on the payment dates of regular and large transactions. daily basis. Discretionary expenditures (e.g. goods and services, Treasury’s cash management unit extensively uses this capital expenditures, subsidies and transfers) are prone data, in particular when forecasting daily breakdown of to government policy decisions that makes them harder to monthly cash flows. forecast. Therefore, it would be more efficient to concentrate Source: Ministry of Treasury and Finance of Turkey on major projects and programs which require large payments, rather than aiming to forecast all expenditures. On the other hand, in most countries, linked to the budget appropriation’s release calendar and due to the budget’s spend-it-or-loose- CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 17 >>> INCORPORATING DEBT DATA numbers of the accuracy of their forecasts, indicating that thorough assessment of estimates performance has not been Debt interest and principal payments are significant extensively done in most of these countries and pointing out to elements of cash flow forecasts, along with the cash inflows a possible area for improvement. from the issuance of new debt. It is a common practice that debt managers provide cash flow projections related to debt A liquidity buffer, discussed in detail in Section III, is a service and borrowing. In addition, cash managers commonly useful tool to deal with deviations between the projections and coordinate with debt management office to collect information realizations. Buffers ensure that an amount of cash is available on the contingent liabilities in case they may materialize. to meet unexpected changes in cash flows (lower revenues or higher expenditure compared to the forecast) so that the cash Cash flow forecasts associated to floating, inflation-linked, manager can still be able to fulfil projected obligations at due foreign-currency denominated or any other variable debt need date. to be estimated using macroeconomic scenario(s) that not necessarily (or commonly) are produced by debt managers (a third party usually generates the required estimates, e.g. Central Bank or macro unit at MoF). Shock scenarios can be useful when defining a liquidity buffer policy, as it is also the case on the design of a Medium-Term Debt Management Strategy (MTDS). >>> ACCURACY OF FORECASTS Producing reliable and accurate cash flow forecasts is crucial for public financial management policy setting and implementation through (i) providing critical information to decision making to take corrective fiscal actions, (ii) avoiding accumulation of arrears and (iii) minimizing cost of carry. There are factors that create deviations between the initial forecasts and actual figures, such as external events, change in government policy, or lack of information. In order to eliminate some of these factors and improve accuracy of cash flow forecasts, countries introduce monitoring mechanisms and preventive actions. Real time monitoring of TSA balance allows cash managers to assess the performance of cash flow forecasts, but strong electronic banking/payment infrastructure is a prerequisite. More realistic budget projections, sensitizing the line ministries on the cost of forecasting errors and mitigation measures such as developing more coercive framework to prevent unexpected large payments help improve accuracy of forecasts. Forecasting deviations from actual cash flows should be frequently reviewed in order to improve the accuracy of the projections and help cash managers understanding the sources of errors. To this end, it is useful to keep a repository of historical forecast data that enables granular analysis of the deviations throughout different periods of the year and time lags between estimated and realized cash flows. Just 9 out of the 24 workshop participating countries presented 18 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? >> II. FINANCING CASH FLOW GAPS Robust cash balance estimates are a pre-condition for expected cash balances (shortage or excess), and the cash governments to undertake necessary actions to ensure that flow forecasting underpins both tasks. One may argue that the obligations will be met on time, while borrowing resources main connection between cash and debt management can be (and cost) are limited to what is indeed needed, avoiding seen on the use of short-term instruments to cover temporary unnecessary borrowing. lack of cash, which is true. Nonetheless, it is worth noting that investing cash will just make sense when government is not Ensuring the availability of required resources to finance the borrowing, given the cost of carry. budget expenditures/deficit and meeting debt obligations with a cost-and-risk minimization approach, is a common objective The choice of instruments to be used to cover temporary of debt and cash management. The main difference resides cash shortages is dependent on the expected period for the in distinct time horizons targeted by cash and debt managers. cash imbalance and associated costs. The chart below shows the funding instruments used by governments for cash and Cash balance management encompasses two main tasks: debt management, while demonstrates how T-bills and the i) raising funds to cover cash shortages; and ii) investing cash liquidity buffer stand in the intersection and well serving both balances to minimize the cost of carry. The government will activities5. float from one side to the other depending on its current and > > > F I G U R E 5 - Funding Instruments for Cash and Debt Management Source: Authors 5. Commercial papers may also be used for debt management, although are more commonly applied to solve short-term cash imbalances (cash management). CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 19 >>> A. FUNDING INSTRUMENTS Temporary cash shortages can be covered by cash managers through a variety of instruments illustrated in Figure 5 and explained in the following: Overdraft facility: The Central Bank provides a short-term credit line (also referred as advances) usually with volume and time caps (used, for instance, by Eswatini, India and Uruguay). Many developing and developed countries has limited this practice to avoid inflationary and foreign currency Almost one third of the assessed countries don’t impose a spillover effects due to the financing of central government by legal ceiling for direct borrowing from the Central Bank (score the monetary authority (Brazil and Chile banned any Central D), which is the minimum requirement for score C under Bank financing at the constitutional level). However, more DeMPA. On the other hand, slightly less than one fourth of recently, monetary financing has been extraordinarily used the countries legally prohibit or limit the monetary financing by several countries under less constrained framework than to emergency situations and to periods not longer than two what it ideally should be6, due to the governments’ increasing weeks (score A). Besides, the approaches significantly vary cash needs resulted from the COVID-19 crisis (see Box 4). across regions: majority of the countries in Latin-America When available to the government, the overdraft facility tends does not get the minimum score, while more than two third of to be one of the most flexible instruments, but with possible the European and Central Asian countries have obtained the drawbacks in terms of cost and volume cap. highest score in the latest assessments. As a response to the Global Financial Crisis, the Federal >>> BOX 4 - CENTRAL BANK FINANCING TO Reserve (USA), the Central Bank of Europe and the Bank of GOVERNMENTS Japan have provided liquidity to the bonds holders (including banks and institutional investors) by purchasing government While monetary and fiscal policies bring undeniable securities in the secondary market, to achieve financial interlinkages, separation between Central Bank mandate markets’ stability. In this case, the Central Banks’ objective was and government financing needs to be in place to avoid not to support the coverage of short-term cash imbalances of undesirable interferences on the implementation of each governments, as targeted by the overdraft facilities. However, policies and support fiscal discipline. more recently, with the increased financing needs related to the COVID-19 pandemic, some countries have authorized Jácome et. al. (2012) show that in a sample of 152 Central Banks to finance governments directly through the countries, 57 permit the use of advances, while 40 allow the purchase of government securities in the primary market, and use of credit (loans) and 51 set prohibition to any kind of credit. to support the bond holders in the secondary market (See Results from DeMPA assessments carried out in 80 countries Arslan, Y, Drehmann, M and Hoffmann, B (2020)). as of end of 2019 also point out the need of narrowing the conditions in which government can directly borrow from the The Central Banks in Indonesia, Thailand and Malaysia have monetary authority. bought government securities in the primary market, while the monetary authority has been the buyer of the bonds in the secondary market in Chile, Colombia, Hungary, India, Israel, Korea, Mexico, Philippines, Poland, Romania, South Africa, Turkey and Malaysia (Brazil and Czech Republic requested amendment to the law to be able to do so). The Central Bank of Philippines has also recently established repo transactions between the Bank and the Bureau of the Treasury to cope with temporary cash imbalances associated to the crisis. Source: DataViz 6. The WB Debt Management Performance Assessment (DeMPA) scores countries in its Development Policy Indicator – DPI 7.3 (Extent of the limit of direct access to financial resources from the Central Bank) according to the imposition of ceilings on the volumes and tenor, getting maximum score the countries who prohibit the direct financing or limit the advances to emergency situations for periods not longer than two weeks. Red color for the overdraft facilities in Figure 5 represents the emergency character of these instruments, ideally not used on regular basis for government financing. 20 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? Repo transactions: These transactions are defined as purposes, either to cover FX or local currency gaps. The main the temporary sale of a (government) security associated benefits are the standardization and depth of the large CP with the seller’s commitment to purchase it back, after a markets in the US and Europe. Issuances are done under a pre-defined period and on a pre-agreed price. Governments ‘program’ arranged with a few commercial banks, that reach use repos to cover temporary cash shortages by delivering out to investors. The program mentions the range of maturities, a government security to the lender. Repos provide good the maximum volume that can be issued, technical conditions flexibility and, in most cases, are used for periods not longer (settlement, payment days, etc.), leaving the issuer with a than the time span between T-bills auctions. Interest rates and lot of flexibility to issue when needed through tap issuances tenors are negotiated by the counterparts, commonly under (private placements). CP programs are popular with European a Global Master Repurchase Agreement7. The advantage DMOs (including Austria, Belgium, Denmark, Ireland, Italy, of these transactions for the lender is to receive a collateral Netherlands, Sweden), both in EUR and USD, as a way to (government security). Although the credit risk of the collateral diversify the investor base at the short end of the curve. It may is the same as of the borrower (the government), the provision also be used, in a smaller extent, for debt management. of a tradable security mitigates the liquidity risk of the lender. Therefore, repo transactions are less costly compared Intra-government borrowing: Governments have been to uncollateralized (“unsecuritized”) borrowing. Several expanding their sources of short-term funding either through countries use repo operations for temporary borrowing, pooling government resources beyond the central government including Hungary, France, Sweden, USA and UK. Despite of in the TSA, or by establishing specific borrowing mechanisms the usefulness of the repo transactions for cash management to access resources of local governments, state-owned purposes, countries with less developed cash management enterprises and public funds. Intra-government borrowing practices and shallower money markets, mostly rely on the mechanism mitigates unnecessary government borrowing issue of T-bills for covering cash shortages. Williams (2010) from the market by matching public entities that have cash refers to the use of repo transactions as one of the “fine- shortages and cash surpluses. tuning” mechanisms of cash balance levels, while most of the emerging economies adopt a “rough-tuning” approach. Finally, it is important to consider the way these transactions are captured in debt statistics to avoid underestimations that may affect monetary and fiscal policies and rules, given the repos can be used by treasuries to cover cash shortages, and by central banks for drying-up financial system liquidity. Commercial banks credit lines: Unsecuritized direct borrowing from commercial banks under bilateral arrangements is an option for countries with less developed financial markets. This instrument is simpler, but typically costlier compared to securitized transactions. Commercial bank credit lines have a high degree of flexibility in terms of tenors, but they may be constrained by exposure limits to the government8 and there are some concerns about the instrument transparency. It tends to be used just for very short-term and emergency needs. Romania and Equatorial Guinea keep commercial bank credit lines in their menu of cash management tools. Commercial papers: These money market instruments are usually issued by corporates and financial institutions to manage their cash position, for maturities up to one year, similarly to T-bills for governments. However, some governments also issue commercial papers (CP), mostly denominated in USD and EUR, for cash management 7. For further details see https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/repo-and-collateral-markets/legal-documentation/global-master-repur- chase-agreement-gmra/ 8. Prudential regulations usually require that lenders allocate capital once the credit line is established, even if it is not used. CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 21 Colombia – government short-term funding is expanded >>> BOX 5 - INTRA-GOVERNMENT BORROWING: beyond T-bills issuance (both for debt and cash management) MAKING BEST USE OF GOVERNMENT FUNDS by the use of: i) special funds; ii) resources from oil royalties fund; and iii) resources of state entities that are part of the An expanded use of general government (GG) resources TSA. Special funds gather resources mostly for investment may go beyond of just making the best use of available projects and Treasury can temporarily use them as a short- pooled cash in the TSA but providing a borrowing mechanism term funding source (amounted USD 8.1 billion at end of 2019). outside of financial markets which has specific governance Resources from oil royalties (Sistema General de Regalias) arrangements. It rarely includes the full extent of entities also serve to cover temporary cash shortages (USD 5.9 billion encompassed in the GG (some SOEs or public banks which on Dec 2019). To make use of these two funding sources and require financial and governance independence and access of resources already allocated for specific state entities within to capital market usually stay outside of this arrangement). the TSA (item iii), Treasury issues promissory notes (pagares) Given that this kind of mechanism expand the reach and the with market-based rates (interbank and government securities size of “government balances” and reduce the need of market interest. rates). borrowing operations, the inflows and outflows in the financial system will be smaller, potentially facilitating Central Banks’ South Africa – TSA is held at South African Reserve Bank task on mopping-up or injecting liquidity in the system through who outsources to its fully-owned subsidiary (Corporation monetary policy transactions. for Public Deposits – CPD) the task of investing excess of cash. The resources to be invested come from the national France – TSA, held at Banque de France, is composed government, provincial governments, and state-owned by approximately 5,000 government accounts including the corporations (SOCs). Subnational entities and selected SOCs Treasury Correspondents. These correspondents include are required to invest their surplus cash with CPD, while local and regional governments and government-funded national government uses these funds for debt and, mostly, institutions, as well as external entities such as the European cash management. In 2018/2019 more than 70% of the daily Union which deposits some of its funds with the French average balances maintained at CPD was borrowed by the Treasury. The main objective of this centralization is to provide national government. Provincial governments can also borrow an additional funding source to the government and reduce from this pool of funds to finance short-term cash imbalances, the size of the funding operations in the markets. To enable under predefined limits. the Agence France Trésor to cope with thousands of daily transactions coming from multiple account holders, besides robust daily cash flow forecast, Treasury Correspondents are required to notify the Treasury until not later than 4pm for any transaction larger than EUR 1 million expected in the following day. Portugal – the Credit Public and Treasury Management Institute (Instituto de Gestão da Tesouraria e do Crédito Público - IGCP) is authorized to issue Special Certificates of Public Debt (CEDIC) in its integrated mandate of debt and cash management. These certificates represent an intra-government borrowing mechanism for administrative public sector entities and enables public sector corporations investing their excess of cash. The security aims to foster the “integration, the optimization and flexibility on public debt management and excess of cash of public entities”. To provide flexibility to IGCP and investor entities, certificates can be amortized before original maturity dates (12 months) upon agreement between the parties and can be traded between depositary entities as well. Interest rates are determined by the Institute based on inter-bank money market rates. 22 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? >>> BOX 5 - INTRA-GOVERNMENT BORROWING: remains fairly constant between years, but with important MAKING BEST USE OF GOVERNMENT FUNDS variations within the year. On the other side, when T-bills are (CONT.) mostly used for debt management purposes, changes in the outstanding can be expected depending on investors’ appetite Peru – The General Directorate of Public Indebtedness and (demand) and what is defined in the MTDS (supply). Treasury has been annually publishing the 3-year “Strategy for Global Asset and Liability Management” since 2013. It Looking at the dedicated debt management instruments, identifies the full scope of assets and liabilities of the Non- fiscal gaps are mostly closed with the issuance of T-bonds Financial Public Sector and, among other objectives, it is meant (longer than 1 year), while T-bills are used for temporary to improve the centralization of the resources in the TSA. On cash imbalances. However, even in countries where T-bills the assets side, out of a total amounting 16% of GDP in July are labeled or segmented as cash management instruments 2018, i) 3.4% relates to Public Treasury Own Resources, ii) (see Box 6), flexibility is granted to enable debt managers to 3.7% is represented by Funds, Allocated and Committed undertake tactical approach to shorten and lengthen the debt Resources, iii) 4.5% by Resources of Public Entities in the portfolio according to market conditions, issuing more or less Private Financial System and iv) 3.6% by Resources of Public T-bills in a period than in another. While this is more commonly Entities in the Public Treasury. While ii) and iii) are mostly seen for developed markets where the investor base is earmarked resources, iv) represents an additional source of diversified, and long-term funding is possible, countries with temporary funding, mostly found in the TSA. underdeveloped markets rely more on T-bills for fiscal gap closing. Source: Debt Management Offices/Agencies websites and country cases presented in the WB Cash Flow Forecasting and Cash To avoid unnecessary borrowing cost beyond the period Management Workshops (2018 and 2019). of a cash shortage, ideally a new security with a specific tenor (matching the extension of the cash shortfall) would be issued. As shown in Box 6 below, countries’ approaches T-bills: These are the zero-coupon securities with assumed vary, as some opt to use a more flexible set of instruments maturities from weeks up to 1 year. As shown in Figure 5, for cash management (France, Hungary, India, South Africa) T-bills are used both by cash and debt managers. For cash while others stick to T-bills with maturities mostly in 3, 6 and 12 management purposes, T-bills may be issued under a months (Albania, Brazil, Colombia, Ghana, North Macedonia, flexible approach, not necessarily through regular issuances, Romania and Rwanda). offered amounts defined according to immediate cash needs and tenors determined by the length of the expected cash It’s worth noting that even in countries that adopt more shortages9. On the other hand, T-bills are one of the main flexible short-term instruments to fund temporary cash instruments for debt managers either to deal with debt cost- shortages, T-bills maturing in 3, 6 and 12 months are also and-risk trade-off10 or cope with large financing needs in regularly issued (India has T-bills and Cash Management the absence of a diversified investor base (concentrated in T-bills and France and Hungary specify T-Bills as an instrument commercial banks). for cash management purpose). These standardized T-bills not only give flexibility to cash and debt managers to raise > > > B . C O O R D I N AT I O N B E T W E E N fund, but also serve as tools to develop price reference in the CASH AND DEBT MANAGEMENT short end of the yield curve. There are countries where this function is mainly performed by the issuance of short-term bills As mentioned before, T-bills serve two different purposes: by the Central Bank (Chile12, Honduras). In other countries i) refinance the debt, especially in countries where the T-bills have been issued by debt management offices as a investor base is highly concentrated in banks11, and therefore part of regular issuance program to maintain reliable price the demand for public debt instruments is limited to short- references for the represented tenors, besides debt and cash term tenors (matching banks’ liabilities length); and ii) cover management traditional objectives (Brazil, Colombia, Turkey). temporary cash shortages. Given that in the latter financing needs are temporary, it is expected that the stock of T-bills 9. Investors don’t request the same level of predictability compared to longer-term instruments. 10. Even countries with wide access of long-term funding use T-Bills to shift the issuance and portfolio profile, temporarily shortening them to avoid excess cost when yield curve slope is uncommonly steep. 11. The demand from banks for T-bills is also limited by their liquidity and regulatory needs, reinforcing the need of diversifying the investor base with the incorporation of final investors’ demand. 12. Chilean Government has recently started to issue 6- and 12-months T-Bills to cope with the increased borrowing needs related to the COVID-19 crisis and “to improve the liquidity and depth of the domestic fixed-income market in the short end of the curves” (Investors Relations Presentations – April 27th, 2020) , but no short-term instru- ments are issued for cash management purposes. CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 23 respectively. Maturity dates are April and October 1st, and >>> BOX 6 – SELECTED EXAMPLES ON THE USE OF T-bills usually have originally been issued as a 2-year zero- T-BILLS FOR CASH AND DEBT MANAGEMENT coupon bond. Underpinned in a cash position that has been floating around 15% to 20% of GDP remunerated by the France – T-Bills (BTFs - Bons du Trésor a taux fixe) are Central Bank at market rates, issuance of T-bills is more part exclusively used for cash management purposes, i.e., of the debt strategy (supporting market development and “smoothing out fluctuations in the government’s cash position monetary policy management) than of cash management. over the course of the year”. Weekly auctions of 3-months BTFs are carried out, while 6-months and 1-year T-bills are Ghana – Short-term instruments issued for cash and debt used less frequently as longer cash flows imbalances may management are represented by T-bills maturing in 3, 6 and require. On the other hand, greater flexibility is provided to 12 months. Until the end of 2018, instead of a 364-days T-bill cope with unexpected shorter-term cash shortages, by the (started in 2019), the government used to issue a 1-year possibility to issue shorter BTFs commonly maturing from 4 Treasury Note, by reopening of medium-term notes (2-year to 7 weeks. or longer). The change draws a line between cash and debt management, but also exemplifies the multiple function of Hungary – “Discount T-bills” maturing in 3 and 12-months T-bills given that more than 50% of total gross debt issued in are used for liquidity management, i.e. for smoothening 3Q2019 consisted of these securities. the fluctuation in the liquidity caused by varying financing Source: Debt Management Offices/Agencies websites. requirements over the year. “Liquidity discount treasury bills” of shorter tenors (usually 6 weeks) alongside with the use of repo transactions complement the tools used for funding While FX-linked, inflation-linked and floating rate bonds temporary cash imbalances. issued in the domestic market are connected with cash management in the same way fixed-rate T-bonds do13, India – Cash flow mismatches of the central government are Eurobonds and FX denominated external loans bring specific managed through the issuance of T-Bills, Cash Management features related to the fact that associated cash inflows are T-bills and access to the Ways and Means Advances (WMA) in foreign currency. It may require specific arrangements with facility from Reserve Bank of India. T-bills are issued for fixed the Central Bank for the internalization of the funds and raised tenors of 91, 182 and 364 days, while Cash Management resources may be kept in foreign currency for the payment of T-bills and WMA grant greater flexibility for the government. liabilities in hard currency, as a separate cash buffer. Countries The latter can be used for up to 90 days, charges market such as Brazil, Chile, South Africa and Turkey have liquidity (repo) rate and are also extended to local governments. buffers in foreign currency. South Africa – T-bills maturing in 6, 9 and 12 months are Commercial loans can also be contracted domestically with issued weekly as part of debt management strategy, while commercial and development banks, especially for project similar instruments maturing in 3 months or less are used for financing. Resources externally borrowed from bi- or multi- cash management purposes. lateral creditors for project financing are not seldom required by the creditor (or donor, in the case of grants) to be kept Colombia – T-bills with a reference maturity of 12 months separately of main TSA funds to ensure they will not be used are weekly issued to finance treasury operations (part of cash for financing expenditures other than the ones associated to management instruments). Instruments with fixed maturity the project. Possible mismatches between disbursement dates dates (due dates in March, June, September and December) and the use of funds create extra cost of carry that may be are issued during a quarter (reopenings). Therefore, T-bills mitigated by specific governance arrangements to be agreed tenors varies from 12 to 9 months, depending on the issuance with the funds’ provider. They might include the temporary date. T-bonds issuances are held in different days of the investment of the cash (in US Treasuries, for instance) or fine- weeks, less focused (but integrated) on cash needs, and more tuning between its disbursement and use. on debt refinancing. Brazil – T-bills maturing in 6 and 12 months are weekly issued on alternated basis through reopenings – actual tenors range from 12 to 9 months, and from 6 to 3 months, 13. Except for the fact that T-bonds provide a precise maturing cash flow forecast given they are fixed-rate securities, unlike FX bonds, floaters and linkers, where scenarios/ estimates need to be used – and buffers built to accommodate unexpected variation of the underline variable remuneration (FX, inflation and interest rate). 24 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? Another debt instrument targeting project financing and proven to help in the endeavor of supporting debt and cash being increasingly used in the past few years are the so- management objectives, mitigating intrinsic conflicts. called thematic bonds, among them green bonds are the most popular. Other examples are blue and social bonds. Formal mechanisms as the creation of coordination In a regular approach, the issuance of the bonds generates committees can be a good first step to strengthen the earmarked funds to be exclusively used in projects fulfilling communication between cash and debt management, specific requirements14, as sustainability, eco-friendly, etc. especially in the countries where functions are scattered in From a debt management perspective, it is important to different departments. Several developing countries have define how these instruments fit and are incorporated in the recently adopted these arrangements17 mainly focusing debt management strategy. On the cash management side, on improving cash flow forecasting and strengthening the thematic bonds cash flows payments tend to follow similar connections between these estimates and the short-term procedures as of the ones applied for T-bonds, while the use debt strategy/auctions. While it creates a formal platform for of proceeds follows specific and stricter guidelines. information sharing and improved coordination, it does not avoid bad practices as cash rationing and accumulation of arrears One last debt instrument used by Islamic countries is the if connection between cash, debt and budget management is Sukuk (or Sharia-compliant bond). While under a debt design weak. The information flow and formal interaction with other perspective they look similar to a fixed-rate T-bond, usually related committees (treasury management, auction decision) aim at financing projects in a way that “a sukuk holder is and activities (budget management, cash allotment) are also granted an ownership interest in the assets or business being key to ensure that outputs of cash management committees financed, and the return is tied to the performance of the are adequately considered in the decision-making process. underlying assets”15. From the cash manager’s perspective, in terms of scheduling of the government’s payments obligations, On the other hand, there are many other countries that Sukuk should be treated as debt payments and requires close adopt an integrated institutional arrangement where cash and coordination with debt managers. debt management are performed by the same department, requiring, in this case, internal coordination rather than Coordination between cash and debt management is greatly formal committees (Colombia, France, Hungary, India, Peru, related to the instruments to raise money to meet government Romania, Slovenia, Thailand, Turkey and UK). Examples of obligations, but it is not limited to that. Another aspect to institutional arrangements adopted by selected countries are facilitate and strengthen the correlated well-functioning of both shown in the Annex. activities is the liability management operations. Government securities buy-backs and switches are the most common ones Funding instruments described in this Section can be used to deal with refinancing and liquidity risks, to avoid the need of by cash and debt managers in different set of combinations to large borrowing on short periods. ensure that cash will be available when needed and with the possible lowest cost. The more developed the debt and money Debt maturity concentrations (benchmark bonds) created markets are, the more countries tend to use a wider range of for market development purposes increase debt refinancing instruments to finance the funding gap. To this end, there is no risk16 and are managed through pre-refinancing, buy-backs or formula which fits the needs of cash and debt managers and switches. If these maturities come due during the low-cash as long as the selection of the instruments are determined balance times, they can also lead to liquidity risk distress. In considering the limitations of the financial markets it is always this regard, even if a government manages to rollover its debt possible to achieve the objectives of cash management by and there is no skepticism in the market about its ability to using fewer instruments. do so, other commitment payments may be postponed due to government inability to have the necessary cash at the right time (led by a cash flow problem, not a refinancing one). Therefore, maturity dates should be planned to support smoothening volatility of cash balances, at the possible extend, given that a benchmark policy will constrain an extensive scattering of the amortization profile. The above-mentioned 3 tools are 14. There are recent discussions pointing out for investors willing to allocate funds in countries “considered” green, instead of specific projects being labeled as so. For more information about green bonds see - https://treasury.worldbank.org/en/about/unit/treasury/ibrd/ibrd-green-bonds 15. http://www.mifc.com/index.php?ch=39&pg=97&ac=312&bb=attachpdf 16. Inability to rollover the debt (or doing it at unexpected high cost) given lack of willingness of investors to buy new government securities to replace the ones maturing. 17. Albania, Bolivia, Chile, Eswatini, The Gambia, Ghana, Lesotho, North Macedonia, Nigeria, Rwanda. CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 25 In parallel, countries that carry large (remunerated) buffers instruments. Therefore, the development of multiple money and do not face frequent cash imbalances, may not necessarily market instruments and associated infrastructure should need to use all the array of instruments, but should dedicate be pursued, but simpler actions which may bring equally efforts to diversify their investor base, for instance. On the important results (e.g. transparency for market participants, other hand, countries with structural fiscal deficits will not be coordination with debt managers and Central Bank, intra- able to overcome the lack of resources by using more funding government borrowing) must be taken. >> III. LIQUIDITY BUFFERS AND MANAGING EXCESS CASH BALANCE The establishment of a liquidity buffer18, similarly to Albania – a liquidity buffer floor is defined by the average of what was discussed for the T-bills, is part of cash and debt expenditures of the three last days of the previous month (when management policies (as reflected in Figure 5). It serves for outflows are concentrated), while the ceiling is determined by the mitigation of risks that are mostly, but not solely, present expected expenditures of the first week of the current month. in cash management (liquidity, operational, settlement and Brazil – an informal minimum cash balance is targeted aiming payment) and debt management (refinancing and related to to cover 6 months of domestic debt refinancing needs. There market volatility). As the accumulation of large liquidity buffers is also a separate liquidity buffer for external debt (capped on mean increasing the cost of carry related to keeping these the debt maturing in 1,500 days). resources, there is a trade-off between the cost and the risks that are meant to be mitigated by the cash cushion. The cost Ghana – minimum cash balance is (not formally) defined as of carry can be minimized by determining the size of required a nominal number (roughly USD 170 million) based on the cash balance and investing the cash not for immediate use. historical data of debt maturity profiles and above the line There are different approaches across countries to determine items. the size of liquidity buffers (Box 7). Romania – no specific level for the liquidity buffer, but if cash is decided to be invested, a minimum (non-invested) >>> BOX 7 – DEFINING THE SIZE OF LIQUIDITY balance is required (approximately EUR 200 million) during BUFFER the investment period. The definition of the liquidity buffer size is not necessarily a Thailand – minimum balance is required to cover at least 2 function of a single parameter, but commonly a combination weeks of future expenditures. of more than one factor. Below are some examples on how countries define the size of liquidity buffer, based on an Turkey – minimum cash balance is determined as a percentage OECD survey undertaken in 2017 with 35 member countries, of the maturing debt in the coming months, and the level is complemented by countries specific practices. calculated through considering (i) average demand decrease in the market (on volatile times); (ii) share of planned financing in stress periods; (iii) forecasted inflows and outflows for the year; and (iv) maturity profile of debt obligations. Uruguay – cash buffer is determined as a range, where the minimum target is expected to cover the debt service under an extreme stress period (12 months without new issuance). Statistical calculations, based on the historical volatility of cash flows, are also considered to define the interval. Source: OECD WPDM 2017 Survey on Liquidity Buffer Practices, and country cases presented in the WB Cash Flow Forecasting and Cash Management Workshops (2018 and 2019). 18. Commonly also referred as cash cushion or cash buffer. 26 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? >>> A. PREREQUISITES OF and interbank money markets (e.g. France and USA) cash INVESTING EXCESS CASH managers have recently adopted a more cautious stance by accumulating or increasing cash balance after the Global Investing idle cash in the market reduces the cost of carry, Financial Crisis20. Not justified by the lower liquidity level of however there are prior conditions which are not always in their domestic markets, but because of earmarked funds place. Essential features are the cash consolidation under and other structural reasons, Brazil and Peru are among the TSA, reliable cash flow forecasting, good coordination the countries keeping the largest cash buffers. On the other with debt management, capacity to define the cash buffer side, there are countries with no formal cash buffer targets, size and to execute the investments, availability of investment including because of underdeveloped cash management instruments and market infrastructure, and design of an frameworks or constrained fiscal situations (Angola, Bolivia, investment policy. Equatorial Guinea, The Gambia, Ghana, Honduras, Lesotho, Nigeria, North Macedonia, Rwanda). Among this myriad of pillars that will sustain the investment decision and execution, the reasons why it is important to have It’s relevant noting that in whichever is the case, the them in place before investing cash balances are simple and arrangement with the Central Bank on the remuneration of the clear. Government needs to: i) be aware of cash availability in idle cash deposited in the Bank will represent a big driver on the present and in the future; ii) be aware of carrying cost and the definition of the size of the liquidity buffer. France, for define a policy to minimize it; and c) pre-defined risk policies instance, invest most of the government cash balances in the that will drive where to be positioned in the multiple options money market, but has a limited buffer at the Central Bank between accepting less or more risk in favor of more or less not invested to address operational and IT risks, accepting cost (see subsection C below on the instruments to invest associated cost to mitigate these risks. The arrangement on cash in the market). Central Bank’s profits and losses transfers to the Treasury (Ministry of Finance) also matters (see discussion below). Government’s ability to produce reliable cash flow forecasting and raise money when needed to cover temporary >>> B. MINIMIZING THE COST OF cash shortages, minimize (but may not eliminate) the need C A R RY to hold cash balances (liquidity buffers) and consequently the cost of carry. Accurate cash flow forecasting is underpinned Although active investment of excess cash in the market on adequate methodology/procedures, work-intense requires prior conditions, it does not mean that less developed data collection, storage and treatment, and appropriate countries which do not meet above-mentioned prerequisites institutional arrangement. However, even during times when are unable to reduce the cost of carry. To this end, the first robust estimates are in place, volatility in the cash flows and possible action is refining the matching of cash inflows and operational issues may lead to the need of unexpected short- outflows to reduce cash imbalances (including excess of term borrowing19. On its turn, government capacity to raise cash). Different from cash rationing, this is an effort to smooth the necessary funds on time will depend on the availability of out cash balances by matching the calendars of expenditures needed instruments, financial markets development level and payments and revenues receipts. This is a two-way avenue: robust infrastructure. Alongside with the aspects described in defining large above-the-line expenditures distant from large Box 7, these factors will drive the definition of the size of the debt maturities (and vice-versa) and setting collection dates of liquidity buffer and investment policies to minimize associated large revenues closer to these significant outflows. Potentially cost of carry. it is also possible to define a borrowing plan where issuance volumes are increased closer to the periods of expected In Sweden, the targeted cash balance is zero, given that the low cash balances. However, it may not be practical and totality of the daily remaining balance in the TSA is invested in desirable given the regularity and predictability valued by the money market. The country relies on its immediate ability investors on the debt issuance profile. Cash flow matching to raise money in the market, even to cover cash shortages needs to be underpinned by strong cash flow forecasting and caused by operational issues, and to quickly invest remaining robust coordination between government entities (bottom-up cash balances once all liabilities are daily paid. However, approach). even in advanced countries with liquid government securities 19. Some countries define layers of cash buffers to cope with different risks (liquidity, volatility, operational), which also drives the kind of investment for each layer to be allocated, according to their needed liquidity. 20. OECD WPDM 2017 Survey on Liquidity Buffer Practices revealed that almost half of the countries responded that there has been policy and operational changes in their liquidity buffer practices in the previous 5 years, and about a quarter were planning to do it in the short-term, showing that the definition of the level of liquidity buffer is an evolving process. CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 27 The second way to minimize the cost of carry is to explore place, investing government cash balances in the market not arrangements with the Central Bank for the remuneration of only may lead to better remuneration, but also has the positive the cash balances deposited in the TSA, ideally at the market collateral effect of fostering the development of money and rates, as stated as a minimum requirement at DeMPA DPI government securities markets, through the strengthening of 11.2. This second dimension of “Cash flow forecasting and price references. On the other hand, it creates counterpart cash balance management” DPI assesses the “decision of credit risk to be accounted and monitored closely. a proper cash balance (liquidity buffer) and effectiveness of managing this cash balance in government bank accounts”. Coordination with the Central Bank is highly critical when For countries being remunerated by the Central Bank, the investing the cash in the financial markets. The monetary conditions may significantly vary. Brazil, Colombia and Turkey authority welcomes information on cash flow forecasting, have their cash balances remunerated by market interest including planned short-term borrowing and investment rates , while Peru and Bolivia do not (the latter receives resulting flows (that also affect the liquidity in the financial remuneration linked to inflation). Chile and Slovenia use system). When sharing this information, cash managers time deposits offered by the Central Bank and South Africa mitigate the risk of competition with the Central Bank as outsources the cash investment for the Corporation for Public it will carry out its monetary policy transactions taking into Deposits, a subsidiary of the South African Reserve Bank. consideration government cash needs or excess of it. The coordination should ensure that the two government entities There are also countries which deposit TSA cash balances will not be unnecessarily at the same side of the market, in the Central Bank receiving no remuneration (Albania, The competing for raise cash (drying-up liquidity) or invest it Gambia, Ghana, Honduras, Nigeria, Rwanda, Seychelles, (injecting liquidity). Investing all the excess of cash in the Thailand and Uruguay). Some of them face legal restrictions market facilitates Central Bank’s own cash flow forecast and and entered into agreements where there is a “compensation” liquidity management since all the government liquidity is re- represented by free-of-charge services provided by the injected immediately in the market. Central bank for the Ministry of Finance, normally related to the TSA operational activities. Even in the cases where the Regarding investment instruments, cash managers may Central Bank’s profit is transferred to the Treasury (somehow opt to use more than one (when available) in order to access compensating the lack of remuneration of TSA cash balances), different risk-return alternatives, according to investment time a possible route might be to strengthen transparency through horizons and government risk appetite. The most common regulations to enable the monetary authority to remunerate the ones are illustrated in Figure 5 and their characteristics are TSA balances and on the other hand charge for its services, described below. under an arrangement where proper cost allocation is clearer (Turkey adopted these measures in 2011). Deposits: Commercial bank deposits are one of the fastest and easiest ways to invest cash, given that they are Brazil has recently published a report on the relationship uncollateralized (no settlement system and margin calls24 are between the National Treasury and the Brazilian Central needed), do not have maturity dates as oppose to short-term Bank23 that sheds light on CB profit and losses composition instruments (possible automatic rollover) and tend to offer and transfer framework, TSA structure and earnings, and CB good remuneration compared to other alternatives. India, for treasury securities portfolio used for repo transactions. Pessoa instance, carries out auction of government cash balances to and Williams (2012) present a thorough discussion about this maximize the return. On the other hand, considering that the relationship, which details are beyond the scope of this paper. deposits are subject to the credit risk of the recipient banks and not backed by any asset in case of default, these are more >>> C. INVESTING CASH BALANCES commonly used only for overnight or very short-term tenure. IN THE MARKET Investing in multiple banks to diversify the risk can be good strategy, keeping in mind that it requires multiple credit risk Besides the possibility of having TSA balances remunerated assessment and permanent monitoring of all counterparties. by the Central Bank, provided that prior conditions are in 21. Score C (minimum) requires that Issuance of short-term instruments is planned according to the forecast of monthly cash balances. In addition, the central government manages its surplus cash (that is, cash in excess of the target) through investment in the market in line with appropriate credit risk limits or with the central bank at mar- ket-related rates. 22. Even in those cases, countries still bear a cost of carry as they usually invest cash in shorter maturities than the ones used for debt issuance, and the yield curve com- monly present a positive slope (meaning higher interest rates in the long end). 23. https://sisweb.tesouro.gov.br/apex/f?p=2501:9::::9:P9_ID_PUBLICACAO_ANEXO:7141 24. Provision of additional collateral when its price goes down. 28 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? Government securities: Using the excess of cash to buy resources capacity. The UK is an example using certificate of government securities is another widespread practice. Cash deposits and commercial papers, although most of the liquidity managers can either buy-back the government’s own domestic is invested in reverse-repo transactions. bonds in the secondary market or invest in sovereign bonds of other countries (e.g. Slovenia). The latter is more usual Reverse repo: This is probably the most common for investment of liquidity buffers held in foreign currency, investment instrument used by cash managers. Reverse where investing in the US Treasuries is the most common repo transactions present comparative disadvantages to the practice, given its liquidity, low credit risk and denomination other previously explored options but have one determinant in USD. Countries such as France, Belgium, Netherlands and advantage: it is backed by a collateral. Therefore, government Germany set arrangements between them to do cash deposits gets exposure to the credit risk of the collateral issuer with each other since there is no currency risk. These inter- (most commonly itself) in lieu of the one associated to the country cash transactions may involve government securities transaction counterpart. The management of the collateral as collateral. adds complexity (and cost) and the lower risk of this instrument results in lower remuneration. Given the strengthened credit Corporate bonds: It is less common to invest cash in risk, it is commonly used for longer periods, from few weeks corporate bonds, either issued by financial institutions (e.g. to 1-3 months. The liquidity of the collateral, which is usually certificates of deposits) or companies (e.g. commercial government securities, drives the liquidity risk assumed by the papers, debentures). Given the low liquidity of these securities government in the transaction. Although the securities can be compared to government bonds, cash managers can either cancelled if the collateral is executed, resulting in a reduction seek an early redemption option, or invest in a medium- in government debt stock (net present value is neutral), this to long-term horizon, targeting a better remuneration. situation is not desirable given that government needs cash in Assessment and permanent monitoring of counterpart credit the short-term in the closing of the transaction. risk is also an outmost, which requires technical and human > > > T A B L E 2 - Instruments Used by Selected Countries for Investing Excess of Cash Note: Angola, Equatorial Guinea, Eswatini, The Gambia, Ghana, Honduras, Kosovo, Lesotho, Nigeria, North Macedonia, Romania, Rwanda, Seychelles, Thailand and Uruguay have not invested excess of cash in the market (reasons range from lack of capacity, lack of legal authorization or lack of idle cash). Sources: Debt Management Offices/Agencies websites and countries presentations made in the WB Cash Flow Forecasting and Cash Management Workshops (2018 and 2019). CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 29 Countries experiences show that investing cash in the market While debt management implementation is guided by the is directly associated to the level of market development, in MTDS, when it comes to cash management, investments are other words, availability of instruments, infrastructure and driven by investment policies rather than strategies25. These players. The deepening of domestic debt and money markets policies take care of credit and liquidity risk management, is a common objective of cash and debt managers, as well as of commonly setting exposure limits to counterparts and the CB and a medium-term plan to this end should be devised. instruments26. Table 3 shows an example from Chile. Lienert (2019) offers an interesting approach on sequencing cash management reforms where active investment of cash balances comes in the later stages of the reforms, given supporting pillars needs to be built in earlier stages. > > > T A B L E 3 -Chilean Cash Management Investment Policy 25. Investment policies will define limits and conditions for the use of instruments, while debt strategies set directions for the government financing (possibly setting targets). 26. Buy-back can be an alternative to reduce cost of carry if the cost of new debt is lower than of the existing ones (and the differential higher than “other investments” remu- neration), provided that there is an excess of cash to be invested/allocated. 30 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? >> I V. C O N C LU S I O N A N D K E Y F I N D I N G S The Global Financial Crisis and the recent COVID-19 cash flow forecasting. As pointed out by DeMPA assessments pandemic proved once again that efficient management of (Figure 4) just 8% of 80 assessed lower income countries get government’s liquidity is crucial to respond to unanticipated a minimum score or above at DPI 11.2 (cash management), revenue losses and increases in expenditures. Uncertain and in 3 out of the 5 regions none of the countries reached this economic situation and unfavorable market conditions worsen minimum. The connection between cash flow forecasting and the cash position, especially in countries with weak budget the issuance of T-Bills can be strengthened and made clearer controls and poor cashflow forecasting. On the other hand, and more transparent in some countries. However, investment modern cash management provides tools to avoid delayed of the idle cash seems to be a rather bigger weakness, with payments and accumulated arrears which are simply (i) the many countries placing their liquidity buffers in the Central consolidation of bank accounts, (ii) generation of daily cash flow Bank with no remuneration. projections for at least next three months, (iii) integration (or at least seamless coordination) of cash and debt management, Cash managers can cover temporary cash shortages and (iv) contingencies for stressed conditions. using multiple instruments that fits better to different needs in terms of time horizon and risk appetite. However, most Country examples, based on the presentations of of the assessed developing countries solely rely on the practitioners delivered in a series of cash management issuance of T-Bills and do not use repo transactions, mostly workshops organized by the World Bank, and the findings because they have underdeveloped money markets, lacking of DeMPA assessments, indicate that full implementation of legal framework, and collateral liquidity concerns in case of modern cash management is still a challenge. A TSA system counterparty default27. On the other hand, intra-government is common in most countries, but further challenges remain. borrowing which has been increasingly used by emerging Following the Global Financial Crisis, the strategy for building market economies, (Colombia, Peru and South Africa) might up liquidity buffers in many advanced and emerging countries be an option for the countries where the government bond give clues on the need for a hedge, due to the size of forecasting markets are less developed. errors and volatility of cash flows. Possible renewed liquidity interruption in interbank markets also contributes for reviewing The active investment of cash balances in the markets cash buffer policies. Therefore, cash flow forecasting is an area is incipient or inexistent not only in low-income countries, to improve in many developing countries, as shown in Figure but also on different income level countries listed in the 4 (DeMPA assessments) and in the low frequency of accuracy introduction. Out of the 24 countries that participated in the analysis made by countries who attended the workshops. WB cash management workshops, only Albania, Bolivia Time horizon not shorter than the budget year, weekly/daily (offshore), Chile, Colombia, Peru, Slovenia and South Africa breakdown and updates constitute sound practices to be claimed to invest their surplus balances in the market. Weak pursued, as adopted by Colombia, South Africa and Uruguay. cash flow forecasting, no formally defined liquidity buffer and underdeveloped money market are the main reasons Coordination across institutions is vital for accurate cash explaining this gap. flows forecasting. The analysis of country practices indicates that the coverage of cash flow projections, the horizon and On the other hand, transparency on the use of financial frequency of forecasts are quite limited in many cases. To instruments either for covering cash shortages or investing this end, consolidation of cash management functions in cash balances should always be a priority that will pave the one unit, establishing a structured data/information collection way for the possibility of using more advanced strategies. framework, and setting up formal coordination mechanisms Countries such as Turkey, Hungary, the UK and France between cash management and budget, debt management include specific sections about cash management in their and monetary policy implementation would be a good first Annual Debt Reports, for instance. Coordination between step to improve the capacity to generate reliable and accurate debt and cash managers and the Central Bank is essential cash flow projections. to avoid unnecessary borrowing costs and misleading signals from the government to the market. When it comes to the use of instruments to cover cash shortages and investment of the excess of cash in the market (or with the Central Bank), challenges in developing, and especially low-income countries, are even larger than on 27. None of the 24 participant countries in the WB Cash Flow Forecasting and Cash Management workshops use repo transactions to cover cash shortages. CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 31 To conclude, country experiences indicate a significant room for short-term improvements in all aspects of cash management including the accuracy of cash flow projections, efficient use of funding instruments for temporary cash shortages, and investment of TSA balances to reduce the cost of carry. To this end, strengthening the technical capacity in cash management, improving the governance structure and the coordination with fiscal, debt and monetary policy enable governments to better manage liquidity and cope with stress situations as proven once more in Covid-19 pandemic. >> REFERENCES Agence France Tresor, Managing Government Cash Flows – Investor Relations of Colombia, Publications – Documents Performance, https://www.aft.gouv.fr/en/cash-management- of Interest http://www.irc.gov.co/webcenter/portal/IRCEs/ performance and Debt Management – General Information pages_Publicaciones/documentosdeinters Accessed on May – Products, https://www.aft.gouv.fr/en/products- Accessed on 22nd, 2020 May 22nd, 2020 IMF (2020) “Fiscal Monitor” https://www.imf.org/en/ Agência de Gestão da Tesouraria e da Dívida Pública – Publications/FM/Issues/2020/04/06/fiscal-monitor-april-2020 IGCP, Home Page, https://www.igcp.pt/en/ Accessed May Accessed on June 18, 2020 22nd, 2020 Lienert, I. (2009) “Modernizing Cash Management” Technical Arslan, Y, Drehmann, M and Hoffmann, B “Central bank Notes and Manuals, International Monetary Fund bond purchases in emerging market economies” BIS Bulletin Nº 20, June 2020 Miller, M. and S. Hadley (2016) “Cash management in cash- constrained environments” Overseas Development Institute AKK, Annual Reports, https://www.akk.hu/en/page/ publications#annual-reports Accessed on May 22nd, 2020 Ministry of Finance of Brazil, National Treasury, https:// sisweb.tesouro.gov.br/apex/f?p=2501:9::::9:P9_ID_ Cangoz, M.C., S. Boitreaud, and C. Dychala (2018) “How Do PUBLICACAO_ANEXO:7141 Accessed on July 1st, 2020 Countries Use an Asset and Liability Management Approach?” Policy Research Working Paper 8624, The World Bank Ministry of Finance of Chile, Investor Relations, https://www. hacienda.cl/english/investor-relations-office/presentations. Cashin, C., S.Sparkes and D. Bloom (2017) “Earmarking for html Accessed on May 22nd, 2020 Health: From Theory to Practice” Health Financing Working Paper, WHO Ministry of Economy and Finance of Peru, Public Debt https://www.mef.gob.pe/es/deuda-publica-sp-14826, and Cruz, P. and F. Koc (2018) “The liquidity buffer practices Financial Policy Guidelines https://www.mef.gob.pe/en/ of public debt managers in OECD countries” OECD Working financial-strategy Accessed on May 22nd, 2020 Papers on Sovereign Borrowing and Public Debt Management No:9 Ministry of Treasury and Finance of Turkey, Public Debt Management Report, https://en.hmb.gov.tr/public-debt- Department of Economic Affairs of India, Public management-reports Accessed on May 22nd, 2020 Debt Management, https://www.dea.gov.in/public-debt- management, Accessed on May 22nd, 2020 National Treasury of South Africa, Investor Relations, http:// investor.treasury.gov.za Accessed on May 22nd, 2020 Jácome, L., Matamoros-Indorf, M., Sharma, M. and Townsend, S. (2012) “Central Bank Credit to the Government: Pattanayak, S. and I. Fainboim (2011) “Treasury Single What Can We Learn from International Practices?” IMF Account: An Essential Tool for Government Cash Management” Working Papers 12/16 Technical Notes and Manuals, International Monetary Fund 32 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? Pessoa, M. and Williams, M (2012) “Government Cash Williams, M. (2004) “Government Cash Management: Good Management: Relationship between the Treasury and the and Bad Practice” http://www.mj-w.net/cac_gov_cash.html Central Bank ” Technical Notes and Manuals, International accessed on August 22, 2020 Monetary Fund Williams, M. (2010) “Government Cash Management: Its Storkey, I. (2001) “International Government Cash Interaction with Other Financial Policies” Technical Notes and Management Practices” www.storkeyandco.com accessed Manuals, International Monetary Fund on August 22, 2020 Swedish National Debt Office, About the Debt Office, https:// www.riksgalden.se/en/About-the-Debt-Office/ Accessed on May 22nd, 2020 World Bank, Finance, Competitive and Innovation (FCI) - https://dataviz.worldbank.org/views/FS-COVID19/Overv iew?:embed=y&:isGuestRedirectFromVizportal=y&:displ ay_count=n&:showAppBanner=false&:origin=viz_share_ link&:showVizHome=n CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 33 >> ANNEX: INSTITUTIONAL ARRANGEMENT OF CASH AND DEBT MANAGEMENT IN SELECTED COUNTRIES >>> COLOMBIA debt management processes, financing targets are defined according to the deficit to be covered and the needed cash The Colombian government has been strengthening cash balances. There is a straight coordination between Domestic and debt management through a process of progressively Financing and Treasury sub-directorates on the numbers integrating both mandates under the Dirección General related to cash needs, debt redemptions and issuances, de Crédito Público y Tesoro Nacional – DGCPTN (Public and T-bills issued for the activities of both debt and cash Credit and National Treasury General Directorate). The management. recent National Development Plan 2018-2022 expands and strengthens DGCPTN functions on the management of the Domestic Finance Sub-directorate issues T-Bills maturing in cash unit, of the excess of cash and financial assets of other 1 year, and long-term T-Bonds maturing from 4 to 18 years. public entities. The last is particularly innovative and other On the other side, Treasury meets its short-term financing countries28 have been gradually adopting the holistic overview needs through intra-government loans29 instrumentalized by of public sector balance sheet. the issuance of papers reflecting the interest rate paid on the excess cash invested at the Central Bank. The current focus of the Plan, once debt and cash management activities are already integrated under the The Treasury also uses repo (and reverse repo) operations same Directorate (and 2 different sub-Directorate), has been to raise short-term money and invests temporary idle cash. the IT systems strengthening, including the modernization These investments are complemented by remunerated of the ones used for cash management, treasury and debt deposits at the Central Bank, and Colombian government management. securities, in pesos, and foreign bank accounts, time deposits, money market funds and sovereign global bonds, in US According to the annual fiscal programming, in terms of dollars. > > > F I G U R E 6 - Organization Chart of Dirección General de Crédito Público y Tesoro Nacional Source: Ministerio de Hacienda y Crédito Público (Colombian Ministry of Finance) 28. E.g. New Zealand, Denmark, Indonesia. See Cangoz et. al. (2018) 29. Treasury has access to resources of special funds under its administration, Development funds (Sistema General de Regalías) and from some SOEs. 34 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? >>> FRANCE There is a cash management unit within the debt office. Its activity is supported by common back office, IT and internal control and risk management units. Short-term transactions undertaken on the money market to cover cash shortages and invest excess of cash are led by the cash management unit, while T-Bills and T-bonds are all issued by the debt front-office (‘debt management’ in figure 7), including liability management operations to deal with different risks related to cash and debt management (e.g. liquidity, refinancing, counterpart, interest rate risks). Being in the same department allows a very smooth and informal coordination between the cash management unit and the debt front-office, for example to decide on the amount and maturity of T-bills to be issued at the weekly auctions. The Agency is organized under the organogram presented below: > > > F I G U R E 7 - Organization Chart of Agence France Trésor Source: Agence France Trésor CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 35 > > > H U N GA RY Public debt in Hungary is managed by an independent agency which is fully owned by the Ministry of Finance. It used to be an organization within the Treasury and turned into an independent agency (ÁKK Rt. – Government Debt Management Agency Ltd.) in 2001. The main focus of the agency is debt management, but it’s also responsible for cash management as one of its main duties to “ensure that the central government deficit and debt redemption are financed, and the government debt and the temporarily free-cash-funds of the state are properly managed”30. The organizational structure indicates a fully integrated cash and debt management under single back, middle and front offices. > > > F I G U R E 8 - Organization Structure of AKK Source: AKK 30. Source: AKK 36 >>> CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? > > > T H E U N I T E D S TAT E S O F the market. “The Office of Debt Management is also providing AMERICA advice and analysis on the matters related to the Treasury’s debt management policy, the issuance of Treasury and Cash and debt management units are located in the federally-related securities, and financial markets.” to the same department and report to the same Under-secretary Assistant Secretary for Financial Markets. Even though debt that is in charge of Domestic Finance. However, debt and and cash management are not integrated under the same unit, cash management are subordinated to different Assistant governance and coordination mechanisms are in place, and a Secretaries. Office of Debt Management (ODM) is placed in single government actor issues securities for the financing of the Financial Market, while the Office of Fiscal Projections the budget deficit and rollover of the public debt. The chart (CMU) is part of the Fiscal. CMU manages the government’s below shows the extension of the agency structure: daily cash position and produces cash and debt forecasts used for determining the size and the timing of the government’s financing operations. ODM and CMU meet twice a week to discuss the financing plan of the week and the cash balance before disclose it to > > > F I G U R E 9 - Organization Chart of Domestic Finance Undersecretariat of the US Treasury Source: US Treasury 30. Source: US Treasury CASH MANAGEMENT - HOW DO COUNTRIES PERFORM SOUND PRACTICES? <<< 37