Cash Management and the Treasury Function
Author: S Schiavo-Campo, D Tommasi
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How should governments in developing countries approach the issue of cash management and what exactly should be the function of the Treasury? In what ways can nations modify their existing monetary and economic practices in order to ensure sound financial management?
Chapter Eight of the book ‘Managing Government Expenditure’, examines the most suitable role for government and the Treasury to adopt in controlling their cash flows and financial assets. Control of cash is a fundamental aspect of macroeconomic and budget management, whilst the increasing separation of the Central Bank and government increases the significance of cash management. To illustrate their argument, the authors use the example of the Philippines and Sweden, where successful cash management reforms have occurred.
Centralisation of cash balances is necessary and will optimise cash management. This should happen through a Treasury Single Account: An account or a group of connected accounts through which all government payment transactions are processed. This should feature: ‘daily centralisation of the cash balance (when possible)’; ‘accounts open under the responsibility of the Treasury'; and ‘transactions recorded into these accounts along the same set of classifications.’
Other conclusions state that:
- Arrangements for banking and processes for transferring funds will have to be re-examined to guarantee improved supervision of cash and prevention of idle balances.
- Cash planning is imperative. It should incorporate: A yearly budget implementation plan; a monthly cash and borrowing plan; and a weekly assessment of the implementation of the monthly cash plan.
- The borrowing policy must be planned beforehand, and the borrowing plan made known to the public.
- In order to stop cash management from being disturbed, guarantees, insurance schemes and other related government liabilities should be assessed for risk and political cost, and reserves adjusted accordingly.
- The medium-term external debt, should be contracted in accordance with the budget or multiyear expenditure programmes, and drawings and loans accurately monitored.
- Debt management should be bolstered.
In developing countries, governments rarely devote time to the issue of cash management, and this needs to be addressed. Usually, the centralisation of payment transactions is not efficient and data is too cumulative to allow for a fair analysis of control budget execution. However, when reforms are being implemented in developing countries there must be an awareness of: Constraints due to the localisation of local agencies and the infrastructure of the country and modern technologies. The authors also suggest:
- Centralising cash balances should be the first step for developing countries, as it would provide the most discernible benefits.
- However, they warn that the utmost caution is needed before contemplating instruments such as index-linked rate instruments and currency-linked instruments, which increase volatility in debt service.
- In introducing the debt policy, responsibility should be distributed in accordance with the abilities of the Ministry of Finance, the amount of development of the financial markets, and the aims pursued.
- Collecting information is a problem for many developing countries and this must be addressed. For example, the authors highlight the setting-up of a monthly system of reporting by project managers and beneficiaries of guarantees to the Debt Management Office.
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Schiavo-Campo, S and Tommasi, D. 1999, 'Cash Management and the Treasury Function', in Managing Government Expenditure, Asia Development Bank, Manila.
Asian Development Bank (ADB), http://www.adb.org/