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Cash Management Framework and its Integration with Debt Management Professional Development Seminar on Debt Management December 10, 2008 Sailendra Pattanayak and Brian Olden, FAD Overview Definitions of Cash Management Outline of a modern cash management framework Cash rationing vs. cash management Benefits of an efficient cash management system Prerequisites for effective cash management Banking and payment arrangements Cash forecasting Institutional framework Managing cash balances-the basic requirements Issues surrounding integration of cash and debt management Discussion on appropriate institutional framework

Some definitions of cash management The strategy and associated processes for managing cost-effectively the government’s short-term cash flows and cash balances, both within government, and between government and other sectors. (Williams 2004) Having the right money in the right place at the right time to meet the government’s obligations in the most cost-effective way. (Storkey 2001) Cash management framework Banks y Pams nte Spending units s ue en ev R Treasury system Debt management Central bank Monetary policy Cash manager Financial markets dev. Short-term Investments Short-term Borrowings

Main building blocks for cash management Control over receipts and expenditures. Forecasting cash requirements. Managing government cash balances – surpluses/deficits. Cash rationing (misnomer cash budgeting) Last resort liquidity management Limits ability to commit until sufficient funds are available (delays implementation) No forward cash planning Disruptive to programs, vendors High corruption potential Need transparent ex ante rules Public procedure Likely to undermine budget priorities Benefits of efficient cash management Ensure obligations can be met as they fall due Minimize idle balances and associated costs

Conduct cost-effective borrowing operations Contributes to development of short-term money markets Reduce liquidity impact from budget deficits/surpluses Separation of cash management from monetary policy Enhanced transparency of government flows Common issues in transition and developing countries/LlCs Budget execution focused on compliance with annual budget law rather than efficiency of resources.

Fragmented treasury system with many separate bank accounts-both in commercial banks and CB. Cash rationing is the main expenditure control system-creates uncertainty of resource availability for Bl’s. Spending units not oncerned with borrowing costs. Daily cash needs met by the central bank-less of an issue witn U applicant countries due to pro i t n bi ion on CB borrowing. Liquidity managed for monetary policy purposes.

Prerequisites for cash management Awareness within the government of the opportunity cost of money Consolidation of government cash balances in a TSA Fund and accounting controls through treasury ledger system Developed expenditure and commitment controls Well developed cash planning and forecasting function Efficient payment system to sustain cash balances at optimum level Such as centralized payments processing Prerequisites for cash management – contd. Realistic budget Adequate accounting framework Tailor-made cash forecasting modules can be part of IFMIS, whose accounting module can provide daily data on inflows and outflows.

Access to financial markets and use of modern instruments for cash management Cash management separated from, but linked to, monetary policy Integration of cash and debt management Single Treasury Account All revenues and expenditures go through TSA The consolidation of government cash resources through a TSA should be comprehensive Budget institutions (Bl’s) do not have separate bank accounts. Bl’s transactions managed through the treasury ledger system Where transactional accounts are necessary, balances are swept up into TSA periodically (preferably daily) All monies seen as fungible to prevent inefficient use of public cash resources.

Wk 1 – Budget Process Memo

Financial analysts guide governments and security entities in decisions about the budgeting process.
Imagine you are a fiscal analyst for a state or local (municipal or county) budget office.
Write a 175- to 350-word memo to the new incoming group of legislators to describe the budget process.
Include the following in your memo:
A description of the steps of the budget process, including when the fiscal year begins and ends
The timeline and key milestones of the budget process from budget submission by agencies/departments to the final budget

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