The primary mandate of a national Treasury is to promote an optimal financial management of government resources, by ensuring that spending agencies are provided, in a timely manner, the resources needed for a smooth provision of public services, while minimizing the cost of government financing. However, international experience shows that agencies that go by the same name (the Treasury) assume a variety of responsibilities within the gamut of functions encompassed by government financial management. This paper argues that, in countries facing substantial economic and financial adjustment problems and/or rapid institutional change, it is desirable to give the Treasury a broader (rather than narrower) range of responsibilities in government financial management. This is typically the case in economies in transition, in which under central planning Treasury functions were dispersed among different agencies, including the Central Bank. The paper presents an overview of the main issues governments are likely to face in setting up a national Treasury, in particular in economies in transition. It begins with an analysis of the main Treasury functions. It then discusses the Treasury’s basic organization and structure, information system, and relationships with other public entities.

Abstract

The primary mandate of a national Treasury is to promote an optimal financial management of government resources, by ensuring that spending agencies are provided, in a timely manner, the resources needed for a smooth provision of public services, while minimizing the cost of government financing. However, international experience shows that agencies that go by the same name (the Treasury) assume a variety of responsibilities within the gamut of functions encompassed by government financial management. This paper argues that, in countries facing substantial economic and financial adjustment problems and/or rapid institutional change, it is desirable to give the Treasury a broader (rather than narrower) range of responsibilities in government financial management. This is typically the case in economies in transition, in which under central planning Treasury functions were dispersed among different agencies, including the Central Bank. The paper presents an overview of the main issues governments are likely to face in setting up a national Treasury, in particular in economies in transition. It begins with an analysis of the main Treasury functions. It then discusses the Treasury’s basic organization and structure, information system, and relationships with other public entities.

I. Introduction

It is generally accepted that national governments must have within their organizational structure an agency responsible for government financial management. However, a review of international experiences in this area shows that agencies that go by the same name (the Treasury) assume a variety of responsibilities within the gamut of functions encompassed by government financial management.

In general, it can be said that the primary mandate of a national Treasury is to optimize the financial management of government resources, by ensuring--through the careful programming and monitoring of inflows and outflows in the government accounts--that spending agencies are provided, in a timely manner, the resources needed for a smooth provision of public services, while minimizing the cost of government financing. The Treasury is also generally responsible for the management of government financial assets and liabilities.

Consequently, the role of the Treasury is closely linked to the execution of the national budget. However, the Treasury’s participation in budget execution can vary from a passive one (when the Treasury does not intervene directly in the execution of the budget, but merely makes the resources available to spending agencies to execute their programs) to a fully active one (when the Treasury is empowered to set limits on commitments or payments of government expenditures, or even to authorize specific expenditures on the basis of pre-established criteria).

The structure and role of the Treasury in each country are affected by historical and cultural factors, as well as by the economic environment and the distribution of power among the various government agencies. In some cases, they reflect a long evolution, during which functions were added (or taken away) as time went by. In other cases, the Treasury was assigned from the outset a wide range of functions and powers. The latter group typically includes countries seeking to address acute problems of poor centralized financial management, lack of control over government assets and liabilities, scattered and inefficient use of public resources, or the lack of a proper system of reporting on the government’s economic and financial situation.

More recently, this has been also the situation in economies in transition, seeking to replace administrative controls with indirect instruments of fiscal and monetary policy. The transition to a market-oriented management of the economy has highlighted the need in these economies for wide-ranging reforms of the whole budget process and, in particular, of the financial management of government operations. As Ministries of Finance have gained more influence and control over the allocation of public resources and the monitoring of their uses, most of them have recognized the need to establish a central unit (the Treasury) responsible for the financial management of government resources.

This paper presents an overview of the main issues governments are likely to face in setting up a national Treasury, especially in economies in transition. It begins with an analysis of the main Treasury functions. It then discusses the Treasury’s basic organization and structure, information system, and relationships with other government agencies. Appendix 1 provides a summary tabular presentation of Treasury systems in major industrial countries. Appendices 2 and 3 expand on areas covered more briefly in the text (the information system and public debt management, respectively).

II. Main functions of the Treasury

The main functions of budgetary and financial management of government operations include:

  1. formulation of budgetary and tax policies, within the overall framework of macroeconomic policy;

  2. budget preparation: formulation and evaluation of budget estimates for revenues and current and capital outlays, and the elaboration and presentation of the budget to Parliament;

  3. budget execution: execution and control of central government operations, as well as monitoring of the operations of extrabudgetary funds and local governments;

  4. financial operations associated with the execution of the budget: cash management, maintenance of registers of government assets and liabilities, issue of government securities and guarantees, internal and external public debt management, and foreign aid management;

  5. accounting and financial information systems: accounting for the operations of the central government, as well as the control and development of the government accounting and financial information systems;

  6. auditing and evaluation: assessment of the compliance of the budget execution with the approved budget and other legal provisions, and, more recently, analysis of the cost effectiveness of the use of public resources. This function is distinct from, and complementary to, that of external auditors reporting to Parliament.

There are several other functions, of an administrative and regulatory nature, which are also carried out by Ministries of Finance. Among these are the preparation of financial legislation, monitoring and control of nonbank financial intermediaries, financial monitoring and control of state-owned enterprises, and the regulation of wages and conditions of service of government employees.

In many countries, the Ministry of Finance is primarily responsible for all the above areas. In others, one or more of these functions are assigned to other entities. Likewise, the functions of the Treasury within the Ministry of Finance also vary significantly from one country to another, reflecting each country’s specific historical, institutional, and political circumstances.

Appendix 1--which presents a tabular international comparison--shows that there is no dominant model of government financial management. Among the main functions of a Ministry of Finance listed above, the Treasury is always primarily responsible for financial management. Less frequently, the Treasury also assumes responsibility for budget execution and accounting, and, in a few instances, for auditing and evaluation.

1. Financial management

a. Cash management

Cash management is the most basic and fundamental activity of the Treasury. It includes the control of all flows to and from the Government accounts, as well as operational activities in the collection and payment processes.

As its minimum and fundamental responsibility, the Treasury must secure complete, timely, and accurate information, and must exercise adequate control on all the inflows and outflows in government’s accounts. These include not only budgetary revenues and expenditures, but also extrabudgetary inflows and outflows, e.g. those which the government’s spending units 1/ execute on behalf of third parties, such as international aid flows.

With respect to operational activities in the collection and payment processes, the responsibilities assigned to the Treasury vary considerably across countries. These activities are often shared with the agency or agencies responsible for tax administration on the revenue side, and with those responsible for budget execution on the expenditure side, in countries where the Treasury does not assume this responsibility. These activities include:

a) on the revenue side:

  • the collection of taxes and other budgetary and extrabudgetary revenues;

  • negotiations with the banking system on collection through the banks;

  • control of collections through the banking system; and

  • distribution of revenue among the various levels of government (central and local), or to special programs.

b) on the expenditure side, the following activities are mutually exclusive, and reflect a greater or lesser degree of Treasury intervention in the payment stage of public spending:

  • allocation of resources, or overall financial limits to spending units for the payment of their expenditures; or

  • authorization and processing of requests for payment of expenditures submitted by spending units, on an individual basis; or

  • automatic payment of requests for payment of expenditures submitted by spending units.

A side question concerns the appropriate payment instruments for various types of government transactions. As regards revenues, it is relatively unimportant whether tax or other payments to the government are made in cash, check or transfer of bank funds, provided that such payments are promptly credited by the receiving agency/bank to the Treasury account. By contrast, payments by the government should be made through payment orders (deposit transfers) up to the final payee. This would expedite payments, simplify administrative procedures, and leave a traceable trail of payments made. Issuing bank checks would only be acceptable in such cases where payment by deposit transfers are unfeasible, while payments in cash should be wholly exceptional.

b. Government cash accounts

The resources collected by the Government are usually deposited in financial institutions, before being ultimately used for payment of expenditures incurred in the execution of government programs. The Treasury does not generally keep its resources as cash in its own vaults, except in special circumstances, normally ones in which resources are needed for payments of very small amounts or in districts difficult to reach. This reflects obvious security reasons, but also the fact that net financial costs for the government can be reduced through the temporary market placement of these resources by the financial institution in which they are deposited.

The number of accounts held by the government in financial institutions can vary from one to thousands, depending on a number of factors, including:

  • the need to control payment limits for each government agency, when expenditure payments by the Treasury are not automatic;

  • the degree of development and effectiveness of the Treasury’s information and control system. If the Treasury does not have a well-developed and effective system, the individual limits of each unit cannot be controlled directly by the Treasury, and the banking system is used for this purpose; and

  • the size of the country, and the number of spending units.

Another important aspect is the type of financial institution, or institutions, in which the Treasury and the spending units hold accounts. The almost universal option is public banks--generally the institution that acts as the central bank. There are two basic reasons for this choice. First, in many countries the central bank is a direct and/or indirect lender of resources to the Government, which often pays interest on the loans. Thus, by holding accounts with the central bank, the Government can use its balances to reduce its net indebtedness and, consequently, also reduce its financial costs. Second, the collection of budget revenues and the payment of government expenditures frequently result in large changes in liquidity; therefore, the monetary authorities need to monitor these flows very closely, in order to take timely offsetting monetary policy measures, when appropriate.

There are also cases in which these accounts are held in public or private commercial banks. This option may be more costly for the Treasury, because it does not exploit economies of scale in the placement of the resources, and/or because the interest earned is credited to the spending unit which holds each account. It also makes it more difficult for the Treasury to control government accounts.

In some countries, though the spending units do not have individual banking accounts, the Treasury itself has accounts in commercial banks, and earns interest at market rates on its balances. This option is generally chosen by mutual agreement with the central bank, as one of its objectives is to stabilize the level of liquidity in the economy. This is achieved by the Treasury managing flows between its accounts in the banking system and its general account in the central bank, so as to keep a stable balance in the latter. However, in general, the commercial bank accounts are not used to pay government expenditures, which are channelled through the main account in the central bank. This option requires that the Treasury be sufficiently skilled and experienced in financial management techniques.

The main trend that has been adopted is one in which the Treasury, as the central financial management arm of the government, holds what is customarily called a single account in the central bank. If the Treasury takes the option described in the preceding paragraph, the accounts in the banking system are used exclusively by the Treasury and actually constitute means of market placement of government assets, while they are not needed for the execution of the budget.

In summary, the single account is an overall account held by the Treasury with the central bank, in which all government operations are recorded, and in which government funds are held (except for any Treasury placement accounts in the banking system). Under this arrangement, no spending unit is allowed to hold individual accounts either in the central bank or in the banking system, except in the cases referred to below. The spending units’ accounts in the banking system are replaced by accounts in the government financial information system, as explained below. The establishment of a single treasury account need not imply less autonomy for the ministries and spending agencies in the use of their idle balances, provided that they are used in accordance with the established budget and financial limits and procedures, and, of course, it helps reduce the financing requirements of the government, and consequently the interest charges to the budget.

Specifically, the working of the single account can be summarized as follows:

  • a government financial information system (GFIS) is set up, which includes ledger accounts for ministries and the other spending units. This system registers each movement in these accounts (inflows and outflows), and the balance in each account represents effective capacity to pay, up to the balance;

  • each spending unit can keep one or more accounts in the GFIS, depending on the degree of detailed control that is desired. In general, cash spending limits are set, registered in the system, and controlled at a more aggregate level than those used in the budget process;

  • all public revenues (those accruing to the state budget, as well as the own revenues of autonomous agencies and extrabudgetary funds) must be deposited in the single account, but would also be credited simultaneously to the appropriate account in the GFIS;

  • transfers between spending units must be registered in the GFIS, but do not affect the single account;

  • only payments to entities outside the system (e.g., government suppliers, public employees, holders of government debt, taxpayers entitled to refunds) are debited to the single account.

It should be stressed that the financial consolidation of government balances is perfectly compatible with the continuation of a decentralized execution of the budgets of spending units. The Treasury ensures an orderly flow of transfers from the state budget to the other agencies, and de facto acts as a bank for them.

Therefore, for the ministries and other spending units, there is little, if any, difference between the functioning of a banking account and of a financial limit account in the GFIS. As a matter of fact, these entities benefit from the availability of reliable and timely information on their accounts provided by the GFIS.

Spending units should be allowed to have accounts in the banking system in the following cases only:

  • when the Treasury system does not have the technical capability to maintain and control the individual financial limits of spending units. In this case, spending units would keep their own accounts with the central bank as subaccounts of the single Treasury account. The nature of subaccounts is important because it indicates that, although these resources are available to the spending units, they belong to the single account and, therefore, should be used to reduce the Treasury’s net indebtedness, to the central bank;

  • for spending units located in places that are difficult to reach. These agencies could have accounts with the central bank, in the banking system or, in extreme cases, could keep cash resources. They would operate using the system of advances, whereby an advance would only be granted after proving that the previous advance was used. In general, these spending units are relatively small, and account for a very small portion of public expenditures.

c. Financial planning

Financial planning involves:

  • projecting inflows into the Treasury account(s), and resource requirements for the payment of government expenditures;

  • programming the domestic and external financing of projected excesses of expenditures over revenues;

  • in the event that projected financing requirements exceed the level consistent with other policy objectives (e.g., the growth of liquidity or the level of interest rates), taking (or recommending to the appropriate authorities) any necessary corrective steps. These may include steps to increase revenues and/or to limit expenditures.

The formulation of an initial financial plan for the budget year is an integral part of the budget preparation process, and in many countries such a plan is also presented to Parliament, along with the budget document and/or a monetary program. In addition to the overall program for the year, a more detailed quarterly (or monthly) financial plan is also generally prepared by the Treasury, as basis for the cash execution of the approved budget (see Section 2b below).

As, however, changes in economic and other factors (including policy changes) affect the actual evolution of revenues, expenditures and financing possibilities in the course of the year, the initial financial plan needs to be revised at periodic, relatively short intervals. Typically, Treasuries prepare rolling monthly forecasts of cash revenues, outlays and financing for several months ahead (preferably for the rest of the budget year).

The mechanisms of adjustment to changes in the conditions envisaged in the initial financial plan differ across countries and over time. In countries characterized by relative economic and institutional stability, and by well developed financial markets, unanticipated excesses of expenditures over revenues can frequently be accommodated through increased recourse to nonmonetary financing, without too sharp increases in interest rates. In these cases, the main adjustment variable in financial planning is the financing of the government deficit. In other cases, it may be possible to accommodate unexpected expenditure needs through increases in revenue even in the short run. In other cases, however, it is necessary to resort to limits on spending, if an excessive increase in liquidity or in interest rates is to be avoided. This is why, in countries characterized by unstable economic conditions or a rapidly changing institutional framework--such as the economies in transition--and by relatively undeveloped capital markets, Treasuries are frequently empowered to set limits on government expenditures below the approved budgetary allocation.

It should be stressed, however, that these limits should not be set only at the payment stage. Budgetary systems that only allow adjustment at that stage tend to hinder the efficient use of public funds, and often lead to an accumulation of payment arrears. It is highly advisable, therefore, that the Treasury be empowered to set, and adjust as necessary in the context of the rolling financial plans, limits on commitments as well as on bold face payments, consistent with the expected evolution of revenues and financing possibilities.

The advantages of reliable and timely financial planning are manyfold:

  • it facilitates the orderly execution of the government budget, and the efficient choice and implementation of any necessary cutbacks in expenditures, avoiding the accumulation of payment arrears;

  • it also facilitates the development of an orderly program of issues of government securities, and the absorption of these securities by the market, thereby moderating the cost of government financing;

  • a reliable forecast of the net recourse of the Treasury to the central bank financing facilitates the control of the monetary base and the money supply, particularly in the absence of flexible instruments for the control of bank liquidity;

  • in the event that government deposits are not remunerated (a practice in some countries, which is not supported in this paper) financial planning helps minimize the balances in those deposits; and

  • it also offers a useful framework for simulating and assessing the effects of proposed changes in revenue or expenditure policies.

Financial planning involves a complex network of information flows between various units responsible for the management of government revenues and expenditures. Some of these units are typically within the Treasury, some in other parts of the Ministry of Finance and some in other government agencies (notably spending ministries, the tax administration and the central bank). As a consequence, it is important that the Treasury include a unit responsible for coordinating the whole process of financial planning, drawing on these information flows as appropriate.

Once the system of financial planning has been set up, the process can be implemented as shown in Table 1. Appendix 2 describes in greater detail the development of this process using the government financial information system.

Table 1.

Financial Planning Sequence and Tasks

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d. Public debt management

Even under the most ideal conditions, small transitory budget deficits are recorded in many countries, and there is a need to finance them through borrowing operations. In economies in transition in particular, more substantial deficits may be difficult to avoid for some time. Furthermore, the coexistence of large government deficits with undeveloped markets for government securities inevitably leads to excessive government financing by the central bank. In these circumstances, it is necessary to develop rapidly forms of financing of the budget deficit which do not add to monetary creation, mainly issues of domestic government securities. These considerations point to the importance of public debt management. Other considerations support a leading role for the Treasury in this area.

First, public debt management is inextricably linked with budget management and, in particular, with government financial planning. In both the formulation and the execution of the budget, policy makers are continuously confronted with decisions at the margin among alternative ways to bridge a projected gap between revenues and expenditure needs: additional recourse to financing, increases in taxes (or other revenues), and expenditure cuts. These decisions are best taken in an integrated financial planning framework, which, as discussed above, is a core Treasury activity.

Second, it is clearly desirable that the agency responsible for the design of the government financing strategy should also be responsible for its day to day implementation. This again points to an essential role of the Treasury in public debt management.

In what follows, a few key principles of public debt management are highlighted. They are developed in greater detail in Appendix 3.

First, decisions on debt management should aim in principle at obtaining the most favorable borrowing conditions. Normally, this would be the only aim of any borrower other than the government. However, the government cannot disregard other aspects of its borrowing activity. It is most likely that the government will be the largest single borrower in the country, so that its borrowing activity is bound to have significant repercussions on the structure and performance of the financial system, as well as on the evolution of interest rates and the conduct of monetary policy by the central bank. The government should not ignore such side effects. Thus, occasionally, its borrowing decisions will have to depart from those which a private borrower, motivated only by cost considerations, would adopt. For the same reason, the government should not assume that it is up to the central bank to take steps to offset any undesirable impact of government borrowing. On the contrary, as detailed in Section 5 below, close coordination of government borrowing decisions with the monetary authority is essential.

Second, it must be recognized that a government will not be able to obtain significant market financing without an appropriate development of the domestic financial system and capital market. Therefore, the Treasury should take an active and leading role, again in coordination with the central bank, in designing and developing the institutional reforms of the financial system and the capital market necessary to broaden and strengthen that market.

Such institutional reforms may take some time to be designed and implemented, and to start yielding the expected results, while the need to borrow may be pressing. To strike a balance between covering the short-term borrowing needs, and fostering the reforms intended to facilitate future borrowing under more adequate conditions may be one of the most difficult and important tasks to be faced by the Treasuries of economies in transition.

Government debt management entails a wide range of special administrative functions to be performed by the Treasury (accounting, planning and disbursement of reimbursements, and interest payments, etc.). In some respects, these functions are analogous to other Treasury activities, or functions performed by some spending agencies. However, it should be noted that, while in other areas of the government budget the Treasury’s main role is to control decisions taken or executed by other government departments or agencies, in the area of debt management the Treasury is the main decision maker.

The Treasury functions concerning debt management should be shaped by a general principle, which should be adequately supported by the relevant legislation: the need for a unified and all-encompassing approach to them. This unified approach should cover several facets:

  • the choice among different sources of financing (e.g., central bank credits, foreign credits, government securities, etc.), and, more specifically, among individual instruments, maturities, cost structure, etc. No source of finance should be left out of the scope of the Treasury activities;

  • the inclusion in the debt to be managed and controlled by the Treasury of contingent liabilities and credits assumed from third parties. Contingent liabilities, that is, guarantees granted by government to third party liabilities, do not imply any short-run disbursement. As a result, there is a risk that the government may be too generous in granting them, only to find, at a later stage, that they entail substantial costs. Many provisions applicable to government debt should, therefore, be applicable to contingent liabilities as well. As regards the assumption by government of third party obligations, it should be reflected in the budget and be subject to the same limitations as apply to the government’s own debt. This is so because such operations involve an implicit transfer of government funds to the third party and an increase in government debt, with an obvious impact on future debt service obligations.

In economies in transition, these two categories of operations may become particularly relevant, and a close control on them should be one of the important Treasury functions in the area of debt management. Since a formal ex-post control is likely to be insufficient, this may include, if necessary, an active Treasury interest in the macroeconomic policies that are at the source of the increase in such categories of government liabilities.

  • the concentration of all government borrowing in a single borrowing agency, which, in line with the practice of most countries, should be the Ministry of Finance and, within it, the Treasury. This implies that no other Ministry should receive loans, neither from third parties, nor from the Ministry of Finance. Any proposed granting of government guarantees to third parties should also be endorsed by the Ministry of Finance. There are strong reasons to also prohibit central autonomous agencies and extra-budgetary funds from borrowing from the banking system or issuing securities. These agencies should be fully funded through their own resources or through budgetary transfers or loans. Centralization of borrowing in the Treasury will promote financial discipline in government operations, contribute to the development of the government debt market (because it will increase the relative importance of standardized instruments) and, in all likelihood, will reduce the cost of borrowing (because of the higher credit rating of the government and possible economies of scale). It should be noted that this centralization of borrowing will be the logical counterpart to the centralization of the cash resources of any government agencies in the Treasury single account, or at least, as separate deposits kept with the central bank;

  • finally, in conducting debt management, the Treasury must keep a multi-year perspective. This is so because the level, composition and maturity structure of the debt affect importantly future budgets. The Treasury must, in particular, ensure that the future profile of the debt service is as smooth as possible, and does not excessively constrain future budgetary policies. This underscores the need for a reliable and timely system of recording debt obligations (including contingent ones) and projecting their future service requirements.

e. Control of the government’s financial assets

Government financial assets generally consist of shares in public enterprises, mixed economy companies, and private enterprises in which the government is a minority shareholder. Also included in this category are loans extended by the government to public or private enterprises, including assumption of debts, payment of guarantees not honored by debtors, etc.

In the first case, i.e. shareholdings, the Treasury usually keeps a complete and updated register of these shares, keeps track of developments in each enterprise’s business, monitors the dividend payments, participates in general meetings of shareholders, and deals with the financial aspects of privatization. This last area would require lengthy discussion of the aspects involved, which is beyond the scope of this paper.

In the case of loans extended by the Government, the Treasury usually keeps a record of each loan, tracks its progress, calculates and collects financial charges, makes principal payments, negotiates refinancing, etc.

f. Control of international aid, including aid in kind

Foreign grants must be recorded and controlled by the government regardless of the form they take, be they in cash or in kind. They may also need to be entered into the budget. An effective control of grants must have an uniform and complete coverage, and requires that a single government body be responsible for monitoring the grants and for their accounting. In some countries, there is a specific agency for this purpose; however, it may be desirable to give this responsibility to the Treasury.

2. Budget execution

As mentioned earlier, in some countries the Treasury may assume the responsibility for budget execution at the central level, while in other countries these activities are assigned to other government departments, for example Budget, Government Accounting, or Audit/Comptroller’s Office. When this responsibility is assigned to the Treasury, it may include, in addition to the cash management activities discussed in the preceding chapter, activities, on both the revenue and expenditure sides, involving control of execution at all stages of the expenditure process, i.e., commitment, verification, and payment. Specifically, these stages can be summarized as follows:

  • Commitment stage: the commitment constitutes the destination (and, as a consequence, the setting aside) of part of the budget allocations for a specific expenditure, in accordance with the approved budget. Generally, it takes a form of contracts with suppliers of goods and services. It is essential to record the commitment stage for two main reasons: to control the actual availability of budgetary resources for assuming new obligations, and to monitor the newly created obligations and their impact on the projected cash outflows from the single account.

  • Verification stage: in the verification stage, a spending unit verifies and certifies that all requirements for payment of a particular expenditure have been meet (e.g. the good has been delivered or the service performed as contracted, an interest payment or loan redemption is due). Registering this step enables the Treasury to track liabilities incurred but as yet unpaid, and to know immediate resource needs for payment.

  • Payment stage: this is the stage at which the obligation incurred above is paid, thereby reducing the government’s liabilities.

Treasury operations in the control of budget execution may take different forms. In some cases, the Treasury sets and controls overall financial limits for the commitment and payment stages. In other cases, the Treasury reviews and approves each individual expenditure to be committed and/or paid. Finally, there are cases in which the Treasury simply disburses the payment orders issued by the spending units, without participating in the previous stages. As mentioned earlier, the appropriate modus operandi in this respect needs to reflect the economic conditions and historical, cultural, and political factors specific to each country.

The use of the government financial information systems for Treasury operations in the budget execution is discussed in some detail in Appendix 2.

3. Accounting

Government accounting is another major function for which responsibility is attributed to different government entities in different countries. In some cases, it is given to a section of the Budget Department, in others to the Treasury, yet in others to a separate department, linked neither to the Budget nor to the Treasury. In this latter case, the accounting office may also be responsible for budget execution functions, including ex ante review of commitments and payments.

In many countries, government accounting is viewed as just a formal reporting tool, rather than as an instrument of government financial management. In these countries, quite often, statements based on government accounts have considerable lags, sometimes of up to two years. By contrast, countries in which accounting is linked to another major function, such as budget preparation or execution, generally use it more effectively. It is therefore important to ensure that accounting does not represent an end in itself, i.e. that it not be established as the final objective of a series of administrative procedures.

An important feature of the government financial information system proposed in this document is the fact that every spending units’ operation is recorded in the system at the time when it is executed. This provides a continuously updated picture of government operations, with clear advantages for budget management. There are important advantages in the use of accounting as the basis for this recording:

  • the accounting system, if based on double entry bookkeeping, ensures intrinsic control mechanisms;

  • it avoids duplication of records, which would occur if the accounting system was separate from the GFIS;

The importance of accounting for the government financial information system points to some advantages in having the Treasury in charge of government accounting, including the definition of its rules and processes.

Since accounting can be said to represent the “backbone” of the information system, a proper definition and implementation of the government accounting framework and methods is essential to the effective working of the system. A detailed discussion of the desirable features of government accounting systems is beyond the scope of this report. Nevertheless, a few main issues should be emphasized here.

  • First and foremost, the system should display the characteristic of universality. Specifically, this means that any transaction involving payments or receipts of any nature, whether budgetary or extrabudgetary, effected by any government body, agency, department, or unit, on its own account or on account of third parties, must be the subject of an accounting operation. Any transaction which alters the present or future value of government assets or obligations must also be recorded in the accounts.

  • Another fundamental principle is that of double-entry bookkeeping, which offers clear advantages over other systems. One of these advantages is that it ensures intrinsic control mechanisms derived precisely from the fact that each transaction is recorded in two separate accounts simultaneously.

  • Great care needs to be taken in the preparation of the government General Accounting Plan. This plan must be structured so as to ensure that for each and every operation there is an appropriate account (or subaccount). The lack of an account for recording certain operations (e.g., the setting of limits on commitments or payments) would entail the unavailability of the corresponding information, thus hindering the monitoring and control of the operations.

  • Also important is the proper definition of accounting processes, i.e., the set of records used for the various stages of a given operation. For example, the purchase of a given equipment item involves various stages; the applicable accounting scheme should ensure that each stage is recorded in the appropriate account of the Accounting Plan. As with the previous item, an inadequate definition of accounting processes may result in the lack of information needed for monitoring and controlling government operations.

  • The primary data pertaining to any given unit--i.e., the data on the basis of which all accounting data is generated--should be registered into the system only once. This does not mean that there should be only one data base, but rather that data for a given unit should not be registered separately in each data base, in order to avoid inconsistencies or the need for complex dual updating routines. Nor does it mean that there should not be any backup files, as these are essential to any data recording system, and to computerized systems in particular.

  • The system must be designed to provide for the automatic registering of operations as they occur, so as to avoid duplication of records in the operational and accounting systems, and to ensure consistency of the data utilized by system users. This automaticity is achieved by drawing up a comprehensive table covering all types of transactions effected by the users of the system. A code is assigned in this table to each transaction, as well as to the corresponding accounting process, which the system will automatically follow once the code is activated. Thus, the accounting of the transaction, though following directly from an action by the operational agencies, does not require them to take any further action or have any technical knowledge of accounting, as it is performed automatically by the system.

4. Auditing and evaluation

From the experience of selected OECD countries 1/ three main trends have emerged in recent years in the area of public auditing and evaluation: (1) the scope of audit and evaluation is being widened; (2) audit and evaluation have increasingly become an integral part of the budget process; and (3) the development of audit and evaluation can be seen as part of a wider movement of budget system reform.

Auditing and control are increasingly going beyond the traditional role of compliance and financial auditing, taking a more comprehensive view of the economic implications of the way in which resources have been used. Specifically, audit is increasingly aimed at assessing the cost-effectiveness and efficiency of the use of public funds. The objective is to contribute “to overall expenditure management by helping to ensure that, within a tightly controlled total, public resources are allocated efficiently.”

Auditing activities are usually divided into internal and external controls. Internal control is exercised by units within the structure of the authority subject to control. By definition, external control is performed by a unit outside the authority subject to control. The latter is generally performed by an entity linked to the legislature, as an auxiliary agency of this branch of power.

There is no unique model for the placement of internal control functions within the government structure. There are countries in which they are attributed to a specific unit. In others, they are given to a subunit within the Budget or Accounting Department of the Ministry of Finance. There are also cases in which the Treasury carries out this function. This is more frequent in countries where the Treasury is in charge of a broad range of functions in the budget execution and accounting. However, it should be stressed that it is not necessary for the Treasury, in performing its main functions in the area of financial management and budget execution, to be in charge of control and auditing. Indeed, the principle of function separation may advise against placing accounting and auditing under the same unit.

III. Basic Organization and Structure of the Treasury

In this section and the subsequent ones, it is assumed that the Treasury is responsible for most of the functions outlined in Section II above. 1/ The main reason for this approach is the fact that the countries that have only recently started to set up a Treasury are, for the most part, transition economies, characterized by a difficult economic situation, fraught with many uncertainties. These conditions call for a system of government financial management that allows a quick and effective response of budgetary policy to changes in the economic environment, so as to minimize macroeconomic instability. To assure this speed in adjustment, and the necessary coordination between budgetary and financial operations, a high degree of institutional concentration of these core functions is recommended. Such concentration of functions allows the system to be more easily computerized, which in turn speeds up the flow of information. It is this access to timely information on budget execution and financial flows which allows the Treasury system to increase budgetary control, to plan and effect rapid adjustments in the execution of the budget, as required by changing economic circumstances, and to be more efficient in the cash management of government funds.

Particularly in relatively large countries, it is advisable to set up the Treasury with a two-tier structure: a central one, including a number of departments and/or divisions responsible for the main Treasury functions; and a network of regional offices, responsible for the operations of the Treasury in the respective regions. For the effective functioning of the Treasury, it is crucial that the regional offices be entirely subordinate to the central Treasury, without any formal links to the local administrations. Cooperation with the latter should be viewed as a service to them, rather than a joint subordination.

It should be stressed that there is no unique model for the organizational structure of the Treasury. The number and specific functions of its divisions and offices has to be determined on a case-by-case basis, in the light of the specific needs of each country, and each one is likely to evolve over time as the Treasury develops. For illustrative purposes, Chart 1 presents one possible configuration of the Treasury’s central organization, based on the key functions envisaged for the Treasury.

Chart 1.
Chart 1.

A Possible Organization of Treasury Functions

Citation: IMF Working Papers 1995, 016; 10.5089/9781451843347.001.A001

Regional Treasury offices would perform the following functions:

(1) process through the government financial information system the expenditures of spending units not directly linked to the system;

(2) at the end of each business day, authorize the regional branch of the central bank to carry out the payments registered into the system by the spending units directly linked to it;

(3) ensure the timely and accurate transfer to the government account of revenues collected by other agencies (e.g., taxes collected by the commercial banks), and register these operations into the government financial information system; and

(4) perform control and auditing functions with respect to the spending units in its region.

IV. A Government Financial Information System

In any country, the Ministry of Finance needs to have a complete, reliable, and timely flow of information on budgetary and extrabudgetary operations of the central government and its agencies, and on the budget execution and other operations of the regional and local governments, so as to be able to adjust the execution of the budget to developments in the economy in an efficient manner.

The fulfillment of these needs is facilitated by the establishment of modern government financial information systems. Such systems can be designed and implemented in a number of ways. This paper provides a broad outline of a computerized, integrated system for the execution, reporting, accounting and overall financial management of government financial operations, and advocates that, in view of its institutional mandate within a typical Ministry of Finance, the Treasury be put in charge of the operation of such a system.

A key characteristic of this system is that, once it is set up, spending units can only execute their operations through the system. In turn, this provides the authorities with timely and accurate information on budget execution and on extrabudgetary operations. This information is essential for effective planning of government operations, including the setting of spending limits. This system can also be designed to process the operations of the regional and local governments (see Section 5 below).

The relation of benefits to costs of the proposed system recommends its early implementation, as soon as a Treasury is set up. Some of its benefits--such as the availability of complete and timely information on government operations--cannot be measured precisely, but clearly are likely to be substantial. One benefit that could be quantified is the financial savings for the government resulting from the elimination of idle balances held by various spending units, if they keep their accounts in the banking system.

Appendix 2 presents the main features of the proposed system, which can be summarized as follows:

(1) The system should be designed to process all operations-- whether budgetary or extrabudgetary, and include any operations which involve a change in assets and liabilities of the central government 1/--of spending units directly linked with it, as well as certain operations of other spending units which would be indirectly linked to it. If there is a large number of agencies which receive and spend government funds, decisions about the form of linkage of the spending units would need to be taken in light of: a) their characteristics (such as geographic location, level of expenditures and degree of reliance on budget financing), for which an inventory is needed; and b) technical and cost considerations, regarding, in particular, the state of telecommunications;

(2) The spending units directly linked to the system would have to register in it the successive stages of expenditure implementation, from commitment to payment. The system would automatically check the conformity of each operation with the relevant budget allocation, and the compliance with the cash limits that would be set periodically for each spending unit. Only upon this verification, would the system permit the issuance of the corresponding payment order. By ensuring the conformity of actual expenditures by individual spending units with their budgetary allocations and spending limits, the system would facilitate the control by the Treasury over the execution of the budget.

(3) As explained before, the government would have only one single account in the central bank, and the accounts with the banking system of ministries and spending agencies would be replaced by ledger-type accounts in the system, and their idle balances would be used to reduce the net government debt to the central bank.

(4) All operations would be accounted for within the system according to standardized accounting rules. As explained in Section 2 above, the system would be programmed to automatically perform the accounting operations of all units directly linked to it. This would provide the Treasury, and any other entity having full (or partial) access to the information generated by the system, a continuously updated picture of the execution of all (or the relevant part of) government financial operations. The information generated by the system would be utilized by the Treasury for the preparation of periodic reports on the execution of the budget, and for the official annual accounts of this execution.

(5) As discussed further in Appendix 2, the proposed system would significantly facilitate the financial planning of government operations by the Treasury.

V. Relations of the Treasury with Other Public Entities

Clearly, the central government requires rapid and accurate information on the operations of those parts of the public sector which it controls. However, it also requires similar information on the payments and revenues of other public entities, including those pertaining to other levels of government, in order to be able to anticipate any implications of developments in those entities for the central budget, and in order to manage effectively the overall budgetary policy for the country. This monitoring should include:

  • the extrabudgetary funds

  • the subnational levels of government

  • the public enterprises of all government levels

This monitoring can be performed in two different ways: by receiving periodic reports from those entities, or by incorporating them into the government financial information system. In the first case, it is necessary to develop and implement a set of rules and forms based on standardized accounting practices, so as to permit an accurate consolidation of the information received. The effectiveness of this system depends upon the willingness of each entity to send the information, its accuracy, and the resources available in the Treasury to process them. Therefore, this system is time-consuming and subject to delays and inconsistencies.

By contrast, the incorporation of these entities into the government financial information system entails considerable benefits, without necessary reduction in the legal autonomy of each institution. First, information flows about developments in the finances of these entities become more readily available both to them and to the Ministry of Finance. Second, the standardization of accounting practices across all levels of government, the implementation of similar expenditure authorization and control processes, as well as similar methods of financial planning, all tend to facilitate the financial management of the entire public sector. It should be also noted that this incorporation need not imply any loss of individual accounting information about the different institutions and levels of government involved, since their accounts can be maintained separately in the system.

1. Extrabudgetary funds and other autonomous public agencies

Quite often, different types of decentralized entities are set up to perform typical government functions. This strategy aims at: (1) giving these entities a greater degree of managerial autonomy which, theoretically, would allow them to better fulfil the purpose for which they were established; and (2) earmarking public revenues to the operations carried out by them. These entities may have their own legal personality, or may just constitute accounting funds, generally known as extrabudgetary funds. Frequently, these funds are part of a social security system, such as pension, employment, health funds, etc.

As these funds perform typical government operations, and these generally involve considerable sums--often comparable to the general government budget--it is crucial for the economic authorities to have complete and up-to-date information on their financial performance. The lack of such information can significantly jeopardize the effectiveness of the central government’s fiscal adjustment efforts.

For these reasons, the general procedures for budget execution should also apply to the operations of extrabudgetary funds, and their operations should be processed through the government financial information system.

However, if it were considered necessary to maintain a degree of independence for some of the extrabudgetary funds, it could be envisaged that the financial planning and determination of monthly spending limits would be carried out by these agencies themselves. If more autonomy is to be given, they can also keep their funds in a separate financial account in the central bank.

2. Subnational levels of government

The relations of the Treasury with the subnational levels of government depend basically on the institutional arrangements for intergovernmental fiscal relations in each country, including, in particular, the degree of autonomy granted to them.

In some countries, expenditures by subnational governments account for a large proportion of overall general government expenditure. Therefore, even when it is not legally or politically possible to require these entities to integrate themselves in the government financial information system, it is highly desirable to encourage such integration on a voluntary basis.

The government financial information system can be designed to provide variable levels of autonomy to any entity linked to it, without losing one of its main advantage, which is the provision of timely and reliable information. Therefore, as for the extrabudgetary funds, the subnational levels of government could take charge of their own financial programming, set their spending limits, and maintain their financial balances separate from the central government single account, while having their operations processed by the government financial information system.

3. Public enterprises

For the purpose of this paper, public enterprises must be divided into three groups. The first would include those enterprises which, although constituted as companies, perform typical government functions. In this case, the procedures discussed above for extrabudgetary funds would be applied.

The second and third groups include entities engaged in commercial or industrial activities. In this case, the relations of these entities with the Treasury should take into account primarily their degree of dependence on government contributions, in both absolute and relative terms. The second group covers enterprises that rely heavily on these contributions. From the standpoint of the government finances, it is important that the Treasury has close and effective control over the finances of these enterprises through their linkage to the government financial information system.

The third group includes the enterprises which are marginally, or not at all, dependent on transfers from the central government. In this case, the Treasury’s relationship with these enterprises would typically be that of a controlling shareholder, including, inter alia, examination of the enterprises’ financial statements, monitoring of their economic and financial situation, participation in their Boards of Directors, and attendance at their general shareholders’ assembly.

4. The Central Bank

The Treasury functions, as described earlier, would be very difficult, even impossible, to perform without the cooperation of the Central Bank. This cooperation (summarized under the notion that the Central Bank should be the “fiscal agent” of the Treasury) includes a vast range of functions, hinging on two factors: (a) the critical position of the Central Bank in relation to the payments system; and (b) the responsibilities of the Central Bank concerning monetary policy.

In a modern economy, payments take place largely through transfers to and from bank deposits. These imply ultimately transfers among financial institutions of their deposits with the Central Bank. As the Treasury is likely to receive payments from, and make payments to, a very wide array of economic agents in the country, holding the single Treasury account at the core of the payments system is the best means to minimize the number and volume of transfers of funds, and the attendant gross flows of information.

As a result, taxes are collected through the banking system, which in turn transfers the proceeds to the single Treasury account with the Central Bank. Similarly, budgetary payments are carried out by issuing orders to the Central Bank to transfer global amounts of funds to specific financial institutions, which in turn, are requested to pay to individual deposit holders. In the case of financial transactions, the payment functions of the Central Bank and the financial institutions are even more direct, as banks themselves are most likely to be the holders of government debt, or to act as depositories for its final holders.

The cashier functions of the Central Bank, important as they are, come to a second place when the implications of the government budget for monetary policy are taken into account. The level and sign of the budget balance affect macroeconomic performance, and consequently the design and implementation of monetary policy. How the imbalances in the government budget are financed is even more significant for monetary policy.

The most direct implications of government financing for monetary policy derive, of course, from changes in the net financing provided to the government by the Central Bank. As detailed in Appendix 3, central bank lending to the government should be either prohibited or subject to very strict and objectively defined limits. However, even in the ideal case of no lending to the government, there are likely to be significant changes in the net financial position of the government with the Central Bank. This is the case since government deposits with the Bank are bound to show important short-run fluctuations. Such a result is largely inevitable. The means to avoid it (holding deposits with commercial banks, delaying payments, or modifying the tax calendar) may have undesirable side effects. This is the first and main rationale for the coordinated planning of government operations that will be detailed later on.

Government financing in foreign capital markets is also directly relevant for monetary policy, due to its implications for the evolution of foreign exchange reserves (held by the Central Bank, and a counterpart to the monetary base) and the exchange rate. Whatever the relative responsibilities of the government and the Central Bank concerning the external aspects of monetary policy, decisions to borrow abroad should not be taken by the government ignoring their implications for monetary policy, and without close consultation and coordination with the Central Bank.

A preferable source of financing budget deficits are issues of government securities in the domestic capital market. According to international practice, this is another important area of functions of the Central Bank as fiscal agent of the Treasury. Following rules agreed with the Treasury and under its guidance, the Central Bank should:

1. carry out the actual issuing of government securities through auctions, which should be the only, or at least the main, issuing technique;

2. perform the cashier functions in relation to the disbursement and repayment of government securities, as well as to interest payments;

3. set up the depository where securities would be held in book-entry form (securities accounts), and the accompanying regulations. In fact, the depository for government debt can, in principle, be kept by the central bank itself, by an independent agency, or by commercial banks. However, since transactions among institutions holding deposits with the central bank should be settled through such deposits, it would be advisable to use, to the largest extent technically feasible, the Central Bank itself as the central depository for government debt accounts (with other selected financial institutions acting as sub-depositories);

4. facilitate the settlement of transactions in the secondary market for government debt. International experience shows that developed markets for government debt are over-the-counter markets, with stock exchanges playing a very minor role. The Central Bank, keeping both the securities accounts and the deposit balances of the main market players, would play a critical function in the settlement of such transactions with a minimum delay after trading, and on a delivery versus payments basis;

5. supervise the secondary market. Whatever the final authority responsible for the supervision of capital markets, the Central Bank should contribute to the day-to-day supervision of the market for government securities, given its close proximity to market developments and to its major institutional players;

6. collect and diffuse detailed and timely information on the volume of transactions in the secondary market for government debt, its composition (by holding agents, types of securities, kind of transactions, etc.), and the implicit market yields. This centralized information system would be an indispensable counterweight to the decentralized character of the over-the-counter market for government securities;

7. advise the government on any relevant aspect of the former activities: the institutional setup of the market, the type of securities to issue, the actual program of securities issues, etc.

Finally, the relationship between the Treasury and the Central Bank has a special economic dimension. As owner of the Bank, the government is entitled to the usually substantial profits earned by the latter, which should accrue to the budget. However, some important principles should be respected. First, clear accounting rules should lead to an unambiguous definition of central bank profits, consistent over time. Second, clear standing rules should dictate the distribution of profits between the central bank’s reserve funds (to preserve the real value of capital, to cover prospective losses, and smooth out year-to-year fluctuations of profits) and the budget. Third, the government should pay a market interest rate on any loans received from the Central Bank, and should receive a similar rate on its deposits (the Treasury single account, plus other government agencies’ deposits, if any). Fourth, if a remuneration for the services of the Central Bank to the Treasury appears desirable, it should be paid through flat service charges, rather than through a reduction of the remuneration of government deposits.

Given the various interactions between the Treasury and the Central Bank, there is a need for active cooperation, to ensure appropriate solutions to technical problems, and above all the mutual compatibility of monetary and fiscal policy targets. Lack of adequate communication on these issues tends to lead to difficult institutional disagreements and political problems. Policy coordination should not be conceived as something to be done once or twice a year, but as a continuous process subject to regular and frequent updating. This calls for appropriate institutional arrangements.

The importance of financial planning in Treasury management has already been stressed above. Short-, medium-, and long-term financial planning of government transactions are equally important for the Central Bank in the discharge of its monetary policy responsibilities. The Treasury should be prepared to share its information and forecasts with the Central Bank, and should also accept, even welcome the elaboration by the Central Bank of its own forecasts on government accounts. These, of course, should also be shared and discussed with the Treasury. In turn, the Central Bank should communicate to the Ministry of Finance any relevant information concerning its monetary policy targets, and any planned action which might have repercussions on the availability and cost of government financing.

The sharing of information would naturally induce the Central Bank to provide advice to the Treasury on matters of mutual concern. The advisory role of the Central Bank is not only desirable, but should be encouraged to become a formal one, even if occasionally the price of unwanted criticism has to be paid. Such advice would not exclude, of course, that final decisions on debt management should be reserved, within any applicable legal constraints, for the Ministry of Finance.

To facilitate coordination, it is desirable to create a high level policy committee between the Ministry of Finance and the Central bank. Such a single body should cover all aspects of the relations between the two institutions, though its main function would be to consider government debt management in the light of monetary and other policy objectives. While the role of this committee would be an advisory one, with the Ministry of Finance retaining ultimate responsibility for decisions in this area, it would be instrumental in ensuring a better coordination of monetary and debt management policies. This body should be supported by appropriate technical stuff, and might be complemented with permanent or temporary sub-committees dealing with specific issues.