This Technical Assistance Report discusses measures to strengthen cash management in Uganda. It recommends establishing a high-level cash management committee to provide the necessary authority to the Cash Policy Department (CPD) in maintaining its relationships, in constantly improving the cash flow forecasts, and in operating active cash management transactions. In the medium term, when cash flow forecasting has gained sufficient accuracy, the CPD must prepare for active cash management operations which will consist of short-term borrowing and investment. An appropriate cash buffer level also needs to be calculated which will define the necessary money market transactions to smooth government cash operations.

Abstract

This Technical Assistance Report discusses measures to strengthen cash management in Uganda. It recommends establishing a high-level cash management committee to provide the necessary authority to the Cash Policy Department (CPD) in maintaining its relationships, in constantly improving the cash flow forecasts, and in operating active cash management transactions. In the medium term, when cash flow forecasting has gained sufficient accuracy, the CPD must prepare for active cash management operations which will consist of short-term borrowing and investment. An appropriate cash buffer level also needs to be calculated which will define the necessary money market transactions to smooth government cash operations.

I. Introduction

1. At the request from the Ministry of Finance, Planning, and Economic Development (MoFPED), East AFRITAC (AFE) fielded a technical assistance (TA) mission to Kampala during June 20–July 1, 2016. The mission comprised Amitabh Tripathi (AFE Public Financial Management Advisor) and John Gardner (Expert).1 It provided practical assistance to the MoFPED on strengthening cash management. Box 1 summarizes the mission’s findings and recommendations, whilst the remainder of this aide memoire provides more detailed analysis.

Uganda: Summary of Findings and Recommendations

The institutional structure for cash and debt management has been officially approved. This has enabled the formal establishment of a Cash Policy Department (CPD) with a suitable level of staff to be recruited in FY2016–17. With significant delay expected to Cabinet approval of the cash management policy document, it is important to define and promulgate the roles, responsibilities and working relationships of the CPD and MoFPED is in the process of developing Guidelines for this purpose. The CPD has created a cash flow forecasting spreadsheet template and has been using it to get an understanding of the cash position of government.

Based on a review of the progress, the following key recommendations are made to further strengthen the cash management function:

  • Finalize and issue the Guidelines with the approval of PS/ST as soon as possible.

  • Start implementing the Action Plan for strengthening cash management (Appendix I).

  • Establish a high-level cash management committee to provide the necessary authority to the CPD in maintaining its relationships, in constantly improving the cash flow forecasts, and in operating active cash management transactions.

  • Improve cash flow forecasting by capturing actual outturn data alongside the forecast data in order to analyze forecast errors; making sure that all significant cash flows are covered and consistent with IFMS scope; and the timeframe conforms with the existing quarterly cash limits and the AGO weekly cash movements.

  • Formulate and start implementing a capacity building program for MDAs in order to explain the objectives of cash management and the benefits which good forecasting can bring.

  • In the medium term, when cash flow forecasting has gained sufficient accuracy, the CPD must prepare for active cash management operations which will consist of short-term borrowing and investment. An appropriate cash buffer level needs to be calculated which will define the necessary money market transactions to smooth government cash operations.

  • Negotiate with the BoU to enable market-based term deposit facilities to be utilized and coordinate with the Debt Policy and Issuance Department on borrowing needs.

A. Background

2. This mission was one of a series planned to assist the MoFPED in improving the management of its cash resources. It follows on, most recently, from an AFE mission in June 2015 which made recommendations for: (i) extending the Treasury Single Account (TSA) arrangement by including selected donor funded and local government accounts; (ii) concluding a memorandum of understanding between MoFPED and Bank of Uganda (BoU); and (iii) finalizing and implementing the Cash Management Policy and Procedures Manual to progressively improve the reliability of cash flow forecasts.2

3. Some progress has been recorded since June 2015. In particular, the Cabinet has approved the MoFPED restructuring proposal including the establishment of the Debt and Cash Policy Directorate. The Cash Policy Department (CPD) has developed draft guidelines for cash management operations including defining the role and responsibilities of different stakeholders and has conducted benchmarking trips to South Africa. Cash flow forecasting templates have been developed for capturing forecast and actual data for revenues, expenditures and financing. The CPD has identified sources of forecast and actual data and started using these templates to get an understanding of the consolidated cash position of government. The MoFPED considers it an opportune time to assess progress, identify any emerging issues and review its plans. Accordingly, it has requested AFE to provide guidance in these areas. The mission was considered timely as its findings will inform the process for operationalizing the CPD.

B. Mission Methodology

4. The scope of the mission was confirmed during an initial meeting with the Director, Debt and Cash Policy. It was agreed that the mission would review the institutional arrangements and plans for developing the cash management function; advise on the processes and templates for constructing and managing a comprehensive cash plan; and provide practical training to the staff of the CPD. The mission assessed the progress and plans and identified emerging issues through document review and discussions with different stakeholders.

5. The mission acknowledges the cooperation and assistance provided by and the discussions held with the senior officials of the MoFPED. The mission benefitted from its meetings with Isaac Mpoza, Director, Debt and Cash Policy; Lawrence Semakula, Accountant General; Lawrence Kiiza, Director of Economic Affairs; and members of staff from these Directorates. It also held useful discussions with the Director and other officials from the Banking Operations Department of the BoU. The information shared during these meetings enhanced the mission’s understanding of the progress achieved and the outstanding issues and thus informed its conclusions. The findings and recommendations in the report were validated during extensive discussions with the officials of the Debt and Cash Policy Directorate and presented in a wrap-up workshop for stakeholders, chaired by Mr. Keith Muhakanizi, Permanent Secretary/Secretary to the Treasury (PS/ST). The mission is grateful to David Wamai, Assistant Commissioner CPD, for coordinating its work.

C. Mission Outputs

6. The output from the mission comprised: practical guidance on development of the cash management guidelines; discussion and training on cash forecasting templates; a wrap-up workshop with senior officials of the MoFPED; and this aide memoire, which following this introductory section is structured as follows:

  • Section II – reviews the current regulatory framework and institutional arrangements for cash management.

  • Section III – considers the draft cash management guidelines and makes recommendations for strengthening the institutional arrangements

  • Section IV – reviews the cash forecasting template designs and suggests measures for improving cash forecasting and management

  • Appendix I: Action Plan – Strengthening Cash Management

  • Appendix II: Draft Cash Management Guidelines

  • Appendix III: Sample Terms of Reference for Cash Management Committee

  • Appendix IV: Institutional Roles in the Cash Management Process

II. Regulatory Framework and Institutional Arrangement

7. The institutional structure for cash and debt management has been officially approved. The Cabinet, as part of the restructuring of the MoFPED, has approved the establishment and structure of the Directorate of Debt and Cash Policy.3 The approved structure is substantial and, for the CPD, exceeds the maximum that would be necessary for the department when it is fully operational.4 The approved positions are to be filled in a phased manner and the budget for FY 2016/17 has provisions for the recruitment of fourteen positions including a Commissioner and Assistant Commissioner. The approval also requires that the recruitment priority is accorded to these positions by the Ministry of Public Service.

8. The PFM Act (2015) provides a reasonable basis for cash management, oversight and monitoring of banking arrangements for the GoU. Section 33 of the Act requires the PS-ST to prescribe the framework within which votes shall conduct their banking and cash management. It also requires the votes to submit their cash flow plans to MoFPED; PS-ST to issue the annual cash flow plan for GoU that shall form the basis for quarterly spending limits for MDAs; and has provisions for in-year revisions to the cash flow plan. The Regulations to the PFM Act have not yet been issued but the latest version that was shared with the mission does not provide adequate guidance to the manner in which the cash management function is expected to be operationalized.5 Additional subordinate-level legal documentation is required to define the roles and responsibilities comprising government cash management.6

9. The cross-cutting nature of the cash management function requires clear articulation and understanding of the institutional roles and relationships by stakeholders. It requires timely sharing and analysis of information and coordination between the different stakeholders within MoFPED, the BoU, the URA, and MDAs. In Uganda, it becomes more critical as the new CPD will have to establish new relationships with these stakeholders and play a coordinating role.

10. Considering that the PFM Act preceded the establishment of the Debt and Cash Policy Directorate it is important to formalize the cash management mandate at the earliest. The formal cash management policy document is being considered by the cabinet but this process is expected to take a long time before formal approval. Therefore, the CPD is in the process of developing operational guidelines for this purpose.7 The PS-ST, in terms of Section 33 of the PFM, is authorized to approve these guidelines which should provide a sound basis for the operations of the CPD.8 At this early stage, it is important that the guidelines are finalized and approved at the earliest so that the cash management function is precisely defined and clearly understood.

11. The main functions of the CPD would include the following:

  • Developing effective cash management policies and procedures including legal and administrative processes for short-term borrowing and investment activities.

  • Developing cash flow forecasting capability in the Directorate and amongst MDAs.

  • Developing capacity to perform active short-term cash management market operations.

  • Coordinating with development and expansion of the TSA system and monitoring the scope of longer-term cash flow forecasting profiles.

The guidelines should specify the technical aspects of the functions of the department and document the core work processes, identify the sources of information and prescribe periodicity of information sharing by stakeholders with CPD. Section III of this aide memoire provides detailed guidance on the proposed cash management guidelines.

12. The guidelines should also clarify the institutional roles and relationships of the CPD with other MoFPED directorates and other stakeholders. Under current arrangements, the Directorate of Economic Affairs (DEA) is responsible for preparing the monthly revenue forecasts and global expenditure forecasts; the Budget Directorate consolidates the cash plans submitted by the MDAs and issues quarterly spending limits as decided by the Cash Flow Committee, based on the revenue projections and quarterly cash flow plans received from the MDAs; and the Accountant General’s Office (AGO) issues warrants against which payments are processed. The AGO, on the basis of expected short-term expenditure commitments, draws down weekly from the Uganda Consolidated Fund (UCF) to the TSA holding account in BoU to enable processing of payments. Some of these functions would, in future, need to be performed by the CPD and there is a need to review, realign and define some of these roles and responsibilities. Further to the approved guidelines, MoFPED Circulars and Instructions will be necessary to ensure that ongoing relationship obligations are effective. Appendix IV provides a matrix of the suggested institutional roles in the cash management process.

III. Strengthening Institutional Aspects

13. Whilst the detailed cash management policy is being approved at a higher government level, the CPD needs to ensure that its functions are recognized and authorized operationally across government.9 Many of these functions entail direct relationships with agencies inside and outside the MoFPED and it is important that the department is seen to be authorized to establish and maintain these contacts. As described above, an approved set of guidelines should serve this purpose. The mission has assisted in drafting such guidelines for approval by the PS/ST and these are given in Appendix II.

14. The guidelines, as drafted, provide an overview of the concept and primary objectives of government cash management with particular reference to cash flow forecasting. They then detail the scope of borrowing and investing operations which are used to meet anticipated temporary cash shortages and surpluses. The guidelines describe and, once approved, will authorize establishment of the necessary relationships which are needed to build cash flow forecasts for the whole of the government included in the scope of the cash management modeling. Important relationships are also required which are distinct from the data forecasting role. These include the BoU, the Cash Management Committee (CMC), the Debt Policy and Issuance Department (DP&ID), and the AGO.

15. The concept and primary objectives of government cash management have been described in detail in previous FAD/AFE TA reports.10 It is very important, however, that the corresponding relationships are built on the understanding of the role and objectives of good cash management. The primary objective is to allow spending agencies to make their appropriated budget expenditures at the most effective time without being constrained by cash rationing activities or the build-up of expenditure arrears. It is vital that MDAs put in the required effort to provide the CPD with accurate and updated expenditure forecasts in order that the cash management objective is achieved. If MDAs fully understand this objective and the path to achieving it, they will be more inclined to work at producing the required forecast information. The inclusion of these factors in the guidelines should assist in ensuring that this understanding becomes widespread.

16. The guidelines include a brief description of the way in which short-term borrowing and investment activities are used to ensure that cash is available to meet the primary cash management objective and is invested efficiently when in surplus. Additionally, a section outlining the essential requirements (or pre-conditions) for effective cash management is provided. This discusses the need for a comprehensive legal framework; the TSA banking structure to be defined as the scope for cash management activity; an effective payment and accounting system; MDAs to have the capacity and capability to produce regular updated accurate expenditure and revenue forecasts; and effective relationships to be built and maintained.

17. The guidelines describe the principle relationships which are needed for good government cash management. Where the focus is on cash flow forecasting, the relationships approved within the guidelines state that the counterparties should provide these forecast data to the CPD when required and in the format specified. These counterparties comprise the DEA and URA—for revenue forecasts; the Budget Directorate—for budget execution information; the MDAs – for their expenditure forecasts; the DP&ID—for information on planned debt raising and debt servicing; the AGO—for short-term forecasts and actual outturn data.

18. The guidelines also describe the role of the CMC and its relationship with the CPD and other counterparties. In the medium term, this role tends to be crucial and must be well understood in order for government cash management to function effectively. The CMC is a high-level committee which acts as the body providing ongoing authority to the work of the CPD. In this role, it should receive reports from the CPD regarding the accuracy of cash flow forecasts received and the reasons for all significant deviations from forecast. These reports should show whether the deviations were avoidable or unavoidable and what action should be taken by the counterparty if avoidable. Despite the existence of an approved set of guidelines, it will still be necessary to instruct MDAs to work harder to provide accurate forecasts and it will take the high-level authority incumbent in the CMC to achieve this when forecasts are proven to be inaccurate for avoidable reasons.

19. The CMC will also have responsibility to provide guidance to the CPD relating to active cash management market operations. Once cash flow forecasts are deemed to be sufficiently accurate by the CMC, the CPD will need to propose making short-term borrowings—usually most effectively through issuance of cash management T bills—and short-term deposits to earn remuneration on idle cash balances. These transactions should initially be approved in advance by the CMC. The CMC would also need to be involved in negotiations with the BoU regarding the availability of term deposits at the central bank.

20. Many central banks do not willingly propose to offer the government a term deposit facility but there is little reason behind this reluctance. Once government cash flow forecasts become reasonably accurate, they should be provided regularly to the central bank to assist in the operation of monetary policy. Periods during the fiscal year when short-term cash surpluses are anticipated should be compensated by utilizing term deposits for the requisite duration. If these deposits are taken out of the TSA structure at the central bank and placed on deposit with commercial banks, ceteris paribus, the central bank will need to drain them by performing open market operations. These cost the central bank an interest rate quite close to the amount being earned on the term deposit. It saves a lot of work, transactional costs, and credit risk exposure if the surplus cash stays on term deposit at the central bank. Such factors need to be discussed with the BoU in order to set up the facility to make term deposits.

21. When government cash flow forecasts are reasonably accurate, the short-term borrowing and investment activities are designed to maintain as stable a balance in the TSA structure as possible. This action, in turn, ensures that the BoU can understand very closely the effect of all government transactions on financial sector liquidity and the state of monetary policy. Since in many countries, including Uganda, the government is by far the largest cash operator in the economy, this knowledge is very important and will assist the central bank greatly in its operation of monetary policy.

22. Whilst the CMC will provide high-level access to relationships with the BoU, an ongoing relationship is also necessary. This relationship should also be included in the guidelines in order that it is maintained as expected. Normally, a memorandum of understanding between the MoFPED and the BoU would explicitly define the service relationship of the BoU with the DEA, AGO, CPD, and the DP&ID. Previous FAD/AFE missions have emphasized the finalization of an updated memorandum of understanding and provided guidance on its scope. This agreement should set out the principles of the relationship between MoFPED and BoU, and develop a service level agreement covering the banking arrangements, including the computation of and compensation for the UCF/TSA and government cash positions and charges for retail services being provided by the BoU. In the interim, while the MOU is finalized, it is also considered important to specify in the guidelines what is expected from the cash management relationship directly.

23. A primary task of the CPD during the early stages of formulating cash flow forecasting will be to build capacity amongst relevant stakeholders. This will incorporate explaining the objectives of cash management and how they will be of benefit to efficient execution of the budget. Revenue projections and debt issuance and debt servicing plans are already available from the DEA/URA and the DP&ID. However, the MDAs only provide block quarterly expenditure estimates which are used by the Budget Directorate to set quarterly spending limits. This information is not sufficiently granular to be of use for cash flow forecasting and active cash management.

24. Once the primary objective of cash management is understood by the MDAs, they should appreciate that provision of accurate and updated expenditure forecasts will obviate the need for spending limits in the long run. If this expectation can be fostered, the MDAs can build the capacity to generate and provide expenditure forecasts in the format prescribed by the CPD. Such capacity building is a difficult task and will need to utilize much of the enhanced CPD workload over the medium-term.

25. MDAs have been significantly constrained by cash rationing in the past. This has led to standard ‘games’ being played when they have been asked to provide expenditure estimates. Rather than these being realistically based upon the efficient timing of budget spending requirements, MDAs have tried to second-guess the expected budget constraints. Typically, this leads to heavy front-loading of expenditure estimates in order to try to ensure that cash constraints further into the fiscal year can be met through higher cash limits in the earlier months. This, if successful, can lead to idle cash resources and constraints in areas of government business where cash limits had to be reduced to meet the front-loading requests.

26. It will be very difficult to persuade MDAs to change their behavior by providing estimates of expenditure timing which would precisely match their budget service delivery needs. MDAs will believe that such realistic estimates will be used by the Budget Directorate to reduce cash spending limits in future quarters when other, unexpected payments become known. This ‘chicken-and-egg’ situation is often very difficult to overcome and requires high-level commitment from the MoFPED—such as can be derived from the CMC—in order to convince MDAs that, in the future, realistic forecasts will be honored but that unrealistic estimates will be penalized.

27. Previously, it has only become evident that front-loading is taking place later in the year, once quarterly limits are compared to outturns. However, as described in the following section, it will be task of the CPD to constantly monitor forecast expenditures and revenues against actual outturns. This monitoring, and its subsequent reporting to the CMC, can be effective in quickly highlighting poor, or contrived, forecasts. As the credibility of the annual budget improves in Uganda, a spending agency which provides good forecasts of how it realistically needs to make expenditures throughout the fiscal year, should be assured that there will be no constraints on its plans. With efficient cash management, short-term borrowing can be used to meet temporary cash shortages which will be repaid as budget revenues catch up with spending.

28. MDAs can be made aware that their spending needs, if realistic, will be met only if they can show that their forecasts are accurate. If the CPD reports to the CMC that an MDA has made, in the recent past, significant errors in its forecasts, it will need to be told that no such assurances will be forthcoming until its spending projections closely match its actual requirements. CMC should be empowered to take these decisions.

IV. Cash Flow Forecasting Model

29. The cash flow forecasting model which has been developed by the CPD demonstrates an excellent start to the cash flow forecasting project. It is based on various models which have been supplied by previous FAD/AFE missions, US Treasury TA, and by benchmarking visits to South Africa. The broad structure of the model is suitable for inputting revenue, expenditure, and debt forecasts, aggregating these in net form, and using opening balances in the bank account structure to produce a profile of available cash resources across the forthcoming periods.

30. There are, however, several shortcomings in the design of the forecasting model, in its scope of operation, and the data which is currently being used:

  • a. The model currently contains forecast data for revenues and expenditures11 for future time periods but these are overwritten as actual outturn data is input and the forecasts are lost. This does not allow forecast error analysis which, as has been described above and in detail in previous TA reports, is vital to ensuring that forecasts are realistic and continuously improving. It is recommended that the templates are expanded to include, alongside the forecast data, columns for the actual outturn information and for the level of forecast error. Templates demonstrating this extra level of detail have been provided by the mission.

  • b. At present, the forecasting model utilizes the entire chart of accounts classification from the IFMS to record forecasts and actual information. The forecasts are made purely by using seasonal trend analysis from previous years’ actual outturns as recorded against the classification within the IFMS. For future use, the model should, in many classifications, use forecast data from the MDAs directly without comparing to seasonal trends of previous years. This methodology will require a far more aggregated structure than the whole (maximum granularity) chart of accounts classification since it will involve too much work to gather such detailed forecasts and analyze forecast errors systematically. It is necessary for the CPD to balance the level of granularity (or disaggregation) against the work which may be unnecessarily required—see (c) below.

  • c. The training and formatted templates given to MDAs to provide accurate, timely, and updated forecasts should focus on more aggregated groups of expenditure classifications than currently used. These need to be carefully chosen and structured in order to capture the most volatile and uncertain spending needs. Expenditures which are constant throughout the year (e.g., some types of remuneration) or those having a very clear seasonality year after year without much variation from trend (e.g. some education or agricultural spending) can be input in aggregate form using the annual budget overlaid with the appropriate seasonal patterns across the coming year. Highly variable spending, on the other hand, is only fully known by the MDA involved and must be forecast by the agency responsible for the expenditure planning. This is particularly applicable to capital expenditures. The format in which forecast information is requested from the MDAs must, therefore, be carefully thought out and constructed.

  • d. At present, there is a need to precisely define the scope of the forecast modeling being performed. It is important to be certain that the ‘pool’ of available cash resources12 being modeled is fully understood in the context that, once its scope is defined, all inflows and all outflows are contained in the model and that any flows which are either wholly inside the ‘pool’ or wholly outside it are excluded from the modeling. It appears that the main bank account structure which, as an aggregated whole, forms the ‘pool’ is well constructed in the existing model. The ‘stock’ of cash resources is well defined but the flows may not be. Checks need to be performed on the consistency of all flows being modeled. In particular, budget expenditures which take the form of cash transfers can be problematic. In the case of local governments, care must be taken to include the detailed expenditures of those within the IFMS—and therefore within the scope of the cash flow model—and ignore their associated transfers since these would be wholly inside the coverage of the ‘pool.’ In contrast, for local governments which are not fully within the scope of the IFMS, only their transfers should be included in the model being expenditures of the agency making the transfer payments since this is the only flow which moves directly out of the ‘pool’.

  • e. Although seasonal patterns and direct forecasts can be derived from historical data and MDAs, the budget execution process still relies on quarterly spending limits provided through the DEA and the Budget Directorate. The timeline of the modeling must therefore be narrowed down to that applicable to reality. It is still relevant to model cash flows further out than the current quarter but it must be understood that these will need to be changed—possibly radically—once the quarterly spending limit is produced. The DEA and the Budget Directorate take account of the projected quarterly cash requirements of the MDAs but will constrain the overall envelope for expenditures to fit within the forecast revenues and debt issuance for the quarter at hand. In the future, once forecasts are accurate and active cash management operations are commenced, there should be no need for the quarterly cash limits to constrain budgeted expenditures since shortages will be met by short-term borrowing. Before that point is reached, however, the modeling should take account of the cash limits.

  • f. Weekly transfers made by the AGO from the UCF to the TSA accounts are based on known payment instructions and invoices already within the IFMS. Consequently, there is no need for the timeframe of the model to include the nearest week. It should therefore initially concentrate its coverage on the timeframe of two weeks to three months from the present.

31. In addition to configuring the cash flow forecasting model, medium-term preparations should be made for performing active cash management operations. These will include:

  • a. Preparing reports on cash flow forecasts to the CMC including recommendations for action to be taken to improve forecast accuracy and for active cash management money market transactions.

  • b. Calculating an appropriate buffer level of cash to be maintained which will guide the determination of the sizes and terms of active cash management instruments.

  • c. Coordinating with the DP&ID on issuance of T bills for cash management purposes and ensuring that the money market is aware of such transactional activity when it starts.

  • d. Coordinating and negotiating with the BoU on managing market-related interest earned on term deposits for cash management purposes.

Uganda: Technical Assistance Report-Strengthening Cash Management
Author: International Monetary Fund. Fiscal Affairs Dept.