Back Matter

Annex A: Rough Tuning: An Illustrative Example

1. This annex illustrates how a cash manager might try to “rough tune” prospective cash flows, using T-Bills. The cash manager has been presented with the daily cash flow forecast over the next 106 working days as shown in Figure A1 (all figures are in millions of local currency). These figures are after planned debt issuance and redemptions, but no decisions have been taken on T-Bill issuance.

2. The task is to plan T-Bill issuance over the same period in such a way as to smooth the cash flow profile so that the cumulative surplus or deficit at any time will be fairly small. The intention is to announce provisional gross issuance plans to the market, at least over the following quarter. Practice is to issue just one-month (28 days) or three-month (91 days) bills.

Figure A1:
Figure A1:

Forecast Daily Cash Flow

Citation: Technical Notes and Manuals 2010, 013; 10.5089/9781462318254.005.A999

3. The task is more daunting than appears from a first glance at the above chart of daily cash flows. This is because the daily flows accumulate to a very substantial deficit over the first part of the period, as is clear from Figure A2.

Figure A2:
Figure A2:

Cumulative Daily Cash Flow

Citation: Technical Notes and Manuals 2010, 013; 10.5089/9781462318254.005.A999

Source: Author’s illustration.

Assumptions and Constraints

4. The existing T-Bill stock is, in local currency:

article image

5. The stock is (by coincidence) in steady state: that is, the existing 28 day bills will be redeemed equally over the next 4 weeks; and the 91 day bills over 13 weeks.

6. Bills are issued once a week; there are 5 working days in each week (no public holidays in the period). Bills are issued on day 1, 6, 11.106 (22 weeks). They are redeemed on the same day of the week that they are issued, that is, settlement lags are ignored.

7. The market does not have an infinite capacity to absorb T-Bills and should be treated as “gently” as possible. For example, the market would prefer to avoid a massive variation in issuance from the steady state of 1,000 of each type of bill–say, a maximum weekly issuance of 2,500 for 91 day bills; and 3,000 for 28 day bills. Large variation from week to week should also be avoided; but at least some of each bill should be issued each week.

8. Ideally the maximum cumulative cash flow deficit at any one time should be no more than 5,000. For instance that might be the opening cash balance in the TSA at the central bank–which should never go negative. The maximum surplus can be a little more, but ideally should not be much more.

9. The issuance of 91 day bills should ideally be less variable from week to week than that of 28 day bills.

The Result

10. The cash manager uses a simple spreadsheet to explore how different gross issuance patterns affect the cumulative profile, at the same time monitoring the net issuance profile and the impact on the stock.

11. There is no single “right” answer. The following charts set out one solution. Figures A3–5 show bill issuance by week; and Figure A6 the final cash flow profile. The more variable issue of one-month bills is readily apparent, although the profile also requires some variation in three-month issuance.

Figure A3:
Figure A3:

Gross Weekly Bill Issuance

Citation: Technical Notes and Manuals 2010, 013; 10.5089/9781462318254.005.A999

Source: Author’s illustration.
Figure A4:
Figure A4:

Net Weekly Bill Issuance

Citation: Technical Notes and Manuals 2010, 013; 10.5089/9781462318254.005.A999

Source: Author’s illustration.
Figure A5:
Figure A5:

Weekly Treasury Bill Stock

Citation: Technical Notes and Manuals 2010, 013; 10.5089/9781462318254.005.A999

Figure A6:
Figure A6:

Daily Cumulative Cash Flow after Bill Issuance

Citation: Technical Notes and Manuals 2010, 013; 10.5089/9781462318254.005.A999

Source: Author’s illustration.

References

  • Árvai, Zsófa, and Geoffrey Heenan, 2008, “A Framework for Developing Secondary Markets for Government Securities,” IMF Working Paper 08/174 (Washington: International Monetary Fund).

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  • Fainboim, Israel, and Sailendra Pattanayak, 2010, “Treasury Single Account: Concept, Design and Implementation Issues,” IMF Working Paper (forthcoming; Washington: International Monetary Fund).

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  • Gray, Simon, and Nick Talbot, 2007, “Developing Financial Markets,” Bank of England Handbooks in Central Banking, No.26. Available via the internet at: http://www.bankofengland.co.uk/education/ ccbs/handbooks/ccbshb26.htm

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  • Lienert, Ian, 2009, Modernizing Cash Management, IMF Technical Notes and Manuals (Washington: International Monetary Fund). Available via the internet at: http://www.imf.org/external/pubs/ft/ tnm/2009/tnm0903.pdf

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  • McCauley, Robert N., 2006, “Consolidating the Public Debt Markets of Asia,” in Asian Bond Markets: Issues and Prospects, BIS Papers No 30. Available via the internet at: http://www.bis.org/publ/bp-pdf/bispap30.htm

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  • Mu, Yibin, 2006, “Government Cash Management: Good Practice and Capacity Building Framework,#x201D; World Bank Financial Discussion Series. Available via the internet at: http://siteresources.world-bank.org/FINANCIALSECTOR/Miscellaneous/20957911/governmentmu0506.html

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  • Storkey, Ian, 2003, Government Cash and Treasury Management Reform, Asian Development Bank, Governance Brief, Issue 7-2003. Available via the internet at: www.asiandevbank.org/Documents/ Periodicals/GB/GovernanceBrief07.pdf

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  • Williams, Mike, 2004, Government Cash Management: Good and Bad Practice. Available via the internet at: http://www.mj-w.net/cac_gov_cash.html or http://treasury.worldbank.org/web/pdf/williams_ technote.pdf

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  • Williams, Mike, 2009, “Government Cash Management: International Practice,” Oxford Policy Management Working Paper. Available via the internet at: http://www.opml.co.uk/publications

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  • World Bank, 2009, Debt Management Performance Assessment Tool. Available via the internet at: http://go.worldbank.org/4VX651FHB0

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Notes: Mike Williams is a former Chief Executive of the UK Debt Management Office and is on the Fiscal Affairs Department roster of experts.

1

This note has benefitted from comments from Ian Lienert, Israel Fainboim, Brian Olden, John Gardner, Tej Pra-kash, and Allison Holland (all IMF), Antonio Velandia (World Bank), and Ian Storkey (consultant).

2

This note is intended as an accompaniment to Lienert (2009).

3

Although cash programming and forecasting may be just as critical for these countries.

4

Both the IMF and World Bank have stressed that poor cash management may be costly and damaging to other policies. “Results of the World Bank/IMF joint public debt management and market development technical assistance program] indicate that weak government cash management is a major impediment to public debt management and debt market development,” see introduction to Mu (2006).

5

Fainboim and Pattanayak (2010) list the types of bank account that may be seen as part of the TSA system. This paper explains the essential features and benefits of a TSA, elaborates alternative models and approaches for its design, and discusses the preconditions and sequencing for successful implementation of a TSA.

6

In some countries, the MoF may hold a number of bank accounts at the central bank and be able to transfer cash between them. This has some of the characteristics of a TSA. However, if the transfer relies on a daily policy decision, it is likely to be much less efficient and reliable—and more subject to operational risk—than an automatic and complete netting.

8

T-Bills are discounted instruments with maturity of one year or less: T-Bonds here includes all securities with an original maturity or more than one year.

9

Business taxes in particular have a marked pattern across the year. On the expenditure side, some transfers or investment spending may be uneven over the year. Some countries have an end-year surge in expenditure to avoid being penalized by rules preventing end-year carryover of unused budget appropriations. The within-the-month pattern is often associated with the payment of civil service salaries as well as the due days for tax payments.

10

In one country, the treasury’s reliance on public corporations to supply or absorb excess cash overnight was damaging both to the corporations and to the development of the money market, since price signals were ignored and the market denied potential cash flow. Where two separate parts of the MoF are interacting with the market, it can also be administratively costly in terms of systems and scare resources.

11

A “repo” (short for sale and repurchase agreement) is the sale of securities tied to an agreement to buy them back later. A reverse-repo is the purchase of securities tied to an agreement to sell back later. A repo is best thought of as a collateralized loan; thus a government cash manager may decide to borrow by way of repo, raising cash against a temporary transfer of assets. Conversely a reverse-repo may best be thought of as a collateralized investment. For repo transactions, government debt managers almost invariably use or require T-Bills or T-Bonds as collateral assets.

12

This point remains even if some of the actual operations are contracted out to, say, the central bank as an agent. However, as the sophistication of interventions develops, this “out-sourcing” to the central bank arguably becomes less satisfactory as a model.

13

Fine tuning is practised in some eurozone countries, as well as the UK and Sweden.

14

During the financial crisis of 2008–09, some governments also had to issue additional T-Bills to make sure there was enough high quality collateral in the market, with the central bank in effect purchasing or borrowing other collateral in return for T-Bills.

15

Countries who are actively fine tuning their cash balances will do very substantially more repo and similar transactions than T-Bill issuances. Thus the Agence France Trbésor (AFT) in France and the DMO in the UK will regularly do 40 or more transactions a day.

16

There are exceptions, for example, in late 2008 when the repo market in some developed countries almost dried up as banks held on to collateral to protect their balance sheets. In those circumstances cash managers had to turn to the interbank market or lend surpluses to the central bank. For the case of France, see Government Cash Management During Financial Market Turmoil, Lienert and Chailloux, 2009, http://blog-pfm.imf.org/pfm-blog/2009/12/government-cash-management-during-financial-market-turmoil.html

17

In the USA, government tax receipts are held against collateral in “Treasury Tax and Loan” accounts in selected banks before they are transferred to central government. China and some other countries have organised tenders whereby banks compete for the deposits.

18

This has been a problem in some transition and emerging economies where money markets remain underdeveloped; there are few market participants and market participants are largely domestic banks. 19See for example Árvai & Heenan (2008) and Gray & Talbot (2007).

20

The other two important influences are changes in the public’s demand for banknotes and changes in net foreign currency flows. The former is usually fairly predictable and central banks can anticipate the additional demand needed at the time, for example, of major public holidays. The latter may at times be substantial, depending on exchange rate policy and the central bank’s willingness to intervene in the currency market, for example, to maintain a preferred rate.

21

The costs of this problem may depend on how actively bills are traded in the secondary market, particularly at the shortest maturities. Separate issuance may also cause distortions in relative prices.

22

Sterilization here means that the cash is held at the central bank and not invested elsewhere in the economy where it might affect interest rates or activity. In principle the account should be remunerated at a rate equal to the cost issuing the extra T-Bills; since the central bank would have otherwise had to issue its bills to drain liquidity; that would leave both parties in the same position.

23

See McCauley (2006), who also estimates the market fragmentation costs associated with the issue of “market stabilization bonds” by the Bank of Korea.

24

In Macedonia, where there were additional auctions of “Treasury bills for monetary purposes”, the policy was put on hold in 2008 because the central bank’s needs so greatly exceeded those of the government.

25

As an example of the problems that can arise, even in a relatively sophisticated environment: in one Latin American country in the early part of the last decade, the treasury, which was separate from the DMU at the time, managed its large cash surplus with reverse repos that were a very large volume of the money market and a greater source of liquidity to the banking system than was the central bank in its monetary policy operations. The problem was not so much the size of these balances, but the way that they were invested, that made monetary policy more difficult and damaged the development of the money market. A very small number of counterparties was used, and the lending was very short-term despite its structural nature. The banks often simply on-lent the cash to the central bank, rather than distributing it around the banking system. This issue has since been addressed.

26

Storkey (2003) defines cash management as “having the right amount of money in the right place and time to meet the government’s obligations in the most cost-effective way.” Williams (2004) widened the definition somewhat: “the strategy and associated processes for managing cost-effectively the government’s short-term cash flows and cash balances, both within government, and between government and other sectors.”

27

In the US Department of Treasury, the overarching unit involved in cash management is the Office of Fiscal Service, comprising the Office of the Fiscal Assistant Secretary and two Treasury Bureaus: the Financial Management Service (FMS) and the Bureau of the Public Debt. There is also daily interaction between FMS and the Federal Reserve.

28

Performance management has several dimensions; ensuring that the government always has cash to meet its obligations is overriding; but other indicators must track how the front office interacts with the market, for example, that it does not distort normal market functioning, and whether its approach to market and credit risk are within agreed parameters.

29

In this context, “above the line” includes all revenue and expenditures contributing to the fiscal balance; “below the line” then includes financing transactions. In practice some revenue or spending information may be generated, for example, from the banking system rather that government agencies directly (and the DMU may itself project debt interest); information on privatisation proceeds or other capital receipts may also be handled variously

30

The number of feeds is potentially large. Each spending ministry and agency, certainly the larger ones, should provide regular forecast information, although in a number of cases they may do that to the MoF (possibly via the IFMIS), rather than directly to the cash managers. These data will often be enhanced by requirements to report separately updated information on, for example, large payments in the pipeline. There are usually fewer tax departments; but information on significant non-tax payments will also need to be supplied by a range of agencies.

31

The central bank cannot of course be expected to disclose any details of specific monetary policy operations.

Government Cash Management: Its Interaction with Other Financial Policies
Author: International Monetary Fund