Annex 1. Illustrative List of Functions of a Cash Management Unit (CMU)
Prepare the cash forecast and make comparisons with previous cash and budget forecasts with data provided by the back office.
Focus CMU core business on ensuring cash availability to make payments due, and on prompt receipt of revenues; FS usually do not have the expertise for more active cash management.
Centralize the monitoring of bank balances and cash flows, initially focused on large inflows and outflows; involve the main managers of these flows; and rely on the central bank to monitor the opening of government bank accounts or identify those that have not been approved.
Adopt a phased approach to forecast and monitor cash flows based on their predictability: debt disbursements, reimbursements, and servicing; main categories of expenditures and revenues; and other predictable payments and receipts.
Track information on daily cash inflows and outflows and daily overall cash position.
Determine which basic tools the CMU should use (such as excel spreadsheets) for preparing cash forecasts.
Sign an agreement with banks to have a quick overall picture of the cash position for each bank, in addition to the detailed banks statements.
References
Allen, Richard, and Dimitar Radev. 2010. “Extrabudgetary Funds.” Technical Notes and Manuals, International Monetary Fund, Washington, DC.
Boukezia, Racheeda, Jean-Baptiste Gros, and Sailendra Pattan-ayak. 2021. “Questionnaire Based Diagnostic Tool to Assess Cash Management Capacity.” International Monetary Fund, Washington, DC.
Cruz, Pedro, and Fatos Koc. 2018. “The Liquidity Buffer Practices of Public Debt Managers in OECD Countries.” OECD Working Papers on Sovereign Borrowing and Public Debt Management No. 9, OECD Publishing, Paris.
Flynn, Suzanne, and Mario Pessoa. 2014. “Prevention and Management of Government Expenditure Arrears.” Technical Notes and Manual, International Monetary Fund, Washington, DC.
Hurcan, Yasemin, Fatos Koc, and Emre Balibek. 2020. “How to Set Up a Cash Buffer: A Practical Guide to Developing and Implementing a Cash Buffer Policy.” How-to Note, International Monetary Fund, Washington, DC.
International Monetary Fund (IMF). 2017. “Building Fiscal Capacity in Fragile States.” IMF Policy Paper, Washington, DC.
International Monetary Fund (IMF). 2018. Fiscal Transparency Handbook. Washington, DC: International Monetary Fund.
International Monetary Fund (IMF). 2018. “Republic of Equatorial Guinea.” IMF Country Report No. 18/146, International Monetary Fund, Washington, DC.
International Monetary Fund (IMF). 2019. “Republic of Equatorial Guinea.” IMF Country Report No. 19/384, International Monetary Fund, Washington, DC.
Lienert, Ian. 2009. “Modernizing Cash Management.” Technical Notes and Manuals, International Monetary Fund, Washington, DC.
Miller, Mark, and Sierd Hadley. 2016. “Cash Management in Cash-Constrained Environments: A Public Financial Management Introductory Guide.” Overseas Development Institute, London.
Obidegwu, Chukwuma. 2004. “Post-Conflict Peace Building in Africa: The Challenges of Socio-Economic Recovery and Development.” Africa Region Working Paper Series No. 73, World Bank, Washington, DC.
Organisation for Economic Co-operation and Development (OECD). 2019. Geographical Distribution of Financial Flows to Developing Countries 2019. Paris: OECD.
Organisation for Economic Co-operation and Development (OECD). 2005. Paris Declaration on Aid Effectiveness. Paris: OECD.
Pattanayak, Sailendra. 2016. “Expenditure Control: Key Features, Stages, and Actors.” Technical Notes and Manuals, International Monetary Fund, Washington, DC.
Pattanayak, Sailendra, and Israel Fainboim. 2011. “Treasury Single Account: An Essential Tool for Government Cash Management.” Technical Notes and Manual, International Monetary Fund, Washington, DC.
Pessoa, Mario, and Mike Williams. 2012. “Government Cash Management: Relationship between the Treasury and the Central Bank.” Technical Notes and Manuals, International Monetary Fund, Washington, DC.
Simson, Rebecca, and Bryn Welham. 2014. “Incredible Budgets: Budget Credibility in Theory and Practice.” Working and Discussion Papers, Working Paper 400, Overseas Development Institute, London.
Williams, Mike. 2010. “Government Cash Management: Its Interaction with Other Financial Policies.” Technical Notes and Manuals, International Monetary Fund, Washington, DC.
Williams, Mike, Yasemin Hurcan, Jean-Pierre Nguenang, Sailendra Pattanayak, Patrick Ryan, and Noel Gallardo. 2022. “Cash Flow Forecasting Tool for Fragile States and the Associated User Guide.” International Monetary Fund, Washington DC.
This How to Note is part of a suite of capacity development products on cash management for FS and LIDCs. The two other companion products are as follows: (1) an excel-based cash forecasting tool and its associated user guide (Williams, Hurcan, Nguenang, Pattanayak, Ryan, and Gallardo 2021); and (2) a questionnaire-based diagnostic tool to assess cash management capacity (Boukezia, Gros, and Pattanayak 2021). The authors would like to thank Mr. Mike Williams for his valuable suggestions on this note. The authors are also grateful to Ms. Sureni Weerathunga for her research assistance and to IMF colleagues who provided helpful comments.
Some FS and LIDCs have a fragmented payment system where ministries, departments, and agencies (MDAs) hold their own bank accounts—especially when no Treasury Single Account (TSA) is in place. Their deposits provide significant liquidity to commercial banks. Improved cash management practices can also help these banks to manage their own liquidity.
A TSA system brings all, or a large majority of, government bank accounts under a single unified structure so that the ministry of finance/treasury can trace all cash flows in and out of these bank accounts and pool the balances for efficient cash management. For more information, see Pattanayak and Fainboim (2011).
Although the custodian of the TSA in an FS or LIDC should be the central bank, the TSA architecture will depend on the country context and its budget execution practices (see Pattanayak and Fainboim 2011).
The 2005 Paris Declaration on Aid Effectiveness (OECD 2005) encourages donors to integrate their funds with the countries’ public financial management systems, which include the TSA (see the Articles 17 and 21 of the Declaration).
An imprest fund is a small amount of cash that is set aside for use by a ministry, department or agency to pay for small, incidental expenses. Funds contained in imprests are regularly replenished to maintain a fixed balance.
For example, South Sudan accumulated arrears representing 125 percent of GDP and 500 percent of the budget in 2020.
In this case, each MDA processes its own payments within an authorized cash disbursement ceiling and directly operates the respective bank account under the TSA system. This process allows centralized cash control, while devolving the responsibility for commitments and payments to the MDA. For more discussion on centralized versus decentralized payment systems, see Pattanayak and Fainboim (2011).
It is important to introduce systems to keep track not only of payments but also of commitments and expenditure arrears. Regular monitoring of high-value commitments in the pipeline (and assessing their impact on cash projections), and data on unpaid bills/ arrears should inform cash projections and planning. At the same time, rationing of cash and delays in budget releases will tend to bunch expenditures toward the end of the year, again complicating cash planning.
See IMF (2019).
The unpredictability of donor fund flows complicates cash planning and affects budget execution, particularly in cases of grants and program loans from donors. Sometimes, project-related donor funds also require counterpart funds from the government before being disbursed.
See IMF (2018).
When cash managers use the information provided by macro-fiscal or revenue units in the ministry of finance, they need to keep in mind that these units are also concerned with the budgetary targets; accordingly, it is important to involve revenue authorities in the cash forecasting process to incorporate revenue collection patterns during the year.
For discussion on the timing gap between revenue and expenditure flows, see Lienert (2009) and Pattanayak (2016).
For the key elements of a service-level agreement between the treasury and banks, see Williams (2010).
The legal framework should provide that the authorization to borrow resides in parliament or another high-level body (such as the Council of Ministers), complemented by an appropriate delegation of authority to allow flexibility for cash managers and debt managers to use certain short-term instruments.
Several FS face high inflation rates and active parallel exchange markets, with large gaps between the official and parallel market exchange rates. High inflation and parallel exchange rates generally make the country unable to secure further borrowing domestically and internationally and even sometimes from international financing institutions until the outstanding arrears to them are cleared (Obidegwu 2004). Zimbabwe is one recent example of such countries.
For example, debt relief under the Debt Service Suspension Initiative in the wake of the COVID-19 pandemic.
A cash buffer is different from keeping a cash cushion. The latter is fairly common in government cash management. Maintaining a cash buffer implies systematically and explicitly identifying the minimum amount of cash reserves as a policy target.
Some countries have often resorted to overborrowing—that is, borrowing more than required by the fiscal deficit—to accumulate the funds needed (Cruz and Koc 2018). There are also cases where some budgetary resources and one-off revenues, such as privatization receipts, have been put aside to build the buffer.
In regions where the central bank is not present outside the capital, the state-owned commercial bank—BNC—is in charge of revenue collection and its transfer to the TSA. The tax administration is not involved in collecting revenue in cash. However, although their amounts are not significant, some customs duties are collected in cash by customs administration staff and then deposited in the BNC in some unbanked points of import.