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Posted by Emre Balibek and Yasemin Hurcan[1],[2]
Governments, central banks and financial markets benefit from transparent government cash management. Unfortunately, many governments publish very limited information about their cash balances and their cash management framework or policy. The benefits of fiscal transparency are often cited as providing legislatures, markets, and citizens with the information they need to hold governments accountable, hence promoting better fiscal management. Existing fiscal transparency frameworks often refer to budget documents, medium-term fiscal plans, financial statements, and other fiscal reports, but seldom to the government’s cash management plans.
Effective cash management facilitates the implementation of monetary policy. Because governments’ deposits held at the central bank constitute a part of the bank’s (non-reserve) liabilities, cash management has a direct impact on the bank’s balance sheet and thus on the liquidity in the financial system. Increases (decreases) in the government’s deposits at the central bank will drain (inject) liquidity from (to) the financial system. Government cash balances held at the central bank can be regarded as part of the autonomous factors (beyond direct control of the bank) that impact the bank’s balance sheet, and hence the liquidity of the financial system and potentially short-term interest rates. In the longer term, inflows and outflows to government accounts tend to balance out - assuming the government spends what it collects as revenue or borrows - and thus have a neutral impact on the central bank’s liabilities. Nevertheless, in the short-term, differences in the timing of revenues, expenditures and financing flows may create fluctuations in the level of the government’s cash balances, and of the central bank’s balance sheet.
Recent financial market developments in the United States exemplify the interplay between financial system liquidity, government cash management and central bank intervention. Early in 2020, in response to the pandemic and in anticipation of increased uncertainty, the US Treasury stepped up the issuance of short-term instruments, including cash management bills, to boost the government’s cash buffer (the Treasury General Account, TGA) to historically high levels - from around USD 400 million to 1.7 trillion.
One year later, in February 2021, the US Treasury announced plans to reduce its cash balances. This policy change resulted in a reduction in the issuance of short-term securities and the release of additional liquidity into the financial system. This additional liquidity in the markets was channeled away from deposit institutions and towards short-term money market funds. Ultimately, the additional liquidity returned back to the Federal Reserve’s balance sheet, through the uptake in its Reverse Repo (RRP) facility. The Federal Reserve facilitated market functioning by adjusting the RRP parameters.
As shown in the US example, an understanding of the trajectory of the government cash balance is important for the financial markets. The government’s cash management plans, including its cash balance policy, affects market expectations about the size of Treasury issuance, the supply of bank reserves, and short-term lending rates, thus informing the investment strategies of market participants. Understanding of these issues supports market functioning and helps the government manage its funding costs.
A lack of information on the government’s cash management plans creates uncertainty for financial market participants directly and indirectly. Experience suggests that even some central banks find it difficult to access information on the government’s cash flow and balance forecasts, which effectively precludes them from taking measures to offset the impact of cash management operations.
The strong message is that governments should set clear cash management objectives and be transparent about them, especially about policy measures leading to changes in the level of the cash balances held in central banks. A recent good example is from New Zealand Debt Management, where the agency describes its cash buffer policy. Enhanced transparency of broad cash management targets on cash flows and balances can help the achievement of debt management objectives and support monetary policy as well as efforts to improve the functioning of financial markets.
Is it possible that improving the transparency of governments’ cash management operations will be one of the unexpected benefits of the COVID crisis?
[1] Fiscal Affairs Department, IMF.
[2] Authors would like to thank Ms. Kleopatra Nikolaou from the Monetary and Capital Market Department for her useful comments.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
