Posted by Richard Allen, Emre Balibek, Yasemin Hurcan and Sandeep Saxena[1]
Faced with decreasing revenues and constrained access to financial markets, governments need to address the challenge of meeting extended cash needs to finance COVID-19 related emergency spending. A recent FAD note recommends a multi-pronged approach to cash management to ensure that liquidity is adequate to satisfy the government’s payment obligations.
The crisis poses several challenges to government cash managers, notably:
- How to identify and estimate the impact of the crisis on the government’s cash operations?
- How to forecast the government’s daily cash balance position and its cash flow requirements?
- How to find enough cash resources to meet increased liquidity needs while financial markets are highly stressed?
A response to these challenges should be centered around the four main pillars of modern cash management: (i) cash consolidation; (ii) cash forecasting; (iii) management of cash balances; and (iv) institutional and organizational arrangements. The overall objective should be for cash managers to utilize all available sources of liquidity in the most efficient way.
The note provides a suite of measures that countries could take to address these challenges. Countries should focus on the measures that are most relevant and feasible given their capacities and the local context. Those with an already relatively well-developed cash management function will not only be better positioned to manage the impact of the crisis but also have a wider range of available instruments to safeguard their liquidity position. Countries that are at an earlier stage of development can still take steps to improve their cash management, as the note explains.
Cash consolidation
Cash consolidation will help in pooling all the cash at the disposal of the treasury, facilitating its best possible use under highly stressed fiscal conditions. Governments that have a functional Treasury Single Account (TSA) structure in place could look for any available opportunities to further expand the TSA coverage and to improve the speed with which cash flows through the system.
Many governments, however, hold numerous accounts for government ministries and agencies that are outside the treasury’s control. A treasury directive requiring banks to share information on such balances may be an efficient way of identifying potential candidates for consolidation. Countries could consider using overnight sweeping arrangements with the central bank to consolidate bank account balances with the main account. They could discuss with public corporations, pension funds and other holders of large idle cash balances the establishment of on-demand short-term borrowing arrangements. And countries that rely on cash distribution—due to constraints on cash pooling from a lack of modern banking technology—can explore options for establishing credit lines with banks to ensure uninterrupted delivery of critical public services.
Reliable and timely cash forecasts
Cash managers should focus on calculating the short-term cash flow impact of fiscal policy measures and macro-economic developments in coordination with other departments of the finance ministry and the revenue collection authority. These forecasts should be updated every few days or even more frequently. To do the cash management unit (CMU) will need to develop very good communications with agencies managing emerging spending programs and get timely updates on any new emergency spending programs or debt relief initiatives.
If necessary, cash managers could shorten the cash forecasting horizon to the bare minimum required for conducting auctions of T-Bills and other instruments that are required to maintain adequate liquidity. In most cases, a forecasting horizon of 4–6 weeks should suffice for immediate needs, but cash managers should also take account of pressures that may arise over a longer period.
Management of cash balances
The government’s aim should be to tap all available sources of information, with due regard to costs and risks. Cash managers should explore the possibility of establishing (or expanding) credit lines with banks and overdraft facilities with the central bank. Such arrangements can substantially reduce pressures on cash managers, but their use should be regulated to bridge temporary cash shortages, not to provide another source of deficit financing. Credit lines should come with a ceiling and a time limit and be interest bearing.
Cash managers should also calibrate the likely impact of the COVID crisis on the government’s cash position to guide decisions on what would be an appropriate level of the cash buffer, and how much to draw down or top up, as part of the government’s overall fiscal policy response. Enhancing the use of the cash buffer is most beneficial for governments that have weaker forecasting capacity and poorer access to money markets. Countries with cash reserve funds can explore how much these reserves should be drawn down and over what period. Some countries maintain foreign exchange (forex) reserve funds, which may also be tapped into, if necessary and where feasible. Sinking funds reserved for future debt service can provide temporary relief to meet immediate cash needs.
Organizational arrangements
Cash managers need to work closely with the group of senior officials, often chaired by the finance minister, which manages the government’s overall fiscal response to the crisis, and with other departments of the finance ministry. A high-level cash coordination group (CCG) could also be established to inform policy makers based on the availability of cash resources and financing options. If necessary, these arrangements can be established informally during the crisis and formalized later.
Coordination between cash management and debt management
Finally, coordination between cash and debt managers should be strengthened to ensure timely access to financing and mitigate refinancing risk for existing debt. In several countries, there is an integrated framework for managing cash and debt, which facilitates efficient decision making. In other settings, the debt management department should consider the government’s cash flow forecasts in updating their issuance strategy and borrowing plans and inform the CMU and the CCG about the available resource envelope.
This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.
[1] Fiscal Affairs Department, IMF.
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.
