## htnea2022001 ## Source details **Canonical URL:** [htnea2022001](https://www.imf.org/-/media/files/publications/howtonotes/2022/english/htnea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/howtonotes/2022/english/htnea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/howtonotes/2022/english/htnea2022001.pdf.json) --- ### Executive summary: context, objectives, and building blocks - Context and challenges - Over half a billion people live in fragile states (FS), the majority of which are low-income developing countries (LIDCs). - FS defined as having either weak institutional capacity as measured by the World Bank Country Policy and Institutional Assessment score (average of 3.2 or lower) and/or experience of conflict (signaled by the presence of a peacekeeping or peace-building operation in the most recent three-year period). - Fiscal institutional capacity in most FS and several LIDCs is much lower than in other countries, with limited access to financial markets and heavy reliance on donor funding; donor resources can form a large portion of budgets. - Common operational problems: dispersed public funds outside ministry of finance control, lack of credible budgets, unpredictable donor disbursements, weak cash forecasting, ad hoc cash rationing, and arrears. - Benefits of a sound cash management system - Make timely payments by estimating available cash deposits, expected cash inflows, and required disbursements. - Reduce financing costs by lowering need for short-term borrowing or premature liquidation of long-term investments, identifying idle funds, and assessing investment options. - Avoid expenditure arrears arising from unrealistic budgets, poor cash management, noncompliance with budget execution procedures, and large shocks. - Improve stability of the domestic financial system through more predictable short-term borrowing and better liquidity management by commercial banks. - Five key objectives for cash managers in FS and LIDCs - Anticipate mismatches between timing of payments and cash availability to identify policy options in advance and analyze tradeoffs. - Develop and use a suite of policy options to address anticipated and unanticipated cash shortfalls (examples: short-term borrowing, deferment of discretionary expenditure transactions, budget adjustment/revision, short-term advances from the central bank, credit lines from commercial banks). - Avoid idle government deposits in the banking system to prevent inaccessible liquidity, unauthorized use of public resources, and leakage. - Minimize government borrowing costs by ensuring available cash is used when most needed and evaluating tradeoffs between short-term borrowing and other options. - Ensure coordination with debt managers and the central bank to avoid adverse effects on debt management, financial markets, and monetary policy. - Three core building blocks (progressive sequencing) - Consolidating cash resources under treasury oversight via a Treasury Single Account (TSA). - Forecasting short-term cash inflows and outflows (monthly, weekly, daily horizons). - Managing the cash balance and ensuring institutional coordination among budget, debt, and monetary authorities. ### Factors inhibiting TSA reform and sequencing of consolidation measures - Political economy and institutional constraints - MDAs reluctant to relinquish control over their bank accounts, especially where ministry of finance/treasury custodial role is nascent. - Transaction-specific bank accounts used for accounting due to underdeveloped accounting systems. - Retention of revenues by MDAs due to technical/IT constraints and distrust of the ministry of finance; weak reconciliation capacity exacerbates the issue. - Lack of fungibility of donor flows; donors may require separate accounts. - Banking infrastructure and operational constraints - Underdeveloped banking infrastructure: lack of operationally integrated banking system, core banking, modern payment/clearing and settlement systems. - Adverse liquidity implications for banks: some commercial banks depend on government deposits; transfers to TSA could affect liquidity (empirical assessment required; audit in Sudan found no such problem). - Inefficient payment modes: dominant use of cash and checks reduces efficiency and timely tracking. - Incomplete information on cash resources: lack of full inventory of government bank accounts, poor electronic infrastructure, loss of access to cash in conflict areas. - Weak staff capacity: emigration, deterioration of education, casualties, and poaching of skilled staff; some FS and LIDCs small size, costly infrastructure, and absence of a central bank (examples: Kiribati, Tuvalu). - Phased consolidation and operational measures - Address banking system constraints: build/coordinate interbank clearing, core banking, expand banking network; where core banking takes long, implement (1) protocol for data sharing with central bank system; (2) regular coordination meetings; (3) regular audits of decentralized units’ bank accounts. - Define role of commercial banks: use for retail operations with timely sweeping mechanisms to the TSA; retain some commercial bank accounts where necessary, preferably zero-balanced with daily sweeps; use notional accounts if IT allows. - Progressive cash consolidation plan (phased approach): take stock and close idle accounts; concentrate large cash movements in the TSA; monitor and reconcile largest inflow/outflow accounts; ensure daily reporting/reconciliation for large accounts; gradually monitor smaller accounts and implement phased unification under TSA. - Institute reporting and reconciliation and treasury oversight: full reporting by banks via formal agreements; monthly reconciliations at minimum; service level agreements covering turnaround times, reporting on individual and consolidated balances, timing of transfers to TSA, and business continuity. - Integrate donor funds progressively: ideally transfer donor-financed project accounts to TSA, phased by currency (local currency accounts first, then forex-denominated accounts); use protocols between donors and treasury defining reporting, internal control, and auditing. - Illustrative country experiences (selected excerpts) - Mali: study of transferring balances in all 3,000+ government accounts (other than project accounts) from 13 commercial banks to BCEAO; conclusion: 11 banks could handle immediate transfer without compromising liquidity ratios, but five banks (out of 13) would see ratios fall below minimum required; decision: transfer accounts opened at “financially healthy” banks first; draft agreement to create zero-balance accounts and organize periodic transfers to BCEAO. - Afghanistan: 2003 presidential order to close unit bank accounts and process operations through the treasury; requirement strengthened in the 2004 Constitution. - Haiti: reforms during 2011–13 with IMF assistance; effective TSA implementation started in 2014; December 2015 core TSA covering all central budgetary units (CBUs) comprised a main account and 15 subaccounts zero-balanced daily; agreement ensured transfer of collected taxes by BNC to TSA within 48 hours; 2016 cash-management agreement with BRH; 2017 strategy to expand TSA coverage and new organic law of public finance enacted in 2017 included provisions. - Sudan: TSA initiated in 2004, implementation phased and accelerated in 2014 with TSA operational in 2015; transitional arrangements allowed some commercial bank accounts for remote areas; second phase developing centralized e-payment system and gradual integration of EBFs and donor fund accounts using subaccounts. ### Key challenges for short-term cash forecasting and operational remedies - Challenges impeding accurate cash forecasting - Lack of timely data on government cash flows and balances due to banks failing to provide information timely and coverage differences between bank statements and treasury records. - Forecasts focus on budget items rather than actual cash flows; some budget expenditures do not imply cash movements and some cash movements are off-budget (imprest funds, project advances, retention of nontax revenue by MDAs, cash transfers between bank accounts). - Confusion between expenditure plans and cash forecasts: budgets represent what should happen; cash forecasts should focus on what will happen and can diverge within the year. - Overemphasis on short-term cash availability instead of longer horizon projection. - Lack of staff capacity and senior management awareness; MDAs may provide inadequate information; revenue authorities may fail to forecast or report expected receipts; central bank may not fully cooperate. - Limited TSA coverage and use of imprest accounts complicate consolidated view (examples: South Sudan, Kiribati, Somalia). - Incomplete information on donor disbursement calendars: example—donor disbursements averaged 20 percent of the overall budget in Mali in recent years. - Unpredictable off-budget/unauthorized spending (examples: external loan drawdowns outside the core treasury in Malawi until 2015; “Despesas não tituladas” (DNT) in Guinea Bissau). - Lack of credibility of budget forecasts and MDAs reluctant to share future cash needs (examples: Liberia, Somalia, South Sudan, Haiti, Malawi). - Adverse effects of unmanaged cash rationing - Accumulation of arrears if MDAs commit expenditures beyond cash availability. - Budget process impairment with month-to-month real budgeting and discretionary bill payments. - Unhealthy competition for cash among MDAs and perceptions of opacity and unfairness. - Example statistics/consequences: - South Sudan: a 1/12th current expenditure limit based on 1/12th of budget appropriation did not reflect seasonal requirements and led to delayed procurements or requests for adjustments. - South Sudan accumulated arrears representing 125 percent of GDP and 500 percent of the budget in 2020. - Measures to minimize adverse effects when cash rationing necessary - Build cash rationing on seasonal pattern of expenditures to avoid accrual of arrears. - Periodically review and reset cash limits on MDAs based on updated forecasts; communicate revisions when revenue flows improve. - Back cash limits with commitment controls, particularly when the budget is not credible. - Cash rationing should rely on basic cash forecasting; forecasts simpler when a TSA provides a consolidated view. - In conflict-affected states with scarce resources, adjust cash limits and consider a buffer for unforeseen spending (security) or shifts in priorities. ### Designing and sequencing a cash forecasting function; tools and practical guidance - Role and scope of cash forecasting function - Identify inflows and outflows to include; secure timely submission from main spending and revenue agencies; prepare and approve a cash forecast/plan (excel template recommended). - Define forecasting horizon—at least three months ahead and updated regularly, at least monthly. - If budget unrealistic, use approved budget appropriations as baseline with adjustments based on historical cash profiles and updated outturns and macro developments. - Basic forecasting approach and prioritization - Two-pronged focus on cash outflows: (1) larger, predictable expenditures (salaries, transfers to lower levels of government, debt service) and (2) other expenditures (capital expenditures, significant goods and services) requiring liaison with large MDAs or project management offices. - Engage debt office and MDAs to address data gaps (timing and amount of debt servicing, completeness of debt database, exchange rate/interest rate impacts). - Involve revenue authorities to reduce optimism bias and incorporate collection patterns. - Cash inflows: features and steps to improve forecasts - Common inflow features: importance of external grants, dominance of trade taxes, optimism bias in revenue forecasts, unpredictability of seasonal timing. - Steps: distinguish tax and nontax revenues; obtain expected tax inflow info from revenue authorities; identify large nontax streams and use past patterns for smaller streams; allow for “leakage” from illegal retention by MDAs. - Donor disbursements: strong coordination framework improves predictability. - Practical guidance: focus, prioritization, baseline system - Start with basic system focusing on larger and more predictable cash flows. - Categorize and prioritize cash outflows by value, predictability, and priority; inflows by main sources. - Minimum coverage: all cash flows that materially impact central government bank balances. - Forecasting horizon and update frequency: rolling forecast at least three months ahead, updated as outturn data are incorporated; increase granularity from monthly to weekly as capacity grows. - The Cash Flow Forecasting Analytical Tool (Box 6) - Designed for treasury practitioners preparing cash flow forecasts and advising senior decision makers. - Features: excel spreadsheet and user guide; focus on monthly forecasts with facility for weekly forecasts; primarily top-down relying on known flows and past patterns, but able to incorporate bottom-up MDA/RA inputs. - Supports early warning requests for large payments, sensitivity analysis, scenario testing, and charts for decision making. - Bottom line: projected balance in the TSA or cash balances under treasury control; includes adjustments reconciling budget flows and cash flows across the TSA. - Encourage comparison of forecasts with outturns to identify drivers of variances and improve future forecasts. - Cash outflows predictability categories (greater to lesser) - Salary payments; debt servicing; current expenditure payments; capital expenditure payments; payments to clear arrears; off-budget payments. - Notable empirical point: lack of information on capital expenditure commitments contributed to arrears above 20 percent of GDP in 2016 (Equatorial Guinea example). - Cash inflows predictability and seasonality - Nontax revenue receipts often seasonal (example: sale of cashews in Guinea Bissau). - Tax revenues: import-related concentrated in periods; income/property taxes collected in defined periods. - Budget support receipts fungible but often unpredictable. - Proceeds of debt disbursements often unpredictable; project-related donor flows difficult to forecast; proceeds of domestic securities issuance timing under ministry control but actual amounts may fall short. ### Monitoring cash balances, short-term financing, buffers, and macro coordination - Monitoring overall government cash balance - Treasury should monitor flows and balances in accounts under its control and periodically assess overall government cash balance. - Three-pronged approach: (1) periodic stock of balances (monthly/quarterly) focusing on large accounts; (2) rely on central bank to monitor government accounts and identify unapproved accounts; (3) sign agreements with banks to provide treasury with overall government cash picture plus detailed statements to line ministries. - Incremental improvements to forecasting and monitoring - Add receipt/payment categories to increase coverage and accuracy. - Increase granularity from monthly to weekly and extend horizon from three to six months as capacity improves. - Frequently review reliability of MDA/RA forecasts and expand information contacts. - Short-term financing options and seasonality handling - Commonly used when domestic markets absent/shallow: short-term advances (“ways and means”) from the central bank; central bank advances/overdrafts desirable to repay within same month or end of financial year but often not repaid, straining monetary operations. - Alternatives: short-term borrowing from domestic commercial/state-owned banks; international aid/grants/loans; prepare scenarios with and without aid disbursements. - As stability returns: issuance of T-bills and later T-bonds to develop money markets, reduce borrowing costs, and facilitate active cash management. - Macro and currency risks: high inflation and exchange rate fluctuations require factoring into forecasts; maintain part of cash buffer in foreign currency where FX obligations are high; use scenario analysis. - Building and managing a cash buffer - Balance maintaining a cash cushion with cost of carry in cash-constrained environments. - Target buffer: lower bound for government cash balances to maintain positive balances at all times; avoid overborrowing to build buffers. - Determinants: volatility of cash flows, forecasting ability, risk management objectives, availability of other mitigants, cost of carrying the buffer. - Regulation and oversight: clear criteria of access and oversight consistent with expenditure controls. - Options to build buffer: use IMF resources or international aid (including budget support in an IMF-supported lending program); ring-fenced central bank account or credit lines with commercial banks. - Managing ministry of finance–central bank relationship - Cash and debt management activities impact domestic monetary conditions and must be coordinated with central bank monetary operations. - Treasury should share cash flow forecasts with central bank for its liquidity planning. - Roles and separation: central bank as fiscal agent and banker; ministry sets debt issuance policy and amounts; roles defined in a service-level agreement (SLA). - Risks: central bank financing of government common when markets lost; advances should be limited in time and strictly managed via SLA with reimbursement modalities. - Examples of central bank assuming revenue/payment roles: Guinea after 2008 coup; Haiti (central bank and tax administration collect revenues on behalf of ministry); Yemen (central bank performed treasury functions before conflict). ### Institutional arrangements: CFU/CMU design, decision mechanisms, and treasury committee - Location, scope, and staffing of forecasting function - CFU (cash forecasting unit) may be part of treasury; a small unit (perhaps three to four people) sufficient to prepare basic forecasts. - CMU (cash management unit) with wider responsibilities requires more staff; choice depends on country capacity. - Indicative CFU task distribution: - Head of unit: prepare forecasts, advise on financing options. - Officer 1: lead forecast compilation and liaison with MDAs and central bank. - Officer 2: maintain forecast database and ex post analysis. - Administrative support: data custody and IT liaison. - CFU responsibilities: prepare forecasts for next three months, circulate to senior management/committee, advise on policy responses to anticipated cash shortfalls. - Information sharing and coordination - Close working relationship between CFU and debt management to share debt issuance/redemption plans and timing. - Information flows from budget/macro-fiscal departments, tax policy and revenue administration, and others. - Agree procedures with central bank and other banks for cash movements and information sharing. - Regular communication (weekly/daily) between CFU and large MDAs/revenue agencies for anticipated large payments/receipts and to communicate cash rationing measures. - Decision-making forum: Cash Coordination Committee (CCC) - CCC reviews latest cash flow forecasts and decides anticipatory actions; CFU can act as CCC secretariat and advise on risks, financing implications, and other actions (currency transfers, payment delays). - Decisions from forecasts include accessing markets/credit lines, postponing payments to prioritize unavoidable payments, and adjusting short-term debt issuance plans. - Example: Guinea Bissau treasury committee - Composition streamlined from a broad representation to a committee chaired by minister of finance comprising key secretaries, general directors (budget, treasury, debt, taxes, customs, forecast), ministry representatives for large sectors, and central bank branch representative; committee coopts agencies in charge of largest revenue/expenditure streams. - Key committee decisions: approve annual cash flow plans and actions; approve monthly/weekly projections; analyze actuals; assess and approve expenditure plans based on priorities and available funds; follow up implementation of cash flow plans and ensure COTADO recommendations implemented. - Cash management decision responses to forecast divergences - If more cash available than needed: - Reduce planned issuance of short-term debt. - Build cash buffer in TSA or banks. - Clear arrears/unpaid bills from previous cash rationing. - Redeem/buy back debt. - If less cash available than needed: - Increase planned issuance of short-term debt, if feasible. - Prioritize payments and introduce cash rationing for discretionary non-priority expenditures. - Adjust short-term debt issuance plan (for example, vary T-bill issuance). - Adjust timing of cash needs vis-a-vis short-term debt issuance plan. _References unit from htnea2022001 - references (htnea2022001 - references).pdf. Source: IMF staff; extracted from "HOW TO BUILD CASH MANAGEMENT CAPACITY IN FRAGILE STATES AND LOW-INCOME DEVELOPING COUNTRIES," Fiscal Affairs Department, International Monetary Fund | February 2022._ ### references. ### References ### Identifiers and Classification - ISBN: 9781557754431 (paper) - Subjects: LCSH: Cash management -- Developing countries. | Revenue management -- Development countries. - Classification: LCC HG4028.C45 P38 2022 ### Ordering and Contact Information - International Monetary Fund, Publication Services - PO Box 92780, Washington, DC 20090, U.S.A. - Tel.: (202) 623-7430 - Fax: (202) 623-7201 - Email: publications@imf.org - Website: www.imf bookstore.org ### Disclaimer - DISCLAIMER: Fiscal Affairs Department (FAD) How to Notes offer practical advice from IMF staff members to policymakers on important economic issues. The views expressed in FAD How to Notes are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ### Acronyms (selected) - BCEAO — Central Bank of West African States - BNC — Banque Nationale de Crédit - BRH — Banque de la République de Haiti - CBUs — central budgetary units - CCC — cash coordination committee - CFU — cash forecasting unit - CMU — cash management unit - COTADO — Comité Técnico de Arbitragem das Despesas Orçamentais - DNT — Despesas não tituladas - EBFs — extrabudgetary funds - EFT — electronic funds transfer - FS — fragile states - FMIS — financial management information system - IT — information technology - LIDCs — low-income developing countries - MDAs — ministries, departments, and agencies - PFM — public financial management - RAs — revenue authorities - SLA — service-level agreement - TSA — Treasury Single Account ### Executive summary of key findings, objectives, and building blocks - Context and challenges - Over half a billion people live in fragile states (FS), the majority of which are low-income developing countries (LIDCs). - FS are defined as having either weak institutional capacity as measured by the World Bank Country Policy and Institutional Assessment score (average of 3.2 or lower) and/or experience of conflict (signaled by the presence of a peacekeeping or peace-building operation in the most recent three-year period). - Fiscal institutional capacity in most FS and several LIDCs is much lower than in other countries, with limited access to financial markets and heavy reliance on donor funding; donor resources can form a large portion of budgets. - Common operational problems include dispersed public funds outside ministry of finance control, lack of credible budgets, unpredictable donor disbursements, and weak cash forecasting, often resulting in ad hoc cash rationing and arrears. - Benefits of a sound cash management system - Ability to make timely payments by estimating available cash deposits, expected cash inflows, and required disbursements. - Reduced costs of financing by lowering the need for short-term borrowing or premature liquidation of long-term investments, identifying idle funds, and assessing investment options. - Avoidance of expenditure arrears, which arise from unrealistic budgets, poor cash management, noncompliance with budget execution procedures, and large shocks. - Improved stability of the domestic financial system through more predictable short-term borrowing and better liquidity management by commercial banks. - Five key objectives for cash managers in FS and LIDCs - Anticipate mismatches between the expected timing of payments and cash availability to identify policy options in advance and analyze tradeoffs. - Develop and use a suite of policy options to address both anticipated and unanticipated cash shortfalls (examples: short-term borrowing, deferment of discretionary expenditure transactions, budget adjustment/revision, short-term advances from the central bank, credit lines from commercial banks). - Avoid idle government deposits in the banking system to prevent inaccessible liquidity, unauthorized use of public resources, and leakage. - Minimize government borrowing costs by ensuring available cash is used when most needed and evaluating tradeoffs between short-term borrowing and other options. - Ensure coordination with debt managers and the central bank to avoid adverse effects of government cash flows on debt management, financial markets, and monetary policy. - Three core building blocks of a cash management function (to be developed progressively with appropriate sequencing) - Consolidating cash resources under treasury oversight - Pooling government revenues in a Treasury Single Account (TSA) facilitates concentration of funds; the TSA brings most government bank accounts under a unified structure so the ministry of finance/treasury can trace cash flows and pool balances for efficient cash management. - Forecasting short-term cash inflows and outflows - Timely and realistic forecasts of aggregate cash inflows and outflows over monthly, weekly, or daily horizons, encompassing all (or at least large) payments and aligning expenditure planning with actual cash spending. - Managing the cash balance and ensuring institutional coordination - Actions to ensure the government has adequate cash to meet obligations, maintain contingency buffers, and establish institutional mechanisms for coordination among budget, debt management, and the monetary authority/central bank. - Implementation guidance and sequencing - Reform measures must be prioritized and sequenced according to country-specific circumstances, initial conditions, and absorptive capacity; an incremental approach is emphasized for FS and LIDCs. - TSA implementation requires preconditions and phased implementation where necessary: a complete inventory of government bank accounts, a well-functioning banking network and technology, and an adequate accounting system. - In many FS and LIDCs, closure of MDAs’ bank accounts may need to be carefully sequenced relative to establishing functional national payment and accounting infrastructure. _References unit from htnea2022001 - references (htnea2022001 - references).pdf_ ### 1. PI-21.2 Cash Forecasting & Monitoring, ### 1. PI-21.2 Cash Forecasting & Monitoring, 2008–20 ### Factors inhibiting TSA reform in fragile states (summary of Box 1) - Political economy challenges: MDAs often reluctant to relinquish control over their bank accounts; more acute where the ministry of finance/treasury is at an early stage of establishing custodial role. - Transaction-specific bank accounts used for accounting purposes due to underdeveloped accounting systems. - Underdeveloped banking infrastructure: lack of operationally integrated banking system, core banking, and modern payment/clearing and settlement systems. - Adverse liquidity implications for banks: some commercial banks depend on government deposits; transfers to the TSA could affect liquidity (empirical assessment required; audit in Sudan found no such problem in practice). - Inefficient payment modes: dominant use of cash and checks reduces efficiency and timely tracking of transactions. - Incomplete information on cash resources: lack of full inventory of government bank accounts, poor electronic infrastructure, and loss of access to cash in conflict areas. - Retention of revenues by MDAs: technical/IT constraints and distrust of the ministry of finance impede timely transfer of revenues; weak reconciliation capacity exacerbates the issue. - Lack of fungibility of donor flows: donors often require separate accounts and may not allow consolidation with government resources. - Weak staff capacity and other constraints: emigration, deterioration of education, casualties, and poaching of skilled staff; some FS and LIDCs face small size, costly infrastructure, and absence of a central bank (examples: Kiribati, Tuvalu). ### Measures to progressively consolidate cash and sequence of reforms - Address banking system constraints: - Build or coordinate with interbank clearing and settlement systems and banking network coverage. - Concurrent actions where core banking takes long: (1) protocol for data sharing with central bank system; (2) regular coordination meetings between ministry of finance, decentralized spending units, revenue agencies, and commercial banks; (3) regular audits of decentralized units’ bank accounts. - Close cooperation and capacity development support for the central bank. - Define role of commercial banks in revenue collection and payment operations: - Use commercial banks for retail operations while introducing timely sweeping mechanisms to the TSA. - Retain some commercial bank accounts where necessary (geographical or processing constraints), preferably zero-balanced with daily sweeps. - Use notional accounts if IT infrastructure allows and the ministry can track/oversee them. - Develop and implement a plan for progressive cash consolidation (phased approach): - Steps include: take stock and close idle accounts; concentrate large cash movements in the TSA; monitor and reconcile largest inflow/outflow accounts (start with budgetary central government); ensure daily reporting and reconciliation for large accounts; gradually monitor smaller accounts; implement phased unification under TSA. - Example: study of transferring balances in all 3,000+ government accounts (other than project accounts) from 13 commercial banks to BCEAO in Mali informed phased transfers (see Box 2). - Institute strong reporting and bank reconciliation system and treasury oversight: - Require full reporting by banks via formal agreements and ensure monthly reconciliations at minimum. - Define service level agreements covering turnaround times, reporting on individual and consolidated balances, information obligations, timing of transfers to TSA, and business continuity arrangements. - Integrate donor funds with overall cash consolidation framework: - Ideally transfer donor-financed project accounts to the TSA, but often phased later. - Phase integration by currency (local currency accounts first, then forex-denominated accounts). - Use protocols between donors and treasury defining reporting, internal control, and auditing mechanisms. ### Overarching elements needed to support reform - High-level political support and commitment is essential to overcome resistance from MDAs and commercial banks; a dedicated committee to manage reform helps sustain pace and avoid backsliding (example: Rwanda treasury committee). - Legal framework provision: - Obligation to set up a TSA is generally enshrined in PFM legal frameworks or financial regulations when parliament is absent (example: Guinea used minister of finance instruction before organic budget law change). - FMIS/IFMIS as enabler: - An FMIS can configure a virtual hierarchical structure of accounts under the TSA main account to track/control specific cash flows. - Functionality can allow the ministry to control MDAs’ spending ceilings without advancing physical cash; banks can be given credit limits settled directly with the TSA. - A well-designed IFMIS supports EFT and facilitates reconciliations and can help integrate EBFs and donor balances without donors losing entitlement claims. ### Illustrative country experiences (selected excerpts) - Mali (Box 2): - Study of transferring balances in all 3,000+ government accounts (other than project accounts) from 13 commercial banks to BCEAO. - Conclusion: 11 banks could handle immediate transfer without compromising liquidity ratios, but five banks (out of 13) would see ratios fall below minimum required. - Decision: transfer accounts opened at “financially healthy” banks first; draft agreement to create zero-balance accounts and organize periodic transfers to BCEAO. - Afghanistan (Box 3): - Political commitment in 2003: president ordered all government units to close bank accounts and process operations through the treasury; requirement for bringing all government revenues to the TSA was strengthened in the 2004 Constitution. - Haiti: - Reforms during 2011–13 with IMF assistance; effective TSA implementation started in 2014. - Prior actions: explain TSA to stakeholders; inventory of government bank accounts at BRH and BNC; review budget execution procedures; upgrade IT systems. - December 2015: core TSA established covering all central budgetary units (CBUs); core TSA comprised a main account and 15 subaccounts that are zero-balanced daily. - Agreement ensured transfer of collected taxes by BNC to TSA within 48 hours. - 2016: BRH and Ministry signed cash-management agreement; treasury access to BNC and BRH portals; 2017 strategy approved to expand TSA coverage to extrabudgetary units, statutory bodies, and donor projects; provisions included in new organic law of public finance enacted in 2017. - Sudan: - Initiated TSA in 2004; implementation in phases and accelerated in 2014 with TSA operational in 2015. - First phase: TSA regulations drafted; commercial bank accounts gradually closed with balances transferred to TSA; transitional arrangements allowed some commercial bank accounts to support ministries in remote areas; commercial banks still used for revenue collection under bilateral agreements. - Second phase (ongoing): centralized e-payment system developed; EBFs and donor fund accounts gradually integrated with TSA using subaccounts to separate cash from permission to spend while maintaining monitoring and accounting controls. - General guidance: consider keeping government accounts in commercial banks on a zero-balance basis if sweeping to main treasury account/TSA is infeasible due to fragile banking infrastructure. ### Key challenges for short-term cash forecasting (section IV) - Lack of timely data on government cash flows and balances due to banks failing to provide information timely and differences in transaction coverage between bank statements and treasury records. - Focus of cash forecasting on budget items rather than actual cash flows; some budget expenditures do not imply cash movements and some cash movements are off-budget (examples: imprest funds, project advances, retention of nontax revenue by MDAs, cash transfers between bank accounts). - Confusion between expenditure plans and cash forecasts: expenditure plans are constrained by the budget and represent what should happen; cash forecasts should focus on what will happen and can diverge from the budget within the year. - Overemphasis on short-term cash availability. *Source: IMF staff; extracted from "HOW TO BUILD CASH MANAGEMENT CAPACITY IN FRAGILE STATES AND LOW-INCOME DEVELOPING COUNTRIES," Fiscal Affairs Department, International Monetary Fund | February 2022.* ### Box 4. Treasury Single Account Reform: The Examples of Haiti and Sudan ### Box 4. Treasury Single Account Reform: The Examples of Haiti and Sudan ### Major challenges to accurate cash forecasting and cash management - Focus on currently available cash for priority expenditures rather than projecting cash balances over a longer horizon (at least three months) can prevent ensuring cash is available when most needed and/or adjusting spending plans to avoid cash rationing. - Lack of staff capacity to prepare cash forecasts, reflecting a wider shortage of skilled staff and lack of senior management awareness of the crucial role of cash flow forecasts. - Lack of cooperation and timely information-sharing by other entities: MDAs may provide inadequate information on cash needs; revenue authorities may fail to forecast or report expected receipts; the central bank may not fully cooperate with the treasury. - Limited TSA coverage: when many MDAs keep separate bank accounts outside the TSA or treasury’s main bank account, treasury cash forecasting may not cover significant cash flows. - Inadequate understanding of the difference between budget data and cash flows data (for example, budgets may record issuance of a check while cash moves only when presented and cleared). - Use of imprest accounts and lack of reporting on their balances, complicating timely determination of overall cash position and forward cash planning (examples: South Sudan, Kiribati, Somalia). - Incomplete information on donors’ disbursement calendars: donor disbursements have on average accounted for 20 percent of the overall budget in Mali in recent years; unpredictability forces the treasury to cover unforeseen payments or delay payments. - Unpredictable off-budget and/or unauthorized spending that bypasses the regular expenditure chain (examples: external loan drawdowns outside the core treasury in Malawi until 2015; “Despesas não tituladas” (DNT) in Guinea Bissau). - Lack of credibility of budget forecasts and MDAs reluctant to share future cash needs (examples: Liberia, Somalia, South Sudan, Haiti, Malawi, South Sudan). ### Adverse effects of unmanaged cash rationing - Accumulation of arrears if MDAs continue to commit expenditures beyond cash availability. - Budget process impairment, where real budgeting occurs month to month or week to week, with discretionary decisions on which outstanding bills to pay. - Unhealthy competition for cash among MDAs and perceptions of opacity and unfairness. - Example statistics and consequences: - South Sudan: a 1/12th current expenditure limit based on 1/12th of budget appropriation did not reflect seasonal requirements and led to delayed procurements or requests for adjustments. - South Sudan accumulated arrears representing 125 percent of GDP and 500 percent of the budget in 2020. ### Elements to minimize adverse effects when cash rationing is necessary - Build cash rationing on the seasonal pattern of expenditures to avoid accumulation of arrears. - Periodically review and reset cash limits imposed on MDAs based on updated forecasts of revenues and other cash inflows; communicate revisions when revenue flows improve. - Back cash limits with commitment controls, particularly when the budget is not credible. - Cash rationing should rely on some form of basic cash forecasting; forecasts are simpler when a TSA is in place or when authorities have a consolidated view of their cash position. - In conflict-affected states with scarce resources, adjust cash limits from time to time and consider a potential buffer for unforeseen spending (for example, on security) or shifts in spending priorities. ### Key measures for progressive development of a cash forecasting function - Progressive development of cash forecasting in FS and LIDCs is important to build the credibility of the ministry of finance to pay for priority expenditures when they fall due. - Implement cash forecasting reforms in tandem with other cash management reforms, especially expansion of TSA coverage. - Move from cash rationing (focus on current cash balance) to longer-term forecasts of cash flows and balances to provide more policy choices. - Start basic cash forecasting with large items and adjust to data availability; progressively build a bottom-up approach while strengthening the top-down approach. - When cash outturn profiles for previous years are not available, use approved budget appropriations as the starting point with necessary adjustments based on budget execution. - Institute legal and regulatory provisions to limit unauthorized spending where MDAs lack discipline (example: post-2012 Mali provision making spending null and void if not authorized within approved budget or respective EBF legislation). - Charge a cash management unit or comparable treasury unit with cash forecasting in coordination with revenue and spending agencies; involve relevant agencies regularly to avoid accumulation of arrears. ### Operational and informational issues to address progressively - Improve reconciliation of cash flows and balances in government bank accounts to resolve delays and inconsistencies in bank statement information (examples of affected countries: Afghanistan, Guinea Bissau, Malawi, Myanmar). - Address floating checks pending encashment and payments from government bank accounts that complicate determination of cash availability (example: South Sudan’s use of physical cash; Guinea Bissau’s use of checks). - Strengthen coordination with donors to improve predictability of donor disbursements, particularly where donor support is a significant share of the budget. - Analyze opportunities for new expenditure commitments against potential availability of cash, including the ongoing pipeline of payments; tailor controls when payments are decentralized and publish criteria for prioritizing commitments/payments within cash limits. *Source: IMF staff.* ### Box 5. General Issues Hindering Improved Coverage and Quality of Cash Forecasts (continued) ### Box 5. General Issues Hindering Improved Coverage and Quality of Cash Forecasts (continued) ### Role and scope of the cash forecasting function - Key elements the cash forecasting function should progressively cover: - identifying the outflows and inflows that should be included in the cash forecast; - achieving broad agreement with the main spending and revenue agencies for the timely submission of their cash flow information to the treasury; - preparing and securing approval by the treasury of a cash forecast/plan, ideally using an excel spreadsheet template; - defining the cash forecasting horizon—at least three months ahead and updated regularly, at least on a monthly basis. - When the budget is unrealistic, establishing a baseline using data from budget estimates and adjusting them based on the historical profile of cash flows, supplemented by updated information on actual cash inflows and outflows and macroeconomic developments during the year, is required. - A basic forecasting approach recommended: - two-pronged focus on cash outflows: (1) larger, predictable expenditures (salaries, transfers to lower levels of government, debt service) and (2) other expenditures (capital expenditures, significant goods and services purchases) requiring relationships with finance officials in larger MDAs or project management offices for timely information. - Treasury coordination needs: - work with the debt office and MDAs to address data gaps and improve quality of cash outflow estimates (timing and amount of debt servicing, completeness of debt database, exchange rate/interest rate impacts). - engage revenue authorities in forecasting to reduce optimism bias and incorporate revenue collection patterns. ### Common features and challenges of cash inflows in FS and LIDCs - Common features of cash inflows: - the importance of external grants from donors; - the dominance of trade taxes in revenue collection; - the frequent optimism bias in forecasting revenues that tends to push expenditures upward; - the unpredictability of timing of certain types of cash inflows due to a weak understanding of their seasonality. - Steps to produce reasonable cash inflow forecasts: - distinguish between tax and nontax revenues; - obtain expected tax inflow information from revenue authorities (to mitigate optimism bias arising from ministry-level resistance to revenue forecasts); - identify large nontax revenue streams and obtain advance information from respective MDAs while using past patterns for smaller nontax streams; - make allowance for “leakage”: illegal retention by some MDAs of revenues for their own purposes. - Donor disbursements: a strong coordination framework between donors and authorities facilitates better predictability of these inflows. ### Practical guidance: focus, prioritization, and baseline system - Start with a basic cash forecasting system that focuses on larger and more predictable cash flows. - Categorize and prioritize: - cash outflows by value, predictability, and priority payment needs; - cash inflows by main sources of receipts. - Minimum coverage: all cash flows that have a material impact on the central government’s bank balances. - Forecasting horizon and update frequency: - rolling forecast at least three months ahead and ideally more; - focus on months immediately ahead (potentially extending into the following year); - forecasts updated as outturn data are incorporated. ### Box 6. The Cash Flow Forecasting Analytical Tool — design and use - Purpose and target users: - designed primarily for practitioners in the treasury or elsewhere with responsibility for preparing cash flow forecasts. - supports preparation of cash forecasts and policy advice to senior decision makers. - Features: - excel spreadsheet and related user guide to construct cash forecasts for the budget year and adjust forecasts as outturn data become available; - focus on monthly forecasts with facility to support weekly forecasts as capacity grows; - primarily top-down mechanism relying on known flows for higher order items and past patterns, but able to incorporate bottom-up information from MDAs and RAs; - ability to request early warning information from MDAs (for example, one week in advance) on expected large payments above a threshold amount; - supports sensitivity analysis and scenario testing with user inputs; includes charts for visual aids to decision making. - Forecast bottom line and adjustments: - bottom line is the projected balance in the Treasury Single Account (TSA) or the cash balances over which the treasury has direct control; - requires adjustments to reconcile budget flows and cash flows, specifically cash flows across the TSA; - tool provides for adjustments and examples of incorporating outturn data and their impact on forecast revisions. - Presentation: - categorizes flows as inflows and outflows to focus users on financing choices available to the government in the event of in-year divergences from plan. ### Comparing forecasts with outturns and learning - Actual cash flows or outturns should be compared with forecasts to: - identify specific drivers for variances to inform immediate action; - learn lessons to improve the quality of future forecasts. - Ensure actual realization information (inflows, outflows, bank balances) is consistent with the forecasting framework for comparability and analysis. ### Cash outflows: predictability categories and implications - Outflows from greater to lesser predictability: - Salary payments: predictable and easy to calculate and schedule; often constitute the largest cash outflows. - Debt servicing payments: mostly predictable and usually large amounts. - Current expenditure payments: utilities and other recurrent expenditures often predictable but more difficult to schedule within the year; treasury should identify which expenses are relevant/necessary given FS characteristics. - Capital expenditure payments: often unpredictable and difficult to schedule; may be large and follow seasonal patterns; forecasts should rely on ministries, departments, agencies, or project management offices for large domestically managed projects. - Payments to clear arrears: difficult to estimate in absence of accrual accounting or when arrears are not properly recorded and disclosed; allowances needed for clearance of arrears carried forward from previous years. - Off-budget payments: generally unpredictable unless early warning procedures can be established. - Notable empirical point: - lack of information on capital expenditure commitments contributed to an accumulation of arrears above 20 percent of GDP in 2016 (Equatorial Guinea example). ### Cash inflows: predictability and seasonality - Inflows by predictability and seasonality: - Nontax revenue receipts: often seasonal (examples include sale of seasonal agriculture products such as cashews in Guinea Bissau). - Tax revenue receipts: import-related revenues may be concentrated in certain periods; income taxes and property taxes typically collected in defined periods. - Budget support receipts: fungible but often unpredictable; regular coordination and communication with donors helps provide updated information. - Proceeds of debt disbursements: program loans often highly unpredictable; provisional schedules can be agreed with regular donors and periodically updated. - Project-related donor flows: difficult to forecast but timing is often linked to project expenditures; treasury focus should be on local counterpart funds and risks that donor delays require treasury advances. - Proceeds of domestic securities issuance: timing is under the control of the ministry of finance/treasury (in consultation with the central bank) but actual amounts raised may fall short due to domestic market conditions. *Source: Box 5 and Box 6, How to Build Cash Management Capacity in Fragile States and Low-Income Developing Countries (IMF, February 2022).* ### Box 7. Categorizing Cash Flows according to Their Predictability and Seasonality ### Box 7. Categorizing Cash Flows according to Their Predictability and Seasonality ### Monitoring overall government cash balance and incremental improvement - Treasury should monitor flows and balances in bank accounts under its control and periodically monitor the overall government cash balance. - Challenges in FS and LIDCs: incomplete list of government accounts in commercial banks; weaknesses in bank reconciliation; time lags in sweeping cash; use of checks or imprest accounts increasing uncertainty about available cash. - Three-pronged approach to assess overall cash balance: - (1) Periodically taking stock of balances in bank accounts (for example, quarterly or monthly), focusing initially on accounts with large balances. - (2) Relying on the central bank to monitor government bank account balances and identify those not approved by the ministry of finance/treasury. - (3) Signing an agreement with banks to provide the treasury with an overall picture of the government cash position with them, in addition to detailed bank statements to line ministries and agencies. - Incremental enhancements to cash forecasting as capacity increases: - Add other categories of receipts and payments to increase coverage and accuracy. - Increase forecast granularity from monthly to weekly. - Expand the cash forecasting horizon from three months to, say, six months ahead, with updates on a weekly basis. - Concrete steps to implement incremental approach: - Review and adjust cash flow forecasts with increasing frequency; compare actual payments and receipts with the initial cash forecast to adjust the next period’s forecast. - Increase the range of inputs by expanding contacts among MDAs and revenue authorities and regulate for systematic reporting. - Frequently review reliability of forecasts provided by MDAs and RAs, following sequence from predictable to unpredictable cash flows (see Box 7). - Take frequent stock of government bank accounts and balances, including review of any new bank accounts opened during the year and approval steps required by ministry of finance/treasury. - Financing requirement focus: - Cash and debt managers should look at the financing requirement and not simply the budget deficit; amortization of debt (principal payments) is typically not budgeted and should be incorporated in the cash forecast as part of the financing requirement. ### Short-term financing options and dealing with seasonality in FS and LIDCs - Options vary by fragility status and type; capacity of financial markets to meet urgent liquidity needs is a major weakness in FS and some LIDCs. - Common approaches when domestic markets are absent or shallow: - Short-term advances (or “ways and means” loans) from the central bank are the most common approach. - Central bank advances or overdrafts often meet financing requirements when markets are inaccessible; desirable to repay within the same month or by end of financial year, but this frequently does not occur in FS, straining central bank monetary operations. - If legal overdraft limits exist, short-term borrowing from domestic commercial or state-owned banks is an alternative, but may have similar monetary policy effects if banks borrow from the central bank. - International aid (grants or loans) and debt relief are another source, but uncertainty in aid inflows complicates forecasting; preparing two cash forecasting scenarios—with and without aid disbursement/inflows—could be an option. - As stability returns, issuance of T-bills and later T-bonds should open up, aiding money market development, reducing borrowing costs, and facilitating active cash management. - Macro and currency risks: - High inflation and exchange rate fluctuations in some FS and LIDCs must be factored into cash forecasting and optimal cash holdings decisions. - Where foreign currency-denominated obligations are high, part of the cash cushion or buffer can be held in foreign currency. - Close coordination with macro-fiscal revenue and budget staff and use of scenario analysis is required. ### Building and managing a cash buffer - Need to balance maintaining a cash cushion/buffer to meet urgent needs and the cost of carry in cash-constrained environments. - Definition and objectives: - Target buffer level often refers to a lower bound for government cash balances; maintain a positive cash balance in government bank accounts at all times. - Avoid overborrowing to build buffers. - Determinants of buffer level: volatility of cash flows and forecasting ability, risk management objectives, availability of other risk mitigation mechanisms, and cost of carrying the buffer. - Regulation and oversight: - Use of the cash buffer should be regulated (clear criteria of access) and subject to appropriate oversight consistent with government expenditure controls. - Options to build a buffer in FS and LIDCs: - Use IMF resources or international aid flows (including budget support in an IMF-supported lending program) to build buffer. - Keep a ring-fenced account in central bank or set up credit lines with commercial banks, weighing reduced risk against cost of carry. ### Managing ministry of finance–central bank relationship - Cash and debt management activities substantially impact domestic monetary conditions and must be coordinated with central bank monetary policy operations. - Coordination is especially important where the central bank lacks adequate monetary instruments and uses T-bills for liquidity control; sometimes the central bank fully controls T-bill issuance for monetary policy. - Treasury should share government cash flow forecasts with the central bank as inputs to the bank’s liquidity forecasts. - Roles and separation: - Central bank usually acts as fiscal agent and banker; ministry of finance should set debt issuance policy and amounts. - Cash management roles: central bank provides services and executes financial operations decided by ministry of finance. - Respective roles should be defined in a service-level agreement (SLA). - Risks in FS: - Central bank financing of government is common when access to markets is lost; such advances should be limited in time and strictly managed via SLA with reimbursement modalities (timeframe, amount, interest rates). - Examples where central bank assumed revenue/ payment roles: Guinea after the 2008 coup; Haiti (central bank, with tax administration, collects revenues on behalf of ministry of finance); Yemen (treasury functions by central bank before armed conflict). - As treasury functions are strengthened and a TSA implemented, central bank systems and SLA arrangements should be adapted accordingly; development of cash management supports development of monetary policy management. ### Institutional arrangements, CFU/CMU design, and decision mechanisms - Key institutional needs: - Location of cash forecasting function and specific roles and responsibilities. - Coordination arrangements for information sharing and policy coordination. - Clear mechanism for policy decisions arising from cash forecasts (temporary shortfalls, surpluses). - CFU versus CMU: - CFU (cash forecasting unit) may be part of treasury and does not require a large staff; a small unit (perhaps only three to four people) might be sufficient to prepare a basic cash forecast. - Main CFU responsibilities: - Prepare forecasts of government cash flows and balances (for example, for the next three months) to be circulated to senior management or committee members. - Advise senior management/committee on policy responses and make recommendations about responses to forecasting challenges, including anticipated cash shortfalls. - CMU (cash management unit) with wider responsibilities may require more staff; choice depends on country capacity and availability of skilled staff. - Initial development stage recommendation: consider a simple CFU or an integrated office with restricted functions to use limited country capacity effectively. - Indicative task distribution among CFU staff (Figure 3 highlights roles): - Head of unit: ensure preparation of forecasts and presentation in line with management needs; advise on financing options. - Officer 1: lead forecast compilation; liaison with ministries, central bank, and within MoF to ensure information flow to update forecasts. - Officer 2: establish and maintain forecast database; analysis of forecast patterns; ex post analysis of forecast divergences. - Administrative support: data custody, liaison with IT, etc. - CFU expected to produce recommendations about anticipated cash shortfalls and policy responses. - Information sharing and coordination (Table 1 outlines providers): - Ensure close working relationship between CFU and debt management unit to share information on debt issuance and redemption plans, expected timing of cash shortfalls or surpluses. - Arrange information flow from budget and macro-fiscal departments, tax policy and revenue administration, and others on changes affecting cash flow profiles. - Agree with central bank and other banks on procedures for cash movements between government accounts and information sharing relating to cash forecasts and TSA balances. - Establish mechanisms for regular communication (weekly or daily) between CFU and large MDAs/revenue agencies for anticipated expenditures/revenues and to communicate cash rationing measures. - Decision-making forum: Cash Coordination Committee (CCC) - CCC or similar entity brings relevant actors to review latest cash flow forecasts and decide anticipatory actions. - CFU can act as CCC secretariat and advise on forecast risks (including sensitivities), implications for borrowing programs or financing options, and other actions (transfers between currency accounts, payment delays). - Decisions flowing from cash forecasts center on: - Accessing markets or credit lines to meet short-term financing needs. - Postponing payments to prioritize unavoidable payments. - Defining how cash forecasting supports cash management and budget execution. - Example: Guinea Bissau Treasury Committee (until September 2020 and after streamlining) - Composition until September 2020: representatives from Revenue Agency, Budget Directorate, Treasury, Debt Unit, main ministries, departments, and agencies; chaired by minister of finance, prime minister, or president, with enforcement authority. - From September 2020 composition streamlined: chaired by minister of finance and comprises secretaries of state to the budget and the treasury; general directors of budget, treasury, debt, taxes, customs, and forecast; a representative of the Ministry of Fishery; and a representative of the national branch of the Central Bank of West African States. The committee coopts agencies in charge of largest revenue and expenditure streams. - Key decisions taken by the committee: - Approving the annual cash flow plans and policy actions, based on the general budget. - Approving the monthly/weekly cash flow projections and analyzing the actuals. - Assessing and approving expenditure plans, as decided by the Budget Committee (Comité Técnico de Arbitragem das Despesas Orçamentais—COTADO), based on priorities and available funds. - Following up on implementation of the cash flow forecast/plan. - Ensuring implementation of COTADO recommendations. ### Cash management decision responses to forecast divergences (Figure 4 summary) - If more cash available than needed for budget execution: - Reduce planned issuance of short-term debt. - Build cash buffer in TSA or banks. - Clear arrears/unpaid bills from previous cash rationing measures. - Redeem/buy back debt. - If less cash available than needed for budget execution: - Increase planned issuance of short-term debt, if feasible. - Prioritize payments and/or introduce cash rationing for discretionary non-priority expenditures. - Adjust short-term debt issuance plan (for example, vary T-bill issuance), if possible. - Adjust timing of cash needs vis-a-vis short-term debt issuance plan. *Source: IMF staff, Box 7, How to Build Cash Management Capacity in Fragile States and Low-Income Developing Countries (February 2022).* ### Box 8. Example of a Treasury Committee: Guinea Bissau ### Box 8. Example of a Treasury Committee: Guinea Bissau ### Purpose and context - In low-capacity environments, start with a basic treasury committee to ensure cash availability for priority spending needs. - A treasury committee provides a basic decision-making structure and procedures for addressing cash shortfalls and coordinating with monetary policy operations. - Establishing a treasury committee should be part of a sequenced reform strategy to build cash management capacity alongside other reforms (TSA, cash forecasting, cash balance management). ### Recommended functions and composition (institutional coordination) - Establish a network of key officials (from large MDAs and revenue agencies and the central bank) to inform the treasury on anticipated cash flows and balances. - Set up basic decision-making structures and procedures for addressing cash shortfalls and coordination with monetary policy operations. - Progressively strengthen the cash management institutional arrangement as capacity improves. ### Operational measures and tools for the committee - Identify and use short-term credit lines and instruments for cash management purposes. - Progressively establish a commitment control system (at least for large value and staggered payments) to inform cash forecasting. - Define key parameters of cash rationing (for example, postponing certain payments to make room for priority payments), if necessary, and update them periodically to eventually get rid of cash rationing. - Identify cash buffer needs based on unpredictable but priority/urgent payment needs. - Ensure positive cash balance at all times taking account of the cost of carry. ### Sequencing and linkages with broader reforms - The treasury committee is an early, low-capacity intervention; reforms should proceed along three pillars: - Consolidate cash resources (including TSA development and bank relations). - Improve cash forecasting. - Strengthen cash balance management and institutional coordination. - Reforms along these dimensions can proceed in parallel; interlinkages should be explicitly identified and considered when updating the strategy. - Communication and change management: accompany reforms with proactive outreach to treasury, line ministries/spending agencies, revenue agencies, the central bank, commercial banks, other financial market participants, and donors. ### Practical steps and monitoring - Use the committee to centralize monitoring of cash availability and prioritize payments. - Leverage existing systems (FMIS, centralized payment systems) to expand TSA coverage and information flows progressively. - Establish/update service level agreements (SLAs) for TSA management and information flows from the banks with government accounts, and monitor their enforcement. - Prepare realistic cash forecasts progressively in terms of “what will happen” rather than “what is in the budget.” - Progressively expand the coverage of the cash forecast and improve its quality. ### Illustrative functions of a Cash Management Unit (CMU) relevant to the committee - 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. *Source: Box 8, "Example of a Treasury Committee: Guinea Bissau," How to Build Cash Management Capacity in Fragile States and Low-Income Developing Countries, Fiscal Affairs Department, International Monetary Fund, February 2022.* --- _Source: https://www.imf.org/-/media/files/publications/howtonotes/2022/english/htnea2022001.pdf_