How to Develop A Framework for the Investment of Temporary Government Cash Surpluses

IMF How To Notes, December 21, 2020

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How to Develop A Framework for the Investment of Temporary Government Cash Surpluses

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Bibliographic details

• Authors: Israel Fainboim Yaker, Sandeep Saxena, Michael J. Williams
• Published: December 21, 2020
• Series: IMF How To Notes
• DOI: https://doi.org/10.5089/9781513563824.061

Overview

• Well-developed cash management aims to improve government operational efficiency and facilitates better service delivery by ensuring liquidity to meet payment obligations as they fall due.
• Liquidity, however, comes at a cost.
• Governments can reduce the cost of maintaining liquidity by proactively managing their cash balance at an appropriate level and prudently investing any excess liquidity.
• This note discusses the policy framework and processes that governments should put in place to identify, guide, and govern the investment of their surplus cash resources.

Key findings and analysis

• Effective cash management supports operational efficiency and service delivery through timely payments.
• Maintaining liquidity involves trade-offs because liquidity entails costs.
• Prudent investment of surplus cash can lower the overall cost of liquidity for the government.
• A clear policy framework and well-defined processes are necessary to:
  • identify surplus cash;
  • guide investment decisions for temporary cash surpluses; and
  • govern the operational and risk-management aspects of surplus cash investments.

Policy framework and processes (scope highlighted by the note)

• Identify surplus cash resources through robust government cash forecasting and cash balance monitoring.
• Define appropriate cash balance targets, including cash buffers, to ensure payment obligations are met while permitting safe investment of excess funds.
• Establish governance arrangements to assign roles and responsibilities for cash managers and oversight bodies.
• Specify investment objectives, permissible instruments (for example, money market instruments and reverse repo operations), and constraints reflecting:
  • liquidity risk;
  • market risk;
  • credit risk;
  • market liquidity considerations.
• Implement operational processes for execution, settlement, custody, and accounting of surplus cash investments.
• Integrate risk management, reporting, and internal control mechanisms to ensure transparency and compliance with policy.

Subjects and keywords (as listed)

• Credit risk
• Currencies
• Financial markets
• Financial regulation and supervision
• Government cash forecasting
• Government cash management
• Money
• Money markets
• Public financial management (PFM)

• Keywords: Africa, cash balance, cash buffer, cash manager, cash surplus, Credit risk, Currencies, debt management, FADHTN, Global, Government cash forecasting, Government cash management, HTN, liquidity risk, market liquidity, market risk, Money markets, reverse repo, surplus cash

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• How to Develop A Framework for the Investment of Temporary Government Cash Surpluses
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