GOVERNANCE GOVERNANCE EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Cash Management and Commitment Control Principles and Problems in Practice EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 1 © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Graphic Designer: Maria Lopez / lopez.ten@gmail.com >>> Contents Acknowledgements v Executive Summary 1 1. Principles of Cash Management and Commitment Control 9 1.1 Introduction 9 1.2 Budget Preparation 10 1.3 Budget Execution 16 1.4 Recording and Reporting 28 1.5 Institutional Arrangements and Coordination 33 2. Mapping out the System and Identifying Bottlenecks and Underlying Causes 38 2.1 Mapping Out Existing Practices 39 2.2 Framework for Understanding Underlying Weaknesses 45 2.3 Identifying Challenges in Practice 49 3. Supporting Solutions 62 3.1 Identifying Underlying Causes and Solutions Which Address the Problem 62 3.2 Provision of Technical Support 69 3.3 Operations – How to Use DPOs, PforRs and IPFs to Support Change 70 Bibliography 71 Annex 1. Glossary 75 Annex 2. Further Technical Resources and Tools 79 Annex 3. Template of a Simple Annual Cash Plan 81 Annex 4. Examples of Chart of Accounts Coding 84 Annex 5. Example Weekly Cash Forecast Tool 87 Annex 6. Example Responsibilities in a Cash Management Framework 89 Annex 7. PEFA Tables 92 Figures Figure 1. Consistency of Information as It Progresses through Budget Preparation 15 Figure 2. Simplified Diagram of the Expenditure Process 16 Figure 3. Cash Flow Forecasting Approaches: Top-Down vs. Bottom-Up 18 Figure 4. Aligned Planning of Commitments and Cash 19 Figure 5. Overview of a Typical Expenditure Control Process 23 Figure 6. Simplified Payments Processing System 26 Figure 7. Illustration of a Simple Weekly Cash Projection Dashboard with Policy Options 31 Figure 8. Excerpts from Kenyan Legislation and Regulation on Cash Management 34 Figure 9. PEFA Scores of 46 Countries (PI-21, PI-25, PI-22, and PI-2) 40 Figure 10. PEFA Scores: Expenditure Control and Budget Credibility 41 Figure 11. PEFA Scores: Arrears Outcomes, Expenditure Control and Predictability of Resources 42 Figure 12. PEFA Scores: Stock of Arrears, Cash Forecasting and Commitment Ceilings 43 Figure 13. PEFA Scores: Cash Forecasting, Size of Arrears and Budget Composition 44 Figure 14. Illustrative Example of Interconnected Challenges 45 Figure 15. Approach to Identify/Address Governance Constraints to Delivery and Value for Money 50 Figure 16. Framework for Identifying Solutions 63 Tables Table 1. Data Required for a Rolling Aggregate Cash Plan (Adapted from Kenya ACP 14 Table 2. Functions and Decisions at the Interface of Cash Management and Commitment Control 24 Table 3. Key Segments of a Chart of Accounts 29 Table 4. Sample Budget Utilization Report with Outstanding Commitments and Obligations 32 Table 5. Formal and Informal Information Flows 35 Table 6. Drivers of Budget Deviations: Zambia, Bangladesh, and Kenya 52 Table 7. Reform Programs - What Worked and What Did Not 65 Boxes Box 1. Features of Cash Management and Commitment Control 10 Box 2. Definitions of Cash Planning and Forecasting 13 Box 3. Definitions Relating to Expenditure Control 17 Box 4. Treasury Single Account 25 Box 5. Definitions of Accounting Basis 28 Box 6. Categorizing Priorities in Expenditure Using the COA in Kenya 30 Box 7. Institutional Coordination and Oversight in Kenya 33 Box 8. What Does a Cash Management Function Look Like? 36 Box 9. Summary of Eight Problems Affecting Cash Management and Commitment Control 39 Box 10. Public Investment Challenges in Kenya 53 Box 11. Reporting on Conditional Grants in Kenya 59 Box 12. Stumbling Blocks in the Operationalization of Cash Management Reforms in Kenya 60 Box 13. Establishing a TSA in Sierra Leone 61 Box 14. Practical Applications of a GovEnable Approach 64 >>> Acknowledgments Manager: This Practice Note was prepared under the guidance of Adenike Sherifat Oyeyiola (Practice Manager, EPSPF). Authors: The note was drafted by Samuel Moon (Consultant) with support from Winston Percy Onipede Cole (Lead Financial Management Specialist, ESAG2); Srinivas Gurazada (Head, PEFA Secretariat and Global lead PFM and PIM, EPSPF); and Tim Williamson (Sr. Public Sector Specialist and Global lead PFM and PIM, EPSPF); Peer Reviewers: Joseph Kizito (Lead Financial Management Specialist, EAEG2); Leandro Puccini Secunho (Senior Debt Specialist, EMFMD); and Akmal Minallah (Senior Financial Management Specialist, ESAG1). Contributors: Hasib Ehsan Chowdhury, Rinzin Dorji, Riham Hussein, Samson Chabuka Kwalingana, Leonard Mutuku Matheka, Pierre Prosper Messali, Diana Mwikali Nzioki,Rama Krishnan Venkateswaran. Bertin Lopez and Umme Saima Sadia provided administrative support. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< v >>> Executive Summary COVID-19 resulted in two immediate challenges for ministries of finance - a sudden reduction in cash inflows, combined with a new set of significant unplanned expenditures. Theory on cash management and commitment control gives us an array of sound practices encompassing accrual accounting methods, the Treasury Single Account and integrated budgeting, commitment, and payment systems. However, such theory does not always give practical answers on how to address the real and varied challenges faced by finance ministries and spending departments in managing cash - including those that COVID-19 has presented. As reforms are developed, keeping an eye on theory is important, but understanding what is realistic and achievable in the specific context, and more importantly how to improve budgetary outcomes, will benefit from both practical experience and careful judgement. This Practice Note is designed to help practitioners identify the problem that needs resolving and the underlying causes, select the instrument(s) that are most relevant for addressing them, and weigh options for how to deliver solutions. Examples from the experience of country teams are used wherever possible to illustrate both problems and solutions in cash management and commitment reform. The note aims to inform practitioners by: • Presenting the overall theory of cash management and commitment control and how it can deliver predictable resources. • How the process can break down in practice – bottlenecks and underlying causes. • How to get the problem diagnosis right. • Identifying technical solutions which best address the underlying causes. • Reference to further guidance and tools to support solutions. How Cash Management and Commitment Control Break Down in Practice Cash management and commitment controls may break down along several dimensions which undermine the ability of the governments to maintain overall fiscal discipline, maintain borrowing within agreed limits, and deliver funds to spending units when they need it to deliver investments and services. Three key areas are highlighted below. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 1 Planning and Forecasting • Furthermore, it may increase incentives for agencies to limit information on cash balances, encourage rent-seeking • Poor forecasting leaves a Treasury with inadequate opportunities within agencies, and allow commercial information on cash flows and too little reaction time to banks to utilise the balances to extend credit, tying up the address cash management issues efficiently. funds and thereby draining liquidity. Bank reconciliations may be delayed or not done at all, further undermining the • Exposure to this risk raises the possibility of unplanned, information on any cash available. short-term, and expensive borrowing and accumulation of debt and arrears, potential cash rationing, and delays Managers at all levels should be held accountable for impacting on the smooth and predictable funding of delivering results and providing public services through service delivery. appropriate use of funds under their control. This in turn requires that public managers at all levels know the • Causes of poor forecasting may include over-optimistic availability and predictability of funds to meet the objectives of revenue projections from the macrofiscal framework; the public services reflected in the government’s policies and unrealistic budgets prepared by ministries, departments priorities. However, service delivery units are often affected and agencies (MDAs) with inadequate challenge from by late and inadequate funds to meet payment obligations the Ministry of Finance; poor forecasting and analytical for service delivery. Uncertainty about actual cash balances skills within Treasury; and breakdown in institutional drives Treasuries to engage in cash rationing, especially communication and data sharing. during the first quarters of the fiscal year, thereby hindering smooth execution of the development budget. In addition, this uncertainty often leads governments to borrow pre-emptively, Effective Expenditure Controls which increases associated costs. Linking budget, workplans, procurement plans, and cash requirement will improve • Weak management of commitments can lead to a build- predictability of availability of funds to undertake service up of arrears, restricting fiscal space and affecting the delivery activities. ability to finance planned service delivery. The key principles and requirements to consider in designing an • Poor recording of commitments and arrears combined appropriate cash management function and a comprehensive with cash-based reporting can hide the scale of existing TSA architecture are: institutional arrangements for cash liabilities. A weak commitment tracking regime may management function including capacity for revenue incentivize spending agencies to withhold information on projections and cash forecasting by the spending units; contractual obligations or other contingent liabilities until coordination with debt management; ability of the accounting they become unavoidable and must either be paid or framework to pool bank accounts and set-off between bank become arrears. accounts; surplus cash to earn interest; minimize idle cash balances; and electronic banking facilities. • Controlling spending at the point of cash rather than commitment can place a lot of pressure on Treasury officials and create gate-keeping roles which undermine transparency and efficiency. Lessons Drawn from Case Studies Functional Treasury Single Account and This Practice Note draws from experience and primary Banking Arrangements data in eight case studies in the Africa and South Asia regions with the selection based on varied capacity • A multiplicity of spending agency bank accounts or a across the region and the existence of ongoing or recent partially implemented Treasury Single Account (TSA) will reforms. The case studies were: Bangladesh, Bhutan, Kenya, result in resorting to borrowing unnecessarily and delaying Pakistan, Sierra Leone, Somalia, West Bank and Gaza and or limiting payments despite idle balances existing in Zambia. The engagement included remote interviews with key government accounts. This would elevate the cost of World Bank staff members, review of primary documentation carry reducing resources available to spending agencies and reports from government and World Bank sources, and for service delivery. follow up joint engagement with country teams around accuracy of presentation of issues. This Practice Note is designed to EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 2 be both globally and operationally relevant by setting out additional expenditures. Whether this is achieved through an approach to identifying country specific challenges and creating a buffer between cash plans/allotments and the budget solutions. This paper does not provide an exhaustive set ceilings (Kenya, Sierra Leone), or through in-year reallocation of potential challenges, examples, and approaches. The of budget (Bangladesh) - where the budget is not credible, dissemination of this note will be used to identify areas that may the perception from MDAs will always be that information need deepening. Future research will collect examples and sharing may affect cash availability, largely because it is practices from other regions. The expansion of engagement true. MDAs that expect to be prioritized have no incentive to to a variety of further regions is also expected to help reveal share cash plans and those that do not are demotivated from a richer set of data and more information on possible causes preparing them. Addressing this is a challenge as it ultimately and solutions for weaker outcomes in cash management and involves developing trust between the institutions. This can be commitment control. generated over time through consistency between the cash plan and cash allocation. Communication and awareness Full commitment from the leadership and careful timing raising by the Treasury is also likely to be beneficial, while of expenditure control reforms is important to clearly regulation to require information sharing may provide a signal change and avoid false starts. The moment cash or necessary push and create a level playing field between commitment controls or TSA reforms cause tangible impact, institutions if enforced consistently. i.e. constraints and expenditure are tightened for MDAs or are expected to do so, there is likely to be resistance. Subtle or Tying cash plans too closely to allotments in these overt resistance along the way is likely to slow progress where circumstances creates structural disincentives to share understanding is poor or information sharing either yields information. Case study countries have addressed this no effect or negative effects for MDAs. Internal, especially by first introducing technical reforms with limited immediate personal incentives may be hard to predict and even harder impact on MDAs. Being careful to avoid real or perceived to pin down precisely, making full Treasury commitment a key influence of information sharing on cash availability to aspect in any reforms that are likely to address internal vested execute their budget has made capacity building easier. For interests. TSA reforms in Sierra Leone are a good example example, establishing cash forecasting functions that have where, despite significant technical progress on reform, it was little or no effect on commitment controls is relatively easy to forced to wait until the entry of a new progressive government do. Of course, this is not achieving the objectives of reform to implement in a meaningful way. But why do these reforms or resolving the problems—cash availability is only a little have impact? The general objective of cash management is to smoother and arrears are still rising. What it does do is allow improve cash predictability does not constrain it. So why does the technical capacity to be in place when the political will to this happen? implement emerges. The more credible a budget is, the easier it may be to introduce the constraints. This is because it will Reassuring MDAs of a distinction between cash planning have fewer negative effects on those MDAs that might have and expenditure control is a hard thing to do when there benefitted from a less credible budget, therefore likely raising is a no perceived (or real) difference between the two. In less resistance from them. many lower income countries, commitment control is either non-existent or meaningless and controls occur at payment Solutions for cash forecasting depend on what you are stage. Best practice suggests MDA cash plans should inform trying to achieve. Kenya, Sierra Leone, and West Bank and cash management but not overall expenditure control, and Gaza each embarked on cash management reforms, but the MDAs will be wary to share information if they believe it will be objectives of each of the reforms were different. In Kenya, the used for expenditure control (Lienert 2009). Communication primary objective was to develop an aggregate cash plan, and of this distinction is important, especially in circumstances subsequently update it in-year from forecast data and actuals where the concepts are new. Essentially, incentives around to deliver more predictable cash allocations to spending units information sharing for cash management should get easier responsible for service delivery. In Sierra Leone and West once expenditure controls can be clearly separated from it. Bank and Gaza, the primary objective was to establish in- year forecasting capabilities to help inform cash management An unreliable budget undermines the credibility of decisions, with the introduction of MDA cash plans a later allotments and commitment control. Allotments will need addition to the reform. In Sierra Leone and West Bank and to be lower than the appropriated budget if they are to be Gaza, the reform steps included improving basic capacity credible in any situation where revenues are systematically benefits from starting simple, developing more functions over-optimistic, or budget execution is subject to unplanned slowly over time, establishing clear roles, and slowly improving EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 3 liaison and trust with the debt and budget departments and is made, and assuring MDAs that cash plans do not inform central bank. In Kenya, a goal of influencing allotments expenditure control – the budget does via agreed priority through better connection of cash plans with the budget and items – are keys to success. technical solutions to allow more granular prioritization of payments embedded in the Integrated Financial Management The benefits of a TSA can only be fully realized if Information System (IFMIS) led to a more ambitious tool and upstream functions are reliable, particularly a credible functions to align MDA plans with service delivery priorities, revenue forecast, a realistic budget, and commitment but less consensus building around the forecast and sharing of controls. A functional Treasury Single Account is a central data for cash management decisions. Forecasting outcomes feature of modern cash management, allowing the Treasury were better in Sierra Leone and West Bank and Gaza, but the to track overall available cash across all central and infrastructure for cash planning and actively using the cash commercial government accounts, avoid borrowing unless plan to inform cash management during budget execution was strictly necessary, and deploy idle balances in the most better in Kenya. efficient manner. Experience from Sierra Leone, where there have been significant steps towards a TSA, shows that Extensive consultation, establishment of broad progress is feasible even in a context where government- understanding of the issues across multiple agencies wide capacity is relatively poor, but the core team in Treasury starting with the Treasury, and careful attention to change is capable and committed and the leadership is supportive. management will help build trust between the Treasury However, improved data on bank balances does not translate other key departments and MDAs. A cash management to immediately improved cash management. Much of the framework or multi-institutional terms of reference that are idle balances, now visible through the TSA framework, still fully understood and designed to be flexible and grow as the cannot be consolidated as they are largely donor or other institutions and functions develop has proven an effective tool protected funds. Furthermore, while the TSA does help with to strengthen cooperation (See Annex 6). Misunderstanding predicting cash availability, and the improved relationship of the objectives of cash management, unwillingness to share with the debt office enhances the tools available to smooth information, and mistrust has occurred for years in most of the spending, optimistic revenue, unrealistic budgets, and a lack case study examples, delaying progress for far longer than of commitment control still causes structural gaps between anticipated. A process of iterative consensus building and inflows and outflows and cash rationing is required. collaborative identification and understanding of challenges and development of solutions is critical to progress. Reducing the prevalence of protected funds requires a minimum threshold of credibility, transparency, Ex-ante agreement between MDAs and the Treasury on and consistency of partner country public financial expenditure priorities within the budget helps to identify management (PFM) systems to gain the trust of donors which payments to protect in the event of a cash shortfall. and other funders, and the World Bank can help to Statutory expenditures such as salaries, interest payments strengthen systems as this trust is being developed. and international obligations are typically prioritized by default. Commitments from donors, and particularly the World Bank Identification of priority service delivery programs by MDAs (WB), to map project accounts to the TSA in a structured and helps the Treasury to be more targeted in delaying payments consistent way across all projects in all sectors will help to and maintain smooth payments to key services. It also helps initially reveal the available cash as it has done in Sierra Leone. to detach the Treasury from short-term payment decisions and Once this is in place, development of a progressive program ad hoc pressure from MDAs. It is important to consider going of transferring cash management functions to the Treasury beyond binary “non-discretionary” and “other” in this schema based on performance in transparency and management of to enable key service delivery expenditures and investments to accounts under the TSA could be considered. This exercise be prioritized after payroll and other statutory items and before requires significant coordination and change management “other.” Attaching this prioritization to the budget, allotments, within the World Bank to encourage task team leaders (TTLs) and commitments via the Chart of Accounts (COA) allows it managing sector projects to commit to “less protected” funding to be automated and limits opportunity for negotiation. Kenya arrangements in a coordinated manner. This may be best has designed a process to deliver this which is currently being delivered through piloting with one or two key sectors as it has implemented within the IFMIS system. Technical delivery is in Bangladesh, with a major focus on change management for certainly more complex than a simple cash forecasting tool, both the government and World Bank program management. but the messaging around how prioritization of commitments EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 4 Taking Practical Steps Towards Strengthening Cash Management and Commitment Control This Practice Note provides a theoretical overview of the bottlenecks in three key areas: forecasting, TSA, and banking main features of modern cash management processes arrangements and commitment control. Guidance on how as they occur through the fiscal year and the supporting to identify problems in these areas and drill down to find the legal and institutional frameworks. Examples of useful underlying causes that may contribute to poor outcomes. The practices and experience from case study countries are table below shows eight common problems and the effects presented throughout. The second section looks at potential they have in the three areas: POTENTIAL EFFECTS ON: POTENTIAL PROBLEM Planning and Forecasting Commitment Control TSA and Bank Accounts Over-Optimistic Revenue • Unrealistic levels • Cash shortfall likely, • Establish special Projections – Where the of expenditure are when optimistic revenue accounts revenue estimates guiding approved as a result estimates are systemic. • Resist implementation the macrofiscal frame and • Macrofiscal framework If allotments are not of TSA. the approved budget are is weakened adjusted, pressure on unlikely to be realized and • Unrealistic MDA Cash Treasury to manage at the financing of the budget Plans undermine commitment or ration is likely to be compromised. forecasting. cash at payment stage. Unrealistic Expenditure • Budget cuts, additional • Unrealistic allotments, • Establish special – Where the budget is not unplanned borrowing especially where cash accounts executed as planned and or deferred payments managers are unable to • Donor projects require either the composition of become necessary as a influence special accounts due the budget, aggregate result of: • Poorly recorded or to unreliable budget execution or both deviate • Budgeted items are unknown obligations or execution from the approved budget. unaffordable contingent liabilities. • Resist implementation • Unbudgeted items of TSA. are presented for expenditure displacing budgeted items. In-Year Mismatch • Inability to anticipate • Allotments poorly Between Inflows and mismatches weakens informed by likely cash Outflows – Where the cash forecast. availability. profile of cash requirements • Payment delays and is not matched by cash arrears. availability and either • Costly unplanned unplanned debt or borrowing. adjustments to budget implementation are necessary. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 Potential effects on: Potential Problem Planning and Forecasting Commitment Control TSA and Bank Accounts Ad hoc or reactive • Borrowing is costly or not • Unplanned calls on the debt decisions – Where available at times when budget due to increased decisions on debt financing required to address short interest payments. are excessively driven term cash shortfalls. by in-year pressures with • Unplanned calls on the limited prior planning, budget due to increased leading to inefficient interest payments. borrowing. • Cost of carry. Commitments made • Unplanned commitments • Direct effect. beyond available cash impact plans. – Where the obligations • Cash rationing. entered into by government • High cost debt. are not constrained by the • Accumulation of arrears. cash plan, cash availability falls short of the cash plan, or a combination of both leading to payments being deferred or short-term unplanned borrowing. Short-term/centralized • Budget deviations • Existing, budgeted decisions about what • Deviation from borrowing commitments are not gets paid – Where plan. honored, accumulation of commitment control is weak • Delayed payments and/ arrears. or non-existent and the or arrears growth. senior management of the Treasury makes weekly or even daily decisions about which invoices to pay and which to defer. Lack of transparency in • Weakens available • Cash may be available • Direct effect. banking arrangements information for but cannot be accessed • Cost of carry. – Where a TSA and forecasting causing commitments to • Unplanned and costly associated reporting on all • Limits access to cash not be payable. borrowing. government accounts is even if it is idle. • Cost of carry. weak or non-existent and the Treasury is unable to access or manage cash balances comprehensively. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 POTENTIAL EFFECTS ON: POTENTIAL PROBLEM Planning and Forecasting Commitment Control TSA and Bank Accounts Weak institutions • Departments within • MDAs are incentivized • Resist implementation and collective action Ministry of Finance not to share information. of TSA. problems – Where (macro, debt, budget, • Commitments are made cooperation and information accounting) do not off system. sharing between institutions coordinate. is inadequate to perform • MDAs are incentivized cash management and not to share information. commitment control functions. The third section provides guidance on supporting the client in identification of possible solutions to address underlying causes, and sets out the principles for establishing a collaborative reform process to address these challenges. The annexes provide examples of technical tools and resources that may be helpful to practitioners. Below is a checklist of key principles and components for an effective cash management and commitment control system which can be used alongside the problem diagnostic framework. KEY PRINCIPLES COMPONENTS • Compliance enforced and deviations sanctioned. 1. Political support • Leadership willing to delegate cash management decisions. • Legal Authority coordination of cash management and commitment control. • Legal authority for opening of bank accounts. 2. Legal and regulatory framework • Legal basis for electronic transactions and e-signature. • Agreement with Central Bank and Agent Bank(s). • Realistic revenue projections – revenue outturn close to original budget. • Realistic expenditure projections – expenditure outturn close to original budget. • Comprehensive cash forecasting framework: revenue, expenditure, grants, 3. Accurate projections of cash loans, debt service. inflows and outflows • Aggregate and in-year cash plans prepared and adjusted – capturing in- year priorities aligned to the COA such as salaries, discretionary and non- discretionary payments, service delivery priorities. • Mechanisms for joint agreement of cash forecasts (within MoF, revenue authority, central bank). • Treasury Single Account (TSA) - an inventory of existing bank accounts to be used in Financial Management Information System (FMIS) and TSA operations. 4. Centralized government bank • FMIS accounting module general ledger (GL) should maintain full cash book accounts records for the TSA bank accounts. • Bank statement containing all the details about the flow of funds in the TSA. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 Key Principles Components • Fully operational interbank settlement systems. • Regular reconciliations of bank accounts. • Appropriation – the approved budget of a spending unit – in place. • MDAs have prepared cash plans consistent with workplans and procurement plans which highlight the timing of commitments and cash requirements and are adjusted based on projected in year cash availability. • Mechanism for prioritizing and allocating cash outflows according to spending category based on projected cash availability. • Comprehensive register of commitments in place, including multi-year 5. Commitment control and commitments. distribution of cash • Allocation/allotments made – providing authority to make a commitment up to a certain limit. • Warrants/releases issued based on cash available and MDA cash plans which provide authority to spend from the TSA up to warranted limits or actual transfer of cash to MDA account. • Clear stages in transaction processing: Requisition (tie budget), purchase order/contract (ring-fence funds), receipt of goods/services, invoice, obligation, arrears, liability, payment. • Clear, formal agreement of institutional arrangements and responsibilities between institutions, particularly departments within the Treasury/MoF, Central Bank and participating Agent Bank(s). • Information sharing between the Central Treasury, revenue collecting agencies 6. Strong institutional interaction and spending. and capability and functional • Strong coordination of debt and cash management. systems • Adequate accounting framework and modern systems for banking, payments, and settlement to support inter-institutional information flows. • Effective communication among stakeholders about cash availability, allotments, warrant/releases and spending unit obligations. • Risk management. • Ability to use short-term financing instruments within agreed limits 7. Liquidity • Capacity for the investment of excess cash. 8. Human resource capacity and • Established staffing and skills for aggregate cash forecasting within Treasury. competencies • Established capacity within MDAs for cash forecasting. • Systems to enable the alignment, consolidation and accessibility of: • MDA cash, commitment and procurement plans with the COA and budget • Revenue, expenditure, debt, exchequer and forecasting data to allow a 9. IT infrastructure complete aggregate cash plan and inform cash management decision making and changes to allotments. • Service level agreements (SLA) between central bank and commercial banks. • Cybersecurity counter measures. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 1. >>> Principles of Cash Management and Commitment Control 1.1 Introduction Predictable resources are essential for delivering services on time and as planned. Gaps in funding or expensive unplanned borrowing reduce a government’s ability to implement its budget efficiently and effectively. Cash management is simply defined as making the right amount of money available at the right time and the right place to meet the government’s obligations in the most cost-effective way (Storkey 2003). Cash management is necessary because there are mismatches between the timing of payments required to implement the budget and the availability of cash from revenues and from debt. (See Box 1). Closely linked to cash management, commitment control is the management and limitation of commitments to ensure the payments can be honored on time. A commitment is a conditional obligation entered into by an MDA to make a future payment, subject to the fulfilment of pre-agreed conditions. The key objective of commitment control is a major step in expenditure control to manage the initial incurrence of obligations, rather than the subsequent cash payments, to enforce expenditure ceilings and avoid expenditure arrears (Radev and Khemani 2009).1 1. See Figure 5 for a complete overview of the expenditure control process and the role of commitment control. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 > > > B O X 1 - Features of Cash Management and Commitment Control 1. Accurate projections of cash inflows and outflows enabling predictable funds for service delivery. 2. Centralized government bank accounts, interlinked by a Treasury Single Account. 3. Commitment control is implemented at the incurrence of obligations to eliminate pressure to enforce expenditure ceilings at the time of cash payments and avoid expenditure arears. 4. Strong institutional interaction and functional systems. • Clear, formal agreement of institutional arrangements and responsibilities between institutions, particularly the Treasury and Central Bank. • Information sharing between the Central Treasury, revenue collecting agencies and spending • Strong coordination of debt and cash management. • Adequate accounting framework and modern systems for banking, payments, and settlement to support inter- institutional information flows. Additional Desirable features: • Ability to use short term financing instruments. • Capacity for the investment of excess cash reserves. Adapted from Lienert 2009, Williams 2010 and Radev and Khemani 2009. The integration of commitment control and managing reflects the government’s policies and priorities. The top- cash is important to provide smooth funding for service down element first establishes a macrofiscal framework (MFF) delivery and investments, but implementation is difficult, to constrain the overall medium-term budget to a size that is even in higher income countries.2 Larger economies will consistent with macrofiscal policy, revenue forecasts, and the often mean more complex institutional arrangements, more debt strategy. This is followed by an iterative process where fragmented systems, and more complex and consequential revenue and sectoral expenditure plans are consolidated by relationship with the private sector. On the other hand, MDAs, and proposals are negotiated within the macrofiscal challenges in low-income countries go beyond the core cash constraints. Cash plans, commitment plans, and procurement management functions and may arise from weaknesses in the plans are then developed by MDAs to reflect when budget “upstream” processes of budget preparation and management implementation is expected to require resources throughout (Miller and Hadley, ODI 2016). the year. The borrowing plan is then developed based on the aggregate cash flow forecasts. The Aggregate Cash Plan This chapter examines cash management through (ACP) pulls together each of these elements into a single tool budget process to summarize the overall theory of cash that allows decision-makers to agree on the cash management management and commitment control and the processes strategy for the year. The ACP is then used during budget that support them. execution to guide cash management. Each of these aspects is examined in turn in this section. 1.2 Budget Preparation A Robust Macrofiscal Framework A clear understanding of the coverage of the MFF is required to define the scope of the cash management During the preparation of the budget, a Ministry of functions and a formal identification of the cash flows Finance (MoF) will deploy both bottom-up and top-down that the Treasury can manage. The MFF is multi-year and approaches to arrive at a balanced annual budget that coverage must be as comprehensive as possible and may 2. Messali, evidence from cash management reform programs in Portugal, interview. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 include extrabudgetary funds, development partner financing To be credible, the proposals must be both appropriate – or other ‘ring-fenced’ funds or funds available to semi- meeting national and sector strategic objectives, adherent to autonomous government agencies depending on the legal national law and international agreements; and achievable framework employed by the country. In practice, developing – target revenue collection and debt operations must be and emerging economies often utilize large extra-budgetary feasible and respect fiscal rules; expenditure plans must funds and state-owned enterprises (SOEs) for investments accurately reflect expenditure intentions and be limited to the and service delivery. Where they exist, transfers to the entity resources available. or dividend payments to the government must be considered. In addition, debt interest and principal fees are also estimated Budgets are prepared by spending agencies, consolidated as well as any contingent liabilities such as loan guarantees by the MoF, and appropriated by the legislature. Several and public-private-partnership contracts that may create tools are available to governments to strengthen the credibility an unanticipated call on the public funds (Cangoz and of the budget. The macrofiscal framework prepared by the Secunho 2020). MoF provides a basis for the broad medium-term fiscal policy and resource constraints faced by the government and the Realistic Revenue and expenditure projections involve annual budget. It may incorporate fiscal targets, bringing models to project the baseline (no policy change scenario), rules around sustainable borrowing and the composition of building in key macro variables to estimate growth of the expenditure between consumption and investments. revenue base over time and applying it to the existing tax and expenditure policies. With a baseline in place, scenarios REVENUE reflecting new fiscal policies can be modeled to inform policy making. Complex models are not necessary and should not Accurate tax revenue projections require technical be attempted until countries have developed the required data capacity to model tax policies as well as adequate data and capacity. Revenue and expenditure forecasts represent from across the economy. The revenue authority will the “above the line” variables in fiscal analysis and may show usually have a central role in the development of the revenue imbalances. In the event of a growing fiscal gap, debt service budget. Other revenue collecting agencies will also require analysis allows the MoF to estimate the costs of additional a certain amount of capacity to project non-tax revenues. borrowing and to factor this into the macrofiscal framework. Some countries, particularly fragile states, may have a large To enforce realism in macrofiscal forecasts, the framework dependence on donor grants and loans. These are usually must consider both historical data and any fiscal rules or negotiated and managed by the MoF, but in some cases MDAs targets provided for in the legislation or policy documents. may play a more significant role in negotiating loans during While compliance with fiscal rules is important to maintain the budget preparation and receiving loan disbursements fiscal policy objectives, historical data will reveal the realism during budget execution. Where this is undertaken without of debt or revenue estimates to ensure that they are not over- clear communication to MoF, the ability to forecast accurately optimistic. can be undermined. Aside from their significance in size, the fact that they are often difficult to accurately project makes Debt financing is governed by a medium-term debt strategy the monitoring and forecasting of these forms of revenue that reflects government policy over the composition and extremely important. In countries that allow revenue receiving risk profile of the debt portfolio. The debt management agencies to retain some or all of collected revenues, the function may be within the MoF or in an external agency, and adequate budgeting and reporting of these flows is important in some cases the office may perform cash management to enable the broader understanding of cash liquidity across functions. If cash and debt management functions are not agencies. A fully functional TSA will incorporate these forms integrated, close coordination is highly needed. See Fainboim of revenue. and Lienert (2018) for an overview of the macrofiscal function. Technical solutions are only one element contributing A CREDIBLE BUDGET to the credibility of the revenue budget. The macrofiscal department of the MoF and revenue collecting agencies A budget is a legal contract between a government may have different incentives around collection targets and and its citizens contained of two main parts: first, the transparency of reporting that lead to significant deviations intended services and investments to be delivered, and between the forecasts of each. For example, the MoF their costs; and second, arrangements for financing may have relatively optimistic expectations for revenue these expenditures through revenues and borrowing. performance and expect tax administration to perform higher EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 than may be feasible, and the revenue authority may prefer More developed countries will typically transition to a greater more conservative targets that it is more likely to be able focus on policy analysis over time. To be effective, MoF will to meet. Designing incentives to forecast transparently and be able to do the following: say “no” to policy proposals, or be accurately will help to align revenue targets with achievable authoritative enough to influence proposals; support saying “ levels of outturn, but gaps may remain, and cash managers ‘yes” or “no” with sound analysis to explain why; and finally, may wish to build scenarios into their models that demonstrate to coordinate information vertically between the politicians the possibility of low revenue outturn. and bureaucrats as well as horizontally across spending agencies to reduce information asymmetries and improve EXPENDITURE the transparency of spending decisions and, ultimately, the predictability of the budget (Hadley and Welham 2016). Expenditure ceilings that align with the macrofiscal Similarly, external actors, including the legislature and audit framework guide spending agencies on the broad limits of bodies, uphold credibility of the budget by exercising their roles an agency budget, but with flexibility in the composition in the review and authorization of the budget and sanctioning of that budget. Program budgeting links policies to the budget any breach of budget regulations. See Simpson and Welham and focuses the budget narrative and expenditure proposals (2014) for an overview of budget credibility theory and practice. on the results intended in sectoral policy. Output-based budgets present the budget in terms of the costs required An Aggregate Cash Plan (ACP) to deliver specified outputs, rather than focusing on the An aggregate cash plan is a tool to consolidate and inputs. Budget costing and a budget baseline allow spending compare revenue and expenditure forecasts (including agencies to cost expenditure required for delivering ongoing debt flows) with actual receipts, payments, and financing policies and the budget implications of any new policies. flows throughout the year. The tool combines the budget Clear methodologies for estimating costs enable agencies profile with the estimated financing flows, usually monthly. to compare and prioritize expenditure proposals. Together, The budget profile, sometimes known as an MDA cash plan, these tools allow policy makers to debate the adequacy of the is prepared by each MDA to communicate the anticipated budget in meeting service delivery objectives as well as the cash requirement for payments over the year, usually monthly efficiency of the budget allocations. and typically broken down by headline budget classification. The sum of monthly requirements must always balance with The national public investment management framework the approved annual budget. The monthly revenue estimates is designed to regulate the flow of proposed investment over the year are prepared on a similar basis by the revenue projects into funded activities. Alignment of the framework authority and any other MDAs that collect revenue, while the to the budget process and enforcement of limitations around schedule of debt operations is prepared by the debt office. project approvals is essential to ensure existing projects are The ACP centers around a high-level report that presents the financed to completion, and new projects are not approved cash projections and incorporates Treasury policies around without adequate resources. Where a large or unknown contingency, commitments, and debt. The role of the ACP number of unfinished projects exist across departments, a is to provide policy makers a clear understanding of the centrally led stock taking exercise to estimate the liabilities cash position over the financial year. To be useful, it must and rationalize the capital budget by prioritizing the closure or be up-to-date and available to policy makers at the time of completion of existing projects will help to reduce the build-up decision making. of arrears, open fiscal space for new projects, and make the cash requirements of the capital budget more transparent. The first version of the ACP is developed well in advance of the budget approval and updated with approved budget CHALLENGE FUNCTION figures prior to the start of the fiscal year. The initial ACP is entirely derived from the cash and financing plans, but must Program and output-based budgets and the budget be updated on a rolling basis throughout the year including baseline are intended to directly inform decision makers both updated forecasts and the execution figures as the of the proposed mix of inputs and the alignment of year progresses. There is a wide variety of data required for resources to policy goals. The value of using these tools to developing and maintaining a rolling aggregate cash plan. generate a granular and narrative driven budget is significantly Table 1 below gives an example of the types of forecast and reduced without a mechanism for the MoF to analyze and execution data that are required on a regular basis and the challenge spending agencies on the proposals. The challenge departments responsible for providing the data. function has two aspects: compliance and policy alignment. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 > > > B O X 2 - Definitions of Cash Planning and Forecasting Budget Profile or MDA Cash Plan: The agreed expenditure profile across the year, usually monthly, of the approved annual budget. The profile may be the basis for the release of spending authority and is used to monitor and control execution of the budget. The cash plan is typically prepared by MDAs to reflect their cash requirements and should be aligned with the commitment and procurement plans. Aggregate Cash Plan (ACP): the planned pattern (usually monthly) of all government cash flows across the year. It aggregates the flows contained MDA cash plans and incorporates financing. Cash Flow Forecast: The best estimate of cash availability update on a regular basis, ideally daily and at least weekly for the forthcoming quarter. Designed to identify what will happen, not what should happen, and needs to be an unbiased and unconstrained best estimate. The two series (ACP and forecast) will often diverge as the budget year unfolds. The cash forecast should help inform changes to the ACP. Despite the relative complexity of the data, the ACP Account balances are important to include in the cash presentation should be as simple as possible and plan. The model of net flows or transactions in and out of the designed in such a way that the primary users, the TSA should match the actual changes in account balances MoF senior management and the cash managers, fully in any period and is an important way to ensure the varied understand and have confidence in the presentation. data in the Aggregate Cash Plan are comprehensive and Key elements of a simple, monthly cash plan include: (i) an accurate. Short-term borrowing decisions should not be made opening balance, total revenue from tax and non-tax sources, based solely on the weekly net cashflow, but on the current (ii) total expenditures by major items, (iii) net cash flows before and projected cash balances. Often figures will not balance borrowing, (iv) net borrowing flows by major type, and (v) due to lags in information or incomplete TSA arrangements, overall closing balance. Annex 3 provides a template for the making it difficult to consolidate all transit accounts. The cash plan and a worked example of an annual cash plan. balancing amount is termed the “residual” or “cash-in-transit.” Change in this balance should be monitored closely and any major deviations or gradual changes over time should be investigated. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 > > > T A B L E 1 - Data Required for a Rolling Aggregate Cash Plan (adapted from Kenya ACP) DATA RESPONSIBLE DEPARTMENT(S) Adoption FORECAST DATA (%) Planned Revenue Budget Unit and Revenue Authority MDA Cash Plan Budget Unit and Spending Agencies Domestic and External Debt Planned Principal and Interest Payments Debt Management Office External Debt Plan Debt Management Office, External Resources Unit Domestic Debt Plan and Maturity Profile Debt Management Office External Grants Plan External Resources Unit Donor Project Loans and Grants Plan External Resources Unit EXECUTION DATA Exchequer, Revenue Authority, Revenue Tax and Non-Tax Receipts Collecting Agencies Donor Project Loans and Grants Receipts Exchequer, External Resources Unit Exchequer, Debt Management Office, External External Loan Receipts Resources Unit External Grant Receipts Exchequer, External Resources Unit Domestic Debt Transactions Exchequer, Debt Management Office MDA Payments Exchequer MoF Direct Payments Exchequer (pensions, interest payments, etc.) Donor Project Loan and Grant Payments Exchequer, External Resources Unit EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 Systems and Consistency of Information Systems can help enable the transfer of information but Data management systems are immensely important will not yield a credible budget without staff capacity to in managing information and improving compliance. understand and deliver the processes, and political will An IFMIS will typically have peripheral modules for budget to adhere to rules. Consistency of information both in format preparation, project management, cash planning, procurement, and content throughout the budget preparation process is payments, and reporting. This system enables consistent essential to enable the stakeholders to understand, debate, information to be shared with stakeholders throughout the and ultimately approve and implement the proposals. Sector process and make data available to the various planning plans, the revenue budget, and the debt plan must align with tools. However, a fully integrated system which performs all the broader macrofiscal framework – the national budget must PFM functions within a single environment is not necessarily pull these together consistently. Procurement, commitment optimal. Departments should develop solutions that meet their and cash plans must all be aligned with MDA budgets. The business demands and capacity levels, while ensuring that MoF consolidates all this information into an aggregate cash functions for data sharing are central to system reforms. plan, and must be able to review the information and challenge spending agencies on compliance and policy alignment. See Figure 1. > > > F I G U R E 1 - Consistency of Information as It Progresses through Budget Preparation Debt Strategy Revenue Aggregate The Budget Budget Cash Plan Spending Agency Plans Sector Sector Strategy Budget Procurement Commitment Cash Macro Fiscal Macro Fiscal Macro Fiscal Framework Framework Framework EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 1.3 Budget Execution The Treasury is responsible for making funds available The Expenditure Process for budget execution and providing permission to The expenditure process and payment procedures vary spending agencies to spend throughout the financial between countries. However, the basic process involves: year. This section covers the expenditure process, in-year authorizing spending agencies to enter contracts; the cash management activities, and the maintenance of the procurement of goods, services or investment by the MDA; rolling aggregate cash plan, commitment control functions and invoicing and authorization of payments; transfer of funds; related exchequer activities. accounting of transactions; and audit. The diagram in Figure 2 summarizes this process. > > > F I G U R E 2 - Simplified Diagram of the Expenditure Process3 1. 2. 3. 4. 5. 6. Allocation Creation of Verification Payment Payment Transaction of Budget Conditional of Authorization recorded in to MDAs Liabilities Deliverables accounts Allotment Payment Goods Payment Transfer Final accounts and Warrant/ Order (PO) Receipt Note Authorized of funds to audited as per Release for Goods (GRN) created and Payment supplier law Issued to MDA or Services and invoice Voucher created to Authorize Placed by received that matches PO Spending MDA from supplier and GRN requesting payment No liability Liability conditional on Government is liable for payments completion of contract and failure will result in arrears Source: Adapted from Miller and Hadley 2016 and Potter and Diamond (1999). The terminology used for describing the expenditure process from appropriation to payment is very specific and carries important implications for liability. While there is some variation from country to country, critical differences are: an Allotment – which authorizes MDA to initiate procurement; Commitment – which implies a conditional liability; and Obligation – which implies a liability that will transition to an arrear if not paid. Box 3 provides a summary of key definitions in the expenditure process. 3. See Figure 5 for a detailed diagram of the commitment control process. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 > > > B O X 3 - Definitions Relating to Expenditure Control The terms used by governments will vary based on the legal framework employed. Some terms are used interchangeably, and, in some countries, certain terms are not relevant. For the purposes of this text, common terms used in literature and operationally are listed with alternative definitions identified where relevant. See Annex 1 for a complete Glossary. Appropriation – The funds legally approved by the legislature through the budget law for expenditure by an MDA during a financial year. While an MDA may have the legal right to spend these funds in the course of the fiscal year, it may not make any commitments against the appropriation until the Treasury authorizes them to do so via an allocation/allotment/ warrant/release. Allocation – A process of distributing budget between MDAs within a fixed ceiling tied to the resources available according to the macrofiscal framework. The term may be used generally or, in some countries it carries a more formal or legal meaning related to approved distribution of budget. Note: The term allocation or quarterly allocation is used interchangeably with the term allotment in some countries. This will make it consistent with Warrant/Release – the instrument of authority given by the Treasury to MDAs to commit and/or spend a portion of the budget (allotment). Allotment – Budget allotments refer to a portion of the budget or ‘provision’ made available for release by the Treasury to a given MDA during a given period of the financial year, often quarter. Cash allotment refers to a fixed amount of available cash set aside for a budget provision. Allotments are designed to both ensure cash is available for budgeted expenditure and prevent MDAs incurring expenditures beyond the available resources. The amount usually has defined sub-limits by economic item or other COA classification and is informed by MDA cash and procurement plans rather than pro-rata. In some countries the term may specifically refer to the apportionment of authorization within an MDA to spending units (Pattanayak 2016). We will use Allotment as a general term in this text. Warrant/Release – The instrument of authority given by the Treasury to MDAs to commit and/or spend a portion of the budget (allotment). The officer authorized by the warrant may extend sub-warrants to units within the MDA. The use of cash releases is more common in anglophone cash-based systems and may differ from the allotment based on the availability of cash – usually to ‘trim’ non priority expenditure in the event of a cash shortfall (Lienert 2009, ODI 2016). Note: Other variations exist in Kenya the term used is ‘authority to incur expenditure (AIE)’ and in South Asia a ‘sanction’ of payment. Commitment – A conditional obligation entered into by an MDA to make a future payment, subject to the fulfilment of pre-agreed conditions. Commitments may be for one payment or specific commitment (e.g. the procurement of a consignment of drugs) or a set of payments – continuing commitments (e.g. staff salaries). (ODI 2016, Radev and Khemani 2009). Disbursement – Transfers in cash. These may not necessarily be to the final recipient or vendor, but include payments to MDA sub-accounts or commercial accounts that are intermediaries before the cash is transferred to its intended final recipient in exchange for goods or services rendered, capital investments or other government expenditure. Use of these is minimized in a TSA arrangement. Payment – A transfer in cash that exits accounts under government control to the benefit of a vendor or other external party in exchange for agreed and verified goods or services rendered, investments or other government expenditure. (Actual) Expenditure – Final account of spent funds after payments have been made and any surplus cash has been returned to the TSA or other government account. This is important in countries that do not operate zero-based TSA accounts and particularly in those that disburse lump-sum funds to MDA accounts at any point prior to the payment phase. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 Procurement and commitment plans prepared by The universal use of electronic payments allows government spending agencies are designed to provide information to minimize the time between when payments are due, and on when an agency anticipates placing orders for payments are made and supports the Treasury Single Account expenditures. The cash plan prepared by the MDA informs structure in efficient use of funds. the Treasury when payments are expected (Step 5), and while connected to the commitment plan, they provide fundamentally Cash Flow Forecasting different information. The cash forecasting framework must be comprehensive, consistent with the budget, and cover all expected inflows If funds are disbursed to MDA accounts to effect and outflows of cash throughout the year. To improve payments, but these payments are not made, or only reliability of estimates, an effective cash forecasting model made in part, the balance is expected to be returned marries top-down data derived from macrofiscal forecasts, to the Central Treasury account. The final amount paid policy change assumptions, and historical data with bottom-up (disbursement minus reimbursed balance) becomes ‘actual estimates from revenue agencies, MDAs, and the debt office. expenditure’ which is presented in final accounts and audited. > > > F I G U R E 3 - Cash Flow Forecasting Approaches: Top-Down vs. Bottom-Up Changes in Budget Revenue Regulations and Estimate TOP DOWN Policy TSA Budget Contingencies Appropriations Cash Flow Forecasts Spending Government Agencies Debt BOTTOM UP Revenue Extra-Budgetary Regional/ Agencies Entities District Offices Source: Cangoz and Secunho (2020). The ability to forecast revenue, expenditure, and debt daily for the forthcoming three months is ideal, though for lower income countries forecasting on a weekly basis at a minimum may be more realistic given data availability and staff capacity. A weekly public debt auction guided by an annual calendar that is updated monthly or quarterly is common in most countries. The efficiency of the auction is improved by an up-to-date cash forecast outlining financing requirements. Working towards a daily update of the cash plans, extending up to three months, should be the target as a governments cash management function strengthens. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 REVENUE FORECASTING operational constraints. The MDA cash plan reflects the total cash requirements of existing and planned commitments Revenue agencies usually operate with monthly or for the MDA. Each of these plans must be updated regularly weekly targets agreed with the Treasury and aligned with throughout the financial year. MDA cash plans must be the macrofiscal framework. As such, it can be important submitted well in advance of the start of the financial year for the Treasury to make their own estimates of revenue to allow the Treasury to consolidate plans for cash forecast to validate the revenue agency targets and challenge and develop the Aggregate Cash Plan. Procurement and significant deviations. Seasonal effects on taxes are also commitment plans must be closely aligned with the cash plan, often predictable: Pay-As-You-Earn (PAYE) taxes usually flow and ideally prepared in an integrated system or similar formats. monthly with incomes such as the salary bill; corporate tax Commitments are obligations to make a future payment. is due either biannually or quarterly; value-added tax (VAT) Typically, a planned expenditure will become a commitment and sales tax are often highest in the period around holidays. when a contract is signed. Commitments may be multiyear, Where possible, coordination between the Treasury, debt so a new financial year will typically inherit numerous ongoing offices and the revenue collecting agencies on the timing of commitments from contracts signed in previous years, regular inflows to match regular outflows will help to maintain including salaries, debt obligations, multiyear projects, and greater stability in cash balances. maintenance contracts. Maintaining an up-to-date, accurate register of existing commitments and planned commitments MDA PROCUREMENT, COMMITMENT, AND that reflect the budget and procurement plan is essential for CASH PLANS the Treasury keep track of overall obligations and to predict and control new commitments entering the system. MDAs are best placed to estimate their own cash needs based on budget policy, contractual obligations, and > > > F I G U R E 4 . Aligned Planning of Commitments and Cash ANNUAL AGENCY PROCUREMENT COMMITMENT PLAN/ AGENCY CASH BUDGET PLAN REGISTER PLAN Appropriations Schedule Register of existing Plan of how much and planned of planned commitments and cash is needed outputs procurements over schedule of when new and when to meet the financial year contractual obligations the commitment are expected to become obligations. commitments CONSOLIDATED EXPENDITURE FORECASTING The government-wide cash flow plan is consolidated from cash plans prepared by MDAs (bottom-up) with guidance from the Treasury on overall monthly availability of cash (top-down). This may be an iterative process where MDAs and Treasury reach a compromise if consolidated cash plans reveal impractical or unrealistic expectations. For example, cash requirements for development spending are typically ‘lumpy’ and can be limited in the first months of the financial year. Guidance from the Treasury to address optimistic timing for development program payments and coordination between MDAs on sequencing payments allows for greater efficiency. It is important for the Treasury to challenge any MDA cash plans that do not acknowledge any legally binding requirements or instructions, for example the allocation of inter-governmental transfers or costs related to SOEs under their mandate. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 Cash outflow projections must identify flows through over’ into the new issue and schedule any substantial maturity the TSA. This means that the focus is on when cash is dates on or shortly after days with significant anticipated inflows required for transactions, rather than when it is released. (Williams 2010). Many countries frontload debt issuance to A clear distinction between permission to spend (releases) and develop a cash buffer and mitigate refinancing risk. It is also actual payments (transactions leaving the TSA) is important common to occasionally borrow in periods of positive inflows (Williams 2010). Releases may provide permission to spend for a variety of reasons, including maintaining a low variation over several weeks or even months, while payments usually of auction volume, to prefinance large debt issuances or in occur on a single day. Salaries, for example, are often paid response to liquidity in the market. Each of these will involve towards the end of the month, inter-governmental transfers an increased cost of carry since interest on the cash surplus is may be “released” quarterly, but scheduled on a particular lower than the cost of borrowing. week of the quarter. Where cash availability is less reliable, MDAs may seek the transfer of cash to commercial bank Constant coordination between cash and debt managers accounts under their control in advance of the payment to is essential to improve efficiency of cash management ensure cash is available. This is considered bad practice and and minimize unplanned borrowing. Information on debt increases the cost of carry, creating idle balances. issuances and redemptions, both planned and actual auction performance, must be made available to cash managers as Other factors may affect expenditure forecasting that will soon as it is available to enable the forecasts to reflect any not be reflected in MDA cash plans but can be predicted. changes and allow decision makers to react. Debt managers For example, expectations of losing unspent balances of must be fully informed of any cash shortages as soon as they allocations drives a seasonality of payment requests, with are known and ideally in coordination with the weekly auction relatively few at the beginning of a release period and high to enable any emerging issues to be incorporated. To achieve spending in the last month(s) (MTI 2020). Many countries this, it is common practice to establish a cash management experience significant seasonal limitations to operations, committee for weekly coordination with a membership that with weather affecting the project cycle and type or scale of includes cash and debt managers. See Section 1.5 and operation costs. The anticipation of significant events such as particularly Box 8 for an overview of coordination arrangements. elections or the likelihood of external shocks may encourage a more conservative approach to contingency arrangements, In-Year Aggregate Cash Management as for example the build-up of a cash buffer. Likewise, foreign In a functioning TSA arrangement, cash managers will aid inflows are notoriously difficult to estimate and often have monitor cash balances daily to ensure accounts are swept significant effects on the availability of cash. One approach is to the central account, the surplus cash is minimized to establish an allocation “buffer” – setting discounted monthly and efficiently deployed while idle. Target weekly or daily or quarterly expenditure allocation levels to withhold a portion balances are sometimes used to maintain balances estimated of the overall allocation (“Month 13”) with the expectation that it as sufficient to finance unexpected payments and avoid fees may be absorbed during the year by occasional departmental for delayed or overdrawn payments. Daily balances will also overspend or emergency spending. This allows cash be used to inform and update forecasts. Where a TSA is not managers to have some leeway in volatile circumstances. in full operation, monitoring daily balances of accounts that However, it also may be perceived by MDAs as withholding the Treasury is able to directly influence is essential, but a approved funds, leaving the Treasury in a difficult position broader, more complex monitoring of MDA sub-accounts, where it must decide between fiscal and political pressures. transit accounts, and donor project accounts is also important to ensure cash is available to agencies to spend within the DEBT FORECASTING fragmented environment. The debt plan needs to include efficient management of Weekly updates of the cash forecast based on inflows and the existing debt stock as well as scheduling borrowing outflows from the previous week and for the near future according to revenue and expenditure forecasts. While allow short-term changes in cash needs to be identified the expected mix of debt instruments in the forecast must be and ideally met through adjustments to the weekly short- aligned with the medium-term debt strategy it will also need term debt operations. Monthly cycles of salary, pension and to reflect emerging market conditions. Auctions are typically interest payments will usually play a large role in the demand governed by an annual debt management plan and monthly/ for cash, so within the month a significant amount of cash quarterly auction calendars. Synchronizing the timing of new managers time is used to ensure these obligations are met. issuance with redemption dates will allow investors to “roll EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 On at least a monthly basis, an MDA will update Where idle balances are necessary or unavoidable due procurement, commitment, and cash plans to acknowledge to mismatch between inflows and outflows, the Treasury past execution and reflect any adjustments to planned should invest them prudently to reduce the losses implementation. The cash managers will consolidate this caused by the cost of carry. Idle cash balances may be information and compile an updated aggregate cash plan. The temporary, caused by short term mismatches, or structural, monthly AGP is reviewed and signed off at senior level and where they are persistently in excess of requirements for cash provides the basis for forthcoming allocations and releases. management. Desirable investment options vary for each.4 Of Quarterly allocations do not entail an authorization to spend, key importance is that the investment strategy is transparent although in practice they are often interpreted that way by and centralized. MDAs or autonomous agencies should not spending agencies which may even consider the appropriated engage in unilateral investment of idle balances they control. budget as authorization to spend. The accuracy and timeliness of the plan is therefore essential as a poor forecast, particularly Commitment Management and Control an over-optimistic forecast, will lead to authorization of Managing commitments occurs throughout the execution spending that is greater than the cash available. process and involves tracking the stock of existing commitments, authorizing payments, and maintaining Within spending agencies, the finance unit plays several a credible schedule of expected future commitments. important roles. Firstly, it is responsible for coordinating Commitments can be specific, requiring a single payment, or the budget, cash plans and payments for agency functions, recurring, entailing a series of payments – for example, for and financial reporting. It is also directly involved in entering larger projects, salaries, utility, or rent contracts. These latter commitments and will hold critical information on new become conditional liabilities at the time of contracting and commitments and the commitment stock. The third key role remain conditional liabilities in future periods until the contract is its responsibility to liaise with the Treasury on these issues. ends. In these cases, allotments and warrants/releases allow Regular coordination between the spending agencies and the an MDA to commit to specific payment tranches. Authorization Treasury is fundamental. should reflect the four main characteristics:5 4. See Fainboum, Saxena and Williams (2020). 5. See Pattanayak 2016. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 • A limit on the amount of expenditure: The maximum the contract with a supporting invoice. When invoices are amount authorized. There may be some flexibility and approved for payment, an expenditure becomes a liability the nature of the limits depends on the accounting that the government is obliged to honor. basis used.6 (vi) Cash management at point of making payment: Cash • A time frame: The period during which expenditure must is made available in TSA and transactions are recorded occur after and which authority expires with automatic general ledger double-entry postings. • A specific purpose: Eligible uses, usually specific Controlling continuing commitments is slightly different programs, projects, items, or grants identified in as the government is already conditionally obliged to the budget and defined by the budget classification make payments even before the release and subsequent and the COA. payment authorization takes place. Managing continuing commitments requires a stock of liabilities to be maintained • Administrative unit accountable: An MDA or specific and accurate commitment and cash plans to be available unit within it with an accounting officer responsible to to the Treasury to ensure cash is made available. Spending ensure the funds are spent as intended. agencies must update procurement and commitment plans throughout the year. The predictability of funds to undertake service delivery activities can be achieved through adequate forecasting Where commitment control is not fully functioning, the and end-to-end processing of procurement activities. A expenditure control defaults to later in the process, typical commitment control process flow is presented in Figure significantly reducing the predictability of funds and 5. The flow for controlling specific commitments is as follows:7 raising the risk of running out of cash. In higher income countries the ability to make payments when they are due is (i) Adequate resources are available for the often taken as a given. Where PFM systems and processes appropriated budget: Ensure the budget appropriation are well established, it may make sense to decentralize and MDA allocations are credible and aligned with the commitment control, allowing a commitment control officer fiscal framework. within an MDA to manage internal commitments within the broader allotments authorized by the Treasury.8 Where the (ii) MDAs are authorized to commit to contracts within commitment controls listed above are not enforced there forecast resource limits: Ensure allotment and warrants/ may not be enough cash to honor the commitments. In releases are consistent with the most recent cash plan. these circumstances, the process defaults to step (vi) of the flow presented in paragraph 41, and commitment control (iii) Reservation of budget availability at point of requisitioning: transitions to cash rationing where the controls are made on Tie budget so that allotted amount cannot be committed which invoices to pay rather than which commitments to allow. for other purposes. Unless it is only very temporary in a moment of crisis, cash rationing typically leads to a build-up of arrears as bills remain (iv) Commitment control at point of raising purchase unpaid. The validity of commitments made outside the system order: Ringfence funds in cash plan so that they cannot can be challenged by the Treasury to combat this issue. Clear be committed or spent for other purposes. Once contracts communication and follow up enforcement from the Treasury are signed, the expenditure becomes a conditional liability that no payments will be honored unless they are put through and commitments must be formally registered. the system will create a signal to both MDAs and contractors. World Bank programs should encourage this position. (v) Obligations are authorized once receipt of goods/ services is verified: Certify that the supplier has fulfilled 6. See Box 4 for an overview of Cash and Accrual based accounting and variants. 7. See also Pattanayak (2016). 8. See Radev and Khemani (2009) for a review of centralized vs decentralized commitment control. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 > > > F I G U R E 5 . Overview of a Typical Expenditure Control Process Receipt of Budget Quarterly Stage Requisition Purchase Goods or Invoice Payment Appropriations Allotment Services MDA budget MDAs create MDA Units MDA or Supplier delivers MDA Units Treasury reviews estimates are monthly/ determine need Authorized goods & services receive Invoice obligations, cash prepared quarterly Cash for Goods & Unit creates a from Supplier as availability Plans aligned to Services based Purchase Order MDA reviews per PO MoF/Budget annual Allocation on Procurement (PO) deliverables vs Treasury creates Department Plan contract and Finance Unit an Electronic consolidates MoF (Budget) Warrant Holder issues Goods creates an Fund Transfer proposal Consolidates MDA Units approves PO Receipt Note Expense (EFT) or Cheque MDA Cash Plans create a (or sub- (GRN) upon Voucher (EV) from the TSA or Adherence to Purchase warrant holder satisfaction from system TSA sub-account macro-fiscal Quarterly Requisition to a certain detailing any aligned with PO framework is Allotment is (PR) threshold) variations from and subject to Where agreed Approved by PO any restrictions commercial MoF (Budget) PRs are Procurement identified in GRN accounts are in Cabinet & consolidated, completed, operation, the Legislature Warrant/Release Approved, and award to Warrant holder instruction to review and issued by MoF to tracked by MDA Supplier approves pay is issued to approve MDA Accounting Finance Unit to EV (or sub- the appropriate Officer ensure total is Contract with warrant holder institution Budget is within Allotment Supplier signed to a certain appropriated MDAs may issue threshold) Funds leave sub-warrants Commitment the system and formally Submission to payment is registered Treasury through complete IFMIS with any supporting documentation Output Allocation Allotment Tied Fund Commitment Certification Obligation Transaction TYPE OF LIABILITY All these stages, the government has not entered into a contract to make payments. the government can No Liability stop or delay expenditure without incurring any liabilities in the event the budget allotments are changed - whether by redistribution of allotments over the financial year to match changes in the aggregate cash plan, or due to a change in appropriations (e.g. by a supplementary budget). The exception is for recurring commitments where liabilities or conditional liabilities exist from previous periods and payments for these will be reflected in Expense Vouchers approved within a future Allotment period. Conditional At these stages, the government has committed to contracts and will be liable for payments on satisfactory Liability receipt of goods and services or on contract cancellation as per contractual arrangements. Unavoidable costs including legal fees and other fees determined by the contract may be implied. The point at which the fullfilment of the contractual obligations is expected should be clear within the contract and consistent with the cash plans to allow the MoF to schedule expected payments. At these stages, the government has a legal obligation to make payments against approved suppliers. Liability Failure to make payments within the stipulated payment period will cause the expenditure to transition into arrears. Arrears usually incur interest costs. Source: Authors, with adaptations from Pattanayak 2016, Radev and Khemani 2009, and Cavanagh, Flynn, and Moretti 2016. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 Connecting Cash Management to Commitment Control Cash management interfaces with commitment control at and compliance may become so consistent and predictable three important points – when allotments are approved, that they effectively become functions, but this should not when commitments are registered, and when payments necessarily be taken for granted. Table 2 outlines key technical are made. Maintaining a connection between cash functions and managerial decisions for cash management management and commitment control is difficult to achieve and commitment control, highlighting those that exist at the even in higher income countries. For the interface to be interface of the two. Without the interface between the two effective, a minimum level of technical functionality is required, working effectively, it is quite feasible for both processes but in addition, managers must actively decide to maintain and to be fully operational without either being able to achieve enforce procedures. In some countries, managerial decisions its objective. > > > T A B L E 2 - Functions and Decisions at the Interface of Cash Management and Commitment Control TECHNICAL FUNCTIONS DECISIONS CASH MANAGEMENT • Comprehensive cash plan and execution data is • Managers actively review and approve cash plans collected regularly from MDAs. and enable/enforce subordinates to execute follow-on • Accurate forecasts covering relevant scenarios are decisions. prepared for managers. • Debt operations are responsive to changes in the • Forecasts and ACP are available at the right time to the cash plan. right officers. • Accounts external to the TSA are closed, swept nightly, • TSA and account reconciliation is operational. and idle balances are put to effective use. • Banking sector fully capable of EFTs and payments are • Payments are predictable and on time. made efficiently. INTERFACE • Timely cash plan is available to Treasury/warrant • Cash Plan/forecasts inform and are consistent with holders. allotments, commitments, and payments. • Full record of commitments and obligations is available • Payments are only made when fully completing the to cash managers. commitment control process. COMMITMENT CONTROL • Commitments are recorded as they are made. • Treasury and MDAs fully adhere to the commitment • Systems can manage allotments, tied budgets and control process. ringfenced funds. • Compliance is enforced and deviations are sanctioned. • Records of the procurement process are maintained and available. • Comprehensive records of existing commitments and schedule of future payment. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 Managing Cash Balances Payments Processing A key objective of cash management is to prevent single balance. The objective is to ensure that cash is available holding idle cash in commercial banks while government in full to government entities, but only when it is required for is borrowing money through Treasury bills (T-bills). The payments. Otherwise, the cash balances should be minimized, TSA is a reform designed to leverage modern data systems to and any idle balances deployed to low-risk liquid or near- link and view all bank accounts held in central or commercial liquid activities that maximize returns. A summary of the TSA accounts and enable the management of cash reserves as a concept is provided below in Box 4. > > > B O X 4 - Treasury Single Account A Treasury Single Account (TSA) is a unified structure of government bank accounts that allows the overall cash balance of the government to be known and enables the consolidation and optimal utilization of government resources. Operationally, the Treasury and spending agencies need to transact with a wide variety of vendors, payees, and payers of cash. There are advantages in using the central bank account, sub-accounts, or commercial bank accounts to handle transactions in different circumstances. Centrally held accounts avoid commercial fees and the complexities of inter-institutional data sharing but usually only have a single customer, the government. Meanwhile, commercial banks already have wide access to businesses and individuals outside government and can provide economies of scale in volume of payments and receipts as well as geographic distribution of physical locations. A TSA is designed to rationalize and link all these accounts to benefit from the comparative advantage of different accounts while not losing the advantage of oversight and management of the overall resources. Three broad principles govern the general design of a TSA: • All government accounts should be integrated in a manner that allows the balances to be fungible and consolidated at the end of the day to record the consolidated cash position and deploy the total balance efficiently overnight. • The TSA should have comprehensive coverage with all accounts held by budgetary and extra-budgetary integrated. • Where local governments or government agencies have a legal mandate to maintain balances in special accounts, these accounts should always be within the oversight of the Treasury. The purpose of these arrangements is to maximize the efficient use of cash by providing cash only when it is required, borrowing only when it is necessary, and minimizing the time taken to transfer funds between accounts. The specific arrangements will vary by country. Payments from the TSA can be handled centrally by the Treasury or delegated to MDA accounts in a more decentralized system. Zero-balance accounts in the central bank and commercial banks work by making payments up to a predefined limits on a daily basis and either being reimbursed for these payments at the end of the day, or the accounts are filled at the beginning of the day with the balance returned at the end. In some cases, payments under a certain threshold are handled by commercial accounts while larger payments are made directly from central bank accounts. Commercial bank liquidity is connected to the structure and implementation of the TSA. Changing government deposits in commercial banks are a dominant and volatile factor affecting overall liquidity of the market. While best practice entails clearing of all balances daily, in some cases agreements with the commercial banking sector, or fragility of the sector results in the maintenance of “transit” balances in commercial banks, obscuring or limiting the function of the TSA. This box summarizes material in a comprehensive overview of the TSA function by Pattanayak and Fainboum (IMF-FAD) 2011. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 Effective operation of a TSA can be achieved by • The IFMIS handles, or at minimum can access all maintaining robust controls and establishing transaction commitment and payment requests. sub-TSAs for spending units with corresponding ledgers • The IFMIS should maintain full cash book records of the in the IFMIS. The IFMIS software that handles payments TSA sub- and transactional accounts. needs to be closely connected to the central bank systems • All transactions have a unique identifier to track them (See Figure 6 below) and a number of essential functions through the systems. must be established:9 • Both the Central Bank and the IFMIS should be able to generate statements independently to allow reconciliation between Treasury systems and TSA. > > > F I G U R E 6 - Simplified Payments Processing System MDAs Information Funds & Information Commitment and Payment Requests Central Bank Borrowing Treasury Reconciliation TSA Main Account and IFMIS sub-accounts Debt Service Payment Daily Orders Settlements Suppliers Revenue Taxes, fees, and Transactional Accounts Daily others incl. MDA including commercial accounts Employees Payments generated Beneficiaries Where daily settlement is not possible, or the Chart of Accounts (COA) and system connections are not set up to allow daily reconciliation, the information available to the Treasury to inform commitment and payment control is weakened or simply not available. Periodic authority to incur expenditure (warrants) can be made for the transaction sub-accounts without the need for physical movement of cash from the Central Bank to commercial banks. A Zero-Balance Account (ZBA) system can then operate whereby spending units can process payments that will be controlled and limited by the balances assigned to the transaction sub-accounts which are mirrored in the IFMIS general ledger. Payments are made by electronic funds transfer (EFT) either by the finance unit within the MDA (decentralized) or by the Treasury (centralized). 9. See Dener (2017): Toolkit for Rapid Assessment of TSA Operations. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 Autonomous bodies and self-accounting entities can Where commercial banks provide transaction banking operate a decentralized-TSA. This allows them to maintain services under the TSA system, their remuneration should their internal procedures and processes and make payments be negotiated competitively and transparently. Retail from their bank account which is linked to the TSA for the banking through commercial banks is desirable in certain purpose of consolidation of overnight balances. Any accounts circumstances where they hold a comparative advantage in held in commercial banks must also be linked to the TSA, and efficiency. However, the relationship between commercial balances swept daily. banks and the Central Bank should be clearly defined. A framework agreement must outline relevant standards At the close of banking operations each day, a cash including consistent and transparent transaction fees, balance consolidation function can be used to ascertain penalties for non-performance, reporting arrangements and the closing positions in all TSA-linked sub-accounts in bank reconciliation procedure.10 Specifically, the framework all banking institutions. The balances will then all be off set agreements must seek to minimize the time which the within the TSA against consolidated revenue, leaving a “zero commercial banks hold idle cash to minimize the cost of carry. balance” for each spending unit sub-account. This process of Reforms to establish a framework agreement with commercial consolidation and zero balancing on a daily basis reduces the banks may encounter some resistance given that efficiency need for borrowing and associated interest payments. The arrangements for the government will likely reduce revenues following examples show that efficiency gains through the from commercial banks. introduction of a TSA can be substantial: MANAGING LIQUIDITY AND COORDINATION • Indonesia: Gains of approximately US$300 million, about BETWEEN CASH AND DEBT MANAGEMENT 4 percent of the Central Government financing costs in 2014. While the cash plan identifies the borrowing requirements • Russia: Interest gained from deposits in commercial to maintain a smooth financing of service delivery, the debt banks of about US$250 million in 2011. plan identifies the mix of borrowing instruments used to implement the medium-term debt strategy and achieve the Advance and transit accounts are utilized in some desired debt composition. Alignment of the two is essential, countries, usually where a TSA is not fully operational, both from the outset of the financial year, and throughout as and especially where the availability of banking services the budget is executed. If forecasts of cash requirements are is limited by technology or geography. Transit accounts reliable, coordinated, and well understood by both offices, a enable the receipt and consolidation of revenues and other realignment of both plans can be achieved efficiently. Where income, often in commercial bank accounts that are more there is weak forecasting or poor coordination, urgent and accessible to the public, before remitting the funds to the unpredictable demands for cash can force inefficient debt central bank revenue fund. In some countries, funds remain in management decisions. Alternatively, borrowing to mop up transit for several days, in effect providing interest-free loans excess liquidity, or in more volatile environments to take to the commercial banks and constraining cash management advantage of market liquidity when it is not immediately functions. Imprest (petty cash) and more general advance required, can lead to large idle cash balances. Government accounts are designed to enable a lump-sum cash transfer cash flows, when not coordinated, are often a major cause of to MDA controlled accounts, allowing the MDA to manage excess bank liquidity and volatility in the money markets. This cash directly and account to the Treasury for the expenditure complicates commercial bank liquidity management as well as ex-post. The arrangement is not optimal as it conflicts with undermining Central Bank monetary policy operations.11 the objectives of a TSA and causes idle balances to be sitting in fragmented government accounts. It also raises The initial cash and debt plans must strategically manage issues around the difference between disbursements – the predictable developments, particularly the redemption amount transferred to the MDA controlled accounts, and schedule of existing debt and revenue and payment actual payments to suppliers. The difference can be both cycles. Where there is adequate liquidity in the money substantial and poorly reported in some countries, impacting market, bond sales can be delinked from the profile of cash the transparency of budget execution. flow, allowing short-term cash requirements to be handled by 10. Pattanayak and Fainboim (2011). 11. See Pessoa and Williams (2012). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27 T-Bills and other money market instruments. Where this is of reporting templates that are useful for presenting data on not the case, the coordination of all aspects of the debt plan cash management and commitment control, and discuss the with the cash plan is even more essential. In the most cash- systems supporting these reports. constrained markets, debt managers may be obliged to build up reserves in auctions over multiple weeks to cover large Accounting Procedures payments.12 During a crisis, the cost of short-term borrowing Over the past three decades, most countries have begun can grow substantially over the financial year, especially where to shift from cash-based accounting to accrual, and most market liquidity is low and increased borrowing requirements higher income countries have completed the transition. exert pressure on thresholds laid out in the macrofiscal The basis for accounting has an impact on cash management framework and fiscal rules. This, in turn, exacerbates the and commitment control, and reforms towards accrual problem by increasing the cost of debt servicing. Further accounting are, in large part, to strengthen the information detail on cash and debt management coordination is found in on and controls of expenditure.13 Box 5 below outlines the Williams (2010). differences between cash and accrual-based accounts. An accrual-based accounting system is preferred as it 1.4 Recording and Reporting formalizes the recording of commitments, but recording of financial liabilities is a relatively advanced feature of accrual accounting and is usually implemented in the Clear, timely and consistent reporting is essential in the later stages of transition from cash basis.14 Accounting time-bound world of cash management. The short-term and reporting systems operating on a cash basis will need to data requirements of managers in multiple institutions need to maintain a separate register of commitments. External ledgers be fulfilled in addition to regular consolidation of both forecast – often in a “vote book” or “commitment ledger ” – are often and execution data to inform decision making. This section harder to maintain and consolidate leading to error or misuse. will briefly review reporting standards, present a selection > > > B O X 5 - Definitions of Accounting Basis Cash-Based • Ignores liabilities until due for payment • Ignores non-cash operations altering stock of government assets and/or liabilities • Must be supplemented by memoranda items to reveal economic flows escaping the accounts Modified Cash • Cash based accounting systems where accounts are kept open for days or weeks at the end of the financial year to include transactions in the pipeline at year end. Modified Accrual • Not a formal definition but designates a system that is migrating from cash to accrual basis or has incorporated some accrual elements but stopped short of full accrual accounting. • Usually incorporates features such as recording commitments before cash flow results. Accrual • All economic flows are recorded at the time economic value is created, transformed, exchanged, transferred, or extinguished • All stocks of assets and liabilities are recorded and enhanced monitoring of liabilities and contingent liabilities • Consolidation of accounts for all entities under government control Sources: Cavanaugh, Flynn and Moretti 2016 and Pattanayak (n.d.). 12. An example of this is given in quarter 1 of the example Aggregate Cash Plan in Annex 3b. 13. The International Public Sector Accounting Standards (IPSAS) and the Government Finance Statistics (GFS). Manual are widely accepted accrual accounting standards and are largely compatible with each other. Most COAs will be configured to report in one or both standards. 14. Cavanagh, Flynn and Moretti (2016). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 28 The Chart of Accounts (COA) is used to embed the transactions and capture relevant information independently accounting standards in the Treasury systems to allow of the cash flows in specific bank accounts. This is important budgets, transactions, reports, and audits to use a because it allows the Treasury to record distinctive information common framework. It establishes a common definition of linked to ledger accounts to track and control appropriations the purpose of funding and the accountable unit which can be and allotments.16 An example of this coding structure is applied to the amount and time frame, thereby establishing a provided in Annex 4a. transparent understanding of the four main characteristics of authorization.15 The COA is typically structured by segment The source of fund segment of the COA with dimensions with specific definitions and associated codes in each segment. for fund component agreements is useful for ring-fencing Table 3 below describes key segments for cash management and monitoring special purpose funds, intergovernmental and commitment control. grants and donor-funds that normally do not allow for co- mingling. This is important so that specific source and use The economic item codes for deposits held at central of funds reports can be produced to meet specific reporting and commercial banks can be used for consolidation of requirements including by disbursement categories. A specific cash balances, including for special purpose and donor- use case in Kenya is described in Box 11 in the next chapter, funds to prepare consolidated financial statements for all and Annex 4b presents an example of funds identified in the controlled entities. It also allows the government to record all fund segment in the COA of the Government of Bangladesh. > > > T A B L E 3 - Key Segments of a Chart of Accounts ECONOMIC ITEM ADMINISTRATIVE PROGRAM SOURCE OF FUNDS Flows • Aligned to • Sector Policies • Designation of • Government Revenues. administrative financed through the origin of the • Government Expenses. hierarchy in each MDA • ongoing spending transaction, including • Acquisition and sale of non- • Linked to the programs. donors and special financial assets. definitions relevant • Sector projects purpose funds which • Transactions in financial for allotments and defined by time- are ‘ring fenced.’ assets and liabilities including warrants. bound investments incurrence and repayment of that often yield a new debt. government asset. • While focused on Stocks domestic functions, • Stock of fixed assets, it may be configured inventories, land, intangible to enable functional assets. reporting in the • Bank account balances internationally including broad alignment to comparable COFOG TSA accounts including special standard. purpose accounts. • Other financial assets including investments and accounts receivable. • Stock of Liabilities in borrowing instruments and overdraft; volume and age of arrears. Sources: Adapted from draft SCOA Manual (Kenya 2020) and IMF 2014 GFS Manual. 15. See previous section on Commitment Management and Control. 16. See Pattanayak and Fainboum 2011. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 29 Government priorities may not always be definable by can be used in combination to preselect or ‘tag’ important the strict structure of the COA. In times of crisis, rapid expenditure items across government. The IFMIS software or selection of portions of the budget to protect and portions integrated modules can manage this information derived from to cut may be necessary. This analysis must then be the COA and make it available to Treasury and commitment reflected in revised allotments and thereby adjust control of control managers to inform allotments, commitments, and commitments. This may be straightforward in the case of payments. This connected reporting structure does not need identifying salaries, debt payments, or other line items that to be limited to commitment control and can be used to define are identified universally across all MDAs. Protecting priority reports on any government-wide reporting – for example, service delivery expenditures may be more difficult as they tracking expenditures related to climate change or other major typically will require a mix of line items and are implemented government initiatives. An example of using the COA for by multiple MDAs. To address this, the COA segments prioritizing expenditure in practice is presented in Box 6 below. > > > B O X 6 - Categorizing Priorities in Expenditure using the COA in Kenya The Government of Kenya Cash Management Framework requires all expenditures to be categorized in the following four categories: Category 1: Expenditures which represent statutory obligations, including debt outflows, salaries, pensions, and county equitable share transfers. Category 2: Expenditures comprised of major social, economic, accountability, governance, and security programs. Category 3: All other Government of Kenya financed expenditures not in Category 1 or 2. Category 4: Expenditures comprised of externally funded projects categorized as revenue in the budget and for which funds are transferred via the exchequer. Cash is rationalized and allocated based on expenditure categorization provided for in the cash management framework. The broad definition of Category 2 expenditures was agreed with MDAs and based around negotiated agreements with budget support donors. The specific definitions were defined within the COA program and item segments using the Hyperion software and a background mapping table. When preparing budgets, MDA officials do not have to specifically identify the category of expenditure because it is automatically generated from the combination of COA codes and mapping tables. Likewise, when a requisition or payment voucher is submitted, the design allows Treasury officers to identify the category of the request and to prioritize accordingly. For this to work, requisitions and vouchers must contain relevant COA codes allowing the system to identify the correct category. Sources: Interviews with L. Matheka and D. Nzioki, World Bank, Nairobi. Structuring Reports for Managing Commitments and Cash In-year cash management requires scenario planning for possible eventualities. What is important and the options available will differ from country to country. However, the fundamental information required for cash management decision-makers revolves around a simple presentation of projected cash availability beyond the legal overdraft limit given no change in policy. Modeling of available policy scenarios informs cash managers of options for possible policy change. The following page presents a simplified template for a cash projection dashboard with policy options. Annex 5 contains an example of an actual table used in Sierra Leone. Non-discretionary expenditure can include debt servicing, pension, salaries, and in some instances security sector spending. The categorization of priority expenditure in Kenya (Box 6) can be adapted in the illustration in Figure 7. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 30 > > > F I G U R E 7 - Illustration of a Simple Weekly Cash Projection Dashboard with Policy Options FORECAST Actual Outturn Estimate Projections wk-3 wk-2 wk-1 This week wk+1 wk+2 ... wk+12 Opening Cash Balance A Revenue B Expenditure (non-discretionary) C Expenditure (discretionary) D Budget Balance E=B-C-D External Financing F Domestic Financing (including T-Bills) G Implied Closing Balance H=E+F+G Overdraft Limit Legal limit of Central Bank Overdraft facility SCENARIOS i. Adjust T-Bills H+/-? ii. Cut Discretionary H+D iii. Cut Discretionary and Adjust T-Bills H+D+/-? IMPLICATION OF POLICY OPTIONS 0 TSA Balance ($ millions) -2 -4 -6 -8 wk-3 wk-2 wk-1 Current wk+1 wk+2 wk+3 wk+4 wk+5 Week T-Bills - - - +0.5 +0.9 +0.5 +0.5 +1 +0.3 i. Adjusted T-Bills ii. Cut discretionary iii. Cut discretionary and adjust T-Bills No policy change Overdraft limit Source: Adapted from Sierra Leone Cash forecasting tool, any data is purely illustrative. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 31 During the execution phase, budget performance reports cases, the Treasury may want to track information on a group must include information on existing commitments and of priority expenditures, in which case a combination of COA obligations to decision-makers at both the commitment codes can be used for a customized report if the codes are and obligation steps. An example is shown below in Table applied to expenditures and accessible in the system at all 4 where headline economic items are listed by MDA and key stages from budgeting through commitment to payment.17 data on performance is shown across the columns. In some > > > T A B L E 4 - Sample Budget Utilization Report with Outstanding Commitments and Obligations For illustrations only GOVERNMENT OF ABCDE in [currency] BUDGET EXECUTION REPORT (BER) AS AT .......... ORGANIZATION/NATURE OF EXPENSES A B C D=A+B+C E F G H=A-(E+F+G) I=B+C-E-F-G J=E/A UN- PERFOR- CoA SEGMENTS/ APPROVED VIREMENT/ ACTUAL TO COMMIT- OBLIGA- AVAILABLE AVAILABLE RELEASE RELEASED MANCE DIMESIONS BUDGET SUPPLEMENTARY DATE MENTS TIONS BUDGET RELEASE BUDGET RATE (%) MINISTRY 1 70,000,000 2,500,000 40,000,000 112,500,000 27,500,000 7,000,000 3,000,000 32,500,000 2,500,000 39% Compensation of 5,000,000 – 5,000,000 10,000,000 5,000,000 – – – – 100% employees Use of goods and – – – – – services Consumption of 10,000,000 (1,000,000) 5,000,000 14,000,000 2,000,000 – 2,750,000 5,250,000 250,000 20% fixed capital Interest 10,000,000 1,000,000 5,000,000 16,000,000 3,000,000 – – 7,000,000 2,000,000 30% Subsidies 35,000,000 – 20,000,000 55,000,000 15,000,000 5,000,000 – 15,000,000 – 43% Grants 5,000,000 – – 5,000,000 – – – 5,000,000 – 0% Social Benefits 5,000,000 2,500,000 5,000,000 12,500,000 2,500,000 2,000,000 250,000 250,000 250,000 50% Other Expenses MINISTRY 2 30,000,000 10,000,000 20,000,000 60,000,000 5,000,000 5,000,000 2,000,000 18,000,000 8,000,000 17% Compensation of 15,000,000 10,000,000 25,000,000 2,000,000 2,500,000 1,000,000 9,500,000 4,500,000 13% employees Use of goods and – 10,000,000 – 10,000,000 – – – – – services Consumption of 7,500,000 – 5,000,000 12,500,000 2,500,000 – – 5,000,000 2,500,000 33% fixed capital Interest 4,000,000 – 2,000,000 6,000,000 – 1,000,000 – 3,000,000 1,000,000 0% Subsidies 2,500,000 – 2,000,000 4,500,000 – 1,000,000 1,000,000 500,000 – 0% Grants 1,000,000 – 1,000,000 2,000,000 500,000 500,000 – – – 50% Social Benefits – – – – – – – – – Other Expenses – – – – – – – – – TOTALS 100,000,000 12,500,000 60,000,000 172,500,000 32,500,000 12,000,000 5,000,000 50,500,000 10,500,000 33% [insert print date/time stamp] - This report can be designed to present information in aggregate OR detailed by the various CoA segments/dimensions 17. See Box 5 for an example of this reform in Kenya. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 32 In countries with weaker reporting systems, key data may institutions communicate and share information within this not be readily available—see columns F and G in Table system is more complex—opaque incentive structures, the 4). As a result, the Treasury will have to default to managing value of personal relationships, and change management to execution based on the unreleased budget (column D). support dynamic reform processes all play a part. Where the budget or releases (allotments) are either overly optimistic, or poorly reflect an MDA cash requirement, this tool Legal Framework will also be inadequate for controlling expenditure. In the most The PFM Act or equivalent law sets in place the key extreme cases where none of the data on controls is reliable institutional roles and responsibilities for making and – releases are mismatched and/or systematically higher controlling expenditure, supported by regulations, than available resources – commitments are not recorded, policies, and guidelines. While the overall authorization and payment obligations may emerge at the last minute. of the budget through the appropriation process is typically Managers will then be forced to ration cash and revert to bank central to any PFM Act, the authority of the Treasury to manage statements for clarity on available resources. Cash rationing this authorization during the year by means of allotments involves controlling entirely at the payment stage, approving and commitment control is not always as well established or payments based on cash balances available on the day. This understood. A recent study found that cash management is is inadequate for managing commitments and, therefore, usually a function of the Treasury and very often integrated it is not possible for the Treasury to limit the gap between with the debt function, but no specific solution fits all countries. obligations and resources, ultimately resulting in delays to The study concludes that the essential factor is not the specific payment and arrears. location of the function, but a clear definition of responsibilities and workflows between entities and adequate capacity in the relevant units. 1.5 Institutional Arrangements The Kenyan PFM Act and associated legislation provides and Coordination a good example of the identification of essential cash management functions (See Figure 8). A key component of the law is the provision to establish a cash management By design, the institutions that collect, spend, hold, and framework to govern the function. Box 7 provides a summary authorize public money are usually deliberately given a of institutional coordination in Kenya and Annex 6 presents level of independence. The legal framework governing the excerpts from the frameworks for institutional coordination in establishment of and relationships between these institutions Kenya and Pakistan. is highly relevant to their overall functionality as a system and suitability for efficient delivery of services. How well the > > > B O X 7 - Institutional Coordination and Oversight in Kenya Kenya developed and approved a cash management framework in January 2020. The framework recognizes the dynamic public finance management environment and so is subject to periodic reviews, as necessary. It borrows from international good practice on principles and sets out benchmarks for continuous improvement towards realization of cash management objectives. Fundamentally, it serves to provide a mandate for coordination between departments. The coordination and oversight structure set out in the Cash Management Framework brings together the National Treasury, Kenya Revenue Authority, Controller of Budget (CoB) and the Central Bank of Kenya (CBK), each represented in the Cash Management Technical Committee (CMTC). On the demand side, the national MDAs, Semi-Autonomous Government Agencies (SAGAs) funded through exchequer, and subnational governments are central stakeholders. The Cash Management Unit (CMU) is the central coordinating body that brings together the Cash Management Advisory Committee (CMAC) and CMTC. The CMAC is composed of senior management and is responsible for decision making and providing strategic direction on cash management, while the CMTC is responsible for the day-to-day management activities and supports the CMAC in executing its mandate and functions. The MDAs, SAGAs and sub-nationals are EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 33 charged with day-to-day responsibilities in ensuring that annual workplans, budgets, procurement plans, operational plans and cash plans are required to be updated on a monthly basis. The monthly revisions are updated through the budgeting Hyperion cash planning tools currently being integrated with the IFMIS General Ledger to facilitate real-time budget execution fiscal reporting. Source: Interviews with WB Governance Team, Kenya. > > > F I G U R E 8 - Excerpts from Kenyan Legislation and Regulation on Cash Management PFM ACT (2012) SECTION 29 MANAGEMENT OF CASH AT THE NATIONAL GOVERNMENT LEVEL Authorize a coordination (1) The National Treasury shall establish a framework within which the national framework government shall manage its cash transactions. Require MDAs (2) Every national government entity, other than a state corporation, shall submit an annual cash plan and forecast to – (a) the National Treasury in a form and manner and to prepare cash plans relating to such periods directed by that Treasury; and (b) the Controller of Budget. PFM REGULATIONS (2015) Align the cash plan 44 (1) Accounting Officers shall provide the National Treasury with an annual cash flow directly to Allotments plan as a requisition for funds needed for the financial year. 44 (3) The annual cash flow plans prepared by Accounting Officers shall be broken down Period of the Allotment into a three-months rolling basis and shall be adjusted to reflect any implementation realities in consultation with the National Treasury. Align the cash plan 44 (4) As far as possible, quarterly cash flow projections prepared by Accounting Officers shall be supported by a procurement plan approved in accordance with the to the procurement plan Procurement and Disposal of Assets Act. 45 (1) The National Treasury shall consolidate all expenditure requirements and Develop an Aggregate projections as forwarded by Accounting Officers, compare with the projected revenues Cash Plan including net domestic borrowing, and thereafter in consultation with Accounting Officers, agree an indicative annual cash flow forecast limit for that financial year. Provision to revise 45 (3) In the event of unanticipated cash flow fluctuations, the National Treasury shall inform the Accounting Officers through a circular requesting them to review and submit cash plan/allotment revised cash flow projections in line with the guideline set out in the circular. Provision for a warrant 46 (2) Release of Funds from the Consolidated Fund to national government entities shall be in accordance with the authority granted by the Controller of Budget together to authorize spending with the written instructions of the National Treasury. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 34 Information Exchange between Departments Legal provision for coordination supports but does level agreement”18 which specifies: (a) delegated roles not guarantee optimal information exchange between and arrangement for mutual information sharing and notice departments. With the mandate given by a framework periods for any changes to schedules; (b) turnaround times or similar policy, technical staff must establish formal and for transactions and any penalties for missing stipulated limits; informal lines of communication between departments that (c) clear renumeration framework for central and commercial enable regular information-sharing, as shown below in Figure banking services; (d) framework for interest payments on 5. To clarify the services provided by the central bank and government securities; and (e) business continuity handling. any commercial banks, it is good practice to use a “service > > > T A B L E 5 - Formal and Informal Information Flows FORMAL INFORMATION FLOWS INFORMAL INFORMATION FLOWS DAILY/WEEKLY UPDATES ON TRANSACTION DATA • Payment and commitment requests from MDAs • Treasury notified of anticipated delays or changes to submitted to Treasury. cash requirements/receipts. • Payment orders submitted to Central bank and/or • MDAs are given ample warning if there is likely to be any commercial banks. cash shortfall that may affect payments. • All transactions recorded through IFMIS daily • Revenue receipts cleared from transaction account and recorded in IFMIS daily. • Consolidated bank statements available from Central Bank and reconciled with IFMIS. WEEKLY UPDATES ON CASH PROJECTIONS • Budget unit coordinates and shares information on • Confirmation of any major upcoming payments between revenue and budget projections, any changes, and any Budget unit, MDAs, and Treasury. prioritization in the event of cash shortages. • Macrofiscal unit engaged well in advance in any • Cash management unit prepares cash projections, discussions impacting macrofiscal framework. including debt data, and informs senior managers for any decisions or authorizations; and informs wider group of any changes. DEBT MANAGEMENT FOR SHORT-TERM BORROWING • Debt managers are instructed on short-term cash • Central Bank and Treasury/debt office are in constant requirements to inform T-Bills operations. contact regarding market liquidity and possible changes • Treasury is informed of borrowing transactions and to short-term debt requirements. recorded in IFMIS. • Central Bank and debt office are in close contact with • Any adjustments to the interest obligations created by Treasury on any major loans or grants being negotiated, the borrowing transactions are recorded through the especially through development partners. accounting system (accrual) or connected register. • Macrofiscal unit participates in any discussions that may impact the macrofiscal framework. 18. See Lienert 2009. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 35 Formal flows of information include instructions, short term borrowing and preparing weekly cash projections. compliance, and operational data while informal flow will Managing these responsibilities requires both high-level policy typically involve anticipating issues before they emerge engagement and extensive coordination between technical formally and ensuring that formal information has been staff. Box 8 below shows an example of the institutional well received, understood, and acted upon. Below are structure of a cash management function. examples of information flows for managing transactions, > > > B O X 8 - What Does a Cash Management Function Look Like? The location and structure of a cash management committee may vary significantly, but two primary aspects of the function are the technical team that collects and prepares data and the senior committee that approves plans and makes any decisions necessary. This box provides an example of the skills and structure required for the function adapted from the Kenyan Cash Management Framework. Cash Management Committee Function: Monitor fiscal projections and performance, ensure cash plan is consistent with macrofiscal plan, approve annual and monthly cash plan, and authorize in-year cash allocations. Membership: Senior civil servants of the Treasury, cash managers and macrofiscal, budget, accounts, debt offices. The Central Bank may also have a presence. Cash Management Technical Team Function: Monitoring TSA (central bank and connected commercial banks) and reconciling daily balances; monitoring borrowing schedule, overdraft facility and debt operations; implement the decisions of the Committee on cash allocations, monitoring exchequer requests and alignment with allocations; advise and monitor adherence to fiscal framework; maintain CM software and databases, prepare forecasts, analysis of revenue and expenditure and forecast reports; liaison with spending and revenue collection agencies; provide training to spending agencies in CM functions. Membership: Representatives from budget, exchequer, IFMIS, macrofiscal, and debt departments; Unit of technical staff including accountants and economists with capabilities covering accounts management, report preparation, data collection and management interdepartmental liaison; forecasting and analysis officers. Structure: An example of the structure of a Cash Management Technical Team is shown below. 18. See Lienert 2009. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 36 Unit Head of Unit and Chair of Technical Team Accounts and Forecasting Reporting Manager Manager Accountant Accountant Financial Officers: Economist Support: Support: IT Support: Liaison with Support: Account Exchequer CM tools and Technical Team Forecasting/ monitoring and monitoring and systems and Agencies analysis/advisory reports reports Additional Technical Members Ministries Departments and Agencies Macrofiscal Budget Public Debt Revenue Spending Collecting Agencies Agencies IFMIS Exchequer Central Bank EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 37 2. >>> Mapping Out the System and Identifying Bottlenecks and Underlying Causes To frame the reasons for poor outcomes in cash management and commitment control, one must consider three buckets: Planning and forecasting, commitment controls and banking arrangements, and eight common problems that affect outcomes in these buckets. To lay the foundation, an analysis of Public Expenditure and Financial Accountability (PEFA) scores is used to examine existing practices in Section 2.1. This helps to inform the set of eight problems, briefly introduced in Box 9, below. In Section 2.2, the eight problems, their underlying causes, and the possible effects of each problem are summarized in the context of each bucket. Section 2.3 reviews each problem in detail, using country examples to understand causes and effects. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 38 > > > B O X 9 - Summary of Eight Problems Affecting Cash Management and Commitment Control Eight common problems that may affect any of the buckets are used to guide the discussion. They are not necessarily comprehensive but are chosen to help to frame the discussion. Each of the problems may affect any of the buckets and the intention of this framework is to consider the interconnections between capacity, systems, legal frameworks and collective action problems on the outcomes in cash management and commitment control. 1. Over-optimistic Revenue Projections – Where the revenue estimates guiding the macrofiscal frame and the approved budget are unlikely to be realized and the financing of the budget is likely to be compromised. 2. Unrealistic Expenditure – Where the budget is not executed as planned and either the composition of the budget, aggregate execution or both deviate from the approved budget. 3. In-year Mismatch Between Inflows and Outflows – Where the profile of cash requirements is not matched by cash availability and either unplanned debt or adjustments to budget implementation are necessary. 4. Ad hoc or reactive debt decisions – Where decisions on debt financing are excessively driven by in-year pressures with limited prior planning, leading to inefficient borrowing. 5. Commitments made beyond available cash – Where the obligations entered into by government are not constrained by the cash plan, cash availability falls short of the cash plan, or a combination of both leading to payments being deferred or short-term unplanned borrowing. 6. Short-term/centralized decisions about what gets paid – Where commitment control is weak or non-existent and the senior management of the Treasury makes weekly or even daily decisions about which invoices to pay and which to defer. 7. Lack of transparency in banking arrangements – Where a TSA and associated reporting on all government accounts is weak or non-existent and the Treasury is unable to access or manage cash balances comprehensively. 8. Weak institutions and collective action problems – Where cooperation and information sharing between institutions is inadequate to perform cash management and commitment control functions. 2.1 Mapping Out Existing Practices Predictability of funding and the management of • Over two-thirds of these countries report relatively strong available resources to maximize their efficient use are predictability of resources (PI-20) and expenditure control the essential outcomes of cash management to support processes (PI-25). Outcomes in terms of arrears (PI-22) service delivery and infrastructure development. These and budget composition (PI-2) show a reverse trend with outcomes are elusive in most lower income countries and, two-thirds of countries reporting relatively weak scores to address them, it is essential to understand what capacity (See Figure 9). issues, system failures or collective action problems may be contributing to the problem. PEFA assessments undertaken • Weaker expenditure control (PI-25) is more closely between 2016 and 2019 from 47 countries reveal the following associated with budget composition (PI-2) than it is with general messages: overall budget deviation (PI-1). (See Figure 10).19 19. Pattanayak (2016) found the relationship between weak expenditure control and higher budget deviation to be much stronger in a comparison of 85 PEFAs from 2006-2014. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 39 • Weak expenditure control (PI-25) and resource The relationship between the availability of information predictability (PI-21) indicators both have a relatively on commitment ceilings (PI-23.3) has a more consistent strong association with larger arrears (PI-22). (See positive correlation with both the size of arrears and Figure 11). deviaitions in budget compositions. • Within the resource predictability dimension, information • A deeper examination of case study countries and on commitment ceilings (PI-21.3) has a much closer regional variations (Annex 7) suggests that achieving association with the size of arrears (PI-22.1). mid-level scores in cash forecasting and segregation of duties is relatively easy, but improvements in arrears and • Cash forecasting capacity (PI-21.2) has little correlation budget composition tend to happen only when information with the size of arrears (PI-22.1) but has a relatively strong on commitments, commitment control effectiveness and association with deviations in budget composition (PI-2). payments compliance is improved. > > > F I G U R E 9 - PEFA Scores of 46 Countries (PI-21, PI-25, PI-22 and PI-2) 75% 50% 25% 0% ng e ak eak ng e ak ak ng e ak ak ng e ak ak rat rat rat rat We We we We we We we o o o o yw Str Str Str Str de de de de y y y Mo Mo Mo Mo Ver Ver Ver Ver PREDICATBLE EXPENDITURE EXPENDITURE BUDGET COMPOSITION RESOURCES PI-21 CONTROLS PI-25 ARREARS PI-22 PI-12 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 40 > > > F I G U R E 1 0 - PEFA Scores: Expenditure Control and Budget Credibility a. EXPENDITURE CONTROL AND BUDGET DEVIATION None Agg. Budget Deviation (PI-1) Small Moderate Large R2 = 0.0523 Not reported Very weak Weak Moderate Strong Strength of Expenditure Control (PI-25) b. EXPENDITURE CONTROL AND BUDGET COMPOSITION None Expenditure Composition Small Deviation (PI-2) Moderate Large R2 = 0.1685 Not reported Very weak Weak Moderate Strong Strength of Expenditure Control (PI-25) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 41 > > > F I G U R E 1 1 - PEFA Scores: Arrears Outcomes, Expenditure Control and Predictability of Resources a. EXPENDITURE CONTROL AND ARREARS Small Expenditure Arrears (PI-22) Moderate Large Very large R2 = 0.3412 Not reported Very weak Weak Moderate Strong Strength of Expenditure Control (PI-25) b. CASH MANAGEMENT AND ARREARS Small Expenditure Arrears (PI-22) Moderate Large Very large R2 = 0.2763 Not reported Very weak Weak Moderate Strong Strength of Cash Management (PI-21) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 42 > > > F I G U R E 1 2 - PEFA Scores: Stock of Arrears, Cash Forecasting and Commitment Ceilings a. CASH FORECASTING AND AND SIZE OF ARREARS Small Size of Arrears (PI-22.1) Moderate Large Very large R2 = 0.054 Not reported Very weak Weak Moderate Strong Strength of Cash Forecasting (PI-21.2) b. CASH FORECASTING AND AND BUDGET COMPOSITION Small Expenditure Composition Moderate Deviation (PI-2) Large Very large R2 = 0.272 Not reported Very weak Weak Moderate Strong Strength of Cash Forecasting (PI-21.2) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 43 > > > F I G U R E 1 3 - PEFA Scores: Cash Forecasting, Size of Arrears and Budget Composition a. COMMITMENT CEILINGS AND SIZE OF ARREARS Small Size of Arrears (PI-22.1) Moderate Large Very large R2 = 0.2386 Not reported Very weak Weak Moderate Strong Information on Commitment Ceilings (PI-21.3) b. COMMITMENT CEILINGS AND BUDGET COMPOSITION Small Expenditure Composition Moderate Deviation (PI-2) Large Very large R2 = 0.2034 Not reported Very weak Weak Moderate Strong Information on Commitment Ceilings (PI-21.3) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 44 Regional comparison shows that experiences vary. For outcome-oriented indicators such as the size of arrears or example, the World Bank’s Latin America and Caribbean (LAC) budget composition, but further context-specific analysis is and Europe and Central Asia (ECA) regions both have strong necessary to understand the underlying issues contributing to resource predictability and expenditure control scores. LAC the outcomes. has good outcomes on budget composition, but arrears are high. ECA has a more mixed story on budget composition, but relatively good outcomes with respect to arrears. A summary 2.2 Framework for Understanding of the key PEFA indicators for LAC, ECA, Africa (AFR), East Asia and the Pacific (EAP), Middle East and North Africa Underlying Weaknesses (MNA) and South Asia (SAR) is presented in Annex 7. The PEFA is an essential tool to help identify key areas Problems in functional areas of cash management and where problems may lie, and further contextual analysis expenditure control usually affect the broad outcomes for should be focused. While these PEFA scores are helpful predictability of cash for service delivery and investment to understand general trends, practical experience tells us in multiple areas. An example is that unrealistic budgets put that they should not be relied upon to reveal the problems pressure on cash managers by systematically inflating the definitively and may be more optimistic than the realities on mismatch between inflows and expected outflows, while at the the ground. Experience from case study countries and wider same time undermining cash planning which should be based experience shows that meeting the minimum requirements on the budget proposals. Negative reinforcement is likely: of a PEFA indicator does not give adequate diagnostic the interconnected nature of the processes and the relatively information about the health of a process. For example, the quick cyclical nature of money-in, money-out provide many fact that a cash plan is prepared regularly may lead to a score opportunities for problems to be exacerbated throughout the of A, but this tells us very little about whether it is actively fiscal year or over the medium term. Figure 14 below provides used by the decision makers. This may be implied by other an illustrative example of how this might occur in practice. > > > F I G U R E 1 4 - Illustrative Example of Interconnected Challenges Unrealistic allotments Poor aggregated cash planning MDA Cash plans Commitments Unrealistic delinked from beyong the Budgets resources available cash MDAs Gaming system Budget Cash Shortfalls deviations EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 45 Given the interconnectedness, problems in expenditure the core finance institutions and MDAs. The framework below control are highly unlikely to be isolated. Understanding is designed to trigger this diagnosis by proposing possible the possible underlying weaknesses, diagnosing the specific underlying causes for different high-level outcome areas causes, and building consensus around the solutions will or “buckets.” typically require coordination between multiple actors across > > > B U C K E T 1 - Planning and Forecasting POSSIBLE UNDERLYING CAUSES EFFECTS OF THE PROBLEM PROBLEM OF THE PROBLEM IN THE CONTEXT EXAMPLES FOR THE BUCKET OF THE BUCKET Over-Optimistic • Unrealistic levels of • Volatile revenue streams, particularly Zambia, Revenue expenditure are approved as external grants, and natural resource Indonesia, WBG a result. revenues. • Macrofiscal framework is weakened. • Unwillingness to make expenditure cuts Zambia • Unrealistic MDA Cash Plans in the face of declining revenues. undermine forecasting. • Political pressure to inflate projections to Bangladesh, support incremental budgeting. Zambia • The result of negotiation between the Kenya, Treasury and the revenue authority to Sierra Leone improve revenue collection performance. Unrealistic • Budget cuts, additional • Unrealistic revenue or financing All except Bhutan Expenditure unplanned borrowing or estimates mean the expenditure budget deferred payments become is also unrealistic. necessary because: • Unplanned expenditures presented as payment requests. • Budgeted items are • Budgets underestimate costs on policies unaffordable. and in-year adjustments are required to • Unbudgeted items are meet policy costs. presented for expenditure displacing budgeted items. Mismatch • Inability to anticipate • Poor coordination between departments. Zambia, between Inflows mismatches weakens cash • Poor capacity to forecast. Sierra Leone and Outflows forecast. • Volatile external sources of revenue Zambia, WBG, (grants, natural resources). Bhutan. • Unplanned expenditures presented as payment requests. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 46 POSSIBLE UNDERLYING CAUSES EFFECTS OF THE PROBLEM PROBLEM OF THE PROBLEM IN THE CONTEXT EXAMPLES FOR THE BUCKET OF THE BUCKET Ad hoc or • Borrowing is costly or not • Optimistic debt strategy: Lack of access Sierra Leone, reactive debt available at times when to planned levels of debt and/or requiring Kenya decisions required to address short debt that has higher interest implications term cash shortfalls. than planned changes the mix of debt in • Unplanned calls on the strategy at short notice. budget due to increased • Taking on unplanned debt alters the interest payments. debt strategy and reduces fiscal space • Cost of carry. through additional debt payments. • Borrowing plan not aligned to cash plan. • Poor coordination and fragmentation between cash and debt management. Commitments • Unplanned commitments • Unrealistic budget and especially over Common made beyond impact plans. optimistic revenue. experience available cash • Cash rationing. • Incentives to withhold information. • High cost debt. • Accumulation of arrears. Short term • Budget deviations. • Crisis causes too many in-year changes. Sierra Leone decisions about • Deviation from borrowing • Powerful MDAs apply pressure. what gets paid plan. • Decision makers not confident in cash • Delayed payments and/or plans and unwilling to delegate power to arrears growth. prioritize payments. Lack of • Weakens available • TSA incomplete or not implemented Common transparency information for forecasting. experience, in banking • Limits access to cash even if with the recent arrangements it is idle. exception of WBG Weak • Departments within Ministry • Asymmetric information and incentives Kenya, institutions and of Finance (macro, debt, to withhold information about cash Sierra Leone, collective action budget, accounting) do not plans due to real or perceived impact on Zambia problems coordinate. access to cash. • MDAs are incentivized not to share information. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 47 > > > B U C K E T 2 - Commitment Control POSSIBLE UNDERLYING CAUSES EFFECTS OF THE PROBLEM PROBLEM OF THE PROBLEM IN THE CONTEXT EXAMPLES FOR THE BUCKET OF THE BUCKET Over-Optimistic • Cash shortfall likely, when • Political pressure to inflate projections to Sierra Leone, Revenue optimistic revenue estimates support incremental budgeting. Kenya, Zambia are systemic. If allotments are not adjusted, pressure on Treasury to manage at commitment or ration cash at payment stage. Unrealistic • Unrealistic allotments, • Pressure for incremental budgeting and Common Expenditure especially where cash weak Macrofiscal framework. experience managers are unable to influence. • Weak application of PIM guidelines and Kenya, WBG, • Poorly recorded or unknown project screening. Zambia obligations or contingent • Poor and/or withheld projects liabilities. information. Mismatch • Allotments poorly informed • Poor forecasting. Zambia, between Inflows by likely cash availability. • Poor coordination. Sierra Leone, and Outflows • Payment delays and arrears. • Unpredictable, large, and volatile WBG, Bhutan • Costly unplanned borrowing. revenues (Natural resource or external finance). Ad hoc or • Unplanned calls on the • Optimistic debt strategy: Lack of access Kenya, reactive debt budget due to increased to planned levels of debt and/or requiring Sierra Leone decisions interest payments. debt that has higher interest implications than planned. • Taking on unplanned debt alters the debt strategy and reduces fiscal space through additional debt payments. • Poor coordination and fragmentation between cash and debt management. Commitments • Direct effect • Unrealistic budget and especially over Common made beyond optimistic revenue. experience available cash • Incentives to withhold information. Lack of • Cash may be available but • TSA not functional, consolidation of Common transparency cannot be accessed causing accounts and zero-balance/clearing not experience in banking commitments to not be implemented. arrangements payable. • Cost of carry. Weak • MDAs are incentivized not to • Asymmetric information and incentives Common institutions and share information. to withhold information about experience collective action • Commitments are made off commitments due to real or perceived problems system. impact on access to cash. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 48 > > > B U C K E T 3 - Functional TSA and Banking Arrangements PROBLEM EFFECTS POSSIBLE CAUSE FOR WEAKNESS EXAMPLES Over-Optimistic • Establish special accounts. • Expected revenue shortfalls may Common Revenue • Resist implementation of TSA incentivize MDAs to create and poorly experience disclose accounts with commercial banks to provide themselves with a cash buffer. Unrealistic • Establish special accounts. • Proliferating special purpose accounts. Common Expenditure • Donor projects require • Withholding own source revenue data. experience special accounts due to • Deviations or possible in year cuts may unreliable budget execution. encourage proliferation of accounts. Lack of • Direct effect. • Proliferation of commercial accounts Common transparency • Cost of carry. may be necessary for service delivery, experience in banking • Unplanned and costly while the systems have not caught up in arrangements borrowing. terms of TSA integration. • Weak TSA implementation. • Accounting and reporting poor. Weak • Resist implementation of • Lack of trust and poor information leads Common institutions and TSA. MDAs to avoid sharing information on experience collective action cash plans, arrears or bank accounts/ problems balances. 2.3 Identifying Challenges in Practice The process for identification of challenges may be as Consensus around the issues and the chain of important as the identification itself. Bottlenecks to service interconnected problems that cause them is at the heart delivery caused by commitment control and cash management of problem identification. Fishbone analysis is a helpful will typically be complex, involving multiple stakeholders, method to work through problem identification collaboratively, systems and affect multiple areas. Identifying the underlying as described in Figure 15 below. Working backwards from an causes of these challenges and prioritizing the areas to agreed bottleneck, such as inadequate classrooms in remote address requires a collaborative approach where stakeholders locations, stakeholders can identify direct causes, and then a build a consensus through an iterative engagement. It is an cascading set of further causes that underlie them. This helps opportunity to build the coordination frameworks between to get to the root causes, and also to identify specific issues siloed departments from the initiation of the reform, rather and the systems and actors responsible for addressing each. than attempt to do so later in the program. To facilitate such Some root causes may affect multiple bottlenecks, helping to approaches to reform the World Bank Governance Practice is identify priorities for intervention that may have wider impact. developing tools and guidance based experience of reforms and operations in Kenya and other client countries.20 20. See Williamson et al. Forthcoming. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 49 > > > F I G U R E 1 5 - Approach to Identify/Address Governance Constraints to Delivery and Value for Money • Define the sector(s) and public service(s) that are the focus of consideration. 1. Understand the • Map out the institutional arrangements, public sector systems, and financing flows Context that underpin service delivery. • Establish the ‘playing field’ for the diagnostic approach and process. • Use ‘top down’ analysis to identify sectoral challenges and value for money concerns. 2. Identify Challenges • Use ‘bottom up’ approach to identify service delivery constraints from a ‘front line’ and Bottlenecks provider perspective. • Initial focus on facility level – largest impact of governance constraints • Prioritize bottlenecks based on impact to service delivery. • Drill down and identify technical and non-technical underlying causes behind each 3. Understand the bottleneck using ‘fishbone’ method until the real issues are identified. Underlying Causes • Identify stakeholders contributing to the causes of the bottleneck and their incentives, authority, and resources available. 4. Agree Solutions, • Agree what a resolved bottleneck looks like, what actions are needed and who must Stakeholders, Steps be involved. and Results • Agree reform steps, responsible reform teams, and define reform results which measure progress. Inadequate budget PFM Problem Poor quality construction HRM Problem allocation Lack of maintenance funding No supervision of contractors Costing norms are outdated Poor quality contractors selected Lack of construction standards Infrastructure: Inadequate classrooms Political interference in remote locations Bureaucratic delays Lack of school construction plan PIM Problem Rigid procurement rules Bad allocation formula Inter-Governmental Incomplete construction Inequitable spending Relations Problem Procurement Problem Fishbone analysis helps to identify not only the root causes of bottlenecks, but also which public sector systems are relevant for resolving them (blue boxes). Look out for: • Common bottlenecks that span across multiple service delivery areas. • Common root causes that span across multiple bottlenecks. This helps teams to identify the space for change the relevant actions and solutions in further steps, and the feasibility of addressing them. Source: Williamson et al. (Forthcoming). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 50 Experience from the case study countries helps to is particularly acute: skills to forecast inflows are inevitably identify numerous underlying causes for key problems in weaker than at national level; access to financing options are commitment control and cash management. This section limited or non-existent; and grants often make up the vast is broken into the eight common problems identified in Box majority of revenue, and many of which may be ringfenced or 9 and draws from case studies to give examples of how they otherwise non-fungible for the purposes of budget execution. develop in practice. Each is examined in this context: How is Yet, at the same time these subnational governments are the problem characterized? What is triggering or perpetuating often the primary implementer of services. the problem? What effects might the problem have? What options are there for addressing the problem? Examples Unrealistic Expenditure are taken from discussions with WB country teams, related Expenditure outturn that deviates significantly from literature and studies. the appropriated budget, either at the aggregate or the distribution within the budget, indicates a breakdown Over-Optimistic Revenue Projections between what is planned and what was delivered. In-year Systematically overestimated revenue undermines the appropriations of supplementary budgets may improve the fiscal framework and underestimates the fiscal gap. alignment and the legal compliance of the budget, but if these Pressure to overestimate revenue to give the appearance are ex-post adjustments to authorize a package of already of more fiscal space is often the result of a negotiation with executed virements or spending deviations rather than MDAs that is largely incremental in nature rather than based active policy changes to allow changes in future spending, on resource availability (Bangladesh and others). Other key the practice may hide the true nature of budget realism. Low reasons for this are (i) unwillingness to make expenditure flexibility of discretionary expenditures such as salaries and cuts in the face of declining revenues (Zambia, Indonesia, interest payments limit the scope to adjust the budget profile West Bank and Gaza); or (ii) the result of negotiation between in-year, placing extra pressure on operational expenditure and the Treasury and the revenue authority to improve revenue investment, and consequently undermining service delivery collection performance (Kenya and Sierra Leone). This which depends on predictable funding of these budget items. has knock-on effects across the cash management and commitment control systems as estimated revenues are highly Variance of sector and individual MDA budget outturn can likely to fall short of planned expenditures. Allotments derived reveal in-year reprioritization of resource allocation while from an optimistic appropriated budget, and poorly informed the variance of composition by economic item can reveal by a cash plan, will likely authorize expenditures that are more the breakdowns in the efficiency of the mix of inputs than available cash as the year progresses. The result is planned for service delivery. Deviations in composition pressure on the macrofiscal framework that will require either will either impact allocations to other sectors or, where fiscal reduced expenditure to maintain fiscal discipline, affecting discipline is weak, affect macrofiscal sustainability and the planned service delivery and infrastructure or increased debt pressures on borrowing. PEFA scores of the case study or arrears. Where revenues do fall short, the evidence may countries show that positive outcomes in reliable composition not trigger action until late in the fiscal year, leaving a much of the budget are harder to achieve than controlling aggregate shorter period to manage financing, or cutting the shortfall deviation (See Annex 7a). The story behind these deviations before the close of the year. Evidence from PEFA suggests is more revealing than the scores themselves; Table 6 that poor revenue outturn is also a relatively strong predictor summarizes key reasons for budget deviation in three case of large aggregate budget deviations.21 study countries. Internal capacity of MDAs and local governments to The strength and adherence to the macrofiscal framework forecast inflows is essential for service delivery. The is critical to ensure the ‘wish-lists’ of MDAs are curtailed inability to predict cash inflows over the immediate and and prioritized to meet sustainability criteria. The PEFA medium terms and poor coordination with the Treasury covers these broader outturn indicators and the macrofiscal on cash availability will have a direct effect on financing forecasting capacity. PI-21.4 clarifies the scale of in-year service delivery. For subnational governments, this situation adjustments. 21. Comparison of PI-1 and PI-3 scores for 47 countries. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 51 > > > T A B L E 6 - Drivers of Budget Deviations: Zambia, Bangladesh, and Kenya Overspending on subsidies and, in later years, debt payments caused a significant fiscal gap. This was absorbed to some extent by cuts to smaller sectors, some of which experienced underspending of up Zambia to 50%. Health, education, and public works all experienced significant variations both under and over original budget. Ultimately unsustainable debt financing led to a default in late 2020. While aggregate budget outturn is consistently below the original budget, in year supplementary budgets have become institutionalized in Bangladesh and the result is an expectation of significant Bangladesh deviations to the originally planned budget with negotiations around allocation typically on the margin rather than policy based. The public services ministry has been used as a de-facto contingency fund to withhold funds for in-year reallocation. Kenya also has an institutionalized supplementary budget which can be under consideration before the original budget is even passed, undermining the credibility of the original budget and incentivizing Kenya continued negotiation around budget allocations. Poor outturns in public investment spending are significantly affected by the volume of dormant projects, a rationalization of which could yield 1.5% of GDP in fiscal savings. Until recently, a lack of comprehensive screening and selection of projects entering the pipeline has made it difficult for the Treasury to challenge MDAs on costs. Source: PEFA Reports and interviews; Kenya Public Expenditure Review 2020. A deeper analysis through a Public Expenditure Review Budgets can be seen as a management tool to improve (PER) or similar instrument is required to understand expenditure efficiency and as a contracting tool to gain more complex elements. For example, the stock of stalled stakeholder support and cooperation. Credibility breaks projects is helpful evidence to understand the realism of the down when uncertainty of information or lack of compliance public investment plan and the scale of the problem in terms undermines the management role, or when the Executive of any rationalization exercise. Entry of expenditure that was uses the budget to intentionally misrepresent aspects of the not originally planned into the budget is also often a significant budget plan to win stakeholder support.22 factor, examined in more detail below with execution and payments. CHALLENGES TO BUDGET CREDIBILITY Management Challenges: Uncertainty – Lack of knowledge on future makes in-year adjustments necessary. Unruly Agents – Inability to control subordinates exposes gaming of the budget by stakeholders. Contracting Challenges: Signaling – Budget presentation is a partial fiction in order to influence external actors. Adapted from Simson and Welham (2014). 21. Comparison of PI-1 and PI-3 scores for 47 countries. 22. Simson and Welham (2014). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 52 In Kenya, sector and MDA budget allocations are well in advance of the budget hearing to establish a budget negotiated during a high profile “budget hearing,” but baseline for each MDA. Public Investment Management the information available to the Treasury is inadequate to (PIM) Guidelines have been prepared and disseminated in make serious challenges to the operational or allocative both countries to formalize and improve the credibility of the efficiency of the budget proposals. Limited capacity to development budget and, in Kenya, a stocktaking and project challenge MDAs on broad policy is part of the problem, but rationalization exercise to further inform the budget has been this is exacerbated by a lack of structured data on policy costs, undertaken. existing budget commitments and a lack of time to examine justifications for expenditure decisions. A recent PER in Kenya Systematic overestimation of revenues allows a Treasury has examined investment projects as a key cause of inefficient to signal commitment to stakeholders while there is budgets (See Box 10). The story in Zambia is similar, with general expectation that in-year cuts will be necessary limited information sharing between MDAs and the Treasury, to maintain fiscal discipline. By withholding expenditure, and poor implementation of appraisal processes. The the Treasury is provided with a crude tool to exercise in-year Treasury in Kenya has responded by introducing reforms to controls while retaining a higher degree of flexibility. This is a strengthen the challenge function, including a costing exercise common problem in the case study countries. > > > B O X 1 0 - Public Investment Challenges in Kenya Kenya is scaling up infrastructure investment but currently has hundreds of dormant projects amounting to 13% of GDP that continue to receive allocations, tying up fiscal space. A key reason is the inadequate hand over of projects from national to sub-national actors during devolution. Planning the transition of the ownership of assets and projects was secondary to the negotiations around functional mandates and revenue allocation. Five years on, the water sector still lacks the institutional and legal frameworks to clearly assign responsibility for public investment and Asset management (Folscher et al. 2019). Where projects have been fully handed over, sub-national strategies have sometimes meant the project is no longer a priority. Final changes to the budget prior to approval have routinely included new projects that have not passed through the appraisal and selection processes leading to projects that are not ready for investment or coordinated with the rest of the investment program. Land acquisition or completion of legal arrangements for un-screened projects is often a major reason for delay. Inadequate allocations for land acquisition is also a primary reason for arrears in the infrastructure sector. PENDING BILLS FOR INFRASTRUCTURE PROJECTS JUNE 2019 (KSH. BILLION) 50 40 30 20 10 0 Kenya Urban Kenya Rural Kenya National Roads Authority Roads Authority Highways Authority Certified Outstanding Works/Consultancy Interest on Late Payment Claims Court Awards Land Acquisition (Actual Valued) Source: World Bank 2020. 19. Pattanayak (2016) found the relationship between weak expenditure control and higher budget deviation to be much stronger in a comparison of 85 PEFAs from 2006-2014. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 53 The Medium-Term Expenditure Framework (MTEF) or special purpose accounts designed to safeguard resources fiscal framework is important as a management tool to and provide an MDA level cash buffer. arbitrate priorities between sectors in the medium term, but also as a signaling tool, committing the executive Unrecorded expansion of contingent liabilities and to a certain broad course of action. Where the MTEF is obligations are likely where unplanned expenditures disconnected from sector plans and the actual budget it has enter the budget, particularly projects that have not met no management impact, and ultimately reinforces a perception appraisal requirements. Kenya and Zambia have both of the budget as theatre.23 Where the budget is prepared in experienced significant challenges with identifying the scope an incremental nature, even a linked MTEF can have limited and nature of the existing stock of projects, the associated value, making its role less of a strategic nature and more arrears, and the implied costs involved in rationalizing or of arbitration. completing dormant projects. The result is a lack of clarity on the extent of liabilities and their inclusion in the budget, What does it cause? difficulty in assessing how to reduce them, and the possibility MDA cash plans are designed to match the full resources of unplanned payments requested from the Treasury. they expect in the budget and will be as systemically inaccurate as the budget, undermining the ability to In-Year Mismatch between Inflows and forecast. The lack of credibility of both budgets and the ability Outflows to provide resources in line with cash plans can also be highly Technical capacity to forecast has been weak in many demotivating for MDAs who may put little or no effort into of the case study countries, but most have reported developing a cash plan.24 improvements over time. Volatile external grants play a large part: Bhutan has relatively strong revenue forecasting Budgets that are systematically underfunded, or where capabilities, but does not include grants in the budget unless significant deviation occurs, necessarily require cash they are confirmed, leading to frequent overperformance. West managers to challenge and revise downwards some or Bank and Gaza has a similar problem with reasonably good all MDA cash plans and allotments which may not be forecasting of VAT and other taxes, but a historic dependence politically viable. Where the budget is not implemented as on large and unpredictable grants in the early 2010s, which planned, allotments, requisitions, and even payments become affected the overall forecasting effort and undermined the less reliable as MDAs cannot be sure that they will receive incentive for the cash managers to persevere in forecasting. planned revenues either because adequate funds are not Breakdowns in this function can be seen from three angles, available, or that they will be reallocated in-year. Where the all of which may be present to some extent: poor capacity cash management team is unable to influence the allotments to forecast cash inflows and outflows; poor communication based on more realistic forecasts of resource availability, between departments; and inability to act on the gap between the allotments may not be altered, compromising the entire inflows and outflows. Mismatched funds directly influence expenditure control process (See Figure 5). Sierra Leone and the ability to provide timely finance for service delivery Kenya are both examples of this where allotments are set and infrastructure spending and necessitate the delay of at fixed amounts, usually a quarter of the budget as default payments, possibly incurring additional fees and creating in Kenya, effectively removing allotment setting as a tool in negative incentives for negotiating the payment priority. expenditure control. FORECASTING CAPACITY AND ANALYSIS When budget credibility is poor, MDAs are incentivized to game the system and withhold information, knowing The case study countries have all scored relatively highly that resources are flexible and if they do not actively work PEFA for cash forecasting ability, but this does not fully to access resources they may well not receive them. This reflect the reality in practice. The amount of data and reinforces a culture of ‘budget as theatre’ and increases the number of sources required for building an aggregate cash likelihood of budget deviations. Knock-on effects may include: plan is extensive (See Table 1), making the initial development withholding important information around the expenditure and institutionalization of the process both complex and fairly proposals that would help the Treasury coordinate and technical. However, once the processes and relationships improve efficiency; masking information around existing are in place, preparing the cash plan is routine. Both Sierra commitments or own source revenues; or the proliferation of Leone and West Bank and Gaza experienced challenges in 23. Rakner (2004). 24. See also the following section. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 54 establishing basic cash forecasting models in the mid-2010s, department must be involved in the process and be able but by 2020 these processes were reported as functional. to recognize and defend their figures within the aggregate Kenya is currently in the process of establishing an aggregate cash plan. cash plan. Some issues encountered are listed below. • External communication of the cash plan by the • Development of integrated systems. Starting simple Treasury. This may be caused by a number of issues and developing more functions slowly over time to including: political concerns about the sources of funding establish a basic understanding of available cash was or specific expenditures; or the challenge of creating the approach in Sierra Leone while in Kenya, a desire to allotments that may be perceived to be budget cuts by establish controls around priority expenditures led to the MDAs—a perception that may be accurate, especially in development of a more complex prototype which was later cases where revenue estimates are overoptimistic. integrated into IFMIS systems. • Identifying cyclical budget items and anticipating • Assigning staff to cover the necessary skill sets. Box large payments. Some of this can be done “in-house” 8 gives an example of the range of skills required. Given by cash managers analyzing historical data around the range from accountants to analysts and information specific revenue streams, payroll, and regular grant technology (IT) managers, it may differ from the core staff payments. This is generally fairly crude and misses that exist in the parent department of the cash function. any changes or one-off transactions, particularly in the Adequate terms of reference for the roles and new hires development budget. are usually required, which may take time. Most of the case study countries found that while the necessary skills COORDINATION BETWEEN DEPARTMENTS usually exist within the Treasury, assigning the right mix of staff for tasks could be challenging. A further challenge Directly affecting the previous point is the capacity or noted by a recent study is that in-year crises such as incentives of MDAs, subnational governments, and COVID-19 require a much more urgent and more frequent revenue collecting agencies to prepare and communicate need for cash forecasting and analysis, but capacity accurate cash plans. This is probably the most enduring cannot usually be rapidly established (Tello 2021). problem and directly impacts the quality and credibility of the overall cash plan. Top-down analysis of past trends should • Comparison of estimated and actual figures. Identifying always be matched with bottom-up cash plans from MDAs and following up deviations between the forecast for a comprehensive picture of cash requirements and cash estimates and the actual realized cash flows is essential availability to inform cash managers. MDAs often have weak to improve the quality of the forecasting model. The cash cash planning capacity and often are disincentivized to provide management team must establish a process to deliver this cash plans when past experience has shown that the cash function, assign staff and design and implement corrective made available bears little relation to the cash plans. measures or incentives for improvement. It is important that the process involves comparison with bank balances The Zambia case highlights the implications of poor and the reported flows to ensure that all cash operations inter-agency communication. Where they are produced, are covered and any residual that may be caused by procurement, commitment or cash plans prepared by the cash-in-transit or error is monitored. MDAs are relatively weak and poorly communicated with the MoF. The revenue authority produces some information on • Establishing common ground with the revenue revenue flows, but gaps remain in the coordination with the authority. Revenue forecasts often double as performance MoF forecast. Coupled with the poor implementation of the targets for the revenue authority. As a result, weekly or PIM guidelines, the Accountant General is sometimes required monthly targets and the reporting of revenues can be to make disbursement decisions with only partial knowledge obscured due to institutional incentives. of future revenues and expenditures. • Ownership of data in the model. While the cash unit Incentives for MDAs to cooperate are a common issue. provides the capacity to consolidate the various sources Bottom up engagement for in-year cash planning requires of data, decision-makers require confidence from (i) a credible connection between budget, procurement plan, budget, revenue, and debt departments that the figures commitment plan, and MDA cash plan; and (ii) releases to are accurate. As a result, technical members from each be provided in line with the cash plan. If the latter does not EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 55 happen, then there is little incentive for the MDA to make the forecast may also encourage the Treasury to build up reserves effort on the former. The result in Kenya has been that MDAs or keep a large buffer when large payments are anticipated are hesitant to prepare detailed cash plans, and the Treasury but not certain. defaults to quarterly allotments of one-fourth of the budget. Ad Hoc or Reactive Debt Decisions There may be an issue of distinguishing information- While the link between debt and cash management is sharing from expenditure control, which can be difficult firmly established in best practice and is well established when budgets are unrealistic, revenues over-optimistic, in higher income countries, the functions can be very and some reductions are inevitable to maintain fiscal weakly integrated and communication between the discipline. When this is not clear, MDAs may be incentivized departments inadequate in lower income countries. to provide biased estimates or withhold information.25 This often means that debt plans are developed without the information on when cash is required, and cash plans are INABILITY TO ACT ON FORECASTS developed without knowing when optimal borrowing may be available. When cash or debt plans are weak to begin Adequate forecasts may be undermined by a limited with, the combination can lead to very little warning on when number of debt instruments available to the Treasury. additional cash is required, pressure to acquire whatever debt Bhutan has at times been unable to match inflows with may be available on the markets at short notice, or borrow outflows despite strong forecasting skills due to the volatility from the central bank, forcing changes to the debt strategy in external grants and legislation that prohibits financing and increasing borrowing costs. When the medium-term fiscal recurrent expenditure through borrowing. West Bank and impact of short-term debt is not adequately calculated, the Gaza has almost no access to debt instruments, while effect on fiscal space can be extremely damaging as Zambia borrowing in Sierra Leone and Kenya can be highly influenced experienced in 2020.26 by market liquidity, and may even be a drain on reserves when an auction fails to roll over maturing bills. Unplanned calls on borrowing can often be the result of poor coordination. Short term debt operations enable the What does it cause? central bank to manage market liquidity and debt managers to Unplanned borrowing is a frequent result of inflow- provide short-term financing to support cash management. In outflow mismatches. While the interaction between the cash best practice, these two functions should be coordinated but and debt functions should enable use of short term borrowing distinct, with careful selection of instruments for each. In many to smooth cash balance variations, very short term unplanned lower income countries, there may be weak coordination among borrowing demands – for example, with less than a month’s cash managers, the central bank, and debt management, notice – can mean appropriate debt instruments or market leading to parallel and potentially conflicting borrowing liquidity may not be available at the scale required, leading operations. Poor coordination can also lead unplanned use to inefficient instruments or rates. In countries with limited of instruments with in-year calls for additional debt financing, forecasting capacity, short-term borrowing demands are likely impacting the longer-term debt strategy, or conversely calls to be the norm and T-Bills may be able to take care of the on the budget for unplanned interest payments in the most majority of short-term unplanned borrowing. severe circumstances, influencing budget credibility. Where debt financing is not available or undesirable, cash Misalignment of cash and debt plans is particularly is likely to be lower than commitments at points during common as credible cash plans are not a given in many the fiscal year, resulting in pending bills or arrears on countries. Implementation of borrowing plans can often unpaid invoices. These may be paid later in the year as cash experience similar pressures as the revenue projections becomes available, but coupled with large outstanding stocks with optimistic estimates undermining the credibility of the of pending bills, this may not be possible. Negative impact macrofiscal framework. Money market volatility and other in government credibility will lead to greater costs for service conditions are often difficult to estimate in lower income and goods provision, since suppliers will charge more in the countries further weakening the implementation of borrowing future already expecting delays to receive the due payments. plans. Where cash and debt plans are prepared, they are Fees may also increase government costs. On the other hand, frequently developed in silos with the cash plan reflecting large inflows can cause temporary inefficient idle balances, revenue inflows and expenditure and the debt strategy especially if market remuneration is not granted. Poor ability to reflecting planned maturities and borrowing transactions. 25. Comparison of PI-1 and PI-3 scores for 47 countries. 26. 26. https://www.bloomberg.com/news/articles/2020-11-16/zambian-finance-minister-says-bondholders-to-blame-for-default. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 56 Unrealistic budgets and optimistic revenue projections Commitments Made beyond Available Cash will typically either force cuts to parts of the budget, This fundamental breakdown in expenditure control arrears, additional borrowing, or a combination of these. is a result of inadequate information available to the Budget deviations and particularly unplanned expenditures Treasury to inform allotments and ensure purchase add further pressure. When payments are particularly urgent, requisitions can be covered, pressure to take on such as payroll, interest payments, or other non-discretionary additional payments not included in the original budget, items, the pressure to quickly find fiscal space through short or a combination. Weak forecasting, inadequate records of term debt is severe. A total disconnection between the debt existing liabilities, and poor coordination with debt managers plans and the budget meant that as expenditure pressures undermines the necessary confidence the Treasury needs ballooned beyond the original budget, financed by new debt, to adjust allotments and authoritatively align them with the impact of interest costs of new debt were not calculated cash availability in order to influence commitment controls. forcing further unplanned costs on the budget and ultimately Systemic revenue underperformance and expectation of cash causing a debt default in December. shortfalls incentivizes MDAs to withhold or provide biased information, including committing to suppliers off-system to With tight fiscal space, short term financing can be improve chances of accessing resources. Finally, political constrained to a very tight margin, effectively forcing pressure to prioritize certain payments or include unplanned the government into re-issuing T-Bills that are reaching payments extends commitments, expanding the gap even maturity. This gives little scope for using T-Bills to address further. Coupled with systemically overoptimistic revenues, short term financing needs as they are intended. In weak control over commitments is all but guaranteed to lead circumstances where there is poor market appetite for T-Bills to unpaid bills and growth in the stock of arrears. or increasing interest rates offered by the market, the squeeze becomes even more pronounced, often resulting in the issue Allotments that are not informed by the availability of of further T-Bills to cover the growing interest costs as used cash, or simply not enforced, will not be effective in to happen regularly in Sierra Leone. In some cases, even constraining MDA commitments. This is a common feature in middle-income countries such as Kenya, the short term- in all the case study countries since none of them have a debt market has encountered serious challenges in times comprehensive commitment control system. West Bank of fiscal crisis: notably that shortfalls in T-bills auction have and Gaza is piloting commitment controls in four ministries led to extrabudgetary calls on the exchequer to finance the after resistance in 2018 led to the reversal of a previous redemption of bills that could not be redeemed through the government-wide commitment control reform. But the link auction. After experiencing this multiple times in 2019/20, the between commitments and available cash is limited even in Treasury established a contingency fund to cover shortfalls in this reform, and interventions to control commitments in pilot the T-Bills auction in 2020/21. ministries are also limited. Where short-term borrowing ceases to be an option, The problem is exacerbated by a lack of information on delays to expenditure and the possibility of arrears the stock of direct and contingent liabilities. Accrual become inevitable. In the case of West Bank and Gaza, accounting is designed to integrate this function, but short-term borrowing was initially very constrained as it was it is not an achievable solution for most lower income limited to the central bank overdraft,27 a facility which should countries and requires records on the stock and flow of ideally be limited in volume and extension and restricted to liabilities to exist. In the most extreme examples, MDAs may unusual circumstances.28 This has changed more recently, enter into commitments outside the systems and without the and currently most domestic borrowing is in the form of knowledge of the Treasury. This is routine in some of the case promissory notes from local banks. Even where some short study countries and leaves the Treasury completely unable term borrowing is an option, a government with limited or to control expenditure beyond basic cash rationing once unpredictable access to short term debt may feel obliged to payment requests are made. build up reserves over several weeks to be able to pay larger expenditures, particularly salaries, which are typically at the Unrealistic budgets mean that for allotments to be end of the month. The cost of carry of stockpiling cash in this effective in controlling commitments they will need to way can be significant. be set below the appropriated budget levels, a political challenge that some Treasuries are simply unable to 27. Arrangements between the Palestinian Authority and Israel do not allow the PA to borrow externally. 28. See Debt Performance Indicator 7 of Debt Management Performance Assessment (DeMPA). https://www.worldbank.org/en/programs/debt-toolkit/dempa. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 57 meet due to pressure from more powerful MDAs. Further Where cash plans are weak, not available in time, or unplanned expenditure worsens the problem. This can be poorly understood by senior management they may be caused by emergency spending, overruns on certain project discarded in favor of highly centralized decision making expenditures, commitments that emerge and were not on all releases based on current cash balances at the budgeted for, and directives from the executive. In most of Central Bank and a list of payment requests and pending the case study countries, a significant number of projects are bills. This situation was the status quo in Sierra Leone in entered into the budget directly before budget approval without 2015, despite a cash plan being prepared on a weekly basis. following PIM procedures. Lack of adequate information on Familiarity with certain formats of data, lack of confidence in these projects exposes the Treasury to “hidden” liabilities externally managed tools, or data that has not been explicitly and contingent liabilities. This may increase continuing owned by the most senior managers in the institution in commitments that result from stalled projects that cannot be question is a major issue. In Zambia in 2020, there were adequately funded as a result of the new projects. Coupled simply too many in-year changes, on a weekly basis, due to with systemically overoptimistic revenues, weak control over elections, COVID-19, the debt crisis, and the falling copper commitments is all but guaranteed to lead to unpaid bills and price that it was not feasible to manage the budget in any a growth in the stock of arrears. other way than day-to-day. This was not for lack of capacity as the Accountant General (AG) is competent and technically Most of the case study countries suffered from a lack able, it is simply just that the pressures were immense. of comprehensive record of arrears. Poor management of arrears results in a growing stock and increased interest The opposite can also be true: cash forecasting may obligations. It also enables gatekeeping and opportunities be compromised by powerful agencies that are able to for corruption around the scheduling of payment of arrears. impose requests to make payments that the Treasury These outcomes serve to reinforce, or at the least create is unable to turn down. A situation of constant bilateral vested interest in poor arrears management and for MDAs budget negotiation and limited independence of the Treasury to withhold information about the arrears they are aware of. in approving payments is a common feature of many lower Where arrears and late payments are commonplace, vendors income countries. In a particularly extreme example, in South can be expected to predict and price these costs into their Sudan in the early 2010s, an army general made an impromptu contracts, thereby further inflating the cost to the taxpayer. visit to the MoF premises with troops and weapons, including a grenade launcher that was set up adjacent to the Under In Kenya, the cash plan is directly linked to the allotment Secretary’s office, while negotiations were carried out. – indeed, it forms the allotment. While this is helpful in forcing alignment, it means that a poor cash plan will Lack of Transparency in Banking mean a poor allotment. In practice, the cash plans default Arrangements to pro-rata for many MDAs and all subnational governments. The implementation of a TSA to link all government bank This causes significant inefficiency and requires extensive ad- accounts and enable regular consolidation is both a hoc adjustment of allotments during the year to accommodate technical and political challenge for many countries. Of bulky expenditures. the case study countries, only West Bank and Gaza has a fully operational TSA, and this is largely because the central bank Short-Term/Centralized Decisions about function is delivered by a single commercial bank within which What Gets Paid all government accounts were already held. Sierra Leone has Where there is little effort to manage at the commitment made significant progress (See Box 13) on a TSA in terms phase, the Treasury effectively must fall back on cash of linking commercial bank accounts and viewing/reconciling rationing practices and make decisions about what gets balances, but has not yet been able to establish the ability to paid first based on submitted invoices and competing clear accounts and manage the overall balance. pressures from MDAs, suppliers, and politicians. In these cases, MDAs are entering into commitments at allotment When availability of cash is unreliable, MDAs are levels based on unrealistic budgets or even without constraint. incentivized to both protect cash reserves through While this appears extreme based on best practices, it is not maintaining bank accounts outside the Central Bank, uncommon. Incentives around gatekeeping and maintaining and withhold information from Treasury to smooth cash a high level, centralized control over payment decisions can availability within their own institution. In some cases, deter Treasuries from addressing the problem. the Treasury may resort to allowing cash balances in sub- accounts to delegate cash management to spending agencies EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 58 where the transfer of cash is costly or time consuming. In For practical purposes, the use of commercial banks to other examples, spending agencies may hoard cash in access retail customers is often desirable, particularly external accounts. Probably the single largest factor in many for service delivery in harder to reach areas but where countries is that donor project funds are typically required to the systems for coordinating and reconciling commercial be held in individual special accounts, often in commercial accounts are weak, transparency is reduced. These accounts. Ultimately, this signifies a lack of trust in the existing pressures to fragment the banking arrangements at best TSA arrangements. Failure of donors to route funds through undermine transparency and, in some cases, are actively accounts that are covered by the TSA or at minimum make designed to obscure activities. The end result is an elevated final payments in such a way that they are recorded through cost of carry and ineffective use of available resources. the TSA is an issue technically, as it reduces information on Resistance to forming a TSA also comes from the banking MDA operations and oversight of cash flows, and also from a sector. Lack of agreements or enforcement around transit signaling perspective as it further undermines MDAs’ trust in accounts and clearing balances encourages commercial TSA reforms. banks to retain balances and withhold information to access greater liquidity. World Bank staff in sector and PFM roles may have differing opinions about the desirability of a functional Financial reporting and transparency of accounts is TSA and an appropriate route to develop one. Coordination directly impacted by the difficulties in reconciling between practices and involvement of sector colleagues fragmented banking arrangements. Inadequate accounting in TSA reforms will be important in developing a roadmap. methodology and low compliance compound the problem. Bangladesh followed a strategy of piloting TSA reforms in Cash-based accounting inherently has less formal information the health and education sectors to focus efforts on service on liabilities, particularly commitments. This leaves the country delivery and work with a manageable selection of MDAs. dependent on external tracking of commitments and other While a TSA needs to have comprehensive coverage to liabilities, which may be inadequate in detail and/or timing to work effectively, this approach is a helpful way of developing support cash management functions. In Kenya, the Office of confidence in TSA arrangements among the Treasury, MDAs, the Controller of Budget (OCOB) is mandated to approve MDA and World Bank TTLs in a way that can later be rolled out. The releases based on adequate implementation and reporting of experience revealed that objections from TTLs are more likely previous quarters. Limitations in the amount of information in Investment Project Financing (IPF) programs and Program- available to the OCOB, originally due to systems access, but for-Results (PforR) operations may be better suited for initial also due to the structure of financial reporting and the COA, efforts to establish trust. mean that the office is not able to comprehensively review budget outturn and thus cannot fully complete its mandate (See Box 11). > > > B O X 1 1 - Reporting on Conditional Grants in Kenya In the recently devolved Kenyan system of government, counties are responsible for a large share of service delivery. The national government supported by development partners have developed a number of conditional grants to support counties in delivering services. Conditional grants are appropriated by national MDAs, for example the Ministry of Health, and transferred to subnational governments for a specific purpose of spending. The grants are paid out biannually on condition of meeting the grant criteria, which include reporting on the expenditure of the specific grant. In practice, the grant funds are co-mingled with general county revenue and the accounting system, without a fully functioning source of funds code, is unable to produce a report that definitively shows that the grant funds were spent for the intended purpose. As a result, is also not possible to produce a report on the balance of the conditional grant account to show how much has been spent and how much remains, which is a legal requirement for authorizing future release of funds. A reform to enable this reporting within the COA as well as the associated training at both levels of government – county and national – is required. Source: Authors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 59 Weak Institutions and Collective Action Problems Cash management and commitment control processes between debt and cash management functions was poor require close technical cooperation between all the in Sierra Leone, with disconnect between plans and no central finance institutions of government and regular regular information sharing. Over time, and particularly open communication with all MDAs. The legal frameworks, with the introduction of a cash management committee, the skill sets, systems, and working arrangements – formal relationship was established, and the plans are now made in and informal – to govern these activities can end up being tandem, with regular monthly and quarterly updates provided complex in more advanced countries, but need to be founded by the debt unit and weekly cash plan updates provided by on basic principles of information exchange and compliance. the cash management unit. Facilitation of the committee by Where trust breaks down between actors, silos preventing technical assistance (TA) helped with the establishment and these principles are likely to emerge. This set of problems skills development. Kenya also saw positive outcomes by affects each of the seven other common problems (Box 9) establishing a Cash Management Framework and cross- in some form. departmental technical team structure, which provided a cross-institution forum and the mandate for technical staff to Lack of budget credibility and poor communication cooperate regularly without seeking permission from superiors. between the Treasury and MDAs is self-reinforcing. Problems around budget credibility discussed above trigger Resistance to change will come from the private sector and negative incentives around asymmetric information and within the Treasury. Commercial banks stand to benefit directly increase pressure to withhold information about commitments from holding idle balances, fragmented and uncoordinated or plans, applying further pressures to distort the budget. fees for transactions, and unnecessary borrowing. Managing Events leading to the debt default in Zambia in 2020 show how a transition to a more predictable and efficient arrangement for this can play out: limited sharing of data on cash, commitment the government will likely negatively impact the opportunities and procurement plans, liabilities and revenues left the AG with for revenue for these banks. Therefore, carefully planned inadequate information when making disbursement decisions. change management is essential to enable business models Frequent cash shortfalls were financed through debt, but to adjust. Within the Treasury, reforms may also conflict with the increased cost interest for that debt was not calculated affect personal or institutional incentives. This may be caused or communicated to the AG, further distorting the budget and by individual staff concerned about losing their roles, losing eventually resulting in a debt default. power, or losing rent seeking opportunities. This can be hard to predict before reform implementation. While some effects Cooperation between core institutions on cash can be reduced or eliminated by a change management plan, management may simply take time to establish as other aspects will need to be firmly supported and pushed by the functions are developed. Originally, communication senior management. See Box 12 for Kenya’s experience. > > > B O X 1 2 - Stumbling Blocks in the Operationalization of Cash Management Reforms in Kenya Many challenges to the operationalization of the cash management framework and implementation of the cash management reforms are non-technical in nature and undermine technical efforts. First, there is an inadequate change management plan to support the legal and institutional framework that has been established. Second, the automation process has also encountered challenges in the roll out phase due inadequate stakeholder consultations largely impacted by COVID-19 disruptions. Thirdly, efficiency gains and incentives brought about by cash management digitization potentially impact on the political economy as the manual processes personalize and “bestow power” on cash prioritization and allocations. Together these challenges have slowed progress on the reform agenda. Continued leadership from the National Treasury to implement the cash framework to sustain cash reforms momentum through appropriate capacity building and communication remains critical. Source: D. Nzioki and L. Matheka. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 60 Delivering reform is often described as needing a similar experiences at points in Sierra Leone. In Bangladesh, champion to signal commitment to change and follow changes in leadership during the TSA reform led slowed through with decisions to implement the reform, but this progress. The opposite can be true as well. TSA reform in is not always available, or may change. Translating initial Sierra Leone had the technical components largely in place, enthusiasm and commitment by the Treasury leadership in but a lack of commitment to the reform from the leadership Kenya into practice proved challenging. Cash management meant no implementation. This rapidly changed on the committees were not regularly convened or chaired by senior arrival of a new government. Box 13 below presents a brief managers, and associated decisions related to aggregate description. cash plans and cash allocations were not made. There were > > > B O X 1 3 - Establishing a TSA in Sierra Leone Within a week of being sworn in after the election of 2018, President Bio of Sierra Leone issued his first executive order: IMPLEMENTATION OF TREASURY SINGLE ACCOUNT ALL MINISTRIES, DEPARTMENTS, AND AGENCIES OF GOVERNMENT THAT COLLECT AND RETAIN GOVERNMENT REVENUES ARE HEREBY DIRECTED TO TRANSFER ALL SUCH REVENUES INTO THE CONSOLIDATED REVENUE FUND WITH IMMEDIATE EFFECT CONSISTENT WITH THE PROVISIONS OF THE FISCAL MANAGEMENT AND CONTROL ACT, 2017. THE ACCOUNTANT GENERAL IS ALSO HEREBY DIRECTED TO CLOSE ALL THE REVENUE COLLECTION ACCOUNTS OF AGENCIES LISTED IN THE FISCAL MANAGEMENT AND CONTROL ACT, 2017 AND TO OPEN SAME AT THE BANK OF SIERRA LEONE WITH IMMEDIATE EFFECT FOR THE COLLECTION OF ALL REVENUES PREVIOUSLY ADMINISTERED BY THESE AGENCIES. THE CHIEF EXECUTIVE OFFICERS OF ALL COMMERCIAL BANKS ARE ADVISED TO STOP WITHDRAWALS OF FUNDS FROM THESE ACCOUNTS WITH IMMEDIATE EFFECT. To a large extent, the effort has been successful. MDA accounts held in commercial banks have been substantially eliminated and those that remain, mostly either for imprest or donor projects, are monitored by the Treasury. Inflows of cash being monitored have risen from around 6bn Leones per week to 120bn. While the order was dramatic, and the importance placed on cash management by the new government fortuitous, the ability to deliver is largely due to technical efforts over the previous years to inventory MDA accounts in commercial banks, build a common understanding between the Central Bank and the Treasury on how to operate a TSA and the development of a PFM Act and regulations that establish the legal framework. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 61 3. >>> Supporting Solutions Getting to best practice is not trivial, even for higher income countries. Theory on cash management and commitment control gives us an array of best practice encompassing accrual accounting methods, the TSA and integrated budgeting, commitments, and payment systems. As reforms are developed, keeping an eye on best practice is essential, but understanding what is realistic, and more importantly how to get there, will benefit from both experience and careful judgement. This EFI Insight is designed to inform practitioners and help to identify the problem that needs resolving, select the instrument(s) that are most relevant for addressing it, and weigh options for how to deliver solutions. There is no blueprint. Lessons from country case studies show that initial conditions, strong leadership, and internal champions play an important role in determining the pace of progress. But ultimately, the technical design of reforms needs to be appropriate to take advantage of these conditions and not depend on them. This section first looks in depth at three case study countries (West Bank and Gaza, Kenya, and Sierra Leone) that have made strong efforts to introduce cash management processes in the past five years and reviews starting conditions, what went well, what did not, and discusses the lessons that can be learned for program development and some specific solutions for certain problems. This is followed by two sections on technical assistance and using World Bank operations. 3.1 Identifying Underlying Causes and Solutions Which Address the Problem A collaborative approach to identifying solutions follows on directly from the framework for identification of challenges and stakeholders in results areas. Consensus around the appropriate solutions is as valuable as consensus around the problem, and should follow as a key element of reform design and management. This involves moving from an understanding of what success would look like, and having stakeholders collaboratively agree on what needs to be done, in what order, and by whom, as presented below. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 62 RESOLVED STAKEHOLDERS REFORM REFORM BOTTLENECK RESPONSIBLE CHALLENGE INVOLVED RESULT STEPS Statement Agree what Identify who How would Identify a set Identify the lead agreed by all a resolved needs to be you measure of key actions and reform teams stakeholders challenge would involved in success in terms and responsible responsible for look like, which resolving the of results that parties which each step. addresses the challenge. This reflects reform represent steps underlying causes would involve implementation towards resolving and reflects authorizers, and progress the problem. desired changes teams, and towards resolving in behavior. coalitions of the bottleneck? support. Some reforms are more contained within a single sector or hazard where resolving a challenge affecting one department department, others may require more support from other requires input from another department that may not see any sectors or departments, as illustrated below in Figure 16. direct benefit. This approach helps to discover and address areas of moral > > > F I G U R E 1 6 - Framework for Identifying Solutions Bottlenecks that the sector can directly address Bottlenecks primarily affecting the sector Creative Quick Wins Solutions Bottlenecks affecting all sectors Coordinated Long Term Reform Strategy Bottlenecks requiring support from other stakeholders EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 63 a) What would a resolved bottleneck look like? (results/indicators) b) What needs to happen to remove bottlenecks? (actions) c) How to address transversal bottlenecks? (sequencing) d) Who is involved in implementing these actions? (feasibility) Not all solutions may be in the full control of an institution. It may be useful to use the matrix to categorise different bottlenecks according to their ease of remediation to aid the prioritization/ sequencing/ approach. Not all solutions may be in the full control of a sector/institution. It may be useful to use matrix to categorise different bottlenecks according to their ease of remediation to aid prioritization/ sequencing/ approach Source: Williamson et al. (Forthcoming). Examining reform design and implementation in practice programs covering cash management, commitment control helps to learn what may work in certain contexts. West and TSA development. Box 14 below presents how Kenya Bank and Gaza, Kenya, and Sierra Leone each have fairly applied a collaborative, problem based and results focused different starting points, approaches and results in reform approach in the development of its PFM reform strategy. > > > B O X 1 4 - Practical Application of a Problem-Based, Results-Focused, and Collaborative Approach to Reform The PFM reform strategy (2018-2023) developed in Kenya has involved a collaborative, problem based and results focused approach with positive results. Initial consultation supported by a PEFA assessment identified eight results areas (RAs) representing aspects of PFM where it was agreed that challenges existed. Results teams comprised of MDAs that contribute to functions relevant to each RA convened to agree a statement of the problem and desired result, identify underlying causes, steps to address these, and responsible stakeholders at each step. MDAs were not restricted to a single RA and were encouraged to participate in any. Some, such as the budget department or accounts participated in several RAs. Among the RAs was “Results Area 3: Reliable Cash for Service Delivery and Public Investment,” with the Accounting Services Department as the lead agency. The strategy developed to tackle this challenge contained a clear statement of the desired results, the changes and planned key steps required to achieve these results within the RA, a timeframe and lead MDA for each step. The PFM Reform Secretariat then developed a tool to combine government and donor activities defined by the steps into a single workplan reflecting the strategy. The World Bank used a Program-for- Results operation to directly align disbursement-linked indicators (DLIs) with reform strategy results and provide technical assistance to support deliverables in the workplan.29 The governance arrangements for the strategy involve regular review of strategy implementation by the Results Team and oversight by a Steering Committee comprising senior management. Table 7 on the following page arranges key information about the respective programs from the three countries to provide a framework for understanding the overall lessons on what worked, what did not, and why. 29. Government of Kenya 2020. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 64 > > > T A B L E 7 - Reform Programs - What Worked and What Did Not SUMMARY OF INITIAL CONTEXT APPROACH WHAT WORKED WHAT DID NOT RESULTS WEST BANK AND GAZA • Systemic over- • Simple forecast • Limited initial • Data • Slower than optimistic tool (excel) uptake of the consolidation - anticipated revenue forecasts developed by original tool the existing simple and volatile TA and updated despite its arrangements for • Tool has limited revenue inflows. monthly to simplicity. banking/TSA and ability to affect inform quarterly functional IFMIS allotments/ • Weak fiscal allotments, • Challenge gave a strong commitments. framework and including basic gaining broad base for the cash incremental prioritization of understanding of forecasting tool to • Greater budget. payments and the problem led be developed. resistance to cash available by to repeated false commitment • No commitment quarter, and cash starts. • Flexibility on CC control than controls buffer. and revision of CM from MDAs • Perceived program to focus resulted in a • Functional IFMIS • Link tool to resistance to on pilot MDAs was reversal of the connected to TSA IFMIS/TSA cash forecasting important. reform and only - Central Bank in a in the face of very recently more single commercial • Develop arrears volatile inflows • A lot of leeway progress. bank. inventory and and concerns of on commitment accounting tool. revealing inflow control (very little • Linking CM and • Relatively dependence. intervention on CC is yet to be poor demand • Develop limits) has made it introduced. False for reform and commitment • Success in easier to introduce starts on CC and engagement control functions routine monthly reforms with a fear of derailing despite having later. forecasting MDAs. cash forecasting some capacity. achieved but by linking it to doesn’t transmit control is forcing to commitment caution. control. • CC improvement • Revision of dependent on commitment more credible control tools to budget which is focus on 4 pilot weak and largely ministries after incremental. broad resistance from MDAs. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 65 SUMMARY OF INITIAL CONTEXT APPROACH WHAT WORKED WHAT DID NOT RESULTS SIERRA LEONE • Cash rationing • Simple forecast • Positive initial • Simplicity of tool • Tool remains and no tool (excel) uptake and quickly led to outside IFMIS commitment developed and understanding ownership and affecting ease of control. updated weekly within the AG handover within data transfer and with a 12-week office allowed weeks of initial compliance. • Significant fiscal forecast. development of development. pressures basic tools. • Weak update of • Strengthen • Marginal information in • Reasonable consolidation and • Routine improvement of cash forecast capacity in AG data ownership engagement with the figures and – the forecast through the weekly debt and revenue detail, through remains closely • Relatively poor CM meeting. units was a weekly routine tied to the original relationship with challenge for a of compilation budget and does revenue and • Strengthen significant amount and regular not incorporate debt offices (and relationship of time. presentation. regularly updated poor Central Bank with the debt cash plans from liquidity/frequent department. • Information • Go ahead for MDAs. poor auction sharing is now TSA reform results). • Strengthen stronger with championed • Limited effect integration with structured reports by incoming on allotments/ • Fragmented TSA. from the debt unit. administration commitments banking. made a sudden –the use of the • Coverage of the jump in progress, cash plan is limited • IFMIS in rollout cash plan limited but was only to predicting phase. due to the extent of possible by the and smoothing operations (much technical side cash flow in • Specific and donor) outside of being ready to the immediate sustained the Central Bank. implement. weeks ahead and demand for cash does not inform forecasting from - TSA dramatically allotments or AG. improved commitments. coverage of the cash forecasting • Zero/balance function. and clearing still weak and idle balances remain high despite TSA because large volume of donor financing remains in commercial special accounts. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 66 SUMMARY OF INITIAL CONTEXT APPROACH WHAT WORKED WHAT DID NOT RESULTS KENYA • Expenditure • Extensive • Broadly • Transfer to IFMIS • Slower than controls primarily problem understood systems was anticipated. at payment rather identification via problem aided strengthened by than commitment. PFM Strategy. development of a collecting and • Lack of appropriate CM Framework => modelling the skills to manage • Fiscal pressures • Prioritization of strong mandate full set of data such a complex tool including growing expenditure was a for technical staff required in a led to frustration and interest, expensive primary demand. engagement, prototype tool, reduced trust and elections and communication. finding issues. engagement with demand to expand • MDA cash technical assistance. infrastructure and plans to inform • Inadequate • Establishment of services. allotments built in permanently MDA cash plans • Tool ownership was from the beginning. assigned as part of the not taken up until • Relatively strong capacity, despite system allowed transfer to IFMIS. IFMIS with all • Complex general capacity them to be built national MDAs Prototype available in into the budgeting • Expectation for using including for (GoogleSheets) Treasury led to software, multiple depts budgeting. was built to delays. improving ease to engage with a integrate monthly of use and complex prototype • Frequent in year MDA cash plans; • Prototype tool compliance and tool had limited budget deviations consolidation; and was too complex consolidation. returns. and regular CM buffer and to be handed supplementary analysis functions; over to staff. • Alignment of • Lack of high- budgets. and prioritization Strategy adjusted budget, cash plan level engagement controls. to incorporate it in and allotment from leadership • Conceptual IFMIS sooner. is central to the undermined understanding of • Migration of design and now all progress and left issues and high- Prototype to • Successful within one system. technical staff. level commitment functions to integration of through WB IFMIS intended key elements in • Inclusion • Pressure through program. after the stability of IFMIS though still of a priority a DLI to produce a function reached in lacking on analysis expenditure cash plan led to a • No TSA in prototype. and automated protocol enabled rushed and sub-par operation despite a controls. automatic tagging plan being prepared long running effort of payment in parallel to the already in place • Weak leadership requests based prototype tool. to develop the of CM committee on COA and system and related due to competing pre-agreed • Misjudged links to CBK and priorities in AG priorities, providing importance the IFMIS. office. information to of change help reduce short management • Resistance term decisions among Treasury to change in and automate staff. Treasury. payments (still being - No TSA, though implemented). efforts increasing. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 67 Lessons likely to be beneficial, whilst regulation to require information Full commitment from the leadership and careful timing sharing may provide a necessary push and create a level of expenditure control reforms is important to clearly playing field between institutions, if enforced consistently. signal change and avoid false starts. The moment cash or commitment controls or TSA reforms have tangible impact – Tying cash plans too closely to allotments in these constraints on expenditure tightened for MDAs or expected to circumstances creates structural disincentives to share do so – there is likely to be resistance. Subtle or overt resistance information. Case study countries have addressed this along the way is likely to slow progress where understanding is by first introducing technical reforms with limited immediate poor or information sharing either yields no effect or negative impact on MDAs. Being careful to avoid real or perceived effects for MDAs. Internal, especially personal incentives may influence of information sharing on cash availability to be hard to predict and even harder to pin down precisely, execute their budget has made capacity building easier. For making full Treasury commitment a key aspect in any reforms example, establishing cash forecasting functions that have that are likely to encounter internal vested interests. TSA little or no effect on commitment controls is relatively easy to reforms in Sierra Leone are a good example, where despite do. Of course, this is not achieving the objectives of reform significant technical progress on reform it was forced to wait or resolving the problems, because cash availability is only a until the entry of a new progressive government to implement little smoother and arrears are still rising. What it does do is in a meaningful way. But why do these reforms have impact? allow the technical capacity to be in place when the political The general objective of cash management to improve cash will to implement emerges. The more credible a budget is, the predictability does not constrain it. So why does this happen? easier it may be to introduce the constraints as it will have a less negative effect on those MDAs that might have benefitted Reassuring MDAs of a distinction between cash planning from a less credible budget, and therefore also less likely to and expenditure control is a hard thing to do when there raise resistance from them. is a no perceived (or real) difference between the two. In many lower income countries, commitment control is either Solutions for cash forecasting really depend on what the non-existent or meaningless and controls occur at payment country is trying to achieve. Kenya, Sierra Leone, and West stage. Best practice suggests MDA cash plans should inform Bank and Gaza each embarked on cash management reforms, cash management, but not overall expenditure control and but the objectives of each of the reforms were different. In MDAs will be wary to share information if they believe it will be Kenya, the primary objective was to develop an aggregate used for expenditure control (Lienert 2009). Communication cash plan derived from MDA plans to inform prioritization, of this distinction is important, especially in circumstances with a secondary objective of updating the plan in-year from where the concepts are new. Essentially, incentives around forecast data and actuals. In Sierra Leone and West Bank information sharing for cash management should get easier and Gaza, the primary objective was to establish in-year once expenditure controls can be clearly separated from it. forecasting capabilities to help inform cash management decisions, with the introduction of MDA cash plans a later An unreliable budget undermines the credibility of addition to the reform. In Sierra Leone and West Bank and allotments and commitment control. Allotments will need Gaza the reform steps included improving basic capacity to be lower than the appropriated budget if they are to be benefits from starting simple, developing more functions credible in any situation where revenues are systematically slowly over time, establishing clear roles, and slowly improving overoptimistic, or budget execution is subject to unplanned liaison and trust with the debt and budget departments and additional expenditures. Whether this is achieved through the Central Bank. In Kenya, a goal of influencing allotments creating a buffer between cash plans/allotments and the through better connection of cash plans with the budget budget ceilings or through in-year reallocation of budget - and technical solutions to allow more granular prioritization where the budget is not credible, the perception from MDAs will of payments embedded in the IFMIS system led to a more always be that information sharing may affect cash availability, ambitious tool and functions to align MDA plans with service largely because it is true. MDAs that expect to be prioritized delivery priorities, but less consensus building around the have no incentive to share cash plans, and those that do not forecast and sharing of data for cash management decisions. are demotivated from preparing them. Addressing this is a Forecasting outcomes were better in Sierra Leone and West challenge as it ultimately involves developing trust between Bank and Gaza, but the infrastructure for cash planning and the institutions. This can be generated over time through actively using the cash plan to inform cash management consistency between the cash plan and cash allocation. during budget execution was better in Kenya. Communication and awareness raising by the Treasury is also Extensive consultation, establishment of broad EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 68 understanding of the issues across multiple agencies does help with predicting cash availability, and the improved (starting with the Treasury), and careful attention to change relationship with the debt office enhances the tools available management will help build trust among the Treasury, to smooth spending, optimistic revenue, unrealistic budgets, other key departments, and MDAs. A cash management and a lack of commitment control still causes structural gaps framework or multi-institutional terms of reference that are between inflows and outflows, and cash rationing is required. fully understood and designed to be flexible and grow as the institutions and functions develop has proven an effective tool Reducing the prevalence of protected funds requires to strengthen cooperation (See Annex 6). Misunderstanding a minimum threshold of credibility, transparency, and of the objectives of cash management, unwillingness to share consistency of partner country PFM systems to gain the information, and mistrust has occurred for years in most of trust of donors and other funders, but the World Bank the case study examples, delaying progress for far longer can help to strengthen systems as this trust is being than anticipated. developed. Commitments from donors and particularly the World Bank to map project accounts to the TSA in a structured Ex-ante agreement between MDAs and the Treasury on and consistent way across all projects in all sectors will help to expenditure priorities within the budget helps to identify initially reveal the available cash, as it has done in Sierra Leone. which payments to protect in the event of a cash shortfall. Once this is in place, development of a progressive program Statutory expenditures such as salaries, interest payments, of transferring cash management functions to the Treasury and international obligations are typically prioritized as default. based on performance in transparency and management of Identification of priority service delivery programs by MDAs accounts under the TSA could be considered. This exercise helps the Treasury to be more targeted in delaying payments requires significant coordination and change management and maintain smooth payments to key services. It also helps within the World Bank to encourage TTLs managing sector to detach the Treasury from short term payment decisions and projects to commit to ‘less protected” funding arrangements ad hoc pressure from MDAs. It is important to consider going in a coordinated manner. This may be best delivered through beyond a binary “non-discretionary” and “other” in this schema piloting with one or two key sectors as it has in Bangladesh, to enable key service delivery expenditures and investments to with a major focus on change management for both the be prioritized after payroll and other statutory items and before government and World Bank program management. “other.” Attaching this prioritization to the budget, allotments and commitments via the Chart of Accounts allows it to be automated and limits opportunity for negotiation. Kenya has 3.2 Provision of Technical Support designed a process to deliver this which is currently being implemented within the IFMIS system. Technical delivery is certainly more complex than a simple cash forecasting tool, A combination of technical support and reform facilitation but the messaging around how prioritization of commitments in the form of ASA facilities is most appropriate for is made, and assuring MDAs that cash plans do not inform supporting cash management and commitment control expenditure control but that it is the budget that does so via reforms. This should be provided at the following levels: agreed priority items, are the keys to success. • Direct technical support in the form of developing tools, A TSA is essential in revealing available cash and legislation, and guidelines. enabling more efficient management, but its benefits can • Support to facilitate cross-departmental coordination, only be fully realized if upstream functions are reliable, problem identification, and implementation of solutions. particularly a credible revenue forecast, a realistic • Senior management engagement to strengthen the budget, and commitment controls. Experience from Sierra authorizing environment. Leone, where there have been significant steps towards a TSA, shows that progress is feasible even in a context where An important focus is to ensure that support is problem- government-wide capacity is relatively poor, but the core team driven rather than solution-driven. This may take more in Treasury is capable and committed and the leadership is work and will almost certainly take more time than developing supportive. However, improved data on bank balances does blueprint-based, solution-driven programs of technical not translate to immediately improved cash management. assistance as significant consultation in program design Much of the idle balances, now visible through the TSA and regular consultative review during implementation will framework, still cannot be consolidated as they are largely be required. Benefits are greater transfer of knowledge to donor or other protected funds. Furthermore, while the TSA government officials in the design phase, a program of work EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 69 more aligned with the problems faced by the government, inputs (TA, systems, capacity) – but may not incentivize and an approach that is flexible and able to react and adjust their implementation. strategy as lessons are learned during implementation. Support should be designed to crowd in other development • DPOs (Budget Support) will be used to deliver major partners. This can be achieved through developing common policy decisions and as levers to create the enabling workplans, scheduling joint missions, and coordinating areas environment (for example. Law, regulations, TSA) of focus and mission schedules. • PfoRs and IPFs with Performance-Based Conditions may Technical assistance (TA) programs that are closely be used to create incentives for implementation of cash aligned to major lending instruments have the potential management and commitment control actions, policies, to be influenced by them as discussed in the following and systems. section. DLIs are used as policy levers to incentivize governments to enact reforms. Importantly, governments may Kenya recently designed several programs along these be incentivized to accept TA programs with objectives aligned lines. A PforR (GESDeK) used the program design process to certain DLIs even when they are not fully committed to to identify problems and solutions to those problems, delivering on these areas. Careful monitoring of TA programs and the stakeholders to deliver reform. Solutions included operating in areas with poor government commitment will improving revenue projections, strengthening aggregate cash allow adjustments to better align incentives. However, in some planning, and delivering reliable cash to service delivery cases, it may be preferable for non-Bank TA to participate or agencies. Subsequently, the PFM reform strategy was lead on the area of work if the independence is likely to be revised, building on this problem-based approach. A DPO considered more trustworthy. For example, cash management helped strengthen the authorizing environment for reform, support to the Accountant General in Sierra Leone from the by setting out prior actions including the approval of a cash International Monetary Fund’s AFRITAC and the Overseas management framework. Finally, TA facilities were developed Development Institute – with no direct link to a financing in collaboration with the PFM Reform Secretariat and other instrument – were both quickly able to gain a position of trust development partners to support systems and capacity within the Treasury. The cash management support elsewhere, development in cash forecasting and cash planning tools. which was provided by the World Bank and directly aligned to the delivery of a DLI did experience setbacks where pressure The specific type of instrument used in other Bank to meet the DLI was misaligned with efforts to develop capacity sectors can influence cash management reforms. During and systems, and communication between officials and TA efforts to establish a TSA in Bangladesh, MDAs were more experienced setbacks and weakened trust. inclined to close special purpose accounts in commercial banks and reduce fragmentation where PforR instruments were used in sector programs rather than project-based 3.3 Operations – How to Use DPOs, operations. Given the breadth of Bank sectoral operations in most countries, coordination between sector programs, and PforRs and IPFs30 to Support TSA reforms to optimize the banking reforms will likely help Change the implementation of both. Using combination of Bank financing instruments for the roles they are best equipped to support is necessary to create the right incentives for decision making alongside capacity support. • ASAs and conventional IPF (projects) that finance reform 30. 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EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 73 World Bank and International Monetary Fund. 2009. Developing a Medium-Term Debt Management Strategy (MTDS): Guidance Note for Country Authorities. Washington, DC: World Bank. Interviews Matheka, L. and Mwangi, D. World Bank Office, Kenya: Virtual, 24 March 2021. Dorji, R. World Bank Office World Bank Office, Bhutan: Virtual, 23 April 2021. Messali, P. World Bank Office, Portugal. (Subject: West Bank and Gaza): Virtual, 9 March 2021. Hussain, R. World Bank Office, West Bank and Gaza: Virtual, 1 April 2021. Chowdhury, H. World Bank Office, Bangladesh: Virtual, 14 April 2021. Rama Krishnan, V. World Bank Office, Zambia: Virtual, 16 March 2021. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 74 >>> Annex 1. Glossary This glossary quotes definitions from existing literature where another financial institution. Cash equivalents are defined to available. Not all countries or studies use identical definitions be highly liquid investments that are readily convertible to for these terms. Where possible, variations in the terminology cash on hand (IMF GFS 2001, 2014). are indicated. (MDA) Cash Plan or Budget Profile: The agreed expenditure Allocation: A process of distributing budget between profile across the year, usually monthly, of the approved MDAs within a fixed ceiling tied to the resources available annual budget. The profile may be the basis for the release macrofiscal framework. The term may be used generally or, in of spending authority and is used to monitor and control some countries carries a more formal or legal meaning related execution of the budget. The cash plan is typically prepared by to approved distribution of budget. Note: The term allocation MDAs to reflect their cash requirements and should be aligned or quarterly allocation is used interchangeably with the term with the commitment and procurement plans. allotment in some countries. This will make it consistent with Warrant/Release, the instrument of authority given by the Aggregate Cash Plan (ACP): The planned pattern (usually Treasury to MDAs to commit and/or spend a portion of the monthly) of all government cash flows across the year. It budget (allotment). Other variations exist: in Kenya, the term aggregates the flows contained in MDA cash plans and used is “authority to incur expenditure (AIE),” which is incorporates financing. more like a Warrant/Release; and in South Asia, a “sanction” of payment. Cash Flow Forecast: The best estimate of cash availability update on a regular basis, ideally daily and at least weekly for Allotment: Budget allotment refers to a portion of the budget the forthcoming quarter. Designed to identify what will happen, or “provision” made available for release by the Treasury to a not what should happen, and needs to be an unbiased and given MDA during a given period of the financial year, often unconstrained best estimate. The two series (ACP and quarter. Cash allotment refers to a fixed amount of available forecast) will often diverge as the budget year unfolds. The cash set aside for a budget provision. Allotments are designed cash forecast should help inform changes to the ACP. to both ensure cash is available for budgeted expenditure and prevent MDAs incurring expenditures beyond the available Cash Rationing: Controlling expenditure at the point of resources. The amount usually has defined sub-limits by payments. This practice occurs when commitment control is economic item or other COA classification and is informed by unavailable, and entails selecting outstanding invoices to pay MDA cash and procurement plans rather than pro-rata. In some or delay to stay within central bank overdraft limits. Without countries the term may specifically refer to the apportionment controls on commitments, any de facto conditional obligations of authorization within an MDA to spending units. We will use may become payable upon completion of contracts. Where allotment as a general term in this text (Pattanayak 2016). cash reserves are not sufficient to honor the payables due, they become arrears and usually accrue interest and/or Arrears: Outstanding obligations that the government has other fees. failed to pay within an agreed time frame. The acceptable time frame may be specified in the country’s PFM legislation, Commitment: A conditional obligation entered into by a MDA though this is not always the case. The IMF sometimes uses to make a future payment, subject to the fulfilment of pre- non-payment periods to define an arrear, such as 45 days or agreed conditions. Commitments may be for one payment 60 days after the date on which goods or services have been or specific commitment, for example, the procurement of delivered and accepted (ODI 2016). a consignment of drugs or a set of payments – continuing commitments such as staff salaries (ODI 2016, Radev and (Budget) Appropriation: The funds legally approved by Khemani 2009). the legislature for expenditure by an MDA during a financial year. While an MDA may have the legal right to spend Commitment Control: The management and limitation of these funds in the course of the fiscal year, they may not commitments to ensure the payments can be honored in make any commitments against the appropriation until the full and on time. The key objective of commitment control Treasury authorizes them to do so via an allocation/allotment/ is to manage the initial incurrence of obligations, rather warrant/release. than the subsequent cash payments, in order to enforce expenditure ceilings and avoid expenditure arrears (Radev Cash: Refers to currency and transferrable deposits held and Khemani 2009). on demand by government institutional units with a bank or EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 76 Cost of Carry: The cost of keeping excess of cash in Expense voucher (also Payment Voucher): A document which government accounts, given that borrowing cost tends to be confirms that payment will be made against a given purchase higher than the return of the investment of these resources, order following necessary approvals. This effectively triggers if any. In a non-strict sense, it could be compared as the the payment, mostly through the Central Bank or through a opportunity cost of “unused” cash, in net terms (Cangoz and check for the seller to cash (ODI 2016). Secunho 2020). Imprest: A “petty cash” or other system of accounting whereby Debt (Borrowing) Plan: An annual plan of aggregate domestic a fixed balance of readily available money is maintained for borrowing that is based on the annual budget and cash flow small purchases and replenished after it has been spent. For forecasts. The borrowing plan should be broken down on a example, a school may keep $100 in reserve and top up this monthly basis to align with cash plans and support the ACP. reserve on a monthly basis if any or all of the money is spent The annual plan should be made public and a short-term (ODI 2016). (three-month) borrowing calendar for wholesale instruments (excluding T-Bills issued for monetary purposes) derived from MDA: A Ministry, Department, or Agency. These represent the plan, with dates, instruments, indicative amounts for each the highest tier of spending authority across government. instrument should be published regularly (World Bank 2015). Funds in the national budget are typically appropriated by the legislature at this level and the senior accounting officer Debt Strategy: A medium term plan that outlines the receives authorization for incurring expenditure during the government’s approach to achieving the desired composition of financial year. (also: spending agency or Vote). the government debt portfolio, and captures the government’s preferences with regard to the tradeoffs between costs and Obligation: A request to the Treasury by an MDA for payment risks of the available debt instruments. It is informed by the of an invoice supported by an expense voucher (EV, a warrant debt sustainability analysis, and it informs the annual borrowing to incur expenditure), a purchase order (PO), contractual plan. It is developed in collaboration between the macrofiscal obligations with the supplier, or acknowledgement of receipt and debt management functions of the government (World of goods (GNR). At this point, the conditional liability becomes Bank and IMF 2009). a liability. Debt Sustainability Analysis: A key fiscal and budgetary Payment: A transfer in cash that exits accounts under policy tool usually utilized by the Treasury’s macroeconomic government control to the benefit of a vendor or other external department to assess the long term sustainability of the future party in exchange for agreed and verified goods or services debt path under certain macroeconomic assumptions (World rendered, investments, or other government expenditure. Bank 2015). The objective is to assess the current debt, its Purchase order: An official offer issued by the government to holders, interest rates, and maturity structure in order to a seller or supplier, indicating types, quantities and prices for identify and inform policy to minimize risks to the government goods or services to be provided (ODI 2016). or prospective lenders (IMF 2017). Repo transactions: The temporary sale of a (government) Disbursement: Transfers in cash. These may not necessarily security associated with the seller’s commitment to purchase be to the final recipient or vendor, but include payments to MDA it back, after a pre-defined period and at a pre-agreed price. sub-accounts or commercial accounts that are intermediaries Governments use repos to cover temporary cash shortages by before the cash is transferred to its intended final recipient in delivering a government security to the lender. Repos provide exchange for goods or services rendered, capital investments, good flexibility and, in most cases, are used for periods not or other government expenditure. Use of these is minimized in longer than the time span between T-bills auctions (Cangoz a TSA arrangement. and Secunho 2020). (Actual) Expenditure: Final account of spent funds after Requisition: The formal request by an MDA for permission payments have been made and any surplus cash has to spend against the allotment. Once approved, the Treasury been returned to the TSA or other government account. will set aside resources or “tie” the funds to ensure resources This is important in countries that do not operate zero- will be available for the forthcoming payments. The approved based TSA accounts and particularly in those that disburse requisition allows a purchase order to be prepared by an MDA. lump-sum funds to MDA accounts at any point prior to the Transit accounts: These accounts are not meant for day-to- payment phase. day transaction banking operations of government units. A EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 77 transit account simply serves as a transit for eventual flow Treasury Single Account (TSA): The Treasury’s account of cash into the TSA main account. Transit accounts might with the Central Bank which consolidates the government’s be necessary: (i) for major revenue streams to monitor their cash position. It is the main TSA account when the TSA collection and remittance by the banking system; and (ii) arrangement in a particular country consists of a set of to facilitate revenue sharing (formula-based sharing from linked accounts. Cash balances in all other linked accounts a common pool of resources) between tiers of government are swept into this account. In other words, all government in a federal system in line with constitutional and/or legal receipts finally flow into, and all disbursements are met from, requirements (Pattanayak and Fainboum 2010). the central TSA account. TSA Subsidiary accounts are not separate bank accounts per se, in the sense of holding Treasury: This can refer to the name of a country’s finance individual cash balances, but are special sub-accounts within ministry (e.g. the Treasury in the UK or in New Zealand). the main TSA account. This is an accounting arrangement to However, for the purposes of discussing cash management it group together a set of transactions and allows the government refers to the specific department or division within government to maintain the distinct accounting identity or ledger of its (often part of a finance ministry itself) that handles payments, budget organizations (line ministries/agencies) effectively. monitors and tracks expenditure, and manages government’s A cash disbursement ceiling for each entity can be enforced financial accounting and reporting. In Anglophone countries, against these ledgers. Balances in these accounts are netted responsibility for this function often lies in the “Accountant off with the TSA main account for cash management purposes General’s Department” (ODI 2016). (Fainboum and Pattanayak 2010). Treasury bill (T-bill): A short-term debt instrument that is Warrant/Release: The instrument of authority given by the issued by a government and which will be redeemed within Treasury to MDAs to commit and/or spend a portion of the one year. Treasury bills do not pay interest but are sold at a budget (allotment). The officer authorized by the warrant may “discount,” meaning there is a difference between the value extend sub-warrants to units within the MDA. The use of cash paid by the government on redemption (e.g. $100) and the releases is more common in anglophone cash-based systems amount actually paid by the purchaser to buy the bill, e.g. and may differ from the allotment based on the availability of $95). The discount (e.g. $5) represents the cost to government cash – usually to “trim” non priority expenditure in the event of and the profit of the purchaser. Treasury bills are traded on the a cash shortfall (Lienert 2009, ODI 2016). “money market” (ODI 2016). Zero balance account (ZBA): An account in which a balance Treasury bond: A debt instrument that is issued by a of zero is maintained. When payments are made from the ZBA, government and which will be redeemed after a period of a funds equal to the value of those payments are automatically year or more. A bond will typically pay a fixed rate of interest transferred from a master account, so the net balance in the (often called a “coupon”) at regular intervals (e.g. every six ZBA remains zero (ODI 2016).  months or every year) until the end of the bond period, at which point the government will repurchase the bond for an agreed price. Treasury bonds are usually traded on the “capital market,” which includes debt and equity markets (ODI 2016). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 78 >>> Annex 2. Further Technical Resources and Tools Key Technical Guidance Key Reference Material Further Guidance on Specific Functions Modernising Cash Management – An overview of the Developing and Implementing a Cash Buffer – A practical objectives and essential functions of cash management with guide to strengthening risk management in times of crisis a review of best practices, challenges in low- and middle- through a cash buffer policy – when it may be appropriate, income countries and suggestions for approaching reforms drawbacks and practical examples from the COVID period. (Lienert 2009). Investment of Cash Surpluses – Identifying when investment Cash Management and Other Financial Policies – Guidance on of cash surpluses may be appropriate, the risks involved and the role of cash management within a broader set of financial practical examples of how it can be implemented. policies and the interactions and relationships necessary for expanding the sophistication of cash management functions. Debt Management System Survey – Guidance and practical A particular focus on the coordination with debt management examples for emerging and developing countries in (Williams 2010). differentiating between mandatory and desirable functions and approaches for context specific strategies for debt Expenditure Controls – Technical Guidance Note (TGN) on the management system development and integration with other government expenditure process and controls at each stage PFM functions including cash management functions (Aslan, designed to help practitioners identify areas of weakness and Ajazaj and Wahidh 2018). identify priorities for strengthening (Pattanayak 2016). Diagnostic tools Commitment Controls – Guidance on the role of commitment control in the broader expenditure control framework and its Assessment of TSA Operations – A toolkit for rapid assessment importance in controlling the accumulation of arrears (Radev of the current status of a TSA and identification of possible and Khemani 2009). improvements to inform PFM reform programs (Dener 2013). Treasury and Central Bank Coordination – Overview of Treasury Diagnostic Toolkit – A tool to identify the status the institutional arrangements between the two institutions of Treasury functions including cash management, for streamlining cash management and monetary policy commitment control and payments and provide guidance operations. (Pessoa and Williams 2013). for reform programs. Includes a detailed annex on Treasury function processes. Accrual Accounting – Overview of Accrual Accounting and factors to consider in preparing for transition from different Public Financial Management and Accountability (PEFA) starting points (Flynn Moretti and Cavanagh 2016). Assessments – The widely used and recognized assessment framework that includes key diagnostics on a broad set of Treasury Single Account – Guidance on the concept of a PFM functions that affect cash management and commitment TSA, which problems it may be able to solve, and practical control (PEFA Secretariat 2016). considerations in design and implementation (Pattanayak and Fainboim 2011). Debt Management Performance Assessment – A World Bank toolkit and library of past assessments for diagnosing government debt management practices and institutions, including the interaction with monetary policy, cash flow forecasting, and managing cash balances (World Bank 2015). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 80 >>> Annex 3. Template of a Simple Annual Cash Plan 3a. Template Annual Cash Plan BUDGET JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL TSA OPENING BALANCE A 0 0 0 0 0 0 0 0 0 0 0 0 Revenue Tax B 0 Non-Tax Revenue C 0 Grants D 0 TOTAL INFLOWS E=B+C+D 0 0 0 0 0 0 0 0 0 0 0 0 0 Expenditure Statutory Items F 0 0 0 0 0 0 0 0 0 0 0 0 0 Domestic Interest 0 External Interest 0 Wages and Salaries 0 Statutory Transfers 0 Other Statutory 0 Other Recurrent G 0 0 0 0 0 0 0 0 0 0 0 0 0 Goods and Services 0 Other Transfers 0 Development (Capital) H 0 0 0 0 0 0 0 0 0 0 0 0 0 Domestic Development External Development TOTAL OUTFLOWS I=F+G+H 0 0 0 0 0 0 0 0 0 0 0 0 0 CASH BALANCE J=E-I 0 0 0 0 0 0 0 0 0 0 0 0 0 Financing Net Domestic Financing K 0 0 0 0 0 0 0 0 0 0 0 0 0 Domestic Financing 0 Overdraft 0 Net External Financing L 0 0 0 0 0 0 0 0 0 0 0 0 0 Commercial Loans 0 Foreign Loans 0 TOTAL FINANCING M=K+L 0 0 0 0 0 0 0 0 0 0 0 0 0 TSA CLOSING BALANCE N=A+J+M 0 0 0 0 0 0 0 0 0 0 0 0 0 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 82 3b. Filled Example of Annual Cash Plan Template BUDGET JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL TSA OPENING BALANCE 20 14 37 1 12 13 29 66 80 60 45 64 Revenue Tax 600 30 30 30 40 40 80 100 50 50 50 50 50 600 Non-Tax Revenue 240 10 20 30 10 20 30 10 20 30 10 20 30 240 Grants 160 40 40 40 40 160 TOTAL INFLOWS 1000 40 90 60 50 100 110 110 110 80 60 110 80 1000 Expenditure Statutory Items 420 31 31 42 31 31 44 31 31 42 31 31 44 420 Domestic Interest 20 1 1 2 1 1 4 1 1 2 1 1 4 20 External Interest 36 3 3 3 3 3 3 3 3 3 3 3 3 36 Wages and Salaries 300 25 25 25 25 25 25 25 25 25 25 25 25 300 Statutory Transfers 40 10 10 10 10 40 Other Statutory 24 2 2 2 2 2 2 2 2 2 2 2 2 24 Other Recurrent 240 20 20 20 20 20 20 20 20 20 20 20 20 240 Goods and Services 180 15 15 15 15 15 15 15 15 15 15 15 15 180 Other Transfers 60 5 5 5 5 5 5 5 5 5 5 5 5 60 Development (Capital) 440 2 24 50 20 50 48 16 40 38 28 46 78 440 Domestic Development 320 20 40 10 30 40 10 30 30 20 30 60 320 External Development 120 2 4 10 10 20 8 6 10 8 8 16 18 120 TOTAL OUTFLOWS 1100 53 75 112 71 101 112 67 91 100 79 97 142 1100 CASH BALANCE -13 15 -52 -21 -1 -2 43 19 -20 -19 13 -62 Financing Net Domestic Financing 38 7 8 11 2 2 -2 -5 -3 0 4 6 8 38 Domestic Financing 38 6 7 8 2 2 -3 -2 4 6 8 38 Overdraft 0 1 1 3 -2 -2 -1 0 Net External Financing 62 0 0 5 30 0 20 -1 -2 0 0 0 10 62 Commercial Loans 2 5 -1 -2 2 Foreign Loans 60 30 20 10 60 TOTAL FINANCING 100 7 8 16 32 2 18 -6 -5 0 4 6 18 100 TSA CLOSING BALANCE 14 37 1 12 13 29 66 80 60 45 64 20 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 83 >>> Annex 4. Examples of Chart of Accounts Coding 4a. Example of Chart of Accounts Economic Segment for Assets (Bangladesh) ECONOMIC SEGMENT Type Category Sub- Category Item Sub-Item Details (Level-1) (Level-2) (Level-3) (Level-4) (Level-5) (Level-6) Description 1 Digit 1 Digit 1 Digit 1 Digit 1 Digit 2 Digit 7 Assets 72 Financial assets 721 Domestic financial assets Monetary gold and Special 7211 Drawing Rights (SDRs) 72111 Monetary gold 72112 Special drawing rights 7212 Currency and deposit 72121 Treasury Single Account (TSA) 7212101 Bangladesh Bank deposit 7212102 World Bank Special Account 7212103 ADB Special Account 72122 Non-TSA account 7212201 Bank deposit 7212202 World Bank Special Account 7212203 ADB Special Account 72123 Cash in hand 7212301 Cash in hand 7212302 Bank deposit (Non- TSA) 72124 Cash in transit 7212401 Sonali bank deposit 7213 Advances 72131 Advances Drawing and disbursement 7213101 officer’s advance 7213102 Advance against TA on transfer 7213103 Advances holders/Imprest holders EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 85 4b. Example of Chart of Accounts Fund Segment for Special Funds (Bangladesh) FUND SEGMENT (8 DIGITS) Fund Fund Type Fund Source Fund Component/Agreement Level-1 Level-2 Level-3 Level-4 Description 1 Digit 1 Digit 3 Digit 3 Digit 7 Consolidated Fund 11 General Fund 11001 Own Source Revenue 11001000 Own Source Revenue 11002 Budget Support (as Sector Support) 11002000 Budget Support (as Sector Support) 12 Specific Foreign Grant 12001 ADB (Asian Development Bank) 12001000 Grant-ADB (Asian Development Bank) 13 Specific Foreign Loan 13001 ADB (Asian Development Bank) 13001000 Loan-ADB (Asian Development Bank) 13029 IDA (International Development Association) Loan-IDA: Public Procurement Digitization 13029289 Project (P160758) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 86 >>> Annex 5. Example Weekly Cash Forecast Tool The following template was developed and used in the cash management office of Sierra Leone. Data has been modified and does not reflect actual figures. BASELINE FORECASTS ACTUALS THIS NEXT CUMULATIVE WEEK +2 WEEK +3 WEEK +4 WEEK +5 WEEK +6 WEEK +7 WEEK +8 WEEK +9 WEEK +10 WEEK +11 WEEK +12 FOR LAST TO HIT CRF WEEK’S WEEK’S TO DATE FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST WEEK LAST WEEK FORECAST FORECAST CRF Balance at start of week 26.75 -104.78 -82.63 -53.88 -31.63 -42.89 -92.83 -81.13 -39.97 20.77 -19.72 -72.20 -44.30 5.87 43.65 add Cash Receipts (a) 290.88 52.08 60.85 60.61 69.97 57.84 71.26 60.17 75.69 60.69 64.54 49.20 74.75 157.81 215.06 add Borrowing to hit CRF (d) 2.59 0.00 -5.15 0.00 -5.23 10.38 21.01 9.47 19.10 19.85 6.64 6.64 17.27 6.64 26.08 less Total non-discretionary payments 148.19 50.80 23.35 38.36 75.99 118.17 80.56 28.48 34.05 121.02 123.65 27.93 41.85 126.67 233.15 Balance before discretionary spending 172.03 -103.50 -53.88 -31.63 -42.89 -92.83 -81.13 -39.97 20.77 -19.72 -72.20 -44.30 5.87 43.65 51.65 less Total non-discretionary payments - 0.00 5.70 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 cash management decision Assumed Overdraft position at end of week 172.03 -86.23 -53.88 -31.63 -42.89 -92.83 -81.13 -39.97 20.77 -19.72 -72.20 -44.30 5.87 43.65 51.65 Leeway 288.03 29.77 90.40 112.65 101.39 51.45 63.15 104.31 165.05 124.56 72.08 99.98 150.15 187.93 195.93 Approved Overdraft Limit 116.00 116.00 144.28 144.28 144.28 144.28 144.28 144.28 144.28 144.28 144.28 144.28 144.28 144.28 144.28 Payment Stock (payables) - - - - - SENSITIVITY ANALYSIS - Impact of different scenarios 2-6 Jan 9-13 Jan 16-20 Jan 23-27 Jan 30-3 Feb 6-10 Feb 13-17 Feb 20-24 Feb 27-3 Mar 6-10 Mar 13-17 Mar 20-24 Mar 27-31 Mar on Leeway If there is revenue shortfall 78.23 106.59 94.40 45.66 56.03 98.29 157.48 118.49 65.63 95.07 142.68 181.48 189.42 If the auction is undersubscribed 90.40 112.65 101.39 51.45 61.05 103.36 163.14 123.61 71.42 99.32 148.42 187.27 194.41 If interest rates/the discounted value of t-bills is lower 90.40 112.65 101.39 51.45 59.57 102.70 161.79 122.94 70.95 98.85 147.20 186.80 193.34 If there is no budget support 90.40 112.65 101.39 51.45 63.15 104.31 165.05 124.56 72.08 99.98 150.15 94.63 45.93 Other government financing e.g. bridging loans, CGT, 90.40 112.65 101.39 51.45 63.15 104.31 165.05 124.56 72.08 99.98 150.15 187.93 195.93 loan repayment, etc. ASSUMPTIONS: - 2-6 Jan 9-13 Jan 16-20 Jan 23-27 Jan 30-3 Feb 6-10 Feb 13-17 Feb 20-24 Feb 27-3 Mar 6-10 Mar 13-17 Mar 20-24 Mar 27-31 Mar Revenue increases (+) or falls (-) by X% -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 Auction undersubscribed (-) by X% -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 Discounted inflow from t-bills higher (+) or lower (-) due to a 0.01 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 change in interest rates by X% EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT More (+) or less (-) budget support than expected 0 0 0 0 0 0 0 0 0 0 0 -93.3 -150 Other government financing e.g. bridging loans, CGT, 0 0 0 0 0 0 0 0 0 0 0 0 0 loan repayment, etc. <<< 88 >>> Annex 6. Example Responsibilities in a Cash Management Framework Kenya Cash Management Framework Coordination & Operational Responsibilities RESPONSIBLE UNIT/OFFICER AND RESPONSIBILITIES CASH MANAGEMENT UNIT HEAD CASH MANAGEMENT UNIT a) Overall coordination of cash management in NT, preparation of Aggregate Cash Plan and guidance on monthly limits amongst other functions. b) Providing information on cash performance for management of the budget. BUDGET FISCAL AND ECONOMIC AFFAIRS (BFEA) DIRECTOR GENERAL BFEA OR/ DESIGNATED OFFICER Provide information on; a) Revenue collection and projections b) Macro data to guide aggregate projections c) Approved budget by category d) Review of MDA cash plans e) County funding. Establish and maintain the list of service delivery MDAs as part of the budget process. PUBLIC DEBT MANAGEMENT OFFICE (PDMO) DIRECTOR GENERAL PDMO OR DESIGNATED OFFICER Provide information on external and domestic borrowing specifically; a) Planned and actual debt service payments. b) External borrowing plan and domestic borrowing program. c) Actual Proceeds schedule. d) On market conditions and reactions to current policies or anticipated changes as far as borrowing is concerned. e) Liaison with CBK to provide the information required. Providing monthly service information on constitutional office obligations. ACCOUNTING SERVICES AND QUALITY ASSURANCE DIRECTOR GENERAL ASQA OR DESIGNATED OFFICER (ASQA) a) Review and prepare the aggregate cash plans b) Provide information on exchequer management. c) Management of government overdraft. d) Management of cash buffer. Provide relevant platform on IFMIS for cash management. PUBLIC INVESTMENT AND PORTFOLIO MANAGEMENT DIRECTOR GENERAL OR DESIGNATED OFFICER (PIPM) Provide information on; a) Monitoring of Major Public Investments (PIPM- PIM) and ensure the status is updated for guidance on projects for exchequer releases. b) Providing monthly projections and receipts from Parastatals c) Pension projections and actual payments. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 90 Pakistan Cash Management Policy Responsibilities for Operation and Reform AIMS AND ACTIONS TAKEN BY ANTICIPATION OF CASH NEEDS OF GOVERNMENT THROUGH; a) Expansion of budgetary and accounting coverage to the public entities receiving FG/FD/ CGA/PAOs single line budget b) Monthly/quarterly/annual expenditure plans by the Principal Accounting Officers PAOs/FD c) Monthly/quarterly/annual procurement plans by the PAOs. PAOs/FD ANTICIPATION OF CASH NEEDS OF GOVERNMENT THROUGH; a) Receipts and payments (above the line) through: I. Monthly/quarterly/annual revenue plans FBR/FD/ CGA/ PAOs II. Monthly/quarterly/annual cash plans FD III. Extension of budgetary and accounting structure to the public entities FD/PAOs/CGA receiving single line budget IV. Detail revenue budgeting on the pattern of expenditure budgeting FBR/ FDs Revenue b) Financing transactions (below the line) through: V. Monthly/quarterly/annual/five years debt redemption plans FD VI. Monthly/quarterly/annual borrowing plans FD VII. Monthly/quarterly/annual/five years assets sales plans by Privatization Priv. Comm. Commission IV. Detail revenue budgeting on the pattern of expenditure budgeting FBR/ FDs Revenue c) Focus on Domestic Currency SBP/FD d) Scheduled Forecast information with identification of future peaks and troughs FD e) Rolled forward Regularly FD EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 91 >>> Annex 7. PEFA Tables EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 92 7a. Case Study PEFA Scores in Key Indicators WEST BANK BANGLADESH BHUTAN ZAMBIA INDONESIA KENYA SIERRA LEONE INDICATORS/DIMENSIONS AND GAZA 2016 2016 2017 2018 2017 2018 2019 PI-1. Aggregate expenditure out-turn B A B B C B D 1.1. Aggregate expenditure out-turn B A B B C B D PI-2. Expenditure composition out-turn D+ C+ D+ D+ C+ D+ D 2.1. Expenditure composition out-turn by function D C C D B B D* 2.2. Expenditure composition out-turn by economic type C B D B C D* D* 2.3. Expenditure from contingency reserves A A A A A A D* PI-3. Revenue out-turn C D+ C+ C D B C+ 3.1. Aggregate revenue out-turn D C A B D B A 3.2. Revenue composition out-turn B D D D D B D* PI-6. Central government operations outside financial reports D C+ C+ A A D D 6.1. Expenditure outside financial reports NR B B A A D* D 6.2. Revenue outside financial reports NR B B A A D* D 6.3. Financial reports of extrabudgetary units NR D D NA A D* D* PI-14. Macroeconomic and fiscal forecasting D+ B B D+ B+ A C 14.1. Macroeconomic forecasts C A B C A A C 14.2. Fiscal forecasts C B B C B A C 14.3. Macro fiscal sensitivity analysis D C B D B B C PI-20. Accounting for revenue C+ B+ B+ C+ A D+ C+ 20.1. Information on revenue collections A A B A A A B 20.2. Transfer of revenue collections A A A A A B B 20.3. Revenue accounts reconciliation C B A C A D C PI-21. Predictability of in-year resource allocation B+ B+ C+ C+ A C D+ 21.1. Consolidation of cash balances C B C C A D C 21.2. Cash forecasting and monitoring A B B A A C B 21.3. Information on commitment ceilings B A C D A C D 21.4. Significance of in-year budget adjustments A A C C B B D PI-22. Expenditure arrears D D D+ D+ B+ C+ D 22.1. Stock of expenditure arrears NR D D D B B D* 22.2. Expenditure arrears monitoring NR D B A A C D PI-25. Internal controls on non-salary expenditure C A B B A B+ B 25.1. Segregation of duties A A A A A A A 25.2. Effectiveness of expenditure commitment controls D A C C A C C 25.3. Compliance with payment rules and procedures D A C C A A C PI-27. Financial data integrity C+ B C B+ A C B 27.1. Bank account reconciliation D B D B A B B EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 93 WEST BANK BANGLADESH BHUTAN ZAMBIA INDONESIA KENYA SIERRA LEONE INDICATORS/DIMENSIONS AND GAZA 2016 2016 2017 2018 2017 2018 2019 27.2. Suspense accounts A C C NA A D N/A 27.3. Advance accounts D B C B A D N/A 27.4. Financial data integrity processes A B B A A B B PI-28. In-year budget reports C+ C+ D+ B+ B+ C+ D+ 28.1. Coverage and comparability of reports A B C B A C D 28.2. Timing of in-year budget reports C C D B B C D 28.3. Accuracy of in-year budget reports C B C A A B C EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 94 <<< 95 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 Mac ro PI- PI- PI- fore -fiscal 14 14 14 cast ing Cas h fo PI- PI- PI- reca 21. 2 21. 2 21. 2 stin g Com mitm PI- 21. PI- 21. PI- 21. e 3 3 3 ceilin nt gs Exp end PI- PI- PI- itu 22 22 22 s. KENYA - arre re m. ZAMBIA - ars FORECASTING FORECASTING FORECASTING FORECASTING B a. BANGLADESH - g. SIERRA LEONE - PI- PI- PI- dive udget 1 1 1 rgen ce com Budget PI- PI- PI- pos 2 2 2 ition 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 Seg rega PI- PI- PI- of d tion 25.1 25.1 25.1 utie CC E s PI- PI- PI- ffec 25. 25. 25. tive 2 2 2 ness Pay PI- PI- PI- com ments 25. 25. 25. plia 3 3 3 nce E x p end itu t. KENYA - PI- PI- PI- n. ZAMBIA - 22 22 22 arre re ars b. BANGLADESH - h. SIERRA LEONE - B dive udget COMMITMENT CONTROL COMMITMENT CONTROL COMMITMENT CONTROL COMMITMENT CONTROL PI- PI- PI- 1 1 1 rgen ce com Budget PI- PI- PI- pos 2 2 2 ition F in 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 a ncia ld PI- PI- PI- inte ata 27 27 27 grit y Fina PI- PI- PI- n 28 28 28 repo cial rtin Rep g o rt co PI- PI- PI- vera 6 6 6 ge Exp end PI- PI- PI- itu 22 22 22 arre re u. KENYA - o. ZAMBIA - ars B c. BANGLADESH - i. SIERRA LEONE - PI- PI- PI- dive udget 1 1 1 rgen ce com Budget FINANCIAL DATA AND REPORTING FINANCIAL DATA AND REPORTING FINANCIAL DATA AND REPORTING FINANCIAL DATA AND REPORTING PI- PI- PI- pos 2 2 2 ition 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 M a c ro PI- PI- PI- fore -fiscal 14 14 14 cast ing Cas h fo PI- PI- PI- reca 21. 21. 21. stin 2 2 2 g Com m itme PI- PI- PI- 21. 21. 21. 3 3 3 ceilin nt gs Ex p e ndit PI- PI- PI- u 22 22 22 arre re p. BHUTAN - d. SOMALIA - ars FORECASTING FORECASTING FORECASTING FORECASTING v. INDONESIA - B j. WEST BANK GAZA - PI- PI- PI- dive udget 1 1 1 rgen ce PI- PI- PI- com Budget 2 2 2 pos ition 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 Seg PI- PI- PI- r e g a 25.1 25.1 25.1 of d tion utie CC s PI- PI- PI- Effectiv 25. 25. 25. ene 2 2 2 ss Pa y PI- PI- PI- com ments 25. 25. 25. 3 3 3 plia nce Exp end PI- PI- PI- itu 22 22 22 arre re q. BHUTAN - e. SOMALIA - ars w. INDONESIA - B dive udget k. WEST BANK GAZA - PI- PI- PI- 1 1 1 rgen COMMITMENT CONTROL COMMITMENT CONTROL COMMITMENT CONTROL COMMITMENT CONTROL ce PI- PI- PI- com Budget 2 2 2 pos ition 7b. Comparing Core CM and CC Capacity with Arrears and Budget Execution Outcomes 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 0 1 2 3 4 Fina n c ial d PI- PI- PI- inte ata 27 27 27 grit y Fina PI- PI- PI- n 28 28 28 repo cial rtin Rep g o rt co PI- PI- PI- vera 6 6 6 ge Exp e n ditu PI- PI- PI- 22 22 22 arre re r. BHUTAN - f. SOMALIA - ars x. INDONESIA - B l. WEST BANK GAZA - PI- PI- PI- dive udget 1 1 1 rgen ce com Budget FINANCIAL DATA AND REPORTING FINANCIAL DATA AND REPORTING FINANCIAL DATA AND REPORTING FINANCIAL DATA AND REPORTING PI- PI- PI- 2 2 2 pos ition 7c. Comparative Regional Strengths and Outcomes Data from PEFA Report 2020 Dataset with the addition of Kenya 2018 and Somalia 2018 which were not included in the PEFA dataset. Strong or small align to countries scoring 3.5 or 4, moderate: 2.5 and 3, weak: 1.5 and 3, and very weak 1 or less. a. ALL 75% 50% 25% 0% ll e e e e e a g ak ak ak ak ak ak ng ng ng ate o o o rat rat rat larg we we we Lar Sm We We We der de de de y Str Str Str y y y Mo Mo Mo Mo Ver Ver Ver Ver PREDICTABLE RESOURCES EXPENDITURE CONTROLS EXPENDITURE ARREARS BUDGET COMPOSITION PI-21 PI-25 PI-22 PI-2 b. EUROPE AND CENTRAL ASIA c. EAST ASIA AND PAICIFIC 75% 75% 50% 50% 25% 25% 0% 0% ll e e e e e ll e e e e a g ak ak ak ak ak ak ng a ge ak ak ak ak ak ak ng ng ng ate ate ong o ong o o o rat rat rat rat rat rat larg we we we larg Lar we we we Sm We We We Lar Sm We We We de de de der y Str Str Str der de de de y y y y Str Str Str y y y Mo Mo Mo Mo Mo Mo Mo Mo Ver Ver Ver Ver Ver Ver Ver Ver PREDICTABLE RESOURCES EXPENDITURE CONTROLS EXPENDITURE ARREARS BUDGET COMPOSITION PREDICTABLE RESOURCES EXPENDITURE CONTROLS EXPENDITURE ARREARS BUDGET COMPOSITION PI-21 PI-25 PI-22 PI-2 PI-21 PI-25 PI-22 PI-2 d. SOUTH ASIA e. LATIN AMERICA AND CARRIBEAN 75% 75% 50% 50% 25% 25% 0% 0% ll e e e e e e e e ll g a ge ng ak ak ak ak ak ak ak ak ak ak ak ak ng ng a ate ate ate o ong o o ong ong rat rat rat rat rat larg larg we we we we we we Lar Lar Sm We We We We We We Sm de de de der der de de der y y Str Str Str Str Str Str y y y y y y Mo Mo Mo Mo Mo Mo Mo Mo Ver Ver Ver Ver Ver Ver Ver Ver PREDICTABLE RESOURCES EXPENDITURE CONTROLS EXPENDITURE ARREARS BUDGET COMPOSITION PREDICTABLE RESOURCES EXPENDITURE CONTROLS EXPENDITURE ARREARS BUDGET COMPOSITION PI-21 PI-25 PI-22 PI-2 PI-21 PI-25 PI-22 PI-2 f. MIDDLE EAST NORTH AFRICA g. AFRICA 75% 75% 50% 50% 25% 25% 0% 0% e e e e e ll ll e e e g ak ak ak ak ak ak a a ge ak ak ak ak ak ak ng ng ng ate ong ong ong ate ate o o o rat rat rat rat rat larg we we we larg Lar we we we We We We Sm Lar Sm We We We de de de der y Str Str Str der de de der y y y y Str Str Str y y y EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Mo Mo Mo Mo Mo Mo Mo Mo Ver Ver Ver Ver Ver Ver Ver Ver PREDICTABLE RESOURCES EXPENDITURE CONTROLS EXPENDITURE ARREARS BUDGET COMPOSITION PREDICTABLE RESOURCES EXPENDITURE CONTROLS EXPENDITURE ARREARS BUDGET COMPOSITION PI-21 PI-25 PI-22 PI-2 PI-21 PI-25 PI-22 PI-2 <<< 96