Cash is King: Time to fortify cash management

Once upon a time, the CEO of a public bank which was also the Treasury’s financial agent, visited the Minister in charge of Treasury. He told the Minister that the Treasury needs to double the balance of its bank account in a couple of days to make sure that salaries of the civil servants can be paid. Otherwise, there will be a default. The CEO also pointed out that interest rates in the markets were increasing rapidly and the difference between the market rates and subsidized credits should be transferred to the Bank, in order to keep government’s lending program working. “What happens if you continue to keep interest rates low?” the Minister asked. The CEO explained that then the Bank had to cover the cost of subsidy which results in losing money. The Minister seemed astonished and couldn’t make an immediate decision. (Excerpt from “Stories on Bureaucracy and Banking that I told my Father” by Osman Tunaboylu)

Indeed, the CEO wouldn’t have had to visit the Treasury and the Minister wouldn’t be surprised if government’s daily cash flow projections would be generated at least for three months, based on realistic assumptions, integrated with debt management, well-coordinated with budget execution and monetary policy, and finally tested under different scenarios. However, if cash rationing is in place, due to weak budget controls and unpredictable revenue inflows, availability of required amount of cash in the right time and the place will not be possible. As a result, the government delays the payments and arrears accumulate.

Cash management, as a process of collection, distribution and investment of cash, requires provision of reliable data, projection of cash-flows, coordination across institutions; employs treasury single account, and short-term financing instruments such as T-bill and overdraft facility; and generates return for excess liquidity. Managing cash is more important in today’s uncertain economic and political environment. Therefore, currency and deposit in both advanced and emerging countries’ balance sheet has increased significantly after the global financial crisis. In this regard, United States, as a hard currency issuer, doubled the size of liquid financial assets by increasing from 1% to 2.3%. In other advanced economies, such as Korea and Japan currency and deposit/GDP ratio reached 9.4% and 7.1% respectively.[…]