Government Cash Management: Relationship between the Treasury and the Central Bank; by Mario Pessoa and Mike Williams; IMF Technical Notes and Manuals 12/02; December 2012

TNM/12/02

International Monetary Fund

Fiscal Affairs Department

700 19th Street NW

Washington, DC 20431

USA

Tel: 1-202-623-8554

Fax: 1-202-623-6073

Government Cash Management:

Relationship between the Treasury

and the Central Bank

Mario Pessoa and Mike Williams

Fiscal Affairs Department

INTERNATIONAL MONETARY FUND

Technical noTes and Manuals

INTERNATIONAL MONETARY FUND

Fiscal Affairs Department

Government Cash Management:

Relationship between the Treasury and the Central Bank

Prepared by Mario Pessoa and Mike Williams

Authorized for distribution by Carlo Cottarelli

November 2012

JEL Classiﬁcation Numbers: E44, E58, E62, E63, H30, H60, H63, H83

Keywords: Central bank, debt management, ﬁscal policy, monetary policy,

public ﬁnance, public ﬁnancial management, treasury, treasury

single account

Author’s E-Mail Address: [email protected] and mike.williams@mj-w.net

DISCLAIMER: This Technical Guidance Note should not be reported as representing the views

of the IMF. The views expressed in this Note are those of the authors and do not necessarily

represent those of the IMF or IMF policy.

Technical Notes and Manuals 12/02 | 2012 1

Government Cash Management:

Relationship between the Treasury

and the Central Bank

Mario Pessoa and Mike Williams

I. The Importance of Formalizing the Relationship between

the Treasury and the Central Bank for better Government

Cash Management

The relationship between the treasury

and the central bank is at the heart of ﬁnancial poli-

cies. This relationship operates at different levels. The coherence of monetary policy with

government ﬁnancing policies (along with ﬁscal policy) underpins successful macroeconomic

procedures. But the management of the government’s debt and cash interacts directly with

monetary policy operations. As the sophistication of the government’s own operations devel-

ops—particularly in relation to cash management—some of these interactions intensify. Both

institutions also interact with the banking system, variously as users of the banks’ transaction

This note was prepared at the request of the Latin American Treasury Forum (FOTEGAL) and has beneﬁted from

the helpful contributions of J. Mueller, R. Allen, J. Gardner, C. de Albuquerque, M. Anthony, K. Eckhold, G. Pedras,

and R. Jiménez.

References to the “treasury” throughout this TNM are to the function, not to any particular organizational model,

of which there is a variety.

TECHNICAL NoTEs ANd MANUALs

This technical note and manual (TNM) addresses the following main issues:

• Interaction between treasury cash management and monetary policy opera-

tions within the wider context of the respective economic responsibilities of

the ministry of ﬁnance and the central bank.

• Institutional arrangements for an effective relationship between the treasury

and the central bank.

• Contractual arrangements between the treasury and the central bank for the

provision of banking and other services.

This document will be particularly relevant to developing countries that are reform-

ing cash management operations or contemplating more active cash manage-

ment; or where there are operational policy differences between the treasury and

the central bank.

2 Technical Notes and Manuals 12/02 | 2012

services, or as ﬁnancial counterparty (and potentially also as owner or regulator). At the same

time, the central bank is the treasury’s banker and provides a range of services at the opera-

tional level, such as managing the treasury single account (TSA), and acting as ﬁscal agent

(running auctions), settlement agent, or bond registrar.

This relationship must therefore be handled with some thought. There will be differ-

ences of policy. The treasury and the central bank separately manage different parts of

the overall government sector’s balance sheet, and they will have different priorities and

perceptions of risk. Without adequate governance and planning mechanisms, and indeed,

goodwill on both sides, there will be risks of conﬂicting policy actions and wider eco-

nomic damage. A framework is vital to policy understanding, operational coordination,

and service provision on issues ranging from the high-level coordination of ﬁscal, ﬁnanc-

ing, and monetary policies, to the management of Treasury bill (T-bill) auctions and the

government’s banking arrangements.

This note addresses these issues, and how best to manage the relationship in order to

further the objectives of cash (and debt) management on the one hand, and monetary policy

(and reserves management) on the other. There is a particular focus on the interaction be-

tween cash management and monetary policy operations, as recent reforms have changed

both respective responsibilities and the policy approach. After a summary of the modern cash

management framework, within the wider context of the greater operational separation of

monetary policy, ﬁscal policy, and debt and cash management policy (Section II), the paper

outlines the reform process and its implications for the treasury, central bank, and commer-

cial banks (Section III). After a fuller discussion of some speciﬁc policy challenges (Section

IV), the manual considers how the interaction should be institutionally and administratively

structured (Section V). Section VI discusses service level agreements (SLAs) and Section VII

concludes. The note is particularly relevant for developing countries.

II. The Modern Framework

The wider context is the high-level policy relationship between the ministry of ﬁnance and

the central bank. One of the lessons from the ﬁnancial crises of the 1980s and 1990s has

been that debt management, and ﬁscal and monetary policy should be treated as separate

arms of macroeconomic policy with speciﬁc objectives. There has to be coherence in the

overall policy mix, as outlined in Box 1, but the use of different instruments to meet differ-

ent objectives facilitates greater transparency and predictability, enhancing the credibility

and effectiveness of policy. In turn, credible policies produce superior overall outcomes

compared to less credible ones. The weak links between debt management choices (that

is, the choice of instrument) and monetary conditions or liquidity, and between monetary

conditions and inﬂation, allow for a greater separation between monetary policy operations

and the management of debt and cash. For most practical purposes, control over short-term

Technical Notes and Manuals 12/02 | 2012 3

rates is sufﬁcient for meeting the central bank’s objectives, although some central banks also

inﬂuence the monetary aggregates more directly.

A key feature of the modern framework is therefore the independence of the central bank

with respect to monetary policy. However, the precise nature of this independence varies and

is determined by national constitutional structures and practices. In most countries, govern-

ments retain some responsibilities, such as for the appointment of board or monetary policy

committee members, and possibly a theoretical override.

For a summary of the background history and past assessments, see Nunes (1999) and Turner (2011). Blommes-

tein and Turner (2011) note that the ﬁnancial and economic crisis has also led to some blurring of the line between

public debt management and monetary policy in developed countries. Debt management ofﬁces (DMOs) have

operated more extensively at the short end of the yield curve, and central banks have been increasingly active in the

same long government bond markets as DMOs. Even in developed markets therefore there cannot be an unqualiﬁed

separation of debt management and monetary policy operations. On the importance of policy coherence, and the

role of an asset-liability management framework in securing it, see Togo (2007).

Box 1: The Importance of High-Level Policy Coherence

The effectiveness of policy decentralization and the credibility of the respective

authorities hinges on the coherence of the overall policy mix. Many countries emphasize

the separation of operational roles between the treasury and the central bank. However,

completely separate policies only work if there are separate policy instruments that

are independent of each other, which may not be the case in emerging market

countries. Thus, ﬁnancing plans may put an undue strain on domestic monetary policy

operations, or the introduction of a new inﬂation-linked bond may have implications for

monetary policy. A more speciﬁc example, discussed further below, is a central bank’s

issuance of securities in order to absorb liquidity in the money market. The mode in

which central banks accomplish this has implications for the securities market and for

the governments’ own sales of short-term securities. Unless executed in a manner

sensitive to respective objectives, there is a danger of weakening the credibility of the

government’s ability to achieve its policy goals.

Debt/cash management and monetary policy should therefore be integrated into a

broader macroeconomic framework of analysis that ensures a consistent policy mix.

Different countries coordinate their policies in different ways. Some countries have ﬁscal

responsibility laws that include target or ceiling deﬁcits and debt levels. Many countries

have internal public debt committees (PDCs), or similar arrangements, which facilitate

coordination. These bodies bring together representatives of the main macroeconomic

policy functions to ensure that debt management decisions, and, more generally, asset-

liability decisions, are properly embedded in wider macroeconomic policies. The role of a

PDC or other institutional mechanism is discussed further below. It should be stressed,

however, that the focus of the interaction discussed here is high-level and strategic.

It should not extend to short-term policy decisions, such as treasury involvement in

changes in the central bank’s policy rate, or in the central bank’s involvement in individual

debt issuance decisions. In these cases, operational independence is important.

4 Technical Notes and Manuals 12/02 | 2012

This greater policy separation has been paralleled over the last two decades by a progressive

reform of the respective operational roles of the treasury and the central bank. At the risk of

some oversimpliﬁcation, under the traditional model:

• Thetreasury’smainrolewasasgovernmentpaymentofce. It either managed all

government payments centrally, or it would release cash to spending ministries, de-

partments, and agencies (MDAs), usually to their bank accounts in the central bank or

commercial banks. The TSA was incomplete, with government agencies often holding

many accounts both in central and commercial banks. Management of cash was essen-

tially passive. The treasury would monitor cash balances, maintaining a cash buffer to

handle both volatility and unanticipated outﬂows. If necessary, it would ration cash by

restraining or slowing expenditures or delaying bill payments, often causing arrears to

accumulate.

• Thecentralbankhadanumberofroles. It would manage domestic monetary condi-

tions, drawing on a range of tools (the setting of policy interest rates, open market oper-

ations [OMOs], reserve ratios, etc.). In so doing, it sought to take account of the govern-

ment’s own cash ﬂows. As ﬁscal agent for the government, it would not only run bond

and bill auctions, but it would also signiﬁcantly inﬂuence issuance and ﬁnancing policies

(a reﬂection of the treasury’s limited capacity) with government debt often issued with

a view to both the government’s cash requirements, and the bank’s liquidity manage-

ment purposes. In practice, this tended to entail the issuance of bonds for ﬁnancing

budget deﬁcits, and of T-bills for liquidity purposes and the ﬁnancing of short-term cash

needs.

The central bank would also provide a range of services to the government as

banker (which might extend to being cashier, processor of payments, and lender of last

resort), and variously as settlement agent, supplier of registry services, and so on. The

central bank would retain wider responsibilities for the ﬁnancial system, notably as the

manager or regulator of the payment (and settlement) systems, overseer of the interbank

and money markets, and in many cases prudential regulator of the commercial banks

and other ﬁnancial institutions. In some countries, the central bank, in effect, had some

budget execution responsibilities through its control over the MDAs’ bank accounts.

• ThecommercialbanksprovidedbankingservicestoMDAs. In the process, they held

substantial government cash balances (both demand and term deposits).

This traditional approach has had the following consequences:

• Therecouldbeexcessgovernmentliquidity. Idle balances in the banking sector are

costly to the government and proﬁtable for the banking sector. Because balances usually

have not been remunerated, or have been remunerated at a lower rate than the bor-

In some countries, golden rules were established to allow new debt only in order to ﬁnance capital investment.

T-bills were to be used only to cover temporary gaps between the receipts of revenues and the outﬂow of expendi-

tures during the month.

Technical Notes and Manuals 12/02 | 2012 5

rowing needed to ﬁnance them, there typically has been an implicit subsidy from the

government. The lack of a market-related interest rate also gives both the government

and banks the wrong incentives.

• Governmentcashowshavebeenamajorcauseofshort-termvolatilityinmoney

marketsandbankliquidity. This has complicated both commercial banks’ liquidity

management and the central bank’s monetary policy operations. The need to mop up

excess liquidity in the banking system can be costly to the central bank.

• Thecentralbank’simplementationofgovernmentcashanddebtmanagementcan

conictwithitsmonetarypolicygoalsandoperations. This has been the case par-

ticularly in relation to interest rate setting and signaling.

• Centralbanklendingtothegovernmentincreasesthemonetarybase. This has po-

tential consequences for inﬂation.

In consequence, the modern institutional framework has a clear separation of roles:

• Thecentralbankfocusesonmonetarypolicy. One result of the central bank’s greater

independence is that its objectives have narrowed, with the emphasis being on the con-

trol of inﬂation. It may still provide services to the government, such as managing the

TSA, although transaction-banking services increasingly tend to be left to commercial

banks.

Where it is still a ﬁscal agent, the central bank’s role has been more clearly that

of an agent, and not as a driver of policy.

• Thetreasurybecomesafully-edgedfunction.

It pools all government liquidity,

takes full responsibility for debt management, and manages cash actively. There is a

spectrum of practices, but effective cash management facilitates unrestricted execution of

the budget. If executed well, it lowers average cash balances, thereby reducing costs, and

moderates money market volatility. MDAs may manage their own expenditures, but the

treasury manages the government’s overall cash through the TSA.

• ThebankingsectorprovidesbankingservicestothetreasuryandMDAs,as

required, onatransparently-costedbasis. This should be done through competi-

tively tendered minimum standard SLAs. The role of the banks depends on the degree

to which government payment processing is centralized in the treasury, or dispersed

to MDAs. In more decentralized payment systems, there is more room for commercial

banks to provide speciﬁc services, such as the placement of short-term excess cash in a

ﬁxed-term investment.

For example, the higher interest rates needed to meet monetary policy objectives may conﬂict with the objective

to hold down the cost of debt servicing. Or, the market may see the coupons set on new debt issues as a signal of

interest rate intentions.

Central banks that have a retail-banking role are often reluctant to expand; it is costly and rests beyond their

core responsibilities; the commercial banks with wider networks are better placed to realize economies of scale.

Institutional arrangements will vary. As stressed above, the focus here on treasury functions (primarily budget

execution and cash management) is independent of whether they lie in a unit denominated “treasury” or an inte-

grated “debt and cash management ofﬁce.”

6 Technical Notes and Manuals 12/02 | 2012

III. Development of a Modern Treasury System

A. Governmental Requirements

The requirements of a modern treasury management function have been well understood.

These should include:

• AcomprehensiveTSA. It consolidates all government cash balances into a single ac-

count, usually and preferably at the central bank.

All government revenues are trans-

ferred immediately upon receipt to the TSA, including so-called own-revenues that are

received by MDAs.

• Anefcientgovernmentpaymentssystem.It may either be centralized through a

treasury-managed TSA, or decentralized to MDAs, as summarized in Box 2. If it is de-

centralized, all MDA bank accounts should be connected to the TSA and zero-balanced

overnight, with any cash balances swept back to the TSA. Commercial banks must have

the capacity to perform sweeping operations with the central bank, and provide elec-

tronic payments and reconciliation services.

• Alinkedtreasury-managedintegratednancialmanagementinformationsystem

(IFMIS). This allows for the management, monitoring, control, reconciliation, accounting,

and reporting of budget execution and bank account balances, in particular the TSA.

• Acashowforecastingsystemwiththeabilitytomakeaccurateprojectionsof

short-termcashinowsandoutows. The separation between the permission to

spend and actual cash payments means that ﬂows through the TSA must be the focus

of the forecast. Good cash ﬂow forecasts underpin active cash management. Ideally,

forecasts of daily cash ﬂows across the TSA should be available for at least three months

ahead on a rolling basis, including at the end of the ﬁscal year. This must be coupled

with an ability to monitor actual changes in the aggregate balance of the TSA top ac-

count, preferably in as close to real time as possible.

• Activecashmanagement. This includes the use of short-term ﬁnancial instruments,

both on the liability and asset sides (T-bills, repos and reverse repos,

collateralized

term deposits, etc.), to help manage balances and timing mismatches.

By both ensur-

ing the availability of cash and avoiding unnecessary idle cash balances, net borrowing

costs are minimized. Lower volatility of the government’s cash balance also facilitates the

See, for example, Lienert (2009).

For a more detailed description of requirements and options, see Pattanayak and Fainboim (2011).

A repo (short for sale and repurchase agreement) is the sale of securities tied to an agreement to buy them back

later. A reverse repo is the purchase of securities tied to an agreement to sell them back later. A repo is best thought

of as a collateralized loan. Thus, a government cash manager may decide to borrow by way of repo, raising cash

against a temporary transfer of assets. Conversely, a reverse repo may best be thought of as a collateralized invest-

ment. For repo transactions, government debt and cash managers almost invariably use or require T-bills or T-bonds

as collateral assets. Repos are often also a central bank’s chosen instrument by for monetary policy operations.

Active cash management and its interaction with other policies are described more fully in Williams (2010).

Technical Notes and Manuals 12/02 | 2012 7

central bank’s monetary policy task.

As capabilities develop, it is possible to target a

low and stable TSA balance, which should be remunerated (discussed below).

There are a number of institutional and market underpinnings to these characteristics of

modern cash management:

Changes in the government’s cash balance at the central bank (changes in the main operational TSA account)

are usually the largest autonomous inﬂuence on a domestic banking system’s liquidity (credit institutions’ net hold-

ings of deposits at the central bank).

If the government is able to moderate the ﬂuctuations in balances at the central

bank, then the central bank’s domestic liquidity management task is reduced accordingly.

Box 2: The TSA and Payment Systems

The TSA can work with a variety of payment systems that are centralized, decentralized,

or hybrid, whether in relation to approval, transaction processing, or accounting control.

There is, in effect, a two-by-two matrix, as shown below.

Processing Payments: the Options

Central Bank responsible for

banking operations

Commercial banks

responsible for banking

operations

Treasury responsible for

payment processing

Spending units responsible for

payment processing

The devolution of payment responsibility tends to be associated with the use of

commercial banks to manage transactions. Most countries fall either into the top left cell

of the matrix (such as France, Russia) or the bottom right (UK, Australia), although there

are other examples (South Africa is mostly in the bottom left cell). Several nations have

mixed arrangements (China, India, USA). Centralization of payments is relatively more

common in smaller or less developed countries, often as part of reform processes.

Centralized transaction processing implies a concentration of authority in the treasury

to process transactions, and to access and operate the TSA. The treasury (in some

countries with a network of regional treasuries, or with treasury ofﬁcials embedded in

ministries) may approve, as well as process, payments. In other cases (for example,

Belarus, Argentina, and Georgia), the MDAs may be responsible and accountable for

payments, although the treasury will process the payments.

In the case of decentralized payment and accounting systems, each MDA processes

its own transactions and directly operates each respective claim on cash. The key

requirement under arrangements that use commercial banks is that any cash balances

left with the banking system at the end of the day should be swept back into the TSA;

any transactional accounts should be opened as zero-balance accounts. There is a

separation of cash from the permission to spend, and cash does not leave the TSA until

the payment is ﬁnally discharged. The requirements apply to accounts that are used for

disbursements or for the collection of government revenues. Ultimately, all revenues are

deposited in the TSA.

8 Technical Notes and Manuals 12/02 | 2012

• Treasury capacities (systems, stafﬁng) and organizational structures often need to be

substantially enhanced, not least to support ﬁnancial transactions.

• Newcoordinationstructuresareneededtocover:

— Information sharing between the cash managers, revenue-collecting agencies, and

spending MDAs (and any relevant ministry branch ofﬁces), in relation to payment

and revenue ﬂows, and cash ﬂow forecasting.

—The close coordination (or integration) of debt and cash management operations.

— Agreements between the treasury and the central bank on information ﬂows, respec-

tive responsibilities, and any operational interactions, including the development of

the ﬁnancial markets.

• Financialmarketsrequireacertainlevelofdevelopmentandliquidityifcashisto

bemanagedactively. A reasonably liquid money market is especially important.

These sound practice elements apply equally to developed and to developing countries.

However, the development of active cash management in low-income countries is inevitably

constrained by thin ﬁnancial markets and, in particular, poor liquidity in the money market.

In those cases, reform efforts tend to focus on the TSA and developing cash ﬂow forecasts.

Many emerging market and middle-income countries, however, are increasingly using T-bills

or bank deposits to smooth cash ﬂows, building on improved forecasts.

B. Implications for the Central Bank

The development of modern treasury functions and, in particular, improvements in the

government’s cash management have implications for the central bank. In the ﬁrst place, the

modern framework will be underpinned by the central bank having the operational respon-

sibility for the conduct of monetary policy. This is a reform that, in most cases, will have pre-

dated the development of cash management. The precise nature of this responsibility varies

and is determined by speciﬁc legal frameworks and practices.

As a government begins improving its cash management, there will be a number of im-

plications for the central bank’s operations. Initially, as the TSA develops and cash is repatri-

ated from MDAs’ balances in commercial banks to the TSA, liquidity will move away from

the banking system. This is often helpful to the central bank, since the drain of liquidity will

improve its ability to control domestic monetary conditions over this period. Moreover, if the

government has not been receiving a full market rate on its cash balances, the implicit subsi-

dy, in essence, will be removed from the commercial banks. The withdrawal of deposits from

banks will, of course, also have implications for the banks, as discussed in the next Section.

As more active cash management develops, there may be implications for monetary policy

management. As the government starts to manage any surplus cash by transferring it out of

the central bank—whether by spending, by retiring domestic debt, or through short-term

investment in the banking system—there will be a monetary easing, other things being equal.

Technical Notes and Manuals 12/02 | 2012 9

A better cash plan will allow the treasury to hold smaller cash buffers to insure against an un-

expected shortage of cash.

Additionally, if the balances are unremunerated, the central bank

will lose the beneﬁt of cheap deposits. There will be a further negative impact on the central

bank’s proﬁts if it is required to drain cash to offset the monetary easing, either by issuing its

own bills or borrowing through repo.

In the medium term, however, there will be a clear beneﬁt to the central bank as the trea-

sury improves the quality of the cash plan projections and becomes better able to hold its

cash balances at a low and stable level. This reﬂects the fact that the government no longer ex-

erts a signiﬁcant inﬂuence on domestic monetary conditions. The moderation of ﬂuctuations

in the government deposits in the central bank will provide a more stable environment for the

central bank’s monetary policy operations. There will remain other autonomous inﬂuences on

domestic liquidity—such as the change in the public’s demand for bank notes and net foreign

currency inﬂows—but these are, respectively, more predictable or more directly controlled by

the central bank. Even when the treasury is not able to smooth cash balances completely, the

central bank should beneﬁt from an improved ﬂow of forecast information from the treasury

on future changes in the TSA.

The central bank may continue to act as ﬁscal agent for the conduct of auctions. However,

as the number of money market transactions increases, there is a risk of confusion between

the central bank’s and the treasury’s operations, particularly where the same group of market

counterparties is involved. In practice, most active cash managers develop their own front

ofﬁce capabilities, such as directly managing the issuance of T-bills and T-bonds, conducting

auctions, and promoting an active relationship with market operators. In any event, it is im-

portant that there is no misunderstanding in the market as to which institution is responsible

for which activity, and their respective aims.

There needs to be clarity concerning respective policy responsibilities. This entails that the

government cash managers usually have no contact with the central bank regarding inter-

est rate decisions or prospective interest rate changes. Nor should they receive from within

the government any advance notice of policy statements or data releases that might affect the

market’s short-term interest rate expectations.

As to policy cooperation, the development of the domestic ﬁnancial market, particularly

the money market, is an especially important area of cooperation between the treasury and

the central bank. A well-functioning money market both supports the conduct of monetary

control through market-based instruments (including repos), and facilitates a more active

management of the government’s short-term cash ﬂows (see Box3).

The buffer will still need to take account of market volatility and rollover risk, as well as potential errors in cash

ﬂow forecasts. It can also be a useful signal to the market of the treasury’s preparedness.

10 Technical Notes and Manuals 12/02 | 2012

In order to provide clarity and avoid market disruptions relating to operations, tenders

associated with the central bank’s OMOs should be held at a different time of the day than

those of the treasury. There should also be an understanding that the treasury will not do

anything that might appear to undermine OMOs, such as the treasury putting cash into the

banking sector at exactly the same time that the central bank is trying to drain cash as part of

its control of interest rates.

The two institutions may also need to cooperate in the handling

of exceptional payment and receipt ﬂows; for example, an unusually large tax payment could

For example, the UK Debt Management Ofﬁce (DMO) agreed with the Bank of England—and explained to

the market—that it would not hold weekly bill tenders or ad hoc tenders at times when the Bank of England was

conducting its money market operations. Similarly, the DMO would not enter into loan transactions of a maturity

that could be perceived as competing with the Bank’s structured repo operations.

Box 3: The Importance of the Money Market

A functioning money market, usually deﬁned as transactions across all instruments of

less than one year, is the cornerstone of a competitive and efﬁcient system of market-

based ﬁnancial intermediation. A country’s money market must be operating well before

a government bond market (including an efﬁcient primary market and a liquid secondary

market) can be fully developed. A well-functioning money market plays several important

roles: (i) it facilitates the conduct of monetary policy through market-based instruments,

anchoring the short end of the yield curve and supporting the development of the

foreign exchange market; (ii) it provides the authorities with better signals of market

expectations; (iii) it allows banks and their customers to better manage their liquidity;

and (iv) it strengthens competition in ﬁnancial intermediation.

The development of a well-performing money market, however, requires three key

conditions:

• Market-based methods of implementing monetary policy.

• Adequate management systems that provide reliable estimates of future govern-

ment cash ﬂows and forecasts of aggregate bank liquidity.

• The presence of banks and other ﬁnancial institutions with incentives to develop

efﬁcient liquidity and risk management services.

An efﬁcient money market stimulates the development of more active debt securities

markets, by lowering liquidity risk premiums and enabling investors to hold larger

portfolios of longer-term instruments. It should evolve parallel to the government

securities market. Access to liquidity and securities, with a well-functioning repo market

and securities lending arrangement, is important for proper secondary trading activities.

A well-developed money market also helps promote private issuance of negotiable

certiﬁcates of deposit, promissory notes, and commercial papers. As in the case of

government debt, active markets in short-term instruments support the development of

longer-term corporate bond markets.

World Bank (2007). The authors also note that the development of an active money market might be

held back by the failure to adopt a master repo agreement, netting and close-out mechanisms, and from

the lack of transparency concerning money market indices and activity volumes.

Technical Notes and Manuals 12/02 | 2012 11

potentially distort the interbank market, which suggests that the transfer to the TSA be made

in tranches throughout the day to allow banks to restore their balance sheets.

In relation to information exchange, there should be three main regular requirements:

• The treasury should provide cash ﬂow forecasts to the central bank so that it can take

these into account in its own forecasts of banking sector liquidity.

• The central bank should keep the treasury informed of ﬂows and balances across the

TSA, ideally in real time, and facilitate the reconciliation with the accounting system

managed by the treasury.

• Arrangements for information exchange should also cover developments in the money

market.

The treasury will often also have responsibility for ownership of the central bank. It needs

to manage the corporate relationship with the central bank, which will be either directly

owned by the government, or set up as some form of statutory corporation under law, but

clearly part of the public sector. Regular discussions about the central bank’s ﬁnancial per-

formance may be needed, especially concerning the dividend to be paid. To this end, clear

and transparent rules should be implemented so that the mechanics are known by the parties

involved. Discussions will also be needed on such issues as how the central bank’s pay and

personnel policies should relate to the government’s policies, if at all. Other major policy is-

sues with budgetary implications might be the possible need to recapitalize the central bank

or to compensate it for the costs of running monetary policy. Normally, it would be preferable

to maintain some separation between this ownership role and the interactions related to debt

and cash management policy or to the treasury’s role as a customer of the central bank, pos-

sibly transferring the ownership function elsewhere in the ministry of ﬁnance.

C. Implications for Commercial Banks

The reform of cash management somewhat changes the treasury’s relationship with the bank-

ing system. It also imposes requirements on the banks. It is difﬁcult to modernize government

payment arrangements without the banks being internally fully electronically integrated, with

collective access to a modern automated system for the clearing and settlement of payments.

This system should either be, or be linked to, a real time gross settlement system (RTGS),

to allow low risk real-time settlement of high-value payments across accounts at the central

bank. Such arrangements would, in turn:

• Allow revenues to be passed from a peripheral rural branch to the bank’s head ofﬁce and

the TSA on the same day.

In general, cash managers should not be given market-sensitive information (for example, on a bank in ﬁnan-

cial trouble), lest that affect its own actions and the market’s perception of those actions.

Sometimes referred to as “core banking”; this entails allowing a transaction in any branch to be reﬂected in real

time in the bank’s central data and accounts systems.

12 Technical Notes and Manuals 12/02 | 2012

• Make it possible, under dispersed payment systems, to use zero balance accounts, with

any balances being swept into the TSA at the end of the day (and, if necessary, returned

the next day).

• Enable same-day crediting of the bank accounts of suppliers or employees. For central-

ized systems, this can be done without the need for intermediary transactions accounts,

but where they are still used, they will often be able to clear with the TSA on the same

day.

• Remove the requirement for expenditures to be preﬁnanced, or any government ﬂoat or

“seed ﬁnancing”, except perhaps to handle residual inefﬁciencies at the periphery.

The development of core banking and the RTGS is also usually a priority of the central

bank. In many countries, the modernization of the banking system has preceded the mod-

ernization of cash management. However, where the banking system is lagging, it is important

that the treasury takes the initiative with the central bank to map out a program for develop-

ment, using regulation or incentives, as necessary, to cajole the banks.

This model has implications for the commercial banks’ ﬁnances. The ability to hold onto

tax revenues for a time without paying interest before remitting them to the government has

been a traditional source of income in many countries, with lags of up to two weeks being

common. Also, as the government becomes more conscious of the need to repatriate balances

held by MDAs under dispersed payment systems, a further source of proﬁts disappears. In

return for this largesse, the banks may be willing to waive fees for services, but the two costs

rarely offset, and this cross-subsidy may not support efﬁcient pricing.

For these reasons, banks’ transactions services should be remunerated. The payment of

charges for collecting revenues and operationalizing retail payments—preferably a unit fee for

each transaction based on a formal contract or SLA—means that there is no need to compen-

sate the banks, for example through tax collection or expenditure payment holding periods. If

they exist at all, they should reﬂect only technological constraints.

The fees paid should not simply be cost-plus calculation, or read off the publicly avail-

able tariff. A competitive process is necessary, to be repeated at three- to ﬁve-year intervals.

The government should request bids against speciﬁed minimum standards. The government

always will be a major customer, and this gives it competitive strength. But it also may be

up against a banking system with a tendency to behave collusively. Another problem may be

that there is only one large bank with branches across the whole of the country. Competi-

tion therefore has to be organized imaginatively, and it may be that the business must be split

between more than one bank. In practice, governments often have been pleasantly surprised

by the results of competition. Banks want this business; for example, handling the payment of

This may not be strictly the case even in a developed fully integrated system. There may be a need for an in-

traday ﬂoat to ensure that the banks have the liquidity needed to lubricate the payment systems, to enable them to

meet all obligations in real time. But any ﬂoat occurring at the start of the day should be swept back at the end.

Technical Notes and Manuals 12/02 | 2012 13

civil service salaries potentially gives them access to a large number of middle-class customers

to whom they can sell other banking services. There have been examples in Asia where, fol-

lowing a competition, the government pays close to nothing for the services offered, and even

receives a proﬁt. This is also the case in Brazil, as demonstrated by the auctions that manage

civil servants’ payroll accounts in some states.

Under dispersed payment arrangements, the negotiation with the banks may be left to in-

dividual MDAs. Australia provides an example in this regard. However, the treasury will want

to insist on some core requirements, not the least of which will be end-of-day sweeping. Even

where there is a central contract, there will usually be some arrangements to allow MDAs to

negotiate speciﬁc requirements.

Payment for services makes the cost of banking more transparent. One corollary is that the

fees paid should be included explicitly in the budget. The implied cost will no longer be lost

in the net debt interest line (although the interest saved will typically offset the fees paid).

The same principles apply to the services supplied by the central bank, as discussed more

fully below. There may also need to be discussions with the central bank on issues such as the

service standards required by the bank’s government. This will ensure that they are consistent

with wider banking sector reforms.

As active cash management develops, the relationship between cash managers in the

treasury and the banks will develop a new dimension. The banks may already be the ma-

jor purchasers of T-bills. Nevertheless, the more ﬂexible use of T-bills will put more weight

behind the consultative machinery. As cash managers start using repos or other money market

instruments, there will need to be direct contractual relationships with the banks (and other

counterparties), usually based on respective market standards.

The market should set the

price of transactions, whether sales and purchases are done through auctions, tenders, or

deals over the counter, or across trading exchanges.

IV. Some Policy Challenges in the Relationship Between the

Treasury and the Central Bank

D. Treasury Bills and Central Bank Bills

Although the needs of cash management and monetary policy normally coincide, there can be

strains between them. These arise particularly when the central bank does not have sufﬁcient

means (collateral) to mop up excess domestic liquidity through repo operations. The liquid-

ity might be generated by foreign currency inﬂows, although there are other mechanisms that

Thus, the Securities Industry and Financial Markets Association, and the International Capital Markets Associa-

tion, have jointly developed a Global Master Repurchase Agreement. This agreement is used widely internationally,

although there may be an annex to cover the speciﬁc circumstances of the market concerned.

14 Technical Notes and Manuals 12/02 | 2012

also have this effect. The need to absorb liquidity in the banking system may lead the central

bank to issue its own bills (CB-bills).

The use of different, but comparable, instruments for monetary policy and cash manage-

ment potentially risks market fragmentation. It could also lead to a loss of the beneﬁts derived

from a larger and more liquid T-bill market. Essentially, the same demand is spread over two

types of instruments, implying that the volume of each issue is likely to be smaller than might

otherwise be the case, which would tend to reduce liquidity.

There are different ways to mitigate the problem of market fragmentation.

The central

bank and the treasury may agree to issue paper of different maturities; for example, the cen-

tral bank might issue CB-bills of two weeks or less, while the treasury would issue T-bills of

three months or more. They may be marketed differently, with T-bills also aimed at nonbanks.

Although such measures reduce the problem, they may not eliminate it. Another approach is

for the treasury to overfund the borrowing requirement, by issuing extra T-bills or T-bonds,

depositing the surplus cash in a sterilized account at the central bank, and allowing the cen-

tral bank to conduct monetary policy through repo or outright government securities transac-

tions in the secondary market. Mexico and Singapore offer past examples in this regard.

Under a more tailored approach, the treasury can sell additional T-bills at the central bank’s

request. This would be done as an add-on to the normal auction, but the proceeds would

be sterilized by holding them in a separate account at the central bank, remunerated at the

discount rate set in the bill auction. The treasury cannot draw on this account, but the bills

will be redeemed from it. This arrangement, and the amounts involved in each auction, must

be explained to the market.

These targeted arrangements require trust between the treasury and the central bank. In

particular, they would rely on the treasury’s constant willingness to accept requests from the

central bank to issue additional T-bills for monetary policy reasons. There may also be dif-

ﬁculties when the central bank’s borrowing requirements are much greater than the treasury’s.

In such cases, the central bank may want more control over the choice of maturities or the

conduct of auctions, rather than accepting a simple add-on to the treasury’s issuance plans.

In some countries (as was the case in New Zealand in the past), the central bank can issue

T-bills at its own discretion, with the proceeds passed directly to the government’s account.

This must be done within a framework agreed with the treasury, and should be transparently

explained to the market.

Another difﬁcult issue that arises is how the cost should be shared. In the ﬁrst instance, this

cost of open market operations falls to the central bank and is part of the cost of discharg-

ing its monetary policy operations. By paying interest on the treasury’s sterilized account at

For a more detailed discussion, see Williams (2010). The beneﬁts of using T-bills to money market develop-

ment, and potentially to the central bank, are also discussed in Nyawata (2012).

Technical Notes and Manuals 12/02 | 2012 15

the same rate of interest as materialized in the auction, the treasury is left unaffected, and the

central bank has to pay broadly the same rate as would have been the case if it had issued

CB-bills instead. The need to drain cash puts pressure on the central bank; it is expensive

compared to lending into the market to relieve a cash shortage which earns income. Some

countries have developed arrangements to reimburse the central bank for the cost of mon-

etary policy, whether directly or by foregoing a dividend. Certainly, where liquidity surpluses

are driven by credit to the government, the ministry of ﬁnance should be prepared to pay for

the costs of sterilizing that liquidity. But not paying interest on a sterilized account is a rather

crude approach, as the transfer depends on other money market developments and may also

undermine the treasury’s willingness to use the mechanism. In the long run, if the central

bank is chronically in deﬁcit, it should be recapitalized from the budget or from long-term

government securities issued to it.

E. The TSA outside the Central Bank

In some countries, notably, but not only, in Latin America, government balances are partially

or totally held outside the central bank, in a government-owned commercial bank. Such a

bank can provide the pooling function of the TSA and help to protect the central bank from

ﬂuctuations in the government’s cash position (although in practice the effect of the daily

ﬂuctuation may be passed onto the market or to the central bank via the intermediary bank’s

transactions

However, implementation of this model requires some safeguards:

• A clear agency agreement giving the treasury unambiguous control over all government

balances, backed by timely and detailed information on those balances.

• Good coordination and information sharing.

• A market-based risk assessment of the bank, reducing any potential exposure of the

government to credit risk and moral hazard.

• Financial and cost transparency, covering the costs and activities performed on behalf of

the government.

Government-imposed requirements on the intermediary bank’s business model may also

leave the bank ill equipped to compete with more conventional banks. The bank may have

become heavily dependent on government deposits or collection lags to ﬁnance its business.

It may already be stretched ﬁnancially, possibly as a result of having to meet social obligations

imposed by government. In other respects, competition may be affected by the bank having

inside information about government business.

This model cannot be unwound overnight. If the withdrawal of excess balances is too

rapid, the bank’s balance sheet may have to shrink signiﬁcantly, notwithstanding the payment

In Peru, the central bank does not allow the Banco de la Nación to use the interbank market, in order to pre-

vent a government’s excess or shortage having an impact on the overnight interbank rate.

16 Technical Notes and Manuals 12/02 | 2012

of transactions fees. This may require a phased withdrawal of balances to give the govern-

ment-owned commercial bank some room to adjust.

The government may, of course, wish

to continue using the bank for transaction purposes, particularly where it is the only one with

a presence in smaller towns and rural areas. In turn, this might constrain its ability to hold

unrestricted competition, but over time it is important to remove internal cross-subsidies, and

if there are social obligations, they should be subsidized more transparently.

F. Remuneration of Treasury Deposits by the Central Bank

Agreement is also needed on the rates of interest paid on the TSA balance and any other gov-

ernment deposits at the central bank.

It is good practice to pay a market-related interest rate:

• This improves transparency and avoids the implicit cross-subsidy associated with ad-

ministered rates.

• It removes the incentive for the treasury to make economically inappropriate decisions

in relation to its balances, such as placing funds in commercial banks with low credit

ratings.

As emphasized above, a corollary is that, in the interests of transparency and proper ﬁ-

nancial incentives, the treasury should pay transaction-related fees. The main beneﬁt of such

reciprocal arrangements between the treasury and the central bank is the avoidance of poten-

tial distortion to treasury choices about how best to invest surplus cash. For example, if the

central bank does not remunerate the deposits in the TSA, the treasury and MDAs may tend

to invest cash surpluses in commercial banks even without adequately evaluating the risk.

It is not always easy to move completely in this direction. There may be legislative con-

straints or pressures on the central bank’s balance sheet. In the short term, it may be expedi-

ent for the treasury to forego interest on a portion of the balances (although if it foregoes the

part lying below a certain threshold, the correct incentives will still apply to balances above

the threshold).

International practice varies. Interest is paid by central banks in proportionately more

developed countries than in emerging market or low-income countries.

Some examples are

Some counties, however, have adjusted their arrangements in recent years to mitigate some of the problems

that can arise. In Peru, only a modest balance is left at the end of the day in the government’s account in the Banco

de la Nación, with cash surpluses or deﬁcits being settled with the government’s main account in the central bank.

In Chile, the government now deploys surplus short-term cash across a wider range of investments in the domes-

tic market, which may include putting term deposits in the central bank, rather than leaving it all with Banco del

Estado. In addition, the Chilean central bank is to be given notice of any one-off movement of substantial balances

from a commercial bank to the central bank to allow it to take into account the impact on liquidity; the central bank

may also prefer a staged process.

There are some notable exceptions, including the USA, although there market interest is paid on revenue

receipts held in Treasury Tax and Loan accounts.

Technical Notes and Manuals 12/02 | 2012 17

provided in Box 4. A sound practice would be for the interest rate paid to the treasury to be at

the same level as the market overnight rate or the central bank’s policy rate.

G. Other Issues

In countries with less developed money markets, the constraints on liquidity management

may force the TSA held at the central bank into overdraft. Limitations on the use of the over-

draft should be deﬁned, and the treasury should give reasonable notice to the central bank

of any drawdown. The payment of a market interest rate should act as a disincentive to use

it. Any overdraft should be used only for very limited short-term borrowing, and be repaid

before the end of the ﬁscal year.

Countries with a structural surplus of cash, such as from natural resources, may hold it

in the central bank, but outside the TSA in some form of sovereign wealth fund. The rules

to create and operate these accounts should be clearly deﬁned, particularly in relation to the

treasury’s ownership of the resources, even if, in practice, the management of the account is

Box 4: Interest Paid on the TSA: Some International Experience

The payment of interest by the central bank is relatively rare among sub-Saharan African

countries, where there are often legislative constraints (South Africa and Ethiopia are

exceptions). This has also been the case in the past in Latin America, although interest

is now paid on balances in Peru and Mexico, and Chile currently earns a market rate on

most of its cash balances.

The benchmark rates that are used vary. They include the rates available for nonbank

deposits at commercial banks (Peru, Belarus, China) or for interbank deposits (Mexico);

the rates received on recent T-bill or related tenders (Italy, South Africa, Canada);

and the rates on counterpart assets held by the central banks (Brazil, Trinidad and

Tobago, countries in the Eastern Caribbean Currency Union). Benchmark rates also

include those linked to the central banks’ policies or corridor rates (the case for several

Eurozone countries, although different rates may be paid according to whether or not

the balances exceed target levels. Some other countries operate a similar size-related

schedule, such as in Mauritius). There are other examples where the interest paid is at

rates below the market’s rates (Philippines, Macedonia, and Vietnam), although currently

low international interest rates often make the differential negligible. The use of the rate

on counterpart assets when the balances are large helps to protect the central bank’s

balance sheet, although, arguably, it is then acting as agent, and the treasury should

have a role in identifying the assets. The same general point applies to those wealth

or stabilization funds held on central banks’ balance sheets (for example, Botswana

and Peru). In Brazil, the counterpart assets mirror the outstanding stock of debt in the

market. This gives the monetary authority a range of instruments to use as collateral,

and also remunerates the treasury at a rate that reﬂects the overall cost of debt.

Many central banks that do not pay market interest rates on the main TSA current

account are willing to do so on term deposits.

18 Technical Notes and Manuals 12/02 | 2012

provided by the central bank. Transparent governance mechanisms should be deﬁned, includ-

ing those for investments and reporting.

V. Coordination Structures

As discussed above, the coordination between the treasury and the central bank should

encompass both policy and operational aspects. On policy, it is important to ensure the

coherence of ﬁscal and monetary policies; this is high-level coordination. For operations, the

main aspects would be related to the functioning of the TSA, issuance of bonds and bills, and

market development.

The relationship should operate at different levels, reﬂecting the nature of the issues being

addressed. It is helpful to distinguish between:

• Meetings at the level of minister/governor, which may be shadowed by meetings be-

tween senior ministry and central bank ofﬁcials.

• Standing committees, for example, a public debt committee and treasury liquidity, or

cash coordination committees.

• Technical working groups.

• Day-to-day operational interactions.

The overall relationship between the treasury and the central bank needs to be clariﬁed at a

high level. This will, in turn, depend on the respective roles and responsibilities. They may be

speciﬁed in legislation. At the other end of the spectrum, there may simply be an exchange of

letters. Nonetheless, there are two types of issues that need to be addressed at the senior level:

• How to ensure policy coherence, as discussed above. This needs some formal mecha-

nism that does not compromise the central bank’s operational independence. It might be

done through a monetary policy committee on which the ministry of ﬁnance is repre-

sented as an observer,

or through some other forum, such as a PDC. A PDC, chaired

by a minister or senior ofﬁcial, would consider the debt (and cash) management strategy

that integrates the asset-liability management analysis of the government’s balance sheet

into a broader macroeconomic framework. It would then delegate the execution of the

strategy and monitor its achievement. Such a committee can ensure that all relevant

interests and experts are consulted (macro and ﬁscal teams in the ministry of ﬁnance and

The observer should not have any role in relation to monetary policy decisions, which are the prerogative of

the central bank. An arrangement along these lines operates in the UK, where a representative from the Treasury

acts as an observer at the Bank of England’s Monetary Policy Committee. He or she takes no part in setting interest

rates, but this mechanism provides an opportunity for the Treasury to set out its latest ﬁscal and debt management

policies, and for the Bank of England to offer its comments. In addition, the objectives of the UK Debt Management

Ofﬁce include consistency with the aims of monetary policy.

Technical Notes and Manuals 12/02 | 2012 19

the central bank), and agree on a strategy.

At the same time, the PDC will help buttress

the operational independence of the debt and cash management functions by reducing

the risk that other functions might try to second-guess, or intervene in, operational deci-

sions once the strategy has been set.

• These formal mechanisms need to address policy clashes or other misunderstandings

that threaten to damage the effectiveness of either institution. When needed, such issues

might conveniently be added to the agendas of the regular meetings—that happen in

most countries with varying degrees of formality—between the governor of the central

bank and the minister of ﬁnance. Such arrangements will do more than ﬁre ﬁght prob-

lems. There may be areas of coordination to be explored, such as those related to sharing

the investment in new databases, where a high-level stimulus might be needed.

• Such mechanisms can also guide major one-off decisions. One example is central

bank recapitalization, which needs to address the form of remuneration. If securities

are used, as is typically the case, they should be made marketable, with the maturity

proﬁle adjusted to take account of the central bank’s collateral requirements, the gov-

ernment’s own reﬁnancing proﬁle, and the nature of the market’s demand in the event

that they are sold.

Some form of protocol, terms of reference, or memoranda of understanding may cover

operational interaction. It would set out the relevant issues and the route for consultation,

covering, for example:

• The joint program for the development of the money market.

• The manner in which the central bank should report its perspective on the views of the

market and investors regarding the debt and cash management program for the coming

period (although this might be covered by the PDC).

• The central bank’s own views on new cash management operations that could have

liquidity implications.

• Policies and operations for bill issuance, given the need for an agreed strategy for the

development of the bill market and the respective roles of CB-bills and T-bills.

• The agreement between the central bank and the ministry of ﬁnance on a common list

of primary dealers or auction counterparties (although more commonly that is left to

each institution).

The strategy needs to analyze the risks inherent in the government’s aggregate balance sheet, including both

assets and liabilities. This involves taking into account the size and composition of the foreign currency reserves.

Similarly, investment objectives for the reserves—notably liquidity, safety, and return—should be considered in the

context of strategic objectives for other parts of the government balance sheet, including the debt portfolio. The

PDC would have an important role in ensuring a full asset-liability management analysis, as well as developing

policy in that context.

In Brazil, the treasury and the central bank have agreed on a common set of criteria, although the treasury

determines who participates in its auctions.

20 Technical Notes and Manuals 12/02 | 2012

• The payment of interest on government balances at the central bank. This has to be

agreed at the policy level, but the basis of interest—maturity, relevant market analogues,

etc.—should also be identiﬁed.

• The arrangements for the exchange of information about cash ﬂow forecasts (responsi-

bilities and frequency).

• The mechanism of communication and the issues covered (for example, the prospective

auction schedule).

• Determinants of such issues as the timing within the day or week of respective auctions

or tenders, and the associated market announcements and any prior warnings.

• In countries where the treasury is able to borrow from the central bank, the protocols

regarding the limits (sums, maturities, roll-over capabilities, etc.) of such borrowing.

The published agreement between the Ministry of Finance and the Central Bank of Iceland

sets out the central bank’s functions as ﬁscal agent and debt manager, and could therefore

serve as a useful example for how the ofﬁcial interaction could be deﬁned.

It does not cover

all the above issues in detail, but ranges widely across issues regarding the management of

domestic government securities; the management of foreign debt; government guarantees and

relending; information disclosure; risk management and liquidity management; and consulta-

See http://eng.fjarmalaraduneyti.is/media/ﬁnances/Agreement_between_MoF_and_CBoI.pdf.

Box 5: Cash Coordinating Committee

Members

• Head of Treasury (chair).

• Head of Debt Management Ofﬁce (DMO [if not integrated with treasury]).

• Head of Fiscal and/or Budget Directorate.

• Representative of the Central Bank.

• As required: representatives of the revenue administration, customs, and/or repre-

sentatives of larger line ministries.

• Secretary from the Treasury or DMO.

• Other units on a need basis.

Responsibilities

• Reviewing cash ﬂow outturns, and the comparison with forecasts.

• Reviewing cash ﬂow forecasts for the period ahead.

• Deciding on the action needed to ensure cash adequacy over the coming time

frame, or how to use surpluses to best effect.

• Making recommendations and/or instructing the front ofﬁce accordingly, setting

parameters for delegated authority.

Technical Notes and Manuals 12/02 | 2012 21

tion arrangements between the ministry and the bank. Although there is no published SLA,

the aggregated service payment is speciﬁed in the arrangement.

In practice, the issues listed may be captured in more than one protocol. There often will

be separate protocols, as speciﬁc policy decisions have been codiﬁed. The arrangements for

handling auctions will often be separately prepared along with published guidance or regu-

lations. In Peru, there is a detailed memorandum (in the form of a ministerial resolution)

covering the terms and conditions, and procedures applying to treasury deposits at the central

bank (although it does not cover the rate to be paid on domestic currency deposits, which is

separately determined by the central bank).

Several countries have found it convenient to establish some form of cash coordinating

committee (CCC) or liquidity committee. It might meet weekly or monthly to consider cash

management requirements and consequent activity for the period immediately ahead. A typi-

cal example is illustrated in Box 5. The CCC might be the mechanism which exchanges cash

ﬂow forecasts with the central bank, and reviews the cash management operations for the

coming period. Separate technical committees may need to be established to handle speciﬁc

issues, such as the introduction of a new instrument.

VI. Service Level Agreements

The central bank will supply a number of services to the treasury. The most important of

these will be as banker, although the central bank will also provide some services that fall un-

der the general heading of debt and cash management. These may include fulﬁlling the roles

of ﬁscal agent, settlement agent, and/or registrar/paying agent. At the same time, the treasury

will provide services to the central bank; some examples have already been mentioned above,

notably the cash ﬂow forecasts.

Although the general nature of the services may be covered by a memorandum of under-

standing, if there is an identiﬁable service of a quasi-contractual nature being supplied, this

fact should be made explicit. Having a full-ﬂedged contract between two organizations that

are guaranteed by the central government may be inappropriate. However, some form of SLA

would be expected to give weight to the expectations on both sides.

Issues covered by the SLA might include:

• The notice that both sides would give of any impending changes in the auction pattern

or timetable.

• The central bank’s turnaround times in handling any relevant transactions as ﬁscal or

settlement agent.

• Details of information ﬂows in both directions, with the intended timing schedule (for

example, cash ﬂow forecasts or transactions across the TSA).

22 Technical Notes and Manuals 12/02 | 2012

• Details to be supplied by the central bank, speciﬁcally in its role as banker, on move-

ments through the TSA during the day (or how it is otherwise to give the treasury some

visibility). These arrangements will also cover the formal statement at the end of the day

on opening and closing balances, as well as transactions.

• The basis of the calculation of fees paid for services. This might include compensation

arrangements for any failure to meet the speciﬁed level of service.

• Details of the rate of interest to be paid on government accounts, including the use of

any reference rate, and the circumstances in which it might be changed.

• The exchange of risk-related information. Increasingly in the ﬁnancial services sector, a

signiﬁcant supplier of services is required to present external audit evidence of the ap-

propriateness and adequacy of its internal control system to the principal. If that is not

possible in the case of the central bank, some analogue should be explored.

• The handling of any business continuity problems.

• The arrangements for handling disputes, reviewing the central bank’s performance under

the SLA, and for future review or renegotiation of the SLA.

Some SLAs are published. In France, the agency with the responsibility for debt and cash

management (Agence France Trésor) has published the details of its agreement with the cen-

tral bank concerning the TSA.

It speciﬁes the instruments used by the bank to ensure that

the French Government can keep track of the transactions in its account in real time, and use

that visibility to reduce the average unused account balance. In addition to details of infor-

mation ﬂows and execution deadlines, it also speciﬁes service availability covering technical

incidents and the implementation of backup procedures. Finally, it requires compensation for

investment opportunities that are missed as a result of the central bank’s inability to honor its

contractual commitments. In Romania, the Ministry of Public Finance has an extensive SLA

with the central bank. It covers the operation of the TSA (both domestic and foreign currency

accounts including interest paid); the roles of the bank as ﬁscal agent, government bond

registrar, and settlement and paying agent; and the participation of the ministry in the pay-

ments systems. It sets out the rights and obligations of both parties, including those relating

to operational risk management, and lists the transaction-based fees in detail.

The arrangements with the transactions banks should normally be covered by a more

conventional contract.

See http://www.aft.gouv.fr/article_787.html.

Technical Notes and Manuals 12/02 | 2012 23

VII. Conclusion

The development of a modern cash management function potentially affects the operations,

ﬁnances, and balance sheets of the government, central bank, and commercial banks. The

implications and management of this function depend on the wider relationship between the

treasury and the central bank, the characteristics of monetary policy operations, the gover-

nance structures, and any prior monetary conditions:

• The reforms will usually move government cash from the banking sector into the central

bank. This reduction in idle cash will beneﬁt the treasury, but at a cost to the commer-

cial banks.

• There may be a cost to the central bank if it pays interest (as it should) on the treasury’s

balances. At the same time, the drain of cash from the banking system should in most

circumstances support the central bank’s monetary policy operations.

• As the treasury builds its capability for managing cash more actively, there will be ben-

eﬁts both to the government and to the central bank’s monetary policy operations, ﬂow-

ing from the reduced ﬂuctuations in the government’s balances in the TSA.

• Structural reforms to remove cross-subsidies and improve transparency, including the

introduction of transaction fees, may have further effects, although net additional costs

could fall on either the treasury or the central bank. There may be also a presentational

challenge for the government as, for the ﬁrst time, payments are put more transparently

into the budget.

There will be transitional issues that need to be addressed. The central bank must accept a

change in roles and responsibilities, and any one-off shift in ﬁnancial ﬂows should be phased

over a period if it would otherwise complicate monetary policy operations. Implications for

balance sheets will need to be monitored.

The institutional relationship between the treasury and the central bank needs to be struc-

tured at different levels. There will be points of contention regarding where market or liquid-

ity risks should fall; on respective operational requirements; and on how best to meet interest

or transactions costs. At the same time, there are beneﬁts from operational coordination, and

also common policy interests, especially in creating an efﬁcient money market. Memoranda of

understanding will need to be put in place. The services supplied by the central bank to the

treasury should be covered by an SLA. None of these measures should jeopardize the inde-

pendence of the central bank in relation to monetary policy.

24 Technical Notes and Manuals 12/02 | 2012

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TNM/12/02

International Monetary Fund

Fiscal Affairs Department

700 19th Street NW

Washington, DC 20431

USA

Tel: 1-202-623-8554

Fax: 1-202-623-6073

Government Cash Management:

Relationship between the Treasury

and the Central Bank

Mario Pessoa and Mike Williams

Fiscal Affairs Department

INTERNATIONAL MONETARY FUND

Technical noTes and Manuals