Cash Forecasting and cash Management in Georgia

1. Cash Forecasting and cash Management in Georgia Nino Tchelishvili May, 2014

2. Cash Planning And ManagementObjectives in Theory According to IMF Guidelines for Public Expenditure Management: • As an integral element of public expenditure management, governments need to develop cash planning and management to keep within budgeted expenditure in cash terms; • To prevent unanticipated borrowing that might disrupt monetary policies; • To help identify the need for in-year remedial fiscal action. Treasury PFM Reforms

3. Cash Planning And ManagementObjectives in Theory According to IMF Guidelines for Public Expenditure ManagementCash planning has three main objectives: • To ensure that expenditures are smoothly financed during the year, so as to minimize borrowing costs; • To enable the initial budget policy targets, especially the surplus or deficit, to be met; • To contribute to the smooth implementation of both fiscal and monetary policy.  Treasury PFM Reforms

4. Cash Planning And Managementeffectiveness in Theory According to IMF Guidelines for Public Expenditure Managementan effective cash planning and management system should: • Recognize the time value and the opportunity cost of cash; • Enable line ministries to plan expenditure effectively; • Be forward-looking--anticipating macroeconomic developments while accommodating significant economic changes and minimizing the adverse effects on budget execution; • Be responsive to the cash needs of line ministries; • Be comprehensive, covering all inflows of cash resources; • Plan for the liquidation of both short- and long-term cash liabilities Treasury PFM Reforms

5. Cash Planning And ManagementGeorgia Context Why Cash planning and Management is significant to us: • To ensure that expenditures are smoothly financed during the year, so as to minimize borrowing costs/to optimize opportunity costs; • To help identify the need for in-year remedial fiscal action; • To contribute to the smooth implementation of both fiscal and monetary policy; • To contribute to gradual development of the securities market in Georgia; • To gain additional revenues from spare liquidity; Treasury PFM Reforms

6. Treasury Single Account • Treasury Service is a direct participant of the Real-time Interbank settlement system (RTGS) • Treasury Single Account is correspondent account of the Treasury in the National bank of Georgia – connected through RTGS; • Treasury Single Multi-Currency Account is held at the NBG – connected through SWIFT; • Credit side: Subaccounts to the TSA (Treasury Codes) for each tax and other receipts type is opened in the Treasury Information system; • Debit side: Subaccounts to the TSA (Treasury Codes) for each budget line is opened in the Treasury Information system; Treasury PFM Reforms

7. Central Bank - Fiscal Agent of the Government • According to the Organic Law about NBG: • NBG is a Fiscal Agent for the Government; • NBG does not charge transaction and commission fees on government transactions; • NBG does not pay interest on Government account balances; • Part of the Profit (after replenishing reserves to the reasonable level) of the NBG is transferred to the Budget; Loss of the NBG is covered by the Government; • Direct lending to the Government is not allowed; Treasury PFM Reforms

8. Cash Planning And ManagementProcedures and Practice Cash planning formal procedures: • Official scheme: Treasury Prepares monthly cash plan using the historical spending data and contract payment schedules. The plan is approved by the Minister; • Strictly followed by the Treasury; • Quality of plans is quite good; Cash planning practice: • Line ministries prepare two weeks cash plans with the daily breakdown. • Treasury consolidates the requests and prepares total cash request of the government for two weeks; • Line ministries strictly follow the plan, but overspending is allowed within total daily limit; • Quality of forecasts is very poor; Treasury PFM Reforms

9. Cash Planning And Managementin Practice • Despite Budget permanently runs deficit at about 3%, there is always large amount of spare cash on the TSA (i.e. smooth financing of expenditure ensured); • Internal Borrowing has a form of selling Government securities (2, 5, 10 year maturity Bonds); • Borrowing from the market follows initially planned pattern which is agreed with the Central Bank (deficit target always met); Treasury PFM Reforms

10. Investing on financial marketsBackground • Budget Code allows government to deposit liquidity for the purpose of generating additional revenue • Draft Liquidity Guideline developed that allows Government to put its spare cash on term deposits; • Other than term deposits financial instruments are not at Government’s disposal as NBG asserts they may hinder smooth implementation of monetary policy. • In general, Treasury does not perform any type of investment activities in a financial market Treasury PFM Reforms

11. long term financing resource for the Economy • Law on 2014 State Budget gives the exact description of the specific investing activities: • MOF issues Bonds with 2 years and 5 years maturity 100 mln GEL each. • Commercial Banks have quotas for procuring securities according to their equity share to the total Banking Assets; • Treasury Service opens term deposits in the commercial banks with the respective amount to the procured bonds; • Interest rate on deposits is coupon plus 1%. • Banks can use Government Bonds as a collateral on Central Bank refinancing auctions, holding Government term deposits at the same time; Treasury PFM Reforms

12. Questions for Considerations • What are the most appropriate banking arrangements for the Governments; • What are reasonable financial instruments for the Government Treasuries to ensure monetary policy is not disrupted; • Strengthen Financial Risk management component in Government Treasuries. • Insufficient Capacity in Government Treasuries; Treasury PFM Reforms

13. Treasury PFM Reforms Thank you for your attention! www.mof.ge www.treasury.gov.ge