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Issues of non-consolidated bank accounts

Efficient management and control of a government’s cash resources rely greatly on the government’s banking arrangements. Those arrangements should be designed to minimize the cost of government borrowing and maximize the opportunity cost of cash resources. This requires ensuring that all cash received is available for carrying out government’s expenditure programs and making payments timely.

Many countries have fragmented systems for handling government receipts and payments. In these countries, the ministry of finance lacks a unified view and centralized control over government cash. As a result, cash lies idle for extended periods in numerous bank accounts held by spending agencies while the government continues to borrow to execute its budget.

How governments can pay for institutional deficiencies

A government lacking effective control over its cash resources can pay for its institutional deficiencies in multiple ways. Here’s three of them.

Idle cash in bank accounts often fails to earn market-related remuneration.
The government, being unaware of these resources, incurs unnecessary costs by borrowing to cover a perceived cash shortage.
Idle government cash balances in the commercial banking sector are not idle for the banks themselves, and can be used to extend credit. Draining this extra liquidity through open market operations also imposes costs on the central bank.

TSA and the ideas behind it

A treasury single account is based on the principle of unity of cash and unity of treasury. It is a bank account or a set of linked accounts through which the government transacts all its receipts and payments to ensure effective aggregate control over cash balances. The consolidation of cash resources through a TSA arrangement minimizes borrowing costs, and effective aggregate control of cash is also a key element in monetary and budget management.

Other objectives for setting up a TSA include minimizing transaction costs during budget execution, notably by controlling the delay in the remittance of government revenues (both tax and nontax) by collecting banks, and making rapid payments of government expenses; facilitating reconciliation between banking and accounting data; efficiently controlling and monitoring funds allocated to various government agencies; and facilitating better coordination with monetary policy.

The central bank acts as the fiscal agent of the government, so custody of the TSA in most countries is with the central bank. In theory, the main account of a TSA system may be held at a commercial bank; A full-fledged TSA shares three essential features: in practice, the government banking arrangements may consist of several bank accounts at both the central bank and commercial banks.

Three essential features

The government banking arrangement must be unified

The unified structure allows complete fungibility of all cash resources, including in real time if electronic banking is in place and enables ministry of finance oversight of government cash flows in and out of the bank accounts. The TSA structure can contain ledger subaccounts in a single banking institution and can accommodate external zero-balance accounts in multiple commercial banks.

No other government agency operates bank accounts

Options for accessing and operating the TSA depend primarily on institutional structures and payment settlement systems.

The consolidation must be comprehensive and encompass all resources

All public monies must be brought into the TSA structure regardless of whether the corresponding cash flows are subject to budgetary control—for example, in the case of reserve funds, earmarked funds and other off-budget/extra-budgetary funds. The cash balance in the TSA main account is maintained at a level sufficient to meet the government’s daily operational requirements, sometimes together with an optional contingency or buffer/reserve to meet unexpected fiscal volatility.

Benefits of a TSA

TSAs offer multiple advantages over fragmented cash management.

Allows complete and timely information on government cash resources

The data is available in real time in countries with advanced payment and settlement systems and an integrated financial management information system (IFMIS). At a minimum, complete updated balances should be available daily.

Improves appropriation control

The TSA ensures that the ministry of finance has full control over budget allocations and strengthens the authority of the budget appropriation. When separate bank accounts are maintained, the result is often a fragmented system, where funds provided for budgetary appropriations are augmented by additional cash resources that become available through various creative, often extra-budgetary measures.

Improves operational control during budget execution

When the treasury has full information about cash resources, it can plan and implement budget execution efficiently, transparently and reliably. Uncertainty about whether the treasury will have sufficient funds to finance programmed expenditures may lead to sub-optimal behavior by budget entities, such as exaggerating their estimates for cash needed or channeling expenditures through off-budget arrangements.

Lowers liquidity reserve needs

A TSA reduces the volatility of cash flows through the treasury, thus allowing it to maintain a lower cash reserve/buffer to meet unexpected fiscal volatility.

Reduces bank fees and transaction costs

Fewer bank accounts mean reduced banking fees and lower administrative costs for maintaining the government accounts, including the cost of bank reconciliation.

Facilitates efficient payment mechanisms

A TSA ensures there is no ambiguity regarding the volume or location of government funds, and makes it possible to monitor payment mechanisms precisely. Economies of scale in processing payments can substantially lower transaction costs. When a TSA is established, the “float” in banking and payment systems is usually eliminated and transparent fee and penalty structures for payment services are introduced. Many governments, such as Nigeria or Estonia, have achieved substantial reductions in their real cost of banking services by introducing a TSA.

Improves bank reconciliation and quality of fiscal data

A TSA allows for effective reconciliation between the government accounting systems and cash flow statements from the banking system. This reduces the risk of errors in reconciliation processes, and improves the timeliness and quality of the fiscal accounts.

Enables efficient cash management

A TSA facilitates regular monitoring of government cash balances. It also enables better cash output analysis (e.g., identifying causes of variances and distinguishing causal factors from random variations in cash balances).

Difficulties that may arise during implementation

Establishing a TSA usually requires a legal basis to ensure its robustness and stability. Being legally recognized is thus a precondition that is particularly important in countries where the presumed autonomy of some institutions poses an obstacle to implementing a TSA. For example, the ministry of defense and other institutions that process state secret information may need autonomy. Several legal matters need to be resolved such as:

Does the government have the legal right to use, even temporarily, the surplus cash available in trust funds (such as for social security and pensions) to ensure cash fungibility for meeting its short-term cash needs, given that the government only manages these resources as a trustee?
Is there a risk that the government may use the cash reserves in such trust funds to finance short-term budget deficits and overlook long-term liabilities and statutory obligations to make other payments?
Does an extra-budgetary fund have separate legal status and/or a claim to operational autonomy, thus making a case for its operating outside the TSA?

Many stakeholders will be involved—including the budget office, the institution responsible for accounting and payments, the central bank, the institution responsible for debt management, and commercial banks. Thus, good communication and their efforts for successful implementation of TSA are critical to its success.

Case study

In 2011-14 Nortal helped Nigerian government implement an integrated financial management information system in Nigeria, helping the country to save billions of euros.

Conclusion

TSA adoption will enable a government and the public to know the consolidated position of government cash resources at any time, facilitate timely decision-making, allow flexibility in funding the budget, minimize idle cash holdings, eliminate float in the system, facilitate planning to meet fund gaps, minimize borrowing charges, eliminate the need to allocate cash to government Institutions that may not be used until later, and much more.

Establishing an effective TSA significantly reduces debt servicing costs and helps a country make a strong leap into becoming a more trustworthy partner for international organizations and investors. Through improved cost and operational performance, capturing the full potential of government digitalization could also save millions on bank transaction fees. Successful application of information technology will determine the future success of revenue bodies in managing compliance risks and meeting rising service expectations.

Additional resources

IMF Working Paper, “Treasury Single Account: Concept, Design, and Implementation Issues,” by Sailendra Pattanayak and Israel Fainboim, 2010
IMF Country Report No. 09/315, Documents of the 2009 Article IV Consultation discussions with Nigeria; November 2009
“Nigeria ministries get single bank account to fight fraud“, BBC.com, September 15th 2015

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