Federal govt’s TSA—A big step in the right direction

A Treasury Single Account (TSA) system reflects stronger internal controls over cash flows into and out of a government account. Among other things, it enables government to exercise oversight of its cash flows and optimizes domestic borrowing and related interest costs. The Constitution of Pakistan sets out a broad framework for managing public moneys from this perspective.

Article 78 stipulates that all revenues received by the Federal Government, all loans raised by that Government, and all moneys received by it in repayment of any loan, shall form part of one consolidated fund, to be known as the Federal Consolidated Fund (FCF).

Other types of money representing government obligations for payments shall be kept in the Public Account. Article 79 stipulates that the federal government shall formulate laws to elaborate on the processes to be followed in handling public money with reference to the FCF and the Public Account. However, it was only in June 2019 that the federal government enacted the Public Financial Management (PFM) Act 2019 to comply with this requirement.

Pakistan has a centralized PFM system and—since there was no legal framework until 2019 for the TSA, government entitiesf avoured keeping public money in commercial bank accounts outside of the FCF to manage their business efficiently.

Government entities avoided a lengthy, inefficient, and corruption-prone centralized payment authorization system through this practice. This was true not only for the Self-Accounting Entities (SAEs) but also for Ministries, Divisions, and Attached Departments thereof. SEAs included provisions in their governing laws to maintain commercial bank accounts. This practice mushroomed over the years and entrenched in the country’s PFM system.

In the years since June 2012, the amount held outside of FCF/TSA has increased from PKR 0.4 trillion in June 2012 to PKR 2.4 trillion till the end of June 2023. This represents about six-fold increase in the amount and reflects deterioration in internal controls over public money. The chart shows annual increase in the stock of federal government deposits in commercial bank accounts:

The practice is in vogue in provinces also where an amount of PKR 1 trillion was being kept in commercial accounts outside of the provincial consolidated funds in FY 2023 as per the SBP’s data.

The growth rate of federal governments’ deposit in commercial banks was 23% in the years between 2012 and 2017 falling to 11% in 2020. The rate accelerated to 20% and has maintained this momentum in the preceding three financial years. While the rate of growth is marginally lower now than it was before 2017, it continues to be worrying and needs to be arrested.

The trend is bad on many counts. First, it implies that many government entities might be getting budgetary grants despite having plenty of cash in their commercial bank accounts. Second, it indicates the government is borrowing more than it actually needs, and it is paying more in interest expenses on such borrowing—because a significant fraction of overall government funds is kept in commercial accounts and the government has no clue about it.

Together, this leads to fiscal deficits—and consequently to the ballooning of public debt. In the 10 years since 2023, the domestic debt has increased 270% from PK 9.5 trillion (38% of GDP) to PKR 35.1 trillion (46.6% of GDP). According to the SBP, the average interest payment (excluding principle amount) has been more than PKR 85 billion per annum in the recent five years.

The government borrows mainly from commercial banks to meet its deficits. Commercial banks make a lot of money from the government’s deposits—both by investing where viable, and by lending to the government’s funds to the same government. Absence of a robust TSA—which keeps government funds in one account, makes it difficult for government to know how much it needs to borrow and when. Thus, a government that has no TSA is forced into making sub-optimal decision about domestic borrowing and ends up paying more interest costs than would be the case otherwise.

The enactment of PFM Act 2019—that obligates the government to establish TSA, has changed cash management scene changed in the right direction. In line with this legal framework, Finance Division has notified Cash Management and TSA Rules 2020 whereby the FCF, the Public Account and the Assignment Accounts linked thereto shall form part of the TSA system. The Rules are applicable to Ministries, Divisions, and attached departments, and subordinate offices (MDAs)—categorized as TSA-1 while all other entities are defined as part of TSA-II.

Substantial progress has been made under TSA-I with 4,581 bank accounts out of the 6,610 accounts identified for the TSA-1, 4,581 accounts held by MDAs in banks were closed and an amount of PKR 4.95 billion transferred to the TSA by February 2022. A stricter regime has been introduced under which no new accounts for MDAs are being allowed without prior approval from FD. FD has also notified procedures for MDAs to manage their Public Account through the TSA-1.

Notable progress has been made under TSA-II. FD identified 28 entities including regulatory authorities, development organizations, Funds & Trusts and educational institutions. Sweeping arrangements are being implemented under which the funds available in the commercial bank accounts of TSA-II entities are swept out of these accounts and swept in the FCF. FD has developed and tested this procedure and notified a procedure for recording and reconciliation of daily receipt and payments. An amount of more than PRK 200 billion was brought under the TSA till the end of October 2023.

While this seems small compared to more than PKR 2 trillion reported as commercial deposits in FY 2023, it represents a significant progress. The federal government needs to maintain the momentum of reforms and focus on resolving a number of issues to accelerate progress on this front:

First, the government needs to review the nature and the applicable laws and regulations of government entities to determine which of them may maintain commercial accounts. All other entities—that don’t qualify for exceptions, should be consulted, and brought under the TSA system. Most entities operate subject to the laws and regulations framed before the enactment of the PFM Act and therefore there is a need to closely review and align these laws and regulations with the provision of PFM Act. Rules—including cash management and TSA policy also need improving considering the lessons learned during the implementation of TSA policy so far.

Second, there are entities that may pose challenge especially the ones falling in the national defense sector. It is hoped that the sweeping arrangements would be acceptable to such entities with few understandable exceptions as appropriate.

The entities don’t lose any control over the use of funds while the arrangements lead to saving of interest costs because money is kept in the STA where it meets the buffer requirements and affect the level of auction, hence the domestic borrowing and the interest costs.

Third, MDAs preferred holding funds in commercial accounts is to ensure interrupted business processes. The centralized government set up tends to negatively affect the flow of funds and efficiency in the operation of these entities. Now that the federal government has begun to implement online billing system—which slashing processing time for payments to vendors by two-third, this justification no longer holds water.

The online process is also being extended to development projects and public works departments which would bring significant cash flows under the TSA. It is important for the online system to establish its credibility to support transitioning toward the TSA.

Fourth, data sharing protocols need to be established so that updated information on cash inflows into, and out of TSA, is available live to decision-makers. While the national integrated financial management system collects and makes available aggregated information to decision makers, there is a time lag between the actual and reported flow of funds, which does not allow optimal decision making on cash.

A related area is capturing non-tax revenue in the cash flow system to improve budgeting. This is grossly neglected area as the mandate for it is scattered across the federal government, and no system is in place to effectively capture it in the country’s PFM system.

A robust TSA shall take a long time, consistent efforts, and sustained commitment from the political leadership. To a government entity used to holding funds in commercial accounts, switching over to the TSA is a big change. It creates the perception that the entity may not be able to use its funds as flexibly as it used under a strict TSA regime.

The TSA also makes cash position explicit for everyone, and there may be entities that would prefer to avoid such transparency. International evidence shows that an incremental approach that is backed with appropriate communication and change management is quite helpful. The SBP maintains useful dataset on classification and categorization of deposits that can used to guide way forward.

In short, the establishment of TSA is a major milestone achieved by the federal government and it is hoped the process will continue till the gaps noted above are resolved and the system aligned with best international best practices. While international financial institutions i.e. World Bank, IMF, etc., supported Ministry of Finance in the transitioning, the whole process was led by the officers of Ministry of Finance, which deserves appreciation.

Copyright Business Recorder, 2024