The talks on implementing Treasury Single Account [TSA] are back in action. It is perhaps one of the IMF to be conditions, as the Fund did try to implement it back in 2009, but that never really happened. The intent is right as the in international public finance literature, there are advantages of knowing the daily cash flows to know about the exact borrowing requirement and theoretically, it can reduce the short term borrowing needs.
However, there could be issues in operational management and the government has to do it right so that there is no panic in the market. The TSA in IMF 2008 programme was scheduled to complete by Jun 2009. But at that time it was communicated to the Fund that it was not feasible to done in that timeframe. The reason sighted was that to avoid destabilizing outflow of deposits from the banking system, the mechanism needed more time.
It was delayed to June 2010, subject to assessment of the impact on banking sector’s liquidity. Some of the cash was transferred while based on assessment, the rest was not possible to be moved due to restriction of donors or deposits were strictly classifiable or for certain purpose.
That is the history, now the issue is again in limelight. The question is what is the objective of the exercise and what does the government aspire to gain from it. If the point is to assess the cash position of government deposit at any given day and to optimally utilize it to reduce short term borrowing, a better option is to have an MIS system.
The idea is probably to use the amount from single account to the need at that time. But can the money of ministry of commerce be used by ministry of power? Or simply put, can provincial account be used by federal? More questions than answers.
If someone thinks this would reduce government borrowing from SBP or from commercial banks, without better cash management, this is not going to happen. If the government deposits are shifted to the SBP, the banks will have to retire T-Bills to the SBP or borrow through open market operations. In that case, effective borrowing from the SBP would remain the same.
The problem is that government deposits are skewed towards a few banks- mainly public sector banks. For instance, around Rs600 billion is deposited in NBP which is owned by government through central bank. The shift in deposits will increase the ADR of the bank and will limit its ability to incremental lending. Plus, this can create a bank run or serious liquidity problem for banks like BoK; where over 50 percent deposit base is government’s.
The second objective could be to not let the banks earn spread on government deposits i.e. investing government deposits in government papers by earning a spread. That can be resolved by making a return equivalent to T Bill on government deposit, mandatory. .
Rest, the debt to GDP ratio will remain as according to new FRDLA definition, government deposits are already subtracted from gross debt to compute net debt. Similarly, deposit flows are subtracted in calculating fiscal deficit number. Then in central bank survey, Rs64 billion and Rs326 billion of central and provincial government deposits are already held with the SBP.
The exercise was tried in 2009-10 and was stopped as not all the money could be shifted to central bank for host of reasons. How much of the existing Rs1.9 trillion could be shifted this time remains to be seen. Hence, caution is warranted. Better cash management aside, jolting the banking system could be counterproductive.