ICGFM Conference December 10-12, 2012 Washington DC

How to develop a cash flow forecasting system based on the concept of a Treasury Single Account: the case of Federal Government of Ethiopia Presentation by Negera Getachew and Kojo Oduro

Paper Outline
1. Country Background & PFM Reforms- Getachew Negera 2. Government Cash Management: Issues faced by developing and middle income countries and the key concepts- Kojo Oduro 3. The Treasury Single Account (TSA) and the challenges of its successful implementation to-date in most developing countries including Ethiopia-Kojo Oduro 4. The Operation of the ZBA before July 2011, the circumstances leading to the change and the impact thereafter-Getachew Negera 5. FGE Cash Management: Summary Analysis and Recommendations Kojo Oduro 6. A Cash Flow Forecasting framework based on the TSA, taking into account the operation of extra-budgetary funds and donor flows into government agencies: A framework that compares CFF to actuals and providing feedback- Kojo Oduro 7. Progress to-date and on-going challenges: what has been achieved and a realistic assessment of what is possible-Getachew Negera

Section 1:Country Background & PFM Reforms Getachew Negera Director of Treasury MoFED Federal Government of Ethiopia

Country Background
Ethiopia is the second most populous country in Africa with a population of above eighty million. The country is organised into a Federal Government, nine Regional State Governments and two City Administrations. The Regional Governments include Tigray, Afar, Amhara,Oromia, Somale, Benshagul-Gumuz, SNNP, Gambela and Harari, The Regional Governments have the power and functions to formulate and execute the economic, social and development policies, strategies and plans of the state; to levy and collect taxes and duties on revenue sources reserved to the state; and formulate and administer state budgets

Country Background
The federal and regional constitutions provide for a three-tier decentralization framework consisting of zones (clusters of districts), woredas (or districts) and kebeles (wards or neighbourhoods). The structure of government for all the regions is similar at all levels of government. The regional equivalent of the Federal MoFED is the Bureau of Finance and Economic Development (BoFED). In turn, there are ZoFEDs (for Zonal Administrations) and WoFEDs (for Woreda Administrations). Sector ministries at the federal level have their equivalents at lower levels of government: sector bureaus (SBs) at regional level and zonal and woreda offices at zone and woreda level. There are no zones in Tigray region; the relative responsibilities of the different levels vary somewhat across the regions.

Economic Context
Ethiopia has grown strongly in recent years, with real GDP growth of the order of 11 per cent over the last 2 years, with a similar rate forecast for 2011-12. The Ethiopian parliament approved a budget of ETB 137.8 billion for the 2012-13 fiscal year (about 21 per cent of GDP), an increase of 15 per cent from the preceding fiscal years budget. Of the approved budget: Federal capital expenditure ETB 55.5 billion(41%) Federal Recurrent Expenditure ETB 26.8 (20%) Regional governments direct subsidies represents ETB 36.5 billion (27 % ) ( recurrent ETB 27 Billion, Capital ETB 9 Billion) The expenditure targeted at millennium development goals ETB 20.0 billion(15%) The pro-poor sectors share: In the total spending: 70.4 %; In the GDP : 13.5 %

Economic Context: Financing of the Budget:

Of the Total Budget
69 % is from domestic revenue, 21 per cent from external grants, loans and credits, and 10 per cent is from domestic borrowing.

The source of domestic borrowing was not specified but was assumed to be the issue of Treasury bills (Tbills) The outstanding stock of Tbills was to double over 18 months (to the end of fiscal year 2011-12)
This would normally be considered an ambitious issue of stock

Economic Context
Government deficit financing contributes to inflation The IMF has identified the principal macroeconomic challenge as surging inflation, which reached 30 per cent in April 2011, specifically noting that: MoFED has emphasised the contribution of import prices to inflation According to government of Ethiopia the November /2012 inflation declines to 15 per cent.

Introducing the 2011 annual budget, the Prime Minister announced that the government would stop borrowing money from the NBE ( Central Bank). Other policy statements from the government reinforced that no further advances from the NBE, and that there should be direct control over cash disbursements.

Fiscal Management Context

The Treasury Directorate (TD) of MoFED has responsibility for executing the annual budget, including disbursing cash or expenditure authorities to spending agencies. It is also responsible for managing the governments aggregate cash resources with the objective of ensuring that commitments can be met without resorting to advances from the NBE.

Treasury Organisational Structure and Banking Arrangements

PBs CENTRAL TREASURY (MOFED) PBs

PBs

NBE (Central Bank)

SBs SBs SBs ZONES (ZOFED) ZONES (ZOFED)

REGIONAL (BOFEP)

CBE
Retail Banking

OFFICES OFFICES OFFICES

ZONES (ZOFED)

ZONES (ZOFED)

OFFICES OFFICES OFFICES

WOREDAS WOREDAS WOREDAS WOREDAS

WOREDAS WOREDAS WOREDAS WOREDAS

Reform Background on Cash Management

There have been PFM reforms dating back to 1996 with the 2nd phase in 2007 The cash management and disbursement reforms addressed:
the development of the Treasury Single Account (TSA) and the implementation of zero-balance accounts system a cash-flow planning system; and the modernisation of the payments and banking systems. The introduction of financial administration proclamation to support this area; However there remained a substantial future reform agenda, including the full implementation of the cash management system and the introduction of an Integrated Financial Management Information System (IFMIS) across government.

Section 2: Government Cash Management: Issues faced by developing and middle income countries and the key concepts Kojo Oduro Lead PFM Adviser Crown Agents, UK

A MYRIAD OF FACTORS AFFECT GOV CASH MANAGEMENT IN DEVELOPING COUNTRIES

The banking system is underdeveloped or underutilized Payments are made in banknotes Daily balances in all government accounts are unknown Unnecessary borrowing occurs Cash flow forecasts are not prepared Cash management is seen as another tool for expenditure control Expenditure arrears have arisen ( unrealistic projections on both rev & exp) IT systems are underdeveloped Lack of human capacityDecentralisation of operations and lack of communication infrastructure Large idle balances Lumpy demands for payment Roles are not clear: between MOF and the Central Bank Poor cash-debt integration Lack of market instruments: poor use of Treasury Bills

Cash management: What it is not !! And what it is.

Not about controlling the expenditure: Not the same as Budget Execution: Not about paying your bills late

Definition: The strategy and associated processes for managing costeffectively the governments short-term cash flows and cash balances both within government, and between government and the private sector

Objectives of cash management

The overriding objective of cash management is to ensure that the government is able to fund its expenditures in a timely manner and meet its obligations as they fall due Cost-effectiveness, risk reduction and efficiency are also important. Can reduce the demand for taxable resources by: Reducing administrative costs Reducing interest rate charges that they bear or increasing the amount of interest earned Reducing stock levels Reducing procurement costs Supporting other financial policies

Objectives
It can also:

Increase the reputation of the government for efficiency by:

Paying creditors at the appropriate time, and Collecting debts promptly and efficiently Supporting a credible budget process Reducing risks

Section 3: The Treasury Single Account (TSA) and the challenges of its successful implementation to-date in most developing countries Kojo Oduro Lead PFM Adviser Crown Agents, UK

The TSA?
The TSA is a unified structure of government bank accounts to give a consolidated view of government cash resources. A fully-fledged TSA shares three essential features: Government banking arrangements should be unified No other government agency operates bank accounts beyond oversight of the Treasury Consolidation of government cash resources should be comprehensive and include all government cash resources, both budgetary and extra-budgetary Sub-account structure may have cash, or notional accounts (i.e. ZBA) as the case of Ethiopia If there is cash in the sub-accounts this should be mopped up overnight, and the account replenished the following day

Why is the TSA important?

Allows the Treasury to minimize the volume of idle balances in the banking system, with consequent cost savings Extra cash requirement has to be financed by borrowing, the cost of which is usually much greater than the interest earned on any excess cash. Helps the Treasury to plan and implement budget execution efficiently and transparently; less uncertainty about cash availability Facilitates effective reconciliation between the government accounts and cash flow statements Reduces transaction costs associated with budget execution Makes it easier to monitor and reduce delays in remittance of revenues by collecting banks, and also to process expenses without the use of intermediate accounts

TSA Works with Different Payments Systems

Central Bank responsible for banking operations
Treasury responsible for payment processing

Commercial banks responsible for banking operations

Spending units responsible for payment processing

Ethiopia

Dispersal of payment responsibility tends to be associated with dispersal to the banking system A dispersed model is likely to be more robust in the longer term ( as it will support a growing complexity and volume of transactions ) but some countries centralise before decentralising Where transactional accounts are necessary, any end-of-theday cash balances should be swept back into the TSA.

TSA: Problems and Choices

Balances of extra-budgetary funds should preferably be included in TSA There may be policy resistance who controls the cash? Ideally the funds account is closed, and cash absorbed in TSA Cash balances integrated in the TSA; but the EBF retains a claim on the resources - a permission to spend Fall back: allow the EBFs to hold their cash but set up arrangements to allow EBF to lend the cash to TSA as needed In principle apply similar arrangements to donors accounts to finance projects Donors need to be reassured. One of the difficulties is how to integrate the TSA concept into the forecasting framework, to demonstrate to both Statutory Fund owners and donors that its is possible to incorporate their cash flows into central government flows without neutralising the independence of the operation of their funds

Section 4: The Operation of the ZBA before July 2011, the circumstances leading to the change and the impact thereafter Getachew Negera Director of Treasury MoFED Federal Government of Ethiopia

The Operation of the ZBA

The reform introduced zero-balance accounts (ZBA) for public bodies (PBs) operating in Addis Ababa to minimise idle cash balances in government accounts. It facilitated the payment of for government expenditure when they are due, It minimized government borrowing costs, and Making payments in real time, The system was operational for over six years until it was put in abeyance for the 2011-12 financial year. It appears this decision was taken in response to liquidity management in the banking system and the risk to inflation.

The Operation of the ZBA

The ZBA was organized along the following lines:
At the Branches of Commercial Bank of Ethiopia(CBE) Line ministries and agencies hold 140 bank accounts These Bank accounts are zero-balance accounts, MoFED has one subsidiary accounts at the CBE which uses to settle these Zero balance accounts ZBAs are linked to MOFED CBE subsidiary Treasurys account Payments were made by spending agencies from their ZBAs The cash was then electronically transferred to ZBAs to settle the credit balance This system meant that spending agencies accounts were automatically cleared and updated The National Bank of Ethiopia consolidated the main and subsidiary treasury financial positions and forwarded them to MOFED at the end of each day

The Operation of the ZBA

NBE main account

Treasury

transfers

CBE Subsidiary account

CBE

transfers
CBE Zero Balance Account

PBs

Payment to beneficiaries

The Operation of the ZBA

The introduction of ZBAs represented a major step forward in the control of idle cash; the main challenge was to roll out similar arrangements across all accounts at all levels. The ZBA cash management system supported a credible budget execution system in the government for a number of years: There was correspondence between the approved budgets and cash releases. Revenue performance from the Ethiopia Revenue and Customs Authority (ERCA) had been good, so that budgetary funds have been provided to PBs as requested.
Average revenue growth over the last three years has been about 37 % Revenue has been about 12.2% of GDP

Challenges of the ZBA

Until 2011, whenever there had been any shortfall, MoFED has taken advances from the NBE to supplement its cash resources. However because of capacity constraints, the cash forecasts from the MoFED was poor There were weaknesses also in the budget execution system in terms of effective control. The cash forecasting system was used as a budget control measure rather than to support the management of cash resources.( The forecasting system was made an integral part of the budget disbursement mechanisms) In addition, the CBE bank accounts served as budgetary control points rather than the relevant controls in the IBEX ( if no funds are in the bank account a PB could not spend; rather than if no budget in the IBEX system then no expenditure)

Strengths and Challenges

There were other problems as well: Even if ZBAs remained in operation, the TSA would still be underdeveloped because a large number of government bank accounts maintained separately (and with no overnight sweep into the TSA). The banking system remains inefficient, particularly outside Addis Ababa. The arrangements for short-term cash-flow financing fell well short of best practice. Treasury bill issuance by the central bank is driven substantially by monetary policy concerns and the coordination arrangements between MoFED and the NBE were weak In addition, there were weaknesses in procurement planning and IT infrastructure. The above challenges are still on-going

After Effect of the Suspension of the ZBA

However, the mid-2011 announcement put the ZBA in abeyance; The replacement of the ZBA with the Budget Account (BAccounts) system was that government cash was placed in public bodies bank accounts (at a zero interest rate). Increasingly cash disbursement begun to be constrained by rationing, notwithstanding the potential damage arising. The need for the authorities to establish a cash-flow buffer arose.

The New Intervention

Against this background, The Federal Government identified the need for further improvement in some areas and asked Crown Agents to assist in strengthening its capacity Specifically the MoFED engaged Crown Agents: To provide technical guidance To prepare a workable cash management and disbursement system manual, which would underpin an efficient and effective cash management system To guide the modernisation of the disbursement system based on best practices. To provide training as part of capacity building program within MoFED, federal PBs and regional finance and economic development bureaus.

Section 5:FGE Cash Management: Summary Analysis and Recommendations 7 Key Areas Kojo Oduro Lead PFM Adviser Crown Agents, UK

Summary Analysis & Recommendation

Disbursement and Payment system IBEX/IFMIS Procurement Planning Cash Flow Forecasting Cash Debt Integration Capacity Building in Cash Forecasting

Summary Analysis: Zero Balance Accounts

Ethiopias use of ZBAs was squarely in line with sound practice ZBAs are credit limits no cash advanced to PBs Cash stays in TSA until CBE presents payments to be cleared Minimises demands on cash, allows the TD to make best use of it until it is needed Limits managed by CBE In some countries the limits might be managed by the IFMIS, ie the banks would not be able to clear payments in excess of the limits identified in the IFMIS Putting the ZBAs on hold was a backward step Perhaps the benefits were unclear Cash again was advanced to PBs Some were inevitably be left idle in accounts in the CBE

ZBAs: Recommendations
The TD should revert to the use of ZBAs (but also deploy a cash buffer to cope with unanticipated cash demands). Improvements in cash flow forecasting will also give the TD more reassurance about the size of the cash buffer needed The ZBA system should be rolled out to all PBs, and providing that it is practical also to the release of cash to regions It will be facilitated by recent and prospective improvements in the banking network (although is strictly not dependent on them) Because of the extra complications associated with grants to the regions, give priority to rolling out ZBAs to all PBs

The Wider use of ZBAs

Similar ZBA arrangements could be rolled out to lower levels of government (and also to any rural PB offices that were not fully integrated in the banking network) But the smaller the sums the less the benefit In medium-term other options open up: Development and integration of banking system might allow transactions to be to be centralised at PB or BoFED or sector bureaus without ZBAs PBs could use IFMIS to set limits on cash transactions rather than ZBAs Policy towards lower level ZBAs should be reviewed during 2012 in the light of the programme for banking system developments

The Use of ZBAs: Summary

Solid arrows show existing or proposed ZBAs Dotted arrows show other cash flows (and potential ZBAs, see text) MoFED CTA

Grants to Regions

Regional BoFED RCA

ZBA, PBs in Addis

PBs outside Addis

Grants to Zones, Woredas

ZBA Regional SBs Dotted squares show existing ZBAs (pre July 2011)

Deconcentrated (local) PB Offices

Pool and other Accounts REGIONAL AND LOCAL GOVERNMENT

FEDERAL GOVERNMENT

TSA: Problems and Choices

Balances of extra-budgetary funds should preferably be included in TSA May be policy resistance who controls the cash? Ideally the funds account is closed, and cash absorbed in TSA Cash balances integrated in the TSA; but the EBF retains a claim on the resources - a permission to spend Fall back: allow the EBFs to hold their cash but set up arrangements to allow EBF to lend the cash to TSA as needed In principle apply similar arrangements to donors accounts to finance projects 200 such accounts in Ethiopia (A-accounts) Donors need to be reassured.

Disbursement & payment system- summary of analysis

The disbursement of funds and expenditure payment operates on three levels, namely: MoFED/TD systems for disbursing funds through the banking system to the PBs: with responsibilities divided between the Cash Management Unit (CMU) and the Disbursement Section(DS) The bank systems for transmitting funds from the Central Treasury Account: from the NBE to the CBE HQ for onwards distribution to CBE branches throughout the country; The PBs payment systems for the discharge of government obligations: made up of 173 budgetary institutions until 7 July 2011, and now rationalised to 124 PBs under Programme Budgeting The current disbursement system is a B-Account funding system at the TD level, with a decentralised payment system at the PB level

 The system of disbursing funds or cash at the FGE is undergoing changes, while the payment systems in the PBs essentially remain the same B-Account-ZBA-back to B-Account: At the Treasury level the system has changed from a B-Account (without cash forecasting) system to the ZBA back to the B-Account system (the latter 2 with cash forecasting) A Decentralised payment system: Both the B-Account system and ZBA operated in an environment of a decentralised payment system at the PBs level The Disbursement system has encouraged the CFF to be turned into request for release of funds: the CFF system is intertwined with the system for requesting funds from the TD Attention to details and accuracy lacking: In both cases not much attention has been paid to the details of the forecasts. The current B-Account system is almost close to a cash rationing regime: It has been in place for only 3 to 4 months, but its dysfunctional aspects

Summary of Analysis of the Disbursement System

DISBUSREMENT & PAYMENT SYSTEM: PBS ARE DIRECTLY RESPONSIBLE FOR PAYMENT PROCESSING IN A DECENTRALISED PAYMENT SYSTEM Budget Appropriation MoFED- BD Central NBE Treasury (The Ledger Central System Bank)(TSA) (IBEX) Reports to Treasury on Payments to Payment & Receipts Suppliers Accounts; Govt Receipts

MoFED- TD
MoFED- AD

Budget Appropriation

PBs

PBs Level Ledger System (IBEX) Expenditure transactions from PBs to TSA Bank; Reports to PBs on payment and Receipts

CBE as Fiscal Agent

Other Comm Banks

 Short term actions to make the B-Account System work better: 1. Clear and transparent rules for ordering payments should be established 2. PBs should prepare regularly the time profile of expected cash disbursements of outstanding spending commitments: by preparing for their own use a schedule of commitments and likely cash outflows on a regular basis to support better forecasts Medium to Long term considerations in the disbursement and payment systems to make the TSA/ZBA system work better: 1. Disentangle budget execution and cash management : the cash flow forecasts should be developed independently of budget execution requirements. 2. The IFMIS system should be used for monitoring and controlling commitments: This responsibility should not be passed on to the banks through the cash management system. 3. Avoid use of physical cash in the transactions whenever possible.

Disbursement & payment system- summary of recommendations

 Whilst some form of CFF by the PBs is in place, it is not well developed. Annual CFF not updated: The revenue forecast is done annually (the annual forecast is reasonable but could be improved further if it were updated in the same manner as the expenditure forecast) Monthly forecast are undertaken : The expenditure forecasts are done on a monthly basis rolled into quarters Manual: The process for collating the forecasts is unnecessarily manual It is closely linked with budget execution Lacks analysis: Little time is dedicated to analysing the forecasts against actual cash flows Feedback is not provided to the PBs or ERCA on their forecasting performance.

Cash flow forecasting (CFF) - Summary of Analysis

Cash flow forecasting-Revenue Recommendations

The TDs focus should be on getting the main revenue forecasts as accurate as possible. In practice, this means working closely with ERCA & PBs as relevant The annual revenue forecast should be updated on a monthly basis for the next three months, consistently with the expenditure forecasts Feedback provided to ERCA, and the PBs: The accuracy of the aggregate revenue forecasts (tax, non-tax, external assistance) should be assessed by the TD. The accuracy of the forecast should be separated from the achievement of ERCAs annual and disaggregated revenue targets. Disbursement patterns from external agencies should be monitored and assessed the pattern of any lags between commitment and disbursement. The TD should work closely with the Bilateral and IFI Directorates in MoFED to liaise with the agencies for up-to-date information. ERCA could work towards a target of improving its average forecast

Cash flow forecasting-Expenditure Recommendations

Annual Forecast on monthly Quarterly forecasts should also be updated on a monthly basis for three months ahead and they should show cash-flows on a weekly basis. The forecasts should roll into the next budget year. The forecasts should be e-mailed to the TD to separate the cash forecasts from budget execution and should include a disaggregation by current and capital spending. Any expenditure forecast above a certain threshold should be included as a separate item: say greater than ETB 1 million + (to be fixed by TD) and large projects that are in the pipeline should be forecast and monitored, even if they extend beyond the current year.

Cash flow forecasting-Expenditure Recommendations

The TD to conduct monthly CFF feedback sessions: The TD should compare the forecasts with actual cash-flows and determine whether current or capital spending is more accurate. The TD should hold monthly meetings with the largest PBs, initially with the five biggest capital spenders and the largest current spender, to understand why there are divergences and identify trends. Finally, work to identify an appropriate cash flow buffer: can start in the near future, although in practice that work will be refined over time and the buffer reduced, as confidence in the forecast grows.. Strengthen the links between CFF and Procurement Planning: (reference the Procurement Planning Section)

Cash flow forecasting-Organisational responsibilities

The precise organisational responsibilities for bringing together the forecasts in the TD should be established: Dedicated CMU in TD with a few staff members (3-5) Establish a network of forecasters across government Implement information sharing network Capacity issues in TD also capacity in DD to be addressed: Training and Capacity building of cash flow forecasting and analysis should be an integral part of the work of the CMU. MoFED should provide the resources to both TD and DD to enhance staff skills Incentives: The arrangements should address both organizational and personal incentives issues

Section 6: A cash flow forecasting framework based on the TSA, taking into account the operation of extra-budgetary funds and donor flows into government agencies: A forecasting framework, that compares forecasts to actuals and providing feedbackKojo Oduro Lead PFM Adviser Crown Agents, UK

WHAT IS CASH FLOW FORECASTING (CFF)?

CFF is distinct from PB accounting and budgeting: CFF is done with the intent to project the organizations ability to meet cash needs the ultimate goal is to identify the need for short-term borrowing and to determine long term investments strategies CFF helps to structure an investment portfolio or make investment decisions A successful borrowing & investment strategy for any organization depends on the accuracy and timeliness of its forecasts.

Why The FGE Undertakes Cash Flow Forecasting

Forecasting the dates when receipts exceed payments and conversely when payments exceed receipts leads to timely borrowing & investment potential maximization. Forecasting accurately enables the NBE to predict the funding the government requires from the sale of TBs: without flooding the market and potentially raising interest rates ( or as in the case of Ethiopia- distorting the financial markets).

Why Undertake Cash Flow Forecasting

Specifically cash flow forecasting: 1. Determines when funds are required to cover anticipated and unanticipated liabilities 2. Minimize banking fees and charges, with the potential to avoid overdraft costs 3. Minimizes the need for short term borrowing 4. Provides an opportunity for spending patterns to be coordinated to mitigate any potential shortfalls and balance the flow of funds 5. Defines liquidity requirements 6. Helps estimate the future cash position enabling the FGE to manage its funds more efficiently

More Specific Reasons for CFF

7. Assists in making the most appropriate investment decisions, thereby maximizing annual investment returns 8. Provides the ability to effectively time investment maturities with anticipated future cash outlays 9. Maximizes investment earnings by investing surplus cash while at the same time ensuring that there is sufficient liquidity to cushion unexpected events 10. Is a tool used to increase the return on its investments by collecting and investing revenues: as soon as possible for as long as possible in the most suitable instruments available

Principles of Good Cash Management

Budget setting procedure: budget ought to flow from management decisions about volumes of activity, efficiency and forecasts of prices Cash forecasting procedures: accuracy will depend on approved budget programmes : important to integrate work plans into the CFF Management Control system: good controls will ensure that budget variations are kept to the minimum Adoption of proper purchasing policies: also integrating procurement planning is important for the CFF Minimise stocks, debtors and prepaid expenses: clear policies in these areas needed Establish policies for collection of revenue, granting of credit or subsidy Mopping up all government cash resources through the implementation of the implementation of the Treasury Single Account(TSA), and avoiding idle cash

FGE 2003 Actual Revenue & Expenditure Pattern on a Weekly Basis

Title

1,000

2,000

3,000

4,000

5,000

6,000

7,000

GFE 2003 Actual Revenue & Expenditure Pattern on a Daily Basis

0 Revenue Expenditure

Title

Ham 1 Ham 8 Ham 15 Ham 22 Ham 29 Neh 6 Neh 13 Neh 20 Neh 27 Neh 4 Mes 7 Mes 14 Mes 24 Tik 1 Tik 8 Tik 15 Tik 22 Tik 29 Hid 6 Hid 14 Hid 21 Hid 28 Tah 5 Tah 12 Tah 19 Tah 26 Tir 4 Tir 12 Tir 19 Tir 26 Yek 3 Yek 11 Yek 18 Yek 28 Meg 5 Meg 12 Meg 19 Meg 26 Mia 3 Mia 10 Mia 18 Mia 25 Gin 3 Gin 10 Gin 17 Gin 24 Sen 1 Sen 8 Sen 15 Sen 22 Sen 29

Procedure & Processes: How these principles were applied in Ethiopia

Identify and work with the biggest spenders: Five PBs make up 74% of the capital budget whilst the Ministry of National Defence has a significant current budget. Develop links with the finance and procurement divisions in the PBs to provide feedback on the accuracy of the forecasts provided. Demonstrate the costs associated with inaccurate forecasts. Require any large expenditures to be forecasted separately by the public body. This should be provided as early as possible. Request cash-flow forecasts for projects before they are contracted. This is important particularly for projects for which the procurement process is likely to be completed within the budget year.

Demonstration of how the Spread Sheet Model Works

At the start of the year, a workbook is created for every department with a page for each month for them to submit their forecasts. These workbooks are sent via email from the centre to the department for them to fill in their forecasts and be returned. Once the centre has got the forecasts, the actual outturn information is fed into the same workbook so that you have an on-going record throughout the year for the forecasts and subsequent outturns. At the end of the month when the outturn is completed, the same workbook is returned to the department for them to check and consider any errors which have taken place.

Making Forecasting Work in Practice

Important that PBs and ERCA both cooperate with TD
May need legislation Scope for sticks and carrots - greater delegated authority, easier virement, financial penalties Some countries also require pre-notification to MoF of all major payments Also consult MoF on eg payment due dates of new taxes, dates of asset sales

Explore past patterns

Business and sales taxes often have a marked pattern across the year Some expenditures eg agricultural support may be seasonal Many countries have an end-year surge in expenditure avoid rules preventing end-year carryover of unused budget appropriations Within-the-month pattern often associated with the payment of civil service salaries as well as the due days for tax payments

Personal contacts
Avoid requests / information going up hierarchy, across and down Cash forecasters in Treasury must have direct contact with opposite numbers in major PBs and ERCA

Weekly Expenditure Forecast and Outturn

TABLE 2

MONTHLY FORECAST
Payments 1. Personnel Services 2. Goods & Services 3. Fixed Assets & Construction 4. Subsidies, Grants & Other payments Payments Sub-total Other Payments 5. Repayments of CF advances 6. Transfers to other PBs account at NBE 7. Other payments Other Payments Sub-total Total Payments Extra- budgetary Receipts 1. Receipts Expected from External Assistance 2. Receipts Expected from Retained Revenue 3. Loans Total Receipts Financed by CF Transfers/Cash Flow Forecast -

TABLE 3

MONTHLY OUTTURN
Net Opening Balance b/fwd from last month End Month Balance for B-Account/ZBA-Account Payable Orders Outstanding at Month End Net Closing Balance CF Transfers on 1st working day Consolidated Fund Advances Top up budget issued External Assistance -

Total Funding Issued Total Funding Issued plus Opening Balance Implied Net Payment Flows Variance To be calculated

Forecasting Arrangements and Changes

1
2 Areas Revenue Forecast Expenditures Forecast: Suggested Improvements The annual forecast shall be updated in the same manner as the expenditure forecast. The aim is to achieve symmetry between revenue and expenditure forecasts. The annual expenditure forecast shall continue to be updated on a quarterly basis. It will be submitted to the Disbursement section to support the budget execution The quarterly profile shall be on weekly basis extending over the next three months. It will continue across the end of the budget year. TD and PBs will continue to explore the possibility of introducing daily forecast as confidence is established in the weekly forecast The TD will send a master spread sheet to PBs every month to submit their forecasts. TD will aggregate on the same basis using expenditure codes: Personal Services Goods and Services Fixed Assets & Construction 6100 6200 6300

Submission Forecast:

of

Subsidies, Grants and Other Payments 6400 The forecast information will be submitted to the TD by prescribed dates and time, electronically. This will support aggregation of the data. The forecast shall be e-mailed by the PBs directly to the CMT. Other web-based data sharing technologies to be explored ( for example, Share Point)

Forecasting Arrangements and Changes

Areas Suggested Improvements

Communication of Cash Flow Forecast information

TA clear line of communication between the TD and the Central Bank of the rolling forecasts. It will be subject to review, along with discussion of the necessary response, in the Treasury Fund Management Committee (TFMC). ( to be set up)

Distinction between the Cash Flow Forecasting Process and Budget Execution Analyses of Data

A clear separation will be made between the two. Cash flow forecasts should be prepared as a separate exercise to the budget execution process and

The CMU and their counterparts in the PB shall spend time to analyse the forecast against outturn, and seek means to improve the forecast.Data will be extracted from IBEX disaggregated analysed to identify patterns in sub-components of revenue and expenditure Disbursement patterns from external agencies shall be monitored and an assessment made of the pattern of any lags between commitment and disbursement. The TD should work closely with the Bilateral and IFI Directorates in MoFED to liaise with the agencies for up-to-date information. The TD should provide feedback to the PBs and ERCA about the accuracy of their forecasts against actual on a quarterly basis.

Capturing aid flows into the CFF system

Feedback

The Cash flow Forecast Scheme: Information Flows

TD Forecasters receive forecasts from ERCA & PBs Specific large receipts and payments to be noted in the submission (PBs to provide this information as early as possible, even if payment is to be made in the following year). Both revenue and expenditure forecasts to be updated on monthly basis three months ahead (the forecasts will be on weekly) Forecast for a particular month to be submitted 6 weeks ahead Weekly and monthly forecasts received via e-mail or an appropriate web-based technology TD Forecasters to provide the NBE with weekly forecast of CTA flows for a period of 3 months , 6 weeks and on monthly in advance as they receive info

Timing of Forecast 1: Presented in Ginbot 2: Presented in Sene 3:Presented in Hamle 4: Presented in Nehassie 5: Presented in Meskerem 6: Presented in Tikimt 7: Presented in Hidar 8: Presented in Tahisase 9 Presented in Tirr 10 Presented in Yekatit 11 Presented in Megabit 12 Presented in Miazia 13 Presented in Ginbot

THE PATTERN OF ROLLING FORECAST FOR A FULL YEARt

M W M W M W M W M W M W M W M W M W M W M W M W M W

Month 1: Hamle W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 Month 2: Nehassie

Month 2 Nehasssie W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 Month 3: Meskerem Month 4:Tikimt Month 5:Hidar

Month 3: Meskerem W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W1 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W2 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W3 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W4 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 W5 Month 4: Tikimt Month 5: Hidar Month 6: Tahisase Month 7:Tirr Month 8:Yekatit Month 9:Megabit Month 10:Miazia Month 11:Ginbot Month12: Sene Month 1: Hamle Nehassie 2 Meskerem3

Month 3: Meskerem Month 4: Tikimt Month 5: Hidar Month 6: Tahisase Month 7: Tirr Month 8: Yekatit Month 9:Megabit Month 10: Miazia Month 11:Ginbot Month12: Sene Month 1: Hamle

Month 6: Tahisase Month 7: Tirr Month 8:Yekatit Month 9:Megabit Month 10: Miazia Month 11:Ginbot Month12: Sene Month 1: Hamle Nehaassie 2

Section 7: Progress to-date and on-going challenges: what has been achieved and a realistic assessment of what is possible-GN

Progress so far in Addressing the challenges

Areas Needing Improvements Yes No XX Comments

Evidence of realistic budget in 2013 and the medium term ( 2014 and 2015)

On progress

Separation of the cash forecasting system from Budget Execution Re-introduction of the ZBA system Implementation of the new cash forecasting system Setting up of dedicated forecasting units in the TD Setting up of dedicated forecasting units in the PBs Extension of the ZBA to Regions

XX

Completed ZBA re-started in July 2012 On progress Completed Not started

Not Started

Progress so far in Addressing the challenges

Areas Needing Improvements Ability to bring in other government bank accounts into the TSA Evidence of to ability to establish a cash-flow buffer ( based on a realistic budget setting) Evidence of Improvements in Work Plans and Procurement Plans informing PBs Cash flow forecast Banking Connectivity improvements across the country Implementation of IFMIS to improve budget execution controls Coordination arrangements between MoFED and the NBE: MoFED advising NBE of how much TBs to be sold to meet monthly cash needs Yes No XX X Comments Not Started Not started On progress

CBE has connected 180 Branches On progress, It is on the end user training On Progress

THANK YOU
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