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    Lecture 2

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    Abdul Samad
    1. The document summarizes key aspects of public financial management including the annual budget cycle, objectives of fiscal councils and rules, the role of fiscal reporting, cash management and debt management, and treasury single accounts. 2. It describes the phases of the annual budget cycle and objectives of fiscal councils in promoting fiscal responsibility through independent analysis and advice. It also discusses international trends in numerical fiscal rules. 3. Fiscal reporting is outlined as central to public financial management by providing information for decision making and accountability. Cash management and debt management are described as intersecting areas with the goal of meeting financing needs at lowest cost.

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    Lecture 2

    Uploaded by

    Abdul Samad
    37 views19 pages
    1. The document summarizes key aspects of public financial management including the annual budget cycle, objectives of fiscal councils and rules, the role of fiscal reporting, cash management and debt management, and treasury single accounts. 2. It describes the phases of the annual budget cycle and objectives of fiscal councils in promoting fiscal responsibility through independent analysis and advice. It also discusses international trends in numerical fiscal rules. 3. Fiscal reporting is outlined as central to public financial management by providing information for decision making and accountability. Cash management and debt management are described as intersecting areas with the goal of meeting financing needs at lowest cost.

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    1. The document summarizes key aspects of public financial management including the annual budget cycle, objectives of fiscal councils and rules, the role of fiscal reporting, cash management and debt management, and treasury single accounts. 2. It describes the phases of the annual budget cycle and objectives of fiscal councils in promoting fiscal responsibility through independent analysis and advice. It also discusses international trends in numerical fiscal rules. 3. Fiscal reporting is outlined as central to public financial management by providing information for decision making and accountability. Cash management and debt management are described as intersecting areas with the goal of meeting financing needs at lowest cost.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    37 views19 pages

    Lecture 2

    Uploaded by

    Abdul Samad
    1. The document summarizes key aspects of public financial management including the annual budget cycle, objectives of fiscal councils and rules, the role of fiscal reporting, cash management and debt management, and treasury single accounts. 2. It describes the phases of the annual budget cycle and objectives of fiscal councils in promoting fiscal responsibility through independent analysis and advice. It also discusses international trends in numerical fiscal rules. 3. Fiscal reporting is outlined as central to public financial management by providing information for decision making and accountability. Cash management and debt management are described as intersecting areas with the goal of meeting financing needs at lowest cost.

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    © All Rights Reserved
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    of 19

    PAAA

    LECTURE. 2

    IFTIKHAR AHMAD
    D.G AUDIT
    Contents
    1. Annual Budget Cycle
    2. Objectives, Design and Performance:
    i. The role of fiscal councils in promoting fiscal
    responsibility
    ii. Numerical fiscal rules: International trends
    3. The role of fiscal reporting in public financial management
    4. Cash management and debt management: Two sides of
    the same coin
    5. Discussion on Treasury Single Account(TSA) and FDRL
    2005 (as amended)
    1. Annual Budget Cycle
    Public Financial Management is the process by
    which governments raise and spend public
    funds. It includes a broader set of functions of
    financial management and is commonly
    conceived as a cycle of seven phases,
    beginning with policy design and ending on
    audit and review by the legislature and the
    civil society. Following are the phases of
    annual budget cycle:
    i. Policy Formulation: It is done by the
    a. Political Parties
    b. Civil Society
    c. Academia/ Research Bodies
    ii. Budget Formulation (by Government)
    iii. Budget Approval (by Legislature)
    iv. Budget Execution (by Administrative Depts.)
    v. Accounting and Reporting ( Accountant
    General’s Dept)
    vi. External Audit ( by Auditor General)
    vii. Review (by the PAC and Civil Society)
    2. Objective, Design And Performance
    i. Role of fiscal councils in promoting fiscal responsibility:
    a. Fiscal council meaning:
    Fiscal council is defined as an independent
    body set up by a government to evaluate its
    expenditure and tax policy. Typically, fiscal councils are
    staffed by economists and statisticians who do not
    have the ability to set fiscal policy, but provide advice
    to governments and the public on the economic
    effects of govt. budgets and policy proposals.
    b. History of Fiscal Councils:
    The concept of Fiscal council arose following the
    financial crisis of 2007 and 2008 in Europe and America with the
    intention of avoiding debt crisis and alleviating the problem of
    budget deficit, with a tendency of governments to allow
    increasing long term budget deficits. Analysis from the IMF
    proposes that budget deficit results from both voters and the
    policy makers (politicians).
    The voters through imperfect information on budgets, neglect
    the future generations. The policy makers through imperfect
    information, information asymmetries, electoral pressures and a
    combination over optimistic spending and growth projections.
    The role of fiscal councils is to alleviate budget deficits by
    providing independent opinion on estimates of government
    income and by reminding the public of the governments budget
    constraints. The public will then, in theory, support governments
    the deliver sustainable fiscal policies and electorally punishing
    The voters may favor fiscal deficit because
    they benefit from tax cuts and public spending
    increases, and only bear part of the cost, the
    rest being borne by future generations.
    Alternatively, electorates vote for deficits
    because they are not fully aware of the
    problem.
    c. List of Fiscal Councils:
    Mainly, fiscal councils are found in
    European countries, USA, Canada and
    Australia.
    ii. Numerical Fiscal Rules: International Trends
    a. Meaning:
    A fiscal rule is a long lasting constraint on fiscal policy through
    numerical limits on budgetary aggregates. Fiscal rules typically
    aim at correcting distorted incentives and containing
    pressures to overspend, particularly in good times, so as to
    ensure fiscal responsibility and debt sustainability.
    b. As a part of modern public financial management
    framework, fiscal rules have to be well integrated within the
    budget formulation and execution cycle.
    c. Types of fiscal rules:
    * Debt rules
    * Budget balance rules
    * Expenditure rules
    * Revenue rules
    iii. International Trends in formulation of fiscal
    rules:
    a. In the past two decades, the formulation
    of fiscal rules is on the rise.
    b. Most world countries now have several
    rules in place, often combining the objective
    of debt sustainability with the need for
    flexibility to account for budget deficits and
    economic shocks.
    c. The next generation rules are inclined to
    be more complex, creating new challenges for
    design, implementation and monitoring of fiscal
    rules.
    3. The Role of Fiscal Reporting in PFM
    i. Meaning of Fiscal Report:
    A fiscal report is also known as financial report or and
    annual report. This type of report is written once per
    annum and it outlines all information and data related to
    the entity’s financial status during the fiscal year.
    ii. Without good information, governments cannot make good
    decisions about public finances. Moreover, unless
    information is published, they are unlikely to be held
    accountable for those decisions. Fiscal reporting--- whether
    in audited accounts, fiscal statistics, or other documents---
    is thus central to public financial management.
    iii. Traditionally, central government’s financial reports
    are tied to the budget, and thus showed the spending
    and revenue of government departments--- and
    approach that is simple and allows governments, the
    legislature and the public to see how most taxes were
    spent and check whether the budget was executed as
    planned.
    iv. Characteristics of Fiscal Reports:
    a. Fiscal reports are standardized
    b. Serve as controlling measures of budgetary
    finances
    c. Help solve fiscal problems and make better use of
    public resources.
    4. Cash Management And Debt Management:
    Two Sides of a Same Coin

    i. Cash and Debt Management appear at a first glance to be quite


    distinct in their objective and functions, but they serve the same
    purpose with slight difference. They have developed separately
    over time.
    ii. Cash Management has a relatively short term outlook whereas
    debt management has medium to long term horizon.
    iii. The key objective of cash management is having the right amount
    of money in the right place at the right time to meet government
    obligations the most cost effective way. The main goal of debt
    management is to ensure that government’s financing needs and
    its payments obligations are met at the lowest possible cost over
    the medium to long term, consistent with a prudent degree of risk.
    iv. Commonality in Both:
    Despite the differences, cash and debt management intersect at many
    points.
    a. An integrated approach to cash and debt management makes sense
    for a variety of reasons. Joint responsibility for cash debt
    management:
    * increases the incentives to manage all govt. financial resources
    as a single portfolio;
    * helps ensure that confusing signals are sent to the market
    regarding govt. financial management strategy
    * ensures that debt issuance decisions are made in the context
    of the govt. overall cash flows
    Advantages:
    * combining cash and debt management in one unit consolidates
    scarce financial sector resources, reducing the difficulties in recruiting
    professional who are in short supply and streamlining the use of
    information technology(IT) and back office facilities such as settlement
    and clearing operations.
    *efficient and effective cash and debt management
    are extremely important for govts. during normal times,
    becomes critical during financial crisis. In normal times,
    good cash management practices can produce
    considerable savings for govts. through accurate
    understanding and management of liquid financial assets
    and shortages.
    * during periods of financial crisis the same
    functions can mean the avoidance of withdrawing govt.
    support from vital sectors of the economy just at the
    worst possible time.
    * Similarly, effective public debt management
    permits fiscal policy to operate efficiently while
    minimizing financial portfolio risks relating to market
    movements and debt rollovers
    iv. Disadvantages of Bad Debt Management:
    A debt management strategy that is poorly
    designed, implemented and communicated can
    induce adverse effects:
    a. Raise debt servicing costs
    b. Damage govt. reputation
    c. Increase market instability
    In periods of serious financial instability,
    countries can put their entire economic well
    being jeopardy if their debt management
    operations has been unable to foresee and
    mitigate risks.
    5. Discussion on Treasury Single Account

    i. Meaning and Definition:


    A treasury single account(TSA) is a unified structure of
    govt. bank accounts enabling consolidation and
    optimum use of govt. cash resources. It separates
    transaction level control from overall cash
    management.
    In other words, a TSA is a bank account or a set of
    linked bank accounts through which the govt. transects
    all its receipts and payments and gets a consolidated
    view of its cash position during each day.
    ii. This banking arrangement for govt. transactions
    is based on the principle of fungibility of overall
    cash irrespective of its end use. Although, it is
    necessary to distinguish individual cash
    transactions(e.g. a typical revenue or expenditure
    transaction of a govt. unit) for control and
    reporting purposes, these objectives are achieved
    through the accounting system and not by
    holding or depositing cash in transaction---
    specific individual bank accounts. This enables
    the ministry of finance and treasury to dealing
    management of cash from control at a
    transaction level.
    iii. Key Principles of TSA:
    An effective TSA system is founded on three key principles:
    a. The govt. banking arrangement should be unified to enable
    the ministry of finance and treasury to oversee cash flows in
    and out of these bank accounts and allow complete
    fungibility(consolidation) of all cash resources, including on
    real time basis, if electronic banking is in place.
    Although, a TSA structure can contain ledger sub accounts in a
    single banking institution(not necessarily a central bank
    account) and can accommodate external zero balance
    accounts in a number of commercial banks. These separate
    accounts should be integrated with a top account ( called the
    TSA main account), usually at central bank, for consolidating
    balances (usually at the end of each day) to determine the
    aggregate cash position.
    b. No other govt. agency should operate bank
    accounts outsight of the treasury. Institutional
    structures and transaction processing arrangements
    determine how a TSA is accessed and operated.
    The treasury as the chief financial agent of the govt.,
    should manage the govt. cash and debt positions to
    ensure that sufficient funds available to meet
    financial obligations, ideal cash is efficiently invested,
    and debt is optimally issued according to the
    appropriate statues.
    iii. The TSA should have comprehensive coverage, that
    is, it should ideally include cash balances of all govt.
    entities both budgetary and extra budgetary, to
    ensure full consolidation of govt. cash resources.

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