Another missed target: Pakistan unlikely to fulfill claim of implementing TSA by year-end

KARACHI: The International Monetary Fund (IMF)’s technical team visited Islamabad in October and worked on a draft report on the status of the “Implementing a Treasury Single Account (TSA) and Managing Fiscal Risks by Pakistan”. As per recent reports, Pakistan will miss its end-December deadline to close all bank accounts maintained by the public sector entities and defense ministry in commercial banks, and transfer the money to the central bank.

Moreover, the report states that the Ministry of Finance (MoF) is unaware of which government departments own the untraceable 484 accounts. It is estimated that the potential amount of these balances is Rs 1.2 trillion to Rs 2.9 trillion.

The technical mission to Pakistan in October is different from the mission that will visit for the staff level ninth review for the current IMF programme. As per Rana, the technical mission’s findings state that it will take at least a year before the country can fully implement the TSA system; expected around October 2023. It is important to note, by then Pakistan will have completed the IMF programme; and will have no push to shift completely towards TSA.

Implementing TSA has been one of the IMF’s conditions in the 2008, 2013, and 2019 programmes.

The government’s progress with implementing TSA

In 2008 Pakistan agreed to implement the TSA by June 2009. However, Pakistan asked the IMF for more time. By 2010, some cash was transferred into the TSA but the remaining could not due to restrictions from lenders and because some accounts were strictly classified for specific purposes.

During the 2013 program, the government engaged in talks regarding implementing TSA, however, there was no meaningful development.

For the current programme, Pakistan had committed to closing all commercial bank accounts maintained by the defense ministry, armed forces, and public sector entities by December 2022.

On the 19th of August 2020, the finance division directed all federal government ministries, divisions, attached departments, and subordinate offices (MDAS) to close their bank accounts with commercial banks/ financial institutions and transfer the balance funds to the federal government’s central account no 1 (non-food) with the SBP. In a circular to commercial banks and financial institutions, the SBP said that upon receipt of account closure requests, the respective branches will initiate the closure of accounts and transfer the available balances to their centralized treasuries within seven days.

Progress had been slow. In October 2021, the IMF expressed serious concerns over Islamabad’s inability to close down accounts of federal and provincial governments into private commercial banks. Under the Treasury Single Account (TSA)-1, Pakistan already agreed with the IMF to withdraw Rs2,900 billion from commercial banks and shift it into the Federal Consolidated Fund (FCA) known as the account number of the federal government with the State Bank of Pakistan. However, all-powerful ministries, including the Ministry of Defense and others, had not yet accomplished such assigned tasks within the stipulated time frame.

In June 2022, the State Bank of Pakistan (SBP) directed all banks to shut down federal government accounts and transfer all balances to the SBP’s account number-1 by June 13, 2022.

“It is advised to close the accounts and transfer the aggregate amount of such balances to federal government’s Account No-1 (non-food) at SBP by close of business on the 13th of June 2022 and ensure the meticulous compliance of these aforesaid directives,” the central bank said in a circular.

Following that, the pace of work on implementing TSA-II has been slow.

What is the TSA?

This means the IMF wants Pakistan to close all bank accounts maintained by public sector entities and the defense ministry in commercial banks. All that money is to be transferred to the central bank in one account. The concept is as simple as it sounds – all public money must be gathered in a single account usually maintained by the central bank as it is the fiscal agent of the government. However, there is no harm in using a commercial bank for this purpose.

A TSA can be defined as a unified structure of government bank accounts enabling consolidation and optimum utilization of government cash resources. The TSA separates transaction level control from overall cash management for a country. Some private sector entities also use TSAs to manage their finances better.

It is easy to imagine the TSA as a big vault where the government stashes all of its money and takes some out when needed, but it is more sophisticated than that. To put this simply, a TSA is basically just a bank account or a set of linked bank accounts that the government uses to transact all its receipts and payments. It presents a consolidated view of the government’s cash position at the end of each day.

Why does the IMF stress adopting TSA?

This works on the principle of fungibility of all cash regardless of what the cash is used for. So instead of separate accounts for each type of transaction, the distinguishing of individual cash transactions are done through the accounting system. To sum it up in a line, instead of having an account for each transaction type, the government clubs its money into one account and distinguishes transactions through accounting and record keeping.

The primary reason to set up a TSA is to ensure effective aggregate control over government cash balances. The IMF believes that a country having a fragmented system for handling government receipts and payments is a critical public finance management weakness. This is because, with a fragmented government banking system, you’ll find idle cash lying around in bank accounts. These may or may not be earning market-related remuneration, or simply interest. In economics, the concept of opportunity cost makes this even more important.

Secondly, not knowing its resources fully or being able to tap into them collectively, the government may find itself borrowing unnecessarily. For instance, the government may pay unnecessary borrowing costs such as interest while raising funds in light of a cash shortage. In reality, there is no cash shortage, it was perceived because the system is fragmented and money is lying around in various accounts. The government is fully aware of the volume of funds and no longer faces ambiguity associated with the location of the funds.

Moreover, any cash that is lying around in banks, can be put to use by the banks to extend credit. This, however, drains the extra liquidity in the system when the SBP goes for open market operations especially when the government has issued debt to cancel off the extra borrowing. Essentially, the debt is draining the liquidity.

The TSA enables government debt servicing costs to go down and brings down the liquidity reserve requirements. This is because, through the TSA, cash flow volatility goes down. As a result, the government no longer finds itself in a position where it needs to maintain a high cash reserve to meet unaccounted-for or exogenous shocks that impact fiscal operations.  

And while it may seem trivial, a little goes a long way. The usage of TSA helps reduce bank fees and transaction costs along with lower administrative costs associated with maintaining these costs. Reconciliation costs are also saved. Basically, this provides an opportunity for the government to reap the benefits of economies of scale in processing payments.

Through TSA, the government can have a consolidated view of all government cash flows. Through the TSA, the ministry of finance has full control over budget allocations. This helps the government improve its budget control and monitoring. It drastically improves the quality of fiscal information. In addition, the TSA also helps strengthen the coordination of fiscal and debt management with monetary policy.