EDITORIAL: Earlier this week, a company registrar According to an exclusive report, the Ministry of Finance has prohibited public sector entities (PSEs) and local and self-governing bodies working under the aegis of the federal government from depositing working capital and surplus funds in private banks. This implies that the authorities agreed on the implementation of the Treasury Single Account (TSA) in their recently concluded negotiations with the International Monetary Fund (IMF) in Doha.

The implementation of the TSA has been one of the IMF conditions in the last three programs (2008, 2013 and 2019). The TSA implementation concept is a step in the right direction. There are benefits to knowing the government’s daily cash flows; and by having all the money in one account, the government’s short-term borrowing requirements can be reduced and better cash management aimed at reducing the cost of servicing domestic debt, which is reaching alarming levels, can be carried out successfully.

The TSA is not unique to Pakistan; it is a well-known and recognized tool in the management of public finances to reduce costs and improve the efficiency of the public treasury. The IMF has made it work in different countries; and he also tried to implement it in Pakistan. However, the government was unable to do so due to start-up problems and the banks’ reluctance to implement it.

In 2008, it was agreed to implement it by June 2009; but later it was communicated to the Fund that more time was needed to avoid the repercussions of deposit outflows from the banking system. Then, in June 2010, part of the money was transferred; but transfer of the remainder was not possible due to restrictions imposed by the lenders and in other cases some accounts were deemed strictly classified for certain purposes such as national security.

In the program signed by the Minister of Finance of the Pakistani Muslim League-Nawaz (PML-N) government, Ishaq Dar, the issue was raised again. However, there were no significant developments. Now, in 2019, under the ongoing IMF program, there were discussions about the implementation of the TSA and again this was delayed for one reason or another.

The beneficiary banks of these deposits are obviously not favorable to the loss of the use of these funds which are in the accounts of various governmental banking entities with them. The biggest loss would be for banks that hold a large share of public sector deposits. Apart from these, the impact would be virtually on all banks as they all compete to mobilize deposits.

It is well known that banks pay returns to government entities on their deposits and use these funds to lend to the government by purchasing government papers. In other words, banks make spreads by using government money to lend to the government, causing the government to bear the cost of its own funds that it had released to its various entities. If the balances of all these government entity accounts in various banks are consolidated in the TSA, it would save the government from having to borrow its own money and incur fees.

Needless to say, as far as government entities (depositors) are concerned, they would continue to operate accounts with the banks in which they have their accounts without any hitch or difficulty. It is important to note that only the banks that hold these accounts would be required to submit these funds at the end of each business day to the TSA.

This would allow the treasury to manage the funds in a way that would significantly reduce their financial cost and also reduce their need to borrow heavily or very large amounts. However, there is reluctance on the part of public sector entities or departments to cede the right to hold money in their respective accounts. These entities benefit from profits on these funds. Not only will they be deprived of these benefits, but the use of self-gratification tactics to secure deposits will also be eliminated.

There are also issues related to security agency concerns about the secrecy of funds they possess if transferred to the TSA. They fear that information about the quantum and use of their funds will be leaked. Such fears are unfounded because the transfer of funds to the TSA by banks will only occur at the so-called “back-end”; and as far as account holders are concerned, it would not change one iota in the mode and ease of dealing with the banks where they have these accounts. Yes, there would be one major difference however: there would be no charm for commercial banks to have and maintain these accounts as they would not be able to profitably utilize the funds available through these accounts.

The implementation of the TSA will certainly be a shocking development for traditional banking practitioners. In the final analysis, there is no doubt that the TSA is beneficial to the government in terms of better debt and cash flow management. This should be done with caution, as banks would lose large volumes of deposits, which could create temporary liquidity shortages for them.

Copyright Business Recorder, 2022