One of the desires of the government in the management of the economy is to reduce waste and ensure that there is prudence in the management of public finances.
Government banking arrangements are an important factor for efficient management and control of government’s cash resources. Such banking arrangements should be designed to minimise the cost of government borrowing and maximise the opportunity cost of cash resources. This requires ensuring that all cash received is available for carrying out government’s expenditure programmes and making payments in a timely fashion.
A government lacking effective control over its cash resources can pay for its institutional deficiencies in multiple ways.
First, idle cash balances in bank accounts often fail to earn market-related remuneration. Second, the government, being unaware of these resources, incurs unnecessary borrowing costs on raising funds to cover a perceived cash shortage.
Third, idle government cash balances in the commercial banking sector are not idle for the banks themselves, and can be used to extend credit. The establishment of an effective TSA significantly reduces the debt servicing costs.
The Public Financial Management Act, since its promulgation last year, has set the legal framework that gives legal effect to the good intentions of the government to ensure that all monies are properly accounted for.
For instance, in the past, one of the blunders of the system was the opening of multiple accounts by state-owned enterprises (SOEs) and ministries, departments and agencies (MDAs) with various banks in the country which led to the mismanagement of public funds and an increase in public debt.
It is against this background and more that the government decided to open the Treasury Single Account (TSA) with the central bank where all monies belonging to the state would be lodged and monitored for good reason.
The decision to operate a single account is a prudent one which was recommended by the International Monetary Fund (IMF), the reason being that initially the government used to operate over 3,000 accounts and as a result, it was difficult managing its cash flow.
With the successful implementation of the TSA, the situation where the banks virtually lend the government’s own money back to it through the purchase of Treasury bills will be eliminated.
The banks have made some recommendations which, when heeded, will reduce the impact of the withdrawal on their operations and the economy at large.
One of such recommendations is a plea to Bank of Ghana (BoG) to reduce its reserve requirement ratio (RRR) from the current nine per cent to six per cent.
The RRR is the percentage of customer deposits that banks are enjoined, by central bank regulations, to reserve in their vaults or at the BoG as an insurance against default.
At nine per cent, it means that the cash reserve of banks in the country stood at GH¢4.8 billion as of May this year when the sector’s deposits were reported at GH¢53.2 billion.
We think that the reduction in the RRR will absorb the shock and also help to free up extra liquidity which can be created as assets by becoming loanable funds.