A Treasury Single Account (TSA) system reflects more robust internal controls over cash flows into and out of a government account. Among other things, it enables the government to exercise oversight of its cash flows and optimises domestic borrowing and related interest costs. The Constitution sets out a broad framework for managing public money from this perspective.

Article 78 stipulates that all revenue received by the federal government, all loans raised, and all money received by it in repayment of any loan shall form part of one consolidated fund, known as the Federal Consolidated Fund (FCF). Other types of money representing government payment obligations shall be kept in the Public Account.

Article 79 stipulates that the federal government shall formulate laws to elaborate on the processes to handle public money regarding the FCF and the Public Account. However, it was only in June 2019 that the federal government enacted a Public Financial Management (PFM) Act 2019 to comply with this requirement.

Pakistan has a centralised PFM system. Since there was no legal framework until 2019 for the TSA, government entities favoured keeping public money in commercial bank accounts outside of the FCF to manage their business efficiently. Government entities avoided a lengthy, inefficient, and corruption-prone centralised payment authorisation system through this practice.

A government with no TSA is forced into making sub-optimal decisions about domestic borrowing and ends up paying more interest

This was true not only for the Self-Accounting Entities (SAEs) but also for ministries, divisions, and attached departments. SAEs included provisions in their governing laws to maintain commercial bank accounts. This practice mushroomed over the years and became entrenched in the country’s PFM system.

Since June 2012, the amount held outside of FCF/TSA has increased from Rs0.4 trillion in June 2012 to Rs2.4tr till the end of June 2023. This represents about a six-fold increase in the amount and reflects deterioration in internal controls over public money.

The practice is also in vogue in provinces, where Rs1tr was being kept in commercial accounts outside the provincial consolidated funds in FY23, as per the State Bank of Pakistan’s data.

The growth rate of federal government deposits in commercial banks was 23 per cent between 2012 and 2017, falling to 11pc in 2020. The rate accelerated to 20pc and has maintained this momentum in the preceding three financial years. While the rate of growth is marginally lower now than in 2017, it continues to be worrying and needs to be arrested.

The trend is bad on many counts. First, it implies that many government entities might be getting budgetary grants despite having plenty of cash in their commercial bank accounts. Second, it indicates the government is borrowing more than it actually needs, and it is paying more in interest expenses on such borrowing — because a significant fraction of overall government funds are kept in commercial accounts, and the government has no clue about it.

Together, this leads to fiscal deficits — and consequently to the ballooning of public debt. In the 10 years since 2023, the domestic debt has increased 270pc from Rs9.5tr (38pc of GDP) to Rs35.1tr (46.6pc of GDP). According to the State Bank of Pakistan (SBP), the average interest payment (excluding the principal amount) has been more than Rs85 billion per annum in the last five years.

A robust TSA will take a long time, consistent efforts, and sustained commitment from the political leadership

The government borrows mainly from commercial banks to meet its deficits. Commercial banks make a lot of money from the government’s deposits — both by investing where viable and by lending the government’s funds to the same government. The absence of a robust TSA, which keeps government funds in one account, makes it difficult for the government to know how much it needs to borrow and when.

Thus, a government with no TSA is forced into making sub-optimal decisions about domestic borrowing and ends up paying more interest costs than would otherwise.

The enactment of the PFM Act 2019, which obligates the government to establish TSA, has changed the cash management scene in the right direction. The Finance Deaprtment has developed and tested the procedure and notified a procedure for recording and reconciling daily receipts and payments. More than Rs200bn was brought under the TSA until the end of October 2023.

While this seems small compared to the over Rs2tr reported as commercial deposits in FY23, it represents significant progress. The federal government needs to maintain the momentum of reforms and focus on resolving a number of issues to accelerate progress on this front.

First, the government needs to review the nature of government entities and applicable regulations to determine which may maintain commercial accounts. All other entities that don’t qualify for exceptions should be consulted and brought under the TSA system.

Most entities operate subject to the laws and regulations framed before the enactment of the PFM Act, and therefore, there is a need to closely review and align these laws and regulations with the provision of the PFM Act.

Second, some entities may pose challenges, especially the ones falling in the national defence sector. It is hoped that the sweeping arrangements would be acceptable to such entities with few understandable exceptions as appropriate.

The entities don’t lose any control over the use of funds, while the arrangements lead to saving interest costs because money is kept in the TSA where it meets the buffer requirements and affects the level of auction, hence domestic borrowing and interest costs.

Third, entities prefer holding funds in commercial accounts to ensure interrupted business processes. The centralised government set-up tends to negatively affect the flow of funds and efficiency in the operation of these entities. Now that the federal government has begun to implement an online billing system, which slashed processing time for payments to vendors by two-thirds, this justification no longer holds water.

The online process is also being extended to development projects and public works departments, which would bring significant cashflows under the TSA. The online system must establish credibility to support transitioning toward the TSA.

Fourth, data-sharing protocols need to be established so that updated information on cash inflows into and out of TSA is available live to decision-makers. While the national integrated financial management system collects and makes available aggregated information, there is a time lag between the actual and reported flow of funds, which does not allow optimal decision-making on cash.

A robust TSA shall take a long time, consistent efforts, and sustained commitment from the political leadership. To a government entity used to hold funds in commercial accounts, switching over to the TSA is a big change.

It creates the perception that the entity may not be able to use its funds as flexibly as it is used under a strict TSA regime. The TSA also makes cash position explicit for everyone, and there may be entities that would prefer to avoid such transparency.

The writer is a former civil servant who now works as freelance consultant with international financial institutions

Published in Dawn, The Business and Finance Weekly, March 4th, 2024