Shaukat Aziz, in a recent meeting of the Financial Market Association of Pakistan, announced that restrictions of placing the government money in the government banks only has been removed and now private banks can also keep the government money.

It is an interesting decision with far reaching consequences and it is expected that the government has done its homework before taking such an important decision. The decision to allow private banks to keep the government money is an essential component of overall cash management or treasury function in the public sector and should therefore be examined in that perspective.

The Constitution of Pakistan provides for separate public accounts of the federation and the provinces. It further provides for two types of funds within the public account; (a) consolidated fund that includes revenues of the government, loans raised by the government, repayment of loans, amortization and sinking funds and (b) the trust funds. All these funds are to be regulated and accounted for according to an act of the parliament, as per article 79 of the Constitution.

No act has so far been promulgated to regulate the public account and as a consequence, neither the federal and provincial budgets are prepared strictly in accordance with the requirements of the Constitution nor they are managed accordingly. Instead, the government has evolved an ad hoc system of cash management, which is not only violative of the constitutional framework for financial management but also smells of waste and inefficiency.

One such area is the cash management. Money is a scare resource and can be put to alternative uses. This is true both in the medium and the short terms. It costs to raise money for a medium term investment as well as for day to day needs. An efficient and well-planned cash management policy is, therefore, an essential component of a good financial management, as it minimizes the need as well as cost of borrowing. It also ensures an efficient and planned expenditure.

To begin with, the government has divided the consolidated fund into watertight and independent compartments, by instituting separate funds for each authority or quasi-independent agency. Transfer of funds from one fund to another are then considered as final expenditure. For instance, CDA may take many months or at times years to spend a grant received from the government but it is shown as an expenditure on the federal government books as soon as it is transferred. This creates an anomaly, as it is possible that government is borrowing its own money to make a book adjustment.

Another way is transfer of funds to assignment or personal ledger accounts of the government departments. The transfer of funds is booked as expenditure against the grant. The third instance is the rush of ‘expenditure’ at the end of the financial year to avoid lapse of allocation. Although no statistics are available on the subject, it is generally assumed that 90 per cent of the frauds in the government departments take place in the transactions of the month of June.

The government has tried to resolve some of these issues through ‘New System of Financial Control and Budgeting’ which was made effective since July 2000. It provides that the ministry of finance would release funds to the spending departments in a prescribed manner over the year. Apparently, it is the best option if you are not making knowledge based decisions. The spending departments are, at least, sure of the release of funds in a given manner and they can structure their investment plans accordingly. There are, two small problems involved in the implementation of the new system. First, the finance division does not strictly follow it and secondly it insists that its ways and means wing clears all major payments. Hence, the new system has not been able to provide adequate support to the executive departments in planning flow of their expenditure.

The result is that the government has no need-based application of funds projections available. Neither it can have one because there is no trust between the ministry of finance and the implementing agencies. Both are trying to deceive each other all the time.

Reverting back to the handling of cash business of the government by private banks, We need to have two things in view. First, that the State Bank has reorganized itself and has established a subsidiary corporation to exclusively handle the government business and that National Bank of Pakistan, as an agent of the State Bank, handling government business for last 50 years and has organized itself accordingly. If the government is not satisfied with the services of the two banks, it is time that the deficiencies are spelled out clearly and they are asked to come up with the solutions.

Secondly, the experience of allowing commercial banks in handling selective government business in 1960s shows that it would result in more corruption in the public sector administration without any specific advantage. In the absence of a meaningful exercise in cash flow projects it would add to the inefficiencies and waste.