Don’t rush Treasury Single Account

So, what is a Treasury Single Account (TSA) and what are the likely consequences if the government implements the new system?

Because of numerous responses I received from readers on an article I did on the subject recently, I feel compelled to return to the issue.

You will recall the recent announcement by the Cabinet of the intention by the government to shut all of its bank accounts in the banking system by centralising and consolidating its cash resources into one system known in jargon as a Treasury Single Account (TSA), which is to be based at the Central Bank of Kenya (CBK).

That announcement has sparked a new wave of uncertainty across the banking system, with analysts predicting that a TSA would drain liquidity, put pressure on banks to increase lending rates and introduce inflationary pressure in the economy.

Just figure out the scenario likely to obtain when commercial banks that keep accounts for taxpayer-funded entities with massive deposits such as KeNHA, Kura, Kerra, the Judiciary or statutory bodies with billions of shillings in bank accounts such as the Communications Authority of Kenya and NTSA are forced to close the accounts and to move the money to the central bank.

I have been a supporter of TSA because I hold the view that its introduction is an important step in reforming the messy public finance management system under which the finances of our government are run. The case for the introduction of a TSA cannot be gainsaid.

Where I disagree is timing, sequencing and phasing. You don’t just wake up one morning to effect such a major change at a time when the banking sector is facing multiple uncertainties.

Today, there are concerns that the sharp increases in interest rates we are currently witnessing may undermine the stability and solvency of large segments of the financial sector.

And, there are concerns -- if a TSA is introduced in the current circumstances -- the insufficiency of available cash in the banking system that will follow may result in a surge in money market rates as affected banks start scrounging for funds to cover their poor liquidity positions. The massive recourse to the CBK’s discount window could complicate liquidity management for banks, making it difficult for the CBK to meet reserve money targets.

Compounding the prevailing sentiment of uncertainty in the domestic market has been the absence of a clear stance regarding the borrowing needs of the government in the medium term and uncertainty around repayment of the $ 2 billion Eurobond debt maturing in June.

In Nigeria, the introduction of a TSA was announced by President Mahmoud Buhari himself. Banks were given a clear time frame with deadlines for transferring all public funds in their books to the TSA.

A TSA is not a simple matter. It is the game-changer we need to kick-start deeper public finance management reforms.

Public finance management is in a total mess because it is currently not possible to see or locate all cash belonging to the government outside a small number of accounts from inside and outside the CBK.

It is impossible to plan and forecast cash flows. The upshot is that significant idle balances sitting in accounts at commercial banks are usually excluded from the computation of the government’s overall cash position.

And, in many instances, the government will be going to the domestic market to borrow from the same commercial banks. The banks readily lend billions of shillings in government-owned money to the same government at a clean profit.

A TSA is what will prepare the ground for moving government accounting systems from the antiquated cash-based system to modern accrual accounting.

A TSA and accrual accounting are what will make it possible for spending departments to produce regular financial statements.

We will be able to see the consolidated financial statements of the government on a regular basis.

If we had a TSA, the money that sits idle in accounts would be given to other government departments that are ready to absorb it. The government would not have to borrow all the time.

But the time is not ripe for the system right now. The government should start by piloting the idea with fewer entities and doing implementation in phases.

The writer is a former managing editor of The EastAfrican.