IMF How To Notes

How to Set Up A Cash Buffer: A Practical Guide to Developing and Implementing a Cash Buffer Policy

Author/Editor:

Yasemin Hurcan ; Emre Balibek ; Fatoş Koç

Publication Date:

December 21, 2020

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

Maintaining a cash buffer has emerged as a risk management tool for government cash and debt management. During budget execution, there is considerable cash flow volatility and timing mismatches concerning revenue collections and expenditures, debt inflows, and debt service. Cash balance management aims to address these mismatches and to ensure availability of liquidity in government bank accounts. From a debt management perspective, holding an appropriate level of cash balance serves to mitigate funding risk. Effective cash balance management is even more critical when there is heightened uncertainty about the magnitude and timing of cash flows, as seen during the coronavirus disease (COVID-19) pandemic. This note discusses the role of the cash buffer for managing cash balances and offers practical approaches to developing a policy framework, considering the risk mitigation objectives and the cost of carry.

Series:

How-To Note No. 2020/004

Subject:

Currencies Government cash forecasting Government cash management Government debt management Treasury Single Account

Frequency:

occasional