3. Modernising treasury and cash management systems in Peru
This chapter presents the main findings and recommendations for modernising Peru’s General Directorate of Public Treasury’s functions. The chapter is composed of six sections: (i) regulatory and institutional framework; (ii) financial planning and cash flow projection; (iii) expenditure execution process and treasury single account; (iv) comprehensive asset and liability management; (v) supporting factors; and (vi) fiscal risks.
Key findings and recommendations
Cash planning would benefit from greater integration with the budget directorate and the entities responsible for estimating public revenue. Deviation analysis should be carried out in order to improve the calculation of future projections.
The great challenge for treasury modernization is to achieve full fungibility of the funds. For this, it is essential to expand the coverage of the TSA and make cash management more efficient, eliminating the rigidities of cash management derived from the effects of expenses on their sources of financing.
Asset and liability management moves towards better integration and search of greater profitability. There is still room to favor integration and make placements at the level of needs, as well as to strengthen the local market and reduce risks in order to achieve greater profitability. The link with fiscal policy should also be strengthened so that the objectives are aligned.
The modernisation of the DGTP requires quality information in real time. The reform of the financial information system (SIAF-RP) and the development of online accounting are essential to record the traceability of expenditure and have complete accounting records.
Proper measurement and management of fiscal risks are essential to inform various phases of the budget cycle and adopt risk mitigation mechanisms. The existing line management must advance in risk mapping, development of measurement methodologies and mechanisms to collect information, in order to prepare reports that can guide decisions throughout the budget cycle.
3.1.1. A brief overview of recent reforms
Treasuries in OECD countries fulfil functions beyond the traditional ones linked to processing payments, cash management and public debt. In recent decades, the importance of a country’s Treasury in the entire public financial management cycle has been growing. Modern treasuries, in addition to the full integration of the debt and treasury areas, also have functions such as defining the debt strategy linked to economic and budgetary policy, supervising the budget execution process, ordering payments, ensuring the availability of funds and providing legal security to the system, and optimising the use of idle resources, among others.
This modernisation process is also underway in Peru. In 2011, the Directorates General of Treasury and Indebtedness were merged into the General Directorate of Public Treasury. Since then, a series of progressive reforms have been implemented to achieve full integration, including:
Updating the regulatory framework through the approval of Legislative Decree (Decreto Legislative, DL) 1437 of the National System of Public Indebtedness and DL 1441 of the National Treasury System.
Progressing towards the overall management of financial assets and liabilities, including the establishment of the second liquidity reserve, updating the regulations of the Fiscal Stabilisation Fund, authorisation to execute repurchase operations and sell its own securities, and the establishment of policies and guidelines for managing the assets and liabilities of non-financial public entities and enterprises.
Including the DGTP in the Cash Committee and creating an Assets and Liabilities Committee, currently replaced by the Fiscal Affairs Committee.
Progress in financial risks assessment: liquidity risk, interest rate risk, exchange rate risk, central government concentration risk.
Regulatory changes related to financial instruments, such as the Repo Transactions Law, Treasury Bill Regulations, the Market Maker Program and the Bond Issuance Program.
The progressive increase in the coverage of the TSA and in the resources comprising the public Treasury.
The Peruvian authorities are aware that challenges remain to modernise the Treasury, including fully integrating the treasury and debt systems and the Treasury with the other administrative systems under the stewardship of the MEF; advancing in the fungibility of funds; improving cash management; implementing an online accounting system; and assessing and disseminating fiscal risks, among others. All these issues are addressed later in this chapter.
3.1.2. General principles of the Peruvian treasury system
Economic control and stability are deeply rooted in the philosophy of the MEF, as the development of the public budget system has shown. This possibly has its origins in the 1990s, when Peru contracted a debt of USD 950 million with the International Monetary Fund. In that period, the high dependence of the Peruvian economy on commodities, together with the rise in interest rates in 1980, led to a period of hyperinflation and a deep recession. As an important part of the economic growth was linked to the extraction of natural resources with prices determined on international markets, a declining pattern of these prices over prolonged periods weakened the economy and reduced government revenues. In turn, given the international context, external credit to the government became more expensive, discouraging public investment. Private investment was also affected by increased uncertainty and the mining sector was weakened due to lower revenue prospects (Aggarwal, 2009[1]).
Economic growth began again in the mid-1990s and was consolidated in the 2000s. Since then, the government has introduced a set of very rigid control mechanisms in public finances due to a fear of deficits and excessive indebtedness. These controls are sometimes counterproductive as they distort financial activity and entail high associated costs.
The most disruptive element of public sector financial activity is linking expenditures to their funding sources. This link goes so far as to control the origin of the source of each payment made by the Treasury, violating the principle of the fungibility of funds, which is essential for efficient treasury management in three areas: 1) forecasting; 2) execution; and 3) profitability. This despite the fact that the legislation itself recognises the principle of fungibility of money as one of the fundamental principles of the National Treasury System (Box 3.1).
1. Efficiency and prudence: The management and disposal of public funds, optimising their use and minimising the costs associated with their administration, subject to a prudent degree of risk.
2. Fungibility: The use of public funds managed in the treasury single account, regardless of their funding source, to provide overdraft for temporary cash shortfalls, ensuring the continuity of the public administration in accordance with Principle 3.
3. Timeliness: The collection and allocation of public funds within the corresponding deadlines to ensure they are available when and where they need to be.
4. Cash unity: The centralised administration of all public funds, regardless of their origin and purpose, respecting the ownership and register that corresponds to the entity responsible for collecting them.
5. Truthfulness: The authorisation and processing of transactions are carried out on the assumption that the information recorded by the entity is supported by documentary evidence of legally and executed administrative acts and events.
Source: Legislative Decree 1441 of the National Treasury System.
3.1.3. Organisation of the General Directorate of Public Treasury
The DGTP reports to the Vice-Ministry of Finance of the MEF and is comprised of two administrative systems: the National Treasury System and the National Debt System.
National Treasury System
DL 1441 defines the National Treasury System’s principles, processes, rules, procedures, techniques and instruments through which the cash flow management is executed, including the structuring of the financing of the public sector budget, the management of non-financial public sector financial assets and the fiscal risks of the public sector.
There are two main models of treasury systems in OECD countries:
1. centralised, where all treasury functions, including payment and control functions, are carried out by the Treasury, which reports to the MEF (e.g. France)
2. decentralised, where operational functions (usually payment processing and controls) are decentralised to line ministries, but central policy and oversight are carried out by the Ministry of Finance (United Kingdom) or an independent agency (Ireland, Scandinavian countries).
Peru’s national treasury system is decentralised, with a central level, the DGTP, and a decentralised level, which performs some operational functions. The DGTP is the governing body and approves the regulations and implements and executes the corresponding procedures and operations within its remit. The decentralised level is made up of the spending agencies of national and regional governments, local governments, subnational government enterprises and entities, non-financial public enterprises, financial public enterprises, and other non-financial organisational forms that manage public funds. The decentralised or operational level is responsible for the administration of public funds, falling to the general directors of administration or the finance manager, and the Treasurer, or those acting in their stead, who must inform the DGTP of their designation.
The National Treasury System comprises financial planning, integrated management of financial assets and liabilities of the non-financial public sector, treasury management, and fiscal risk management.
National Debt System
Operational decentralisation is also observed with respect to the National Public Debt System. According to Article 6 of DL 1437, the functions of the spending agencies are to: “(i) manage public funds from public indebtedness; (ii) determine and collect revenues; (iii) contract commitments, accrue expenditures and order payments, under applicable legislation; (iv) record information generated by actions and operations carried out; (v) report on the progress and/or fulfilment of goals; and (vi) receive and execute disbursements of debt operations.”
Organisational structure of the General Directorate of Public Treasury
The DGTP’s current structure is comprised of seven line directorates. Six have treasury and debt functions. The seventh, the Fiscal Risks Directorate, carries out broader tasks than treasury alone and, as will be discussed below, should have functional autonomy and become an independent unit. The seven line directorates are:
1. The Directorate of Normativity is the organic unit in charge of elaborating the norms of the National Debt System and the National Treasury System, articulated to the public sector’s financial administration.
2. The Directorate of Financial Planning and Strategy is in charge of proposing guidelines and standards related to financial planning and the strategy for the integrated management of financial assets and liabilities, debt operations, debt management, and investment of public financial assets.
3. The Credit Directorate proposes guidelines and regulations and manages public sector credit operations. It administers and manages Peru’s membership in multilateral financial organisations.
4. The Directorate of Financial Investment Management and Capital Markets is an organisational unit that proposes guidelines and regulations related to financial investment management and capital markets.
5. The Directorate of Treasury Operations proposes guidelines and regulations related to the National Treasury System and executes the system’s procedures and operations.
6. The Directorate of Debt Management, Accounting and Statistics records obligations arising from public sector borrowing operations and compiles public debt statistics.
7. The Fiscal Risk Directorate formulates guidelines, methodologies, models and regulations for the identification, measurement, mitigation and monitoring of fiscal risks.
Following the merger of the Directorates General of Treasury and Indebtedness, the directorate’s functions were allocated to differentiate between the front, middle and back offices, which is a typical distinction in treasuries in OECD countries.
The staff of the DGTP is characterised by low turnover at the managerial level, with some stability at director and middle management level.
3.2.1. Adequate cash flow forecasting makes it easier to identify the government’s funding needs
The overall objective of cash flow forecasting is to anticipate the government’s funding needs by monitoring the spending agencies’ incoming and outgoing cash flows. The review framework should be comprehensive and focused on cash flows rather than on the point in time when contractual obligations arise or accounting accruals occur.
Effective cash management requires the ability to forecast daily cash flows from the TSA, facilitating the orderly achievement of budget targets, ensuring that expenditures are funded smoothly, and designing strategies that smooth the cash flow profile. Smoother cash flow means:
reduced borrowing costs, as the interest on cash balances is always lower than the interest on marginal loans
reduced pressure on central bank’s monetary policy operations.
An efficient cash flow forecasting system is capable of formulating reasonably reliable projections of cash inflows and outflows in the short to medium term. Ideally, these forecasts should be broken down into daily balances and cover 3-12 months, so that a cash curve and a cash receipts and payments journal can be drawn up. Good cash flow forecasts are also the basis for active cash management. Advanced countries have rolling forecasts of daily cash flows through the TSA for at least the next three months, including the end of the fiscal year, complemented by the possibility to monitor actual changes in the aggregate balance of the TSA’s main account in real time (Pessoa and Williams, 2012[2]).
The TSA records most cash receipts and payments, thereby consolidating government cash balances and generating information efficiently. However, while TSA flows in countries with advanced practices are the focus of forecasting, they must also be complemented by practices and tools that take into account past history and experience.
The credibility of projections is essential for the effective and efficient management of public resources. Consistent, coherent and accurate integration of the government’s various projections ensures predictability, with acceptable degrees of uncertainty, for decision making in the management of public resources, from revenue collection to payment or borrowing.
Forecasting capacity depends on the quality, availability and classification of the information provided by the collection agencies and payment commitments, hence the necessary coordination of the various actors involved. Often the basis is a daily projection for the next month, weekly for the following two months and monthly for the rest of the fiscal year. The planning horizon; the incorporation of technological innovations; greater co-ordination efforts, in particular with tax administration agencies; and the inclusion of simulation techniques and econometric models are some of the factors that have had an impact on improved cash planning in recent years in OECD countries.
3.2.2. Revenue estimates in Peru are heavily influenced by the existence of different funding sources
The existence of different funding sources and items (rubros) has a strong impact on the govenrment’s revenue estimates, as different entities are responsible for collecting information on the different types of revenues. This has an impact on the General Directorate of Macroeconomic Policy and Fiscal Decentralisation’s calculation of expenditure ceilings, the General Directorate of Public Budget’s budget formulation, and the DGTP’s revenue planning. Table 3.1 shows the entities involved in revenue programming for each of the funding sources.
Ordinary revenue represents, on average,1 62% of total annual budget revenues and are the Treasury’s single most important source of funding. SUNAT is the main collection agency and provides information to the MEF. Traditionally, SUNAT presented monthly information only for a three-month horizon and the DGTP made the annual projection based on models. Since 2019, closer collaboration has been established between the Treasury, the General Directorate of Macroeconomic Policy and Fiscal Decentralisation, the General Directorate for Public Budget, and SUNAT to improve the quality of information and make information on public revenue available promptly.
The Cash Committee2 meets every month with the participation of the General Manager of the Bank of the Nation (Banco de la Nación), the General Manager of the Central Reserve Bank of Peru (Banco Central de Reserva del Perú) and the MEF (Vice-Minister of Finance, Director General of the DGTP and Director General of Budgets). SUNAT is invited to present short-term and the previous month’s revenue and expenditure projections, with work is underway to complete the extended 12-month information. Revenue projections are adjusted whenever the macro variables projections change. Currently, work is underway to improve the projections, and specifically to update the best way to project the refunds of the general sales tax for companies, which significantly alters the ordinary revenue because exports are not subject to this tax.
The budget units (pliegos) do not share their revenue projections of directly collected revenue with the DGTP, so the DGTP must estimate them. In a recent legal amendment of 2022, the national government’s directly collected revenue – fees, non-tax revenues and fines – will become part of the Treasury’s resources from 2023, which will undoubtedly complement the DGTP’s information.
Weaknesses also exist with respect to the other funding sources, as some of the information is neither recorded nor shared with the DGTP. Hence, improved methods for providing the necessary information and ensuring the capture of all resources by the TSA can improve the availability of data and, thus, planning.
It is also relevant to highlight the importance of measuring uncertainty. In the case of Peru, this task is entrusted to the General Directorate of Macroeconomic Policy and Fiscal Decentralisation, but the DGTP is one of the main users of such information. Since the COVID-19 pandemic, which has seen greater volatility and significant changes in revenue collection, measuring uncertainty has become even more relevant. Uncertainty also exists at other times of less change, for example when new taxation is adopted or improved revenue collection procedures implemented (for example, the use of electronic invoicing had a positive effect on revenue collection). Its measurement is taken into account in the calculation of the macroeconomic and budget ceilings. It is a very relevant factor for the DGTP, which may be inclined to update its cash projections depending on events that may occur.
3.2.3. Expenditure estimates are adjusted when the institutional opening budget is modified
Estimates of payment schedules are essential for predicting expenditure flows, and thus fulfil the main objective of cash management, which is to ensure that the government can execute its budget in a smooth and timely manner and meet its payment obligations, giving legal certainty to the system. Only by knowing the payment schedule can active cash management be carried out, drawing on financing mechanisms when resources are needed and investing surpluses to avoid idle resources.
Expenditure estimates are mainly obtained from the Integrated Financial Administration System (Sistema Integrado de Administración Financiera, SIAF). The first data are from the opening institutional budget, but these vary as changes occur, resulting in a modified institutional budget (presupuesto institucional modificado). Compared to OECD countries, the amount of these variations is very high and has an impact on the updating of expenditure projections.
The DGTP would benefit from having access to information the spending agencies’ expenditure projections, at least of the most relevant ones, which are privy to this information. As in the case of revenues, the information should be updated on an annual, monthly, weekly and daily basis, and the timing of major payments should always be reported. In some OECD countries, such as Australia, entities that fail to provide this information are penalised with a lower budget allocation the following year.
Some systems have relevant information, but it is not yet integrated into the SIAF, and the information is not always up to date with the exact schedule of payments.
The General Directorate for Public Budget has an instrument called Annual Commitment Programming (Programación de Compromisos Anuales), which includes the scheduling of the spending agencies’ commitments and changes as the modified institutional budget changes, but this tool does not replace the cash plan. The objective of the Annual Commitment Programming is to make the cash flow compatible with the expenses of the Public Sector within the parameters of the established fiscal rules. It is controlled and updated quarterly by the General Directorate for Public Budget, which by resolution establishes the criteria for its determination, review and update by the budget units and the spending agencies. Compared to the cash plan, it suffers from inaccuracies in the flow estimates (once it is compared with budget execution), as it is more of a forecasting tool. It also does not include information on payment schedules for supply contracts, public investments or even some payrolls.
3.2.4. Peru’s cash programming is closely linked to the level of liquidity reserves required to meet its cash requirements
Treasury cash programming is a process that, based on information and estimates of revenue and expenditure flows, presents one or more cash flow projection scenarios. The annual projection is disaggregated at a monthly level for a 12-month period and the monthly projection is disaggregated at a daily level for the next 90 days. The cash plan allows the members of the Cash Committee to approve the levels of income and expenditure for a given month and allows monitoring the liquidity in the TSA and, in case of a lack of liquidity, to ration the execution of public expenditure.
The cash flow projection methodology is carried out by the Directorate of Financial Planning and Strategy of the DGTP using an econometric model developed by the directorate which is based on input provided by various entities. The available data are used to estimate income and expenditure flows, based on directorate’s own experience, in addition to information from the spending agencies . The DGTP has refined the calculation mechanisms for forecasting revenues through historical monitoring of actual execution, identification and analysis of errors, and adjustments to the methodology.
Measuring slippage in cash planning allows the Treasury to improve the quality of revenue and expenditure projections and anticipate funding needs, which controls financial programming risks. So far, the recorded slippage has been variable (around 5% in ordinary revenue before COVID, higher during the pandemic), which prompted the authorities to increase the secondary liquidity buffer (explained later in this section). Measuring errors is essential to map and help measure deviations. In recent years, the largest errors have been seen in ordinary revenue, as many years have been underestimated, with variations as much as 20-30%. Variations in other revenue sources are not as significant.
Finally, it should be noted that one of the biggest challenges in building the Treasury yield curve has been the lack of full fungibility of the TSA’s resources. Although this practice has been improving, the revenues that are integrated into the TSA are still collected through some bank sub-accounts. The multiplicity of sub-accounts adds unnecessary complexity to the government’s revenue management. The MEF should replace this model with one based on virtual accounts in the SIAF, so that the different allocations and ownership of resources are done through SIAF records. This issue will be discussed in the next section.
The Cash Committee approves the cash plan, monitors its implementation and updates it regularly
The Cash Committee was created by Supreme Decree No. 227-90 and ratified by the Annual Budget Law for the period 1991. Since its creation more than 30 years ago, its composition has been enlarged by a few additional members, but its functions have practically remained the same, with an emphasis on the management of short-term funds available and the monitoring of budget execution in relation to the cash budget. While initially the director of the National Treasury was not a full member of the committee, the director general of the DGTP participates as a full member of the committee since 2016.
The Cash Committee is chaired by the vice-minister of finance, and composed of the vice-minister of economy, the general directors of the public treasury and public budget, and the general managers of the Bank of the Nation and of the Central Reserve Bank of Peru. The General Directorate of Macroeconomic Policy and Fiscal Decentralisation and SUNAT are also invited. The committee meets monthly and its functions include:
2. co-ordinating and agreeing on the actions necessary for the execution of the cash budget
3. carrying out comprehensive monthly monitoring of the implementation of public expenditure
4. evaluating the execution of the cash budget for the preceding month.
At the monthly meetings, SUNAT presents updated monthly collection data, updated forecasts for the rest of the year and an explanation of any deviations.
The Cash Committee analyses the execution of financial and non-financial expenditure and the future prospects presented by the General Directorate for Public Budget with respect to accrued expenditure: the execution of the previous month, the projections for the following month, the annual projection up to December of the current year and the forecast for the year-end. With these data, the General Directorate of Macroeconomic Policy and Fiscal Decentralisation also monitors and updates the multiannual macroeconomic framework; the DGTP does the same for the cash plan.
There are limitations to the scope of the analysis that are due, again, to the existence of the different funding sources. SUNAT’s information refers to ordinary revenue. The DGTP has information on ROOCs, but for the remaining resources, the information is very aggregated because the data available to the director generals of the MEF are not complete. The recent regulatory change that converts national government directly collected revenue to Treasury resources is likely to improve programming in this area. Challenges remain in the subnational governments’ directly collected revenue, and primarily determined revenue.
The DGTP’s implementation of provisions and mechanisms to ensure liquidity
Once information on revenue and expenditure flows is available, the DGTP must manage the data. The cash managers’ database must be under their control (not in the SIAF), be flexible, allow analysing the different scenarios and contain performance information for analytical purposes. Excel is often used for this purpose, as is the case in OECD countries. The cash flow curve is based on the forecasts.
At this point, there is a close relationship between the National Treasury System and National Debt System, closely linked to the concept of “smoothing” net cash flows, which distinguishes:
“Rough tuning”: issuing Treasury bills (or other short-term instruments) in a way designed to offset the impact on the banking sector of net cash flows in and out of government, i.e. to smooth out changes in the TSA.
“Fine tuning”: more active policies, a wider range of instruments, to smooth the Treasury balance more comprehensively. This is technically more demanding.
Temporary liquidity support mechanisms ensure that the Treasury can meet payments even if unexpected needs arise
Liquidity management guarantees the availability of the public funds collected or collected for the timely payment of the obligations contracted in accordance with the law by the authorised entities. To this end, the DGTP is empowered to use temporary financial support mechanisms using the funds in the TSA, the Secondary Liquidity Reserve and the balances from the placement of public Treasury bills. Box 3.2 defines the liquidity reserve and its determinants in OECD countries.
As there is no standard model of optimal cash balance, the Treasury must cover its liquidity needs by identifying the reserve or “liquidity cushion”. This is a temporary saving in anticipation of a potential period of illiquidity. The factors that determine the cash buffer vary. For example:
projection of historical, estimated and observed cash flow programming data
the ability to forecast these cash flows (the standard deviation of the forecast errors should be much smaller than the standard deviation of the results)
the extent to which unforeseen fluctuations can be managed and the time frame within which they can be managed, depending on the speed of issuing more Treasury bills (or other short-term instruments)
the existence of safety nets, including emergency credit facilities or reserves of funds; end-of-day lending from commercial banks; and short-term lending from the central bank.
The composition of the stock of funds varies from country to country. For example, several northern European countries operate with central bank cash balances of less than 0.1% of annual central government spending, thanks to liquid money markets and sophisticated active cash management. It is common for countries to be able to increase reserves in times of crisis and heightened uncertainty in the pursuit of prudence, as was the case in the 2009 crisis and currently in the wake of COVID-19.
In Peru, the Primary Liquidity Reserve is held at the Bank of the Nation and amounts to a fixed amount of 250 million Peruvian soles (PEN). It is intended to cover day-to-day payments in the event of unforeseen needs. If the balance is higher, resources are accumulated in the Central Reserve Bank of Peru; if it is lower, resources are taken from the Central Reserve Bank of Peru. Before the pandemic the Primary Liquidity Reserve amounted to PEN 50 million, but due to the uncertainty of the pandemic it was increased because a higher security threshold was necessary.
The Secondary Liquidity Reserve is made up of the Treasury’s freely available resources at the close of each fiscal year to cover seasonal mismatches or cash deficits, the cumulative amount of which does not exceed 1.5% of the nominal GDP of the corresponding year. The reserve is fed by the annual surpluses of ordinary revenues, as well as the resources that are legally determined. It was created to provide financing for the execution of the payment of the DGTP’s obligations, in extraordinary circumstances in which less revenue is received than foreseen in the Public Sector Budget Law.
It should be noted that the Secondary Liquidity Reserve can only be used to finance the expenditures foreseen in the public sector budget, for ordinary revenue and ROOC, in the event of a possible drop in the amount of these funding sources. There was no need to use it in 2021.
There are also contingent lines that the MEF maintains with some multilateral organisations, loans or contingent credit lines to be used in certain specific circumstances, as established in the relevant contracts. At the end of 2021, for example, there was a contingent line exclusively for financial risk, others for natural disasters, and others for economic crises and disasters.
The Fiscal Stabilisation Fund functions as a closure mechanism for the system, with resources that can be used in exceptional situations
The Fiscal Stabilisation Fund is managed by the MEF and administered by a board of directors composed of the MEF, which chairs it, the president of the Central Reserve Bank of Peru and a representative appointed by the president of the Council of Ministers. The fund’s resources are invested in term deposits at the Central Reserve Bank of Peru under the investment guidelines approved by the board of directors, at the proposal of the technical secretariat, which is the DGTP. This fund can be used when public revenues are expected to fall or when exceptional situations such as natural disasters threaten the economic viability of the country. When the amount in the fundexceeds 4% of GDP, the excess can be used to reduce public debt. This fund is made up of the fiscal surpluses that have arisen since 2006. Since its creation and until the third quarter of 2021, the Fiscal Stabilisation Fund had received revenues of USD 10 099.89 million, while its expenditures had totalled USD 10 096.98 million. Due to the pandemic, USD 5 471 million was spent, bringing its balance to USD 1.05 million at the end of 2020, as shown in Figure 3.1.
Source: MEF (2021[4]), Fiscal Stabilisation Fund, Third Quarter Report 2021, Ministry of Economy and Finance, Lima, https://www.mef.gob.pe/contenidos/tesoro_pub/fef/informe_IIITrim2021_FEF.pdf.
3.3.1. The role of treasuries in OECD countries in the budget execution process
Budget execution is the process that ensures the economic and efficient implementation of budgetary decisions, optimising the use of available budgetary resources, and promoting integrity and legality in the management of public funds, financial responsibility, transparency and accountability.
An orderly implementation process prevents unauthorised expenditure and payment delays, enhances the credibility of the budget, promotes financial integrity, and helps identify opportunities for more effective budget interventions and better value for money.
In OECD countries where the implementation process meets these characteristics, there are fewer payment delays and in general more efficient payment authorisation processes. There is also a separation of functions that ensures adequate control, as well as a documentation procedure that allows the expenditure to be traced so that audits and controls can be carried out. The areas where control is most relevant are in commitment, accrual and payment, to observe, on the one hand, that there are resources in the budget for a given purpose, and on the other, that there are effective procedures for receiving and verifying goods and supplies according to orders and clear procedures for issuing payment orders to the identified beneficiary within reasonable deadlines.
Relationship between budget management and treasury management in Peru
In Peru, the budget execution process begins on 1 January and ends on 31 December of each fiscal year, during which time public revenues are collected and expenditure obligations are met in accordance with the budget appropriations authorised in the annual public sector budget laws and their amendments.
Budget execution comprises the stages of authorisation, commitment, accrual and payment. For treasury purposes, the most relevant stages are: accrual, which generates a payment order once the creditor’s right has been verified based on a previously formalised and registered commitment; and payment, which is the act by which the amount of the recognised obligation is extinguished, partially or totally. No payment may be made for unearned obligations. From the Treasury’s point of view, payment management involves the handling of the payment of obligations from the funds centralised in the TSA in accordance with procedures that will be discussed in the following section.
The SIAF-SP incorporates some controls in the budget execution chain, such as financial allocations. These are funds available to the entities that can be used for the payment of their previously disbursed and committed obligations. If the Treasury were in an illiquid financial situation, no commitments would be allowed above the expenditure ceiling set by the Annual Commitment Programme, and the system would not allow these operations to be recorded. The controls help to avoid the generation of arrears, at least as long as the spending agencies registers the whole chain promptly. The DGTP approves the financial allocations and their cumulative amount is the limit for the recording of accruals.
Accruals formalised and recorded on 31 December of each fiscal year can be paid until 31 January of the following year, which is considered good practice in OECD countries.
The stages of revenue implementation include estimation, determination and collection. The DGTP must analyse the actual revenue collection flows and compare them with the cash flows to inform the Cash Committee of the evolution of the financing and update the curve if necessary.
3.3.2. The treasury single account, an instrument to improve the efficiency and control of public funds
Peru’s TSA was created to make all government funds available for treasury management, thus contributing to the efficient use of resources and facilitating their control. It also contributes to the implementation of the principles of cash unity and fungibility of funds, thereby reducing the cost of capturing public funds by financial operators; it rationalises financial stocks by ensuring that the state’s financial inflows and outflows are efficiently managed by the Treasury; and it helps support the implementation of monetary policy.
Since its creation in 2008, the coverage of the treasury single account has progressively increased
The TSA was created in 2008.3 The strategy for implementing it was developed on the basis of:
the use of already consolidated elements or means, with which the entities were familiar and with which the change did not represent a major impact for them to assimilate
an adequate level of response to their queries, as well as requests for attention from representatives of user entities, both on operational, registration and regulatory issues.
It began by incorporating in one account funds from determined revenue (recursos determinados), with respect to resources related to royalties and surcharges, customs revenues, and spending agencies’ and municipalities’ shares. Subsequently, funds from other sources of financing have been centralised in this account, including, for example, resources from indebtedness with multilateral organisations. The latest incorporation is that of the directly collected revenue of the legislative, executive and judicial branches, which will be registered as ordinary revenue, by virtue of a regulation approved in 2022. Currently, approximately 100% of the above-mentioned resource categories are in the TSA (Table 3.3).
The TSA comprises all the financial resources of the public Treasury, including those received by the entities of the non-financial public sector, through the spending agencies of national and regional government entities and of the provincial and district municipalities. In addition to the funding sources described in Table 3.3, the TSA includes loan disbursements for projects and borrowing via bonds. It also includes some extra-budgetary funds, for example, the Armed Forces Extra-budgetary Fund, which is funded by royalties (determined revenue).
Trusts: these are very ad hoc. Some are authorised by the DGTP, as part of debt operations with multilaterals or for financial support programmes or through guarantees to companies, generally under the responsibility of the Development Finance Corporation (COFIDE) in its capacity as a second-tier state financial institution. Others are set up, without authorisation, by some municipalities, using their own revenue.
Certain resources directly collected from subnational governments and other municipality taxes, including their carry-forward budgets.
EsSALUD funds administered by the Social Health Insurance Institute, resources of the social health insurance (the resources of the National Pension System and other pension funds, under the responsibility of the National Office of Pension Standardisation, if the National Office of Pension Standardisation has provided for them in its budget [funding source determined revenue]).
Internal credits (for municipalities), not yet incorporated into the TSA.
In addition, there are entities at all levels of government that continue to have their own bank accounts outside the TSA. SUNAT, for example, maintains a separate bank account from the tax collection assigned to it as own resources. These funds generate carry-forward budgets, which can be earmarked for a specific purpose at the request of the MEF.4 From 2023, all these SUNAT resources will be registered as ordinary resources, including their carry-forward budget.
The cash collected by SUNAT in the banks as ordinary revenue, once reconciled, is transferred to the Bank of the Nation to be credited to the TSA within 24 hours. The amount collected by cheque has to go through the clearing house for certification and is then credited as indicated. SUNAT receives a 1.5% commission, from which it in turn pays the banks with which it has an agreement.
These assets outside the TSA represent 11% of the total in the case of entities that are part of the budget and 42% if all financial assets of the non-financial public sector are considered.5
Peru has a unique system, as there is a Bank of the Nation and a central bank, both of which affect the TSA’s operating system
The TSA consists of a DGTP bank account at the Bank of the Nation, with collecting and paying bank sub-accounts at the same bank. Each spending agencies (approximately 3 000) has a paying sub-account at the Bank of the Nation. The sub-accounts do not maintain balances, and therefore cannot have savings, as the amounts received through the collecting accounts are transferred at the end of each day to the TSA. The amounts of payments ordered by each government body and entity are recorded in their respective payable accounts and at the end of each day, the total paid is affected to the single account in the Bank of the Nation.
At the end of each day the balance of the TSA is transferred from the Bank of the Nation to the Central Reserve Bank of Peru. A minimum liquidity reserve is held at the Bank of the Nation each day, as indicated in the previous section.
Surpluses in the Central Reserve Bank of Peru do receive remuneration, in accordance with the guidelines set out in the remuneration policy approved by an agreement between the MEF and the Central Reserve Bank of Peru; the interest rate is not a market rate. The Directorate of Financial Planning and Strategy establishes a schedule with the projection of surpluses available for deposits in terms of term and amount; likewise, demand accounts are left with a balance to ensure liquidity.
The existence of sources of funding is also a constraint for optimising the return on treasury. Only ordinary revenue and resources derived from borrowing can be invested by placing securities. Very rigid rules limit the operational capacity of the Treasury.
3.3.3. Payment process
Payment authorisation and execution are the responsibility of the directors general/managers and the spending agencies to which they report
The director general of administration or finance manager, or those acting in their stead, authorises the recognition of the accrual. The corresponding spending agencies makes the payment obligation, charged to public funds centralised in the TSA.
There are rules on the authorisation and means of payments
Peru has some regulated payment criteria and treasury management practices, such as the delay to provide authorisation (seven days from receipt of an asset), to register the accrual (three days), to draw (five days) and to pay (the next day). There are also rules governing petty cash.
While the average supplier payment period is not defined, in practice there is a mechanism for the lapse for events that have not registered a draft within 30 days. There are also rules regarding liability for late payment.
The recognised means of payment are:
1. electronic transfers on a mandatory basis, such as payroll and pensions and other related obligations and to suppliers and creditors of the state
2. cash payments, per the modalities under the regulations of the National Treasury System (petty cash and advances).
Electronic payment to suppliers is mandatory for the national and regional governments, and is being extended extensively to local governments. Cash payment is allowed when technical capacities make it difficult to make electronic or account payments. Cheque payments are being replaced by electronic means, as they can generate operational risk6 and are susceptible to manipulation. Some spending agencies sign cheques. A modern treasury management system should not allow this type of payment, except for duly justified exceptions. In addition, cheques can be cashed or debited, which may require a higher buffer. Advanced OECD countries do not use cash payments, except for some in petty cash equivalents. For example, Box 3.3 shows the payment process in Spain.
In Spain, to ensure electronic payment, payees must have their bank details included in the so-called “central third-party file” (fichero central de terceros).
The process starts with a payment proposal from a management centre, which arrives via the SIAF equivalent (SIC3). The Treasury checks that the account exists in the central third-party file and verifies that there is no seizure order by Social Security or the tax collection body. Once verified, the payment is ordered as per the payment order criteria (which, for example, define the deadlines), and provided that there are available funds under the current monetary budget (including the appropriate timing of payments, the estimation of borrowing needs to ensure that there is always a balance available). The payment is executed from the treasury single account of the Bank of Spain and may pass through an operational account until it reaches the final recipient.
Source: Directorate-General for the Treasury, Ministry of Economy and Business, Spain.
Depending on the type of beneficiary, payments can be made to accounts in private banks or to the Bank of the Nation. For example, most public sector employees in Peru (teachers, police, doctors, paramedics) and pensioners have an account with the Bank of the Nation, which is not a common practice in OECD countries. These cases also reveal weaknesses in the system, for example for deceased persons, particularly those without a national identity card. These are isolated cases, but the Treasury makes efforts to mitigate these practices, such as controls in conjunction with the Bank of the Nation or the monitoring of accounts which have not had any movements for at least six months.
Various expenditures are made using petty cash, mainly in institutions or by means that do not allow transfers or cash payment (e.g. hotel reservations in the case of official travel are increasingly common). To reduce the use of this type of payment, OECD countries, and increasingly Latin American countries, are resorting to the use of credit cards. Argentina was one of the first countries to use corporate credit cards in the region (Box 3.4).
The use of credit cards in the public sector arose from the interest in increasing transparency and efficiency in the use of public funds, reinforcing expenditure control measures within the revolving funds regime, and making it possible to replace the use of cash and cheques in favour of electronic means of payment. In Argentina, agencies may set up revolving funds, internal revolving funds and petty cash exclusively to meet urgent and duly justified expenses that do not allow for the routine processing of a payment order.
The use of corporate purchase cards involves channelling funds from the current account associated with the main revolving fund of each agency to a main virtual card account at the Banco de la Nación Argentina, from which funds are distributed to each of the cards associated with the main revolving fund, internal revolving funds and petty cash, as well as to the cards of each of the officials authorised to carry out official missions.
The corporate purchasing card, as the preferred means of payment for the payment of expenses channelled through this scheme, also includes payment of expenses made during duly authorised official missions within the country and abroad. This enables officials to pay their expenses with a highly secure payment means that is accepted locally and internationally, thus avoiding the transfer of sums in cash.
Using the corporate purchasing card decreased the prevalence of cheques and cash payments, bringing security and control to government units’ payment system.
Source: FOTEGAL.
The execution of spending agencies’ payment operations is carried out through sub-accounts in the Bank of the Nation authorised by the DGTP
For the execution of payment operations, the spending agencies have so-called bank sub-accounts in the Bank of the Nation authorised by the DGTP, which are dependent on the TSA. Although the TSA’s constituent accounts are held at the Bank of the Nation, the MEF’s procedures allow for payments from public funds (whether from the payroll of active and retired staff or suppliers) to be made both to personal or corporate accounts as well as to other institutions of the national financial system.
The bank sub-accounts depend on the TSA. They do not receive credits or deposits. They only record debits for the payment of cheques, order letters and electronic transfers authorised by the DGTP through the SIAF and maintain a zero balance at the close of each day.
Although they maintain a zero balance at the end of the day, the use of such sub-accounts generates transactions that do not add value to the system, and which engender risks and inefficiencies. Modern treasury systems lack such sub-accounts.
The System of Register Accounts records and tracks the TSA’s movements and balances
The System of Registration Accounts records and monitors the movements and balances of the funds held in the TSA. It includes detailed information by concept and/or entity holding the funds. In Peru, there is a tendency for the spending agencies to consider themselves the “owners” of their revenue. This system tries to find the link between this “ownership” that each unit or municipality exercises with respect to the revenue they generate or which, by law, “corresponds to them”, and the fungibility of the funds in the TSA. The System of Register Accounts is a system of scriptural accounts in the SIAF-SP, which is the only means of recording information on the financial execution of revenues and expenditures from public funds, guaranteeing a link between the funding source and the type of expenditure.
As discussed previously, the existence of funding sources undermines the effectiveness of the public financial management system and distances it from the public financial management systems of OECD countries. In particular, in the case of Peru, it undermines compliance with the principle of fungibility.
Treasury single account management indicators are mainly for internal use
OECD countries such as France, along with Chile and Mexico in the region, have developed and publish management indicators. These indicators generally seek to assess that available balances are as low as possible and that the daily surplus has been invested in financial instruments. Payment-related indicators include the percentage of payments made electronically, the volume of transactions to subnational governments above a certain amount reported in advance, dates on which amounts paid by cheque are cashed, or interest earned on deposits with primary repo loans.
The indicators are adjusted to the country’s needs; for example, if electronic payments are encouraged, special monitoring of their evolution should be carried out. If there are arrears, calculating the average supplier payment period is relevant. Spain reports these monthly to combat the problems of late payments that resulted from the 2009 crisis.
Peru has indicators for internal use. Peru is encouraged to publish this type of information, as it increases transparency and promotes the achievement of better results.
Comprehensive asset and liability management is the integrated management of the non-financial public sector’s financial assets and liabilities in accordance with financial planning guidelines. It aims to manage them efficiently, seeking to maximise the return on assets and minimise the cost of liabilities while assuming prudent risk. Comprehensive asset and liability management is achieved only through the full integration of the treasury and debt areas.
3.4.1. Integrated asset and liability management has begun in Peru, although there is room for improvement
Comprehensive financial asset and liability management was introduced in Peru following the merger of the Directorates General of Treasury and Indebtedness. It was formalised in 2013 with the Global Asset and Liability Management Strategy 2013-2016, then in 2014 with the creation of the Assets and Liabilities Committee. The predecessor to the first strategy, the Annual Debt and Debt Management Programme, was prepared by the Ministry of Economy and Finance from 2005 to 2012 and focused on public debt and debt management.
The DGTP annually formulates the Strategy for the Integrated Management of Financial Assets and Liabilities of the Non-Financial Public Sector, which is approved by ministerial resolution of the MEF and published to create awareness. The strategy observes the country’s financial policy guidelines. For example, it determines the debt financing structure and debt sustainability, among others.
The strategy covers four years and guides the management of the non-financial public service’s financial assets and liabilities. Its objective is to strengthen public finances under a medium- and long-term vision, following principles, objectives and goals more relevant to the financial strategy of debt, savings and treasury. The Comprehensive Asset and Liability Management Strategy contains seven guidelines (Box 3.5) that have been renewed since 2019, which are intended to guide non-financial public service entities in managing their financial assets and liabilities. The Fiscal Affairs Committee, which replaced the Assets and Liabilities Committee (Box 3.5), defines the guidelines.
The Ministerial Resolution of the Ministry of Economy and Finance of 29 December 2021 approved the regulations for the development of the Fiscal Affairs Committee, which was already provided for in DL 1436 Framework Legislative Decree of the Public Sector Financial Administration. The Fiscal Affairs Committee replaced the Assets and Liabilities Committee and establishes guidelines and strategies on fiscal risk management and the management of financial assets and liabilities. It is chaired by the Minister of Economy and Finance and composed of the Deputy Ministers of Economy and Finance. The technical secretariat is provided by the director general of the public Treasury. The committee’s functions include:
leading the management of tax risks and the comprehensive management of financial assets and liabilities
approving the guidelines, strategies and other instruments submitted for its consideration, necessary to optimise fiscal risk management and the comprehensive management of financial assets and liabilities
approving the reference structure of the Treasury’s financial assets and liabilities.
It is foreseen to meet twice a year, and when necessary on an extraordinary basis. The preparatory work is all attributed to the General Directorate of Public Treasury.
The management of assets and liabilities is directly related to certain risks
According to the Comprehensive Asset and Liability Management Strategy, the analysis of the risks of the financial assets and liabilities that make up the non-financial public sector’s balance sheet is based on the three main groups of risks that define them: market, credit and liquidity risks (Box 3.6).
Asset risks
Market risk: Financial assets are mainly concentrated in the very short term, reflecting the Treasury’s conservative management and the need for immediate liquidity in the face of financing requirements. Likewise, the public Treasury has been managing its assets, prioritising capital preservation; in this sense, its return alternatives are reduced to term deposits in the Central Reserve Bank of Peru and the financial sector (through auctions of its temporary liquidity surpluses).
Credit risk: The principal counterparty of Peru’s financial instruments is the Central Reserve Bank of Peru, which accounts for 53.2% of the non-financial public service’s total assets due to the centralisation of resources in the treasury single account and the balances of the Fiscal Stabilisation Fund. Investments by counterparty of public funds are mainly held by the government (68% end-2020), most of which are deposited in the Central Reserve Bank of Peru, showing limited asset diversification.
Liabilities risks
In particular, there has been an increase in fundraising in the domestic market, in Peruvian soles as opposed to other currencies. In this context, identified risks include:
Market risk: One of the objectives of the non-financial public service’s gross public debt management is to mitigate payment pressures in the medium term through debt management operations. The debt service profile (principal and interest) is 18% and the average maturity has been extended to 13.2 years. As a result, the weighted average rate of return is at rock bottom.
Credit risk: Episodes of volatility have led to an increase in Peru’s risk; between March and July 2021, there were rapid and widespread increases in sovereign risk. This increase is estimated to be a response to recent conjunctural events.
Liquidity risk: Trading volume has increased steadily since 2015. The hedging ratio averaged around 2.6 times in the period 2015-19 due to increased demand for financial instruments issued by the state and the growing development of the local debt market. However, from 2019 onwards, the coverage ratio for medium- and long-term benchmarks increased between five and sevenfold in response to changes in the auction schedule and investor demand at Treasury auctions.
Other risks: The composition of sovereign bond investor holdings has been reformed several times since the beginning of 2021, when non-resident investors started to reduce their share from a high of 51.7% in January 2021 to a low of 44.5% in May 2021. It has subsequently stabilised at around 50.0%; the reduction in the share of this type of investor is related to the trend of global fixed income asset sales.
Analysis of the net position
Exchange rate: The structure of the non-financial public service’s net public debt by currency has the local currency (19.5% as of September 2020) and the US dollar (69.2% as of September 2020) as its main components. The level of the dollar is due to the large amount of liabilities denominated in this currency and the reduction in assets.
Liquidity gap: There is a positive gap the first year and a negative gap the remaining years. The cumulative gap is positive for three years and negative for the next seven years of the period under study.
Source: MEF (2021[5]), Comprehensive Asset and Liability Management Strategy 2022-2025, Ministry of Economy and Finance, Lima, https://www.mef.gob.pe/contenidos/tesoro_pub/gestion_act_pas/EGIAP_2022_2025.pdf.
The risk analysis is complemented by a scenario analysis and various indicators of the public debt position.
The Comprehensive Asset and Liability Management Strategy highlights the most relevant developments and measures to combat the identified risks. For example, strengthening treasury management, with alternatives to make resources profitable, will positively affect liquidity and market risk. In addition, the streamlined handling of cash operations will result in lower resource requirements.
The DGTP has identified the most relevant asset and liability management reforms, and their publication reflects its commitment to them.
An assessment of the implementation of the Comprehensive Asset and Liability Management Strategy is published annually around May in the Annual Debt Report. This report also includes information on risks. By publishing both documents, the Comprehensive Asset and Liability Management Strategy in November and the Annual Debt Report in May, the most relevant risks and indicators are made public at least semiannually.
3.4.2. The link between cash planning, debt management and fiscal policy
Financial institutions may face short- and long-term lending risks when their planning and management are not well integrated. Governments must avoid taking on long-term debt to meet short-term needs.
Cash planning is essential to identify short-term needs that can be covered by short-term credits. Ideally, only structural deficits should be covered by long-term financing instruments. Only adequately prepared planning will be able to identify these needs.
Moreover, the government’s decision on its financial assets and liabilities will have a profound impact on monetary policy and capital market development, including indirectly through the availability of resources for credit expansion by the Bank of the Nation or the central bank, as the case may be.
The integration of cash and debt has been positive but is insufficient
Integrating the treasury and debt areas into a single organisation does not per se resolve the difficulties of aligning cash and debt management objectives. There are still examples of unconsolidated integrated management of assets and liabilities. There are placements above the real needs for resources as a result of the pre-financing some spending agencies have been carrying out to provision and ensure the payment of the public debt service for the following fiscal year (considering obtaining resources at a lower financial cost given the market reading), which is perceived as keeping resources temporarily idle. Public institutions also place funds in the financial system at the same time as the DGTP.
Co-ordination needs to be strengthened so that the functions of the Cash and Fiscal Affairs Committees complement and support each other, and so that information flows and dependencies between the decisions of the two committees can be established. For example, the Cash Committee conducts short-term and liquidity analysis, but this analysis must also be put in the context of issuance and borrowing needs, thus aligning cash and borrowing with budget execution, fiscal policy and economic conditions. Uncertainty about interest and exchange rates, and current commodity price volatility, make it particularly important to understand this relationship, identify risks and design alternative courses of action that directly affect Treasury borrowing policy. This could be entrusted to a Fiscal Policy Committee or the role of the Fiscal Affairs Committee could be expanded to include directors general as members.
The Rules of Procedure of the Fiscal Affairs Committee were adopted in December 2021 and are of a very high standard. The aim is to find an instrument to present data on planned execution and the proposed adoption of measures to comply with fiscal rules. It should focus on analysing monthly cash and budget projections until the end of the year and updating them every month, with the support of DGTP, the General Directorate of Macroeconomic Policy and Fiscal Decentralisation and with inputs from the spending agencies and SUNAT. This analysis is complementary to that carried out by the Fiscal Affairs Committee.
3.4.3. Public indebtedness and debt sustainability
Economic crises hit quite frequently, bringing in their wake rapid increases in public debt in excess of macroeconomic projections. This is the case in OECD countries as a repercussion of the COVID-19 crisis, and Peru has not been immune to it.
A country’s level of indebtedness, as well as its debt management, have medium- and long-term consequences for its economy. Hence, indebtedness should not be alien to the concept of fiscal sustainability and should play an active and integrated role in fiscal policy.
There is nothing intrinsically harmful about borrowing. Incurring public debt can be a necessary component of fiscal policy to support growth and development. Countries can resort to domestic savings or international borrowing, depending on the conjuncture. External borrowing may be necessary not only to secure financing but also to obtain the necessary expertise and investment.
The critical issues in a country’s debt policy are to analyse:
the costs, including the terms of borrowing versus other options, if any, such as using reserves
the sustainability of debt service costs, which means understanding what is a manageable interest burden for the state.
Fiscal sustainability is defined as a situation in which the government is capable of servicing public debt in the short, medium and long terms without the need for economically or politically unlikely policy adjustments, without defaulting on its payment obligations or incurring renegotiations, and given the financing conditions and costs it faces. Excessive debt or debt overhang is not conducive to growth and development. And an increasing share of revenues devoted to debt service payments weakens a government’s ability to implement its desired policies.
In short, debt strategy and management is a very important area for countries, and should be fully integrated with public financial management, particularly macroeconomic planning, budget planning and execution, and treasury. However, like all other areas of public financial management, debt can only be well managed when there is full accountability and transparency. At a more technical level, an active strategy between cash management and debt management is essential.
The integrated debt management system registers and manages all public debt
In Peru, a debt analysis is carried out and published in the Annual Debt Report. The Integrated Debt Management System (Sistema Integrado de Administración de Deuda) is a tool that includes the public debt. It is not part of the SIAF-SP but execution of the payment of debt is reported in this system.
This system covers operations with internal and external debt securities and loans from international financial institutions and other entities. The “Simulation” module was designed to calculate and analyse, from the gross debt payable database, at a given cut-off date, different indicators associated with public indebtedness, as well as to determine debt flows in different scenarios, considering macroeconomic and financial variables as inputs. The module also assesses debt sustainability in financing or payment strategy scenarios and stress situations.
To move towards comprehensive management of financial assets and liabilities, it is necessary to assess the possibility of creating a new simulation module for structural balance sheet risk, considering all the information on the Treasury’s financial assets and liabilities and, in due course, of the entire central government, where the necessary changes to implement such a process are outlined.
In addition, the Integrated Debt Management System supports debt management, although the operational processes are still paper-based and a lot of data are entered manually, making the system insecure. Debt management is carried out by the Debt Management Unit, and for a loan repayment for example, about five signatures are necessary to proceed with the repayment. This system will be absorbed in the reform of the new SIAF-RP.
Public debt is mainly made up of bonds
Public debt management is the process of establishing and executing a public debt management strategy to obtain the necessary amount of financing at the lowest possible cost over the medium to long term consistent with a prudent degree of risk and often to achieve secondary objectives such as the development of domestic debt markets.
Once the global strategy has been agreed upon, it is necessary to study the different possible instruments and materialise the debt policy with one of the instruments. According to the latest Debt Report,7 at the end of 2021, external debt prevailed over domestic debt. In 2020, there was a notable increase compared to 2019, especially in direct external government debt (Figure 3.2).
Source: MEF (2021[6]), Annual Debt Report 2021, Ministry of Economy and Finance, Lima, https://www.mef.gob.pe/contenidos/deuda_publ/documentos/Informe_Deuda_Publica_2021.pdf.
The cost of servicing public debt has an impact on public policies, i.e. crowding out other expenditures. Moreover, the structure of the debt portfolio can aggravate or contribute to crises. For example, a large stock of short-term debt increases the risk of a liquidity crisis (inability to roll over debt), and a large stock of foreign currency debt prevents the use of currency devaluation to adjust to shocks.
Developing the domestic capital market is also desirable, as it enhances a country’s financial stability. However, throughout 2021, local borrowing decisions remained cautious, mainly due to the approval of the fifth partial withdrawal of pension funds and the unfolding presidential elections, which usually adds volatility to markets.
The size of the local government bond market declined from 17.2% of GDP in 2020 to 14.7% at the end of 2021.
There is also a two-way relationship between debt management and the macroeconomic environment. Good debt management enables the effective implementation of macroeconomic policies. Inappropriate macroeconomic policies generate uncertainty in financial markets (higher risk premia, higher exposure to rollover and currency risk). Thus, there is a strong need for a high degree of co-ordination between debt managers and macroeconomic policy makers, i.e. between the DGTP and the General Directorate of Macroeconomic Policy and Fiscal Decentralisation.
The Annual Debt Report also includes an analysis of the structural balance sheet risk, composed of liquidity, interest rate, exchange rate and concentration risk. It also has an assessment of the Comprehensive Asset and Liability Management Strategy, pointing out the most relevant actions in the seven guidelines.
Such modernisation as highlighted above requires a number of supporting factors to improve the integration of systems and the flow of information, which are themselves undergoing reform. These are the SIAF and online accounting, both of which are also closely related.
3.5.1. The reform of the SIAF can contribute to improving the information available to the DGTP
Integrated systems play a crucial role in recording information, and can also bring benefits to financial control. However, it must be stressed that the system is a support factor, a tool for the general directorates of the MEF, which must carry out the modernisation process.
During the 1980s, there was a significant development of integrated financial management systems in Latin America. In the case of Peru, the system began to be used by the government and was extended to the spending agencies as the technical and material infrastructures (purchase of equipment, training) were developed. The development of the SIAF has been in continuous movement. In 1999, it became an official system for recording the spending agencies’ expenditure and revenue operations, replacing various records and reports that until then were scattered and came from the General Directorate for Public Budget, the DGTP and the National Public Accountant's Office.
However, there are still databases in the entities that are not connected to the SIAF, so that the loading of data generates a risk of creating inconsistencies since the institutions’ information is not validated on line against the central databases. In addition, the security system is weak because at the central level it is not possible to identify which users carry out transactions in the entities. The architecture can have high costs because the institutions must have the technical staff to maintain the applications and operate the systems, and have tools and servers with sufficient capacity.
Specifically in the Treasury, the SIAF does not allow information on debt and cash holdings to be obtained in real time, but with a time lag, and there is no guarantee that the information is accurate.
The MEF has recently signed a loan with the Inter-American Development Bank to develop a new SIAF.
3.5.2. E-accounting and accounting regulatory reform will contribute to improved forecasting
Timely and reliable financial information is essential for sound financial management, and accounting is a fundamental tool for this purpose. Accounting, through the timely records that different public entities keep, provides the necessary information to produce the best projections for cash flow management and fiscal risk management based on the timely records made in a decentralised way by different public entities that interact in the process.
Peru’s accounting system is based on the budgetary approach to recording transactions (modified cash basis), and the desire to adopt IPSAS has been expressed numerous times. Implementing IPSAS requires a detailed adaptation of IPSAS, where the basis of accounting is budget execution. Given that the government is committed to developing a new SIAF, it is essential that all IPSAS requirements be taken into account in the definition of its conceptual and technological model and that the functional, technological and executing areas of the MEF participate jointly in its development.
No operational manuals have been prepared setting out the information flows necessary for recording all accounting transactions in accordance with IPSAS. Operational manuals could identify the transactions to be recorded in accordance with IPSAS, the offices to which they should be recorded, as well as the time of recording of each transaction and its measurement in both accrual and budgetary accounting, which in many cases can be very different.
Regarding the recording of treasury and debt operations, the DGTP is interested in having timely and relevant information for treasury management. The implementation of accrual accounting following international standards (IPSAS) will allow meeting these information needs for the efficient management of public funds.
The DGTP is working on a process for cleaning up the application of IPSAS, which allows for a self-assessment to identify accounting problems in the different areas and to share them with the DGCP. The aim is to clean up the information in order to train staff in IPSAS, then to proceed with implementation. For the time being, debt operations more than 20 years old and old accounts receivable are still recorded in the financial statements. It appears that assets are being overstated. There are also differences in the cash account, with balances that do not cross-check with the applications, mainly in the case of regular revenue float, which creates uncertainty. The balances drawn pending payment cannot be distinguished from the floating balances because the application does not allow this. In addition, the lack of online accounting does not allow the Bank of the Nation and the Central Reserve Bank of Peru to see the actual cash position.
Implementation of IPSAS is not yet underway. Full adoption can be challenging; ideally, countries should adopt the standards gradually according to their priorities, current situation and possibilities. For example, in the DGTP, no provisions are recorded, except for outstanding receivables, and the provision for national government guarantees is calculated but not recorded.
At the central government level, ministries are considered as accounting entities. This is not in line with the most widespread accounting practices. Furthermore, it leads to financial statements that are not very meaningful and far from giving a true and fair view of the units to which they refer. For example, the financial statements of the Debt spending agency contain on the liabilities side of its balance sheet all the debt issued by the state, which constitutes a liability of the central government as a whole and not of that spending agencies. Another example is the Treasury, which appears as an asset in the Treasury’s financial statements, and constitutes an asset of the central government.
The spending agencies does not qualify as an institutional unit of government. An institutional unit must have the power to hold assets, incur liabilities and transact business in its own right. Therefore, in general, all entities funded by appropriations under a budget controlled by the legislature must be merged into a single institutional entity.
3.6.1. Introduction: Tax risk analysis today
Fiscal risk management is a key part of public financial management in OECD countries. For example, all EU member states must present a risk analysis in their annual Stability Programme submitted to the European Commission. Other countries such as Australia, Canada, Colombia and the United States have also made significant developments in this area. Promoting risk management requires investment in training and the development of new reports and specialised areas within the ministries of economy and finance and other units that have the necessary information and may be more exposed to the different sources of risk.
In recent years, the MEF has also shown interest in developing this area. Institutionally, the DGTP has a Fiscal Risk Directorate, created in 2011 to analyse operational, contingent and financial risks. Following the change in the organisational structure of the MEF in 2018, resulting from the development of the rules on the modernisation of the financial management system, part of the directorate’s functions were transferred to the Directorate of Institutional Integrity and Operational Risks, and part to the Directorate of Financial Planning and Strategy. Currently, the directorate is responsible for fiscal risk management and the analysis of contingent risks associated with public-private partnerships; to implement these functions, it is progressively working on developing guidelines and methodologies for managing fiscal risks established by DL 1441.
Peru has identified fiscal risks that should be assessed and mitigated, and there is a commitment on the part of the authorities to make them transparent. At the moment, though, there is still limited information and insufficient capacity to do so. In principle this role would be assumed by the line management of the DGTP; however, this is not considered to be a role to be assumed by the DGTP. This should be reconsidered. In OECD countries, often there is not one directorate in charge of studying all risks in depth, due to their high number and diversity, but rather risks calculated by several entities are co-ordinated, with some of the being calculated. In some OECD countries, this function is attributed to the Directorate General of Macroeconomic Analysis; in others, it is decentralised. Others have created a specific Risk Coordination and Management Unit.
In Peru, the MMM includes information on structural revenue and expenditure risks, which are calculated by the General Directorate of Macroeconomic Policy and Fiscal Decentralisation, part of the Vice-Ministry of Economy. Internal reports (annual and periodic) on fiscal risk management are prepared by the DGTP’s Fiscal Risk Directorate. Likewise, information on explicit contingent liabilities has been reported in the multiannual macroeconomic framework.
Fiscal risks within the framework of DL 1441
The approval of DL 1441 of 2018 seeks to achieve a comprehensive view of fiscal risks. The DGTP’s functions explicitly include proposing guidelines, methodologies, models and complementary regulations for the identification, measurement, mitigation and monitoring of fiscal risks, as well as preparing the annual report on fiscal risks and the periodic and follow-up reports.
According to DL 1441, fiscal risk management should comprise the identification, measurement or valuation, mitigation, and monitoring of risks, defined in Box 3.7. Such tasks are attributed to the DGTP.
1. Identification: This consists of determining the nature of the risk and its characteristics, including internal and external events, activities, or systems that may have an impact on fiscal policy objectives.
2. Measurement or valuation of the fiscal risk: This involves estimating the levels of exposure to the identified risk. This is done by indicating the level of probability and impact.
3. Mitigation: This involves formulating and selecting actions to address the risk, planning and implementing the risk treatment, and evaluating its effectiveness.
4. Monitoring: This consists of the follow-up of the implementation of measures to be adopted to avoid, reduce, transfer or retain the risk and actions aimed at preventing or reducing the probability or severity of the consequences of the fiscal risk.
Source: Legislative Decree 1441.
Work to advance these activities has slowed down due to the pandemic, so the most developed step so far is the identification of risk sources. Risk management staff are undergoing training and upskilling to develop assessment and measurement methods. The mitigation and monitoring phases have, for their part, not yet begun to be developed.
Some fiscal risk reports have been produced, but only internally within the DGTP, the Vice-Ministry of Finance and the Vice-Ministry pf Economy, and have not been circulated to other stakeholders. There are currently two such reports per year. There are difficulties in collecting and aggregating all the available information and the Treasury line directorate does not have the authority or mechanisms to collect it from other directorates or units.
3.6.2. Identification and measurement of tax risk categories
The main objective of fiscal risk management is to adopt measures to mitigate the impact of events that generate differences between fiscal results and expected results. To this end, countries must identify the vulnerabilities that each risk can produce.
DL 1441 classifies fiscal risks into three categories and identifies the entities in charge of reporting the information:
1. Macroeconomic risks, referring to the exposure of public finances to changes in macroeconomic parameters such as economic growth, commodity prices, interest rates and exchange rates, considering the analysis of different economic scenarios and their impact on fiscal accounts and public debt sustainability. They are provided by the General Directorate of Macroeconomic Policy and Fiscal Decentralisation.
2. Specific risks, which are further subdivided into:
Contingent risks of judicial and arbitration proceedings, registered by the Public Prosecutor’s Offices that make up the State Legal Defence System, supplied by the DGCP.
Risks related to possible financial crises, provided by the General Directorate of Financial Markets and Private Pensions of the MEF.
Risks assumed by Licensor, provided by the General Directorate of Private Investment Promotion Policy of the MEF.
Risks arising from the implementation of investment projects, provided by the General Directorate for Multiannual Investment Programming.
Pension risks of the public sector entities under its scope of action, provided by the Directorate General for the Fiscal Management of Human Resources.
Risks arising from the execution of existing contracts, provided by the General Directorate for Supply.
Risks of Financial and Non-Financial Public Sector enterprises, provided by FONAFE (National Fund for Financing State Business Activity).
Natural disaster risks, provided by the Presidency of the Council of Ministers.
3. Structural and institutional risks. They stem, for example, from the structure of public revenues (mining), rigidities in public spending, lack of institutional capacity, etc. These are currently referred to in the MMM.
Difficulties and possible improvements
Although responsibilities are clearly delimited, in practice, there are difficulties for a line management of the DGTP to receive information from the subjects identified. Furthermore, there are no mechanisms to identify the formulas for collaboration or the scope and frequency of the provision of information. It is necessary to convey the importance of risk management, which is not yet internalised by the entities. Many lack the knowledge to be able to develop an assessment, and a joint and integrated co-ordination and development effort would be necessary.
The international situation and events that have taken place in Peru highlight the importance of measuring risks and defining strategies to mitigate and control them. For example, variations in the price of raw materials, natural disasters derived from global warming, and problems in subnational governments, among others, are all significantly impacting the budget and fiscal policy. The MEF’s task is to foster a culture of measurement and to design formulas for sharing and processing information so that risks can be mitigated.
So far, the risks most worked on by the DGTP management are those associated with debt, particularly guarantees, public-private partnerships and debts with public companies. The management is organised into two teams: six staff to analyse public-private partnership contracts and four to analyse other risks, which is insufficient.
For its part, the General Directorate of Macroeconomic Policy and Fiscal Decentralisation has functions in respect of explicit contingencies and macroeconomic risks. The assessment of these is already well established.
References
[1] Aggarwal, V. (2009), “The politics of confrontation: Peruvian debt rescheduling in the 1980s and 1990s”, in Debt Games: Strategic Interaction in International Debt Scheduling, pp. 376-408, Cambridge University Press, https://doi.org/10.1017/cbo9780511609282.014.
[6] MEF (2021), Annual Debt Report 2021, Ministry of Economy and Finance, Lima, https://www.mef.gob.pe/contenidos/deuda_publ/documentos/Informe_Deuda_Publica_2021.pdf.
[5] MEF (2021), Comprehensive Asset and Liability Management Strategy 2022-2025, Ministry of Economy and Finance, Lima, https://www.mef.gob.pe/contenidos/tesoro_pub/gestion_act_pas/EGIAP_2022_2025.pdf.
[4] MEF (2021), Fiscal Stabilisation Fund, Third Quarter Report 2021, Ministry of Economy and Finance, Lima, https://www.mef.gob.pe/contenidos/tesoro_pub/fef/informe_IIITrim2021_FEF.pdf.
[2] Pessoa, M. and M. Williams (2012), Government Cash Management: Relationship between the Treasury and the Central Bank, International Monetary Fund, Washington, DC, https://www.imf.org/external/pubs/ft/tnm/2012/tnm1202.pdf.
[3] Ricardo Quiroz Mejía, J. (2022), “Level of management performance of the provincial municipality of Chota: A methodology for local governments”, Revista Industrial Data, Vol. 25/1, pp. 79-102, http://www.scielo.org.pe/pdf/idata/v25n1/en_1810-9993-idata-25-01-79.
Notes
← 1. Five-year average: 2018-22.
← 2. The Cash Committee was created in 1991 and reformed in 2016 (thereafter the Director General of the DGTP was recognised as a full member). Its functions include approving the cash budget, co-ordinating its implementation, and evaluating and monitoring its execution.
← 3. Before the creation of the TSA, there were more than 14 000 accounts at the Bank of the Nation.
← 4. This is one of the cases of an entity whose funds (registered as directly collected revenue) will become ordinary revenue from 2023.
← 5. Data provided by the DGTP in August 2022.
← 6. The concept of operational risk includes a number of different types of risks, such as inadequacies or failures in internal controls or systems and services; reputational risk; legal risk from security breaches; and natural disasters affecting the business.
← 7. https://www.mef.gob.pe/en/?option=com_content&language=en-GB&Itemid=100789&view=article&catid=234&id=749&lang=en-GB