OPM briefing notes
2010 - 02
Cash Budgeting: Sub-Saharan Experience
and Lessons for Zimbabwe
Introduction
Cash budgeting systems1 determine
within-year budget releases primarily
upon the basis of revenue collected,2
rather than using the cash flow
profile associated with the Approved
Estimates. In this situation, the
approved budget becomes a guide
rather than an authority. Cash
budgeting systems release the
authority to incur expenditure only
when adequate cash is available. In its
strictest form, cash budgeting allows
no possibility of short-term financing to
smooth over temporary illiquidity.
Cash budgeting is used either:
• as an emergency measure
to restore fiscal discipline and
macroeconomic stability (in many
African countries in the 1990s, e.g.
Malawi, Zambia and Uganda); or
• as a routine measure to cope
with revenue uncertainty (either in
aggregate or simply unpredictability
over time).
Historically cash budgeting has often
been introduced as the first and
retained as the second, often for long
periods. At one time or another, cash
budgeting has been used by countries
as diverse as Bosnia-Herzegovina,
Guinea, Peru, the Russian
Federation, Tanzania and Uganda
(Stasavage and Moyo 2000).
In the medium-to-long term there
are better tools than cash budgeting
to cope with both macroeconomic
instability resulting from poor
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fiscal discipline and with revenue
uncertainty. Accordingly, it will be
argued in this short note that cash
budgeting should be seen as a shortto-medium term measure, for which
an exit strategy should be built into
public financial management planning
and reforms.
commercial banks; improvements in
procurement procedures; new public
finance legislation; and stronger
oversight agencies. However, among
these, cash budgeting was often seen
as the quickest fix since it appeared
to require relatively little institutional
change.
Zimbabwe is emerging from a period
of macroeconomic instability, and has
adopted cash budgeting to manage
prevailing revenue uncertainty.
This briefing note examines the
experience with cash budgeting in
three sub-Saharan African countries,
and considers what lessons might
guide Zimbabwe in developing
its cash budgeting systems,
avoiding the difficulties others have
experienced, and ensuring that
future macroeconomic stability is not
dependent on the continuation of this
emergency measure.
It soon became clear that cash
budgeting caused particular
difficulties, of which six stand out:
xperience in
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sub-Saharan Africa
In the African countries where it has
been introduced, cash budgeting
has followed a common pattern. In
the 1990s many African countries
found that budget execution was
undermined by fiscal indiscipline,
causing severe macroeconomic
instability. An IMF recommendation
or conditionality was often the
catalyst for cash budgeting along
with other interventions including:
computerisation of public financial
management; rationalisation of
bank accounts, including the use of
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• Arrears: with immediate buying
power constrained, spending
agencies used credit from local
suppliers, leading to a steady increase
in arrears. The build-up of arrears
rendered cash budgeting ineffective,
but had other consequences:
- local suppliers demanded higher
prices for goods and services to
compensate for likely delays in
payment, and
- ­manual, cash-based accounting
systems in many countries had
no means of recording arrears
effectively, and the financial
position of many ministries became
increasingly unclear.
• Volatility: some countries elected
to base monthly allocations on the
revenue collections of the preceding
month. Since many tax revenues
are seasonal and grants from donor
agencies are notoriously volatile
this caused wide swings in cash
allocations. Consequently, spending
agencies were unable to plan beyond
the immediate cash horizon with
adverse consequence for service
delivery.
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• Misallocation across sectors:
whenever funds were insufficient,
powerful ministries were able to
defend their allocation, while priority
(often pro-poor) spending that was
the responsibility of less powerful
ministries or departments was prone
to cuts (e.g. in Zambia, see Dinh et
al. 2002, and in Zimbabwe, see OPM
2009).
• Poor accountability for
allocation: the annual budget is
approved by parliament in most subSaharan countries. However, cash
budgeting reallocations are often
determined directly by the treasury,
thus weakening parliamentary
oversight of the budget and leading to
a parallel budgeting process.
• Operational cost cutting: savings
are typically made by severe cuts in
non-salary operating costs, which are
invariably a small proportion of the
budget to begin with. These nonsalary expenditures (e.g. transport)
are often critical to rendering
government staff effective in their
work.
• Incompatibility with the Medium
Term Expenditure Framework: the
MTEF provides a degree of financial
certainty to spending ministries
over the medium term, whilst cash
budgeting creates uncertainty and
undermines this gain. Historically,
ministries have lost interest in
medium-term budgeting as a result.
However, although it is difficult to run
both effectively, especially where cash
budgeting is severe, it is essentially
revenue uncertainty and financial
indiscipline that undermine the MTEF,
and not cash budgeting per se, which
is a response to these factors.
In recent years, there has been an
effort to resolve some of these issues,
whilst still including cash availability
and/or revenue collection as a key
determinant of monthly releases.
It has led to better managed cash
budgeting arrangements.
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Case studies
Malawi
Cash budgeting was introduced
in Malawi in 1995 as a result of
unsustainable deficit levels and
dramatic increases in inflation. It
was initiated by the IMF in order to
restrain government spending and
limit net domestic credit. The monthly
allocation envelope was calculated
from the previous month’s revenue
collections after deducting nondiscretionary expenditures (primarily
debt servicing). This led to volatility.
Cash budgeting placed severe limits
on sectoral spending, undermining the
ability of ministries to plan or perform
effectively (World Bank 2001). It also
had the unintended consequence that
those who controlled cash budgeting
were able to rewrite the budget from
month to month (Rakner et al. 2004).
Cash budgeting (and the concurrent
transfer of government accounts to
commercial banks) sought to control
aggregate expenditures and was not
expected to improve the quality of
spending. Cash budgeting may have
contributed to the reduction in the
reported budget deficit in 1995/96 and
1996/97. However, by 2002/03 the
deficit was back up to 11.6% as a result
of continued fiscal indiscipline, made
possible by supplementary budget
requests and the build-up of arrears.
In 2000, in response to uncertainty
of funding, the government of Malawi
introduced the credit ceiling allocation
system (CCAS), which gave all
ministries advance notice of spending
ceilings on a quarterly basis. These
ceilings formed the budget constraint,
effectively replacing the allocations
in the budget. CCAS also required
the reporting of commitments in order
to control the build-up of arrears.
However, in spite of such measures,
arrears continued and a World Bank
Country Assistance Evaluation
concluded that:
‘All the budgetary measures and
administrative reforms, including cash
budgeting, publication of budget data
on the Internet, MTEF, and IFMIS,
proved ineffective tools for expenditure
control … the main source [of
overspending] was that ministries and
agencies were allowed to overspend
their budgets or accumulate arrears
without penalty.’ (2006: 16)3
In 2005, the newly appointed
Accountant General centralised
systems such that all purchase orders
were computer-generated. The
Accountant General’s Department
reviewed all documentation prior to
issuing cheques centrally, and revoked
any payment supported by a manual
purchase order. This is understood
to have significantly improved
expenditure control in Malawi.
Zambia
Zambia’s cash budgeting system was
introduced in the early 1990s against
a backdrop of runaway inflation
and macroeconomic instability.
Under this system the aggregate
monthly release was calculated as
the difference between the revenue
projection of the Zambia Revenue
Authority (called the ‘revenue profile’)
and the monthly surplus necessary to
meet the IMF’s quarterly Enhanced
Structural Adjustment Facility (ESAF)
benchmark. Allocations in each
expenditure category were determined
by a small committee within the
Ministry of Finance and National
Planning. In some months priority
spending (personnel emoluments
or debt servicing) absorbed all
available resources so that non-salary
recurrent and capital expenditures for
low-priority budget heads received
no funding. What distinguishes
Zambia’s cash budgeting process is
that it is based on a strict rule of no
net borrowing in any month except
extremely short-term borrowing to
cover salaries when required. Dinh
et al. (2002) argued that this, together
with the need to meet quarterly ESAF
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targets, exacerbated the volatility of
Zambian cash releases.
Dinh et al. identified a number of other
difficulties in Zambia’s cash budget.
These include heavy reallocation of
expenditures during the course of
budget implementation, leading to
skewed and distorted expenditure
composition compared to the
original budget estimates; and over
commitments and arrears. In respect of
the latter they state that in 1995, K22.2
billion or 3.7% of total domestic budget
outlays was spent on arrears. Since
then the amount increased annually,
reaching 12% of total domestic budget
outlays in 2004. A five-year plan for
dealing with a substantial build-up of
outstanding payments, focussing on
more regular cash releases coupled
with stronger commitment controls,
amounted to 4.3% of total budgeted
spending (including pension arrears) at
the end of 2007.
Uganda
As with Malawi and Zambia, Uganda’s
cash budgeting system was introduced
in response to a protracted period of
macroeconomic instability in 1992/93.
The instability arose from inflationary
financing of public deficits through
central bank borrowing in the 1970s
and 1980s. Cash budgeting is credited
with playing a part in the low rate
of inflation achieved since that time
(CABRI 2004).
Under Uganda’s cash budgeting
system, expenditures were not strictly
tied to the previous month’s revenues.
The Ugandan government allowed the
Finance Ministry to borrow from the
central bank (within a predetermined
limit) to adjust monthly spending levels,
so a certain level of deficit was permitted.
The composition of expenditure was also
determined by the Finance Ministry. As in
Zambia, this represented a shift in power
to the Finance Ministry to have discretion
over budget allocations instead of
implementing the budget as approved by
parliament (Stasavage and Moyo 2000).
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Before 1992, systems for monitoring
cash disbursements and commitments
entered into by line ministries had
eroded considerably. The cash budget
helped address monitoring problems
through the creation of a Cash Flow
Committee, improving transmission
of information to control expenditure,
which is believed to be the major
change brought about by the cash
budgeting system.
Possibilities for expenditure control in
Uganda were also improved through
the introduction of the central control
of payments. This distinguishes both
Uganda and latterly Malawi, from the
Zambian case. Uganda Computer
Services, under Finance Ministry
control, had the sole privilege of
producing cheques and only did so if
ministries had sufficient funds.
Uganda’s cash budgeting system
is reported to have had severe
costs in terms of the effectiveness
and efficiency of expenditure. First,
multiple in-year budget revisions
associated with cash budgeting have
meant that less attention is paid to
annual budget preparation; second,
there was a huge build-up of arrears;
and third, it served to undermine
budget reforms in planning. However,
it is generally considered that volatility
was reduced as a result of the
smoothing of releases provided by
limited borrowing.
Can Zimbabwe prevent some of
the downsides experienced in
other countries?
Cash budgeting can contribute to
fiscal balance and control of inflation,
and can therefore provide shortto-medium term fiscal discipline for
Zimbabwe. However, depending
on the particular practice of cash
budgeting, certain difficulties may
arise. The following approaches are
suggested by the case studies.
Arrears
Good practice requires strong
commitment control to prevent the
development of arrears. In order
for this to be enforceable, it should
be supported by vigilant monitoring
and sanctions for public officials and
private suppliers who offend. This is
easier said than done. For example,
where a minister instructs an
accounting officer to provide funds (or
the necessary authorisation to access
them, as with a purchase order to
a private supplier), to undertake
an international business trip, or
acquire emergency supplies, the
latter might have difficulties declining
such a request in spite of legislative
protection. To what extent can either
the accounting officer or the minister
be sanctioned for that behaviour?
As liquidity in the market increases,
arrears might grow, although any
lending to government or credit
offered to line ministries will most
likely be at a very high cost. At that
point it will be imperative that the
centralised systems of Commitment
Control within the computerised
accounting systems should be
effective: suppliers should be notified
that credit purchases by government
departments are prohibited, that only
system-generated purchase orders
are valid and that the Ministry of
Finance will not meet unauthorised
commitments.
Volatility
Good practice suggests that steps
must be taken to avoid volatility,
which undermines the ability of line
ministries to plan effectively.
Uganda used limited central bank
borrowing to smooth volatility and this
may become an option for Zimbabwe,
although it is currently difficult.
Tanzania smooths out disbursements
by basing them on an average of the
previous three months’ revenues.
Monthly revenues have now begun
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to plateau in Zimbabwe and such
averaging has become an option. In
the meantime the Ministry of Finance
can provide as much advance notice
to line ministries of the cash-adjusted
disbursement as possible. Although
this does not smooth volatility per se,
it assists the planning of line ministries
who can then adapt expenditures
accordingly and project one-off lump
sum expenditures for those months
with expected larger disbursements.
Deviation of expenditure
composition with respect to
the original budget
In any country adopting emergency
cash budgeting, cuts fall more heavily
on discretionary non-salary budgets.
There is no obvious way to prevent
this without a long-term review to
reconcile public employment and
salary levels with available budgetary
resources. The development of
guidelines will assist Zimbabwe in
specifying an ordering of priorities,
sectors and types of expenditures
to be protected, to ensure that the
composition of expenditure outcome
(by functional as well as by economic
classification) reflects the original
budget. Regular monitoring will be
required to ensure that this is so.
An exit strategy from
cash budgeting
For the reasons outlined above,
including deviation from the approved
budget, cash budgeting is a second
best solution: easy to begin, but
very difficult to end. There are
many reasons for its persistence,
including the tendency to overbudget expenditures to accommodate
different interests during budget
preparation, forcing later cutbacks;
a preference for some ministries of
finance for a centrally-sanctioned
tool to vary budget allocations in
line with evolving needs without
further reference to parliament; and
continuing poor, or over-ambitious,
revenue estimation.
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An exit strategy from cash budgeting
requires revenue certainty on the
one hand, and fiscal discipline on the
other. The first can best be achieved
by conservative revenue estimation
and mid-year upward revisions where
justified. The second has expenditure
control at its heart, and requires a
strong accounting system, prompt
within-year reporting, sanctions for
overspending, and effective oversight.
However, as the experience from
Malawi highlights, fiscal discipline
requires strong enforcement
measures. If ministries and agencies
are allowed to spend above their
budget allocations and not comply
with the systems and procedures,
cash budgeting will remain as a
formal procedure rather than an
effective constraint. From a technical
standpoint, all expenditure control
measures are within reach of
Zimbabwe in the short-term. Their
effectiveness will require high level
political buy-in and strong leadership.
Tim Cammack
Associate Consultant,
Public Financial Management
Clara Picanyol
Consultant,
Public Financial Management
[email protected]
Bibliography
CABRI (2004) ‘Budget Reform Seminar,
Country Case Studies’, 1–3 December.
Pretoria: Collaborative Africa Budget
Reform Initiative.
Dinh H., A. Adugna, and B. Myers (2002)
The Impact of Cash Budgets in Zambia,
October. Washington DC: World Bank.
Government of Zimbabwe (2009) Budget
2009 Content, March.
Government of Zimbabwe (2009) MidYear Fiscal Review, July.
IMF (2008) ‘Institutional Arrangements
for Cash Management’, September
(presented at CABRI).
Oxford Policy Management (2009) Review
of the Zimbabwe Budget 2009, final
report, August. Oxford: OPM.
Rakner, L., L. Mukubvu, N. Ngwira,
K. Smiddy, and A. Schneider (2004)
The Budget as Theatre – The Formal
and Informal Institutional Makings of the
Budget Process in Malawi, July, final
report for DFID.
Stasavage, D. and D. Moyo (2000) ‘Are
Cash Budgets a Cure for Excess Fiscal
Deficits (and at what costs)?’, World
Development 28(12): 2105–22.
World Bank (2001) Malawi Public
Expenditures: Issues and Options, June.
Washington DC: World Bank.
World Bank (2006) Malawi Country
Assistance Evaluation, Report No.
36862, 26 July. Washington DC: World
Bank.
Endnotes
Based on a paper prepared for the
Ministry of Finance, Zimbabwe, funded
by DFID. The views expressed are the
authors’ and should not be attributed to
any institutions mentioned here.
1
Cash budgeting is also referred to as
cash rationing, which implies a downward
revision of total releases.
2
In practice, the releases depend upon
the broader availability of funds including:
funds on hand from earlier periods;
required ‘buffers’ or contingency funds;
and any short term borrowing allowed
under the cash budgeting guidelines.
3
IFMIS: Integrated Financial Management
Information System.
OPM briefing notes
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