The State Treasury is responsible for the State’s daily cash flow management, i.e. guaranteeing that all State entities can make all needed payments every day, and for investing the State’s financial reserves – the Liquidity Reserve and the Stabilisation Reserve Fund.
These principles are followed in managing the State’s cash flow and financial reserves management:
- Consolidated cash management: the State Treasury manages day-to-day cash flows of all State entities, State-owned foundations (such as museums, theatres, hospitals etc.) and social security funds as a whole.
- Liquidity Reserve and Stabilisation Reserve Fund: the State maintains financial reserves for both day-to-day cash management and for crisis situations.
- Minimum liquidity requirements.
- Conservative investment requirements.
Cash flow and financial reserves management
Consolidated cash management
The State Treasury manages day-to-day cash flows of all State entities, State owned foundations (such as museums, theatres, hospitals etc.) and social security funds as a whole. The State Treasury guarantees that State entities can make payments subject to their budget limits and/or cash balances whenever they need.
The State Treasury uses four local banks – Swedbank, SEB Bank, Nordea Bank and Danske Bank - for collecting revenues and channelling domestic and foreign payments.
By law, ministries and agencies are not allowed to have their own bank accounts (except for embassies), to borrow, give loans and guarantees or to invest in securities (unless specifically approved in the annual State budget).
State-owned foundations and social security funds were merged into the State cash pool in 2011. The aim of the consolidation was to increase synergies in central government cash management. Different entities with positive and negative cash positions balance each other internally so decreasing the borrowing needs for the State. In addition, consolidated cash management improves the State’s liquidity and financial risk management and decreases costs.
Social security funds and State-owned foundations do not need to deal with their own cash flow and financial reserve management. The State Treasury pays interest on their cash balances. The interest rate equals the return achieved on the overall Liquidity Reserve. Social security funds and State-owned foundations never suffer losses even if the return on the Liquidity Reserve is negative. In addition, the State Treasury covers their payment fees with local banks.
Graph: Liquidity Reserve and financial assets owned by the social security funds and the State’s foundations
Liquidity Reserve Fund
The Liquidity Reserve is a financial buffer for the State’s daily cash flow management. The size of the liquidity reserve fluctuates significantly from day-to-day. At the beginning of each month the balance decreases due to pension, benefits and salary payments. The Liquidity Reserve then increases on tax payment days, mainly on the 10th and the 20th day of a month. At the end of 2016, the size of the Liquidity Reserve was EUR 0.78 billion (3.7% of GDP).
Graph: The monthly balance of the Liquidity Reserve and the requirement for the minimum size of the Liquidity Reserve
Stabilisation Reserve Fund
In addition to the Liquidity Reserve, the State has a financial reserve for unexpected situations and for financing in crises, called the Stabilisation Reserve Fund. The Stabilisation Reserve Fund was formed in 1997 and its initial size was EUR 45.2 million. At the end of 2016, the size of the Fund was EUR 406 million (1.9% of GDP). Parliament decides upon the use of the Fund. The Stabilisation Reserve Fund has been used twice – during 1998 and 1999 EUR 17 million for funding the claims from a bankrupt bank (Eesti Maapank), and in 2009 EUR 224 million for funding the State’s budget during the financial crises.
Graph: Size and return of the Stabilisation Reserve Fund
The investment reports on the Liquidity Reserve and the Stabilisation Reserve Funds
The Parliament (Riigikogu) determines the annual limit for the amount of debt obligations when it approves the State Budget. The Ministry of Finance (the State Treasury department) is permitted to assume debt obligations for the State within the approved limit. These debt obligations can be loans, overdrafts, issued bonds and treasury bills, and security repurchase agreements (repos). The State Treasury department also manages the financial risks associated with the State’s debt obligations.
The State Treasury’s task is to secure the liquidity and funding for the central government. The State’s borrowing needs depend on the State’s fiscal policy. As Estonia has had conservative fiscal policy for a considerable time, the State Treasury has more financial reserves than debt.
At the end of 2016 the Liquidity Reserve (EUR 785 million) was larger than the debt portfolio (EUR 489 million), which comprised the remaining part of two loans from the European Investment Bank.
Although the State Treasury is not active in debt management, it has to be ready to borrow quickly if needed. Therefore, the State Treasury has signed several committed credit lines with banks to safeguard the State’s ability to make daily payments.
Estonia has had conservative fiscal policy for a long time. Successive governments have been following a balance budget policy, i.e. the general government revenues and expenditures (including investments) have been more or less in balance. Therefore, there are accumulated financial reserves and relatively small debt obligations in the State Treasury.
As of the 31st of December 2016, the debt portfolio of the State Treasury consisted of two loans from the European Investment Bank in total of EUR 489 million. The two tranches of the loan from EIB were taken in 2009 and 2012 in the environment of financial crises. In 2016 the State Treasury refinanced EUR 385 million with a new loan from EIB. As of 31 December, 2016, the weighted average term to maturity was 4.92 years, average interest rate was 0.03% and the average duration was 0.12 years.
- List of borrowing transactions of the Rublic of Estonia (31.12.2016) » (14.79 KB, XLSX)
- Lending and guarantee transactions 31.12.2016 (19.04.2017) » (15.94 KB, XLSX)
The State Treasury continually monitors the State’s contingent liabilities, such as guarantees granted and callable capital of International Financial Institutions, to assess the probability of crystallisation of any of the liabilities at any point in time. This is for cash management purposes since typically, having crystallised, liabilities must be paid out within 2 to 30 days.
At the end of 2016, contingent liabilities of the State totalled EUR 2.3 billion (10.8% of GDP).
Graph: Contingent liabilities of the State GDP forecast for 2016
Contingent liabilities can be divided into the following groups: guarantees granted by the State on the basis of the State Budget Act, guarantee or other collateral granted by the State on the basis of another Act and callable capital of International Financial Institutions.
On-lending and guarantees to State entities
The State’s policy is to give loans and guarantees to State-owned companies and local governments only in exceptional circumstances, for instance when banks are only prepared to offer loans on excessively onerous terms and conditions or when they will not offer loans at all. Moreover, when making loans or giving guarantees to State-owned companies, the State must be extremely mindful of EU rules about giving State aid.
On-lending and guarantees to State entities as of December 31, 2016:
- The on-lending portfolio totalled EUR 104.4 million. It included two long-term loans to State owned foundations KredEx and Environmental Investment Centre.
- The State has given state guarantees to CEB and EIB in respect of long-term loans granted to KredEx and the North Estonia Medical Centre (PERH). The amount of loans guaranteed by the State was EUR 60 million.
- Overdraft agreements for the two State entities that settle their accounts through the in-house e-treasury system amounted to EUR 7.1 million.