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Management of cash and other financial instruments

Public money

Public money consists of all revenue earned or collected by the Crown, proceeds of asset sales and money borrowed by the Crown. This money is used to fund the activities of government, its departments and agencies. Public money does not include money held by Crown entities or SOEs.

Banking

All public money must be held in a Crown or departmental bank account.

Crown bank accounts: These are the main operating accounts of the Crown and refer to a suite of accounts opened, maintained and operated by the Treasury or by departments operating as an agent of the Crown, under a delegation from the Treasury.

Departmental bank accounts

Departmental bank accounts contain the money disbursed to the department by the Treasury, receipts for services provided by the department, and receipts from the disposal or sale of departmental assets. All other public money is paid into the Crown bank account.

Departments are responsible for:

  • liquidity (ensuring they have enough cash to meet payments). A positive balance must be maintained at all times in New Zealand dollar departmental bank accounts, and Crown bank accounts departments have delegated authority to administer
  • making and accounting for payments. Departmental receipts and payments are paid into, and out of, departmental bank accounts. Crown bank accounts are used for Crown receipts and payments
  • bank reconciliations and other internal controls over their cash management processes.

Each department forecasts its expected cash requirements for the coming year. This forecast is combined with information on output delivery and used to agree cash payments schedules with the Treasury. Schedules may be revised during the year but total payments must remain within approved budgets. During the year the Treasury makes disbursements to departments in accordance with those agreed cash payments schedules. Departments then pay non-departmental providers, such as Crown entities.

The Government uses the Westpac Banking Corporation as its banker for most departmental and Crown activities. The amounts held in all of the Crown and departmental bank accounts are ‘swept' into the Crown Settlement Account with the Reserve Bank of New Zealand each night. This permits the centralised management of the Crown's cash position by the NZDMO. NZDMO manages Crown bank accounts, the relationship with Westpac, and the Government's investment and debt-financing activities.

Crown entities can use any bank and type of account approved by the Minister of Finance, or by regulations made under Part 4 of the Crown Entities Act.

Investments

To maximise return and best manage financial risks, surplus funds are generally held in marketable securities and deposits.

Except in very limited circumstances, only the Treasury, selected Crown entities[33] and SOEs (most of which are monitored by the Treasury) may borrow or invest public money in securities.

These restrictions protect the Crown from liabilities or losses that may otherwise occur and ensure trading is managed by competent parties.

Most public sector entities that hold substantial securities do so to cover future costs or financial risks of government policies they are responsible for. These include superannuation schemes, accident compensation schemes and earthquake response funds.

Borrowing

The NZDMO issues a range of domestic and foreign-currency debt securities. At present, New Zealand dollar securities are preferred. Domestic-currency securities managed by the NZDMO include:

  • Government Bonds: Wholesale fixed-term debt securities the Crown issues to, and repurchases from, registered tender counterparties in periodic tenders. Bonds have an initial maturity of one year or more.
  • Treasury Bills: These are wholesale, fixed-term debt securities issued by the Crown to registered tender counterparties in weekly tenders. Treasury bills have an original maturity of one year or less. Most bills are issued to mature in three months, six months or one year.
  • Inflation-indexed bonds: Inflation-Indexed Bonds are a wholesale debt instrument with an inflation-indexed component. Inflation-indexed Bonds were introduced in 1996. Issuance was suspended in 1999, and no further Bonds have been issued since.
  • Infrastructure Bonds: In 2006, part of the Government's borrowing programme was designated for infrastructure development. This is declared as 'Infrastructure Bonds' in its financial reporting. They are issued in similar ways, and on similar terms and conditions, to other government bonds.
  • Kiwi Bonds: New Zealand Government Kiwi Bonds are retail stock offered directly to the public. They are available only to New Zealand residents. Kiwi Bonds are denominated in New Zealand dollars with a fixed interest rate paid quarterly in arrears. The bonds are redeemable on maturity or at the option of the bondholder.

Under the authority of the Minister of Finance, the NZDMO maintains a portfolio and risk management framework within which it operates. That includes NZDMO's strategic objective, objectives for New Zealand dollar and foreign-currency debts, the instruments in which NZDMO may transact, limits in respect of market and credit risk, composition requirements for the liquidity asset portfolio, and maturity profile requirements.

Notes

  • [33]Crown entities do not typically hold securities, borrow, give guarantees or indemnities, or use derivatives, unless exempted in Schedule 1 of the Crown Entities Act.
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