Asjadul Kibria | Published: 06 Aug 2022 22:18:52
Over the years, the government has taken steps to revitalize Bangladesh’s sluggish debt market. However, all this turned out to be insufficient to achieve the goal. Converting non-traditional fixed income government securities into tradable securities could now be an option.
It should be noted that the debt market is popularly known as the bond market and is sometimes referred to as the fixed income market or the credit market. In this market, investors buy and sell all types of debt securities, mostly in the form of bonds. The government usually issues bonds to raise money to pay off debt and fund development projects. It is also referred to as deficit spending. Private companies issue corporate bonds to finance business expansion projects and to keep ongoing operations running.
There are currently two types of government fixed income securities available in the market. One is tradable while the other is non-tradable. National Savings Certificates, Accumulation Bonds (US Dollar Bonds, US Dollar Mutual Bonds and Wage Earner Growth Bonds) and Special Purpose Treasury Bonds are not tradable in the secondary market, as are Premium Bonds. In particular, accumulation bonds are only available for non-resident investors in Bangladesh. Tradable securities are treasury bills, which are short-term government debt obligations, and government bonds, which are long-term debt obligations.
Data available at Bangladesh Bank shows that the combined value of annual secondary transactions of these short- and long-term fixed income government securities in FY22 was 2077.88 billion. in fiscal year 2011. As a result, secondary trading in Treasury bills and bonds grew by approximately 50.82 percent in the previous fiscal year compared to the previous fiscal year. At the beginning of FY20, annual transactions of traditional government debt on the secondary market were recorded at Tk594.77 billion compared to Tk183.10 billion in FY19.
The gradual increase in secondary transactions involving treasury bills and bonds shows that the demand for safe and risk-free investment vehicles is increasing. However, the secondary transactions of these bills and bonds are mainly reserved for institutional investors. Bangladesh Bank introduced secondary trading of these securities through a market infrastructure module within the interbank ecosystem, allowing certain banks and financial institutions to participate. Select banks are now authorized primary dealers (PDs) to buy the notes directly through auctions conducted by the central bank. Other banks and financial institutions are allowed to buy and sell bills and bonds between themselves on the secondary market as safe investments. Individuals can also invest in these fixed income securities through PDs.
One move is trading government bonds on exchanges to create opportunities for individual investors. Although over 250 government bonds are listed on the Dhaka Stock Exchange (DES), none of the bonds have seen secondary trading. The date on which trading in government bonds will start has not yet been determined. There is also a lack of adequate communication from the regulator regarding the way of trading.
Aside from Treasury bills and bonds, this is also the time to introduce untraded government fixed income securities to the secondary market. As with Treasury bills and bonds, the government must first allow savings certificates to be marketed through the central bank’s existing platform. Later, savings bonds must be listed on exchanges so that individual investors can freely buy and sell these fixed-income securities.
Making savings certificates tradable on the market also helps the state to reduce the interest burden, since the market ultimately determines the return. Currently, the return or interest on savings bonds is artificially increased. For example, at the end of June this year, the annual weighted average yield on a 5-year government bond was 7.80 percent. At the same time, the 5-year Bangladesh Sanchaypart returns 9.35 percent at the end of the first year, while the rate at maturity rises to 11.28 percent at the end of the five-year term.
However, the government introduced a plate system that offers various returns on investments in these securities. For example, if the cumulative investment over 5 years in Bangladesh Communications is over Rs. 1.5 crore, the annual rate is 8.58 percent, and if the invested amount exceeds Rs. 30 million, the win rate at the end of the first year is 7.71. will be percent. The reduced interest rates with higher investments in savings certificates indicate that the gradual market interest rates are slowly progressing.
Although the savings bond is considered an inflation hedge for those on a fixed income because of its high yield, high-income people benefit from buying non-traditional government fixed-income securities. The net result is a large accumulation of government debt.
The outstanding stock of savings bonds reached 11.20 percent of the country’s gross domestic product (GDP) in fiscal 2020-21. In the same fiscal year, outstanding tradable government securities accounted for 10.34 percent of GDP, while government external debt as a percentage of GDP was 16.30 percent. Data available at Bangladesh Bank also showed that the share of outstanding domestic government debt from the banking sector through Treasury Bills and Savings Certificates issuance steadily decreased from FY13 to FY18. In subsequent years, the ratio began to reverse, and in fiscal 2011 government bonds accounted for 52 percent of outstanding savings certificates versus 48 percent for traditional securities.
Once the savings certificates are tradable on the secondary market, it will help deepen and liven up the country’s debt market. The government may initiate a study to find out the pros and cons of being able to trade these securities.