DEVELOPMENT OF GOVERNMENT
SECURITIES IN TANZANIA
June 2003
ORGANIZATION OF THE
PAPER
•
I.
Introduction
Period prior to
1991
II. Period after 1991
III. Period after 1993
B. What are financial markets?
- Transfer of funds
- Bonds, Foreign Exchange
Markets
C. What are Government Securities?
- Treasury bills
- Treasury bonds
- Other market instruments
(repos)
D. Participation in the securities market
- Primary market
- Secondary market
- Primary dealers and
Direct
Investors
E. Performance of the market
F. Factors inhibiting development of
the Government Securities
- Lack of secondary
market
- Market shallowness
G. The way Forward
H. Conclusion
Development of
Government Securities in
Tanzania
Presentation by:
J.K. Ndissi (Mrs.)
Deputy Director,
Domestic Markets,
Bank of Tanzania.
A. Introduction
1. Period Prior to 1991
- Introduction of the Arusha
Declaration in l967. The financial
sector wholly state owned.
- Absence of money and capital
Markets.
- A few long term non tradable
papers were issued in favour of
the state owned institutions.
- High inflation and interest rates.
- 1988 government directed credit
to a few selected sectors which
led to credit misallocation.
- Establishment of the Banking
Commission.
2. Period after 1991
Launch of comprehensive
Financial Sector Reforms.
- Reforms aimed at supporting a
stable macroeconomic
framework.
- Development of money market.
- Strengthening of banking
supervision function at the Bank.
-
- Restructuring of state owned
banks
- Enactment of Banking and
Financial Institution Act. 1991
(facilitated the licensing of new
banks and financial institutions)
3. Period after 1993
- Mr. John M Keyes said “……. The
important thing for the
government is not to do things
which individuals are doing already
and to do them a little bit better or
worse, but to do those things
which at present are not done at
all …………”
- Introduction of treasury bills
auctions August 1993.
Advantages of treasury bills
include:- a vehicle for sterilising excess
liquidity in the economy.
- establish a reference point for
interest rates and spearhead
development of secondary
market.
- Non inflationary mechanism.
• Introduction of Capital Markets and
Securities Authority Act. 1994
(establishment of Dar es Salaam
Stock Exchange).
• Bank of Tanzania Act 1995 (Price
Stability).
• Introduction of two year treasury
bonds (1997)
B.
Definition of Financial
Markets
• Markets in which funds are
transferred from those with axcess
to those who have a shortage
(financial intermediation).
• Types of financial markets are Bond,
Stock, and foreign exchange market.
• Another distinction is by the
maturity of securities i.e. money
markets (short term debt) and
Capital markets (long term debt).
C.
Government Securities
• Treasury bills (short term)
• Treasury bonds (long term)
• Other market instruments
Treasury bills
• Short term debt obligations
• Government borrows from the
public, banks and non bank
financial institutions.
• Secured by the government’s
credit worthiness.
• Maturities include 35, 91, 182 and
364 day bill.
• Weekly competitive multiple pricing
(Dutch) auctions.
• Auction results announced after
two hours of auction processing
• Rediscount and redemption
facilities offered at the Bank
• They are secure, transferable,
negotiable and can be pledged as
collateral.
Treasury Bonds
• Issuance methodology
- Introduced in 2002 (between
February and October) after the
recommendations made by the
National Debt Strategy (2001).
- Maturities include 2, 5, 7 and 10
years.
- Issued on a monthly basis.
- Tranching or re-opening system.
- Parent bond issued in the first
month of the quarter and then
reopened with the same coupon
rate and maturity date in the
next two months.
- Government fixes the coupon
and investors bid prices
against TZS 100 per value.
- Multiple pricing auctions
(discriminatory).
Book entry system (no physical
certificates).
- Listed at the Dar es Salaam
Stock
Exchange (DSE)
- Interest payable semi-annually
- Single prospectus – a call to
tender issued one week before
the auction
-
Why did we introduce Treasury
Bonds?
Domestic Debt restructured into
marketable securities.
- Lengthen the maturity profile
and the yield curve.
- Meet the excess demand for
long term bonds by the market
players.
- Enhance transparency in the
trading of bonds.
-
Adhere to the international best
practice and develop financial
markets.
- Pave way for the introduction of
corporate bonds /municipal
bonds (benchmark pricing).
- Reduce the number of auctions
to 12 in a year (4 bonds (1
bond on a quarterly basis).
-
- spur secondary market
trading (listing of bonds at
the DSE) and
thereby
facilitate development of
capital markets.
D. Participation in the
Securities Market
• Primary market (wholesale of new
issues)
• Secondary market(resale) stock
exchange or OTC
• Auctions are done at a primary
level.
• Offers an entry point.
- Primary market dealership system
(exclusive rights to bid in auctions)
- Group of selected participants
(banks/broker dealers/DI)
- Prior to introduction of this system
the market was characterized by yield
volatility,number of participants was
large.
- Primary dealership system aimed at
simplifying issuance and
administration of government
securities.
- Obligations include, receive bids from
investors in t/bills/bonds, bid
objectively on behalf of their
customers and on their own behalf.
Keep an inventory of securities for on
selling.
- Expected to spur competition and
lead to development of secondary
market.
- Transfer and updating of ownership
of securities is done in the Book Entry
System (Central Depository System).
It is in paperless form.
-
E. Performance of the
Government Securities
• Experience in the t/bills market has
revealed mixed responses.
- the first auctions were highly
oversubscribed and yields went
up due to probably to the
newness of the market and lack
of expertise.
- The governments borrowing
needs were on the high-side.
- Segmentation of bidders
- Currently yields have been
declining and undersubscriptions have been the
order of the day.
- Treasury bonds are also undersubscribed.
- Institutional investors have
diversified their investment
portifolio into real estate.
- inverted yield curve whereby
short-term bills are earning
more than the
long term
papers.
- the primary dealership has not
yielded the expected results.
F.
Factors inhibiting the
development of the
Government
Securities Market
• Lack of deep and broad markets
due to:- Absence of secondary market
trading and no price discovery
(PDs buy and hold).
- Excess liquidity – limited number
of market instruments.
- Reduced government borrowing
requirements.
- Structural rigidities:- minimal
bank lending to the private
sector.
- absence of the Credit Information
Bureau.
- Delay/reluctance in signing the
Master Repurchase Agreement.
(un-collateralized lending in the
interbank market)
- Limited pricing expertise among
investors.
H.
The Way Forward
• Development of the secondary market –
situational analysis, enforcement of
dealer obligations
• Development of new tradable market
instruments to enable diversification.
• Speed up the formation of the Credit
Information Bureau (enable participants
to make informed decision).
• Encourage the signing of the
Master Repurchase Agreement.
• Conducting sensitization seminars.
H.
Conclusion
• Central banks are responsible for
implementing appropriate policies that
bring about stable interest, exchange
and inflation rates and to promote
development of financial markets
through the issuance of government
securities.
• It is necessary therefore that debt (sale
of government securities) and liquidity
management (Open Market
Operations) strategies are
synchronized and complement
each other.
• “Central Banks speak without
saying anything” Mike Moscow,
President of the Chicago Federal
Reserve 2002.
THANK YOU