Make cash vouchers negotiable

Over the years, the government has taken steps to invigorate Bangladesh’s sluggish debt market. However, all this proved insufficient to achieve the goal. Converting non-marketable fixed income government securities into marketable securities may be an option now.

It should be noted that the debt market is commonly referred to as the bond market and sometimes referred to as the fixed income market or the credit market. In this market, investors buy and sell all kinds of debt securities, mainly in the form of bonds. The government usually issues bonds in order to raise funds to repay debts and finance development projects. This is also known as deficit financing. Private companies issue corporate bonds to fund business expansion projects and maintain ongoing operations.

Currently, two types of fixed income government securities are available in the market. One is tradable, while the other is non-tradable. National Savings Certificates as well as Prize Bonds, Sanchayabonds (the US Dollar Premium Bond, US Dollar Investment Bonds and Employee Development Bonds) and Treasury Special Purpose Bonds do not are not negotiable on the secondary market. Notably, Sanchayabonds are only available to non-resident Bangladeshi investors. Marketable securities are treasury bills, which are short-term government debt securities, and treasury bonds, which are long-term securities.

Statistics available from the Bangladesh Bank show that the combined value of annual secondary transactions of these short and long-term government fixed income securities amounted to Tk 2077.88 billion (or Tk2.07 trillion). Tk) in FY22, or 1377.70 billion (or 1.37 trillion Tk) in FY21. Thus, secondary trading in Treasury bills and Treasury bonds jumped by around 50.82% in the last financial year compared to the previous financial year. Earlier in FY20, annual transactions of tradable government debt securities in the secondary market were recorded at 594.77 billion taka compared to 183.10 billion taka in FY19.

The gradual increase in secondary trading of treasury bills and bonds indicates that there is a growing demand for safe and risk-free investment tools. However, secondary transactions of these bills and bonds are mainly reserved for institutional investors. Bangladesh Bank has introduced secondary trading of these securities through a market infrastructure module within the interbank ecosystem that allows selected banks and financial institutions to participate. Some banks are now primary dealers (PDs) allowed to purchase the bonds directly through auctions conducted by the central bank. Other banks and financial institutions are allowed to buy and sell the bills and bonds among themselves in the secondary market as a safe investment. Individuals can also invest in these fixed income securities through PDs.

To provide an opportunity for individual investors, there is a movement for trading treasury bills on exchanges. Although more than 250 treasury bonds are listed on the Dhaka Stock Exchange (DES), secondary trading of a bond has never taken place. The start date for Treasury bill transactions has not yet been determined. There is also a lack of proper communication from the regulator regarding the mode of trading.

Along with treasury bills and bonds, it is also time to bring non-marketable fixed income government securities to the secondary market. Like treasury bills and bonds, the government must allow savings certificates to be market-tradable initially using the central bank’s existing platform. Later, cash certificates should be listed on the stock exchange so that individual investors can freely buy and sell these fixed income securities.

Making savings certificates tradable on the market will also help the government reduce the interest burden as the market will ultimately determine the returns on investment. Currently, yields or profit rates on cash certificates are artificially high. For example, the weighted average annual yield of 5-year Treasury bills was 7.80% at the end of June this year. Meanwhile, the 5-year Bangladesh Sanchaypartra offers a profit of 9.35% at the end of the first year, while the rate drops to 11.28% at maturity at the end of the five-year term.

However, the government has introduced a tranche system offering different rates of profit on investment in these securities. For example, if the cumulative investment over 5 years Bangladesh Sanchaypartra exceeds Tk 15 million, the annual rate will be 8.58% and if the invested amount exceeds Tk 30 million, the profit rate at the end of the first year will be 7.71 percent. Reduced rates on higher investments in savings certificates indicate that there is a slowness in shifting returns gradually towards the market.

Although the savings certificate is considered an inflation shield for people on fixed incomes because of its higher rate of return, it is people with higher incomes who reap the benefits by buying certificates. ‘State Non-Tradable Fixed Income. The net result is a large accumulation of government repayment obligations.

In the 2020-21 financial year, the outstanding balance of savings certificates reached 11.20% of the country’s gross domestic product (GDP). During the same fiscal year, the stock of negotiable public securities was 10.34% of GDP, while the ratio of external public debt to GDP was 16.30%. Statistics available from the Bangladesh Bank also revealed that the stock of domestic public debt of the banking sector in the form of treasury bills and bonds as a proportion of savings certificates declined steadily from FY13 to FY18. In recent years, the ratio has started to reverse, and in FY21 savings certificates in circulation accounted for 52% of government bonds versus 48% of marketable securities.

Once the savings certificates are tradable in the secondary market, it will help make the country’s debt market deep and vibrant. The government can launch a study to find the pros and cons of making these securities tradable.

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