DEVELOPMENT OF GOVERNMENT SECURITIES IN TANZANIA

1

• DEVELOPMENT OF GOVERNMENT SECURITIES IN TANZANIA
• June 2003

2
ORGANIZATION OF THE PAPER

• Introduction
• - Period prior to 1991
• - Period after 1991
• - Period after 1993

3

• What are financial markets?
• - Transfer of funds
• - Bonds, Foreign Exchange Markets
• What are Government Securities?
• - Treasury bills
• - Treasury bonds
• - Other market instruments (repos)

4

• Participation in the securities market
• - Primary market
• - Secondary market
• - Primary dealers and Direct Investors
• Performance of the market

5

• Factors inhibiting development of the Government
  Securities
• - Lack of secondary market
• - Market shallowness
• The way Forward
• Conclusion

6
Development of Government Securities in Tanzania

• Presentation by
• J.K. Ndissi (Mrs.)
• Deputy Director,
• Domestic Markets,
• Bank of Tanzania.

7
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.

8

• High inflation and interest rates.
• 1988 government directed credit to a few
  selected sectors which led to credit
  misallocation.
• - Establishment of the Banking Commission.

9

• 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.

10

• - Restructuring of state owned banks
• - Enactment of Banking and Financial Institution
  Act. 1991 (facilitated the licensing of new banks
  and financial institutions)

11

• 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.

12

• 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.

13

• 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)

14
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.

15

• Another distinction is by the maturity of
  securities i.e. money markets (short term debt)
  and Capital markets (long term debt).

16
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.

17

• Secured by the governments credit worthiness.
• Maturities include 35, 91, 182 and 364 day bill.
• Weekly competitive multiple pricing (Dutch)
  auctions.

18

• 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.

19
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.

20

• - 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).

21

• - 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

22
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.

23

• - 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).

24

• - spur secondary market trading (listing of
  bonds at the DSE) and thereby facilitate
  development of capital markets.

25
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.

26

• - 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.

27

• 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.

28

• - 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.

29
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.

30

• - Segmentation of bidders
• - Currently yields have been declining and
  under- subscriptions have been the order of the
  day.
• - Treasury bonds are also under- subscribed.
• - Institutional investors have diversified
  their investment portifolio into real estate.

31

• - inverted yield curve whereby short-term bills
  are earning more than the long term papers.
• - the primary dealership has not yielded the
  expected results.

32
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.

33

• Reduced government borrowing requirements.
• Structural rigidities- minimal bank lending to
  the private sector.
• absence of the Credit Information Bureau.

34

• - Delay/reluctance in signing the Master
  Repurchase Agreement. (un-collateralized lending
  in the interbank market)
• - Limited pricing expertise among investors.

35
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).

36

• Encourage the signing of the Master Repurchase
  Agreement.
• Conducting sensitization seminars.

37
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

38

• 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.

39

• THANK YOU