a year ago

Making savings certificates tradable

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Over the years, steps have been taken by the government to turn Bangladesh's sluggish debt market vibrant. Nevertheless, it all proved insufficient to achieve the end. Converting the non-tradable fixed-income government securities into tradable ones may be an option now.

 It is to be noted that debt market is popularly known as bond market and sometimes called fixed-income securities market or credit market. On this market, investors buy and sell all kinds of debt securities, mostly in the form of bond. Government usually issues bonds in order to raise money to repay debts and fund development projects. This is also known as deficit financing.  Private firms issue corporate bonds to finance business- expansion projects and maintain ongoing operations.

 Currently, two types of fixed- income government securities are available on the market. One is tradable, while the other is non-tradable. National savings certificates along with prize bonds, Sanchayabonds (The US Dollar Premium Bond, US Dollar Investment Bond, and Wage Earner Development Bond) and Special-Purpose Treasury Bonds are non-tradable on the secondary market. Notably, Sanchayabonds are available for non-resident Bangladeshi investors only. Tradable securities are treasury bills, which are short-term debt instruments of the government, and treasury bonds, which are long-term ones.

 Statistics available with Bangladesh Bank show that the combined value of annual secondary transactions of these short-and long-term government fixed-income securities came to Tk 2077.88 billion (or Tk 2.07 trillion) in FY22 which was 1377.70 billion (or Tk 1.37 trillion) in FY21. Thus, the secondary trading of treasury bills and treasury bonds jumped by around 50.82 per cent in the last fiscal year over the previous fiscal year. Earlier in FY20, the annual transactions of the tradable government debt securities on the secondary market were recorded at Tk 594.77 billion against Tk 183.10 billion in FY19.

 The gradual increase in the secondary transactions of treasury bills and bonds indicates that there is a growing demand for secure and risk-free investment tools.  Nevertheless, the secondary transactions of these bills and bonds are confined mostly to institutional investors. Bangladesh Bank introduced the secondary trading of these securities through a market-infrastructure module within the interbank ecosystem which allows some banks and financial institutions to participate. Select banks are now authorised primary dealers (PD) to purchase the bills directly through auction conducted by the central bank. Other banks and financial institutions are allowed to purchase and sell the bills and bonds among themselves on the secondary market as a secure investment. Individuals can also invest in these fixed-income securities through PDs.

 To provide an opportunity to the individual investors, there is a move for trading in treasury bonds on the stock exchanges. Though over 250 treasury bonds are listed with the Dhaka Stock Exchange (DES), secondary trading in any bond did never take place.  The date of starting trade in treasury bonds is yet to be finalised. There is also a lack of proper communication from the regulator regarding the mode of trading.

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

 Making the savings certificates tradable on the market will also help the government to reduce the interest burden as the market will ultimately determine the returns on investment.  Currently, yields or profit rates on the savings certificates are artificially high. For instance, annual weighted average yield of 5-year treasury bond was 7.80 per cent at the end of June this year. At the same time, 5-year Bangladesh Sanchaypartra offers 9.35-percent profit at the end of first year while the rate rises to 11.28 per cent at maturity on completion of the five-year tenure.

 The government, however, introduced a slab system offering different profit rates on investment in these securities. For example, if the cumulative investment on 5-year Bangladesh Sanchaypartra goes above Tk 15 million, the annual rate will be 8.58 per cent and if the invested amount goes above Tk 30 million, the profit rate at the end of first year will be 7.71 per cent.  The reduced rates on higher investment in savings certificates indicate that there is a slow move to make the yields market-oriented gradually.  

 Though savings certificate is considered a shield against inflation for fixed-income people due to its higher rate of returns, it is higher-income people who are reaping the benefit by purchasing the fixed-income non-tradable government securities. The net result is big accumulation of government's repayment liabilities.

 In the fiscal year 2020-21, outstanding amount of the savings certificates reached 11.20 per cent of the country's gross domestic product (GDP). In the same fiscal year, outstanding amount of the government tradable securities was 10.34 per cent of GDP while the ratio of external public debt to GDP was 16.30 per cent. Statistics available with Bangladesh Bank also revealed that the outstanding domestic public debt from the banking sectors through treasury bills and bonds in proportion to the savings certificates declined steadily from FY13 to FY18. In the later years, the ratio started to be reverse, and in FY21, outstanding savings certificates were 52 per cent of the government borrowing against 48 per cent of the tradable securities.

 Once the savings certificates are tradable on the secondary market, it will help to turn the country's debt market deep and vibrant.  Government may initiate a study to find the pros and cons of making these securities tradable.

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