DEVELOPMENT OF GOVERNMENT SECURITIES IN TANZANIA June 2003

ORGANIZATION OF THE PAPER Introduction I.-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 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 government directed credit to a few selected sectors which led to credit misallocation. - Establishment of the Banking Commission.

2. Period after 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 (facilitated the licensing of new banks and financial institutions)

3. Period after 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 (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 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.

- 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.

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