Govt aims to borrow more through treasury bonds

The government is actively considering increased borrowing using treasury bonds to meet its deficits. Such a decision is basically aimed at developing the country's bond market, officials at the Ministry of Finance (MoF) told the FE Sunday.

They said the government's latest move would help reduce its short-term borrowing from banks.

The government has been borrowing largely through short-term tools instead of long-term bonds since fiscal year 2012 to meet its budget deficits.

According to many financial analysts, the government's greater dependence on this type of bank borrowing has given rise to 'crowding-out effect' in the economy.

The cash and debt management committee (CDMC) under the MoF wants to increase the level of borrowing through the government treasury bonds to the extent of at least 70 per cent from March next.

The central bank, however, has chalked out its January-June auction calendar by assuming an equal share of both bills and bonds in the government borrowing. The January-June auction calendar is 50:50 basis.

"We're considering gradual policy reversal by switching over to bonds from bills as liquidity position in the public sector has improved," said an official working at the CDMC.

He said the government is also mulling over new products relating to development of both primary and secondary bond markets.

Ahsan H Mansur, a renowned economist involved in financial sector, told the FE: "Definitely the government's latest move would help grow the bond market."

He, however, said market forces should be involved in auctions. "In my view, there are some mechanisms that interfere in bond yields."

"As long as market forces are not allowed to come into play in auctions, the bond market will not grow," Mr Mansur, also Executive Director at the Policy Research Institute of Bangladesh (PRI), said.

Currently, the 15 primary dealers (PDs) are bidders in both primary market of treasury bills and bonds.  The central bank organises bond auctions electronically on Tuesdays.

But, officials at the CDMC told the FE that they did not intervene in fixing the rate of interest applied for bonds.

"But we try to match the world's best practices," said another high CDMC official.

He said common people are not showing interest in long-term bonds as the other tools including saving certificates are much more attractive in the context of smaller denominations and easy availability.

Government bonds' duration ranges from two years to 20 years. Bills range from 91-days to 364 days.

He, however, said the government is also considering introduction of bonds of smaller denominations. Currently, the minimum denomination is Tk 100,000.

Dr Zaid Bakht, Director (research) at the Bangladesh Institute of Development Studies (BIDS), told the FE this move would help stop crowding-out effect in the economy.

"I think, the government wants to raise credits to the private sector. And the government's latest move to shift to bonds is the right choice," Mr Bakht said.

Mr Bakht said bond has wider market involving the common people and the institutions while bill is limited to commercial banks only.

Prior to fiscal year 2012, the ratio between the bills and the bond was 20:80.