Greater mobilisation of resources and their allocation in the process of sustainable economic development require an increase in the capacity of the public debt markets, especially in the evolving context of technological development, globalisation and prudential regulation. Making both primary and secondary markets of the government bonds competitive and efficient would be quite useful in addressing the long-term development finance requirements.
For effective public debt management, it is crucial to enhance the depth, breadth and iversity of the public debt markets and ensure enhanced liquidity, transparency, reliability, attractiveness and diversified risk and maturity structures of the debt instruments. Primary issuance of the government bonds through auction is intended to enhance the process of realistic pricing of the government bonds, thereby increasing the liquidity and attractiveness of these bonds. In accordance with the fiscal and monetary policy statements of the past couple of years that gave policy signals for the issuance of the long-term bonds through auction, the governmnet issued on March 30 â€œRules for the Management of the Primary and Secondary Markets of the Long-Term Government Bonds, 2005â€. As per the rules, the primary issue of the bonds is made by the Nepal Rastra Bank through auction and the secondary market transactions of the bonds is carried out through the stock exchange. Through the auctions, the government received Rs. 50.2 million as a premium. The auction of the long-term bond heralds the beginning of the era where the primary issuance of the long-term bonds is made on the auction basis. Before this, only the Treasury Bills were issued on the auction basis in the primary and secondary markets.
The new arrangement of primary issuance through auction and secondary transactions through the stock exchange is expected to enhance the liquidity of the long-term government bonds. Allowing non-banking financial institutions in the secondary market transactions of these bonds will enhance the competitiveness of the prices and improve the liquidity of the bonds. This process should especially be instrumental in broadening and deepening the secondary market of the government bonds. As a result, not only will the market for the bonds broaden, the ensuing enlarged competition through widened participation in the bonds market will also help ensure realistic pricing. As for a future agenda, the introduction of an electronic exchange trading system should greatly enhance the operational efficiency of the secondary market of the bonds as it will facilitate placing the buy and sell orders through an electronic system. Enlisting and trading the government bonds on the stock exchange is thus considered an efficient way to develop a liquid and transparent market within a short period of time. An active and efficient secondary market for government bonds contributes towards the successful primary sale of bonds and hence towards achieving financing of government by ensuring the governmentâ€™s access to the financial markets on a sustainable basis. Broad and well-functioning secondary markets are particularly important where the governmentâ€™s borrowing needs are substantial.
Basyal is an executive director, NRB