MINISTER OF FINANCE’S DRAFT SPEECH AT THE OFFICIAL ...



INAUGURAL ADDRESS BY HON. BASIL. P. MRAMBA (MP)

MINISTER FOR FINANCE, AT THE OFFICIAL LAUNCHING OF THE 5-YEAR TREASURY BONDS AT THE

DAR-ES-SALAAM STOCK EXCHANGE ON

9TH MAY, 2002

The Governor, Bank of Tanzania,

The Chairman, Capital Markets and Securities Authority,

The Chairman, Dar Es Salaam Stock Exchange (DSE)

The Chief Executive Officer Capital Markets and Securities

Authority (CMCA)

The Chief Executive Officer Dar es Salaam Stock Exchange,

Members of the Brokerage Community,

Investors,

Distinguished Guests,

Ladies and Gentlemen.

It gives me great pleasure to have the opportunity (albeit belated) to formally inaugurate the launch of the 5-year Government bond and the listing of all Treasury bonds (Hatifungani za Serikali) on the Dar Es Salaam Stock Exchange. It is a moment of great satisfaction to see our initiatives in this direction taking root.

It is important, at the outset, to remember that government bonds are not being issued for the first time. The government has been issuing market – based T-bills and T-bonds since

1993 and 1997 respectively, for a number of short-term objectives, such as mopping up liquidity, development of money markets, and provision of bridging finance for government budget. However, the listing of Treasury bonds on the stock exchange was not possible until recently due to the high frequency of bond issuance (once a week), and the fact that bonds were auctioned on coupon rather than price basis. Material changes to the microstructure of bond issuance were required to bring it in line with international best practice and thus make the bonds suitable for trading on the exchange.

The first issue of the 5-year bond was held on 27th February 2002. The Government’s intention is to issue four 5-year bonds annually and list the same on the stock exchange. The rationale for this policy stance can be summarized as follows:

First and foremost, the move aligns with our overall macreconomic and financial programme. Recent gains in fiscal consolidation, control over inflation and the resultant decline in yields on government paper, have all served to increase the relative attractiveness of market-based domestic financing for the budget. At a time when the government is restructuring its debt profile towards marketable securities, as well as developing strategies to fund potential liabilities arising from the privatization process, the availability of long-term domestic financing at affordable rates is important. Further, since such financing is non-inflationary, it also serves to reinforce the recent success of monetary policy in reducing inflation.

Second, the Government realizes that, due to historical reasons, Tanzania’s financial market development has not moved quite in tandem with its overall economic development. The Government has sought to remove this inconsistency in recent years by liberalizing the financial sector, encouraging private financial institutions, and establishing the two major capital market bodies: CMSA and DSE. With the launch of this new 5-year instrument, the intention now is to develop the market in Government bonds as well, which, as risk-free assets, offer a natural benchmark for pricing other long-term debts in the economy. In addition, they have the potential to materially boost trading activities at DSE, in terms of both volume and liquidity.

Third, the specific move to transfer secondary trading in government bonds from an OTC (‘over-the counter’) market operating around BOT to an organized floor like the DSE is tied with the rationale of price discovery and transparency – something that was also touched upon by CMSA Chairman, Dr. Nyagetera. By collecting all the buy and sell orders under one roof, the new system will help the forces of demand and supply to operate freely, smoothly and transparently. This is almost certain to boost market liquidity and provide easy entry and exit mechanisms to investors.

Fourth, by taking advantage of the stock exchange window for its own debt operations, the Government wants to send a signal to the private sector, encouraging them to expand their

use of capital markets as well. As you know, the deposit rates offered by banks to savers are very low (below 5%), whereas lending rates charged to borrowers still remain around 15-20%. This large interest rate spread of 10-15% partly reflects the high cost of financial intermediation, which can be potentially shared out between savers and borrowers if they decide to meet directly at the stock exchange. Indeed, borrowers will raise funds at lower cost, while savers will earn higher returns. In fact, once this starts happening to a reasonable extent, it will automatically force banks to cut down their intermediation costs and operate more efficiently.

Finally, the Government realizes that in order for Tanzania to be self-reliant and for post-HIPC debt sustainability to be a lasting phenomenon, it is essential to avoid past mistakes—such as the accumulation of unhedged currency risks on our outstanding foreign debt. One way to mitigate such risks is to develop a more even balance between foreign and domestic debt. This, however, requires the development of appropriate and cost-effective instruments of domestic borrowing. The introduction of the 5-year bond, thus, can also be considered as a step in that direction. Indeed, in due course, we will develop even longer-term instruments, like 7 and 10-year bonds, so as to reduce our reliance on foreign loans for long-term project financing.

Ladies and Gentlemen, after this background to the launch of the 5-year bond, let me now move to a brief discussion of the key capital market challenges still lying ahead of us.

We all know that the mere listing of government bonds will not guarantee “trading”. In a situation of excess monetary liquidity, and perceived scarcity of viable alternative investment opportunities, investors seem unwilling to part with their securities. This presents a major obstacle to both, wider asset ownership, and price discovery, the two pillars of a well-functioning capital market. A simple solution to the problem would be resumption of bank lending to corporates, which would redirect some of the liquidity towards productive activity. Alternatively, the problem could be addressed if corporations themselves increased their resort to the capital markets through equity or debt issuance on DSE, something I have already urged them to do.

On another note, prospects of secondary trading can also be improved by strengthening the primary dealership system. Questions like the status of primary dealers in T-bond auctions, their market-making responsibilities and the like, need to be examined. Given its importance in ensuring the success of our initiatives to develop the secondary market, the primary dealership issue needs to be resolved urgently through discussions between brokers, investors and government.

Another aspect that I find worrying, from a medium to long-term perspective, is the low saving rate in our economy. A strong private-sector led capital market requires a minimum level of household saving mobilization. Further, the households must be willing and motivated to invest in “financial” assets rather than putting all their wealth in real estate, gold or cattle. In that context, it is important to develop schemes such as employee ownership and collective investment schemes that permit individual savings to reach the demanders of capital. Indeed, if we are to meet our growth and poverty reduction targets, we will have to ensure that businesses are not constrained in their initiatives by scarcity of funding. In that context, I urge the investor community, both individuals and corporations, to play their part in providing businesses with sustained access to national savings, for such savings are the fuel for our economic development.

In conclusion, I would like to say that it is the Government’s desire to fully involve the public and the institutions in the policy-making process. After all, the success of any policy or strategy depends in large measure on how the people receive it. In that context, I thank the investor and broker community for their enthusiastic response to the 5-year bond, and the BOT, DSE and CMSA for their support in making the launch a success.

On a point of history, I would like to take this opportunity to note and congratulate the Dar es Salaam Stock Exchange for marking its 4th Anniversary since it commenced operations in April, 1998.

On that note, I wish to offer my sincere thanks to all of you for your attention. I hope that we can continue working together towards the good of our capital markets and through that, our beloved homeland.

I thank you all.

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