Budget deficits could be met from bond market: Monetary policy

Infographic: TBS

The government could finance a significant portion of its budget deficit from the bond market at a lower cost, but the capital market, particularly the bond market, is not yet well developed, according to the monetary policy statement (MPS) unveiled on Sunday.

The central bank said in its monetary policy that several initiatives have been taken in recent years to develop the capital market and promote investment opportunities in the country.

At an event arranged at the central bank headquarters to announce the monetary policy for the first half of the upcoming fiscal year, Bangladesh Bank Governor Abdur Rouf Talukder said, "We are trying to develop a vibrant bond market, which will reduce investors' risk and secure a fixed income."

The proposed budget for the fiscal 2023-24 has a deficit of Tk261,785 crore, which is 5.2% of the gross domestic product. In the outgoing fiscal year, the budget deficit was estimated at Tk245,064 crore.

The Bangladesh Bank also instructed non-bank financial institutions (NBFIs) to explore opportunities to mobilise funds by issuing bonds rather than relying heavily on banks.

The central bank said in the MPS, a well-developed capital market is essential for the long-term investment and economic development of the country, but public and private investments in Bangladesh largely depend on banks' finance due to the absence of a well-developed capital market.

Usually, banks rely on short-term deposits for long-term financing, which creates a maturity mismatch in the financial system and puts pressure on liquidity management, it said, adding that a developed capital market, especially the bond market, can meet the huge financing requirements for infrastructure development and industrialisation and contribute to the banking system's stability. 

Besides, investors can reduce business costs and improve operational efficiency by borrowing from the bond market at competitive rates, according to the monetary policy.

The MPS stated that the government has made significant modifications to issuing and re-issuing T-bonds to improve the secondary market for government securities. The modifications include the introduction of BB's Market Infrastructure (MI) module platform, which is used to settle the transactions of government securities, including their listing and trading.

The central bank has released guidelines regarding using the MI module platform to manage secondary trading better.

Accordingly, government securities are now transacted in the secondary market through BB's MI module platform.

According to the Bangladesh Securities and Exchange Commission (BSEC), general investors in the capital market are getting the opportunity to buy T-bonds in the primary auction of the central bank through their beneficiary owner (BO) accounts.

The commission took the decision to increase the supply of T-bonds in the secondary market of the stock exchange in collaboration with the central bank.

BSEC sources said that if general investors want to buy T-bonds, they will have to send letters regarding this through the respective brokerage firm.

Then the brokerage firm will buy the Treasury bill through primary dealers or banks. The bonds can be sold on the secondary market.

What MPS says on the capital market

Bangladesh's capital market experienced marked fluctuations during the second half of FY23 till May, primarily influenced by economic challenges such as high inflation, pressure on the exchange rate, and foreign exchange reserves.

The DSEX, which represents the benchmark index of the Dhaka Stock Exchange, saw a decline of 0.8% by the end of May 2023 compared to the same month in the previous year. 

Besides, the daily average turnover, a crucial indicator of capital market liquidity, experienced a notable decline of 40% at the end of May 2023 compared to the end of June 2022. The decreased turnover volume is attributed to investors' cautious approach.

The central bank has tried to ensure enough liquidity in the capital market in the wake of some economic challenges. In this context, the central bank allowed the banks to maintain a general provision of 1% instead of 2% on classified amounts for loans to brokerage houses, merchant banks, and stock dealers.

The MPS said that to enhance overall market growth, the BSEC has emphasised the involvement of institutional investors in the capital market and taken several policy measures in this regard. One significant measure is the extension of investment limits for mutual funds, excluding special funds like pension funds.

In this context, the BSEC has raised the minimum investment threshold level from 60% to 80% for institutional investors. Looking ahead, the central bank, the BSEC, and other related government authorities' coordinated efforts are required to promote a strong and vibrant capital market.

Besides, the amendment of the Banking Companies Act 1991, which waits in parliament for approval, can contribute to the development of the capital market by providing regulatory oversight, enabling banks to engage in capital market activities.