Key findings from the 2014 Africa CFO Survey

Rwanda: Why the country should develop treasury bills and bonds

By Godfrey Kiiza

What benefit does Rwanda stand to gain if it develop its treasury and bonds trading? The market for government securities is defined as the market for tradable securities issued by the central government that is National Bank of Rwanda (BNR). The primary focus is on the market for bonds, which are tradable securities of longer maturity (usually one year or more). These bonds typically carry coupons (interest payments) for specified (for example, quarterly) periods of the maturity of the bond.

Government bonds are the backbone of most fixed-income securities markets in both developed and developing countries. Development of a government bond market provides a number of important benefits if the prerequisites to a sound development are in place. At the macroeconomic policy level, a Rwanda securities market provides an avenue for domestic funding of budget deficits other than that provided by the National Bank and, thereby, can reduce the need for direct and potentially damaging monetary financing of government deficits and avoid a build-up of foreign currency–denominated debt.

Rwanda securities market can also strengthen the transmission and implementation of monetary policy, including the achievement of monetary targets or inflation objectives, and can enable the use of market-based indirect monetary policy instruments.

The existence of such a market not only can enable authorities to smooth consumption and investment expenditures in response to shocks, but if coupled with sound debt management, can also help governments reduce their exposure to interest rate, currency, and other financial risks.

Finally, a shift toward market-oriented funding of government budget deficits will reduce debt-service costs over the medium to long term through development of a deep and liquid market for government securities.

At the microeconomic level, development of Rwanda domestic securities market can increase overall financial stability and improve financial intermediation through greater competition and development of related financial infrastructure, products, and services.

Development of a securities market can help change the financial system from a primarily bank-oriented to a multi-layered system, where capital markets can complement bank financing.

However, it is not always necessary for Rwanda to develop a government securities market. Even some developed economies do not have one, either because the government has not run budget deficits requiring funding through securities issues or because the country is not large enough to support the necessary infrastructure. Depending on the availability of alternative financing channels for the public and the private sectors, the size of the economy, and the maturity of the financial sector, better options might include private placements of securities, development of retail markets, or even regional solutions.

Rwandan Bond and stocks

Development of a securities market can help change the financial system from a primarily bank-oriented to a multi-layered system, where capital markets can complement bank financing.

Government securities market development must be viewed as a dynamic process in which continued macroeconomic and financial sector stability are essential to building an efficient market and establishing the credibility of the government as an issuer of debt securities.

Prerequisites for establishing an efficient Rwandan government domestic currency securities market include a credible and stable government, sound fiscal and monetary policies, effective legal, tax, and regulatory infrastructure, smooth and secure settlement arrangements, and a liberalized financial system with competing intermediaries. Where these basics are lacking or very weak, priority should be given to adopting and implementing a stable and credible macroeconomic policy framework, reforming and liberalizing the financial sector, and ensuring the proper pace of liberalization in different areas (for example, financial sector versus capital account measures).

Godfrey Kiiza is a Senior Tax Consultant/ Economist with KPMG Rwanda.

David Okwara

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