Govt to go in for long term bonds to fund fiscal deficit

The 2020-21 Financial Year budget of the government has a gaping and record fiscal deficit hole of 7.36 percent or Nu 15.329 billion (bn).

Of this amount the government plans to borrow Nu 13.592 bn from the domestic borrowings.

While a portion of this amount will be met with the usual Treasury Bills (T-Bills) the problem with T-Bills are that they are only short-term borrowings that are not convenient be used for long-term projects. T-Bills have to be renewed every three months or so.

The government availed T-Bills of Nu 1.6 bn in June 2020 alone to meet short term cash management.

The Finance Minister Namgay Tshering said that to address fiscal deficit the government will issue long term bonds.

He said the bonds will be bought by the Financial Institutions (FIs) for a certain interest rate and they can be redeemed later.

Lyonpo said that the money raised from the bonds will be pumped into the budgetary systems and be used for capital works.

According to Investopedia a government bond is a debt security issued by a government to support government spending and obligations. Government bonds can pay periodic interest payments called coupon payments. Government bonds issued by national governments are often considered low-risk investments since the issuing government backs them.

The minister said that the government has not yet decided how much amount of bonds will be floated for sale to FIs, but it would be a substantial amount given the limited life period of T-Bills.

He said the final amount will depend on the situation through the year as if the COVID-19 situation worsens then some works would be shelved and so there may not be as much requirement for bonds. On the other hand, if the situation remains the same and revenue does not match up then more bonds would be in order.

Lyonpo said that the bonds will be floated in a cautious manner so as not to overcrowd the market for private players.

The minister also pointed out how bonds can be helpful for FIs as well. He said that banks have to keep around 20 percent of their deposits at a Statutory Liquidity Requirement (SLR) with RMA.

He said the banks can use some of this SLR money to buy bonds and earn income on money they ordinarily would not be able to make money off.

Lyonpo said that the issuance of bonds will also help in liquidity in the market as the government will be pumping that money into capital projects.

However, a banker on the condition of anonymity said that it will be important to ensure that the government does not mop of so much money from the FIs through bonds that there is not enough left to borrow to the private sector.

He said that banks will always prefer to buy government bonds even though the income is less than a commercial loan as a bond is backed by the government and hence is risk free.

He said this is especially relevant at a time when the Non Performing Loans (NPL) are high and the banks are  risk averse.

The banker, however, said that using the bond money to finance capital projects will help stimulate the economy.

Banks have requested the RMA to reduce the SLR from 20 to 15 percent which would release Nu 6 bn but RMA has not relented so far.

According to the Budget the regular issuance of long term bonds will help to develop the domestic debt market, apart from helping the government to meet its financing requirements.

It says the regular issuance of long-term bonds would build a bench mark yield curve, providing a pricing reference to private and corporate entities for issuance of bonds.

 It says increased primary issuances could spur secondary market transactions and will promote a vibrant domestic capital market.

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