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History of Treasury Bills |
1. Background
In1988, the Lesotho Government made a policy to develop
money markets in Lesotho. The decisive steps to implement
this decision were, however, only taken in the early 1990’s.
The objectives of this policy were:
(i) to improve financial intermediation by expanding and
creating alternative investment and borrowing instruments;
(ii) to broaden participation in short term financial
instruments; and
(iii) to create a vehicle through which monetary policy
decisions of the Central Bank could be effected.
In 1992 the Central Bank of Lesotho introduced an English
Auction System for issuance of treasury bills to the public.
Under this system, the Central Bank announces a reserve
price for the purchase of securities. On the day of an
auction, participants are invited to submit their bids.
The sale of the treasury bills is divided into two markets,
namely, the competitive market and the non-competitive
market. For the non-competitive market a price at which the
treasury bills are sold is set. All participants in this
market would be buying for the same price. The participants
are largely the members of the public and small to medium
companies/organizations.
In the competitive market, the participants are the
commercial banks and the companies/organizations larger than
those mentioned in the non competitive market. In this
market, securities are sold to the highest bidder, if there
are any certificates remaining after the first allotment to
the public.
The Central Bank had to embark on a massive campaign to
inform and educate the general public, not only on the new
system, but also on this form of saving which has so far
received a relatively large participation.
1.2 The Securities Nominal Value
When trading in treasury bills started in April 1992, their
nominal value and still is M154.1 million. This value was
broken down into three series of 91-day treasury bills. This
resulted in an auction being held every month.
1.3 Restructuring of the Securities Market
Of the objectives mentioned above only one has been
achieved: broadening of participation in the short-term
financial instruments. The public is saving in large numbers
in the treasury bills.
Following the non-accomplishment of other objectives under
the old system, the Central Bank has taken a policy decision
to restructure the current operation of the securities
market in such a manner that the unrealized and other
additional objectives are addressed.
2. The Proposed System
2.1 Objectives
The general objective of the proposed system is still to
encourage an orderly development of money markets in
Lesotho. The specific objectives of the proposed system are:
i) to create a vehicle though which the Central Bank could
effect its monetary policy decisions;
ii) to help increase the overall level of savings;
iii) to deepen and widen the range of investments and
borrowing opportunities;
iv) to encourage the orderly and effective evolution of the
secondary markets for short-term securities; and
v) to broaden participation and encourage competition in the
money market.
2.2 Structural Features of the Proposed System
2.2.1 The Instruments
In an effort to achieve the aforesaid multiple objectives
the Central Bank intends to issue three types of
instruments. Each of these instruments will be used to
attain a particular objective.
The 91-days Treasury Bills
The primary purpose for issuing 91-days treasury bills will
be to create the vehicle through which the Central Bank can
effect its monetary policy decisions. Accordingly, the
91-days treasury bills will be targeted mostly at commercial
banks. However, limiting participation in this market to
commercial banks only will tend to stifle competition as
there are presently only three commercial banks in the
country. In order to broaden participation and encourage
competition, other institutional investors will be allowed
to participate in this market.
The 182-days Treasury Bills
The main objective in issuing the 182-days treasury bills is
to widen the existing range of investment opportunities. In
the old system, institutional investors with longer-term
liabilities, and therefore relatively lower liquidity needs,
had limited avenues for investing their funds. Such
investors had to look elsewhere, mostly the RSA, for
investment opportunities, that suited the maturity profiles
of their liabilities. The 182-days government securities are
intended to meet the investment needs of this class of
investors and stem the potential outflow of capital.
Although participation in this market will be aimed mostly
at the non-bank institutional investors such as pension
funds, commercial banks will not necessarily be barred from
participating in this market. The broader participation will
encourage a degree of competition.
The 365-days Treasury Bills
The objectives for issuing these securities are two-fold.
The first is to provide a mechanism for financing government
deficit. Accordingly, the issuance of these securities will
be done once a year and will be made to coincide with the
beginning of the government’s fiscal; year. As soon as the
government’s borrowing requirement is known, the government,
in consultation with the Central Bank, will decide on the
best possible way of meeting this borrowing requirement
consistent with domestic as well as external macroeconomic
objectives.
The second objective for issuing the 365-days treasury bills
is to allow individuals and small investors to participate
in the money market. Once the domestic borrowing requirement
by the government in a particular year has been ascertained,
the Central Bank will then invite bids from individual
participants and small investors.
The longer-term nature of these securities is also intended
to build a culture of savings. One of the shortcomings of
the old system was that small investors tended to engage in
frequent liquidation of their investment often in small
amounts to meet their short-term liquidity needs. This
practice did not help build the culture of savings. The
practice also tended to strain the administrative
capabilities of the Central Bank which had also assumed the
role of discount house. By limiting the participation of
individuals to the long-dated securities, it is anticipated
that the culture of savings will emerge.
2.2.2 The Method of Auction
The English Auction System adopted under the old system
proved to be somewhat complicated and confusing to
first-time participants in the securities market. Under this
old system, securities were sold at the discount to their
face value and the Central Bank would announce a reserve
price after which the bids would be allocated to the highest
bidder.
The main method of bidding was the price and it was often
difficult for first-time investors to relate the price to
rate of interest that would accrue on their investment. Also
it was often difficult for first time investors to
appreciate the gains realized on their investments since,
under this method, investors get the rate of interest in
advance. In order to overcome these deficiencies, it is
proposed that a much more simpler method of auction, the
Dutch Auction System, be used to allocate securities to
bidders.
2.2.3 Modus Operanti Under the Dutch Auction System
The proposed Dutch Auction System, will work as follows:
i) on the day of the auction, the Central Bank will invite
bids from suitable participants for a particular class of
securities;
ii) participants will submit sealed bids on prescribed forms
to the Central Banks;
iii) the method of quotation will be the rate of interest
and each bid will include the interest rate and the amount
that the participant wishes at that rate;
iv) securities will be sold at their value;
v) the Central Bank will establish the demand curve based on
the bids that have been submitted on the day of the auction
and decide on the amount of securities to be auctioned;
vi) the market-clearing rate will be the rate of interest at
which the demand for securities is equal to the amount of
securities that the Central Bank has decided to put out for
the Auction;
vii) all bids below the market-clearing rate of interest
will be allocated securities in accordance with the amounts
indicated on the bids;
viii) the rate of interest that will apply on all
allocations will be the market-clearing rate of interest on
the day of the auction;
ix) the Central Bank of Lesotho will determine the amount of
securities that will be put up for auction in accordance
with its monetary policy objectives.
2.2.4 Central Bank Intervention
As the 91-days treasury bill market is expected to be the
most active and most representative of the general liquidity
conditions in the economy, the Central Bank will intervene
in this market in order to effect its monetary policy
decisions.
3. IMPLEMENTATION MODALITIES
The system became effective in September 2001. The Bank had
to involve negotiations with various stakeholders to canvass
their views on the new approach. A massive public campaign
was embarked upon to inform and educate the general public
of the reasons underlying the new approach. An important
aspect of the education campaign was to sensitise the public
about the basic opportunities and risks of investing in
money market instruments. |
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