On 3rd December, the government of Maldives launched Treasury Bonds (T-Bonds) for the first time in the history of the country. It is also the first time a government security denominated in US Dollars is issued.
Since 2006, the government has been issuing Treasury Bills (T-Bills) with maturities of one month and three months. However, with the introduction of T-Bonds (with has a longer maturity; exceeding one year), government would be able to obtain finance for a longer period. The introduction of T-Bonds and the halt of reliance on the Central Bank for deficit financing is an important step towards an independent monetary policy, without the fiscal dominance that we’ve been used to in the previous years.
T-Bonds also enable the development of the capital market, and these securities can be traded in the secondary market. With the auctioning of the existing T-Bills, there would be further development of our capital market, as it would provide opportunities for private individuals to invest their savings on government securities.
However, in order to effectively establish a securities market, there are certain prerequisites; including a credible and a stable government; sound fiscal and monetary policies; a good regulatory infrastructure; smooth and secure settlement arrangements; and liberalized financial system with competing intermediaries. Hence, we still have a long way to go.
The negative side: With the government borrowing from the commercial banks, and paying high interest rates, will crowd-out private investments. There will be fewer funds available for private investments, and lower investments now would mean lower economic growth.
One thing is sure, with no more printing of Rufiyaa to finance the budget deficit, the pressure on inflation will be eliminated; and the pressure on the exchange rate will be eased. The next big challenge is to strengthen the fiscal discipline, as the finance comes at a huge cost.