THE MARKET for government securities is defined as the market for tradable securities issued by the central government through the 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 coupon rates (interest payments) for specified maturity periods of the bond, for example, quarterly. Government bonds are the backbone of most fixed-income securities markets in both developed and developing countries. Developing a government bond market provides a number of important benefits if the prerequisites to a sound development are in place. At the macro-economic policy level, a Rwanda securities market provides an avenue for domestic funding of budget deficits other than that provided by the central bank and thereby reduce the need for direct and potentially damaging monetary financing of government deficits which helps avoid a build-up of foreign currency–denominated debt. The 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 can, not only enable authorities to smooth consumption and investment expenditures in response to shocks, but (if coupled with sound debt management) can also enable governments to reduce their exposure to high 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 micro-economic 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. The development of a securities market can help change the financial system from a primarily bank-oriented to a multi-layered one, where capital markets can complement bank financing. However, it is not always necessary for Rwanda to develop the 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. The government securities market development must be viewed as a dynamic process in which continued macro-economic and financial sector stability are essential to building an efficient market and establishing the credibility of the government as an issuer of debt securities. The pre-requisites 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, as well as a liberalised financial system with competing intermediaries. Where these basics are lacking or weak, priority should be given to adopting and implementing a stable and credible macroeconomic policy framework, reforming and liberalising the financial sector and ensuring the proper pace of liberalisation in different areas, for example, financial sector versus capital account measures. The writer is a senior tax consultant/economist with KPMG Rwanda. These views are the writer’s personal opinion and do not in any way represent those of KPMG.
