Developing a Deep and Developing a Deep and Liquid Bond Market -Liquid Bond Market -

Experience of Sri Lanka Experience of Sri Lanka

Presentation by Presentation by

K.G.D.D.DheerasingheK.G.D.D.DheerasingheAssistant to the GovernorAssistant to the Governor

Central Bank of Sri LankaCentral Bank of Sri Lanka

Development of the Bond MarketDevelopment of the Bond MarketEvents of SignificanceEvents of Significance

1923 - Issue of loans commenced under the Colonial Treasury 1923 - Issue of loans commenced under the Colonial Treasury Bill Ordinance by Crown Agents in U.K.Bill Ordinance by Crown Agents in U.K.

1937 - Issue of Rupee Loans commenced under RSSO No.7 of 1937 - Issue of Rupee Loans commenced under RSSO No.7 of 19371937

1941 - Issue of Treasury Bills commenced under LTBO 1941 - Issue of Treasury Bills commenced under LTBO (Chapter 287)(Chapter 287)

1950 - Public debt management was vested with the Central 1950 - Public debt management was vested with the Central Bank under the Monetary Law Act.Bank under the Monetary Law Act.

1981 - A secondary market window was opened for Treasury 1981 - A secondary market window was opened for Treasury Bills by the Central Bank.Bills by the Central Bank.

1986 - Weekly Treasury Bill auctions commenced1986 - Weekly Treasury Bill auctions commenced 1992 - Primary Dealers were appointed.1992 - Primary Dealers were appointed.

Development of Development of the Bond Market the Bond Market contd...contd...

1993 - Repo window for Treasury Bills was introduced by 1993 - Repo window for Treasury Bills was introduced by the CBSL.the CBSL.

1994 - Primary Dealer system was recognised.1994 - Primary Dealer system was recognised. 1995 - Non-competitive bidding at primary auctions was 1995 - Non-competitive bidding at primary auctions was

phased out.phased out. 1995 - Reverse Repo window was introduced by the CBSL.1995 - Reverse Repo window was introduced by the CBSL. RSSO, LTBO and MLA were amended to enable scripless RSSO, LTBO and MLA were amended to enable scripless

issue of Treasury Bills and Treasury Bonds.issue of Treasury Bills and Treasury Bonds. 1997 - Issue of Treasury Bonds commenced.1997 - Issue of Treasury Bonds commenced. 2000 - Dedicated Primary Dealers were2000 - Dedicated Primary Dealers were appointedappointed 2000 - Primary Dealer supervision commenced.2000 - Primary Dealer supervision commenced.

Development of Development of the Bond Market the Bond Market contd...contd...

2001 - US Dollar denominated Sri Lanka Development Bonds 2001 - US Dollar denominated Sri Lanka Development Bonds were issued.were issued.

2002 - Fiscal Management Responsibility Act was enacted.2002 - Fiscal Management Responsibility Act was enacted. 2003 - Issue of 10,15 & 20 year Treasury Bonds commenced.2003 - Issue of 10,15 & 20 year Treasury Bonds commenced. 2003 - Bloomberg Bond Trading System for Primary Dealers 2003 - Bloomberg Bond Trading System for Primary Dealers

was introduced.was introduced. 2004 - RSSO,LTBO & MLA were amended to enable the 2004 - RSSO,LTBO & MLA were amended to enable the

trading of scripless securities.trading of scripless securities. Scripless Securities Settlement System (SSSS) and Central Scripless Securities Settlement System (SSSS) and Central

Depository System (CDS) commenced operations.Depository System (CDS) commenced operations.

Legal FrameworkLegal Framework

((a) Appropriation Acta) Appropriation Act

- Authority for annual borrowing limit- Authority for annual borrowing limit(b) Local Treasury Bills Ordinance(b) Local Treasury Bills Ordinance - Issuence of T-Bills- Issuence of T-Bills(c ) Registered Stock & Securities Ordinance(c ) Registered Stock & Securities Ordinance - Issuence of T-Bonds & Rupee Loans- Issuence of T-Bonds & Rupee Loans(d) Foreign Loans Act(d) Foreign Loans Act - Borrowing from foreign sources- Borrowing from foreign sources(e) Monetary Law Act(e) Monetary Law Act - Debt management as a function of Central - Debt management as a function of Central BankBank(f) Fiscal Management Responsibility Act(f) Fiscal Management Responsibility Act - Guidelines- Guidelines and debt sustainabilityand debt sustainability

Organizational FrameworkOrganizational Framework

PARLIAMENTPARLIAMENT

- authority to borrow and accountable to the public- authority to borrow and accountable to the public MINISTER OF FINANACEMINISTER OF FINANACE

- - delegates authority to Central Bank delegates authority to Central Bank MINISTRY OF FINANCE / TREASURY-Principal MINISTRY OF FINANCE / TREASURY-Principal

- authority & accountability- authority & accountability

- Contracting non-commercial foreign borrowing- Contracting non-commercial foreign borrowing CENTRAL BANK - AgentCENTRAL BANK - Agent

- Iisuence and debt service- Iisuence and debt service PRIMARY DEALERSPRIMARY DEALERS

- market making- market making BANKS, PENSION/PROVIDENT/INSURANCE FUNDSBANKS, PENSION/PROVIDENT/INSURANCE FUNDS

- Investors and Secondary Market Dealers- Investors and Secondary Market Dealers

Implementation of the Implementation of the Government Securities Government Securities

ProgrammeProgramme

Preparation of the borrowing calendarPreparation of the borrowing calendar Release of information to the marketRelease of information to the market Regular meeting of the Debt Management Regular meeting of the Debt Management

Committee ( weekly)Committee ( weekly) Regular meeting with Primary Dealers (weekly)Regular meeting with Primary Dealers (weekly) Issuance of domestic debt: e.g. Auction, Tap, Issuance of domestic debt: e.g. Auction, Tap,

PlacementsPlacements

Organization ofOrganization of Public Debt Department Public Debt Department

Front OfficeFront Office - market/public relations, primary issuance, - market/public relations, primary issuance, market information, investor awarenessmarket information, investor awareness

Middle OfficeMiddle Office - research inputs, risk analysis, issuance - research inputs, risk analysis, issuance techniques, product development, techniques, product development, databasedatabase

Back OfficeBack Office - payment and settlement, servicing of - payment and settlement, servicing of concessional foreign debt, CS-DRMSconcessional foreign debt, CS-DRMS

Support ServicesSupport Services- human resources, training, IT support,- human resources, training, IT support, maintenance.maintenance.

Budget Deficit and Borrowing Budget Deficit and Borrowing Requirement Requirement (as a % of GDP)(as a % of GDP)

19971997 2000 2000 20032003

Total RevenueTotal Revenue 18.5 18.5 16.6 16.6 15.715.7

Total Expenditure 26.4 26.7 23.7Total Expenditure 26.4 26.7 23.7 Overall Deficit - 7.9 - 9.9 - 8.0Overall Deficit - 7.9 - 9.9 - 8.0 Finanacing 7.9 9.9 8.0Finanacing 7.9 9.9 8.0

Foreign 1.9 0.4 2.9Foreign 1.9 0.4 2.9

Domestic 3.4 9.4 4.5Domestic 3.4 9.4 4.5

Other/Privatization 2.5 0.1 0.6Other/Privatization 2.5 0.1 0.6

value (Rs. Mil) % value (Rs. Mil) % value (Rs. Mil) %1. Tradable debt 1.1 Treasury Bonds 10,000 2.74 204,124 33.85 483,107 50.81 (medium - long term) 1.2 Treasury Bills 114,996 31.55 134,996 22.39 219,295 23.06 (short term 91-364 days)2. Non Tradable Rupee Loans 239,475 65.70 263,888 43.76 248,414 26.13

Total 364,471 100.00 603,008 100.00 950,816 100.00

1997 2000 2003Composition of Tradeble & Non Tradeble debt in domestic debt

Source : PDD, Central Bank of Sri Lanka

value (Rs. Mil) % value (Rs. Mil) % value (Rs. Mil) % 1 Government 10,000 78.94 125,322 98.39 214,797 98.63 2 Corporate 2,668 21.06 2,056 1.61 2,979 1.37

Total 12,668 100.00 127,378 100.00 217,776 100.00

Note. Corporate debt issues are for 1998, 2000 and 2002.

2002-03

Distribution of Bonds by Issuer

Source : PDD, Central Bank of Sri Lanka & CSE.

1997-98 2000

Government Domestic Debt Indicators

1997 2000 2003

Govt. Debt/GDP 85.8 96.9 105.9Domestic Debt/GDP 43.6 53.8 57.9Total Debt Service/GDP 9.4 14 19.6Domestic Debt Service/ Govt. Revenue 38.6 67.9 108Domestic Debt Service/ Govt. Expenditure 23.4 31.6 46.9Domestic Interest/GDP 5.5 4.9 6.4Domestic Interest/ Govt. Current Expenditure 27 24.5 39.9

Source : Central Bank of Sri Lanka

Domestic Financing of Fiscal Deficit (Rs. billions)

1997 2000 2003

By Instrument 39.6 118.5 79.7Long term Bonds 10 90.6 137.1Short Term Bills -4.7 6.1 14.9Non-tradable Securities 33.5 1.8 -39.3US$ denominated Bonds - - -15.2Other Loans -9.5 15.8 -18.3

By Source 39.6 118.5 79.7Bank Borrowing -2.2 56.5 -20.9Non-Bank Borrowing 41.8 62 100.7

Source : Central Bank of Sri Lanka

Owner value (Rs. Mil) % value (Rs. Mil) % value (Rs. Mil) %1. Domestic Debt 1.1 Banking Sector Central Bank 19,770 2.59 97,778 8.02 44,587 2.39 Commercial Banks 80,766 10.57 101,252 8.31 183,824 9.86 1.2 Non-Bank Sector Savings Institutions 63,028 8.25 87,263 7.16 138,939 7.45 Sinking Funds 100 0.01 100 0.01 100 0.01 Insurance Funds 9,292 1.22 18,969 1.56 24,828 1.33 Provident and Pension Funds 144,406 18.90 218,615 17.94 333,289 17.88 Official Funds 15,438 2.02 24,640 2.02 40,739 2.19 Private Business and Individuals 48,638 6.37 120,116 9.86 246,209 13.21 1.3 Other 6,302 0.82 7,927 0.65 7,453 0.402. Foreign Debt 376,331 49.25 542,040 44.48 843,882 45.28

Total 764,071 100.00 1,218,700 100.00 1,863,850 100.00

Source : PDD, Central Bank of Sri Lanka

Ownership of Government Securities

1997 2000 2003

Figure 1Policy Interest Rates and Call Money

Averate Rate

4

6

8

10

12

14

16

18

Per

cent

RepoReverse RepoCall Avg.

Secondary Market -Secondary Market -

- Participants- Participants

- Ownership Structure- Ownership Structure

- Taxation Policy- Taxation Policy

- Yield Curve- Yield Curve

Government SecuritiesSecondary Market Yield Curve

7.00%7.25%7.50%7.75%8.00%8.25%8.50%8.75%9.00%9.25%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

25/11/03

31/12/03

09/06/04

Bond Market InfrastructureBond Market Infrastructure

Online Electronic Bidding SystemOnline Electronic Bidding System Real Time Gross Settlement SystemReal Time Gross Settlement System Scripless Securities Settlement Scripless Securities Settlement

SystemSystem Bloomberg Bond Trading SystemBloomberg Bond Trading System Colombo Stock Exchange - DEX Colombo Stock Exchange - DEX

SystemSystem

Transaction Numbers and Transaction Numbers and Volumes of the SSS Volumes of the SSS SystemSystem

PeriodPeriod Number of Number of TransactioTransactionsns

VolumeVolume

(Rs. Mil)(Rs. Mil)

February –February –20042004

5,6965,696 481,719.01481,719.01

March –March –20042004

14,03714,037 503,271.56503,271.56

April – April – 20042004

11,50011,500 523,349.47523,349.47

May – May – 2004 2004

11,83311,833 598,636.56598,636.56

TotalTotal 43,06643,066 2,106,976.62,106,976.600

Source:CDS,PDD, Central Bank of Sri Lanka

Growth of Depository Growth of Depository Accounts of CDSAccounts of CDS

PeriodPeriod No:Of AccountsNo:Of Accounts

February –2004February –2004 10,89310,893

March –March –20042004

12,48312,483

April –April –20042004

13,78113,781

May – May – 20042004

13,84613,846

Source: CDS,PDD,Central Bank of Sri Lanka

Regulatory FrameworkRegulatory Framework

Licencing of Primary DealersLicencing of Primary Dealers Primary Dealer SupervisionPrimary Dealer Supervision

- On Site Examination- On Site Examination

- Off Site Surveilance- Off Site Surveilance Regulations, Directions and Regulations, Directions and

GuidelinesGuidelines

The EndThe End

Thank You !Thank You !