Caleb M Fundanga: Develpments between the Bank of Zambia and the
Lusaka Stock Exchange
Opening remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the
LUSE/BESA/BOZ workshop for secondary trading of government bonds, Lusaka,
3 March 2008.
* * *
The Chairperson,
Resource Persons,
Workshop Participants,
Distinguished Ladies and Gentlemen,
I am honoured for the invitation extended to me this morning to officially open this important
workshop on secondary market trading for Government securities. To begin with, I wish to
commend the Lusaka Stock Exchange (LUSE), the organizers, on the timeliness of this
workshop. I have little doubt most of you will agree with me that this discussion on the
secondary market is long overdue and therefore could not have come at a better time.
Dialogue among key stakeholders is invaluable to the success of market development
efforts. This is particularly so because this allows each participant to share and learn from
their diverse experiences in this area. I must say that this workshop addresses a subject in
which I personally take keen interest. This is because I have, over the recent past,
participated in a number of meetings with key investors in our securities market. At these
meetings, issues surrounding the development of the secondary market have always been at
the centre of our deliberations. I am glad that we have now began to address those very
issues. This workshop also demonstrates the stakeholders' commitment to support the
market development efforts as outlined in the Financial Sector Development Plan.
Chairperson, over the recent past, the Zambian economy has performed well. This is
reflected in a number of the key macroeconomic indicators. To mention but a few; the growth
rate in real Gross Domestic Product (GDP) has remained positive and above 5%, we
attained single-digit inflation, relative stability in the exchange rate of the Kwacha against
major currencies, stable financial sector and improved banking services. These impressive
economic trends suggest that the reform programmes that have been implemented are now
bearing fruit. The reforms have focused on the restructuring of the economy, to let markets
determine key decisions so as to allow the private sector lead, which has provided for
increased investment in the economy. It is the contention of many financial analysts that
there is no better market to determine prices than the secondary market. In that regard, this
workshop is vital.
Ladies and gentlemen, the importance of a secondary market cannot be overemphasized. By
facilitating a ready mechanism through which financial claims can be transferred from one
holder to another, a secondary market provides wide possibilities for issuers of long term
securities to match their cash flows in a stable and cost effective manner. Investors with their
diverse liquidity needs are assured that they can convert their investments into cash at any
time and at a fair market price. At the same time, issuers are assured that their financing
needs, especially the long term ones, will be met in an orderly and timely way. By providing
such an assurance, a secondary market ensures that savings are pooled and invested in the
economy in a cost efficient manner. In this respect, a vibrant secondary market is therefore
an important aspect of the price discovery process.
Chairperson, an active secondary market is important to central banks as it facilitates the
efficient conduct of monetary policy. This is because, to effectively implement monetary
policy, central banks depend largely on the ability to influence financial markets. Therefore,
with a vibrant secondary market, monetary policy effects are transmitted to the rest of the
economy in a more transparent manner, which in itself contributes to price stability.
At this point in time, it is opportune for me to outline briefly the efforts Government has made
towards developing our secondary markets. Since the early 1990s, the government has
taken steps to develop the securities market. There has been good progress made on the
developing the primary market, though further refinements can be made to the structure. As
for the secondary market, it has barely evolved beyond the elementary levels.
Let me quickly go over some of the most important changes to the primary market:
•
Following the liberalization of interest rates in 1992 the auction system for Treasury
bills was introduced to create a more transparent and market-based system of price
determination that would encourage broader investor participation.
•
Alongside the introduction of the auction system, the maturity structure was
extended from the only existing term of 91 days to include 28 and 182 days in order
to meet the various liquidity needs of investors.
•
In 1995, Government bonds with a maturity term of 12 month and 18 months were
added to the list of securities.
•
Following the increased depth of the market, the structure of Government securities
was streamlined with the termination of the 28 day Treasury bill issuance and the
subsequent introduction of the 273 days maturity term.
• In 2005, reforms of the Government securities market continued with the cessation
of the 12 months and 18 months Government bonds. In their place, a 364 day
Treasury bill was introduced alongside the 3 and 5 years bonds.
•
More recently, in August 2007, a portfolio of Government bond maturity terms was
further increased to include the 7, 10, and 15 years.
Since that period, the size of the outstanding issues has grown from 7% of GDP in 1994 to
17% by the end of 2007.
With regard to secondary market, policy efforts have been initiated at different stages in the
development of our market.
•
In 1996, the Bank of Zambia attempted to jumpstart secondary market trading in
Government securities by restricting the primary issues of Government securities to
commercial banks. It was expected that commercial banks would take up the role of
market-making. This did not materialize with most commercial banks preferring to
buy and hold the securities until maturity. Consequently, authorities were obliged to
re-open the primary market to other non-bank investors.
• Further, since 1998, Government bonds have been listed for trading at the Lusaka
Stock Exchange. The benefits have not been realised despite the fact that all banks
are registered as brokers in this respect. I am sure the LUSE will provide you with
more detail on this as you deliberate.
•
More recently, the Government and the Bank of Zambia in 2006, with the support of
DIFID and the World Bank undertook a study tour of selected emerging markets in
Africa and Asia. The aim of this tour was to learn the actual workings of well
functioning government securities markets. Technical information was collected and
a report prepared. Once the recommendations in that report have been adopted, I
expect that these will complement your own efforts to activate secondary market
trading.
I am aware that the successful development of a secondary market needs a reliable and
efficient settlement infrastructure. This is important for it addresses the concern that is
normally raised on the possibilities of settlement risk. You may wish to know that the Bank of
Zambia and the Lusaka Stock Exchange are already engaged to develop an efficient
settlement stream within the RTGS payments system. It is my belief that once this initiative
has been fully developed, settlement risk will be reduced and more credibility will be added to
securities trading.
Chairperson, I know there are still formidable challenges in building a vibrant secondary
market. Hence, in my concluding remarks, let me reiterate what I said earlier; that setting the
primary market off the ground has been a challenging task. To set up secondary markets is
even a more challenging task. Yet it is not an impossible one. With the participation of every
stakeholder, the challenges that seemingly look insurmountable can easily be overcome. We
all know that the development of a vibrant secondary market for securities is necessary.
When I look at all of you gathered here this morning, I see a determined optimism that we
can get there. Each and every one of us has a role to play, be it Government, corporate
institutions, or indeed a small investor. On our part as Bank of Zambia, you can rest assured
that we will continue doing our part in facilitating the development of this market.
Thank you very much and I wish you a very successful workshop.