Developing the demand for T‐bills from banks and, over time, institutional investors. Private banks should be allowed to participate in the T‐bill market and prepare themselves accordingly. Because of the repressed financial environment and the absence of marketable financial instruments, the CBE and private banks have not developed modern treasury operations. They have been coerced to invest in both government securities and SOE bonds without much concern about duration mismatching and interest rate risk. The NBE initiative to develop an active money market and reduce access to central bank financing should encourage the CBE and private banks to develop more sophisticated treasury operations. During a transition period, the auction mechanism (e.g., uniform or multiple price auctions, hybrid system) should be adapted to accommodate the technical difficulties that the banks may face while minimizing the risk of collusion among bidders.<sup>99</sup> In any case, the CBE should be treated in the same way (i.e., rights and obligations) as private banks. Institutional investors should also be gradually authorized to participate in the government securities market. While the two social security funds will remain captive investors, they should nevertheless be also allowed to invest a growing share of their resources in marketable government securities (see Box 7).

## **Box 7.  Examples of partial liberalization of social security fund investment**<sup>100</sup>

Because of their role in mobilizing long‐term savings, public pension institutions in many developing countries play an important role in funding the government debt. But for various reasons they continue to be treated as captive or semi‐captive investors. These include the lack of sophisticated treasury and asset management operations by public sector institutions, the inefficiency of government cash management systems, and political concern about the potential for misuse of the funds of these institutions. At the same time, the misuse of their funds by the governments themselves, forcing them to invest for prolonged periods in non‐marketable securities at interest rates that are well below market levels, even below the rate of inflation, constitutes major financial and political risks.

Several countries in Latin America, Central and Eastern Europe, and Southeast Asia have implemented systemic pension reforms in recent years (e.g., the Arab Republic of Egypt, Colombia, Ecuador, Malaysia, Sri Lanka, and Tunisia). These reforms aimed to direct a growing share of their resources into marketable government securities, while making the rates of interest paid on non‐marketable securities closer to market levels. Other countries went further and promoted the expansion of supplementary private pension funds. But with the exception of Chile where the reform was implemented in 1981 and has already led to the accumulation of large long‐term savings by private pension funds and insurance companies, the reform programs to promote private pension funds are still at an early stage of implementation in many developing countries.

# 4.5. Introducing indirect monetary instruments

Adopting a new monetary policy framework. So far, the use of indirect monetary instruments by the NBE has been extremely limited due to the underdevelopment of the money market and the virtual non‐ existence of a financial market for NBE‐bills and government securities (T‐bills). However, as noted by the

> 99 Vittas, Dimitri (2007). Debt Placement with Public Investors. World Bank. Washington D.C.

> 100 This box draws on Vittas (2007).

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