Saturday, June 15, 2013

Finance Ministry preparing guidelines for local currency bond

The Finance Ministry is preparing guidelines to issue local currency bonds. “The guidelines will be prepared within a month,” informed joint secretary at the ministry Baikuntha Aryal.
“However, the Cabinet will have to approve the guidelines before they are implemented,” he said, adding that Asian Development Bank (ADB) and International Finance Corporation (IFC) — a private sector lending arm of the World Bank — have shown interest in issuing local currency bonds that could help mobilise financial resources and increase access of the private sector to long-term loans for infrastructure projects like hydropower.
However, the government must be cautious in managing the domestic borrowing calendar and bond issuance calendar, he added.
The liquidity scenario, maximum ceiling for bonds, protection of investors, underwriter and their tax, mechanism to repatriate profits in foreign currency, short-term mechanism to mop up excessive liquidity, bridging financing for commercial banks, spread between lending and borrowing rates, and listing mechanism at Nepse should also be seriously worked out before allowing the local currency bond issue, Aryal added.
As there is no long-term financial instrument in the market that can help boost long-term infrastructure projects, local currency bonds are expected to fulfil the current resource gap by mobilising small local capital.
In recent years, the government has not been able to spend enough on infrastructure but its social sector spending has been increasing, forcing the government to devise an instrument to finance long-term infrastructure projects. “Since there is a mismatch between long-term credit demand and short-term liquidity, the local currency bond could help manage bridge the gap,” according to him.
The last two three-year interim plans had focused on spending on infrastructure but it could not materialise also due to resource constraint. The draft of the third Three Year Interim Plan also focuses on infrastructure development, but the government has limited resources. Though private investment had seen encouraging increment post-1990, the trend has slowed down in recent years.
In the last 10 years, government spending on power has been half of the allocated budget, whereas it has been spending one-third in the economic sector. But the need to invest in infrastructure reconstruction after the decade-long conflict and private sector's low capacity has made local currency bonds a must to raise funds also due to lack of financial instruments.
Domestic banks and financial institutions cannot invest in bigger and long-term infrastructure projects due to the single obligar limit and lack of long-term lending provision. ADB and IFC are both rated AAA and are eligible to issue local currency bonds.
The Finance Ministry will make it mandatory for international financial institutions to seek the government's permission prior to issuing such bonds to ensure funds mopped up by bond issuance do not put liquidity strains on the banking sector, added Aryal.
“It is a risk-free instrument as only rated institutions can float local currency bonds,” he said.
Foreign investors can also invest in local currency bonds as it will increase confidence in the local currency. However, reducing foreign currency exchange rate volatility and attracting foreign investors will be a challenge, he added.
Local and foreign institutions can float local currency bonds which can be bought by big business houses, banks and financial institutions, according to the proposed draft, according to which the bond's coupon rate and lending rate will be fixed and the project will pay the bond issuer and the bond issuer will pay bond purchasers the interest.
Bond issuers will also have to discuss maturity period and yields of such bonds, and the bonds will have to be listed at the stock market, Aryal added.

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