Developing a Deep and Liquid Bond Market Experience of Sri Lanka

The bond market in Sri Lanka has shown a slow but steady growth since the primary issue of Treasury Bonds that began in 1997. The Primary Dealer System that existed since 1992 provided a sound institutional framework for this growth whilst the Real Time Gross Settlement System and Scripless Securities Settlement System that came into being recently provided further impetus to the development of the bond market. With regular primary issues and secondary market trading in long-term debt, a yield curve emerged in the Treasury Bond market. The existence of a yield curve in the government bond market would encourage issuance of corporate debt as it would provide a bench mark for pricing of corporate debt. The high degree of risks involving settlement and trading in scrip securities and systemic deficiencies were minimized with the introduction of new infrastructure and efficiency in the market operations increased due to scripless trading and electronic on-line settlement in a delivery versus payment environment. With the increased competition in the market, spreads between buying and selling prices have reduced gradually. This would assist, among other things, in reducing the cost of borrowing to the Government. The large institutional investors have taken the initiative to develop their fund management skills and, with better trading skills of dealers and investors, the market will be increasingly active and even the long-term bonds will become much more liquid instruments in the market. The organizational and policy related issues, such as the delay in the formation of a public debt management office, large and widening fiscal deficit, debt sustainability and solvency issues, high proportion of short term debt, irregular cash flows, deficiencies in cash management, primitive nature of the corporate debt market and taxation on debt instruments vis-a-vis conventional sources of financing, are the key remaining issues that need to be addressed. (JEL H63, G18) DOI: 10.4038/ss.v34i1.1240 Staff Studies Volume 34 Numbers 1& 2 2004 p.69-85