Bond markets are central to the development of an efficient financial system which showcases complete financial markets and generates market interest rates, according to Mr. Amadou Colley, the Governor of Gambia’s Central Bank (CBG).
“This can reflect opportunity cost of funds at a wide range of maturities,” Mr. Colley said here Tuesday in a message to a five-day West African training on Developing Bond Markets (issuance and pricing strategy) and Risk Management in Financial Service.
The message, read on his behalf by his deputy, Basirou A. Njai, said “Bond markets are essential for efficient investment and financing decision,” adding that “The absence of such markets could have adverse effect on investment opportunities.”
“The development of bond markets reduces dependence on bank financing and better still spreads corporate risk,” Mr. Colley said in the statement.
Presided over by the CBG and the West African Institute for Financial and Economic Management (WAIFEM), the training is meant to strengthen participants’ capacities and highlighting essential areas that needed to help the function of local currency bond markets.
It will also take up longitudinal analysis of bond market development in WAIFEM member countries — Ghana, Guniea, Liberia, Nigeria, Sierra Leone and The Gambia.
“In essence, sound macroeconomic policies, particularly prudent fiscal and monetary policies, and a credible exchange rate regime matters profoundly,” says Colley. “Financial sector liberalization is also key.”
He said banks and financial institutions in sub-regional economic bloc, ECOWAS, increased their appetite for bond in recent years due to low-investor participation and ample liquidity in the banking system.
He added that there was a lack of price transparency in the trading of bonds in secondary markets.
“This is because the majority of bonds, particularly cooperate and sub-national bonds, are traded over-the-counter (OTC), contributing to wide bid-ask spreads and making transactions unnecessarily costly and inefficient to investors,” he argued.
Withholding taxes and taxes on financial transactions remain prohibitively high for non- resident investors in some markets, Colley explained, saying “For instance, in some countries, withholding taxes on interest income applicable to non-resident investors and taxes on capital gains derived from holding of bonds are very high, thereby discouraging foreign investor participation in the local bond market.”
WAIFEM Director General, Prof. Akpan H. Ekpo, said “The bond market is a key element, along with the banking system and equity and derivative markets, of a well-developed financial system.”
His statement, delivered by Baba Yusuf Musa, Director of Debt Management Department at WAIFEM, said financial system contributes to economic development by enabling firms, governments and households to manage risk, avoid having to sharply compress spending in bad times, and invest in high-return project that might otherwise remain beyond reach.
With WAIFEM member countries increasingly involved in bond market particularly local currency bond, Mr. Ekpo said the common motive for this trend is the desire to develop local capital markets to improve the flexibility and effectiveness of sourcing funds for financing local infrastructure, medium- and long-term socioeconomic development projects.
WAIFEM was set up in 1992 by the central banks of The Gambia, Ghana, Liberia, Nigeria and Sierra Leone, and joined by Guinea in 2012.
It is aimed at strengthening capacity for sound debt, macroeconomic and financial management in these countries.