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Capital market key driver of economic growth: Analysts

THE government’s commitment to strengthening the domestic capital market as a crucial financing source
Finance Minister Dr Mwigulu Nchemba Tabling the 2024/25 budget in Dodoma last month,

TANZANIA: THE government’s commitment to strengthening the domestic capital market as a crucial financing source will play a key role in driving economic growth and development.

Vertex International Securities Limited, Research and Analytics Manager Mr Beatus Mlingi said yesterday that the 2024/25 national budget tabled in the Parliament in Dodoma recently outlined a comprehensive strategy to enhance Tanzania’s domestic capital market.

“The domestic capital market serves as a vital conduit for channeling savings into productive investments, thereby supporting infrastructure development, corporate expansion and job creation,” he said.

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Tabling the 2024/25 budget in Dodoma last month, Finance Minister Dr Mwigulu Nchemba said in ensuring that domestic capital market remains as a key source of financing, the government will continue issuing benchmark bonds to create competitive reference rates within the domestic capital market.

Mr Mlingi said these benchmark bonds, typically government securities with established maturities, serve as reference points for pricing other securities in the market.

He said by regularly issuing benchmark bonds, the government aims to create a yield curve that reflects the cost of borrowing over different time horizons.

“This yield curve not only aids investors in making informed decisions, but also helps in setting competitive reference rates that can influence the pricing of corporate bonds and other financial instruments,” he said.

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According to him, benchmark bonds are pivotal in developing a robust capital market. They provide a reliable benchmark for pricing various debt instruments, thereby enhancing market transparency and efficiency.

Further, the issuance of benchmark bonds will help in establishing a riskfree rate, which is crucial for pricing other securities.

“A well-defined yield curve, derived from these bonds, provides investors with a clear picture of the expected returns on government securities over different maturities. This, in turn, facilitates better investment decisions and portfolio management,” he said.

Also, Mr Mlingi said regular issuance of these bonds ensures a steady supply of high-quality securities, attracting a broad spectrum of investors, including pension funds, insurance companies, and individual investors.

The increased participation in the bond market enhances liquidity, making it easier for investors to buy and sell securities without significantly impacting prices.

Moreover, benchmark bonds play a critical role in shaping monetary policy.

Central banks often use government bond yields as indicators of market expectations regarding future interest rates and inflation.

“By maintaining a stable and predictable issuance schedule, the government can provide valuable signals to the market, helping to anchor inflation expectations and influence monetary conditions,” he said.

An economist-cum-investment banker, Dr Hildebrand Shayo, said the capital markets potentials as key source of financing is not exhausted.

“Much as the need for using alternative source of financing for development projects increases, an efficient use of capital market is of paramount importance,” he said.

He said the private sector in the country has insufficiently used the capital markets avenue as key source of alternative financing.

“Most of the private companies are run as family businesses thus failing to access capital markets potentials to raise alternative finances,” the economist said.

Dr Shayo noted that as much as government securities and other instruments have been recording oversubscriptions, implies that there a lot of liquidity in the circulation which could be used for investment.

He called on the need for putting incentives to attract more companies both public and private make use of the capital markets avenue in raising investment funds.