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Debt Markets Development in Mozambique

Project Development Objective (PDO)

The objective of this project is to enhance the development of the primary government bond market by helping the authorities adopt the annual borrowing plans, improve the debt management practices, improve relevant rules and procedures for the Primary Dealer System and secondary market framework, and establish a central securities depository (CSD) in line with the Principles for Financial Market Infrastructures by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions.

Background

The primary government bond market in Mozambique faces irregular and infrequent bond issuances, market players’ lack of deep knowledge on the functioning of the government bond market, and weak price dissemination procedures, among others. The lack of depth in the government bond market hinders the broader development of the financial sector, affecting the effective allocation of existing excess liquidity in the financial system, limiting the scope of savings vehicles for the population, and reducing the potential for developing long-term finance in local currency for both the public and the private sectors.
The Ministry of Finance and the Bank of Mozambique have taken significant steps and actions to enhance Mozambique’s money market (for example, new regulations for repossession and reverse repossession and other interbank operations) and its primary market of government securities. Authorities have made other efforts to promote a trading platform for the secondary market through the primary dealer rules and the Mozambique Stock Exchange. However, the lack of capacity and understanding of the functioning of the primary and secondary markets hinders the designing of proper mechanisms. 
In August 2006, the government introduced a decree for the centralization of securities registration and administration and mandated the Mozambique Stock Exchange to set up a CSD. Apart from facilitating the ease of transfer of ownership through book entry, the introduction of the CSD is expected to significantly improve the efficiency in the trading and settlement of securities in the market. A well-functioning CSD is therefore a key pillar to building efficient bond markets.

Activities

The envisaged activities of this technical assistance project are as follows:
1.  Conducting diagnostics and preparing an action plan for a primary bond market framework
2.  Evaluating the conditions for greater reliance on domestic debt market funding
3.  Preparing and implementing improved cash flow forecasting guidelines to support the
     development of the primary markets
4.  Designing a secondary market architecture
5.  Reviewing the existing primary dealer framework and regulations
6.  Supporting the establishment of a CSD

Expected Outcomes

The expected outcomes of the project are the following:
Short-term outcomes
     1.  Developing and implementing the primary market issuance program 
     2.  Offering of mechanisms  
     3.  Establishing the primary dealership 
     4.  Developing an investor base; building of a yield curve 
     5.  Developing a relationship between fiscal and monetary policies, debt management, and cash
          management 
     6.  Creating a government bond market architecture 
Medium-term outcomes
The Ministry of Finance and Mozambique Stock Exchange and the Bank of Mozambique are expected to complete the following:
     1.  Developing and implementing a primary market issuance program supported by improved
          cash projections 
     2.  Enhancing the regularity and efficiency of government bill auctions, while balancing the need
          to improve the functioning of the local debt markets 
     3.  Enacting a new decree and supporting regulation to improve the primary dealer system 
     4.  Implementing procedures to stimulate secondary markets and price dissemination 
     5.  Fully developing the oversight framework for CSD and securities settlement systems