Financial Institutions and Markets

Report
On
Government Securities of Nepal
Guest lecture by
Dr. Gopal Bhatta
Director of
Nepal Rastra Bank

By:Prabuddha Nar Manandhar

Acknowledgement
The following report has been On 2nd December 2014 Dr. Gopal Bhatta, Director of Nepal
Rastra Bank gave us a lecture at Apex College on what government securities are? Why we need
to understand government securities? what are the types of government securities? The status of
government securities in Nepal and the issues we are facing.

Introduction
Government securities are debt obligation issued by the government authority with the promise
of repayment upon maturity that is backed by the government. Government securities are
considered risk free as they are back by the taxing power of the government. They are related to
the Treasury of the Nation. As an individual needs to fulfill his/her various levels of needs to step
up in the Maslows Hierarchy of needs, the government also needs to fulfill the various levels of
needs of the Nation. In order to finance the various needs of the country, government issues
securities. These needs of nation can be building infrastructures, providing education, health
facilities, public safety etc. Other than through taxation, issuing government securities is one of
the most important sources of generating government revenue.
Government Securities can be divided into three types regarding the maturity date of the
securities, they are:
1. Treasury Bills
2. Treasury Notes
3. Treasury Bonds

Status of Government Securities in Nepal

Normally the expenditure of the government is greater than the revenue generate by the
government. According to the 2071s budget of Nepal the expenditure of the government was
Rs. 5 kherab (five hundred billion) where as the revenue generation was about Rs. 4 kherab (four
hundred billion) [Type a quote from the document or the summary of an interesting
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Revenue
Expenditure
4 Kherab
Kherab

As we can see due to high expenditure than revenue generation there creates a gap. There are
three methods by which the government can reduce this gap. They are by:
1. Overdraft from the Central bank (Printing money)
2. Domestic Borrowing (Issue of government securities)
3. Foreign Borrowing (International organizations like IMF, World Bank, Multilateral and
Bilateral loans)

Overdraft from the Central Bank

Government makes an overdraft from the central bank to close the gap by printing money and
injecting it into the nations economy. Taking overdraft form the central bank can be one of the
fastest ways to reduce the government revenue and expenditure gap, but this has to be done in a
controlled way. As injecting excess amount of money can increase the supply of money which in
turn will increase the rate of inflation.

Foreign Borrowing
Government can reduce the revenue and expenditure gap by taking multilateral and bilateral
borrowing and funds from foreign countries and international organizations like International
Monetary Fund (IMF) and World Bank. Multilateral borrowing is loans that involve a number of
lenders and a single borrower. World Bank and Asian Development Bank are the largest
multilateral donors for Nepal. Bilateral loan is loan that involves a single borrower and a single
lender. Japan is Nepals largest bilateral aid donor.

Domestic Borrowing
To reduce the gap the government may also borrow money from the nations citizens. This is
done by issuing government securities. Government securities are treasury bills, treasury notes
and treasury bond. In USA treasury bills are short term government securities having maturity
period of less than one year. Treasury notes are intermediate term securities having maturity
period of less than ten years. And treasury bonds are long term government securities having
maturity period of more than 10 years. Where as in Nepal treasury bills have maturity period of
less than one year, treasury notes less than five years and treasury bonds are those securities that
have maturity period of more than 5 years.

Types of Government Security available in Nepal

There are five types of government securities issued by the government in Nepal. They are:
1.
2.
3.
4.
5.

Treasury Bills
Development Bond
Citizen Saving Bond
National Saving Bond
Foreign Employment Bond

Features of Debt Instrument issued by the Government of Nepal

Features

Time
Method

Treasury Bills Development

Short
of Auction

Issue
Type of Stock

Promissory

Bidding
Manual
Interest Rate Market

Citizen

National

Foreign

Bonds

Saving Bond

Saving Bond

Employment

Long
Auction

Long
Par Issue

Long
Par Issue

Bond
Long
Par Issue

Promissory

Stock

Manual
Market

Promissory
Application
Government

Promissory
Application
Government

Promissory
Application
Government

Biannually

Biannually

Biannually

Biannually

and Stock

and Stock

and

Determinatio
n by
Method

of At Maturity

Interest
Payment
Maturity

28,91,182,36

Period

4 days

more

Years

or 2

Years

more

or 2

Years

or 2

more

Years

or

more

As we can see from the table above treasury bills is only the short term security provided by the
government of Nepal. The government of Nepal issues four types of treasury bills having the
maturity period of 28, 91, 182 and 364 days.
Treasury Bills and Development Bonds are issued by the process of auction where as citizen
saving, national saving and Foreign employment bonds are issued at par value.
Treasury bills and development bonds are bought mostly by huge organizations and investors,
such as commercial banks as one has to auction to buy it. Whereas citizen certificate, national
saving certificate can be bought by anyone having the citizenship of Nepal and foreign
employment bond can be bought by the citizen of Nepal who are abroad at par value by filling an
application.
The coupon interest rate of treasury bills and development bonds are determined by the market
mechanism where the bid goes to the buyers that have offered to buy the most securities for the
least rate of interest. Whereas the interest rates on citizen saving, national saving and foreign
employment bonds are decided by the government.

Among all these five types of government securities only the interest on treasury bills are paid at
maturity. For the rest securities the interest is paid biannually.
All the securities provided by the government of Nepal except Treasury Bills have the maturity
period of two years or more.

Secondary Trading Mechanism in Nepal

Instrument
Treasury Bills

Primary Transaction
Secondary Transaction
Nepal Rastra Bank(NRB), Among Financial Services
through auction

Industry(FSI),

Development Bond
Citizen Saving Bond

developed
NRB, Through Auction
Stock Exchange
NRB, with the help of Market Market Maker

National Saving Bond

Maker
NRB, with the help of Market Market Maker

Foreign Exchange Bond

Maker
NRB, with the help of Market Market Maker

Special Bond

Maker
NRB

not

well

No Secondary

As we can see from the above table Nepal Rastra Bank (NRB) on behalf of the government
primarily issues the government securities
A market maker or liquidity provider is a company, or an individual, that quotes both a buy and a
sell price in a financial instrument or commodity held in inventory, hoping to make a profit on
the bid-offer spread, or turn.
The

secondary

transaction

market

is

not

well

developed

in

Nepal.

Issues of Government Securities in Nepal

Treasury bill is issued at discount, its return is discount.

There is no secondary market for treasury bills.
Development bond has secondary market but there is no trading.
Citizens saving, National saving and Foreign Exchange Bonds are bought and sold as per
decided by the government.

Conclusion
After getting knowledge and information from Dr.Gopal Bhata and by preparing this report I
found out that the government of Nepal has surplus of revenue than expenditures. This is due to
the lack of investment opportunities. There are many possibilities for the government to invest
but the risks are very high. There are no proper policies to aid government in reducing the risks
associated to making these investments.
I also found out that even though citizens of the country can buy the securities issued by the
government with ease, it is very hard to sell those securities make them less liquid due to the lack
of well developed markets in the country.