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The Financial Express

'Muni bond' for LG bodies

| Updated: October 24, 2017 18:10:39


Image only for representational use Image only for representational use

Notwithstanding a certain element of uncertainty over investors' response to it, the reported move to use a new securities tool, popularly known as 'muni bond', to mobilise resources for the urban local government (LG) bodies does certainly deserve appreciation. The objective, according to the initiators of this innovative move, behind floating the proposed bond is to help the LG bodies carry out necessary development projects and infuse dynamism into the country's moribund bond market. Meanwhile, the government, in collaboration with the United Nations Capital Development Fund (UNCDF), has made substantial progress in preparing the tool suiting to the needs of urban LG institutions and selecting potential of a few municipalities that are fit enough to offer it for subscription through the country's capital market.

A government-appointed credit rating agency has identified at least nine municipalities having the strength to offer this kind of investment tool. However, both the government and the UNCDF have decided to exercise caution in their move. They would not go whole hog right now, rather experiment with one municipality to see investors' response prior to bringing in all the eligible municipalities that have reportedly submitted development project proposals worth over Tk 9.0 billion. But the government would have to bring in amendment/s to the relevant local government act empowering the LG bodies to borrow from others, including the private sector, using bonds or any other means.

The state of financial conditions of the LG bodies in Bangladesh has always been deplorable, for they have to remain largely dependent on government doles, made available on an annual basis, to execute most of their development projects. The situation is quite contrary to what the country's Constitution asks the government to do. In the articles 59 and 60, the Constitution demands that the LG bodies are made administratively strong and financially self-sufficient. Thus, the supreme charter has made it mandatory for parliament to confer powers by law upon these institutions, irrespective of their locations to achieve those objectives. However, as far as the financial powers are concerned, the objective has still remained unmet. Their inability to raise enough funds through tax and other measures, coupled with inadequate allocations by the government, has made them financially crippled. The government, on its part, has also limitations as, despite having its good intentions, it cannot make available sufficient allocations to the LG bodies.

Under the circumstances, either the government has to forego a part of the revenue it mobilises through a number of fiscal measures in areas under the command of the LG bodies, both urban and rural, or put in place affordable means for them to help mobilise funds needed for the execution of development programmes.  The 'muni bond', which has been introduced in a number of countries, could prove itself handy, only if investors respond to it positively. However, investors would obviously show their interest in the bond only if it carries attractive yield rates and is backed by state guarantee. Nothing is known about both these issues. During the launch of the bond for one municipality on a pilot basis, its initiators should give special emphasis on those, for the fate of the remaining bonds would largely depend on the investors' response to the maiden one.

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