By Liku Irene Kamba
June 2015
The government bond market in the EAC has been one of the major sources of government funding and has played a major role in funding long term development projects in the region. This market took shape as a result of reforms implemented in the 1990s and some that are still ongoing.

There have been deliberate efforts taken by governments in the region to boost development of the government bond markets. The question with all these initiatives remains; has the government bond market been strengthened? And have all these efforts improved the performance of the government bonds in the region with particular emphasis placed on the liquidity of these securities?

The paper offers insight into the performance of the Government bond market in Tanzania, the factors that have made government bonds illiquid and the efforts taken by government to correct this. Among the factors highlighted to be affecting liquidity of government bonds in Tanzania is the structure of the government bond market itself in terms of the nature of the market players, instrument design, mechanism of issuance, and the legal and regulatory frameworks in place, particularly, the collateral management framework, statutory requirements, taxation policy and capital account controls.

Using the volume-based measures of liquidity, government bonds in Tanzania are seen to be illiquid when compared to those issued in Uganda and Kenya. And in order to revamp the performance of government bonds in Tanzania through increased liquidity, the paper looks at strategies applied by the two countries that worked favourably and proceeds to propose strategies that would work in the Tanzanian environment such as: introduction of benchmark bond programs; reduction of issuance frequency; introduce market determined coupons; review of collateral management framework; full liberalization of the capital account and enhancement of market infrastructure to support Delivery Versus Payment (DVP) arrangement in both primary and secondary market.