A new diagnostic published last week by the International Monetary Fund (IMF) and the World Bank has urged Bangladesh to undertake a series of urgent and comprehensive reforms to strengthen its local currency bond market (LCBM), warning that persistent structural weaknesses continue to limit the country’s capacity to mobilise stable domestic financing.
The high-level technical assistance report, Bangladesh: Local Currency Bond Market Development Diagnostic, is based on a joint mission conducted from July 5–17, 2023, at the request of the Ministry of Finance.
It assesses the sovereign debt market across six key building blocks—money market, primary and secondary markets, investor base, financial market infrastructure, and the legal and regulatory framework.
According to the diagnostic, Bangladesh has the basic preconditions needed for a deeper and more efficient bond market, but most components remain stuck at a “developing stage.” A central concern highlighted by the mission is that, despite regular oversubscription of government securities auctions, market-clearing prices were long suppressed due to devolvement practices that compelled the Bangladesh Bank (BB) to absorb unsold securities. This pricing intervention, designed to keep lending rates low, distorted the auction system and impeded healthy market development.
The report further warns that Bangladesh’s heavy dependence on high-cost National Savings Certificates (NSCs) has crowded out the bond market by diverting long-term savings away from market-based instruments. Direct central bank financing in recent years and a fragmented issuance structure have added to pressures on the sovereign debt market.
Secondary market liquidity remains severely limited, despite strong transparency in transaction reporting. The mission found that trading volumes are low due to a narrow investor base dominated by banks, widespread buy-and-hold behaviour, tax distortions—particularly the uneven application of withholding tax on interest—and weaknesses in the design of the primary dealer (PD) system. The PD framework, originally intended to support auctions and provide market-making functions, is labelled “ineffective” and in need of redesign.
Money market gaps pose another significant constraint. The absence of a reliable short-term yield curve and the dominance of unsecured interbank transactions reflect an underdeveloped repo market. The lack of a standardised master repurchase agreement and the evolving monetary policy operating framework reduce the effectiveness of short-term instruments and weaken price discovery.
To address these challenges, the IMF–World Bank team has recommended a set of high-priority reforms. First, the authorities are urged to fully maintain the recently introduced acceptance of market-clearing auction prices and to permanently eliminate devolvement to BB and PDs. The report calls for the withdrawal of mandatory underwriting commitments by PDs and the implementation of liability management operations to consolidate benchmark bonds. A gradual reform of NSCs to align their returns with market yields is also advised.
The PD system, the mission notes, requires a comprehensive overhaul. A smaller, more committed pool of primary dealers, stricter eligibility and performance criteria, and a better balance of rights and obligations are expected to improve market-making and trading activity.
Improvements in the money market—including transitioning to a full interest rate corridor, developing a reliable short-term yield curve, and introducing a master repo agreement—are also key priorities. Strengthening the financial market infrastructure through securities lending facilities, BD-RTGS-based settlement, and tax reforms would further support market deepening.
The mission recommends establishing a high-level inter-agency Steering Committee under the Ministry of Finance to coordinate the multi-stakeholder reforms needed to build a deep, liquid, and modern local currency bond market—an increasingly vital tool as concessional external financing declines.
