Thursday, September 4, 2014

My Contribution to Kuensel K2, Lets Make it SImple

T-Bills to the Rescue 

LETS MAKE IT SIMPLE Governments around the world use different tools to collect money from the economy to be used for its expenditure. Some of the simple methods of doing this is by imposing taxes and by borrowing from financial institutions.In some cases, the government also issues treasury bills. 

Unlike taxes and borrowings, these bills are sold to the public by the government. Institutions, corporations, banks and individuals buy these bills from the government. 

The government in turn promises to pay them back after a fixed period with a small interest.Say for example, the value of each bill is Nu 100 and the interest amount is Nu 5. The investor will pay only Nu 95 and when his investment matures, he will receive Nu 100. The additional Nu 5 is the interest rate.

Interest rates of treasury bills are called coupon rates.

Our government recently issued treasury bills worth Nu 4 billion. In other words, it wants to raise Nu 4 billion from the economy by selling bills, which it promises to repay at a later date with an additional interest.

There are two primary purpose of issuing treasury bills by the government. T-bills are issued when there is a mismatch between income and expenditure. For example, the government’s total income is Nu 100 and its expenditure is Nu 150, it has to look for an additional Nu 50 for which it has decided to sell treasury bills in the economy.

Treasury bills are mostly short-term and mature within 90 days. After 90 days you get back what you bought from the government with an interest. Institutions, banks and corporations are mostly interested in treasury bills, as it is risk-free and totally guaranteed by the government.

The central bank, which in our case is the Royal Monetary Authority, acts as the government’s agent to sell the T-bills on behalf of the government.During World War 2, countries like United States were issuing billions worth treasury bills to finance its war activities.

The other purpose of issuing treasury bills in the economy is to control money supply. The supply of money has to be constantly regulated because too much or too less is not good for the economy.Too much money will lead to inflation while too less will decrease economic activity.

If your father gives you Nu 1,000 a day for your pocket money, you would be able to buy many things and some of you might land up buying unhealthy, unnecessary items that will affect your health and habit. 

As soon as your father realises that, he will cut down on your daily allowances.Similarly, if there is excess money in the economy, it will lead to increase in consumption. When too much money chases too few goods, it will result in inflation. 

Inflation is bad as it affects mostly the poor who cannot afford the increase in prices.So, when there is excess money in the economy, the central bank will issue treasury bills, which will suck excess money from the economy, and then they will release it back when the money supply has decreased.

Just like a father cutting down on your allowances, the central bank or the government cuts down the money supply in the economy, both has the same objective-to inculcate economic discipline.

Contributed by Nidup Gyeltshen

1 comment:

  1. That was financial coverage from your end. It was informative one. Thanks.