Chapter 133 of the Laws of Malta, consisting of the Malta Treasury Bills Act, is one of the shortest on the book and consists of just 12 sections. It gives the government the power to issue treasury bills to finance its short-term liquidity requirements.
Before 1987, the amount of treasury bills which could be outstanding at any one time was limited to Lm2.5 million, but this limit was then raised to Lm30 million, then to Lm100 million, and eventually to Lm300 million in November 2002. Since 1996, the government was no longer able to borrow from the Central Bank, via what used to be called the "ways and means" facility, and this put more pressure for the government to borrow via treasury bills.
Lm300 million is not a small sum. As at the end of 2002, it was approximately 18 per cent of gross domestic product, 37 per cent of total government bonds outstanding and 37 per cent of government's total expenditure.
Last year it would have taken the government nearly four and a half months to spend Lm300 million.
Of course, Lm300 million is the maximum that can be outstanding at any one time and the government usually does not make use of the whole amount. In fact, at the end of 2002, the government had Lm219 million treasury bills outstanding, of which 73 per cent were held by the banking system.
The average amount outstanding, however, keeps increasing both because the economy and the government are getting bigger and because of the greater reliance on treasury bills as a financing instrument.
Sometimes the figure of treasury bills outstanding gets stuck at a certain level, sometimes close to the limit, especially at times when the government would be seeking to raise it, and this may indicate that there is a danger that what was meant to be an overdraft-like facility turns into a permanent loan, with each redemption funded by a new issue.
Treasury bills are meant to be "temporary borrowing" and, for those who watch the government's finances, what is happening in this area is an important indicator to the government's cash flows. At the time of writing, the amount of treasury bills outstanding is Lm271 million (Money Market Report for the week ended July 11, 2003).
Treasury bills usually have a three-month life and each bill has a face (par) value of Lm1,000. One buys treasury bills at a discount to their par value, i.e. at less than Lm1,000 each. On maturity, the government pays Lm1,000 and the discount therefore represents the interest which the holder of the treasury bill receives for lending money.
The Treasury also issues bills for one, six, nine and 12 months, along with the regular three-month bills. The Treasury cannot issue bills with a life of more than 12 months.
Treasury bills are sold by auction and one has to bid for a minimum amount of Lm20,000, except for the one-month bills where one has to bid a minimum of Lm100,000. Tenders are usually submitted on Tuesdays and payments are settled on Friday. The Treasury regularly publishes a timetable of its planned activities in the Government Gazette.
Investors who wish to bid for smaller amounts may approach their stockbroker or other investment adviser who may run a treasury bill service and accumulate various clients' holdings.
Prior to 1995, when the Act was extensively amended, treasury bills were issued at a fixed rate. Since then, as noted, they have been mostly issued following an auction at which various investors bid for different amounts. The auction helps ensure that the rate of discount (interest) reflects monetary conditions although the Treasury has a lot of input into the rate eventually set. Furthermore, the Treasury still has the power under the Act to issue treasury bills at fixed discount rates.
In times such as today's, where it is normal to see bids of ten times the amount of bills issued, the Treasury as issuer virtually sets the rate. The last auction yielded a weighted average rate of 3.1234 per cent, reflecting a bid price of Lm99.2273 per Lm100 nominal.
According to the Act, the intention is for there to be an electronic central depository for treasury bills. This would function in much the same way as the electronic register at the Stock Exchange and will greatly facilitate administration.
Banks held 73 per cent of the treasury bills outstanding at the end of 2002, the balance being held by the so-called "non-bank public". This is in contrast with the Malta Government Stocks (MGS) where banks and non-banks each hold around half the Lm813 million which were outstanding at the end of last year.
In the old days, treasury bills used to be tax-free. Now, interest on treasury bills qualifies for the deduction of the 15 per cent final withholding tax. Treasury bills are exempt from any duty under the Duty on Documents and Transfers Act.
Treasury bills can be sold prior to maturity through intermediaries who are active in this market. The market value of treasury bills may fall as well as rise but, due to their short-term nature, fluctuations are likely to be small, which is the reason why banks are so enamoured to them.
The Central Bank acts as market maker in treasury bills and deals in bills prior to their maturity.
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