Central Bank changes pricing system for government debt

The Bank of Uganda has announced a change in the pricing of government debt in primary auctions from the current multiple prices to a single price, according to a statement issued on Monday.

Under the single price method, treasury bills and bonds in the primary auction will be sold at the same price to both competitive and non-competitive bidders. The change will take effect on 2 July at the start of the 2018/2019 fiscal year.

The new system, according to the central bank, is aimed at encouraging secondary market trading; investors will not balk at selling their treasury securities as they will all have received the same price at the auction.

“Previously, non-competitive bidders’ allocations of securities would be done at the weighted average price (or interest rate) of the successful competitive bids in an auction,” the statement said.

Under the new method, the allocations of securities for non-competitive bidders will be done at the highest interest rate from the successful bids.

Additionally, “competitive bidders, whose allocations were previously done at the prices in their respective bids will now receive allocations at the highest interest rate from the successful bids in the auction.”

As a result, both competitive and non-competitive bidders will receive allocations at the same interest rate under the new method, which will be the cut-off price of an auction

Competitive bidders are investors with bid amounts above $540,000 (Shs200m) while non-competitive bidders are investors with bids between $23,000—$54,000 (Shs100m—Shs200m)

“The single price with respect to each specific security will be the highest interest rate from the accepted bids in the auction,” the Bank said.

BoU says the single price auction will also simplify the computation of withholding tax on the interest rate that is earned from government securities.

The government borrows from the public by issuing treasury bills and bonds. Government securities are auctioned monthly by the central bank and applications can be made via commercial banks.