Central Bank makes reforms to bolster economy 

By Tracy Gwambe

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Bank of Uganda has appointed seven banks to compete at its auctions of treasury bonds and bills, reforming the primary dealership system.

These primary dealer banks will make bids above sh200m at each auction and then resell the bonds to other investors on the secondary market. 
 
The primary dealer banks include ABSA, Baroda, Centenary, DFCU, Housing Finance Bank, Stanbic Bank and Standard Chartered Bank. Experts say that the move will improve the attractiveness of Uganda's treasuries to investors at home and overseas. 
 
These investors include non-primary dealer commercial banks, firms, overseas buyers and ordinary Ugandans that are looking to enjoy interest payments from government and to use the treasuries as collateral.

Government treasuries are the safest form of collateral, and therefore increased circulation of treasuries will impact loan markets. 
 
"In order to enhance liquidity in the secondary market, effective October 01, 2020, competitive bidding in the primary market for Government securities shall be limited to only Primary Dealer Banks," Prof. Emmanuel Tumusiime-Mutebile, the Governor Bank of Uganda said.  
 
The Governor said that the changes are aimed at improving the buying and selling government treasuries. He pointed out that in the financial year 2019/20, the turnover in the secondary market was 41% of the total outstanding stock of Government securities. 
 
This means that 59% of the total outstanding stock of Government securities was not traded at all and was simply held until maturity.  
 
In contrast, he noted that South Africa's government treasuries change hands at least 12 times in a year, which substantially increases liquidity in the market.

This also enhances the attractiveness of the securities since the abundance of buyers and sellers facilitates the ease of entry and exit into the financial market.  

"It also strengthens a country's ability to withstand exogenous shocks to the economy, as offshore investors would be more assured of stability in prices as opposed to the expectation of heightened volatility in illiquid markets," Prof. Mutebile said.  

Joram Ongura, the Associate Vice President Trading East Africa at EFG Hermes, a financial services company said that the Bank of Uganda's move will improve pricing and transparency in the markets for government treasuries since primary dealer banks need to resell to non-primary dealer banks in order to patriciate in further auctions.   

"I think the agenda is to open this market and get a large pool of Ugandans participating. This helps the ministry of finance and economic development and Bank of Uganda to achieve their macro and microeconomic policies," he said.