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Need for urgent cash forces govt to increase interest in first 2025 bond auction

Government continues to mobilise money for debt repayment and budget support. Photo / File 

What you need to know:

  • The 15-year treasury bond had earlier offered a 15.8 percent yield but heavy discounts pushed the interest to above 17 percent for the first time in 18 months

Investors in government debt last Wednesday hit a jackpot, securing interests of 17.5 percent on the 15-year bond and 16.75 percent on the five-year bond.

Bank of Uganda data shows that the increase in earlier interest rates was due to government’s urgency to raise funds through domestic borrowing.

The 15-year treasury bond had earlier offered a 15.8 percent yield but heavy discounts pushed the interest to above 17 percent for the first time in 18 months, while the five-year bond offered investors nearly a 4 percent discount, thereby increasing interest from 14.25 percent to 16.75 percent.

The two-year bond, which offered a 13.5 percent yield scooped an auction closing interest of 16 percent.

Collectively, government had tendered Shs990b, but bids exceeded Shs1 trillion. However, only Shs791b was accepted, which raises the question of whether government is taking a cautious approach to borrowing or testing the waters.

Data from Crested Capital, a brokerage firm, shows that last week trading in the secondary market dropped significantly by Shs627.69b ($169.99m), a 38.5 percent decline from Shs1.63 trillion ($425.83m) to Shs1.01 trillion ($271.33m).

Long-term bonds led the way, accounting for 46 percent of turnover, with Shs460.87b ($124.81m) in trades, yielding between 17.9 percent and 15.02 percent.

Short-term bonds made up 28.3 percent, exchanging Shs283.62b ($76.81m) at yields ranging from 15.41 percent to 8.24 percent.

Medium-term bonds contributed 25.7 percent, with Shs257.41b ($69.71 million) traded at yields of between 17.72 percent and 13.45 percent.

The June 18, 2023 bond was the standout, representing 14.1 percent of turnover with Shs141.37b ($38.28m) in trades.

So far, in the current financial year, government has raised Shs14 trillion from the bond market.

Data from the Ministry of Finance November State of the Economy report shows that a large chunk of the money borrowed is used to refinance maturing debt with the rest going into budget support.  Borrowing to refinance maturing debt continues to bother civil society, amid revenue shortfalls, in which URA fell short of its 2023/24 Shs29.671 trillion target by Shs7.794 trillion.

“We reiterate our call to government to improve tax compliance, reduce tax exemptions, deepen collaboration across its entities on revenue collection, and intensify fiscal consolidation. URA should increase tax education and close all leakage,” CSBAG, a non-profit organisation that tracks fiscal operations, said in December.