The financial sector reform is amongst the major approach considered in the country’s homegrown reform agenda. The reform agenda that the nation has already embarked is said to go in line with government’s development strategy, with the continuation of an important role for the public sector but with greater private participation in the economy through measures to encourage private investment.
Thus, the reform consist structural changes aimed at removing business constraints, opening sectors to private sector competition and ensuring transparency and accountability.
In 2008, the African Development Bank launched the African Financial Market Initiative as part of its strategy to develop the financial sectors in Africa.
The initiative aims to contribute to the development of domestic bond market in Africa through African Financial Market Database (AFMD) and African Domestic Bond Fund (ADBF).
Local currency bond markets (LCBMs) can promote financial stability in developing countries. For instance, they can help mitigate the currency and maturity mismatch that contributed to the outbreak of the Asian financial crisis of 1997-1998, according to World Bank.
At the 8th annual local currency bonds and financial sector development which was organized by the African Development Bank (AfDB) and National Bank of Ethiopia recently, it was mentioned that a well managed and developed local currency bond markets are important pre-requisites for enhancing and promotion financial market development.
Fikadu Digaffie, Vice Governor of National Bank of Ethiopia said that a well-functioning and transparent domestic bond market increases incentives for investors’ participation thereby promote the culture of savings and investments which ultimately translate into sustainable economic growth and development of an economy.
Moreover, local currency helps emerging market economies to lower external vulnerabilities emanating from adverse currency fluctuations, as to him.
Though the nation’s local currency bond market is at an early stage of development, the Bank has determined to continue improving the conditions in the market and the prospects for establishing a sustainable capital market in Ethiopia.
Since the launch of the Initiative in 2008, remarkable progress has been achieved in the continent through increased access to finance and deepen financial institutions said Yasmin Wohabrebbi, Director of International Financial Institutions Cooperation representing Minister of Finance.
Though Ethiopia’s performance during the last decade was built on the fast and sustained growth, rising external imbalances and lack of competitiveness has challenged the economy over the last three years.
To address the imbalances, the government has been taking various initiatives aimed at strengthening the role of private sector in driving growth, as to her.
“The AFMI workshop is very important given the role of local bond market to play for African countries financing needs in the development. I am particularly excited that the ADB has selected Ethiopia to host this annual event in a time where we are embarking to make bold reforms in the financial sector that includes the development of the capital market in the country.” she said.
Amongst the potential benefits of local currency bond issues on domestic bond market development could be strengthening the legal regulatory framework for the issuance and trading of local currency bond issues.
Moreover, stimulating competition in the domestic capital markets by involving domestic financial intermediaries in the issuing process, adopting best practice standards and skills to issue local currency bonds, and providing liquid benchmark bonds which are also prerequisite for domestic corporation and banks to issue local currency bonds are part of the benefits of local currency bond markets.
Local capital markets provide opportunities for better risk sharing and a more efficient allocation of capital.
Local currency bond markets are highly advisable for developing countries as it avoids the financial fragility associated with a currency mismatch in investment and other sectors.
The Ethiopian Herald December4, 2019
BY BETELHEM BEDLU
