Despite being the largest economy in East Africa, Ethiopia does not have a stock market. While the government is poised to set up the country’s first stock market by 2020, experts advise that the necessary preparation have to be conducted first.
In Ethiopia, a commercial law that governed share companies was formulated around 1960. Then after, sugar factories introduced stock market and sold their shares. But the initiative was short-lived as the Dergue, the communist military junta, dismantled it as soon as it came to power. In 1993 Ethiopia embraced a free market economy and currently, there are more than 1000 share companies.
Besides its economic value, economists consider the presence of a capital market would facilitate wealth distribution in an economy. On the other hand, others argue that capital markets will not have significant economic contributions in developing countries where there are few companies with the capacity to take part in capital markets.
Dr. Atelaw Alemu, an economist at Addis Ababa University tells The Ethiopian Herald that stock market opens the door for individuals, and companies to accumulate capital and the government to earn more income from tax. “It enables people to own a company by contributing some amount of capital. In such a way, individuals will have a chance to invest more or sell their shares in the stock market.”
He further says that the stock market is a means to create a secondary market. “Currently, there is no mechanism for shareholders to sell their shares. The primary market is where companies sell their shares and hence shareholders have no right to sell their shares. Hence, the presence of a stock market or a secondary market will totally alter this situation.”
Besides, secondary markets also give others an opportunity to invest in new business ventures and help companies raise more capital. “So far, such a market doesn’t exist in Ethiopia. Having a population of more than 100 million, Ethiopia might be the only country that does not have a stock market.”
According to Dr. Atlaw, the presence of a stock market also significantly raises government revenue in the form of tax. Hence, when the wealth of companies increases, so does the government’s income. But Atlaw states that as anybody cannot just come and involve in the stock market, first, the criteria for doing so need to be set.
Zafu Eyesuswork Zafu, a businessperson who has a wealth of experience in the banking and insurance industry, says a team of high-level experts has been set up and is seriously engaged in studying the establishment of a stock market in Ethiopia.
While a study has already been conducted some 20 years ago, the team is receiving international expertise advice from prominent international financial institutions, to update and add value on it.
Noting that lack of trust, understanding on the functioning of the stock market, and interest from the advocates of developmental states to shift the resource base to others, he says such ideological stance has hindered the progress of the stock market in the past.
However, the stock market is a place where capitalists get in the front seat. Now, the financial flow will be decided by the will of the people, not by the government, he adds.
The presence of stock market improves resource utilization and financial management. It helps investors to invest their money in a place they want. It also attracts foreign capital to the country. Some people might raise the negative aspects of having a stock market, but the advantages outweigh the disadvantages, Zafu stresses.
The first priority in establishing the stock market, he says, is registering those parties that want to get involved and making sure that they meet the criteria. On the other hand, there are still those who oppose the idea of establishing a stock market in a developing country like Ethiopia.
General Secretary of African Chamber of Commerce, Kibur Gena recently told the Amharic Daily Addis Zemen that it is not the right time to establish capital markets in Ethiopia as the number of companies that meet the criteria to engage in capital markets is limited.
The criteria include respecting rules and regulations, paying taxes and having a bookkeeping system that meets international standards. “For instance, most companies in Ethiopia are not willing to reveal their profit to evade tax.” Hence, as there are few companies that could take part effectively, capital/ stock markets will have a very limited role for economic development and distribution of wealth, argued Kibur.
The capital markets in most African countries have not been delivering meaningful contributions to the economies as most of them do not have a well organized financial system. All most all are small capital markets, he said adding hence, even if Ethiopia establishes capital markets, the outcome would not be any different. “Moreover, in the first place, it requires the presence of large companies in Ethiopia to attract foreign companies to its capital market.”
Currently, the companies’ shares are in the hands of few and these are the groups who are calling for capital markets to be established as they already own a large number of shares and currently there is no way for them to trade and make money out of them. “A capital market established for this purpose will not have any meaningful economic significance,” Kibur warned.
Yet, Zemedeneh Negatu, Chairperson of Fairfax Africa Fund said being part of the global economy, the country needs a stock market.
“If we are part of the global economy, we should not be that unique. We are joining the World Trade Organization. We are doing a lot of things that we should have done a long time ago. We are going to join the global capital market club. We have a bigger GDP than Kenya; there are only two sub- Saharan African countries which have bigger GDP than us — Nigeria and South Africa. I think it is time. We have companies ready to be listed in the stock exchange.”
According to Zemedeneh, there are a number of new institutions required for running a successful capital market. “We first need to set up a regulatory institution.” The stock exchange can be incorporated by the private sector but the regulation has to be done by the government. “We need to have stock brokerage firms and investment banks. Stock traders have to be trained and the local accounting and auditing firms have to build their capacity,” Zemedeneh said during a recent summit.
He also believes that financial media has to be established. “The financial media has to be established or the existing ones should extend their financial news coverage. Financial media is also a key component.”
According to Zemedeneh, there are 50 to 70 local companies which can be listed in the stock exchange. “All the banks and insurance companies, which are well regulated, can offer an IPO (Initial Public Offering) the day the Addis Ababa stock market is ready for launch,” Zemedeneh said.
The Ethiopian Herald, August 8/2019
BY GIRMACHEW GASHAW
