A cooperation agreement to establish the Ethiopian Securities Exchange is signed by Ethiopia’s Ministry of Finance, Ethiopian Investment Holdings and FSD Africa in Addis Ababa on May 18 (ETHIOPIAN INVESTMENT HOLDINGS)

Ethiopia’s decades old attempt to establish a capital market began in February 1963, when the National Bank of Ethiopia (NBE) took the initiative to establish a share dealing group dubbed the Addis Ababa Share Dealing Group. This quasi-stock share dealing group was set up to facilitate operation of shares, mainly banks and government bonds, with the listing of 15 companies. 

Yet, efforts to establish a capital market have remained in vain after that. The then government’s policy blocked attempts to launch a quasi-stock market in 1999. Experts observed that Ethiopia was the only African country with a relatively large economy that had no capital market.    

MoU signed 

Fast forward to May 2022, when the Ethiopian Ministry of Finance signed a historic memorandum of understanding (MoU) with Financial Sector Deepening (FSD) Africa, an NGO based in Kenya. The agreement is to form a project team that will pave the way for establishing the Ethiopian Securities Exchange (ESX), which will report to Ethiopian Investment Holdings (EIH).  

Mark Napier, CEO of FSD Africa, said his organization is pleased to be collaborating with the Government of Ethiopia in this historic initiative that will accelerate the development of capital markets in the country.  

“Our assistance for establishing the ESX will leverage FSD Africa’s vast expertise and experience in developing capital market infrastructure across Africa,” he said.  

Speaking at the signing ceremony, EIH CEO Mamo Mihretu said the project team is tasked with preparing the business plan, drafting the rules of engagement and identifying partners.  

Despite the previous practice that mandates the national bank to oversee the formation and establishment of the capital market in Ethiopia, this time it is Mihretu’s office which took the administrative responsibility under Ethiopia’s first sovereign wealth fund.  

EIH said ESX will democratize corporate ownership of the nation’s largest and most influential companies, empowering Ethiopians with a direct stake in their country’s economic infrastructure.  

“EIH’s role in the development of capital markets goes beyond its investment in ESX. As the owner and manager of state-owned companies, EIH will serve as the wind underneath ESX’s wings by floating minority shares of selected companies under its management,” said EIH on twitter.  

The Ethiopian parliament endorsed a proclamation in June 2021 that permits the establishment of capital markets. NBE Governor Yinager Dessie briefed media on the sidelines of the signing ceremony that 15 experts have already been engaged in designing the blueprint to launch the country’s first capital market.  

“Compared to global experiences, Ethiopia is among the few countries that do not host stock markets,” he said, adding that this time both local and international investors can benefit with the opening of the new capital market.  

“Represented by EIH, the government can purchase stock shares like anyone else,” said Dessie.  

Challenges ahead  

The World Bank suggests preconditions for development of capital markets such as a stable macroeconomic environment, which means economic growth, low inflation and robust fiscal policies, a certain level of development of the financial sector, including a healthy banking sector, institutional investors and financial openness, as well as a robust legal and institutional environment, including mechanisms to ensure the protection of investors and, more generally, that the country abides by the rule of law.  

Experts say all these preconditions are not met currently in the country. According to Lamessa Tariku, Research and Policy Analyst with the Ethiopian Economics Association (EEA), the inflation pressure that the country experienced over the last few years, and lack of robust legal and institutional environment that can develop the confidence of foreign investors are the major issues.  

However, Tariku told ChinAfrica that the country does have prospects in developing the capital market, in the form of its unexploited resource and large population - the second largest in Africa.  

“Current orientation of the government toward a market system and emphasis given for private sector and privatization efforts with the existence of institutions like pension funds, insurance companies, and credit unions with large sums of money bring optimism,” he said.  

Tariku sees a number of potential challenges that Ethiopia could face in its ambition of developing its markets. These include knowledge of retail investors, an unstable macroeconomic policy framework, and limited access to information, as well as inefficient market infrastructures. 

“It is important to educate retail investors on investment products and the benefits of saving, in order to channel savings to the capital markets,” he said.  

Dessie admits that a great deal of tasks pertaining to infrastructure development and legal frameworks are required to realize the market.  

An essential condition for a well-functioning capital market is the existence of sound macroeconomic policy frameworks. “Capital markets depend on investor confidence,” he said, adding that strong institutions thrive in stable macroeconomic conditions and investors can also be confident that their capital will not be eroded by factors such as hyper-inflation and exchange rate risks when there is a strong macroeconomic framework in place.  

Similarly, access to information and transparency allows for the monitoring of users of funds, which increases investor confidence, said Dessie, while lack of adequate and efficient market infrastructure for issuing, trading, clearing and settlement is a major issue for capital market development, as it pushes away potential investors to an economy.