Ethiopia needs more infrastructure for stock market: panel says

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(Photo: Anteneh Aklilu)

Ethiopia’s desire to start a stock market by 2020 was the imputes for a dustup among scholars, business leaders, consultants, and government officials during a day long discussion co-hosted by HST consulting and Capital newspaper at the United Nation Economic Commission for Africa (UNECA) last Tuesday.
To realize such a market, Ethiopia needs more time to build a strong and reliable infrastructure to enable the market to operate smoothly, says Solomon Gizaw Managing Director of HST Consulting.
“A stock exchange needs the technology infrastructure, reliable accounting information, and trained human resources.”
“It also requires a legal infrastructure and governance system to protect the rights of investors and creditors and ensure transparency in the management of listed companies. Stock markets work on the basis of accurate, transparent and timely public information,” Solomon said.
“Pension funds and life insurance institutions are the powerhouses which ensure the continuous supply of long-term funds that are critical for the development of stock markets in an economy. However, such institutions are not well developed to provide the required long-term finance for a stock market” Solomon added.
“The insurance industry is very weak here in Ethiopia, so we cannot establish a stock market here,” Solomon said adding that a stock market for Ethiopia now is a luxury and totally rejects the idea of setting up a stock market. “If we want to set up a stock market it should be tightly controlled and should be heavily taxed,” he said.
“The country can establish a full-fledged strong stock exchange market system that usefully supplements the bank-based financial system for sustainable economic development of the country,” Solomon adds.
Public confidence in the workings of a stock market system are paramount and there are signs those companies are able to mobilize local savings.
“Some of the fear of beginning a stock market emanates from losing faith in our people, and it is unfair to take it that way to raise a lot of money for various projects such as breweries, cement and other factories, so we should lay a foundation for the future generation to compete in the global economy,” said Yared Hailemeskel, Managing Director of YHM Consulting.
“Once you have the regulation, setting up the trading floor is not a challenging task,” Yared adds.
Since Ethiopia is a big country with the highest GDP in Sub-Saharan Africa he suggests a stepped approach.
“Ethiopia has a late coming dividend advantage to catch the technology straight away to begin the stock market, Ethiopia can start a suitable market in accordance with the size, just start from the smallest,” said Japheth Katto former CEO of the Uganda Capital Market Authority.
“Stock market technologies are expensive and a property exchange without a strong private sector is difficult so create a viable private sector first,” Katto also added.
“Stock markets are not easy to establish, we have to be realistic we have to be very responsible to manage somebody’s money, to build the capacity cornerstone for the public market with high professional ethics and it should not be an exercise that we do it by trial and error where the money is not wasted anywhere,” said another participant.
At present, there are 29 stock exchanges that ‘serve’ about 38 countries in Africa but there are only four that contribute significantly to their countries’ economies: Johannesburg Stock Exchange (South Africa), Nigeria Stock Exchange; Casablanca Stock Exchange (Morocco) and Egypt Stock Exchange.
Therefore, at this stage of its economic development and weak institutional infrastructure, Ethiopia can benefit more by using the bank-led financial model as its prime financial system rather than sharing the meager savings to both systems.
The government may also allow the setting up of institutions to develop medium to long-term institutional development plan supported by appropriate national policies to build: contractual saving institutions and legal, governance, accounting and audit infrastructures to serve as strong foundation for the development of a stock market.