Wednesday, April 17, 2024
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Will the promotion of stock markets help or hinder the real economy at the current stage of Ethiopia’s development?

stock markets _ Ethiopia
Kebour Ghenna

By Kebour Ghenna Desta

In recent years, there has been a growing eagerness to establish a capital market (popularly labeled as stock exchange) in Ethiopia. However, amid this enthusiasm, a critical challenge demands attention: the feasibility of establishing and sustaining a capital market to foster business growth, especially for small and medium enterprises (SMEs).

As a reminder to those who value capital markets, it’s worth noting that in the years following the Great Depression of the 1930s, stock markets were viewed unfavorably by many, being seen as a significant contributor to the economic downturn. Keynes (1936) reinforced these concerns by likening the stock market to a gambling casino, where price determination is often driven by speculators. He argued that if a nation left its investment activities to the vagaries of a casino, “the job is likely to be ill-done”.

In the present era of celebrating the virtues of markets, such views are regarded as heretical. Let’s face it – launching such an initiative demands a comprehensive overhaul of the business environment, the establishment of robust regulatory frameworks, improved financial literacy, heightened profitability, a resilient investor base, and institutional capacity to manage the market, including the exchange, clearing, and settlement systems. Unfortunately, these essential elements are sorely lacking in Ethiopia, but also in most part of Africa.

Although I subscribe to the view that we should avoid dealing with “Africa” in a general way, since it ignores the need to recognize country by country differences and specifics. In this case, a broad brush seems useful.

Indeed, most African stock markets (excepting for South Africa’s) – currently 29 –  remain undersized, underdeveloped, and illiquid, failing to become vital financial institutions within their respective economies. And while it’s true that stock market development correlated positively with economic growth in SOME [emphasis] African countries, the reality is that MANY African stock markets face challenges such as the lack of skilled manpower and the dominance of a small number of stocks, which account for a significant fraction of market capitalization.

Take, for example, Safaricom Plc of Nairobi Securities Exchange, it constitutes over 40%  percent of the Kenyan Stock Exchange.

Given these unfavorable assessments of the benefits and outcomes associated with stock markets, Ethiopia should carefully reconsider the wisdom of pursuing this path. It time for a reality check. While aspirations of a thriving financial market are commendable, Ethiopia must prioritize building a strong foundation for economic growth and development. This entails investing in human capital, enhancing institutional capacity, and fostering a conducive business environment that empowers SMEs to thrive.

Rather than chasing elusive dreams of financial market sophistication, Ethiopia should focus on practical solutions to address the fundamental constraints hindering business growth. This may involve targeted interventions such as improving access to finance for SMEs, streamlining regulatory processes, and promoting entrepreneurship and innovation.

While the idea of a flourishing financial market may be enticing, Ethiopia must confront its current realities and prioritize the prerequisites for sustainable economic development. By focusing on strengthening its economic fundamentals and empowering SMEs, Ethiopia can lay the groundwork for inclusive growth and prosperity for all its citizens.

Editor’s note : The article first appeared on the FB page of Kebour Ghenna.

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2 COMMENTS

  1. Stock market ከሁሉ ኬኛ ሰገጤ ጋር????

    በእንቁላሉ ግዜ እኮ ያልታመነው አይነት ተረት ተረት ነው::

    Under circumstances would a legally functioning stock market flourish on abiy ahmed’s watch.

    The master fibber and በሬ ወለደ አፈቅቤው ልበ ጩቤው 7ኛ ጨ ከኪስ አውላቂዎቹ ጋር ተሰብስቦ የአምስት አመት ህፃኗን የምሳ ገንዘብ ሙጭጭ አድርጎ ነጥቆ ደም እንባ አስለቅሶ ከምላሴ ፀጉር ይነቀል አላሁን ገና አይቻት አላውቅም ብሎ የሚገዘት ቀማኛ ነው::

    Thanks but no thanks.

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