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Since the dawn of the reform, Ethiopia has undertaken several economic reforms, including plans to privatize public companies and liberalize a large part of the economy. Despite this development, Ethiopia still does not have a capital market. Amid these developments, one of the debatable issues is the question of whether it is time for the country to introduce the capital market.
Currently, the country does not have a capital market to carry out transactions of shares (stocks) and bonds (debt instruments) in secondary markets. The stock market facilitates the purchase of stocks, while the bond market provides a means to sell and trade bonds on the secondary market to enable participating governments, institutions and companies to raise long-term capital. In its current form, Ethiopia has lagged behind in creating or implementing such an ingenious financial mechanism.
Some argue that as the economy is booming, in addition to existing financial institutions, the introduction of a capital market is essential. On the contrary, as commercial banks have not been operating to their full potential, there is plenty of room in the financial market for them to prosper. Therefore, the claim, instead of introducing a new capital market, should be given due emphasis to the strengthening of existing banks.
As for Dr. Zelalem Mtekilu, an economist, investors can deposit their surplus in banks, but they can make more profit if they buy company stocks or government bonds.
In developed capitalist economies, wealthy investors supply their money to companies that need more capital in the form of equity purchases. The companies also sell their stake to investors who prefer to buy shares rather than deposit their money in banks. In fact, multinationals and national mega-corporations would not be able to access such an enormous amount of capital in the form of bank loans. Therefore, the capital market plays a key role in filling this gap, he said.
Capital investment used for long-term projects such as building giant factories, huge towers, and establishing large mechanized farms. One may face difficulties in carrying out such large projects if the only available source of capital is loans from commercial banks. In fact, accessing bank loans on its own has its own bureaucratic procedures and can be time consuming. Banks are also more interested in providing soft loans used as working capital to borrowers rather than long-term investments. Therefore, the capital market offers what banks do not offer.
Investors have multiple interests and those involved in buying company stocks should maximize their profits by investing their money in the capital markets.
For example, for a person who inherited a large amount of money from family members, investing wealth by buying stocks in companies that in turn need the money to raise capital and expand their businesses is a profitable decision than to accumulate the money at home. or deposit it. in the bank. First, the person earns additional money and second, it helps the business add value. As there is a shortage of capital in Ethiopia, such a mechanism is essential.
Investors, mega industries and service provider companies participate in the capital market. To expand their business and employ more labor, these companies need more capital.
There are institutions that facilitate the capital market in advanced countries and, among others, investment banks and private equity are well known in this regard. In Ethiopia, there is no investment bank and, if established, it serves by connecting money owners with joint-stock companies. Meanwhile, it also makes its own profit, Zelalem said.
“In our context, the exercise of the free market is in its infancy and the economy invites government interference. Sometimes, the government controls prices due to the supply of goods and services,” he said.
The free market system and competition favor private investors over profit-making public institutions, and this situation sometimes creates anomalies in market equilibrium to some extent.
Dr. Tefera Tibebu is an accountant and consultant for various companies. As for him, the capital market benefits not only investors, but also helps people make money. “You can buy a share and have ownership rights to the company, you earn dividends and when the value of the share goes up, you can sell your share and get more profit,” he said. “You can also invest your money in mutual funds and the mutual funds reinvest the money in large companies. All of this indicates how the market is open to everyone and the self-regulatory mechanism of the capital market benefits everyone.”
As for Dr. Tefera, at present, the national economy is booming and it would be impossible to satisfy the growing demand for capital through commercial and development banking. The presence of a capital market would fill this demand.
Ethiopia is a populated country (more than 100 million) and almost 70% of its population is under 30 years old. To create jobs for this huge workforce, more than a million jobs must be created each year. The capital market in this regard plays a crucial role. Access to finance also reduces poverty, improves living standards and boosts the economy.
According to Dr. Zelalem, wealth is created when capital, labor, natural resources, technology, and management skills are combined into one. But the capital shortage in the country is widespread. Therefore, it is imperative to look for several options to fill the gap.
Last time, the Governor of the National Bank of Ethiopia, Yinager Dessie, announced that due to the change of monetary note, some 300 billion Birr could be collected that were outside the banking system. This clearly shows how the country’s financial market is performing below its potential. The most important opportunities that the capital market will create include adding huge sums of money to the market.
The economy should not be stagnant. There has to be growth and more production is needed to achieve the growth ambition. Therefore, more capital is needed for job creation and the use of technology. When production increases, companies maximize their income and expand their business. This, in turn, would increase the wage of the labor force and indirectly stimulate the national economy.
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To reduce unemployment, more companies should get involved in the economy and produce at full capacity, but currently, due to shortages of cash and foreign exchange, they are unable to do so. “They only use between 60 and 70 percent of their capacity. If they produce at full capacity, more workers will be employed; the consumer culture of society would change and this would definitely stimulate companies to increase their productivity,” he said.
The establishment of a capital market also improves competition between financial institutions and breaks the dominance of the market by commercial banks. And it is a proven fact that the absence of competition hinders growth.
In the current management, banks require collateral to release loans and conduct feasibility studies. But when it comes to the capital market, this type of precondition is not present and therefore could be an alternative to banks for companies. The availability of financing is not just a catalyst for the national economy and giant companies. It is also critical to the growth of small businesses.
Once the market is established, if foreign companies are allowed to participate in it, it would be an additional boost for the financial market as it would be a boon for the availability of foreign exchange in the market.
Currently, economists and business firms are on the air for the establishment of the capital market and the government seems to be listening to their concern.
