Ethiopia is set to establish a Secondary Capital Market for local currency and Treasury bills in about a year.
“Foreign investors would most likely be barred”, according to World Bank’s program leader for Ethiopia, Lars Christian Moller, remark to Reuters. The Bank and the IMF had participated in the National Bank of Ethiopia’s(NBE) study on a secondary debt market that could help the government raise funds.
The successful Ethiopian Commodity Exchange is also mulling to broaden its operations into stock and bond trading, as Bloomberg recently reported.
A capital market is a market for debt or equity securities and other financial instruments, used by business and governments to raise long-term funds. In primary capital markets, new bond or stock issues are sold to investors via the mechanism known as underwriting. In secondary capital markets, existing securities are sold and bought among investors or traders, usually on a stock exchange (SE), over-the-counter (OTC), or elsewhere.
The government cash-strapped since the launch of several mega infrastructure projects reaching the world’s third-highest public investment rate. Ethiopia borrowed $1 billion from international investors in its oversubscribed maiden Eurobond debut in January.
There seems a need for the development of a capital market as a complementary source of capital for long-term financing in addition or as a substitute to the loans from the commercial banks.
Moody’s recent country report is only encouraging for the central bank in this endeavor. According to the report, “Ethiopia’s debt burden is low compared to its peers, standing at around 26% of GDP in 2014 while the median for B-rated countries is at 42% of GDP”, thereby affording the government an experimentation on secondary debt market.
The effort to establish a capital market is as old as the lifespan of the free market in Ethiopia.
In early 1995, few years after the introduction of free market economy, the National Bank of Ethiopia reportedly undertook a study on the “Feasibility of Establishing Securities Exchange Market in Ethiopia” and also prepared a draft Securities and Exchange proclamation. However, the study failed to get government approval.
In mid 2008, the NBE launched a capital market infrastructural development study with international consultants under the Financial Sector Capacity Building Project. The initiative was finance d by the World Bank (WB) based on the potential interest of the government which was reviewing it according to WB Ethiopia Office and the Project Unit at NBE.
It is after five years, on October 2013, that NBE representatives had revealed that the central bank finalized its study to establish secondary market during a discussion held at the Hilton hotel that was attended by experts from the financial sector. “But, we have gone back to our study and focus on a stock exchange that will include both the primary and secondary market,” an expert from NBE explained at the time.
Recent announcements only mention the establishment of a secondary market stock exchange indicating a likely move by the government to delay or shelve the primary market stock exchange plan.
Whether effective supervisory and regulatory institutions, the critical preconditions for the creation of capital market, can be fulfilled in a year or so is yet to be seen.