Introducing capital market: What is at stake?

 BY ABEBE WOLDEGIORGIS

Weeks ago, the Council of Ministers sent the draft law regarding the establishment of capital market to the House of Peoples Representative for debate and to be ratified.

Some expressed their optimistic view that the introduction of a capital market stimulates the economy, others are skeptical about its positive impact in the Ethiopian context.

Renowned financial market experts and economists also have different views regarding the introduction of a capital/stock market in Ethiopia. Kibur Gena is the president of the African Chamber of Commerce.

In an exclusive interview, he told The Ethiopian Herald that he is skeptical about the benefits of introducing a capital market in Ethiopia. Simply put, he said, a capital market is a company established by shareholders to earn profit through dividends.

The market is characterized by primary and secondary market and established for long-term investment and mostly institutions and large companies are the ones involved in such venture, he added.

In a stock market, providing the necessary and timely information with regard to the functioning of the market to shareholders is essential. In addition, the appointment and removal from office of the Chief Executive Officer/General Manager must be conducted in a transparent manner.

Plus to this, shareholders have to have adequate knowledge of the changes in the stock market’s financial system. It is also vital to scrutinize the registration process and the institutions’ financial status to be a member of the stock market.

Financially bankrupted organizations should not be allowed to be registered in the capital market. The eligible companies to be involved in the capital market should be the ones that made a profit for the past three to four consecutive years. He further said that in our context, banks, insurances and few organizations and rich individuals can join the capital market.

As to Kebur, in the stock market tradition, one can purchase a share and he/she can resale it within days or weeks. Countries such as Kenya and Nigeria have a stock market experience that extends to almost a century. Yet, it has not yet played a significant role in their economic growth.

Very few organizations involve in the capital market and it does not seem lucrative to others. Government supports the establishment of capital markets as it sells shares and raises finance to fund mega projects.

As to Kibur, USA is one of the countries where the stock exchange is well-developed. While the capital market is booming, on the contrary, the GDP growth is in decline. This is an indication of the fact that the market benefits only a few segments of society.

He further said that to his experience in Ethiopia, most local investors have very limited knowledge of the stock market. “They only get information from the international media about the stock market in the US but they don’t know who is really benefiting from the market there. They assume that they could use the stock market when they want to sell their shares.”

As to Kibur, once the government intends to give the green light for the establishment of the stock market, it should formulate the right form of laws and regulation and organize it in the way to benefit the general public.

Capital market is established as a long term investment scheme. On the other hand, the process of purchasing shares can be undertaken within days or weeks. It can be sold within the shortest time possible one the value of the share changes.

The renowned financial Economist Ermyas Amelga on the other hand said he looked into the draft law sent to parliament. “All the essential issues have been included and, it is an astounding document,” he said.

As to him, the stock market is a common phenomenon across the globe. Some 200 countries in the world have capital markets while only 19 are without capital markets including Ethiopia.

For Ermias, it is not necessary to discuss the matter with stakeholders and the private sector as it is not that much a burning issue. “It is almost similar to establishing other financial firms and it is more of a professional exercise which has its own science than anything else.

There is also an argument in favour of the capital market that it would help to further liberalize the economy as so far, the government has a dominant role.

While he reflects his view in this regard, Kibur began by raising a question that “to whom are we going to liberalize the economy, is it for the masses or for the few segments of society who are accumulating wealth?”

In Ethiopia, there are about 20 Banks and the major stakeholders in each bank do not exceed 3,000. Hence, if we multiply it, the number of shareholders in all the banks does not exceed 60,000. Hence, in the country of 110 million, it would be difficult to realize a competitive capital market in this context.

In addition, the number of the population with average income who deposit their money in the bank is not more than one million. Hence, structurally, the economy is favouring the few segments of the society said Kibur added.

The liberal economic philosophers claim that when wealth is created by the rich, it has a trickle-down effect on the mass population manifested by job creation and income generation. And they also claim that such were what has been witnessed in the emerging economies such as India, Turkey and Brazil.

Asked whether Ethiopia can emulate such economic achievement from these countries, Kibur does not agree with the concept of the trickledown effect.

It is the liberal economists who raise such an idea and their claim is not supported with studies and evidence. It goes without saying that in the above-mentioned countries the governments have a significant role in the economy.

Proponents of the free market economy such as Bretton Woods Institutions such as the World Bank and International Monetary Fund put the establishment of Capital market as the first criteria to access loan and realizing a free-market economy.

Kibur claimed the liberalized economy never allows making an inclusive environment which benefits all and those who have financial muscle have higher bargaining power. They are the ones who are competitive in every market opportunity.

Currently at the international level, only one per cent of the richest controlled the nations’ wealth but the majority left in a precarious situation. This is the shortcomings of the liberal economy, he added.

In the Derg era, Ethiopia pursued the socialist and letter on command economy policies which left the country to be trapped in the vicious circle of poverty. Though the EPRDF claimed to pursue the free-market economy and privatized some public enterprises, still the economy is not liberalized.

The Ethiopian Herald January 8/2021

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