For the first time in half a century, Ethiopia has opened its stock exchange, the Ethiopian Securities Exchange, a move that many have described as a turning point in the economy of one of Africa’s fastest-growing economies and the second-most populous country in the continent. The stock market was dissolved during the socialist revolution in the 1970s.
But why is this development significant, and what does it mean for investors, entrepreneurs, and the continent’s economic future? Here’s why, read on;
A Flash Back: Why Ethiopia’s Stock Market Vanished
In 1974, during the socialist revolution, the Derg regime dissolved the Addis Ababa Share Dealing Group, Ethiopia’s first stock exchange. As a result, private businesses were nationalized, and the state controlled the economy under socialist policies. This transition left Ethiopia without a formal capital market; therefore, the system did not support business fundraising through equity.
For years, Ethiopia’s companies have relied on banks for loans to fund their projects, which has curtailed growth and innovation. The reopening of the stock exchange comes with a light at the end of the tunnel for not only investors but businesses in the country as well and is expected to transform its financial sector.
Why the Relaunch is a Big Deal
The re-opening of the Ethiopian Securities Exchange is not just a symbolic event; it is the start of the journey towards liberalizing the economy of Ethiopia and unlocking new opportunities for businesses and investors.
Here’s why;
Making Capital for Local Businesses: A stock market creates a platform for businesses to raise capital by selling their shares to the public and other investors and that is exactly what this bold move in Ethiopia means for its people. This will make businesses less reliant on bank loans, which usually set high interest rates and rigid payment terms.
For example, Ethiopia’s flourishing coffee and textile industries can use the stock market to expand, invest in technology, and create jobs. SMEs, which are considered the backbone of the Ethiopian economy, could also benefit considerably from this new source of capital.
Attracting Foreign Investment: The launch of a stock exchange sends a strong message of commitment to international investors that Ethiopia is ready and rife for business. For many years now, State-controlled policies have deterred FDI.
The new market will also offer foreign investors a regulated and transparent avenue to acquire shares in Ethiopian companies, reducing the risks associated with informal financial channels. This might enable Ethiopia to be better integrated into the global economic system.
What Does This Mean for the Rest of Africa?
This bold move by Ethiopia comes at a time when several African countries want to develop their financial markets. Only 29 countries in Africa currently have formal stock exchanges. Its entry allows other countries with state-dominated economies to consider market reforms.
Notably, the Ethiopian capital market is positioned to deepen regional integrations through cross-border investments, meaning the East African region might get closer together by traders and investors looking across the border to invest or trade.
A Catalyst for AfCFTA?
The reopening of the Ethiopian Securities Exchange also coincides well with the AfCFTA’s goal of creating a single market for goods and services across the continent. An Ethiopian Securities Exchange could raise capital for infrastructure projects that would benefit Ethiopia and the region as a whole.
While the Relaunch is a significant step forward, challenges remain and must be addressed.
Regulatory Framework: Ethiopia must establish strong regulatory bodies to ensure transparency, protect investors, and prevent fraud.
Public Awareness: Many Ethiopians are not familiar with the workings of stock markets, which could slow down public participation. Educational campaigns or public awareness needs to be done to educate the masses to build trust in the system.
Economic Stability: Ethiopia’s recent history of political unrest may weaken investor confidence. Political, just like economic stability, is a primary necessity for any stock market to thrive. There is no two way to that.
Reopening its stock market is a bold step that may well define the future of Ethiopia’s economy. The Ethiopian Securities Exchange stands to change the face of the country and the continent at large by unlocking new capital, encouraging foreign investment, and promoting regional integration.
All eyes are on Ethiopia now, as far as Africa and the rest of the world are concerned. But the question is, will this historical Relaunch usher in a new era of economic growth and opportunity or is it a gamble that will end up costing the country? While only time will tell, one thing is certain: Ethiopia’s stock market is now open for business, and the future is promising.
