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www.thereporterethiopia.com By Asrat Seyoum

Last week, the who’s who of the Ethiopian business community congregated in the UNECA conference hall discussing an issue which is dear to their heart: the establishment of a stock market in Ethiopia. Although the discussion has been going on for past 20 years the authorities are yet to pay attention to it. Nevertheless, some of the papers and arguments also showed how the economy is now ripe for an organized exchange platform and that it is completely feasible for the country to operate one. Meanwhile, how the fear of the unknown is still holding the authorities back, writes Asrat Seyoum.

An ordinary discussion forum organized by the Addis Ababa Chamber of Commerce and Sectoral Association in Ghion Hotel back in 1998 was rare in attracting the interest of the business community in the capital. The meeting hall was utterly packed without a single chair left unoccupied. In fact, few of the participants were even willing to attend the proceedings from their standing position at the back. The subject of discussion was the prospect of capital market in Ethiopia; and the guest speaker was none other than Ermias Amelga, the embattled CEO and found of Access Real Estate, a developer currently under scrutiny for failure to deliver housing units for its customers.

With a stellar career as an investment banker in the US, Ermias, who decided to resettle in Ethiopia two years earlier, took the podium to share his view on the prospect of a capital market in the country. Asserting that Ethiopia was in fact the second country next to Egypt to operate an organized stock exchange in Africa, Ermias told the business community that operating a stock exchange is a lot easier than it is made out to be in Ethiopia.

“Established in 1956, Ras Hotel was actually the first shareholding company in Ethiopia,” Ermias told the gathering.

Traded under the auspices of the Addis Ababa Share Dealing Group, companies such as Ethiopian Abattoirs SC, Bottling Company of Ethiopia, Indo-Ethiopian Textiles SC, HVA Ethiopia and Tendaho Sugar Plantation are indeed part of that long history of share market in Ethiopia. Ermias argued at length that most of the world’s well-established stock exchanges have their roots in small gatherings and humble private initiatives.

“The likes of the New York Stock Exchange (NYSE), which started as early as 1792, was actually an accord between 24 stockbrokers signed under a Buttonwood tree in New York City,” he said.

Almost two decades later, Yared Haile-Meskel, managing director of YHM Consulting, reflected a similar sentiment at the East African Finance Summit held last week at the UNECA conference hall. In a meeting still well attended by investors, finance professionals, scholars and regulators, Yared told the gathering that Ethiopia is still ripe for an organized stock exchange; “even if it is the most basic exchange platform”.

Yared too went back to the 1950s and 60s and dug up the stock exchange experience in Ethiopia in hope of renewing the drive to re-establish an organized exchange in Ethiopia which was dissolved in 1974 following the coming to power of the Derg.

Ermias’s saga with the establishment of an exchange in Ethiopia was, however, just staring during that chamber meeting twenty years ago. The subject matter necessitated a discussion which is a little more than a mere intellectual debate, it seemed. It was decided right there in Ghion Hotel that a steering committee be setup to see through a business community initiative towards an organized stock exchange in Ethiopia. “By the next meeting, together with the chamber and another consulting firm (East African Investment Securities), we were deep into the work of organizing a stock exchange,” Ermias told The Reporter.

The initiative attracted all sort of companies, those from the financial industry and government enterprises (Commercial Bank of Ethiopia (CBE) was one) and each company made a contribution of 50,000 birr to get us started. “We took an office in the chamber and went through the paperwork to get the project off the ground,” Ermias remembers. Luckily, the paperwork was completed and the International Finance Corporation IFC(), the private sector investment arm of World Bank Group, channeled USD 200,000 in support to finance a reputable consulting firm which is hired to check if all the prerequisite paperwork was there for an establishment of an organize exchange.

That was where the consortium decided to invite a government official and launch the project formally and publicly. “In hindsight, that was a fatal mistake in our part,” Ermias remembers. The guest of honor, the then minister of Finance and Economic Development (MoFED), Sufian Ahmed, was quick to write back to the consortium informing them that what they are planning to do is illegal, a sentiment rejected by Ermias completely.

“You see, the the 1960 Commercial Code of Ethiopia was far more progressive in providing for the establishment of an organized stock exchange by a private initiative,” Ermias argues, hence the consortium responded to the minister incorporating legal opinion on the matter. According to Ermias, eventually, the overall tone of the discussion has calmed down and “we were asked to wait for the government while it sets up its regulatory institution”.

Unfortunately, two decades later, Ermias’s and other initiatives have all been shelved; while there is no regulatory institution in sight except a thriving Commodity Exchange, far more complicated and difficult to operate compared to a stock exchange.

However, the capital market saga in Ethiopia is far more complicated than what meets the eye. For one, the overall claim that there is no thriving capital market in the country is not agreeable to experts. For starters, the 16 private banks in Ethiopia are all shareholding companies with diversified ownership base; the same goes for the insurance companies. In the non-banking, shareholding companies’ category as well the country has seen a boom in the past two decades.

A host of companies in manufacturing, food and agriculture, services, education, construction and the like dipped into the share market and raised capital. This is what the experts call a primary market for shares or stocks.

According to economics literature, the whole financial market architecture is understood to incorporate the money market and the capital market. The capital market in turn is made up of financial instruments like stocks and bonds (securities) and other non-securities instruments such as bank deposits, mutual funds, and the like. As far as securities are concerned, there are primary and secondary markets signifying transactions between the original issuer/owner of bond or stock (share) and the buyer (primary market); and transactions between holders of bond and share certificates on secondary level (secondary market).

In Ethiopia’s case, there is considerable level of share transaction concluded in the past two decades with companies floating stocks (shares) to buyers in the format of primary capital market. According to Yared, the total estimated shares floated to buyers to date amounts to a staggering 80 billion birr and 4.72 percent of the GDP.

“The financial sector share alone goes up to 28 billion birr,” Yared told The Reporter. But, what is missing in this picture is a secondary market platform like an organized stock exchange. For Ermias, the authorities’ decision to allow primary share markets to thrive and bar the establishment of secondary markets (stock exchanges) is a real enigma. “It becomes weird when one sees how unregulated (rather neglected) the primary market really is; at least secondary markets comes with their own inbuilt standards and investor safeguards,” he argues.

To his credit, Yared tried to take the whole discussion surrounding stock exchange one step further by conducting an actual needs assessment survey. The survey, which incorporated financial sector regulators, share promoters and share buyers, revealed that there is a big chunk of the national economy, little shy of five percent of the GDP, existing outside the regulatory reaching.

The study revealed major gaps in Ethiopia’s primary share market. For one, lack of standard for companies to fulfill when they want to float their shares to the public is causing real grievance among investors. “Repeated failure stories in share companies such as Hibir Sugar, Addis Prefab Houses, Sheger City Taxi SC, Timret Agro Processing and many more are showcases as to how unregulated this market is and how damaging it has become,” Yared told The Reporter in a telephone interview.

The problem starts with the initial investment pitch. According to experts, one rarely finds companies which present the real truth regarding the benefit and risk of these projects especially if they are preparing to float shares. Yared’s survey shows that in majority of the cases companies floating initial shares (dubbed initial public offerings) make an exaggerated claim regarding the investment returns.

This is well understood by investors, according to Yared, and because of this, social capital and personal network are the only factors driving investment on shares in Ethiopia. “Investors buy shares when they see personalities they can trust among promoters and investors,” he argues and this is highly irregular.

However, Andualem Telaye (PhD), Director of the Macroeconomics and Trade Centre with Ethiopian Development Research Institute (EDRI), takes an issue with the whole process of making initial offers in Ethiopia. As far as he is concerned, companies, which have not tested their investment ideas in the market, should not dream of raising capital in the share market.

“That is a job for venture capitalists and angle investors; it is absurd that new companies having nothing but ideas actually float shares to the public,” he told The Reporter. Venture capitalists exist to back an idea and take risk; Andualem argues adding that “stock markets don’t bankroll ideas but concrete projects”.

That is where stock exchanges come in handy. Andualem says that the fact that organized exchanges have a set of minimum standards for companies wishing to float shares as initial offering makes them uniquely tailored to the current gaps in Ethiopia’s capital market.

On the other hand, Yared pointed out that lack of regulatory structure is also exposing investors in terms of misappropriation of funds. “Promoters take charge of six to 12 percent of shareholders money and use it to cover their overhead cost while establishing the shareholding company,” he argues; and this makes shareholders particularly exposed to misappropriation.

Nevertheless, the likes of Ermias Eshetu, the newly appointed CEO of the African Renaissance Television Service (ARTS), and former head of Ethiopian Commodity Exchange (ECX), are not convinced that primary market in Ethiopia, with all of its regulatory gaps, can be called a share market and the companies really “shareholding companies”.

Ermias Eshetu is firm in arguing that “we can’t call the existing, fragmented share trading activity a primary capital market”. As far as he is concerned, even in the well-regulated financial sector, shares of financial institutions are not really available to the public; but to those in and around the circles of the founders. “This is not a character of a well-functioning market,” he argues; hence he says that it is high time for an organized stock exchange in Ethiopia.

For Andualem, there are far more grave concerns which require the establishment of stock exchange in Ethiopia at this time. “Under the current condition, without readily accessible saving instruments like shares and stocks, the overall income inequality would keep on widening,” he argues. His unique take looks into the fact that the only saving instrument available to fixed income earners being bank deposits would ultimately put them at a distinct disadvantage.

“As long as the inflation rate is more than the bank deposit rate, the saver would always loose the purchase power of its saved income while affluent members of the community would be well placed to invest on appreciative fixed assets preserving and improving the value of their savings,” he argued. In a nut shell, the poor get poorer, while the rich get richer or at least maintain its income, Andualem stated, “and such policy implication does not go hand in hand with the pro-poor policies of the government”.

Apart from that, Ermias Eshetu sees a lot of other benefits from stock exchange such as improvement in corporate governance on the account of being publicly owned would ultimately encourage managers to strive for better governance. An exchange would also help to expand the tax base of the country. On the other hand, all the experts agree that the impact of stock exchange on attracting quality FDI is also something that could not be downplayed.

As to Yared and Ermais, the Ethiopian authorities espouse unreasonable fear of regulating a stock exchange. “Granted the flashing indexes of the New York Stock Exchange (NYSE) and Nasdaq could play a deterrent role for authorities; however, what Ethiopia needs at this time is a rudimentary stock exchange which is quite easy to regulate,” Yared concludes.

While Ermias asserts that even in the Eastern Africa region Ethiopia is in the league of Eritrea and others with political problems in terms of lacking an organized stock exchange. “If we can regulate ECX, we can regulate stock exchange; it is not like we would start with derivatives and other complicated instruments,” he stresses.

As head of ECX, Ermias has pushed for some sort of stock exchange in Ethiopia. To that end, he also showed interest to host the stock market with the ECX market platform “being perfectly fit” to handle such transactions. The National Bank of Ethiopia (NBE) has always had some sort of a capital market in its pipeline.

Currently, the Bank has long overdue project to establish a secondary market for bond; and has not moved forward, thus far.

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