As Ethiopia’s South Africa-brokered peace process moves forward, the country must heal societal divisions through measures that restore faith in central governance structures.
With a planned launch date of early 2024 and an international promotional roadshow planned for next month, the new Ethiopian Securities Exchange (ESX) could make a significant contribution to restoring faith in the center by diversifying state assets and building publicly-owned corporations that transgress politics.
Ethiopia is the largest country in the world without a stock exchange. Prime Minister Abiy Ahmed’s (PhD) 2019 Medemer Reforms promoted the liberalization of financial markets, which involves capital market development. But for the new ESX to succeed, it must be more than just a frontier stock market; it must help Ethiopia become a better democracy. Democratizing ownership of state and tightly controlled private sector assets can contribute to this effort. This requires the PM’s full political support behind the institution, which could also play a significant role in supporting sustained peace.
The nascent bourse is expected to have 50 public companies within the first two years of its launch. The Ethiopian Ministry of Finance and the Ethiopian Sovereign Wealth Fund are its main backers, with support from Financial Sector Deepening-Africa (FSDA). Once the ESX is up and running, various markets for trading fixed-income securities, such as government and corporate bonds and equity securities, are expected to be launched.
With a state-led economy that has grown by 9–10 percent per year for more than two decades, one may ask why launching an ESX is so important. Typically, in underdeveloped democracies, incumbents and autocrats sustain power if the economy is delivering strong economic growth, particularly to the middle classes.
When the economy slows down, such as during the Asian economic crisis, despots fall. Suharto’s Indonesia serves as a case in point. The protests that ultimately led to the fall of the Ethiopia People’s Revolutionary Democratic Front (EPRDF) government began in 2015, during a period of high economic growth.
While the initial focus of the protests was linked to the heavy-handed expropriation of land around Addis Ababa, they evolved into something more basic: Ethiopia was becoming prosperous, but that prosperity was perceived to be flowing overwhelmingly into the pockets of entrenched elites of primarily one ethnic group. After the popular revolt widened to other regional states, the EPRDF coalition fell, and Abiy Ahmed and what became the Prosperity Party assumed power.
Abiy has been in power since 2018 but has been distracted by the conflict in northern Ethiopia. With a peace agreement now in place, economic reform is back on center stage, and the launching of the ESX could allow Ethiopia to address some pivotally important issues. The first of these is the role of state-owned enterprises (SOEs).
Given Ethiopia’s long-standing, elite-led, state-centric economy, SOEs are critically important to the nation’s economy and, not surprisingly, a subject of much controversy. These entities have typically enjoyed monopoly status but have also been undermined by cronyism, rent-seeking, corruption, and incompetence, much of which was organized along ethnic lines. By listing its SOEs, Ethiopia can address many of these issues by providing greater transparency and accountability while at the same time giving the ESX scale and credibility.
These measures should also lead to improved standards of financial reporting, legal frameworks, and governance, as well as expanded options for growth capital, asset management, and retirement savings. These areas of finance are in their infancy in Ethiopia and will only evolve with the creation of more sophisticated financial institutions.
With the benefits of creating the Exchange so obvious, what challenges can be anticipated? First, Ethiopia has had a long-standing focus on a state-led economy that dates back to the 1970s. Its underdeveloped private sector economy suggests that corporate issuers of securities are likely to be underdeveloped and weak at the start. Second, existing ethnic divisions, power dynamics, and unresolved grievances among ethnic elites will be an ongoing problem for Ethiopia.
Finally, underdeveloped bureaucracy and regulatory entities, cronyism, and corruption, which have been endemic in the past, could undermine the integrity of the stock exchange if launched without a strong accompanying governance framework and both the will and capacity to enforce it.
Ethiopia cannot achieve sustained peace or succeed as a democracy with deep ethnic divisions dominating the nation’s political system. A developed capital market could help move the economy towards a fairer and more inclusive place and provide opportunities that incentivize lasting peace. Strong leadership behind a commitment to capital markets reform will be the key to its success.
Ann Fitz-Gerald is a professor of international security and the director of the Balsillie School of International Affairs. Jason Donville is a Toronto-based hedge fund manager who was formerly the director of research for Credit Suisse First Boston, based in Singapore.
Contributed by Ann Fitz-Gerald and Jason Donville