FACTORS THAT AFFECT EFFICIENT IMPLEMENTATION OF STOCK MARKET IN ETHIOPIA

Stock markets play a significant role in every country’s economy as it mobilizes savings and provides the public with amazing investment opportunities. Moreover, the securities market also serves a key role in disciplining management and public ownership hence improving the accountability of the business sector. On the other hand, Ethiopia grapples with several challenges that have since crippled the development of a reliable stock market in the country.

Besides, the state has an undeveloped primary market with no secondary capital market in place. It is the only country of the world’s 15 most populous states that does not have a stock exchange market, making the selling of shares a difficult affair. Consequently, below are interesting factors that have since affected the implementation of the securities market in Ethiopia.

Macroeconomic Conditions

• Having a stable macroeconomic environment is crucial for the development of a securities market.
• On the contrary, macroeconomic volatility is a source of vulnerability as it tends to worsen the menace of informational asymmetries in the financial system.
• Moreover, predictable and low inflation rates in any country are likely to contribute to the stock market exchange and high economic growth.
• It is no secret that foreign and domestic investors will not be willing to invest in a country where there are expectations of high inflation rates.
• Although the Ethiopian gross national production is growing each year, the stock market exchange has not been promoted.
• The government has continued to push away the idea of introducing a securities market in the country even though the Ethiopian economy positively favors the development of stock markets.
• A sound macroeconomic condition, higher GDP per capita, sufficient domestic savings, and investments are key determinants of stock market exchange development.

Government Commitment

• A stable stock market exchange greatly depends on the degree of stability, internal security, and peace of a country and how well the government controls and functions.
• Besides, government commitment also entails how the government relates to the rule of law and how effectively strong and independent the legal institution is to protect property rights and private ownership.
• Several institutions in Ethiopia, such as the Addis Ababa Chamber of Commerce and Sect Oral Associations, have tirelessly worked to introduce securities and capital markets in the country to no success.
• Unluckily, the two institutions have failed to get the government permission to put up a working stock market in the country.
• Despite several recommendations of a stock market by scholars and economists alike, Ethiopia has remained passive with introducing the securities market.
• As a result, it has affected its market liquidity, which has negatively impacted economic development due to the absence of an institutional and legal policy framework for stock market activity.
• Governments have to enhance financial development by promoting an independent, strong, and effective legal system where the judiciary plays an essential role in protecting the constitution, individual, and property rights.
• Therefore, the Ethiopian government has given little attention to the establishment of a securities market, making the introduction of share markets a challenge.

Business regulations

• Ethiopia must regulate its stock market to protect investors and the economy from malpractice and corruption and uphold public confidence.
• Ethiopia does not have stipulated regulations that control the marketplace, hence making its markets an unsafe unregulated space.
• Such a space exposes customers and investors to the hands of selfish opportunistic individuals who are after selfish, materialistic gains.
• There is a need for strong minimum standards to regulate the company’s internal systems and strong regulators to implement the standards put in place.
• Moreover, when regulations and supervisors are put in place to control the securities market, it would help protect investors from opportunistic individuals.

Accounting and auditing

• Reliable auditing and accounting standards help to provide investors and customers with financial statements that are consistent, uniform, and relevant presenting a true view of the financial dealings.
• Ethiopian accounting and auditing standards need improvement as there are no consistent reports accessible by possible investors in the country and beyond.
• Nonetheless, the country needs to invest in incredible accountants and auditors who can prepare a single set of financial statements and reports that present complete economic facts that are unambiguous.
• Having clear standards in place that are internationally acceptable would allow financial reports and statements to be reasonably compared between firms and accounting periods.

Infrastructure

• An effective securities market has to be founded on a clean, transparent, and enforceable legal environment.
• Sets of rules, contracts, and procedures consistent, clear, and understandable with relevant regulations and laws are critical for an efficient stock market exchange.
• Moreover, to have a working stock market, an articulated legal basis for business activities to relevant authorities, investors, and customers alike ought to be clear and consistent.
• In this regard, Ethiopia does not have a reliable legal infrastructure in place set to provide a high degree of certainty in the marketplace.
• Most of its legal business rules and standards are in the draft stage and are yet to be approved by the government.
• To have a successful stock exchange, the legal market infrastructure put in place ought to have clear rules and procedures that would not be voided or reversed.
• The infrastructure, therefore, should instead have standards that are progressive and meet the challenges of advanced technology in business.
• Summarily, it is until such challenges are addressed that the Ethiopian stock market will resurface again.