Prospects and Challenges for

Developing Securities Markets in

Ethiopia: An Analytical Review
Asrat Tessema*
This paper is an analytical review of the prospects and challenges of developing securities
markets in Ethiopia. With the fall of communism and the emergence of capitalism, many
countries around the world are moving toward market-oriented economies and securities
markets are springing up on all continents around the globe. Securities markets have come to
symbolize to many the essence of capitalistic economic relations. When studying the econo-
mies of developing countries, the first thing that becomes apparent is the existence of
immense and, to a considerable extent, unemployed human resources as well as an acute
shortage of capital. Shortage of capital is a major constraint in the realization of economic
development. Recognizing the role that securities markets play in mobilizing capital, more
than a dozen African countries have established stock markets. Ethiopia is not one of them.
There is little current research which focuses on Africa’s securities markets. This study helps
to contribute to that effort by focusing on Ethiopia, the second largest country in sub-
Saharan Africa plagued with major economic problems. The paper concludes by recommend-
ing the establishment of a stock market and providing suggestions on how to do it.

1. Introduction According to the International Finance Cor-

poration (IFC, 1997), sub-Saharan Africa

G overnments in developing countries face

increasing difficulties in funding public
enterprises through government allocations
because of budget constraints due to low savings
and population explosion. It has also become
increasingly difficult to expect an increase in the
flow of foreign private and government capital
because of the recent debt crises experienced by
some developing countries as well as budgetary
uncertainties in the developed countries them-
selves. This situation has been exacerbated by
the opening up of Eastern Europe and the crum-
bling of the Soviet Union. These European coun-
tries have better industrial bases than sub-
Saharan African countries like Ethiopia, and
thus are likely to attract most of the limited
funds available from external sources.
attracted only $11.8 billion in private capital in
1996 or less than $1 for every $20 invested in
developing countries. This region, however,
received about 50 per cent of the $20 billion
annual aid to developing countries and is still
mired in extreme poverty due mainly to political
and economic turmoil. However, many African
countries, including Ethiopia, are in the process
of overhauling their economic and political sys-
tems and may be opening up the last untapped
market in the world. Therefore, if Ethiopia wants
to become self-reliant through economic growth
and modernization, it will have to develop its
domestic capital markets and rely less on foreign
sources of capital. Research has shown that
development of securities markets1 contributes to
economic development through the mobilization

* Professor of Finance, Department of Accounting and Finance, College of Business, Eastern Michigan University,
Ypsilanti, MI, 48197, USA; e-mail: asrat.tessema@emich.edu. This study was conducted when the author was a
Fulbright scholar during the 1997/98 academic year at Addis Ababa University’s Faculty of Business and Economics.

50 R&D Management 15, 1, 2003. # Blackwell Publishing Ltd, 2003. Published by Blackwell Publishing Ltd
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

of savings and their channeling to the most
productive enterprises.
The development of securities markets is not
an easy task, however, since many of the funda-
mentals of capitalism required for the develop-
ment of securities markets represent a major shift
in culture for many developing countries. These
developing countries have little or no experience
with modern market-driven economic mechan-
isms as a whole, much less with even more com-
plex securities markets. Nevertheless, some
developing countries, eager to avail themselves
of the benefits of securities markets, sometimes
disregard the costs and requirements and push
ahead with policies that may not produce the
desired effect. About a dozen African countries
currently have stock markets in place; Ethiopia is
not one of them.
The purpose of this study is to explore the
possibilities of developing securities markets in
Ethiopia. The study is organized into five sec-
tions. The first section provides an historical
overview of the Ethiopian private sector. The
second section reviews the rationale for develop-
ing securities markets. The third section discusses
the costs and requirements for developing secur-
ities markets. The fourth section deals with the
current Ethiopian economic environment and
highlights the prospects and challenges for devel-
oping securities markets. The last section pre-
sents conclusions and recommended actions.
2. A Historical Overview of the Ethiopian
Private Sector
Ethiopia, with a population of about 60 million,
is the second most populous country in sub-
Saharan Africa. It is the only country in Africa
that has never been colonized. The last emperor,
Haile Selassie, was forced to abdicate in a coup
in 1974. From 1974 to 1991 the country was
ruled by the Derg, a communist military dictator-
ship. The present government is controlled by a
party that acquired power in 1991 when it won a
long civil war against the Derg. The relative role
of the private sector in Ethiopia’s economic
development has evolved with changes in govern-
ments. The changes depended very much on the
type of economic system adopted by the govern-
ments. The Ethiopian economic environment
over the years can be classified into three distinct
phases: mixed economy, command economy and
market-oriented economy.
# Blackwell Publishing Ltd, 2003
Developing Securities Markets in Ethiopia
The first phase covers the period prior to the
1974 revolution. This period may be characterized
as a feudo-capitalistic economic system in which
land ownership was the source of income. Land
was disproportionately owned by the ruling class
and had always been a source of complaint
against the government. This period marks the
beginning of modernization of the country and
the encouragement of private sector participation
in economic development. The government issued
several proclamations to encourage private
domestic and foreign investments. Manufacturing
was given a central role with the hope that it
would stimulate other sectors of the economy.
The government provided several incentives such
as tax holidays, tariff protection, remittance of
profits, repatriation of invested capital, tax
exemptions on imported capital goods and con-
cessions in the form of land leases or land grants.
As a result, the manufacturing sector had made
steady progress. The contributions of medium and
large scale manufacturing industry to GDP grew
from about 2 per cent in 1961 to about 5 per cent
by 1973 (UNIDO, 1991, p. 21).
During the third five-year plan (1968–73, the
last for the imperial era), 41 per cent of the
manufacturing activities was done by the public
sector; the remaining 59 per cent was done by the
private sector (third five-year development plan,
p. 231). The share of the private sector in con-
struction was as high as 79 per cent.
Although the private sector was given a pro-
minent place, foreign investors dominated it, and
the local entrepreneurs’ participation was very
low, partly because of cultural bias by the intelli-
gentsia against business and shortage of capital.
Business was meant for less educated people.
Most educated people regarded government
employment as a dignified profession. This atti-
tude was an impediment to development of entre-
preneurship. Moreover, the financial sector was
underdeveloped and largely owned and con-
trolled by the government. The banks that domin-
ated the financial sector were unable to mobilize
enough capital to meet the demand, mainly
because of low savings.
A short-lived stock market started informally
in the late 1950s and was formally instituted in
1965. The stock market was administered by the
National Bank of Ethiopia (the equivalent of the
Federal Reserve Board in the United States). The
government through the National Bank tried to
improve resource mobilization by establishing a
share-dealing group that brought together buyers
and sellers to participate in an auction process.
R&D Management 15, 1, 2003 51
A. Tessema
The bank laid out rudimentary rules and regu-
lations for the auction market. According to a
study by J.D. Von Pischke (1968), former lec-
turer at Haile Selassie University’s College of
Business, the stock market was moderately suc-
cessful in its pioneering efforts to provide an
organized market for companies whose shares
were relatively widely held. Workable trading
practices and standards had been developed,
and a fairly smoothly operating market mechan-
ism had been created.
It was a good start, and no crisis of public
confidence had occurred. Market capitalization,
however, remained small and did not have much
impact on the economy since the participation of
the general public was limited. Investors were
naturally reluctant to invest in a corporation in
which they do not have any personal involve-
ment. Businesses in many developing countries
are carried out in a secretive environment, some-
thing not possible for a listed stock that is pub-
licly traded. Moreover, opportunities for tax
evasion, which is rampant in many developing
countries including Ethiopia, would vanish
because of a stock market’s requirements for
proper bookkeeping and regular reporting of
firm activities necessary to safeguard investors
from the abuses of corporate insiders.
The private sectors accessible to most Ethi-
opians were the trade and service industries,
which in many cases require relatively less capital
than manufacturing, construction and mining.
Thus, investors stayed away from projects requir-
ing long-term commitment. Yet, manufacturing
increased modestly. Despite a steady growth in
manufacturing, there were some problems. First,
the sector depended heavily on imported inputs
and did not help the development of local
resources. Second, due to tax exemptions on
imported capital goods, capital intensive technolo-
gies were used in most industries. Third, since
manufacturing companies were located in only a
few urban centers where less than 10 per cent of
the population lived, the majority of the popula-
tion did not feel the impact.
Agriculture remained primitive. There was
very limited use of modern technology in agricul-
ture which would have helped increase product-
ivity to meet the growing demand for consumer
goods. As a result, prices soared and the spread
of drought in the northern parts of the country
worsened, triggering the revolution that culmin-
ated in ousting the government of Emperor Haile
Selassie in February 1974. A new government
headed by the military was instituted.
52 R&D Management 15, 1, 2003
The second phase started in 1974 with a
declaration of a centrally planned command
economy. The military government’s first order
of business was to nationalize most of the indus-
tries and assume ownership and control of vir-
tually all economic activities. The private sector
was marginalized.
The infant stock market ceased to exist in
1975. The government introduced a series of
policies and reorganized the manufacturing sec-
tor into corporations. All medium and large
companies came under these corporations. Com-
pany managers reported to corporate managers.
The government set input and output prices.
Company managers had one duty: comply with
set goals at any cost. Policies of collectivism at all
levels and anti-market policies retarded the econ-
omy, and consequently foreigners who owned
and operated most of the industries left the coun-
try. High-caliber Ethiopian entrepreneurs and a
qualified work force migrated to neighboring
countries and elsewhere in the world. Domestic
private investments virtually ceased.
The development policy denied investment
incentive to small-scale industries. Their access
to credit was limited by the stringent require-
ments placed on them by the banks, which were
all now under government ownership and con-
trol. Little institutional support existed to intro-
duce new technology in the private sector; as a
result, most small enterprises had very low prod-
uctivity using basic and outdated machinery and
equipment.
The continued adoption of a fixed exchange
rate (2.07 Birr for US $1) resulted in the over-
valuation of the domestic currency and under-
mined the competition of the local firms in the
export sector, and thus limited the country’s
access to foreign exchange. Moreover, the escal-
ation of the civil war in the north and the severe
drought that struck the country once again dis-
rupted normal economic activities. The need to
increase the size of the military and to acquire
arms necessitated an increase in the defense
budget. These increases put further pressure on
the country’s meager foreign exchange reserve.
In 1983 the government introduced a new pol-
icy encouraging participation by private invest-
ors. Among the incentives were tax relief,
import and export duty relief, repatriation of
capital, and protective tariff measures. Despite
such measures, the private sector, most of which
had lost confidence in the government, showed
little interest in investing in the country. Lack of
investment was also reflected in a severe shortage
# Blackwell Publishing Ltd, 2003

of the foreign exchange needed to finance the
import of spare parts and foreign inputs.
Shortage of foreign exchange also resulted in a
significant decline in capacity utilization by pub-
lic enterprises, making it difficult to generate
adequate revenue. Since the mid-1980s, GDP
growth declined steadily, reaching negative fig-
ures at times. This resulted in budget deficits that
had to be offset by higher external financing
grants and higher money supply growth, all of
which increased domestic inflation.
In 1990, the government declared a move from
a centrally planned to a mixed economy in which
the private sector was once again encouraged and
some favorable concessions were introduced.
However, it was ‘too little too late’ to change
the trend in light of the unfortunate fall of inter-
national coffee prices (the major export of the
country). Armed insurgents overthrew the gov-
ernment in 1991.
The third phase started in 1991 and it still
continues. By this time the economic and polit-
ical landscape around the world had changed.
With the fall of communism and the emergence
of a global economy, many nations around the
world were slowly moving towards a market-
oriented economy. It became clear that market-
based economies fared better than those guided
by socialist ideologies.
Despite the socialist orientation of the leaders
of the new government, it was in the country’s
interest to comply with the new economic order.
That meant transforming the economy from a
centrally planned to a market-oriented system.
Since 1992 the government has undertaken eco-
nomic reforms by adopting the Structural
Adjustment Program that meets International
Monetary Fund (IMF)/The World Bank require-
ments. The program’s main emphasis was the
liberalization of both factor and commodity mar-
kets, as well as privatization and commercializa-
tion of state-owned enterprises.
As a result, new investment codes aimed at
stimulating both domestic and foreign private
sector investments have been enacted. In October
1992 the Ethiopian currency, birr, was devalued
by a sizable amount to a level that reflected its
approximate value. In May 1993, foreign
exchange auctioning was introduced and, as
such, allocation of foreign exchange to the pri-
vate sector improved. The government also lib-
eralized foreign trade policy by abolishing export
taxes on various items.
In general, the relative role of the private sec-
tor is being enhanced by the new economic policy
# Blackwell Publishing Ltd, 2003
Developing Securities Markets in Ethiopia
with the professed intent of creating an enabling
environment, which would unleash the potential
of the private sector. At the same time, Ethiopia’s
history of state intervention in the economy and
the antipathy and suspicion towards private busi-
ness still lingers. The financial sector reform so
important for the realization of the private sector
potential is not moving at an appropriate pace.
The government has allowed establishment of
private banks by private citizens. As a result, six
private commercial banks and eight private
insurance companies have started operating, but
they are not large enough to have much impact.
The largest and oldest commercial bank which
has many branch offices in the country is still
owned and controlled by the government. For
the most part, interest rates are still determined
administratively in favor of public enterprises
and major private companies, thus crowding
out most of the smaller enterprises. The dynamism
of the economy is curtailed by the near exclusion of
this segment from economic activities.
The country suffers from poor economic and
social infrastructures such as roads, power, tele-
communications services, water supply, appro-
priate schools and hospitals. Another
impediment to private sector development is the
lack of securities markets. The recent border con-
flict with Eritrea (once a province of Ethiopia,
independent de facto since 1991, de jure 1993) is
another problem diverting the government’s
attention away from economic development.
The outcome of the conflict is uncertain. Political
disruption almost always affects economic activ-
ity as businesses postpone investments, scale
down growth projections and may even consider
moving capital elsewhere.
3. A Review of the Rationale for
Developing Securities Markets
The nearly universal goal of nation-states is to
become ‘strong’ through economic growth and
modernization. They want to see the rate of
increase in GNP go up, per capita income rise,
and efficiency and employment increase. A grow-
ing literature argues that stock markets provide
services that boost economic growth and contrib-
ute to the achievement of these goals (see
Bencivenga et al., 1996; Levine, 1991; and Obstfeld,
1994). Theoretical disagreements about the impor-
tance of stock markets for economic growth also
exist (see Mayer, 1988; Stiglitz, 1985, 1993; Dever-
eux and Smith, 1994; Shleifer and Summers, 1988;
and Morck et al., 1990a, b).
R&D Management 15, 1, 2003 53
A. Tessema

Levine and Zervos (1996) conducted an
empirical study and reported a strong positive
correlation between stock market development
and long-term economic growth. Furthermore,
they provided data on the trend in stock market
activities in the recent past.
During the period between 1985 and 1995,
world stock market capitalization rose from
$4.7 trillion to $15.2 trillion, and emerging mar-
ket capitalization jumped from less than 4 per
cent to almost 13 per cent of total world capital-
ization. Over this decade, the trading of shares
in emerging stock exchanges rose from less than
3 per cent of the total value of transactions on
the world stock exchanges to 17 per cent. In
addition, Korajczyk (1996) shows that emerging
markets have become more integrated with world
capital markets2 during the past seven years.
Consequently, portfolio equity flows to emerging
markets jumped from $150 million in 1984 to
over $39 billion in 1995.
However, due to the relative underdeveloped
nature of equity markets in Africa, the region has
attracted a disproportionately small share of
recent international private capital flows to
developing countries. Little current financial
research focusing on African equity markets is
being done. The region has not received the
attention that Latin America and South-east
Asian countries received in the literature.
Recently, however, recognizing the potential
benefits of a well-functioning equity market, sev-
eral African countries have made important
efforts to establish and invigorate stock
exchanges. These include Botswana, Egypt,
Ghana, Ivory Coast, Kenya, Mauritius, Mor-
occo, Namibia, Nigeria, South Africa, Tunisia,
Uganda, Zambia and Zimbabwe. With the
exception of South Africa they are all small
both in terms of size (capitalization) and num-
bers of listed companies; and are infrequently
traded (see table 1).
In the developed countries the existence of
securities markets is frequently taken for granted
since their development is considered a natural
outgrowth of the free-market system. Only in
times of considerable turmoil in the markets is
policy toward them given much attention. For
developing countries in transition from a cen-
trally planned to a free-market economy, how-
ever, policy with regard to securities markets
must be more deliberate, and should involve con-
sideration of sensitive economic, political and
social issues. In analyzing the net effect of devel-
oping securities markets, one must understand
benefits to developing securities markets as well
as their costs and requirements.
Review of the literature indicates that well-
functioning securities markets have the following
benefits:
1. Enhanced savings mobilization. Stock and
bond issues serve to increase the national
savings rate by creating incentives to invest.
Since securities are risky investments, they
generally earn higher returns than more secure

Table 1. Sub-Saharan African stock markets.

Year established Listings (No. Capitalization (US$ million) Value traded

of domestic (US$ million)
companies)
1996 1990 1996 1996

Botswana (1989) 12 NA 326 31

Ivory Coast (1976) 31 549 914 19
Ghana (1989) 21 NA 1492 17
Kenya (1954) 56 453 1846 67
Malawi (1996) NA NA NA NA
Mauritius (1989) 40 268 1676 78
Namibia (1992) 12 NA 473 38
Nigeria (1961) 183 1372 3560 72
South Africa (1887) 626 137540 241571 27202
Swaziland (1990) 6 17 1642 8
Zambia (1994) 5 NA 229 3
Zimbabwe (1946) 64 2395 3635 255
Malaysia 621 48611 307179 173568
Brazil 551 16354 216990 112108
UK 2433 848866 1740246 578471
USA 8479 3059434 8484433 7121487
Source: IFC (1997). NA denotes not available.

54 R&D Management 15, 1, 2003 # Blackwell Publishing Ltd, 2003


instruments such as bank savings deposits.
They also offer investors the option to diver-
sify across industries, thus improving their
risk/return tradeoff. This is a better option
than putting all one’s savings into a small
business where one’s entire livelihood would
have to depend on the success of that particu-
lar business.
2. Help in resource allocation. In a market econ-
omy, issues of securities help raise capital for
projects whose outputs are in the highest
demand by society, and those enterprises
which are most capable of raising productiv-
ity. Thus, efficient enterprise management is
rewarded by access to investment funds. Secur-
ities prices serve as a means by which investors
express their confidence in enterprise prospects
and management. Without securities markets,
companies must rely on internal resources
(retained earnings) for investment funds, on
bank financing or on government grants or
subsidies. Such forced reliance on self-finance
penalizes young companies whose products
may have greater future demand. These new
and growing enterprises often have little in the
way of retained earnings.
Bank loans are an important source of cap-
ital throughout the world, but are limited by
the amount of deposits banks are able to
mobilize. As a result, banks tend to be very
conservative in their lending policies, thereby
penalizing younger or emerging companies
whose business risk is higher than those
faced by established firms, and yet contribute
to the dynamism and future growth potential
of the economy through innovations. Thus,
the role of the private sector is limited by the
exclusion of this important segment from the
activity.
Since banks in emerging economies are
mostly owned and run by governments, they
extend loans to priority sectors in response to
government directives without due regard to
quality, and often at interest rates below the
bank’s cost of funds. This leads to inefficient
resource allocation and widespread loan delin-
quencies. The prevalence of these problems
reduces the level of investments, productivity
of capital and the volume of savings.
Even if government grants and subsidies are
available, they tend to introduce market
imperfections that contribute to the distortion
of financial prices. These imperfections sub-
vert the positive allocation role of securities
markets. Governments generally are not
# Blackwell Publishing Ltd, 2003
Developing Securities Markets in Ethiopia
known to process the enormous amount of
information necessary to make sound alloca-
tion decisions. The result is irrational invest-
ment patterns, further distortion due to
political influences over economic decisions,
and discrimination against smaller, younger
and innovative undertakings.
Securities markets create better opportun-
ities for small emerging companies to raise
funds in the venture capital market since ven-
ture capitalists would be more comfortable
investing in new ventures with the knowledge
that possible future divestment can take place
through a public offering at a potentially sub-
stantial profit.
3. Promote efficient financial system. Securities
markets break the oligopoly that would be
enjoyed by the banks in the absence of secur-
ities markets. The government does not auto-
matically have privileged and subsidized
access to funds and must compete on equal
terms. Securities markets provide impetus for
the establishment of financial prices based on
scarcity values rather than on administrative
fiat. Such market-determined financial prices
and investment options, in turn, attract more
savings, creating a virtual circle of innovation
and mobilization that contributes to the over-
all efficiency of the financial system.
4. Help term transformation and improve capital
structure. Healthy debt/equity ratios are
important for a robust economic system. Cor-
porations in many developing countries are
undercapitalized. In the absence of equity
markets, debt/equity ratios inevitably rise.
First, in growing companies, retained earnings
and fresh cash injections from the controlling
shareholders usually cannot keep pace with
the needs for more capital, thus slowing
growth. Second, outside investors require
liquidity and some sense of security that can
be provided only by an organized market-
place.
When active secondary markets for secur-
ities exist, savers can be induced to provide the
long-term funding that corporations seek
because savers are assured that the markets
can provide them with liquidity. Thus, what
is the equivalent of short-term investment for
the security purchaser is transformed into
long-term financing from the issuer’s perspect-
ive. The more efficient matching of asset and
liability maturities that result means less
financial risk for companies and thus a more
stable economic environment in general.
R&D Management 15, 1, 2003 55
A. Tessema
Moreover, the availability of equity capital
through the markets decreases the overall
debt/equity ratios of business, which may (in
the absence of such financing) reach levels at
which default risk outweighs the advantage of
increased leverage.
5. Allow deconcentration of ownership. Equity
sales provide for a wider participation in
enterprise management and for a wider distri-
bution of corporate profits. These factors
would help allay the fear that a few individu-
als or groups linked to the ruling party
would dominate the private sector. Wider dis-
tribution of corporate profits develops a gen-
eral sense of ownership and an assumption of
responsibility on the part of the citizen. People
will now be united by their common defense
of their business interests, and ethnic and reli-
gious differences would gradually dissipate.
6. Improve accounting and auditing standards.
Securities purchasers rely in part on corporate
information provided in financial reports to
make their investment decisions. The develop-
ment of securities markets is usually accom-
panied by increased reporting standards and
requirements, which contribute to the effi-
ciency of the markets and their mobilizing
and allocating functions. A regular disclosure
of adequate, reliable and timely information
makes it possible to compare performance of
various companies. The development of
widely accepted accounting procedures,
checked by independent external auditors is
also an important benefit derived from the
development of securities markets. Availabil-
ity of good information helps corporations
make better decisions and provides better stat-
istics for economic policy makers. Good
information may even help tax authorities
collect taxes in a more efficient and equitable
fashion. The need for disclosure of financial
information is a strong incentive for the
improvement of accounting and auditing
standards.
7. Provide effective tools for monetary and fiscal
policy. When an economy has well-developed
securities markets, it can conduct monetary
and fiscal policies through these markets.
The Anglo-American style economies conduct
monetary policy through open-market opera-
tions. These economies affect the market
interest rate and money supply by buying
and selling securities in the open market. Gov-
ernments in these countries can finance their
deficits by issuing bonds in the open market.
56 R&D Management 15, 1, 2003
Therefore, a government deficit does not
necessarily bring about an increase in money
supply and thus inflation.
Economies with only a commercial banking
system have to conduct their monetary policy
and deficit financing through the banking sys-
tem. Open-market operation is not available.
The only effective tools are direct credit con-
trols, ceilings on loans and interest rates, as
well as reserve requirement manipulations.
Also, deficit financing is carried out by either
borrowing directly from the central bank or
by selling bonds to commercial banks. Conse-
quently, deficit financing puts pressure on the
money supply and leads to inflationary pres-
sures. As a result, financial repression is com-
mon in countries with banking-oriented
financial systems. Full-scale financial sector
reform (liberalization) may be impossible
unless the economy has well-developed secur-
ities markets.
8. Help privatization efforts. Public investments
vastly exceed private investments in transi-
tional economies. Economists widely believe
that privatization of state enterprises will
reduce losses and create efficiency. However,
transitional economies generally lack the
financial infrastructure and the legal frame-
work to engender privatization efforts. Yet,
these economies often like to privatize state
enterprises. One of the most notable problems
associated with privatization of state enter-
prises is the lack of well-developed domestic
equity markets. An inadequate supply of cap-
ital due to low savings, low gross national
product and limited access to international
capital markets has been an impediment.
One of the main challenges for transitional
economies is, therefore, to improve the quality
of financial intermediation and resource allo-
cation to contribute to a more rapid rate of
economic growth that would lead to higher
levels of savings and investments.
The establishment of securities markets would
ensure the existence of not only a primary market
for the initial public offering but also a secondary
market for shares after firms have been pri-
vatized. Without such markets, individual share
owners would be unable to adjust their portfolios
as required. This would increase the risk and
uncertainty faced by investors, thus increasing
the cost of capital to firms issuing equity to
raise capital. The marketability of shares is a
key element in the ability of firms to attract
# Blackwell Publishing Ltd, 2003

private investors who would have options to
liquidate their holdings. Securities markets devel-
opment and privatization of state enterprises are
two sides of a coin in the sense that a government
cannot hope to carry out meaningful privatiza-
tion unless securities markets adequate enough to
finance them exist.
4. Costs and Environmental
Requirements for Securities Markets
Development
The benefits of securities markets do not come
without certain problems, which are inherent in
the system. Some of the costs inherent in secu-
rities markets as discussed in the literature
include:
1. Market cycles. During the early stages of
securities markets development the supply of
stocks and bonds is limited, manipulation is
relatively easy, investors are unsophisticated,
underwriters and brokers are inexperienced,
and securities legislation often has loopholes.
As a result, economic cycles are more difficult
to predict. Thus, the job of a financial analyst
would be very difficult during the early years
of development.
2. Interest rate fluctuations. The fluctuations in
interest rates, which occur in a financially
competitive environment, make planning more
difficult for both borrowers and savers. The
additional efforts required for information
gathering and decision making in such environ-
ments, together with the need for borrowers
and savers to adjust their positions more
frequently over time, constitute costs brought
about by a liberalized financial system.
3. Intermediation and regulation. The institutions
and individuals that constitute the securities
markets fall into the following categories:
* participants who are the savers and users of
capital (individuals, corporations and gov-
ernments);
* the financial institutions and intermediaries
that channel capital from savers to users;
* supporting and supervisory entities which are
typically government bodies that facilitate
and regulate the activities of the participants.
The market itself has two levels:
* the primary market where newly issued
securities of newly created or existing enter-
prises trade;
# Blackwell Publishing Ltd, 2003
Developing Securities Markets in Ethiopia
* the secondary market where trading in out-
standing shares is done.
The specialized services of financial intermedi-
aries in securities markets are costly, yet indis-
pensable. The strategic position that financial
intermediaries hold in the market system in
terms of access to information and control
over transactions can lead to profiteering
behavior that decreases the benefits accruing
from the mobilizing and allocating functions
of the securities markets system as a whole.
The reporting requirements also represent
costs to participating firms. In addition,
firms have incentives to falsify such reports,
which result in distorted investment decisions
on the part of securities purchasers that may
lead to decreased government tax revenues.
Such expenses related to the organization
and function of regulatory agencies as secur-
ities commissions, stock exchanges and
administrative organs represent monitoring
costs associated with the control of securities
markets abuses.
4. Income inequalities. While securities markets
provide wider investment choices for savers
and also serve to spread ownership in compa-
nies, it is likely that in the initial stages of
securities markets development, the benefits
of securities ownership will accrue to a limited
group of investors. According to Wai and
Patrick (1973), until a wide range of firms (in
terms of size) and savings units (in terms of
distribution of income and wealth) participate
in the securities markets directly or indirectly
(through mutual funds, pension funds, insur-
ance companies, etc.), the development of the
capital market, particularly the market for
equities, is likely to increase the inequality of
income and wealth distribution. A vigorous
program of wealth distribution through highly
progressive income taxation is one counter-
measure, although it is fraught with its own
problems.
Obviously, each of these costs of securities mar-
kets operation is significant and may have the
potential to undermine the concomitant benefits
through both economic and political reaction.
However, the experience of many countries in
introducing securities markets shows that the
existence or creation of certain political, econ-
omic, policy and institutional environments can
smooth the process of securities markets devel-
opment for the following reasons:
R&D Management 15, 1, 2003 57
A. Tessema
1. Political environment. Political uncertainty is
detrimental to any investment. Investors’ pro-
jection of future political conditions, both
domestic and international, directly affects
their willingness to invest in such risky finan-
cial assets as stocks and bonds. Government
stability and consistency in applying financial
and economic policies tends to increase invest-
ors’ confidence and to increase the flows of
capital from savers to productive investments.
2. Economic environment. The key environmen-
tal factors for the success of securities markets
include sufficient demand for and supply of
securities. Financial and commodities prices
that do not depart too much from scarcity
values and low or predictable inflation are
necessary. Demand for securities depends on
the amount of capital available for investment
in the hands of individuals and institutions. In
very low per capita income nations and where
corporate investment funds are in short sup-
ply, demand for securities cannot be expected
to be high.
The degree of familiarity of potential invest-
ors with the securities markets operation
affects demand. The existence of investment
alternatives affects both the demand for and
the supply of securities. Thus, bank deposit
interest rates, tax policies, and the capitaliza-
tion of securities markets are all considered by
owners of capital when they make investment
decisions. Investors must be convinced that
the risks of securities ownership are likely to
be offset by returns that sufficiently adjust for
those risks as compared with more secure
investments.
The supply of securities is as important to
the smooth operation of a market as the pre-
sence of demand for them. When too few
securities are available for purchase and trad-
ing, it may be difficult to attract investors,
who may doubt that a large enough market
exists to ensure the liquidity of their invest-
ments. The result will be a shallow, sluggish
market that does not perform its function. In
cases where demand for securities is high but
few issues are available, securities prices may
rise to unrealistic levels. Experts believe that a
minimum number of issues required for the
successful institution of a stock market is 20
profitable companies (Wai and Patrick, 1973).
3. Policy environment. To encourage develop-
ment of healthy securities markets, legal induce-
ments that affect the supply and demand for
securities are helpful. Such incentives include
58 R&D Management 15, 1, 2003
tax exemptions or reductions for income
derived from capital gains and/or dividends
from securities issued by publicly traded com-
panies; tax credits for owners of publicly
traded shares; tax deferral for dividends, inter-
est and capital gains from securities purchased
for retirement funds; and tax breaks for com-
panies that list their shares on exchanges.
While governments have important policy
roles in the early stage of securities market
development, their future involvement should
be primarily catalytic and supervisory to create
a sense of confidence in the public about the
market.
4. Institutional environment. Four related insti-
tutional areas are very important for the suc-
cess of securities markets. First, corporation
and securities laws are important for protect-
ing both the interests of companies and those
who purchase the securities they issue. Sec-
ond, securities markets work most efficiently
when such intermediaries as brokers, dealers,
underwriters and the like are knowledgeable,
professional, skillful, honest, and have suffi-
cient resources to perform their functions.
Third, legal or regulatory standards for these
professionals are important for the assurance
that financial intermediaries possess such qual-
ities. Enforcement of securities laws, account-
ing regulations, and professional standards
should be carried out by government securities
and exchange agencies, or through the auspices
of such self-regulating bodies as exchange
administration organizations. Fourth, account-
ing and auditing standards are necessary to
provide comparable financial information.
This information is critical to making sound
investment decisions.
In summary, despite the impetus to economic
growth that the development of securities mar-
kets can provide, the costs associated with such
development can be substantial. The magnitude
of such costs and the capacity to manage them
depend on a complex set of factors in many
spheres. The experience of a range of developing
countries in instituting securities markets indi-
cates that their beneficial effects do not come
automatically, and that cyclic phases of develop-
ment are the rule. Securities markets remain sens-
itive to changes in the macro and micro-
environments affecting issuers and purchasers.
The degree of government intervention in sup-
port of capital market development through fis-
cal and monetary policies is critical.
# Blackwell Publishing Ltd, 2003

Furthermore, the question of how much mar-
ket orientation of the economy as a whole is
required in order for securities markets to play
a beneficial role is uncertain, but clearly it must
be substantial. These observations must be kept
firmly in mind as we now examine the environ-
ment for developing securities markets in Ethiopia.
5. Environment for Developing Securities
Markets in Ethiopia
Research shows a strong positive correlation
between overall securities markets development
and long-term economic growth and that the
association is robust (see Levine and Zervos,
1996). As a result, a worldwide movement exists
to encourage development of securities markets
in developing countries and transitional econ-
omies of Eastern Europe, and countries of the
former Soviet Union.
In Africa, the African Capital Market Forum
(ACMF) is leading the effort assisted by the
Organization of African Unity (OAU) and the
African Economic Commission, both headquar-
tered in Addis Ababa, Ethiopia. At the 6th Con-
ference of African Finance Ministers in mid-
September of 1997 held in Addis Ababa, the
ACMF and the inter-governmental group of
experts discussed financial market development
and integration in the African continent. The
participants made several strong recommenda-
tions including developing stock exchanges in
Africa and integrating them. They endorsed the
idea of regional exchanges that would allow
member states access to a much larger pool of
external funds besides increasing mobilization of
domestic capital. Of course, these changes call
for harmonizing security laws and accounting
and auditing standards.
For its part, the Ethiopian government has
been studying the possibilities of developing a
stock exchange. The government has sent a dele-
gation of experts from the National Bank of
Ethiopia to some African and Asian countries
to see how securities markets operate. Pressure
also may be coming from the International
Monetary Fund (IMF) and the World Bank to
open up the economy by developing securities
markets. As recently as September 1998, a panel
discussion organized by the Addis Ababa Cham-
ber of Commerce underscored the need to
develop a stock exchange in Ethiopia. The
panel highlighted the need to look beyond the
banking system for additional capital by provid-
# Blackwell Publishing Ltd, 2003
Developing Securities Markets in Ethiopia
ing investors with choices that induce them to
save and invest.
In the last ten years, Ethiopia has been in the
process of transforming itself from a centrally
planned to a market-oriented economic system.
Early on, the government redefined its role in
such a way that it would be engaged only in
regulatory aspects and strategic economic activ-
ities, while playing a primary role in creating an
enabling environment for the private sector.
In Ethiopia, public enterprises are being
restructured and some have been privatized. In
addition to privatization, commercialization of
state enterprises is underway. The government
issued a series of investment proclamations
(1992, 1996, 1998) with many incentives intended
to attract both domestic and international invest-
ors. The incentive package, however, does not
compare favorably with those found in many
developing countries, thus placing Ethiopia at a
competitive disadvantage (see Teklu, 1994).
Moreover, the existing barriers to investment
in Ethiopia are so great as to render the benefits
provided in the proclamations immaterial to the
investment decisions by investors. The most fre-
quently cited complaints by potential investors
have to do with the bureaucratic process. The
working relations between the central and
regional governments do not seem to be clearly
defined. As a result, potential investors run into
many obstacles in getting access to land, power
and telecommunications services. This may be
one of the reasons why the number of investment
projects implemented by the business community
is far below the number of licenses issued. For-
mulation of favorable policies and issuance of
regulations alone are not sufficient to encourage
private sector activities. A faulty implementation
puts the finest blueprints into disarray. Further-
more, some aspects of the proclamations limit
the areas of investment by foreigners. The latest
proclamation (1998) addresses some of these limi-
tations, and allows foreign investors to invest in
energy projects, telecommunications and the
transport industry.
Ethiopia needs massive investment to upgrade
its road network, supply of energy, water and
telecommunication services to provide the neces-
sary infrastructure to potential investors. These
are areas, perhaps, in which foreign investors
with capital as well as new technology should
be invited to participate. Investments in those
major infrastructures would create employment
opportunities for those who would be laid off as
state enterprises are restructured and privatized,
R&D Management 15, 1, 2003 59
A. Tessema
and thus alleviate the problem that would be
encountered when the breadwinner in an
extended family loses his/her job which is typical
in countries like Ethiopia.
Ethiopia also needs to overhaul its educational
system in such a way that it addresses the coun-
try’s manpower need. The current system is elitist
and does not prepare students for anything other
than entering the university. High school gradu-
ates are functionally illiterate. If they do not
make it to college, they simply have to join the
ranks of the unemployed. The magnitude of this
problem is exacerbated by the percentage of high
school graduates who do not make it to college.
For instance, 160,000 students took the college
admission test during the 1997/98 academic year
and only 12,000 (less than 8 per cent) made it.
The remaining 148,000 will be added to the
already bloated unemployed work force. Ethio-
pia would have a competitive advantage of low
wages and a large labor force if its labor force
were trained properly.
Higher education continues to be the respons-
ibility of the central government while primary
and secondary schools are run by the regional
governments. Education in Ethiopia for the most
part is still free to students. The Addis Ababa
University (AAU) system is the largest in Ethi-
opia and one of the oldest universities in Africa.
Its graduates have proven without any doubt
that they could compete at a global level and
make it in any field imaginable.
Newer colleges in the various parts of the
country are being elevated to universities for
what seems to be political reasons. The national
university (AAU) operates under conditions of
overcrowded classrooms, deteriorating physical
facilities, lack of resources for such things as
textbooks, reference materials, computers,
laboratory equipment and consumables. Lack
of textbooks, reference materials and the inabil-
ity to make copies of handouts for students have
been major impediments to effective teaching.
Faculty members have to learn to improvise
and make do with minimal resources. Given the
relatively high cost of establishing and operating
universities, it would not be in the country’s
interest to add universities when the existing
one is suffering from lack of adequate support,
financial or otherwise. This simply diverts
resources from Addis Ababa University, affect-
ing the quality of its programs.
Lack of a skilled labor force has been cited as
one of the reasons why foreign investors are not
attracted to developing countries like Ethiopia.
60 R&D Management 15, 1, 2003
The government, instead of adding universities
by opening one in each regional state, should
strengthen the national university and expand
intermediate schools for high school graduates
(who could not make it to college) to learn
some skills they could use. Thus, a skilled labor
force would be readily available and would be
attractive to foreign investors coming to the
country.
Although the 1998 Investment Proclamation
Act expands the areas in which foreign invest-
ment is encouraged, foreigners are still not
allowed to invest in the financial sector. Ethi-
opian law forbids any foreigner, including a for-
eign bank, to own shares in an Ethiopian bank.
The law also forbids foreign banks from con-
ducting any banking activities in Ethiopia. This
isolation of the Ethiopian banking system from
the international banking community has per-
haps the most important and far-reaching of the
several consequences emanating from the restric-
tions upon foreign investment imposed by the
Ethiopian government. By denying foreigners
any role in the Ethiopian banking industry, the
government has closed an obvious source of
much-needed capital for banks.
Perhaps more significantly, the government
has also closed an important source of impartial
information to potential foreign investors. Many
investors, especially those who are new to a
country or region, rely upon their international
banks not only for banking services but also for
information. For most businesses contemplating
starting operations in a foreign country in which
they have not previously invested, an important
part of their due diligence investigation is an
appraisal of the investment environment and
the general business climate.
A local branch of their bank can usually be
trusted to provide the kind of information an
investor needs about the practical realities (as
opposed to the theoretical legal opportunities)
of the local business climate. Because of its con-
tacts with the local business community, the local
branch of a potential investor’s bank can also
perform a second valuable function by finding
and evaluating particular investment opportun-
ities. Ethiopia deprives foreign investors of these
services from their international banks.
If a potential foreign investor is unable to get
information from their bank, they must rely
upon the government’s investment promoters
and other local sources which have interests
which differ from those of the foreign investor.
Information from these sources not only lacks
# Blackwell Publishing Ltd, 2003

the impartiality which an investor expects of their
international bank, but these national sources are
unable to perform a comparative analysis which can
assist the investor to determine in which country,
among many possibilities, to make an investment.
Similarly, the restriction upon foreign insur-
ance companies and upon foreign investment in
Ethiopian insurance companies also deprives the
country of badly needed capital. Another effect
of these restrictions in the financial sectors of the
economy is that foreign banking and insurance
businesses do not establish branches or subsid-
iaries in Ethiopia in which Ethiopians can receive
training in the latest techniques and procedures
and thereby develop skills needed both by them
and by the country. This increases the difficulty
of every investor because it inhibits the growth of
a pool of skilled personnel.
The financial sector requires highly skilled
manpower to undertake the vast range of tasks
needed to mobilize and allocate resources as
effectively as possible. It also needs help from
the government. The role of the government
should take the form of regulations to monitor
and enhance bank solvency and limit finance
sector instability. Building the confidence of the
general public in the operation of the capital
market in general, and securities markets in particu-
lar, is a critical aspect of development of capital
markets. A well-functioning private sector enhances
the development of securities markets.
Developing securities markets in Ethiopia face
several direct challenges:
* Low level of public awareness about securities
markets (the degree of awareness by potential
investors of investments in stocks and bonds
affects demand for securities).
* Lack of public confidence in share investment
(after 17 years of socialism, there is neither the
tradition nor the trust in share companies).
* Lack of institutional capacity to facilitate
securities trading.
* The underdeveloped state of the bond (debt)
market due to the historical prominence of
bank financing.
* A low level of private sector development and a
low level of market orientation in the economy
(there is still government interference in the
market).
* Easy access to loans by wealthy and financially
sophisticated Ethiopians, and probably those
with a strong link to the party ruling the country.
* Problems with the supply and demand for
securities at least initially (a reasonable num-
# Blackwell Publishing Ltd, 2003
Developing Securities Markets in Ethiopia
ber of companies whose shares are publicly
traded and a variety of individuals and institu-
tional investors). When too few stocks and bonds
are available for purchase and trading, it may be
difficult to attract investors who may doubt the
existence of a large enough market to insure
liquidity. On the other hand, in a very low per
capita income country like Ethiopia and where
investment funds are in short supply, demand for
stocks and bonds cannot be expected to be high.
* Absence of input by the business community
in the formulation of economic policy by the
government (there is no mechanism in place to
solicit input from the business community).
Many prospects (opportunities) for developing
securities markets exist in Ethiopia:
* Ethiopia has considerable unexploited
resources. Ethiopia’s known natural resources
include gold, platinum, tantalum, soda ash,
potash and natural gas. Except for gold,
none of these resources has been exploited on
a large scale. Ethiopia also has considerable
unexploited fertile land. Agriculture plays a
key role in the economy, although the country
still uses primitive technology and the climate
is subject to recurrent droughts due to irregu-
lar rain.
* Ethiopia, with over 60 million people (second
most populous in sub-Saharan Africa), pro-
vides one of the largest potential markets in
Africa.
* Ethiopia’s process of transition from a cen-
trally planned to a market-oriented economic
system and the process of economic liberaliza-
tion underway is encouraging.
* The privatization efforts going on would help
with the supply problems, particularly if a
public offering of shares is used as the method
of privatization.
* The existence of many profitable companies,
which can potentially benefit from floating
shares to the public.
* The existence of institutions like the country’s
Pension Fund, insurance companies, credit
unions, etc., with large sums of money. If
allowed to invest, they would boost the
demand for securities.
* The gradual improvements of the incentive
packages in the successive investment proclam-
ations help attract new investors including
Ethiopians with foreign passports.
* The debate going on in academics, the busi-
ness community at large and the government
circle is encouraging.
R&D Management 15, 1, 2003 61
A. Tessema
6. Conclusion and Recommendations
One of the main challenges for developing coun-
tries like Ethiopia is to improve the quality of
financial intermediation and resource allocation
to contribute to a more rapid rate of economic
growth. Recent developments in sub-Saharan
Africa hint at benefits to be gained as a result
of opportunities from the domestic capital mar-
ket. More than a dozen African countries have
now put in place stock exchanges.
At the same time, the interest in emerging
stock markets by international investors is
increasing largely due to the possibilities of
above average long-term capital gains. In Ethi-
opia, bank-based financing of investments is still
prevalent. Such a system leads to a greater degree
of control over the private sector by a relatively
small group of agents. This stricture could be
avoided by putting more reliance on market-
based financing. Reliance on debt financing, on
the other hand, has weakened domestic entrepre-
neurship and has favored government or family
group ownership with excessive debt ratios. To
avail capital to the most productive enterprises,
there seem to be strong arguments for developing
an equity market in Ethiopia as an alternative to
debt financing. Unlike banks, equity investors
will share in both the benefits and costs of risky
projects (enterprises) and, unlike banks, their
return is not limited to a fixed interest rate but
will rise with the profitability of an enterprise.
Ethiopia is in the midst of economic transfor-
mation from a centralized to a market economy.
A successful transformation requires gradual
development of the capital markets to support
economic activities. International experience
shows that no universal blueprint or model can
address every country’s needs. This suggests the
need for flexibility in the choice of methods in
economic reform that must take into account the
unique features of a country, particularly in
terms of the level of economic development and
administrative capacity. The success also
depends on how carefully it is implemented, as
there is much potential for good or bad. It takes
time to develop the country’s rudimentary insti-
tutional infrastructure to run the operations of
securities markets.
The following recommendations are suggested.
They should not be taken as a blueprint but
rather as a general road map, which can be
revised as experiences are gained.
The successful development of securities
markets requires the existence of sufficient
62 R&D Management 15, 1, 2003
demand and supply of stocks. Demand for stocks
depends on the amount of capital available for
investment in the hands of individuals and insti-
tutions. The supply depends on the number of
companies willing to list their company to trade
shares publicly.
The first and foremost task in increasing the
demand for securities is to educate the public
about securities markets using the public
media. Organize forums where the business
community and the general public can learn
about the benefits and costs of investing in
securities markets. At the same time improve
the political and legal environment in order to
build the confidence first of the domestic busi-
ness community and then of the international
investors.
A legal system which not only allows for a
clear definition of the rights and responsibilities
of the contracting parties, but also provides for
cost effective enforcement of covenants. Through
its regulatory power, the government can do
much to reduce uncertainty by increasing infor-
mation flows, by punishing those who engage in
forbidden activities, and by taking measures to
enhance investor confidence. The securities laws
may be copied from countries with situations
similar to Ethiopia.
Another way of creating demand for
securities is lifting all the legal restrictions
from institutional investors like the largest gov-
ernment pension fund, public and private
insurance companies and credit unions so that
they can fully participate in the securities
markets.
As far as the supply side is concerned, move-
ment towards active private sector development,
in conjunction with enabling privatization
programs and liberalization of trade and capital
flows, will help boost the supply of securities.
The Ethiopian government can help this process
by using public offering of shares in future
privatizations of state enterprises. Although
the lack of dependable financial data poses
valuation problems, public offering of shares as
a modality of privatization would result in broad
ownership of firms. Broad ownership of firms
would give citizens a stake in the country’s
economy, thus reducing the resistance generated
by the discomfort of the layoffs due to privatiza-
tion and the suspicion that state enterprises are
being sold to individuals or groups with political
links to the ruling party. Other private firms may
also benefit from going public. The advanced
nations have a number of reasons why firms in
# Blackwell Publishing Ltd, 2003

general consider going public. Among these
reasons are:
* availability of significant funds for such pur-
poses as working capital requirements, devel-
opment of new products, expansion of existing
ones, paying off debt and for research and
development activities;
* a publicly traded company is in a more favor-
able situation to finance acquisitions with its
own stock as an alternative to using cash;
* issuance of equity would help expand debt
capacity thus allowing the firm to access
more readily available sources of debt at
attractive interest rates.
Many of these advantages also exist for com-
panies going public in Ethiopia. Experts believe
that the minimum number of issues required for
the successful institution of a stock market is 20,
each representing a ‘float’ of 25 per cent of enter-
prise capital (see Van Agtamael, 1984, p. 45).
Ethiopia definitely has more than 20 profitable
firms that can pay more in dividends than what
banks currently pay in interest.
Reducing government securities-holding
requirements by banks and savings institutions
would encourage government agencies and state
enterprises to issue bonds to raise capital in the
open market by offering attractive rates. The
banks and savings institutions would then be
able to invest in the securities markets, thus
creating demand. In order to avoid bank runs,
however, the government, through its regulation,
may limit the equity participation by banks and
savings institutions to protect depositors. Other
measures the government should take to encour-
age public ownership of private firms include tax
exemptions or reductions for income derived
from capital gains and/or dividends from stocks
issued by publicly traded companies.
Most importantly, the government should
help in the development of the debt market
by expanding auction programs for treasury
bills, and federal investment bonds, together
with the development of a framework for pri-
mary dealer networks in the secondary market.
Along with the public debt market, the corpor-
ate debt market, which will expand financing
options for private enterprises, needs to be
developed. The establishment of bond-rating
agencies will facilitate the development of the
debt market. This is important, because in
many countries the development of the bond
market precedes the development of the equity
markets.
# Blackwell Publishing Ltd, 2003
Developing Securities Markets in Ethiopia
Securities markets work most efficiently when
brokers, dealers and the like are knowledgeable,
professional, skillful, honest, and have sufficient
training and resources to perform these func-
tions. The government, among other things,
should permit private and state banks to act as
market makers until such time that the stock
exchanges start issuing licenses to dealers and
brokers. The government should enlist the ser-
vices of the International Finance Corporation
(IFC) for operational and technical advice in
training government staff and staff of financial
institutions (e.g. accountants, financial analysts
and lawyers) responsible for the operational,
supervisory and regulatory aspects of securities
markets activities. This would help in upgrading
the quality in terms of technical skills and analyt-
ical capacity of the personnel in the securities
markets business.
Furthermore, substantial banking sector
reform, including privatization of the largest
commercial bank, is necessary. It is also import-
ant to enhance the authority and capacity of the
central bank in order to improve the health and
competitiveness of the financial sector. For the
National Bank of Ethiopia to fulfill its role as the
monetary and supervisory authority more effect-
ively, its authority and capabilities may have to
be considerably enhanced by ensuring greater
autonomy and improving its technical capacity.
A vigorous and independent regulatory body is
essential for conducting monetary policy through
open-market operations and purely on economic
considerations.
The dissemination of market information is
another integral part of securities markets devel-
opment. Since the competition among developing
countries to attract foreign capital is very intense,
there is a need to make concerted efforts to dis-
seminate market information to potential invest-
ors abroad. A coherent and integrated strategy to
market the country based on providing pertinent
and timely information to the international
investors would help attract direct and indirect
(portfolio investment through an Ethiopian
country fund) investments and invigorate the
securities markets.
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 Developing Securities Markets in Ethiopia

Conference on Privatization and Public Enterprise tiable forms that are issued by corporations and
Reform in Ethiopia, pp. 181–99. governments through financial institutions directly
to individuals and different holders.
2. Capital markets include both securities markets and
Notes ‘non-securities markets’. Non-securities markets
provide non-negotiable medium- and long-term
1. Securities markets are markets that provide med- debt funds through financial institutions such as
ium- and long-term equity and debt funds in nego- commercial banks and savings and loan institutions.

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