The document discusses capital market development in East Africa under the Homegrown Economic Reform Program (HERP). It outlines two phases of reform: developing a competitive treasury bills market and establishing a stock exchange. For phase one, the necessary legal and regulatory frameworks for treasury bill auctions are in place and the first competitive auction was conducted. For phase two, preliminary assessments show the need to develop legal/regulatory frameworks and market infrastructure like a registry before establishing a stock exchange. Capacity building efforts are ongoing for both the central bank and private sector.

1. Capital Market Development under the
Homegrown Economic Reform Program
The 4th Annual East Africa Finance Summit
December 4, 2019
Addis Ababa

2. Outline
 The Homegrown Reform Program
 Developing Financial Markets: Overview
 Phase 1: Developing a Competitive T-bills Market
 Phase 2: Establishing a Stock Exchange

3. Home Grown Economic Reform
Program (HERP)

4. HERP: Rational
 Building on the success of the past
 Addressing emerging challenges
 Creating new opportunities
 Upgrading the policy and institutional frameworks

5. HERP: Key Pillars
Macroeconomic
reforms
Macroeconomic
reforms
Macroeconomic
reforms
Structural reforms
Macroeconomic
reformsSectoral reforms
Ease business
constraints
Address sector-specific
institutional and market
failures
Control inflation
Improve access to finance
Ensure debt sustainability
Build
confidence
Rebalance
growth and
enhance
productivity
 Jobs
 inclusive
growth
 Poverty
reduction
 Creating a
path to
prosperity
Correct FX imbalances

6. HERP: Why Does Developing Capital Markets Matter?
 Access to finance is one of the key bottlenecks to business and productivity growth
 Capital markets help mobilize domestic savings
 Creating liquidity
 Reducing the need for reliance on foreign capital
 Capital markets channel domestic savings into projects and companies based on
market principles
 Improving efficiency of resource allocation
 Capital markets provide the long-term capital that businesses need to invest and
expand
 All of which would help achieve the HERP’s objective of rebalancing growth and
enhancing productivity

7. Developing Financial Markets: Overview

8. Structure of Financial Markets
Financial
Markets
Based on
maturity
structure
Money
markets
Capital
markets
Based on
trading
structure
Primary
markets
Secondary
markets
Markets where financial assets
(securities) are issued and traded
For trading short-term
debt instruments.
E.g. T-bills, Repos,
commercial papers
For trading long-
term securities.
E.g. equities, bonds,
mortgage-backed
securities
Where new
securities are
issued and sold.
Where already
issued securities
are traded.

9. Ongoing reforms to foster development of
financial markets
Liberalization
Repealing the NBE bill
Opening the financial sector to
the Diaspora
Market Development- phase I
Launching a competitive T-bills
market
Introducing liquidity management
NBE instruments
Facilitating development of
interbank money markets
Market Development- phase 2
Developing secondary T-bills
markets
Launching stock exchange
Developing bond markets
Modernizing the Financial Market Infrastructure
Upgrading the Financial Regulatory and Safety Nets Frameworks
Macroeconomic stabilization

10. Phase 1 Developing a Competitive T-bills
Market

11. What are Treasury bills?
 Government debt with maturity less than one year.
 Typical maturities are 28- , 91-, 182-, and 364 days.
 They are discount securities, no coupon payments
 The most marketable and traded money market
instrument.

12. Rational for developing a competitive T-bills market
Market development
• Foster price discovery
• Benchmarks for asset pricing
• Starting point for
development of all other
financial markets
• Mobilize savings
• Improve efficiency of capital
allocation
Government
• Non-distortionary means of
budget financing
• Reduce reliance on foreign
debt
• Facilitate monetary policy
operation
• Improve monetary policy
transmission
Financial investors/Banks
• Portfolio diversification
• Low risk investment
opportunity
• High-return liquid asset
• Qualify for liquidity
requirement
• Can be used as collateral

13. T-bills Market in Ethiopia: Historical Background
 Started in 1995:
 With the issuance of 91 days T-Bill,
 Auction was conducted monthly
 T-bills with maturity of 28-days, 182-days and 364-days were introduced subsequently,
 Frequency increased to weekly issuance over time.
 NBE issued a formal T-bills directive in 2011
 Has not reflected market fundamentals, especially since 2008
 The returns on investing on government securities (T-bills) is very low
 Participation is limited to very few public institutions
 Pension funds became captive investors while private banks dropped out more recently

14. Readiness for a competitive T-bills market
Legal and regulatory framework
•Procl. 263/1969 on issuance of T-bills
and bonds
•Procl. 591/2008 authorizes the NBE to
manage and sell T-bills/bonds
•NBE Directive TRB/001/2011 on issuance
and trading of T-bills
•Procl. 718/2011 authorizes the NBE to
act as provider of critical infrastructure
for payments, clearance and
settlement of government securities
•Guideline on T-bills auction prepared
and circulated to fin. Institutions.
Financial market
infrastructure
•An online auction portal launched
•NBE’s Quantum Core Banking System
enabled to automatically process
auction and determine allocation
•Manual book entry system for
depository of securities
•NBE exploring to develop CSD and
trading platform
Institutional and human
capacity
•Leveraging NBE’s well established
institutional capacity
•A team of capital market advisors
with international experience
embedded within the NBE
•A capital market working group
established
•Capacity building of the working
group

15. Readiness for a competitive T-bills market
The first competitive T-bills auction was
conducted this morning!

16. Phase 2 Developing Stock Exchanges

17. Historical background
 Imperial period
 A small share trading activity under the regulatory auspices of the NBE
 Over the counter deals intermediated through the AA Share Dealing Group, AA Bank,
CBE and the Ethiopian Investment Corporation
 Derg regime
 Nationalised private companies and dissolved the share dealing group
 Government took control of major economic activities
 EPRD: 1991-2017
 Government encouraged private sector, but maintained control a heavy hand,
 Primary equity market emerged with corporations established by issuing equity shares
 However, the government remained reluctant on the issue of a stock exchange

18. Current Administration
 Rebalancing the roles of the public and private sector
 Creating enabling environment for market developments
 A stable macroeconomic environment
 Privatization agenda
 Upgrading regulatory frameworks
 Phasing out financial repression
 Capital market development and establishing stock exchange are key priorities of
the HERP

19. Preliminary internal assessment shows need for establishing a solid
legal, infrastructure, and institutional bases
Legal and regulatory
framework
•Procl. 166/1969 establishes a
minimum legal basis
•However, no specific legislation or
regulatory policy on stock
exchanges
•Need to establish a regulatory
agency or commission, which will
have the authority to (among
others):
• Set out rules on exchange,
disclosure, and insider trading
rules;
•Issue listing requirements and
guidelines;
•Oversee the exchange market
and clearing institutions;
•Investigate wrong doings,
adjudicate complaints, and refer
criminal cases to the appropriate
court when necessary.
Market infrastructure
•Need to build a central
registry/depository, clearing,
and settlement infrastructure
•Need a trading platform
Institutional and
human capacity
•Need for a regulatory
agency/commission staffed with
adequately skilled human
resources
•
•Independent and strong
governance structure

20. Ongoing work
 Capacity building
 Capital market advisors with international experience providing on-job training to the
NBE and MoF capital markets working group
 Workshops and exchange programs with Kenyan capital markets and institutions
 Although capacity building currently focuses on the NBE and MoF, this will be
transferred to the new agency when established
 Capacity building initiative also targets the private sector
 Trainings and certification program being arranged with the Chartered Institute of
Securities and Investment (CISI)
 An international consulting firm about to launch a feasibility/scoping study for stock
exchange
 Exploring with international partners on the possibility of supporting the
establishment of the technological infrastructure (CSD and trading platform)

21. Thank You

22. Annex Slides

23. 17
Access to finance is one of the key bottlenecks to doing business in Ethiopia
1.7
3.9
4.6
5.8
6.6
7.1
7.6
9.9
10.1
40.4
0 10 20 30 40 50
Poorly educ. work force
Transportation
Access to land
Informal sector
Tax administration
Corruption
Tax rates
Trade regulations
Electricity
Access to finance
Source: The World Bank’s Enterprise Survey (2015).
Percent of firms identifying the following as the biggest
obstacles to business
0 5 10 15 20
Crime and theft
Government instability
Restrictive labor regulation
Tax regulations
Policy instability
Tax rates
Inadequate educated labor
Poor work ethic of workers
Inflation
Inadequate infrastructure
Inefficient gov. bureaucracy
Access to financing
Corruption
FX regulation
Most problematic to doing business
Source: Global Competitiveness Report (2018).