In a monumental stride forward for its economic liberalization and financial modernization, Ethiopia today officially launched its long-awaited securities exchange. This historic event marks the introduction of a secondary market for government treasury bills (T-bills) in electronic form, signaling a profound transformation in how the nation mobilizes domestic capital and integrates into the global financial landscape.

The milestone ceremony, held at the prestigious Sheraton Addis Hotel, was a collaborative effort involving the National Bank of Ethiopia (NBE), the newly established Ethiopian Capital Market Authority (ECMA) – the primary regulator – and the Ethiopian Securities Exchange (ESX), the market operator. The event brought together a distinguished gathering of senior financial policymakers, prominent bankers, and key market participants, who collectively marked the launch by ringing the ceremonial opening bell, a symbolic gesture signifying the dawn of a new financial era for the Horn of Africa nation.

The new platform represents a major step towards modernizing Ethiopia’s financial infrastructure. Previously, T-bills were issued and settled through cumbersome physical certificates, limiting their accessibility and liquidity. The transition to electronic trading is set to revolutionize this process, offering unprecedented efficiency and transparency.

“This is a historic shift in how Ethiopia mobilizes domestic capital,” declared Finance Minister Ahmed Shide at the event, underscoring the profound implications of the launch. He emphasized that electronic T-bill trading will not only offer investors better yield opportunities but also equip the government with more efficient tools for managing public finances and implementing monetary policy. Echoing this sentiment, National Bank Governor Mamo Mihretu highlighted that traditional funding sources such as taxes, loans, and grants have proven inadequate to meet the country’s ambitious long-term development needs, thereby underscoring the critical importance of deepening local capital markets.

The inaugural trading session saw Gadda Bank and Wegagen Bank, the first two institutions officially registered as ESX trading members, jointly ring the opening bell. Their pioneering involvement signals the central role commercial banks are expected to play in developing Ethiopia’s nascent securities market, acting as crucial intermediaries between the exchange and investors.

The Long Road to Financial Liberalization: Ethiopia’s Economic Reforms

The launch of the Ethiopian Securities Exchange is the culmination of years of meticulous planning and a cornerstone of Ethiopia’s broader economic reform agenda. Historically, Ethiopia operated under a largely state-controlled economy, with limited private sector participation and underdeveloped financial markets. However, under the leadership of Prime Minister Abiy Ahmed, the country embarked on an ambitious journey of economic liberalization, aimed at opening up key sectors to private investment, fostering competition, and stimulating growth.

This reform drive, often referred to as “Homegrown Economic Reform,” recognized that a vibrant capital market is indispensable for sustainable economic development. It provides a mechanism for businesses to raise long-term capital, for investors to diversify their portfolios, and for the government to manage its debt more efficiently. The absence of a formal securities exchange meant that companies largely relied on bank loans or retained earnings for financing, limiting their growth potential and stifling innovation.

A pivotal step in this journey was the promulgation of the Capital Markets Proclamation No. 1248/2021 in July 2021. This landmark legislation laid the legal and regulatory framework for the establishment of a capital market in Ethiopia. It provided for the creation of the Ethiopian Capital Market Authority (ECMA) as the primary regulator and the Ethiopian Securities Exchange (ESX) as the operational platform. The proclamation was meticulously drafted, drawing lessons from other emerging markets and incorporating international best practices to ensure a robust and transparent market.

The process involved extensive consultations with local and international stakeholders, including the International Finance Corporation (IFC) – a member of the World Bank Group – which provided technical assistance and advisory support. The IFC’s involvement underscored the international community’s confidence in Ethiopia’s reform trajectory and the potential of its burgeoning economy.

Electronic T-Bill Trading: A Foundational Step Towards Market Depth

The decision to commence trading with government treasury bills (T-bills) is a strategic and prudent move for the nascent ESX. T-bills are short-term debt instruments issued by the government to raise funds for its immediate financial needs. They are considered low-risk investments because they are backed by the full faith and credit of the government.

Traditionally, T-bills in Ethiopia were issued through a primary auction system, and their trading in the secondary market was largely informal, cumbersome, and illiquid, relying on physical certificates. This meant:

• Limited Liquidity for Investors: Once purchased, it was difficult for investors to sell their T-bills before maturity, trapping their capital.
• Lack of Price Discovery: Without a formal secondary market, the true market value of T-bills was not transparently determined, leading to inefficiencies.
• High Transaction Costs: Manual processes involved significant administrative overheads.

The transition to electronic T-bill trading on the ESX addresses these inefficiencies directly:

• Enhanced Liquidity: Investors can now easily buy and sell T-bills on the secondary market before maturity, providing them with greater flexibility and access to their capital. This increased liquidity makes T-bills more attractive as an investment.
• Transparent Price Discovery: The electronic platform facilitates real-time bidding and offering, allowing market forces to determine fair prices for T-bills, benefiting both buyers and sellers.
• Reduced Transaction Costs and Increased Efficiency: Automation streamlines the trading and settlement process, significantly reducing manual errors and administrative burdens.
• Wider Investor Participation: The ease of electronic trading is expected to attract a broader range of investors, including individuals, pension funds, insurance companies, and other financial institutions, deepening the pool of domestic capital.

For the government, electronic T-bill trading offers substantial benefits in public finance management:

• Efficient Borrowing: The government can raise funds more efficiently and at potentially lower costs due to increased competition among buyers and improved market liquidity.
• Monetary Policy Tool: The National Bank of Ethiopia (NBE) can use the T-bill market as a more effective tool for implementing monetary policy. By influencing T-bill yields, the NBE can manage liquidity in the financial system, control inflation, and guide interest rates across the economy. This provides the central bank with greater control over macroeconomic stability.
• Transparency and Accountability: An electronic, regulated market enhances transparency in government borrowing, fostering greater accountability.

The Ethiopian Capital Market Authority (ECMA): The Guardian of the Market

The establishment of the Ethiopian Capital Market Authority (ECMA) is a cornerstone of the new financial architecture. ECMA is the independent regulatory body tasked with overseeing the development and operation of Ethiopia’s capital markets. Its mandate is broad and critical for building investor confidence and ensuring market integrity.

ECMA’s key responsibilities include:

• Licensing and Authorization: Granting licenses to market participants, including the ESX itself, brokers, dealers, investment advisors, and fund managers, ensuring they meet stringent eligibility criteria.
• Regulation and Supervision: Developing and enforcing rules and regulations for market conduct, trading, clearing, and settlement. This includes rules on disclosure, insider trading, and market manipulation to ensure fair and orderly markets.
• Investor Protection: Safeguarding the interests of investors through robust regulatory frameworks, investor education initiatives, and mechanisms for dispute resolution. This is paramount for attracting both domestic and international capital.
• Market Development: Fostering the growth and development of the capital market by promoting new products, encouraging listings, and enhancing financial literacy.
• International Cooperation: Collaborating with international regulatory bodies to align Ethiopian capital markets with global standards and facilitate cross-border investment.

The presence of a strong, independent regulator like ECMA is crucial for the success of any emerging market. It provides the necessary oversight to prevent abuses, maintain stability, and build trust among participants, which is essential for attracting both local and foreign investment.

The Ethiopian Securities Exchange (ESX): The Engine of Capital Formation

The Ethiopian Securities Exchange (ESX) is the operational platform for Ethiopia’s capital market. It is structured as a public-private partnership (PPP), a model designed to leverage the efficiency and expertise of the private sector while ensuring alignment with national development goals. This hybrid ownership structure typically involves government entities (like the Ethiopian Investment Holdings) holding a significant stake alongside private investors, including international exchange operators or financial institutions. This blend is intended to bring in global best practices, technology, and capital.

The ESX’s development is planned in a phased approach, reflecting a cautious yet ambitious strategy:

1. Phase 1: Government Treasury Bills (Current Focus): As launched, the initial focus is on electronic trading of T-bills. This allows the market to establish core infrastructure, test systems, and build operational experience with a relatively low-risk asset class.
2. Phase 2: Corporate Bonds: Following the successful establishment of the T-bill market, the ESX plans to introduce trading in corporate bonds. This will enable Ethiopian companies to raise debt capital directly from the market, reducing their reliance on traditional bank loans and diversifying their funding sources. This is a critical step for private sector growth.
3. Phase 3: Equities (Shares): The ultimate goal is to launch an equities market, allowing companies to list their shares and raise equity capital from a broad base of investors. This will provide a vital avenue for Ethiopian businesses, from established enterprises to promising startups, to fund expansion, innovation, and job creation. It will also offer investors opportunities to participate in the growth of Ethiopia’s private sector.

The ESX’s role extends beyond merely providing a trading platform. It is envisioned as a central pillar for:

• Facilitating Capital Formation: Connecting businesses that need capital with investors who have capital to deploy, thereby driving economic growth.
• Promoting Corporate Governance: Companies seeking to list on the ESX will be required to adhere to stringent disclosure and governance standards, fostering greater transparency and accountability within the corporate sector.
• Providing Investment Opportunities: Offering a diverse range of financial instruments for both domestic and international investors, enabling portfolio diversification and wealth creation.
• Benchmarking and Valuation: Providing transparent pricing and valuation for listed securities, which can serve as benchmarks for the broader economy.

Broader Economic Implications: A Catalyst for Growth

The launch of the ESX and the development of Ethiopia’s capital market are expected to have profound and far-reaching economic implications:

• Enhanced Domestic Capital Mobilization: By providing attractive investment opportunities, the ESX can tap into Ethiopia’s significant domestic savings pool, including funds from pension schemes, insurance companies, and individual investors. This localized capital can then be channeled into productive investments, such as infrastructure projects (like roads, energy, and telecommunications), industrial expansion, and agricultural development. This reduces the country’s reliance on volatile foreign loans and grants, fostering greater financial self-reliance.
• Attracting Foreign Direct Investment (FDI): A developed and well-regulated capital market signals financial sophistication, transparency, and stability to international investors. This makes a country more attractive for foreign direct investment, as foreign companies can more easily raise capital locally, repatriate profits, and perceive a more robust financial ecosystem. FDI brings not only capital but also technology, expertise, and management best practices.
• Stimulating Private Sector Growth: The ESX will provide a vital platform for Ethiopian companies to raise both debt and equity capital for expansion, innovation, and job creation. This is particularly crucial for small and medium-sized enterprises (SMEs), which often struggle to access traditional bank financing. A liquid stock market also provides an exit strategy for private equity and venture capital investors, encouraging more risk capital to flow into the economy.
• Supporting State-Owned Enterprise (SOE) Privatization: As part of its reform agenda, Ethiopia is looking to privatize some of its large state-owned enterprises (SOEs) in sectors like telecommunications, logistics, and energy. The ESX can serve as an ideal platform for listing these SOEs, allowing for transparent and broad-based ownership, and generating significant revenue for the government.
• Strengthening Monetary Policy Effectiveness: As mentioned by Governor Mamo Mihretu, the NBE can use the T-bill market to influence interest rates and manage liquidity. A deep and liquid bond market allows the central bank to conduct open market operations more effectively, thereby enhancing its ability to control inflation and maintain macroeconomic stability.
• Improved Corporate Governance: Companies seeking to list on the ESX will be required to adhere to stringent disclosure, transparency, and corporate governance standards. This will foster better management practices, greater accountability to shareholders, and ultimately more efficient and ethical businesses across the economy.

Challenges and Opportunities for Ethiopia’s Nascent Capital Market

While the launch of the ESX is a cause for celebration, Ethiopia’s capital market journey will undoubtedly face challenges, alongside immense opportunities.

Challenges:

• Investor Education and Financial Literacy: A significant portion of the Ethiopian population may lack familiarity with capital market investments. Extensive investor education campaigns will be crucial to build trust and encourage participation, particularly among retail investors.
• Liquidity and Market Depth: Initial trading volumes might be low, especially for equities, until more companies list and investor confidence grows. Building sufficient liquidity will require continuous effort from the ESX and market participants.
• Regulatory Capacity: ECMA will need to continuously build its capacity to effectively regulate a rapidly evolving market, keep pace with international standards, and address new challenges like cyber security and market manipulation.
• Corporate Governance Standards: While listing requirements will promote better governance, ensuring consistent adherence and enforcement across all listed entities will be an ongoing task.
• Global Market Volatility: As an emerging market, Ethiopia’s capital market will be susceptible to global economic shocks and investor sentiment shifts, which can impact capital flows.
• Competition from Informal Markets: In economies where formal financial markets are nascent, informal lending and investment channels often thrive. The ESX will need to demonstrate its superior benefits to attract capital away from these alternatives.

Opportunities:

• Large Untapped Domestic Market: Ethiopia boasts a population of over 120 million people, a vast domestic market with growing incomes, representing a significant source of potential investors and consumers.
• Significant Economic Growth Potential: Ethiopia has historically been one of Africa’s fastest-growing economies. The capital market can unlock further growth by facilitating investment in productive sectors.
• Strategic Location: Its position in the Horn of Africa provides strategic access to regional markets.
• Young and Growing Population: A large youth demographic offers a demographic dividend, providing a growing workforce and consumer base for decades to come.
• Diaspora Engagement: The Ethiopian diaspora represents a significant source of potential investment, and a formal capital market can provide structured avenues for their participation.

The Pivotal Role of Commercial Banks

The involvement of Gadda Bank and Wegagen Bank as the first two registered ESX trading members is highly significant. Commercial banks are expected to play a multifaceted and central role in developing Ethiopia’s emerging securities market:

• Primary Dealers and Brokers: Banks will act as primary dealers for government securities, participating in T-bill auctions and making markets in the secondary trading. They will also serve as brokers, facilitating trades for their clients (both institutional and retail investors).
• Custodians: Banks will provide custodial services, holding securities on behalf of investors, ensuring their safety and facilitating settlement.
• Investment Advisors: Leveraging their client relationships, banks can offer investment advisory services, guiding clients on participation in the securities market.
• Financial Intermediation: Banks remain crucial for traditional lending, but their participation in the capital market allows for a broader range of financial intermediation, channeling funds from savers to borrowers through diverse instruments.
• Product Development: As the market evolves, banks may develop new financial products and services linked to the securities exchange, such as mutual funds, pension funds, and wealth management solutions that incorporate listed securities.
• Market Liquidity Providers: Through their trading activities, banks contribute significantly to market liquidity, ensuring that there are always buyers and sellers for securities, which is vital for efficient price discovery.

Their deep client networks and existing financial infrastructure make them indispensable partners in fostering market participation and growth.

Lessons from Regional Markets: A Path to Growth

Ethiopia’s journey into formal capital markets can draw valuable lessons from other African exchanges. The Nairobi Securities Exchange (NSE) in Kenya, the Johannesburg Stock Exchange (JSE) in South Africa, and the Egyptian Exchange (EGX) in Egypt, among others, have undergone similar developmental phases. Key takeaways include:

• Phased Development: Starting with simpler instruments (like T-bills or government bonds) before moving to more complex ones (equities, derivatives) is a common and effective strategy.
• Strong Regulatory Framework: A robust and independent regulator is paramount for building trust and attracting investment.
• Investor Education: Continuous and comprehensive investor education programs are essential for fostering a broad and informed investor base.
• Technology Adoption: Investing in modern trading, clearing, and settlement systems is crucial for efficiency and international competitiveness.
• Regional Integration: Exploring linkages with other African exchanges can enhance liquidity and attract cross-border investment.

Ethiopia’s unique context, including its large population and significant untapped economic potential, positions its new securities exchange for potentially rapid growth, provided it effectively navigates the initial challenges and builds on these foundational steps.

Conclusion: A New Chapter for Ethiopia’s Economy

The official launch of Ethiopia’s first securities exchange is more than just a ceremonial event; it marks the opening of a new chapter for the nation’s economy. By establishing a formal, electronic secondary market for government treasury bills, Ethiopia has taken a decisive step towards modernizing its financial infrastructure, deepening its capital markets, and enhancing its capacity for domestic capital mobilization.

This initiative is poised to unlock new avenues for investment, stimulate private sector growth, and provide the government with more sophisticated tools for economic management. While challenges lie ahead in building market depth and fostering widespread participation, the strategic vision and collaborative efforts of the National Bank of Ethiopia, the Ethiopian Capital Market Authority, and the Ethiopian Securities Exchange lay a robust foundation. The ESX is set to become a vital engine for economic transformation, connecting capital with opportunity and contributing significantly to Ethiopia’s ambitious development goals for generations to come.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

14th July, 2025