Financial Market Reforms – the Key to Africa’s Strong Economic Future
By 2025, Africa’s booming population is expected to surpass China, vesting on its undeniable economic potential. As global growth is slowing, the world has started to identify the population boom in Africa and the opportunities presented by it.
Within a span of seven years from 2010-2016, over 320 embassies opened in Africa. The continent is also starting to receive global investment. An industrious approach can guarantee the conversion of these opportunities into great returns and profits. However, that is not the entire challenge.
In order to become a potential economic powerhouse, Africa will need to seriously consider the reformation of its financial markets. For Africa to grow, the financial markets should be broader and all-inclusive, aiding all investors. For the young Africans who decide where to invest their money, there are educational platforms like TradeForexSA, as well as the FSCA that regulate the information available to ensure it is accurate and not misleading.
The recently approved African Continental Free Trade Agreement proposes the creation of a single market having a GDP of US$2.5trillion and catering to 1.2 billion people.
However, to liberalize and reform the varied financial markets of Africa, individual countries need to contribute to the process. The involvement of other countries will be essential to nurturing financial inclusion, aid economic development and raise the capital required for infrastructural growth and business scalability.
Kenya, Botswana, South Africa, and Nigeria are some countries that have achieved steady progress towards the reform of their financial markets. South Africa, housing the Johannesburg Stock Exchange that is the largest exchange in Africa, booked the top slot in the Absa African Financial Markets Index for 2017 and 2018, both. While the index is representative of the commitment and progress towards reform, much work remains to be done.
Countries like Mozambique and Ethiopia lag behind the heftier markets of Kenya and Nigeria, specifically in developing a stock exchange, a necessity for raising capital. While a securities exchange is absent in Ethiopia, Angola’s exchange has no equities listed on it. The market capitalization is lower than 5 percent of the GDP in both Mozambique and Cameroon.
South Africa is the only country on the continent where the aggregate value of the listed securities crosses the $100billion mark, standing at $1.1trillion. The only countries with a market cap over 100 percent of the GDP are Ghana, South Africa, and Botswana. In 14 other countries, this rate stands below 50 percent.
The crying needs of the continent for funds to bridge the education and infrastructure gaps can be tackled through accelerated reforms of the financial markets. These reforms can also act as a catalyst for the positioning of capital markets as platforms for mobilization of funding needed to support the growth of both small and medium-sized sectors, in a low-risk environment.
Africa’s transformation needs trillions of dollars for improving water, electricity, and roads in the coming twenty years. For example, the continent needs to raise approximately US$55billion annually to achieve access to universal energy by 2025. For funding of other infrastructure projects in the continent, a further capital of US4$50billion is required.
African countries that are executing policies to boost integration of stock market and boost expansion, they are hurdled by obstacles like low liquidity, low product diversity, limited scope for new listings and too many administrative procedures and controls in foreign exchange markets.
But there are positive outcomes too. Several countries have been able to switch to foreign exchange rules determined by the markets, implement local content regulations and create regulated and transparent capital markets, supported by a better tax environment.
This is key to encourage domestic involvement in the capital markets, attract foreign investment and aid the development of domestic capital markets. The enhanced financial inclusion due to improved designing, execution, and regulation of financial savings institutions is also impressive, widening the opportunities for residents to participate in capital markets.
African countries need to prioritize policies to simplify investor participation in markets to accelerate its reform of financial markets. For instance, the trading and clearance infrastructure needs attention to stimulate liquidity while simultaneously ensuring transparency and timeliness of market data.
This will make Africa’s financial markets more competitive and make the continent in a better position to attract global capital.
The benefits of liberalizing the financial markets are sure; being the main reason behind the GDP per head in regions south of the Sahar being two-fifths more than 2000.
As many countries are withdrawing into protectionism, the world awaits the liberalization of African markets. Powered by diligent reforms of the financial market structure, Africa can transform its economic future and the lives of millions.