Business
Harnessing stock exchanges in Africa to promote growth
Yet Isimbabi’s study, published in the US-based Johns Hopkins University’s SAIS Review, concluded that notwithstanding these criticisms, there is strong evidence that a stock market can be an essential part of a developing economy. A number of studies by the IMF also arrived at the same conclusion: if supported by the right policies and reforms, stock markets can help African companies expand operations, in turn contributing to economic growth.
Increased investment flows
Luckily, environments favorable to the growth of stock exchanges are beginning to take root in Africa. Political stability now exists in many countries — despite recent setbacks in Mali and Guinea-Bissau — even in post-conflict countries like Liberia, Sierra Leone and Côte d’Ivoire. In its latest survey, the Mo Ibrahim Foundation, a group that supports good governance in Africa, says that “political stability in sub-Saharan Africa has dramatically improved in recent years.”
Sound economic policies and accountable institutions too are a must. Along with political stability, the World Bank’s 2012 Global Economic Prospects report attributes increased investment flows to Africa to higher commodity prices and improved macroeconomic stability. Rwanda, for instance, is now one of Africa’s fastest-growing economies, thanks to its pro-business policies and a positive investment climate. South Africa — and to some extent Kenya — have a long history of investor-friendly policies. And the continent’s sleeping giant, Nigeria, even in the face of current bombings by the Boko Haram group, is gradually getting its act together, guided by reformist finance minister and former World Bank managing director Ngozi Okonjo-Iweala.
In contrast, countries with high levels of risk, such as weak investment laws or lack of respect for property rights, have learned the hard way. Zimbabwe comes to mind. Uncertainty over the direction of its economic policies has seen the Zimbabwe Stock Exchange, once one of Africa’s biggest and most active, shrink in both size and value.
The small size of African stock markets and the absence of liquidity are often cited by foreign investors as the major impediments to investing in the region. Experts have recommended merging them into regional exchanges as one solution. “A regional exchange should mean more liquidity, the lifeblood of exchanges — by making stocks available to a wider range of investors,” argues The Economist, a British weekly magazine.
