9 September 2017

Ethiopia: To Disintangle ECX From the Agriculture Mentality


In the land of the living, we are eternally yearning for change. But change, especially for the better, does not come our way as frequently as we would like it to. When a change occurs, it rarely endures a timely challenge beyond which to renew its relevance.

The Ethiopian Commodity Exchange (ECX) is a case in point. Whether or not the recent corporate initiative revealed through ECX's strategic intent to stretch and maintain a widened scope is a milestone worth cherishing, we cannot ascertain until a change has been realized.

The Ethiopian Commodity Exchange, the first of its kind in Ethiopia, has been a platform for an organised marketplace mainly benefiting smallholder farmers to trade and export their agricultural products to the wider and most reliable markets. The number of its warehouses across the country continues to rise. Still, ECX is a loner and maintains its comfort zone in Addis Ababa.

The ECX should by now have been able to replicate its successful practices across other major regional cities in the country as well as diversifying the cash crops and other goods and services for exchange in the marketplace. This would mean an inclusive marketplace that enables traders from diverse sectors to trade with more than grain-based commodities pulled from the agricultural sector. That could also mean paving a path to the changes coming through a widened performance scope. After all, the ECX is a year shy of marking its 10th year anniversary.

In 2008, when the ECX was established, it had at its helm the Stanford educated former economist for the World Bank, Eleni Gabre-Medhin (PhD). When I heard of this first, I enthusiastically sipped from a glass half full, hoping that the path for securities exchange marketplace would soon be a reality in Ethiopia, as this would have been another answer to the misfortunes of our past, and also our present.

In the past, we have had changes that ushered us from absolute monarchy to a communist totalitarianism. The combined tenure of the last Emperor and the Dergue spanned six decades, only to have crashed and died soon after. And our hope for a free market economy was revived by the coming of a new administration a quarter of a century ago.

At that time, many thought the era of small changes, confined to the spirit of a glass half empty, would be replaced with a glass half full psyche. After 26 years, the more things seemed to change, the more they remained the same. As a nation, we have not made changes to engineer a genuinely free market economy, nor did we see our lone ECX evolve thoroughly enough to trigger changes that could pave a new future during the nine years of its existence.

In the past nine years, instead of the ECX being stuck on commodities from just one sector, it should have diversified to allow other private sectors to partake in the trading. One path to such changes for ECX was to evolve into a securities exchange.

If ECX's mission is only trading in food related security, it will not live up to its primary objective. For without a free market in which the various economic actors representing the diverse private sectors take lead roles in transforming the ECX, we would have to start all over again. But, there are still many ways to set the new paths. For instance, learning from the experience of the Nairobi Securities Exchange and tailoring it in our contexts is worth the effort.

What began as a voluntary association of stockbrokers registered as the Nairobi Stock Exchange in the mid-1950s, it underwent numerous changes before it was renamed as the Nairobi Securities Exchange (NSE) about six years ago. With it, according to the NSE's sources, the change in name revealed the strategic plan of a widened scope of NSE to evolve into a full-service securities exchange, which supports trading, clearing and settlement of equities and other associated instruments across a broad range of sectors. More than one dozen sectors, including agriculture, brought a multitude of companies to be listed on the NSE, as opposed to the case of the ECX that was initiated and founded by Eleni.

Before formally launching the ECX, Eleni had delivered an important speech at an official TED Conference in June 2007, a media organisation which posts and offers live streaming of innovative ideas. There, she emphasised the importance of the private market in economic development. She sounded optimistic about the possibilities for African countries to privatise certain sectors.

"That business is agriculture," she underlined as an important part of her speech.

The former chief executive officer (CEO) of the ECX had her vision confined to the agricultural sector. The ECX has been able to enhance the livelihoods of more than a million smallholder farmers in Ethiopia. This is a commendable contribution in the equation of our economy. The ECX has also set a learning curve for some countries in Africa. However, it mostly remains state-controlled and after nine years, it still has cooperatives and companies listed on the exchange that trade in only agriculture commodities.

But is it not time for Ethiopia to have an exchange marketplace largely independent of the state? Has the time not come for the ECX to get a makeover in structure and evolve into an exchange market place, where securities of all kinds, including stocks and bonds as well as commodities and other financial instruments belonging to every sector, are traded?

Primarily though, it is important to understand the differences and the similarities between the exchanges in commodities and stocks. Their varied impact on the economy can be the source of change for the country.

We also find a striking dichotomy between commodity and stock exchange. Experts in the field describe the differences in the blog Expert Sources as follows.

Markets for stocks and commodities are not structurally dissimilar. In fact, it is universally defined that, like the stock market, the commodity market is a financial institution. However, their differences hinge on the diversities and types of goods traded on their respective marketplaces. It means that in case of stock markets, shares and stocks of companies are sold and bought. While in commodity markets, traders deal with the shares of raw materials to be used for manufacturing other goods, including traders, who sell cash crops or food supply.

Commodities such as coffee beans, sesame seeds, navy beans, maize and wheat are typical grains for trading in the case of the ECX. Even so, many financial analysts have given a thumbs-down to the progress being made by ECX, thus far, as it has focused only on one sector. And yet, they also weigh in the unique challenge the ECX is facing in the absence of inclusiveness in its trading and investment scope across multiple sectors.

Nayna Bhardwaj, a financial analyst, who authored numerous articles on stock markets, argues that despite their similarities for being investment assets in which the investors and traders can invest their funds by purchasing or selling, commodity and stock markets strikingly differ. For instance, in a commodity market, it is either buying or selling that takes place. While in the stock market, both buying and selling could happen in tandem. He further noted that in order to gain profit and earn good returns, what they call 'intraday' is very helpful for trading in stock market.

In one of his earlier articles, Chuck Kowalski, who has expert knowledge in the field, wrote about the history of commodity trading that goes back 150 years in the US, and yet he explored some evidence of a similar undertaking in Japan that could go as far back as a thousand years. Countries with a long history of successful exchange markets have changed to a more diversified securities exchange to build on their free market economy. In all cases, there has not been one change that went unchallenged to get where each has to get to.

The challenge faced with the ECX model of a singular sector marketplace will continue to manifest sluggishness in the future. That is until multiple sectors diversify trading in commodities, stocks and other investment assets.


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