The capital market is expected to see substantial growth in size and investment over the next four years, contingent on favourable macroeconomic conditions and successful policy implementations, according to a market size estimation study published by the Ethiopian Capital Market Authority (ECMA). The study, titled "Potential Market Size Estimation & Projection for the Developing Ethiopian Capital Market," was prepared by economists Tewodros Mekonnen Gebrewolde (PhD) and Getachew Ahmed Abegaz. It provides an in-depth analysis of Ethiopia's capital market potential by 2028, examining key macroeconomic variables such as GDP, national and financial savings, interest rates, and inflation rates to assess prospects for the country's debt and equity markets.

The study outlines three scenarios for the future of Ethiopia's capital market. According to Tewodros, the baseline scenario assumes no consequential policy changes, while the other two envision different outcomes based on varying economic conditions. The second scenario, which projects the most growth, relies on the successful implementation of reforms like the Home-grown Economic Reform (HGER) 2.0 plan, an improved investment and trade climate, macroeconomic stability, and increased productivity. Conversely, the third scenario assumes economic setbacks due to internal or external shocks, such as fuel price hikes, natural disasters, or intensified conflicts, which could hinder the development of the capital market.

All three scenarios predict an increase in national savings, albeit at different rates. The second scenario projects national savings to reach 4.6 trillion Br, with a faster annual growth rate. This growth would reduce dependence on foreign debt, enable more public investment, and create a larger pool of resources for the capital market, potentially lowering costs and attracting a diverse range of investors.

"Economic growth over the last few decades has not been matched by stability," Tewodros told Fortune. "The pace and extent of growth depend heavily on the successful implementation of reforms aimed at achieving macroeconomic stability, improving the investment climate, and promoting financial inclusion."

He emphasised that long-term investment and savings require a well-functioning capital market to meet growing demand, supported by a favourable environment and effective policy implementations. Tewodros also underscored the importance of the floating foreign exchange market and other reforms as critical to enhancing the capital market.

The projection aligns with the National Bank of Ethiopia's (NBE) three-year strategy, which aims for a market-based monetary system focusing on price and financial stability, financial inclusion, digitisation, and strong governance. The NBE's measures to reduce inflation to 20pc by June 2024 and below 10pc by the following year include capping credit growth to 14pc of previous loan disbursement levels, limiting direct advances to the government to a third of previous levels, and raising the interest rate at the NBE’s emergency lending facility from 16pc to 18pc.

However, Tewodros cautioned that challenges remain. The current fiscal imbalance is a concern, with a declining tax-to-GDP ratio indicating that the government is not generating sufficient revenue to finance its spending, leading to heavy reliance on borrowing to fill the gap. However, he believes higher gross national savings envisioned under the second scenario could offer several economic benefits, including reduced dependence on foreign borrowing, increased government investment in infrastructure and public services, and overall economic growth and improved living standards.

The government's recent macroeconomic reforms are anticipated to contribute to the growth of the capital market through increased foreign direct investment and improved liquidity.

According to Yohannes Arega, a senior advisor and chief of staff at the Authority, the study provides a better understanding of the current market dynamics, ensuring a smooth transition by identifying potential risks and opportunities.

"It's a benchmark for measuring market performance, which can be used to track progress and make necessary adjustments to ensure the market develops as intended," he said.

ECMA has been preparing for the market's opening by developing regulatory frameworks and implementing new technologies. Yohannes said market surveillance system is nearing deployment, and several participants have already received licenses to operate.

"We are ready to launch," he told Fortune.