In my last week’s article, I tried to indicate, picking from other country’s industrial revolutions and transformations perspectives, how they financed their transformation and how necessity it is for a country to transform its domestic financial resources mobilisation as it aims to transform its economy through industrialisation — like we intend to do. Today, I will focus on the need for a vibrancy stock market, as part of the tools economies normally utilise in financing their economic transformation.
History tells us, most successful industrialisation and economic transformation policies were preceded and/or accompanied by important development in the country’s savings and capital formation. The lesson in front of us is somehow clear in the sense that the process of capital formation go hand in hand with efforts to industrialise and transform. In my reading of the National Five Year Development Plan (FYDP-II) 2016/17 – 2020/21, which carries the theme: “Nurturing Industrialisation for Economic Transformation and Human Development”, the almost 400 pages document, the word Dar es Salaam Stock Exchange has been mentioned only once — the DSE mentioning came under the context of trying to explain why FYDP-I didn’t achieve some of its intended objectives. One of the reasons given being the lack of capital and funds to implement some of the key priorities, and DSE underdeveloped being one of the reasons. Other than that, DSE (or the capital market in that matter) has not been mentioned in the FYDP-II and its proposed financing strategies. And I think this is a mistake, similar to the one we made in FYDP-I.
FYDP-II is right — our local stock market is relatively underdevelopment. After almost 20 years of existence, the DSE is still narrow and thin, domestic market capitalisation (Tshs. 8.5 trillion) ratio to GDP is only about 10 percent, liquidity/turnover ratio (averaging about Tshs. 800 billion p.a) to market capitalisation is also about 10 percent. Only 17 domestic listed companies (23 inclusive of cross listings) are listed, and three currently outstanding corporate bonds. Government’s listed bonds worth about Tsh. 4.8 trillion are also listed, less than 5 percent of our current GDP; and the total number of investors at the Exchange is only about 450,000 — closer to only one percent of total investable population.
In my opinion, the upside potential is high, but only if we consciously decide to create and pursue the right policies under this context. Previously (& currently), the stock market has not been part of the country’s development plans (the same seems to apply under FYDP-II). DSE has not been treated as the primary national engine of capital formation and economic development by the Government or the donors. For instance, instead of driving most privatisations through the DSE and creating a tax efficient structure for companies listed on the exchange and investors in listed securities, different policies are normally chosen. The consequences of these policies are an economically weak stock market (as rightly stated in the FYDP-II), without a vastly adequate supply of securities in the market place. This is a big lost opportunity for financial inclusion, domestic capital formation and broad-based economic empowerment.
To avoid repeating similar mistakes, FYDP-II should specifically aim to revolutionise the growth and vibrancy of the stock market in the process of sustainable domestic capital formation as we strategies to finance our future. FYDP-II should have made DSE as one of the tenets of financing the envisaged industrial programs and its related infrastructure programs. How can the government facilitate growth and development of the stock markets? — there are several tools that can be deployed to achieve this objective. I will mention a few:
Out of hundreds of privatised state-owned entities, only seven (7) were privatised via listing into the exchange. These are TOL Gases, TBL, TCC, Swissport, Tanga Cement, Twiga Cement, and NMB. Hundreds of others were privatised via private sales, large part of these didn’t bring the financing, skills, technology or job creation, as was envisaged and most of these entities are no longer in operations. Comparably, entities that were privatised through the stock market on an efficient combination of ownership, by: the government, strategic/industrial investors and the public (by way of IPOs); have been more impactful, both socially and economically compared to entities that were privatised through private sales. The 7 mentioned companies are some of the largest tax payers, they provide some of most quality jobs — propelling their employees to middle income earners, being listed entities, they are relatively more effective for tax administration purpose. I therefore, urge the government to learn from this experience; the remaining SOEs should be conducted across the DSE. With the vibrant stock market (brought by, among others, privatisation of SOEs through the DSE), entrepreneurs, industrialist and business owners from the private sector will be attracted to use the capital market for their enterprises growth and development as well as an exit mechanism. This is how consideration to use the stock market for funding industrialisation would be meaningful.
Apart from privatisation, the government should also implement policies and legislative actions whose spirit was to facilitate growth of the local stock market, a wider economic empowerment and an inclusive growth i.e. policies such the economic empowerment; financial inclusion; local content; privatisation, etc. Furthermore, the Mining Act of 2010 as well as the Electronic and Postal Communications Act (EPOCA) of 2010 (amended in 2011) are some of the legislative actions meant to economically empower local citizens by way of ownership in such key sectors of our economy, however, provisions of these laws in the context of ownership distribution hasn’t been implemented, or for the case of EPOCA, the 2015 regulation provided an option. Were these laws implemented, we would have increased the depth, liquidity and the number of local investors in our stock market; that’s how we will encourage more savings and domestic capital formation.
Additionally, we should proactively and aggressively encourage domestic savings by pursuing programs that will introducing other financial instruments that can then be used as investment platforms for many. Financial instruments such as, common stock (for common ownership), micro savings bonds, infrastructure bonds, municipals revenue bonds, real estate investment schemes, collective investment schemes, etc must be championed by both the government and private sector using existing and potential financial institutions. These financial instruments should be linked to the practical industrialisation projects and enterprises that requires such funding.
As we pursue this approach, we need to be mindful of the fact that our current savings rate as a proportion of our GDP is about 20 percent while the country’s investment rate per annum is about 30 percent of the GDP, the gap is financed using foreign funds and capital. We need to gradually reduce this gap by way of developing our domestic capability to raise the rate of domestic savings and capital formation.
Blending private domestic and foreign investment through shareholding on the state-owned enterprises is vital for creating a vibrant local capital market. In relation to FYDP-II financing, a combination of government’s substantial ownership in existing (and new industries) via financial interests/commitments, combined with large number of shares trading publicly in the stock market, plus joint ventures between strategic/industrial investors on one hand and small investors (via IPOs) on the other hand, plus debt instruments i.e. syndicated trade credits, project finance will encourage the financing of the envisaged industrial program, enterprises and projects.
The FYDP-II has mentioned many strategies of financing identified priority sectors and projects; i.e. increase tax revenue by broadening our base; establishment or enhancement of specialist banks; foreign direct investments (FDIs); domestic borrowing; issuance of sovereign bonds, etc. What is clearly missing is the intent to grow the stock market so it can facilitate capital raising, encourage savings and capital formation — which is vital for the envisaged industrialisation program and for economic transformation. We shouldn’t continuously avoid this opportunity.