Stock Market in Financing of Economic Growth

Many within our society think of stock market as one of those things that virtually exist for some few. Many among us can not relate the stock market to our economic growth, understandably so.
However, as it were, the functioning of the economy depends on the financial system of the country. This financial system includes capital markets, stock exchange, central bank, and commercial banks as central entities along with other financial services providers. Normally, the financial system should be deeply entrenched in the society and provide employment to a relatively large population. Accordingly, the three major functions of the financial system are: providing capital and credit; providing liquidity which protect businesses and individuals against sudden cash needs and providing risks management mechanisms.
Another important work of finance is to boost growth of capital markets. Business needs two types of capital – fixed capital and working capital. Fixed capital relates to funds that are needed to finance infrastructure, production and other such activities which are long term in nature. To achieve these, business and governments issue shares and bonds to raise fixed capital.
On the other hand, money needed to run business on the day to day basis (working capital) i.e. ongoing purchase of raw materials, financing cost of finished goods, costs of proving services, transportations, operating costs, facilitating trades, etc are provided by banks. Businesses access this type of financing by issuance of bills and promissory notes or bank borrowings, etc. These instruments are valid in the money market, and banks exist for that purpose. Banks also facilitate international trade via issuance of letters of credit, trade guarantees, and provide access to foreign exchange by businesses.
Thus, it is somehow clear that the financing of infrastructure, or industrial development, or financing of such other long-term projects which plays an important role in the socio-economic development of the nation and its people depends on the development of the nation’s financial markets, particularly in this context, the capital markets and its key institutions such as the stock market. It is argued that there have been few economies that have run successfully and sustainably without a sound capital market.
So, where are we on this finance-growth nexus, particularly in the tale of capital markets? Well, our market capitalization to Gross Domestic Product (GDP) ratio is less than 10 per cent, our liquidity to market capitalization is less than 5 per cent and the number of people with investment accounts at the Stock Exchange is less than 1 per cent of the population.
With domestic equity market capitalization of Tsh 9.1 trillion and Outstanding bonds worth Tsh. 9.4 trillion relative to the GDP of about Tsh 125 trillion; with only 28 listed companies; with market turnover of about Tsh. 400 billion per annum; and about 550,000 investors out of more than 55 million population, it says that as a society we need to do more in this important aspect of an market-based economy. What does these data tell us?
It means, as a country, we could potentially unlock a substantial portion of highly needed capital to build our physical and social infrastructure system, build industries and finance local development projects. We need to enhance and diversify the role of finance in our economic development. The stock market can be a tool and a platform that could inject much needed capital into our country’s growth engine. Crucially, however, is the fact with our current direction where domestic financial resources mobilization seems to take a significant consideration in our political and policy discussions, then the stock market could be one of the focal vehicles which can enable local citizens to play a more active role in financing our own economic development by way of releasing some of the idle savings in financing investable enterprises and development projects.
The key question, however, is, how do we get there? by creating awareness and forming a mutually shared understanding and appreciating this matter. How do we bring this awareness? Or how can we act towards this direction? These requires both political and policy leadership, especially if this is considered to be one of the policy priorities – and I do not see why it is not, why it should not be a policy priority especially if there is a fundamental understanding that economic development requires financing, and that the stock markets is one of the key tool for mobilization of domestic and foreign funds for investing in our development.
Without prejudice to the above, the government has so far done a significant portion of its part. It has put in place the regulatory framework and key institutions for the operationalization of the market. There are several tax incentives provided by the Government to incentive businesses to participate in the capital markets.
The other aspect where the Government has led the way is championing mandatory listings of companies from some sectors for the purpose of enhancing economic empowerment to citizens, creating the atmosphere of good corporate citizenship as well as encouraging transparency in the Tanzania corporate environment.
Privatization via the stock markets and enabling many Tanzanians to participate in the ownership of some key entities in our economy is another key contribution by the Government.
In conclusion — the growth of our stock market represents an opportunity which has the potential to accelerate development and promote financial inclusion and economic empowerment. However, stock markets do not grow on their own — political willingness and leadership, policies mandates and priorities, strategies and action by public and private sector should accompany a mere existence of a stock market.

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