Capital markets provide companies with platforms to raise funds, encourage investment, and facilitate the allocation of resources. However, there are opportunities and challenges in leveraging capital markets in Africa to boost the economy. According to financial experts, nations in Africa struggle with financial obstacles, primarily stemming from the relatively modest size and limited capitalization of the continent’s stock markets.
Even after hosting over 30 stock exchanges for more than 40 economies, Africa’s capital markets are underdeveloped compared to European, North American, and major Asian markets. The acknowledgment of the importance of developing domestic capital markets for financing priority sectors and driving economic development is growing among African policymakers. Across many African countries, this is evident in national visions such as Nigeria’s FSS2020, Zambia’s Vision 2030, Rwanda’s Vision 2020, Uganda’s Vision 2040, and Kenya’s Vision 2030. Also, the African Union’s (AU) agenda for 2063 includes the development of capital markets to strengthen domestic resource mobilisation and increase their contribution to development financing.
Despite being central to facilitating economic development in Sub-Saharan Africa, there has been little focus on understanding precisely why capital markets are important on the continent.
The capital markets provide a platform for companies to raise funds by issuing stocks and bonds. This capital can be used for expansion, research and development, and other growth-oriented activities, contributing to overall economic development. Access to capital allows businesses to expand their operations, leading to increased production and job creation. This, in turn, helps alleviate unemployment and improve living standards.
The annual infrastructure funding deficit in Africa exceeds USD 50 billion, particularly in crucial areas like electricity, water, and transportation. The lack of reliable infrastructure disproportionately affects poorer countries in Africa. The capital raised from the markets can be channelled into infrastructure projects such as roads, bridges, and power plants. Funding key infrastructure and housing investments with long-term local currency instruments can help governments and the private sector avoid foreign exchange and refinancing risks. This approach mitigates the potential economic collapse witnessed in previous crises when countries were overexposed to foreign currency loans. Improved infrastructure is vital for economic development as it facilitates trade, reduces costs, and attracts investments.
The capital markets provide a variety of financial instruments, including stocks, bonds, and derivatives. This diversity allows investors to manage risks more effectively and provides a range of investment opportunities. Well-functioning capital markets make a country more attractive to foreign investors. Foreign direct investment (FDI) and portfolio investment can bring in additional capital, technology, and expertise, contributing to economic growth. The relatively small and bank-dominated financial sector in Africa can benefit from the development of capital markets. This diversification complements the banking sector, providing the public and private sectors access to long-term financing, promoting risk sharing, and creating new institutions through equity investment, ultimately broadening the sources of finance.
African countries face persistent challenges in development financing, hindered by high unemployment, informal markets, and reliance on volatile commodity income, leading to inadequate tax revenue for social and capital expenses. Efforts by leaders have improved market participation and liquidity, but more progress is needed. Concentration in a few capitals, such as South Africa, Nigeria, Mauritius, Kenya, and Egypt, highlights the need for broader market development. Some emerging markets, like Ethiopia, are yet to establish exchanges, but there are initiatives to address this gap.
This cycle of poor economic performance, insufficient investment, and handicapped development can be disrupted through local capital market development. By utilising domestic private sector funds for infrastructure investments, African countries can attract foreign capital and reduce dependence on loans, addressing concerns about debt-trap diplomacy, as seen in cases like Sri Lanka.
While local capital pools may not match the scale of international funds, they offer cheaper funding in local currency, reducing exposure to foreign exchange volatility. Strengthening domestic capital markets provides a cushion against offshore events and volatile risk appetites. Efficient use of capital market debt for infrastructure projects benefits various stakeholders along the value chain, promoting economic growth.