Following the passing of the Commodities Exchanges Act 2015, the Tanzanian Mercantile Exchange (the TMX) will begin operating in Dar es Salaam this September. After many years in the pipeline, it is hoped the TMX will play a key part in encouraging vital domestic and foreign investment into Tanzania, as well as being in the vanguard of the latest generation of commodity trading venues in Africa. We take a look at the effect this Exchange could have on the Tanzanian economy.
Learning from experience
Since the Cold War environment prevented the first African commodity exchange in Egypt from taking off in 1961, the Ethiopian Commodity Exchange (ECX) remains the role model for a number of African countries in forming their own commodity exchanges. In the immediate aftermath of ECX’s initial success, many countries attempted to replicate Ethiopia’s successes but with much less reward. In a short period, commodity exchanges were opened – and in some cases closed – in Zambia, Uganda, Nigeria, Zimbabwe and Kenya. Withmany African economies, especially the export economies, suffering due to the unstable oil price and the knock-on impact for other commodities, the question remains whether lessons can be learnt from the less successful commodity exchanges to enable the new generation of commodity exchanges to provide much needed liquidity to these commodity-dependent economies.
Helping to sustain economic growth
Initially, the TMX will be trading spot contracts for cashew nuts as their season begins in September, but then is expected to expand to maize, rice, sesame, sunflowers and coffee, with the intention over the medium term to move towards developing futures contracts. With the Agricultural Council of Tanzania estimating that 70% of the population of Tanzania engages in agricultural activities, a more efficient agricultural sector is a vital source for employment in a country where 44% of the population is under 15 years of age. A more efficient agricultural sector is of paramount importance in encouraging vital domestic and foreign investment for a country looking to sustain its impressive economic growth, with the TMX insisting that “it would [have] achieve[d] its main objective when a Tanzanian farmer would be in a position to choose his cropping pattern based on the spot and futures prices disseminated by the Exchange, rather than the practice of sowing a particular crop based on current prices.”
So, how will the TMX help secure this powerful legacy?
Guarantee of payment obligations
Firstly, the TMX will assume a Central Counterparty (CCP) role in all trades, in effect guaranteeing the sellers’ delivery obligations and the buyers’ payment obligations under all trades. By providing performance security, both buyers and sellers are able to have much more confidence in the markets, especially important as they plan investment into their production and supply chains. The guaranteeing of performance obligations is of vital importance for producers who, in the words of Mr John Chaggama, the CEO and Managing Director of the TMX, have “been victim to fragmented, disorganised markets.”
I am not saying we should build the Chicago Mercantile Exchange… But within the limitations of the particular countries there can be an appropriately designed exchange, or form of an exchange that facilitates better trade, [and] improves or modernises the current system.
Solomon Edossa, Founder of the ECX
Improving communication of market information
Secondly, the TMX is taking a comprehensive and advanced approach to the dissemination of market information and are intending to use advanced technology to underpin this. The TMX is intending to install electronic tickers in strategically important regional production sites, create a mobile phone SMS messaging service and operate a 24/7 automated telephone line, along with the more conventional website and newspaper published data. As well as being an exciting example of how technology can be harnessed to improve underlying structural inefficiencies, the wide dissemination of market information amongst rural communities in Tanzania will assist producers of agricultural products in their day-to-day crop management, as well as in making their strategic investment decisions over the medium term.
For commodity traders operating in a highly sophisticated, interconnected marketplace, the difficulties of operating in African economies with basic infrastructure, insufficient warehousing, decentralised market places and counterparty uncertainty are significant.
While it is too early to say with any certainty whether the TMX will give a significant boost to commodity trading across Tanzania, or whether the founding of the TMX represents a growing trend towards a new generation of institutional commodity trading platforms in Africa, such developments are surely to be welcomed and will be watched closely by commodity traders.
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