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Reinvigorating capital market of Pakistan

The newly installed government in Pakistan faces a mammoth task of reinvigorating capital market of the country. This should be among the top five most important items of the economic agenda. The fiscal consolidation requires some other unpopular measures that include: 1) improving tax collection to bridge budget deficit, 2) containing extravaganzas for spending more on development, 3) boosting exports by making Pakistani manufacturers/exporters competitive in the global markets and 4) privatizing state own enterprises to save one trillion rupees, which these units swallow annually.Since the role of the government is to facilitate the business community in making fresh investment for the creation of new job, stock exchange is one of the most important institutions that play a key role in the mobilization of capita. In the following paragraphs an effort has been made to review the factors affecting the performance of Pakistan Stock Exchange (PSX) and suggest the impetus to make it more vibrant.

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Let the story begin with the performance of Pakistan Stock Exchange (PSX) during FY 18. The general perception is that the year could be termed one of the bad years because the benchmark Index posted highly erratic movement. However, a closer look at the graphs for the last three financial years confirms that the behavior of market in FY18 was not very different from the other two years. The Index movement was a reflection of: 1) the ongoing economic uncertainty, 2) country facing precarious balance of payment situation, 3) incumbent government borrowing dollars to pay off the loans acquired in the past. The natural outcome was persistent selling by the foreign funds, who own nearly one-third of the free float. Some of the analysts don’t miss a change to make management of PSX a scapegoat, which definitely failed in playing a proactive role and failed in convincing the incumbent government to offer some incentives to contain the decline.

It is known to all and sundry that in the benchmark Index some of the sectors enjoy high weightage and factors affecting the performance/outlook of these sectors put the Index on upward/downward trajectory. During the year under review exploration and production (E&P) sector contributed significantly in the upward movement of the Index because of persistent rise in the prices of crude oil and depreciation of Pak rupee. Consumer goods sector also posted gains on the back of repaid urbanization.

As against this, banking and cement sectors witnessed erosion in value. In the banking sector the top loser was Habib Bank Limited (HBL); its share price plunged on the back imposition of penalty. This also created concerns about other big banks having overseas operations. The sector also faced uncertainties because of low commodity prices, subdued performance of textile sector. Over the years banks have been lending huge sums to cement sector for adding production capacities on the hope of high offtake due to ongoing CPEC projects. However, the lenders totally ignored the risk of emerging supply glut. Rising coal prices also eroded competitiveness of the manufacturers and further insult was added as foreign investors selling of shares of cement companies.

According to a PARCA report, Pakistan’s stock market remained lackluster due to political uncertainties, persistent selling by foreigners, emerging balance of payment crisis and mounting current account deficit. Inclusion in MSCI emerging market index also failed in providing fresh impetus. Depreciation of rupee and general election scheduled on 25th July 2018 also prompted investors to follow wait and see policy. Fears of emerging water shortage also dampened outlook of agriculture sector and agro based industries.

 

All this has become past that can’t be changed. The strategy going forward for making Pakistan’s capital sector vibrant should encompass: 1) listing of shares of profit making state owned enterprises at the local bourse and offering of minimum 10 percent shares of these entities to general public, 2) reducing corporate tax to 25 percent for public limited companies, 3) making listing mandatory for private limited companies if their paid up capital exceeds Rs500 million, 4) declaring dividend income tax exempt and 5) exempting insurance companies and mutual funds from payment of capital gains tax.

The new government hasn’t come up with any explicit plan regarding elimination of Riba from the economy. Since Islamic banks are suffering from surplus liquidity problems, new asset and liability products should be approved by the apex regulators at the earliest. As the government needs foreign exchange, dollar denominated Sukuk should be issued to finance mega infrastructure projects.

If the incumbent government is serious in accelerating economic activities in the country, it should reduce interest rate by 100basis points immediately. The interim government did the biggest disfavor to the country by increasing interest rate by 100 basis points. The government should make the effort to bring down policy rate to 5 percent over the next 12 months. Commercial banks of Pakistan should review their business model and make efforts to curtail operating expenses by following prudent policies that can help in avoiding provisioning and non-performing loans.

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