Updated June 04, 2005



It's a wild world at the KSE these days, where during the last two weeks have seen completely contrasting behaviour. The KSE-100 Index eroded by 11.4% (833 points) during the week ending 27th May, gained 11.5% (746 points) during the week ended 3rd June. The badla market saw its last full week of financing before the final phase-out plan beginning from 8th June, with an 8.25% reduction in weekly badla volume. Badla statistics remained relatively sedate with no major fluctuations during the course of the week.

The weighted average badla rate at KSE stood at 11.4%, which represented a slight increase of 60bps versus the weighted average badla rate of 10.8% seen on the previous Friday. Badla rates did not fluctuate that wildly during the week, and in fact saw a slow and steady increase. A highly liquid interbank money market seems to have allowed potential badla financiers room to finance leveraged positions with relative ease.

The weighted average badla rate at LSE also depicted a slow and gradual rising trend during the week. Badla investment at KSE rose to Rs21.5 billion compared to Rs20.4 billion. This increase was brought about by rising equity prices. Badla volume, on the other hand, remained relatively stagnant on a weekend. Badla investment at the LSE also witnessed a rising trend in line with rising equity prices.

The COT phase-out plan provided by the KSE management will begin from next week. Total badla volume will have to be reduced by 8.25% on a weekly basis. This is likely to exert some pressure on prices, as the shift to margin financing and stock futures isn't likely to be an easy one for investors. Investors are likely to take cue from the 2005-06 budget and the announcement regarding CVT will have a bearing on the market.

The Federal Budget 2005-06 is to be announced on the 6th June and expectations of an increase in the capital value tax (CVT) are amplifying with each passing day. The requirement to increase the tax net on the services sector along with documentation of the capital markets would propel the Central Board of Revenue (CBR) to push for an increase in the CVT.



Last year, the market participants and investors had cumulatively lobbied the government to reduce the tax rate to a minimal 0.01%. However, till the time the issue of CVT persisted, the market remained static like a dead horse. An increase in the CVT from 0.01% to 0.01% is very much on the cards. The government may even go ahead with taxing trading income with the objective of curbing excessive day trading. The CVT certainly has the potential of delivering a mighty blow to the already weak and capitulated market. The CBR is considering reducing the tax on petroleum development levy and widening the tax base to cover the services sector. Already the tax collection in the economy is abysmally low.

Tax as a percentage of GDP in Pakistan is around 14%, while in the region most developing countries like India, Malaysia, Korea and Indonesia have tax revenue more than 20% of GDP.

In the search for alternative sources of tax revenue, the government is likely to impose taxes on the capital market and real estate. Furthermore, the government would also be aiming to improve the documentation of the capital market by brining it in the tax net. Another objective of the government, which may make CVT more attractive to them, is to curb excessive day trading.

Currently, Karachi Stock Exchange is one of the most volatile markets of the world. The SECP might recommend a deepening in CVT to the government with the objective of pulling in reins on the volatility.

The market seems to dislike any move towards documentation. An example of the market behavior was evident, when a notice for client information by the SECP, send the market into panic. Similarly, last year, when the government initially announced the imposition of CVT, the market remained in the doldrums for long, until finally the government reduced the CVT to a minimal 0.01%.

And finally, the government has decided to postpone bidding for PTCL scheduled for 10th June. The uncompromising attitude adopted by both the government and the employee unions has turned for the worse. Employees were vehemently opposing privatization of PTCL. They were disgruntled with the situation relating to what they referred to as cronyism in promotions. They had no doubt over the government's seriousness about the issue, but believed that the new management would not succeed in running the company without giving the employees guarantees over job security and experience-based promotions.

Employee Union leaders dropped all their demands with regard to bonuses and salary increases and urged stoppage of the privatization process. The management wanted privatization to go through but was skeptical over the actual success of the whole process. It was in a conundrum of being in the firing line between the government higher-ups and the employees. The Privatization Commission seemed the most helpless body. The front-runners in the process (Singtel, Etisalat and Telekom Malaysia), as expected, were tight-lipped. They were keeping a close eye on the developments.

The bidding has been postponed and the next question is, will it happen and what will be the response of strategic investors. It is feared that it may also turn out to be a lost opportunity.