INTERVIEW WITH HAROON ASKARI, MD KARACHI STOCK EXCHANGE
Mar 28 - Apr 3, 2011
PAGE: HOW WOULD YOU COMMENT ON ECONOMIC PERFORMANCE OF PAKISTAN FOR LAST 63 YEAR?
HAROON ASKARI: Pakistan's economy has come a long way since 1947. The country with a very narrow industrial and commercial base has grown from scratch to a reasonably large economy with even larger market of nearly 180 million people.
Pakistani economy has made a substantial progress during the last sixty years but it has lagged behind other Asian countries in realizing its full potential. Pakistan is the third largest exporter of rice in the world and produces enough food grains to feed its people. Pakistan is one of the leading cotton producers and one of the five major textile producing countries in the world. Agriculture now accounts for 20 percent of our national income, and 40 percent of the country's labor force is engaged in agriculture as compared to 70-75 percent sixty years ago. This implies that productivity per acre of land has increased in this period. Within agriculture there has been a significant change. Livestock, dairy, mutton, beef, poultry and similar other products form almost one-half of total agriculture output. Pakistan produces third largest quantity of milk in the world. So this shift within the sector has resulted in the reduced importance of major crops which only account for 36 percent of agriculture value added and minor crops, fisheries, orchards, fruits and vegetables another 14 percent. Manufacturing and industry now account for 25 percent of the income. There was not even a single industrial unit worth its name at the time of independence. Services sector has been the most dynamic sector that generates 50 percent of national income and employs about the same proportion of the labor force. In 1969, Pakistan exports of manufactured goods were higher than the combined exports of Indonesia, Malaysia, Philippines, and Thailand. In 1960's, Korea emulated Pakistan in its five years planning process. Today the country such as Vietnam which was completely devastated by the war has now overtaken Pakistan. Ten years ago, India which was way behind Pakistan (till 1990's) is now way ahead.
Pakistan has achieved 5 percent average annual growth rate during the last 60 years of its existence, with much higher growth in the 1960s, 1980s and early 2000s. During 2002-07, Pakistan's economy grew at 7 percent annually; poverty and unemployment were reduced, external indebtedness was lowered, international financial markets were accessed and Pakistan attracted sizeable foreign direct investment. But, the last three years have been quite difficult for the economy. It all started with the oil and commodity price shocks of 2007.
Pakistan has successfully pursued a macro-economic stabilization program with the assistance of the IMF. The results that were envisaged ñ a reduction in current and fiscal deficits, decline in government borrowing from the central bank, bringing inflation down, accumulating foreign exchange reserves, stopping flight of capital and maintaining a realistic exchange rate ñ have more or less been achieved. The government has taken some tough decisions such as curtailing many of the untargeted subsidies and introduced social safety net for the poor in form of a cash transfer scheme. However, in this process the country has incurred external debt that has raised the Public Debt - GDP ratio, sacrificed public sector investment for infrastructure and human development, and raised overall interest rate structure. The dependence on external bilateral and multilateral agencies has increased sharply and the degrees of freedom available to economic managers have been curtailed significantly. Going ahead Pakistan's main imperative today is how to resume the journey to high growth trajectory that was disrupted. We face at least eight challenges that have to be overcome in order to resume this journey.
CHALLENGES TO PAKISTAN'S ECONOMY
Low Domestic Savings
High Fiscal Deficits
Energy and Water Shortages
Governance and Implementation Weaknesses
Political Stability, Law and Order/Security
We can overcome these challenges and problems and improve our economy by taking following steps:
Invest in Education that will build our Human Capital
Invest in infrastructure program and cut government expenses by reducing the size of the government.
Provincial autonomy to raise local tax including tax on agricultural income and property tax
Use of new technology
Young Labor Force
Devolution and Decentralization
PAGE: WHAT IS YOUR OPINION ABOUT STOCK MARKET PERFORMANCE IN PAKISTAN FOR LAST 60 YEARS?
HAROON ASKARI: Karachi Stock Exchange was incorporated on March 10, 1949 and it is the biggest and most liquid exchange of the country. As on March 21, 2011, 638 companies having listed capital of Rs909.79 billion (US$10.64 billion) were listed with market capitalization of Rs3047.57 billion (US$35.85 billion) the benchmark KSE 100 Index closed at 11375.14 points.
1950 1960 1970 1980 1990 2000 2010 Listed Companies (Number) 15 81 291 314 487 762 644 Listed Capital
(Rs. in millions)
117.3 1,007.7 3,864.6 7,630.2 28,056.0 236,458.5 919,161.27 Market Capitalization
(Rs. in millions)
NA 1,871.4 5,658.1 9,767.3 61,750.0 382,730.4 3,268,948.59
GROWTH & PROGRESS
Today KSE has emerged as the key institution of capital formation in Pakistan with:
(a) Ordinary shares of 638 companies are listed, Preference shares of 11 companies and 29 Debt securities (TFC's) are listed.
(b) Listed capital Rs909,793.20 million (US$10,640.86 million).
(c) Market capitalization Rs3,064,190.10 million (US$35,838.48 million).
(d) Average daily turnover of ready market is 139.39 million shares with average daily trade value Rs5,701.90 million (US$66.69 million).
(e) Membership strength at 200 around 155 active members.
(f) Out of 200 members 186 are corporate members including 11 listed at KSE.
(g) Fully automated trading system with T+2 settlement cycle.
(h) Deliveries through Central Depository Company.
(i) Settlement through National Clearing and Settlement Company of Pakistan.
KSE offers a wide range of products to its investors through a state of the art technology infrastructure. Market participants (local and international) are provided access to these products through various distribution channels of brokerage houses.
Our trading products include:
• Ready /Cash Market for listed shares
• Deliverable Futures Contracts
• Cash Settled Futures Contracts
• Stock Index Futures Contracts
• Bond Automated Trading System for dealing in listed debt securities
KSE is actively working for introducing other products which includes:
• Options on individual securities and indices
• SIFC on sector indices
• Exchange Traded Funds (ETF)
• Islamic Equity Financing
The KSE also offers a number of data products and services providing both historical and "live" data feed to its customers.
CORPORATIZATION AND DEMUTUALIZATION
KSE is presently a metalized exchange with 200 members. The Stock Exchanges (Corporatization, Demutualization and Integration) Bill was passed by the National Assembly of Pakistan on October 08, 2009. After completion of the process, KSE will be one of the very few demutualized exchanges of the world.
Presently, the KSE is run by a board of directors consisting of 10 members including the managing director. Out of these, 5 Directors are elected from amongst 200 members of the Exchange and 4, non-member Directors are nominated by the SECP. The Chairman is elected by Board from amongst non-member Directors. The operational and administrative activities of the Exchange are managed and supervised by the Managing Director who is the full time Chief Executive of the Exchange.
PAGE: HOW WOULD YOU DESCRIBE THE INTRODUCTION OF LEVERAGE PRODUCT IN THE MARKET?
HAROON ASKARI: Karachi Stock Exchange is currently experiencing low volumes as compared to the volumes seen in 2007, one of the reasons for low volume is the discontinuation of funding facility called CFS. It is noted that there is over dependence on cash (Ready market), in spite of availability of derivative products. Around the world leverage products provide impetus to the equities market and Pakistan can't be an exception. In the past CFS has served the purpose.
Recently a leverage product called Margin Trading System (MTS) has been introduced to bring back the liquidity and volumes and allow more investors to participate in stock trading. Margin trading is buying stocks without having the entire money to do it. KSE and NCCPL have institutionalized the method of buying stocks without having to pay in full to purchase stocks in the ready market. Investor pay up to 25 per cent of their purchase at the time of purchase and 75 per cent are borrowed to buy stocks. Buying on margin is using leverage to maximize your gain / loss when prices rise/ fall. Leverage is simply using borrowed money to increase your profit/ loss.
The product is widely accepted as a good replacement of CFS by brokers and investors and regulator also believes that this is a better product than CFS from risk management point of view.
PAGE: HOW DO INTEREST RATES AFFECT THE ECONOMY?
HAROON ASKARI: The economy can be influenced easily by interest rates. When interest rates are high, people do not want to take loans out from the bank because it is more difficult to pay the loans back, and the industrialization suffers and number of purchases of cars and homes goes down. People instead of investing keep the money in interest bearing instrument like bank deposit etc.
The effects of a lower interest rate on the economy are very beneficial and industrialization grows. When interest rates are low, people are more likely to take loans out of the bank in order to pay for things like houses and cars. When the market for those things gets strong, price decreases and more people can purchases these things. This also bodes well for investors, who perceive less risk in taking out a loan and investing it in something because they would have to pay less back to the bank.
People and business who have mortgages or other loans to pay for their houses have more disposable income when interest rates are low, thereby increasing the economic activity. Corporations report better profit numbers when they have to pay lower borrowing cost.
PAGE: WHAT NEEDS TO BE DONE TO BRING DOWN INTEREST RATES IN PAKISTAN?
HAROON ASKARI: High inflation due to large government borrowing is the main cause of high interest rates in Pakistan. If we can improve our tax collection and improve our Tax / GDP ratio, we shall be able to lower our interest rates which will directly affect our rate of inflation, positively.
Further, in order to reduce the interest rates it is necessary to increase the performance and efficiency of financial institutions to minimize the non-performing loans. Government borrowing should be reduced through privatization of state owned companies.
PAGE: WHERE DO YOU SEE THE INTEREST RATES GOING IN THE DAYS TO COME IN PAKISTAN AND IN THE WORLD?
HAROON ASKARI: I feel that the pressure on the political front will keep the key policy rate at the same level. However, considering multiple factors, including declining inflation, lower government borrowing from the central bank, improved external account with a stable reserves position, positive real interest rates and ongoing restructuring process ñ all leads to SBP reducing the discount rate at in their next policy meeting.
It is encouraging that the government has adhered to structural reforms and shifted financing pressure from the central bank to commercial banks.
The government vowed to contain its borrowing from SBP at September 2010 level of Rs1,280 billion. Recent monetary data shows that the desired level of Rs1,280 billion is in place.
Furthermore, the government is also pursuing to minimize budgetary gap through increasing revenues and decreasing expenditures for the remaining period of fiscal 2011. Therefore, ongoing fiscal consolidation is at least heading in the right direction.
February was a good month for the economy with both exports and remittances surging to new highs. Remittances sent home by overseas Pakistanis soared 20 per cent in the first eight months (July-February) of the current fiscal year, in the wake of a tightening of noose around illegal channels, a stable rupee and contribution of charity money after flood ravages. Remittances totaled $6.96 billion in July to February 2010-11, compared with $5.79 billion in the corresponding period of the preceding year. Also, for the first time in 63 years, the country's exports grew by 42 per cent to $2.2 billion in February over the corresponding month of the previous year.
MONEY MARKET TREND
In the recent Treasury bill auction held on March 9, cut-off yield for three-month bills declined by nine basis points to 13.9 per cent while yields on six-month and 12-month papers were maintained at 13.68 per cent and 13.85 per cent, respectively. As the secondary market normally adjusts yields preemptively, the recent trend shows market expectations of an unchanged policy rate this time.
Due to recent disaster in Japan, we noted that the exports of Japan will also be affected. Japan is the big investor in US and I feel that to rebuild the damaged structure Japan needs cash to pump for rebuilding the damaged structure. This Japan measure will force the US to increase the interest rates.