Inexplicable Spurt in the Pakistan Stock Exchange
By Masood H Kizilbash
Islamabad, Pakistan
Following the international financial crisis in 2008/2009, there has been a continuous steep rise over six years’ timeframe in the stock market indices. The most commonly referred Karachi/ PSX Index zoomed from 9721.90 as at end-June, 2010 to 37,783.54 at the end of June, 2016, denoting a compound annual growth of 25.4 percent. The Index has continued to thrust forward during the current financial year, reaching the level of 49,876.18 on 23rd January, 2017.
The strength of the market in any economy is the function of its socio-political and economic factors. Does it apply to Pakistan? As regards socio-economic factors, Pakistan has been exploding with terrorism and extremism and shredded unity of the state and has created several centers of power within the state for long. The situation worsened during last six years timeframe. Yet, it has hardly affected the sentiment on the market.
The trend in the stock exchanges is largely determined by the key economic indicators in an economy.
Economic Surveys and Federal Budgets
The eminent economists in an open letter to the International Monetary Fund, published in the Business Recorder on 24th October, 2016 have expressed their reservations about the official data. Yet, I have reproduced the official data in the table as it also does not offer any comfort either. An analysis of the data clearly establishes that the economy has been “managed” and kept “afloat” by resorting to unbridled borrowings both from domestic and external sources. Total public debt rose exponentially at annual compound growth of 13.4% during the six years’ timeframe. This compared with an annual growth rate of GDP at less than 3%.
The debt accumulation not only breached the Fiscal Responsibility and Debt Limitation Act,2006, touching the level of 64.8% in 2015/16 (end-March) but raised the servicing burden from 43.9% (accounting for repayments) of Federal Revenues to 78% in 2015/16. However, if the gross consolidated revenues of the federal and provincial governments are taken into account, as per the official methodology, the ratio of servicing in 2015/2016 moved slightly upward to 40.4% from 40% in 2009/1 (end- June).
The rising macroeconomic imbalances that are being financed by unprecedented levels of borrowings suggest a dismal state of the economy and a continuous upward swing in the Index cannot be explained away in terms of strength of the of the indicators. Some analysts ascribe the boom to a rising trend in net portfolio investments. In order to test the validity of the argument, the data as released by the National Clearing Company of Pakistan of foreign inflow of foreign investment is revealing.
The data of the Foreign Investment Inflows of the National Clearance Company indicate that during the timeframe of six years, there were net outflows in two of the six years, especially during 2015/20016. Yet, the Index continued its forward- thrust, belying the view that FIPI was the cause for fuellng the market.
In order to reach out to the cause, a revisit to the policy framework may be useful. It may be recalled that following nationalization of the economy between 1972 and 1974, there was a serious adverse fallout on the key economic indicators including Balance of Payment. With a view to mopping up foreign exchange, Pakistanis working and living abroad were permitted to open foreign currency accounts in Pakistan. This provided an opportunity to our industrialists, merchants and privileged political elite to facilitate opening such accounts in Pakistan by their non- resident relations, friends and business associates. Under the cover of these accounts, the rich elite purchased the foreign exchange out of their legal and illegal funds and deposited in these accounts to launder the money and use these accounts to either borrow to make investment locally or to transfer the funds to off-shore companies for deposing in the foreign banks or making investment in moveable or immovable property abroad. The measure promoted the flight of capital and brought the Balance of Payment under serious strain and forced the government to enter into Stand-by Arrangements with the International Monetary Fund during 1970s. The window provided for the flight of capital was not closed during 1980s. Instead, as many as four different kinds of agreements were signed with IMF for priming the wheels of the economy.
The system was liberalized in 1991 when resident Pakistanis were also allowed to open foreign currency accounts with the facility of exemption of income tax and zakat. With nearly half of the economy being informal, it facilitated black money to find its way to these accounts and became a conduit for whitening it under the policy of “no question-asked and no-tax foreign currency accounts”. This led to dollarization of the economy with the deposits reaching the level of $ 11 billion. Back in May 1998, the foreign currency accounts were frozen on the fears of a run of the depositors to the banks for withdrawal of their funds following the atomic tests conducted by Pakistan and suspension of foreign aid.
Despite the mishap of 1998, the governments have continued to patronize foreign portfolio investors through the window of Special Convertible Rupee Account. The facility offered under the Account was relaxed in March, 2000, allowing authorized dealers to make outward remittances from SCRA of disinvestment proceeds, dividends and broker’s commission. These rules were further relaxed in 2013 to permit foreigners and non- resident Pakistanis to trade in the equity market through the window of SCRA. This measure was to facilitate those Pakistanis who had earlier transferred their funds abroad to bring them back to the country without fear of being frozen by the government as happened in 1998
The relaxation has enabled our big business houses to bring their legal and illegal money stashed abroad in the mainstream of the economy to acquire management controls of the companies in the corporate sector. At the same time, their business associates in Pakistan who have fat reserves of funds built –up through tax evasion and under tax Amnesty Schemes of the government, are funneling their funds to acquire the shares of corporate entities for grabbing the management control.
The scramble to acquire the management of corporate bodies as well as public sector entities under the privatization policy may be the cause of a spurt in the stock exchange as there were no sound socio-political or economic reasons to explain it. Is it precursor of some big catastrophe that is to befall us?
(The writer is former Joint Chief Economist, Planning Commission, Government of Pakistan. - masood_kizilbash@hotmail.com)
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