The dramatic fall of the KSE-100, losing about 3000 points after having crossed the 15,000 mark in March this year, received tremendous media coverage. It was presented as evidence of a deteriorating economy and invited criticism from some media anchors, analysts--and even the President. The fall in KSE-100 and subsequent events raise important issues about public policy and stock market.
In wake of falling stock prices, a delegation of KSE met Asif Zardari on May 29 and the KSE-100 swiftly recovered about 500 points that it had lost on that day. This was followed by another meeting of the KSE delegation with the Finance Minister. The demands of the delegation were acceded to, a press release was issued on the third of June and the KSE-100 jumped by about 600 points or close to 5 per cent in one day.
A delegation of KSE seeking an audience with the government decision-makers in the backdrop of falling prices is a tradition of our stock market. Stock prices continue to fall as if pleading that an audience must be granted to the stock brokers by the government, and when desired concessions are extracted, the prices rise as if saying thank you. Instead of taking a random walk as per financial theory, stock prices jump up and down as an enthusiastic supporter of market participants.
Recent attempts by the State Bank of Pakistan (SBP) to rein in inflation, which are largely consistent with public interest, were received with a sense of panic among market participants. This monetary tightening was long overdue after what we believe was irresponsible monetary policy under Dr Ishrat Hussain to facilitate the then government's growth projections. Still SBP's steps were met with scathing criticism by stock market participants and the policy was condemned by attributing to it a large drop in stock prices.
It is odd that some in the new media refer to the stock market for getting the final verdict on every economic step taken by the government and this trend can be traced to the deliberate policies of the previous government. It was the Shaukat-Salman team of economic managers that persistently used the rising KSE-100 as evidence of its success in delivering economic growth, both in Pakistan and abroad. They conveniently overlooked the limited economic relevance of the market and the various scams that define its history.
That was an opportune time for the economic managers to do such a thing. The stock market was feverishly bullish and there was intense and unprecedented coverage of the stock market by the new electronic channels. So much media hype accompanied KSE-100 that it became the jewel in the crown of Musharraf regime's economic success. The regime was keen to protect its jewel and, when it had to, it went as far as suddenly and illegally removing the vhairman of the SECP in early 2006 to appease allied market participants and pre-empt an independent investigation into the March 2005 crisis.
The Shaukat-Salman team is now out of business but what is most disturbing is that the new government elected by popular vote has also failed to resist the temptation of using KSE-100 as an indicator of Pakistan's economic fortunes. Amidst desperate cries for flour, electricity, and law and order by millions of poor Pakistanis, the PPP-led government chose to give "relief" to the stock market and in dishing out concessions, it has clearly outdone the Shaukat-Salman team.
With a single stroke of pen, it has deferred imposition of capital gains tax by two years, frozen the rate of trading taxes and made room for channelling more public money in the stock market. The government seems to have done this to please the mega rich market lobby, reverse the market decline, and convince the ordinary Pakistani that he has economic hope because while inflation, power supply, and law and order continue to be trouble areas, the KSE-100 is back on track.
We believe that the importance of stock market for Pakistan's economy has been blown out of proportion by vested interests. We offer three simple reasons to prove this point. First, despite all the hype surrounding the stock market, few Pakistanis have invested in it. You can estimate the total number of investors by summing up shareholders in listed companies and unit holders in mutual funds and adjusting for double counting. Even if you include investors with insignificant economic stakes, such as 100 shares bought in public offerings, any estimate--whether conservative or liberal--will not result in a number that exceeds one per ent of Pakistan's adult population. The number of active investors as measured by UIN registrations or number of account holders in the securities depository would not cross 150,000. So even if the KSE-100 goes through the roof, it would not have any impact on the economic fortunes of an average Pakistani, though it may make some billionaires richer. This is unlike the situation in developed countries, such as USA and Australia, where direct or indirect ownership of shares covers one-fifth to half the adult population, as shown in various share ownership surveys.
Second, market's contribution to real economy is minimal. Only 4 new listing took place at KSE in first half of CY2008 and just 14 - including a number of mutual funds that shouldn't have been included in this figure - in the whole of CY2007 compared with 201 at the National Stock Exchange of India. Those already listed at KSE also raised little capital by means of either equity or debt instruments. Despite years of economic growth, the ratio of new listing to total listing for KSE has often been amongst the lowest in the world, as shown by the data on KSE's website and the reports of the World Federation of Exchanges.
Third, stock market is dominated by speculative trading and a recurrence of crises. In turnover velocity, KSE ranks among the top exchanges in the world with just about 30 companies, accounting for as much as 90 per ent of trading. The dominance of speculative activity remains heavily dependent on the notorious 'badla' financing, which is unique to the local market and has contributed to every crisis, be it May 2000, May 2002, March 2005, or June 2006. When speculation grows out of control, rules are changed overnight to prevent broker defaults and to save face. Most recently, in May 2008, after years of "reforms" and pursuit of "international best practises", the KSE's board of directors had to meet in an emergency meeting to change it rules overnight, extending 'badla' financing to speculators who were unable to settle their positions in single stock futures. The ground reality of the once "best performing market" remains rather grim.
In sum, in a market that has so few investors and raises so little capital, how can the speculative antics of a tiny minority in the shares of a few companies mean anything for Pakistan's economy and its 170 million people? An important responsibility rests on the shoulders of mainstream anchors in private media to present stock market performance in the correct economic perspective. It is about time that the bluff of KSE-100 representing the economic fortunes of Pakistan is called for once and for good and the government be forced to focus on meaningful economic indictors such as inflation and unemployment. Public policy ought to be driven by the wider public interest rather than be hijacked by special interest groups.
Dr Adeel Malik is a lecturer in development economics at the University of Oxford, a Rhodes scholar and has worked for Dr Mahbubul Haq's Human Development Centre in Islamabad. Usman Hayat is an independent securities markets consultant and has worked with the SECP. Emails: adeel.malik@qeh.ox.ac.uk,usmanhayat@hotmail.com
Courtesy : THE NEWS
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