The Karachi Stock Exchange breached the 1250 point level on July 28, clearly signalling the inability to absorb the massive floating stock of approximately six billion shares.   The performance of the country’s largest bourse has been dismal in 2001.  A number of factors sent share values spiralling downwards and investors burnt their fingers during the prolonged bearish spell.  The list of causative factors include slow economic growth, foreign selling, financial crunch, tussle between SECP and the KSE members, the government’s failure to sell any state-run units, the weakening rupee versus the dollar, the law and order situation and the closure of two brokerage houses with connections to the Prudential Commercial Bank.

            The Karachi Stock Exchange plunged to the bottom of the scale when compared with regional bourses.  Despite promises and assurances by the government that economic reforms would soon get a legal stamp the confidence of foreign investors failed to recover.

            Meanwhile, local investors, including financial institutions or banks, do not have enough strength to absorb the huge selling pressure and the market remained dry and starved for funds.  Poor economic growth coupled with the failure of the government to sell shares in any large state-run companies through the stock market badly impaired investor confidence.  Growth in the economy stood at its lowest ebb in last 20 years.  The government, meanwhile, found a convenient scapegoat in the drought.

            Cotton and wheat output remained the same compared to last year’s level of 9.7 million bales and 19 million tons respectively.  Rice and sugar showed a decline but have sufficient stocks.  Pakistan achieved its highest export figure of 2.4 million tons of rice this year.  Given these figures there seems to be no problem.  So one can only assume that earlier statistics were fudged.  According to officials, the drought has cast a dark shadow and the country now stands to lose nearly 927 million dollars.

            The stand-off between the regulators and the stock exchanges was another crucial issue.  While the sole aim of the regulator was to induce an appropriate operating environment in the capital markets, the modus operandi chosen by the authorities in Islamabad was deplorable.  Sudden changes in the regulations without consulting the brokers community created “insecurity” among market players.  This factor pushed the players to start liquidating and in the process, small investors lost their shirts.

            The Karachi Stock Exchange for the third time reached the 1300 mark.  “Increase in treasury bill rates, the launch of Pakistan Investment Bonds and Terms Finance Certificates, which offer fixed returns, attracted both the investors and institutions,” says Mohammed Sohail of Invest Capital Securities.  He also felt that the weakening of the dollar where return on average was over one per cent a month, had also sucked funds from the equity market.  Other contributing factors that erased stock values were the delay in priviatisation, the government’s failure to announce a fertiliser policy and the liquidation of the Pakistan Investment Fund.

The new trading system, ‘T+3’, also resulted in a massive sell-off.  Under this trading system, players have to pay their dues in three days instead of five+3 days. The system was aimed at curbing speculation; however, it hurt the sentiments of the punters.  Moreover, the Prudential Bank scam in which the institution siphoned off as much as 2.4 billion rupees from its depositors, created a massive scare.  The bank was the major client of two corporate brokerage houses, Republic Securities and Total Securities.  The directors of the brokerage houses, on behalf of Prudential Bank, bought shares and what they earned through trading went to line their own pockets, while all losses were shown in the bank books.  The authorities resorted to hasty selling to collect this outstanding amount and in just two sessions, about 700 million rupees worth of shares were settled.  NAB also played a pivotal role at the KSE.  Its undue involvement in the financial matters of a few businessmen irked large investors who began slicing off large positions as a reaction. Meanwhile, the market also objected to the consultants hired by the agency for indulging in front running and insider trading.

Commenting on the current stock market scenario, Arshad Arif, head of research at First Capital, spelled out various factors for the existing chaos.  Firstly, he blamed the regime for being “too loud in words, and too slow in implementation.”  He cited examples of the establishment of the Oil Gas Regulatory Authority and the fertiliser policy.  On the SECP/KSE stand-off, he blamed SECP for being too hawkish in terms of dictating terms and then expecting miracles over-night.  Arshad also criticised the central bank for overlooking the Prudential Bank imbroglio.  On the closure of the two brokerage houses, Arif felt that the whole market was aware of the situation and hushed it up, while the regulators ignored the fiasco in the making.  Arif also blamed NAB for their role in spoiling the business atmosphere.  While he appreciated the punishment awarded to the former owners of Mohib Textiles, he also pointed out that was NAB blatantly ignoring corruption in the army and the judiciary. According to him, foreign investors are wary of this discrimination, and this could be one of the reasons behind their sell-off in the last fiscal year.

            On the future direction of the stock market, Arif was of the opinion that the index will remain within a narrow band of 200 points.  However, the Poverty Reduction Growth Facility (PRGF) could be a major trigger factor, although Arif feels that chances are dim for Pakistan getting the PRGF at this juncture.  He felt that PRGF will only be forthcoming under a democratic rule.  According to Arif, IMF support will continue in the near term, but feels that after the expiry of the current short term facility, Pakistan will probably get further short term funding through a drought facility whereby the international financial institutions will try to keep Pakistan afloat in economic terms till the country reverts back to democracy.