The decision taken by the Board of Directors of the Karachi Stock Exchange to give additional one week for settlement of March contracts on the Futures counter is not a solution and only amounts to deferring the problem. It could also be viewed as a violation of the sanctity of a contract unless both parties involved in the settlement, agree to give additional time. It appears that the KSE Directors have either not understood the nature of the problem or lack the expertise to tackle it.
The authorities were well aware that fast rise in the Index was unnatural and bears no co-relation to the improvement in economic fundamentals. Yes macro-economic stability has been achieved. The growth in forex reserves gives the breathing space to keep the wheels of the economy moving. Demand side greased by an accommodative monetary policy has given an opportunity to raise production from 60 to nearly 100 percent of the installed capacity; and in some sectors such as automobile assembly, cement and telecom, investments have been made to double the installed capacity.
The unusually high import of machinery to modernise and expand the textile sector places them in better shape to compete in the post quota regime.
Against all these plus signs there are also a number of minus signs. The cost of doing business in Pakistan continues to be on the higher side as compared to our competitors. The productivity levels need to be raised to international levels. Therefore we cannot afford to be complacent and continue to boast that the growth levels have reached over seven percent.
GDP of China has doubled four times in the last 25 years with growth rates consistently in double figures. Our growth is more dependent on mother nature. Good wheat and cotton crops push it up.
That is, our dependency on the weather cycle for growth continues. Industrial expansion is becoming increasingly difficult due to lack of skilled work force and crumbling infrastructure.
What we have seen in the stock market in the last quarter is a bull run which sharply accentuated in the last one month. The shooting of the market Index from 5000 to over 10000 had more to do with the way the KSE-100 Index is formulated and also the fact that small level speculators jumped on the gravy train to make a fast buck.
Calling them small investors is a misnomer. An investor is always careful about his investment decisions. He gives thought to both the upside and the downside of his decision to buy. He can only buy if there is a seller. For the seller the price must be attractive, and the timing right to sell.
For a buyer it is good to buy if he has expectations of making a profit on future sale. What we have seen in the last 10 days is a logical consequence of a bull onslaught running out of steam.
Whenever common folks in such large numbers jump on the bandwagon when sentiments are positive and with their greed knowing no limit, they are ready to borrow at over 100 percent without blinking on eye and when all and sundry forget about their core business as they see a windfall opportunity, it is just a matter of time for the cart to turn turtle.
This is what has happened and no matter how much they holler and place the blame on the government, it is the same people who have burnt their fingers at least four times during the last five years and we are sure that by and large they would do it again.
Yes the financiers of these small players can be partially blamed. It is the big boys of the exchange who with the help of some banks and financial institutions funded them on interest rates which would make even shylock envy them.
Yes we can rightly blame the management of KSE for not strictly enforcing its rules and the SECP for not raising the margins sharply when the bull run was being accentuated. KSE rules require clients to provide margins to the brokers against placement of individual orders. But rarely do brokers follow this rule.
They are afraid to lose the client as he would shop around and go to another broker who is willingly ready to oblige and provide the margin. If KSE would periodically audit its members and penalise those who do not conform to this rule this practise would end.
Secondly, had SECP drawn the necessary structure for the Futures market with proper risk parameters we would not be in the soup. What we today have is just a Forward Delivery Counter and not a proper Futures market. It was only in March that SECP asked the bourses to put in place the software and hardware to monitor the tightened risk rules and plug the big loopholes.
The permission sought to switch from March to later delivery in April, may give time to big players to raise the funding to meet delivery commitments. Asking the big brokers to bail out the small speculators (not an investor) to smooth away the settlement crisis could open them to charge of taking advantage of the small man. Even the call to remove the five percent lock upon fall in the scrip value in a day is unjustified. It gives the exchange the chance to collect the loss from the members.
Those who have lost know it was pure greed for the quick buck that attracted them to the bourses. We sympathise with them. But we feel sorrier for the Pakistani nation that has once more lost a good opportunity for capital formation. It is time the fiscal authorities stepped forward and took the pressure off the monetary officials to bear the load of leading the economy forward.
Interest rates will have to be raised. Liquidity around and monetary overhang of last three years has to be corrected through lower monetary expansion. We require the fiscal authorities to give tax incentives so that holding companies can be formed that can take up infrastructure projects which have become bottlenecks in fast delivery of our goods and services. Let us stop crying and let the market find its natural level.
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