We had opened up our bourses to the international investors a few years back as a measure of [partial] capital account convertibility. As per one newspaper report, equities valuing $3 billion or 25 percent of the "free float" are currently held by the foreigners. As per Business Recorder /report (August 28, 2008) the foreigners have taken back $396 million since the beginning of the current calendar year.
The economic managers had been boasting during the last half a decade or so that the Pakistani bourses are the best performing ones in the world even though they [bourses] had created the worst crises for the small investors in 2005 and 2006. The situation has became the most critical in 2008 as the KSE 100 index is on the slide since April,2008.
It has fallen from 15,750 points to 9208 points as on 28th August, 2008 - a hefty decline of over 41 per cent. The sufferers are ordinary persons with small resources while a few dozen large brokers may be the gainers as it is widely believed that these brokers do manipulate the markets for their personal gains.
Is it not strange that the shares market remained stable or showed march to the north during the period of over one year when the country was in the grip of the legal fraternity's movement? Is it also not strange that currently the fall in the KSE 100 index and depreciation of rupee against the dollar are taking place simultaneously? Have the people having extra large resources moved to the currency market for speculative gains after ruining the small investors at the bourses?
Is it also not strange that the exporters' lobby - particularly the textile sector - which had always been demanding depreciation of Pakistan Rupee against the dollar have now begun to take the plea that over 20 per cent recent depreciation of the rupee is causing losses to them? This apparently seems to be an endeavour to seek more monetary gains from the government in one way or the other.
We have seen the fall of the KSE 100 index in 2005,2006 and 2008; all are believed to have benefited the rich investors/ brokers. The strong lobby of the rich did not allow appropriate investigations of the causes of the loss [2005/2006] and pin-pointing of the beneficiaries so much so that- as per media reports- the record of the Securities and Exchange Commission of Pakistan (SECP) was destroyed.
It has been witnessed in the past that whenever, there is an anti-climax in the bourses, the Government (Ministry of Finance) and State Bank of Pakistan (SBP) immediately come to the rescue of the big belly seths by asking (a) the banks/financial institutions including the government-owned mutual funds to embark on the "purchase" spree to raise the market, (b) the banks to provide finance to the investors mostly comprising big belly seths under CFS or other methodology.
One wonders whether is it the responsibility of the Government/SBP to arrange finance to the investors in a field which is neither contributing anything to the national Gross Domestic Product (GDP) nor are they prepared to support the national exchequer by paying capital gains tax on the huge earnings on the daily basis.
One recalls that in the 2005 bourses crisis, the then prime minister had immediately summoned back the SBP Governor, who was outside Pakistan on official assignment, with a view to resolving the crisis; of course by devising means to pump more money in the hands of tax-evaders. Such governmental sympathies are never seen in other sectors of the economy. What does this close nexus between the powerful investors [read powerful brokers] and the government hierarchy shows? It is anybody's guess.
As indicated earlier, our bourses were opened to the foreign investors a few years back. The funds pumped into the bourses constitute "hot" money coming in and going out [with tax free huge profits] at any moment. It will be recalled that this capital account convertibility was one of the reasons which generated financial crisis in the Far-Eastern economies in 1996-97.
These economies were much stronger than that that of Pakistan. Resultantly, the respective countries had to seek bailout packages from the Bretton Woods Institutions [BWIs] with the exception of Malaysia which managed without their help. Our economic managers, whose bent of minds implies that we should blindly adhere to the formulas/strategy suggested [read dictated] by the BWIs notwithstanding whether such a strategy suits to the ground realities of our economy or not.
The country is passing through a difficult external side scenario these days. In case the non-residents/ foreigners decide to take out their entire investment from the bourses, in what manner the economic managers will tackle the problem is not understandable as the stake involved is as huge as over $3 billion.
The above discussion also raises the question whether the policy of capital account convertibility needs reconsideration; at least for a temporary span during which we are able to tide over current external sector difficulties; and if so how could it could be made possible?
The present concept of "free float" available in our bourses is not correct. The amount depicts the entire capital of the listed companies although the controlling shares of any listed company- at least 51 per cent- are held by the "owners" - whether they are private entrepreneurs or the government/semi-government organisation(s). Naturally such shares are not available for trading at the bourses and hence should not constitute "free float".
Thus the foreigners/non-residents must be holding 50 percent [or more] of the "free float" and not merely 25 percent as indicated in media report as mentioned in the opening paragraph of this write-up. The SECP should pay attention to this aspect of the matter so that the bourses issue correct [daily] statistics about the "market capitalisation".
(The writer is retired Additional Director/ Foreign Exchange-SBP and had been contributing to these pages in the pen name of A M Talha for quite some time)