Our governments are very fond of celebrating occasions which are quite ordinary and do not carry much importance for economic or political landscape of the country. Such a mindset was evident on 15th June, 2016 when Morgan Stanley Capital International (MSCI) upgraded the Pakistani bourse to Emerging Markets Index from Frontier Markets status. Overjoyed by this decision, Finance Minister Ishaq Dar declared on the floor of National Assembly that "I want to share good news with the nation that Pakistan has regained membership of Emerging Markets Index." He also added that 22 institutions of the world have already accepted macroeconomic stability of Pakistan. Making a surprise visit to the SECP headquarters the same day, Dar called it a historic day for the country and reminded that "we have regained the status which we had lost after the 2008 stock market crisis." After the country's stock market was upgraded and included in the MSCI's index, Pakistan Stock Exchange soared and closed higher by 1042.12 points or 2.78 percent in a single day to reach the mark of 38,559.87 points on 15th June which was a record level. The decision by the MSCI, the leading provider of research-based indices that claims to cater to 97 out of top 100 largest international fund managers, was claimed to have been made after extensive consultations with international fund managers. To support its contention, the MSCI said that Pakistan met all quantitative and qualitative criteria for the upgrade which included the liquidity and the market size. Improvement in these areas over the last few years had helped Pakistan's market reclassification to emerging markets.
As for the background, Pakistan was part of the Emerging Markets Index from 1994 but the country's stock exchange was dropped from the MSCI Emerging Markets Index when it imposed a floor on the market during the financial crisis in 2008, effectively trapping local and foreign investors for several months. In 2009, Pakistan was included in MSCI's Frontier Markets Index and warned that the market needed to function without any trading disruptions for some time before being considered for reclassification in its EM Index. Funds tracking EM Index are estimated to be around dollar 1.4 trillion to dollar 1.7 trillion which are much larger than those that track the FM Index valued at dollar 17 billion to dollar 20 billion. Nine companies of Pakistan have been short-listed by the MSCI committee for probable inclusion in the EM Index. These include OGDC, HBL, UBL, MCB, ENGRO and PSO.
However, notwithstanding the mirth over regaining entry into the MSCI's EM Index, the real question begging for an answer is the total net economic gain to the country from this development. Dar has claimed at the floor of the house that the new development will help bring foreign investment in Pakistan and boost economic growth. Nevertheless, such a claim is not backed by a proper analysis and could be out of tune. A cool-minded calculation by certain major market players suggests possible inflows of nearly dollar 250 million. Agreed that the MSCI decision bodes well for the market as it would enable the country to gain access to a larger pool of foreign funds but the total expected inflow from this source is too meagre to make a significant impact on the level of investment and growth prospects of the country. Moreover, it should not be forgotten that these funds would largely flow into the stock exchange of the country which do not contribute much to the economic development and could flow out of the country at the first hint of trouble. That is why portfolio investment is regarded as 'hot money'. It can flow in and out with ease. Besides, even the inflow of dollar 250 million would depend on the behaviour of investors and their analysis of the situation. You can lead a horse to water but you can't make him drink. Above all, the government needs to know that the overall level of foreign investment does not depend on such minor developments but is contingent upon some other fundamental factors like returns and safety of capital and ease of doing business in a country. Foreign investors make comparisons of investing in various countries on the basis of these factors and then make up their mind to select a country for investment. Unfortunately, however, foreign investment in Pakistan has dwindled from about dollar 5 billion a few years ago to the present level of only about dollar one billion per annum due to a negative perception of the country. In our view, Pakistan needs to improve the attraction of other factors a great deal before thinking about a big jump in foreign investment for the development of the country. The inclusion of Pakistan in MSCI Emerging Markets Index is only a minor development likely to have a marginal impact on the economy of the country and should be treated as such.