Restoring investor confidence is the need of the hour

Islamabad: The steep fall in volumes of Pakistani shares and prices traded on Friday must come as yet another major setback to the future of the country's equities.

Just about 800,000 shares traded on the day, as opposed to daily trade averaging about 300 million shares during the first half of 2007.

The lacklustre performance reflects the way in which investors have lost their appetite. If indeed, the representative KSE-100 index has not fallen radically on Friday. That was largely because of an artificial floor established in August to prevent the index from falling below a certain level.

The Karachi Stock Exchange's (KSE's) performance is not surprising. Recent weeks have been dominated by concerns over not just Pakistan's continuing political uncertainty but also unwelcome economic factors such as the fiscal and current account deficits, the declining exchange rate of the rupee versus the US dollar and indeed the depleting foreign currency reserves.

For the stock market, such trends reflect an unwelcome development because they suggest not just a declining economy but indeed also declining pros-pects for the market itself.

Pakistan's future outlook has been troubled in view of the fast-rising cost of oil imports, which tapered off for a while but are now rising again.

For countries like Pakistan, which depend on commodity imports, the unprecedented rise in prices of key commodities has hardly helped. For players in the stock market, issues surrounding food shortages may not be of direct relevance. But they are certainly vitiating the overall mood and making it difficult for players to enter the Pakistani market in a big way.

For many foreign investors who entered Pakistan in the past, a country internally divided poses new risks and challenges. To make matters worse, the downgrading of Pakistan by Moody's and Standards and Poor's has added to the anxiety.

On Friday, president Asif Ali Zardari, during a visit to the US, oversaw the creation of a new international forum called 'Friends of Pakistan', which includes western industrialised as well as Arab countries that consider themselves friendly towards Pakistan.

From Pakistan's perspectives, these countries will help put together international financing packages needed to rescue Pakistan from its many challenges. Given Pakistan's overall strategic importance, it is also likely that these countries will together deliver enough resources for Pakistan to survive a difficult economic situation. But is that going to solve the biggest of all problems, that of overseeing a turnaround in Pakistan's destiny?

Solution

The solution to restoring investor confidence lies in tackling a fundamentally vital and inter-connected issue surrounding Pakistan.

It is essential that Pakistan learns to tackle gaps in its tax collection machinery, short of which the country will continue to be haunted by a recurrence of its dismal performance from yesteryears.

That has been amply illustrated by the failure to bring in a badly-needed element of equity where only the rich are taxed to their full liability while the poor do not face a growing burden of direct or indirect taxes.

Once the state of Pakistan is able to improve its revenues, the ability to tackle the need for creating long overdue public services is far more likely to be achieved.

- The writer is a journalist base in Pakistan.