Rupee's exchange rate will determine gains in equities

Islamabad: The future of Pakistan's economic conditions on a wide variety of issues ranging from the outlook for the stock market to the economy of the average household is partially tied to the exchange rate of the rupee.

In a year when the rupee has devalued in a range of eight to ten per cent versus the dollar so far, there is a major challenge for the country's economy.

The rupee's fall has been fuelled by a number of adverse indicators that have come in to influence the Pakistani currency, ranging from a declining economic growth rate to a significant rise in the international trade deficit and a widening current account deficit.

The adverse trends surrounding the rupee are, of course, troubling for stakeholders in the equity market. The key players in the Karachi Stock Exchange (KSE) have seen their fortunes multiply over a period of time, when the KSE acquired for itself that status as one of the world's fastest growing stock markets.

For the KSE, adversity surrounding the rupee is especially worrying for two fundamental reasons.

On the one hand, a devaluation of the kind seen recently would only prompt foreign investors present in the Karachi stock market to leave for other destinations. An outflow of foreign capital in this way would only aggravate the KSE's future and pull down the Karachi market's global standing.

Insecurity

On the other hand, devaluation of the rupee would cause undue loss to stakeholders at the KSE and add to the sense of insecurity for individual investors.

Given this challenging outlook, there are no easy solutions. However, individual investors can indeed put safeguards in place to protect their key interests as conditions remain increasingly unfavourable for their business.

For many equity investors, new options worth exploring may well include diversifying their investments into areas outside the stock market, to simply work as a hedge in protecting their interests.

There must also be essential safeguards to avoid a panic-selling spree. In achieving this objective, the government of course has a role. While the stock market can do infinitely better as long as it is squarely run by the public sector, the government can help in two different ways.

The government should curb its expenditure in a way that the overall budgetary position improves radically. It should also restore calm to Pakistan's often nerve-wracking political conditions.

For stakeholders tied to the stock market, Pakistan is essentially a country with constant political infighting. It is no surprise that the latest fall in the value of the rupee has coincided with growing political turmoil as a new elected government is trying hard to settle in the job.

- The writer is a journalist based in Pakistan.