Karachi stock decline reflects grim state of affairs

The fall of Pakistan's key stocks on Tuesday as foreign investors sold their shares heavily due to prevailing political uncertainty and worries about the broader economy, says much about the country's prevailing trends.

The KSE-100 index of the Karachi stock exchange (KSE) lost about two per cent of its value at close. This followed Monday's spectacular fall when the KSE-100 index declined by just below 4.5 per cent.

Yesterday's decline followed a continuing slide for many weeks as equity investors are worried about Pakistan's fragile political situation, which has added to the prevailing doubts over a new government's ability to handle economic challenges, notably the widening trade and fiscal deficits and fast surging inflation.

The latest selling pressure in the Karachi stock exchange has come after the Securities and Exchange Commission of Pakistan (SECP) - the stock market's regulator, and the KSE's management decided on Friday to revert to a daily limit of five per cent rise or fall in share prices, giving an opportunity to investors to divest from the Karachi stock market. Last month, the SECP and the KSE's management amended the limits to block daily decline by up to one per cent while the limit for upward movement was kept at 10 per cent.

News from the KSE has coincided with expectations of another rise in interest rates by Pakistan's central bank - the State Bank of Pakistan. In May this year, the central bank raised interest rates to 12 per cent from 10.5 per cent - a move which in turn added pressure to the stock market.

For the central bank, raising interest rates is indeed a growing obligation at a time when it must also grapple with fast mounting inflation. In the past few months, news of a spectacular growth in prices of key food commodities giving an impetus to already growing inflation, has indeed made it increasingly unlikely that interest rates would remain unchanged.

In this environment, the short term outlook for the KSE appears to be far from promising. Going forward, the likelihood of continuing losses in the KSE is set to be the norm unless some of the fundamental challenges tied to the stock market are finally resolved.

In the short term for the newly elected government, there must be a realisation that the fall of fortunes of the KSE would indeed cause a fall in the fortunes of the government itself. This is essentially the writing on the wall at a time when Pakistan's outlook offers few immediate reasons for comfort.

To change the outlook for the stock market, there must be a set of two related changes that have to be put in place. On the one hand, it is vital that the new government backs off from further vitiating the political atmosphere. But for achieving this objective, there must be an end to the constant infighting. Once this objective is achieved, the next step has to be a review of economic policies embraced under Pervez Musharraf's rule.

This is just not a matter of a simple review. This is more about overhauling a structure which is built around managing the economy in a comprehensive way. For much too long, Pakistan's economic prospects have suffered badly on account of poor management on issues ranging from the obligations of the state such as imposing taxes, to matters tied to business functions such as providing a secure and stable environment. Ultimately, if Pakistan is able to resolve some of these challenges, the country's ability to attract investors is bound to improve significantly.

The likelihood of continuing losses in the KSE is set to be the norm unless some of the fundamental challenges tied to the stock market are resolved.

The writer is a journalist based in Pakistan.