The Securities and Exchange Commission Pakistan is facing a challenging job developing the capital market in an economy where the savings rate is 13pc of the GDP and where there are only around 250,000 investors; a vast majority of whom are based in the three large cities.

The bulk of the savings are drained away by the government and banks in the form of risk free assets. A handful of blue chip scripts form a major part of the leading index and total market capitalisation. A serious liquidity risk is faced by investors due to lack of depth in the capital market.

The argument presented here is that the Capital Market Development Plan (CMDP) is promising but will be pointless without political will and active support to tackle the existing fiscal and monetary policy issues.

The capital market is one of the most crucial indicators in determining an economy’s health. Recognising the need, the SECP has framed the CMDP (2016-2018) around the following strategic targets: legal and regulatory reforms; structural reforms and developmental initiatives at the SROs; reforms for capital market intermediaries; product and market development; reforms for issuers in the capital market; reforms for investors’ access, awareness, protection and facilitation; and improving image-building and compliance with international standards.

The plan largely focuses on introducing key structural reforms, revising existing laws and enacting legislations for new products, as a measure to encourage new listings on capital markets.

In line with the plan, the SECP has enacted the Debt Securities Trustee Regulations (DST) 2016 through Statutory Notifications: the SECP approved a regulatory framework under the Securities Act, 2015, for Public Offering of Securities Rule 2016.

These two regulations intend to tighten risk management characteristic of the market in a hope to stimulate business activity and growth. But national savings needs to be improved along with both the risk management and controls. Cutting the returns on National Savings Schemes will be counterproductive.

The capital market development plan suggests integrating the NSS into the capital market for growth purpose only.

The real intention is to increase the sovereign borrowing pie and reduce cost under the pretext of capital market development. The NSS is holding prize bonds and government securities as assets while the government’s appetite for debt is out to lunch at the expense of forced savers, like pensioners etc.

The level of capital market development is determined by its efficiency, regulatory framework and national savings, and ultimately, the rate of economic growth.

Only six new companies listed themselves on the Pakistan Stock Exchange (PSX) during FY2015-16 while the ratio of market capitalisation of listed domestic companies to GDP was as low as around 24pc, according to the CMPD.

Domestic and foreign investors are mostly interested in a few blue chip stocks.

Institutional buyers are holding a large portion of capitalisation in a few scripts due to limited interest of a typical householder.

This limited participation of households is multi faceted, based not only on ‘no’ or ‘little public awareness’, but also on a lack of faith that their interests would be protected by regulations.

Most individuals are involved in leveraged trading; restricting their choice to blue chip accounts. Demutualisation has not enhanced market depth, either of the number of buyers and sellers or of the trading instruments at a given price.

The Savings-Investment gap for the year 2005 to 2016 was negative except, for year 2010-11, as per the Pakistan Economic Survey 2015-16; with declining foreign direct investments.

The heart of the problem in the non-development of capital markets is not the lack of better controls but low rates of domestic savings and investments..

The SECP’s efforts will be futile without supportive monetary policies and fiscal measures. The savings to GDP ratio should be enhanced, along with measures to make saving more attractive by offering good returns.

An unrealistic monetary policy rate and non-availability of specialised institutions to save and fund, along with mixed sovereign allocation of funds, will add fuel to fire.

Mobilisation of savings and investments through the capital markets is imperative but cannot be achieved merely by introducing regulations.

One cannot solely rely on banks for capital development because of asymmetrical development that is counter to market depth. Everyone has to chip-in, even the big guys.

Published in Dawn, Business & Finance weekly, February 13th, 2017