A 20-billion-rupee bailout

Updated June 23, 2019


The writer is a former member of the PSX board of directors.
The writer is a former member of the PSX board of directors.

THE Karachi Stock Exchange was established in 1949. When the Lahore and Islamabad stock exchanges were de-licensed in 2016, the three stock markets were consolidated into one entity, the Pakistan Stock Exchange. While the PSX garners a fair amount of media coverage, it is instructive to study what its actual contribution to the Pakistan economy has been.

In its simplest form, a stock exchange provides a platform where companies looking to raise capital are matched with investors looking to invest profitably. Judged by this parameter, does the PSX add value? Let us look at some numbers.

Presently there are 558 companies listed on the PSX; this number has ranged between 557 and 560 over the last five years. The earliest data available on the PSX website is for 2001, when there were 747 listed companies. That’s right, the number of companies has actually declined over the years. This is due in part to companies de-listing or merging with one another. More importantly, it is due to pitifully few new listings; the numbers for the last five financial years are: 2018:6, 2017:5, 2016:4, 2015:9, 2014:5. The story is little different if you go back further, say 10 or 20 years. In 2019, only one company has listed. PSX fares poorly in its first core function, ie helping companies raise capital.

PSX fares even more poorly in its second core function, ie as a platform for investors. The total number of investors in Pakistan is 231,793, or 0.1 per cent of the country’s population (National Clearing Company of Pakistan Ltd data, March 2019). A regional comparison is telling. Bangladesh, with a comparable per capita GDP, has 2.8 million investors. That works out to 1.65pc of its population.

Should the government underwrite the investment risk of financial markets? Unequivocally, no.

A global measure of the size and significance of any stock market is the market capitalisation to GDP ratio, expressed as a percentage value. Market capitalisation is the value of all listed companies. In general, developed countries with developed financial markets have a higher ratio. According to World Bank figures — the latest available are for 2017 — the ratio for high-income countries is 138pc, while for low- and middle-income countries it is 67pc. At PSX, from 2008 to 2018 this ratio has ranged between 16pc and 34pc. Again, a regional comparison is telling. Some country ratios from the World Bank data are: India 88pc, Bangladesh 35pc, Saudi Arabia 66pc, UAE 63pc. PSX’s ratio, 30pc in 2017 and down to 20pc currently, is one of the lowest.

Most observers would conclude therefore that PSX plays a relatively insignificant role in Pakistan’s economy. Seventy years after its inception it has still not matured to the level of a serious capital market, even by regional standards. The reasons for this are manifold, and while Dawn editorials have pointed out some of these, they lie outside the scope of this article.

It is intriguing, therefore, that the PSX should qualify for government support at this time of economic distress, when resources are scarce and all sections of society are being asked to share the pain through the difficult period ahead.

The government, from among all of its pressing tasks, has managed to conjure a bailout fund of Rs20 billion for the stock market. According to the Ministry of Finance, the Economic Coordination Committee on May 30 approved the issuance of a sovereign guarantee for investment in the National Investment Trust State Enterprise Fund. The reported broad outlines are that NIT will manage the fund, which will invest in state-owned enterprises with the objective of supporting the market as a whole. Also, the usual suspects from state-owned financial institutions (FIs) — State Life Insurance Corporation (SLIC), Employees Old Age Benefits Institution (EOBI), National Bank of Pakistan (NBP), etc — will be rounded up to invest in the fund.

Here a number of questions arise for the above FIs, the Securities and Exchange Commission of Pakistan (SECP) — the apex regulator for the country’s capital markets — and the government itself.

Does the FIs’ mandate include bailing out the market? Unequivocally, no. It is hoped that the FIs’ boards, fully seized of their fiduciary responsibilities, will decline to participate in the fund. Their fiduciary responsibilities, if it needs spelling out, are to their unit holders (NIT), policy holders (SLIC), pensioners (EOBI) and depositors (NBP).

Should the government underwrite the investment risk of financial markets? Unequivocally, no. The only justification for government intervention is in case of systemic risk to the financial system. The Asian crisis of 1997-98 and global financial crisis of 2007-08 were instances of significant government intervention because entire countries, indeed the global economic system, was at risk. Is that the condition in Pakistan? No. First, the market has an insignificant role in the economy. Secondly, the quantum of market decline is not extraordinary. As of mid-June, the KSE-100 index is down less than 10pc in 2019 and less than 20pc in a one-year period. The claim that there is a crisis is risible.

So, to the larger question: do our governments understand their job? This is a question not directed at the PTI government specifically, but governments in general. The primary responsibility for the stock market lies with the SECP. It should advise the finance ministry on the measures, if any, that need to be taken. This advice cannot be reactive to market movements or to the clamour of market participants. Instead it should be based on considered, rigorously developed policy and guide government responses to any and all situations, whether born of a crisis or in the routine.

The International Organisation of Securities Commissions, the global association of securities regulators (SECP is a member), has three core objectives of securities regulation: protecting investors; ensuring that markets are fair, efficient and transparent; and reducing systemic risk. Everything flows from these objectives. We would do well to heed these basics.

The writer is a former member of the PSX board of directors.

Twitter: @samirahmed14

Published in Dawn, June 23rd, 2019