This file photo shows traders at the Pakistan Stock Exchange. — AFP/File

How developing a culture of investing in stocks can save Pakistan's economy

Pakistan’s society needs a wider and collective share of economic interests.
Published October 8, 2021

A wider adoption of investing in stocks can solve Pakistan’s deepest economic challenges: a high and growing debt burden, lack of capital for entrepreneurs and poor economic sentiment.

While decades of policy input has failed to bring about any meaningful change, I think merely the alignment of economic interest through shared and collaborative ownership could lead to a complete change since there is immense power in the alignment of economic interests.

Anyone who has invested in the shares of a company would confess that it transforms them into the strongest supporter of that business.

Indeed, this shared ownership of business risks and rewards was the main genius behind the creation of public companies.

As chronicled in William Darlymple’s book Empire, one of the reasons why the East India Company won state support in the United Kingdom was the wide ownership of their stocks among the British political elite.

Similarly, Pakistan’s society needs a wider and collective share of economic interests.

Since business ownership is primarily concentrated within a few families, wider society becomes resentful of their success.

This creates a culture of pessimism and trust deficit which is then exacerbated, since Pakistan’s economy is primarily consumer driven. For the public, the companies' profits are in a way a burden on them as they don’t directly benefit from the growth.

In contrast, if they were shareholders in the same businesses, they would see a mutual benefit in corporate growth.

For example, shareholders of Tesla and Apple celebrate when stock prices go up on the back of greater sales and higher prices. Similarly, India's Reliance group is famous for generating shareholder returns which turned their customers into their partners.

I think a growth in retail ownership of stocks would drive a sharp improvement in investor sentiment. This would allow people to hedge against inflation — they would ultimately benefit from higher prices since the dividend income on the stock of the companies raising prices would increase.

Secondly, a shift in capital allocation to equity would reduce our reliance on debt. Unsustainable levels of debt is perhaps the country's biggest economic challenge.

I fear that existing policy tools fail to address this aspect since most of people and institutions advising Pakistan are either banks, bankers or donor agencies — they only know how to add to debt.

This is why, while there is so much attention given to the International Monetary Fund (IMF) and Sukuk bonds, there is little effort to attract and facilitate the inflow of investments.

In fact, until recently it was practically unfeasible for overseas private equity investors to invest directly in Pakistan due to the rules on capital movement.

Debt does not build alignment of interest — equity does.

We see this play out at a geopolitical level as well. The recent growth in Indian influence in the Middle East and the United States is partially driven by investments by American and Middle Eastern investors in India.

Lastly, the flow of domestic capital out of dead assets such as real estate and into entrepreneurial ventures is necessary for sustainably funding the economy.

Pakistan does not lack domestic capital. However, the issue is that most of the liquidity gets sucked into real estate.

Real estate is a dead asset, in the sense that it does not allow that liquidity to then flow back into the economy.

For example, if a business raises capital for growth, they use that money to hire people or get customers, so the money starts flowing back into the economy with a higher multiplier effect.

Real estate, on the other hand, sucks it dry.

Higher real estate prices also increase the cost of doing business through higher rent and further damage the economic circle.

In Western economies, mortgage financing is the policy tool used to free this trapped capital. Since Pakistan doesn't have such financing against real estate readily available, it leads to serious liquidity shortage.

Hence, we have to end up relying on foreign debt to finance our liquidity needs.

I think it's imperative for policymakers to understand the importance of stock investing. It is not a casino controlled by a few investors and it is not a place of making speculative bets.

The stock exchange is perhaps the most critical financial institution as it allows the flow of capital between the savers and businesses.

It is like the heart which pumps the blood. Since it is clogged, equity is not flowing, and debt is accumulating.

But unlike debt, equity is fair, democratic and allows collective and shared success — which is what Pakistan needs.