PAKISTAN’S stock market has been on a downward ride for the last several months as a result of deteriorating macroeconomic data and economic uncertainty.

Share prices, however, started to sink deeper following the State Bank’s decision to unexpectedly boost its key policy rate by a hefty 150bps to 8.75pc at the Nov 19 Monetary Policy Committee meeting. But few expected the bloodbath witnessed in the market on Thursday with the benchmark KSE-100 index suffering heavy losses of more than 2,100 points — signifying an erosion of 4.7pc of its value — in a single day since March last year when Covid-related curbs were first imposed. The stocks lost almost the same amount of their value in three days following the recent monetary policy announcement.

The main culprit for the bloodbath appears to be the widespread apprehension over new PBS data showing that the trade deficit worsened last month; this led to fears of a sharper increase in interest rates in the immediate term and greater pressure on the deteriorating current account and weakening home currency. That the yields on treasury bills have already jumped to nearly 12pc over the last few days and the rupee has declined to 176.77 to a dollar in the interbank market confirms that the investors’ anxiety isn’t misplaced.

The markets follow not only economic indicators but also popular perceptions about the economy. The decline in share prices has much to do with the worsening economic data but the current situation cannot be fully explained without taking into account what investors think about the future of the country’s economy in the near to medium term. The failure of the PTI government to contain runaway inflation coupled with the consistent rupee erosion because of the burgeoning current account deficit has not only battered investors’ confidence but also entrenched expectations of higher headline numbers over the next several months.

Average headline inflation is anticipated to rise from 9.3pc in the first five months of the present fiscal to nearly 12pc for the remaining months, with more inflationary measures in the proposed ‘mini budget’ to meet IMF demands. Likewise, the current account deficit is predicted to balloon to nearly 5pc of GDP this year, breaching State Bank estimates of 2pc-3pc.

The delays in the resumption of IMF funding in spite of a staff-level agreement with the lender, and stringent Saudi conditions linked to the kingdom’s loan, have also reinforced worries over the government’s ability to raise foreign funds for reducing pressures on the external sector. Expecting the bears to return to their cages in such uncertain times when the government is putting growth into lower gear is foolish. Share prices will likely continue to plunge until inflation is controlled, normalcy returns to the foreign exchange market and the cost of money comes down to make stocks a more attractive option than sovereign debt.

Published in Dawn, December 4th, 2021