ISLAMABAD: Pakistan’s economy remains vulnerable despite a stable debt outlook as investment rates have remained very low at 15.2 per cent of GDP in the last fiscal year, says the Asian Development Bank.

The under-developed capital markets in Pakistan have contributed to the ineffective mobilisation of savings, leading to a wide saving-investment gap. The banks’ own credit origination capacity was hampered by the ineffective role of the country’s capital markets, and the economy remained dependent on volatile foreign capital.

The development of domestic capital markets can have the benefit of increasing the government’s access to local currency financing by issuing debt through domestic open-market operations and thereby help manage foreign exchange risk and inflation better.

An ADB internal report connected with the approval of a $300 million loan on March 22 to further develop Pakistan’s capital markets, promote private investment and help to mobilise domestic resources to finance sustainable growth, says Pakistan significantly below peer countries on key capital market-related indicators.

At 15.2pc of GDP, Pakistan’s investment rate in the fiscal year 2021 is almost half of the South Asian average of 31pc of GDP. For an economy at Pakistan’s development stage, this low level of capital investment reflects low investor and business confidence and also constraints future growth. Nascent capital markets are part of the problem. Stock market capitalisation, at 17.4pcof GDP as of June 2021, has been declining and is below the figures for India (99pc) in 2020.

In Pakistan, assets managed by mutual funds and pension funds represent a fraction of those in regional peers. Pakistan has the lowest open-end fund asset base among its regional peers in Asia and the Pacific, totaling $6 billion or about 2pc of its GDP, the report says.

Pakistan’s finance sector is predominantly a bank-based system. As of December 2020, bank assets accounted for almost 75.5pc of the country’s total financial assets, whereas national saving instruments accounted for 12.7pc, the insurance sector 5.5pc, and non-bank financial institutions 5pc. Such a bank-dominated finance sector reflects a lack of capacity in the non-banking sectors and capital markets, points out the report.

The ADB report says a non-diversified finance sector represents a risk because of the inability to deal with financial shocks and periods of uncertainty. It also fails to support the development of long-term finance and risk capital solutions.

In addition, the lack of sufficient outstanding stocks of marketable and market-friendly government securities at crucial yield tenors impairs the formation of an effective pricing and risk management benchmark for financial deepening in local currency. This greatly impairs banks’ maturity transformation. Banks in Pakistan mainly offer short maturity loans and offer very limited long-term financing for infrastructure projects, it says.

Underdeveloped capital markets with a limited role in financial intermediation and resource mobilisation. The PSX lacks depth in the number of investors and the number of companies raising capital. As of December 2021, about 255,000 individual investors have a stock investing account.

The role of capital markets has regressed, with the number of companies listed in the PSX declining from 747 in 2001 to 533 by December 2021.

Published in Dawn, March 27th, 2022