KARACHI, March 20: Nervousness among investors following the deployment of Indian troops after December 21, sent the Karachi Stock Exchange into a tailspin with the index losing 130.95 points in the last ten days of the quarter, the SBP second quarter report stated; the index closed the Q2-FY02 at 1273.06 points on December 31, 2001.

But the market was said to have started the second quarter on a positive note. Expectations were that the country would reap significant economic benefits including debt rescheduling as a result of its assumption of an important role in US-led coalition.

In the meantime, fear of crackdown by US on informal channels of money transfers forced hundi/hawala dealers to sell dollars in open market, thus forcing an appreciation of the rupee. “With interest rates falling (as a matter of policy by the SBP) and the dollar weakening against the rupee, investors had little choice but to enter the equity market,” SBP said, adding that the KSE-100 index therefore kept up the rising trend to reach level of 1406.05 on October 31. The index consolidated and moved in a narrow range of 61.86 points (between 1399.81 and 1337.95) from November 1 to December 13. But the December 13 attack on Indian parliament went on to make the market jittery.

The SBP stated that though the Indian government continued its rhetoric of blaming Pakistan together with the troops build-up on border, market rebounded strongly by the beginning of January 2002. “Two factors were instrumental in this recovery: first, it became clear that war with India was not on cards due to international diplomatic efforts and secondly, economic fundamentals remained strong during this period,” the SBP stated.

The bank observed that with the foreign exchange reaching as high as $4.82 billion at end-December 2001, there was a sense of stability vis-a-vis rupee. As a result, effective rate of return on dollar denominated assets became unattractive. Likewise, weighted average rupee deposit rates were also low. “In this scenario, equity market proved to be an attractive avenue for investors,” the SBP said.

The SBP commended the role played by the SECP as regulator of the equity market. Besides the resolution of sensitive issues with the stock exchanges, successful introduction of T+3 system, adoption of risk management system by KSE and imposition of circuit breakers were all said to have contributed to the buoyancy of the market.

“As a word of caution, there are still certain weaknesses that need to be addressed,” the Bank said. For example, issue of poor disclosures by the companies is the foremost concern for investors, the Bank said. It stated that the recent fiasco of Enron in US had once again brought the issue of poor accounting disclosures to the surface. In many ways, it highlighted the need to improve both internal and external auditing standards, the Bank said. “The myth of self regulation that is prevalent in accounting industry (in Pakistan as well) needs to be changed. It is easier said than done for the management body to regulate its members, who elected it.”

The Bank observed that there also was the need to split auditing and consultation business of accounting firms. “It is high time for concerned authorities to make changes in regulations that govern accounting profession in our country,” the SBP stated, adding that it would make accounting disclosures more transparent and would provide comfort to domestic and foreign investors.