The stock exchange is always in the limelight and gives much to economic managers of the country to boast about. However, its proper basic role of meeting the capital needs of the economy while giving an alternate outlet for investment of public saving has been quite limited, rather not even worth mentioning.
The crying news headlines of boom and bust only depict the position of no more than 4-5 leading companies accounting for 80-90 percent of the turnover. Their market price has no relationship with the economic fundamentals.
For example, according to State Bank’s Financial Sector Assessment(FSA) 04: “Indeed at its FY05 peak, index heavy-weights, such as OGDC and PTCL (with a combined index-weight of over 40 per cent in the KSE-100) were trading at historic P/E multiplier of over 25x and 20x respectively which is difficult to justify on the basis of fundamentals alone.”
The rationale lies in speculation, simple and pure. The daily turnover of the heavy-weights is so high that the average holding period would work out in minutes, not even hours. The role of the equity market to raise capital for productive investment has been quite limited.
Of the 662 companies listed at the Karachi Stock Exchange, 151 are financial companies, non-financial companies thus being only 511. According to the Balance Sheet Analysis prepared and published by the SBP, in 02 the ordinary share capital of non-financial companies was Rs228.1 billion, of which private sector accounted for Rs130.8 billion. This represented only one third (33.5 per cent) of gross fixed investment in just one year, that is 01-02. New listing of shares has been quite negligible. During FY 05, KSE witnessed only 18 public offers increasing the paid-capital by Rs32.3billion as against offers raising Rs53.4 billion in the preceding year. As to the corporate debt, 12 debt instruments raised Rs15.5 billion as compared seven listing with Rs3.3 billion last year.
Banks are now increasingly involved in the stock exchange, both directly through their own investment and indirectly by providing credit to others for this purpose. Scheduled banks own investment in “Others” had increased from Rs62.8 billion in 02 to Rs116.4 billion in 04 and Rs122.9 billion in 05 on the same day.
Their investment (book value) in shares went up from Rs23.1 billion in 02 to Rs34.8 billion in 03 and was Rs33.0 billion in 05. Of this, the investment in “private shares” rose from Rs13.1 billion in 02 to Rs27.2 billion in 04 and was Rs24.4 billion in 05.
Their advances secured by “Securities, Shares and Other Financial Instruments” rose from Rs37.3 billion in 02 to Rs83.5 billion in 04 and Rs94.7 billion in 05. Advances secured by “Shares and Debentures” rose from Rs5.2 billion in 02 to Rs20.4 billion in 04 and Rs45.9 billion in 05. Interestingly enough, the advances to “Stock Brokers and Dealers” increased from Rs7.4 billion to Rs25.9 billion and Rs47.2 billion on these dates.
In the post-March 05 crash rescue package, the central bank has encouraged bank investment by raising the exposure limits for banks from 20 to 35 per cent and for DFIs\Islamic banks from 30 to 45 per cent of their equity, earmarking 10 per cent as the specific share for dealings in the futures.
Moreover, margin financing by banks was introduced but this did not take off and instead a system of continuous financing has been initiated to replace COT During the first quarter of 06, the investment in shares and other equity had gone up to Rs208.2 billion. The banks and DFIs exposure in Badla\Continuous Financing System (CFS) on September 30, 05 was Rs12.6 billion.
All this has been for the handful who were responsible for the crash and have been identified but not disclosed. The big question is: How far the increasing involvement of banks in an extremely volatile stock market, which is more a casino than a properly functioning financial market, is justified and desirable? One of the crucial economic variables, which has suffered most is domestic saving the vital importance of which can never be over emphasized, if the cherished dream of self-reliance is to be ever realized. Domestic saving was Rs861 billion as against Rs910 billion last year, a decline of 5.4 per cent.
Domestic saving \GDP ratio declined from 16.4 to 13.3 per cent, household savings from 13.2 to 10.8 per cent and this was almost half of the rate of 18 per cent in 03. This should not be surprising, as the saver has been given negative real rate of return.
During FY 05, in spite of a small increase, the weighted average of return to depositors of scheduled banks was negative by as much as 7.5 per cent. The rate of increase in consumption expenditure, in constant prices, has more than doubled from 7.5 per cent in FY 04 to 15.2 per cent in FY 05, the rate for private consumption rising from 8.2 percent to 16.8 percent.
According to RE 05: “The rise in consumption expenditure reflected consumer confidence as a result of an improvement in the economy, huge capital gains at the stock exchange and real estate markets (a wealth effect). Moreover, growth in consumer credit also facilitated the rise in private consumption as is reflected in the demand for durables.” Consumer financing by the banks, encouraged by the central bank as a matter of deliberate policy, increased from Rs122.4 billion in 04 to Rs213.8 billion in 05. This raised its share in total bank advances from 9.8 to 12.6 per cent. Interestingly enough, bank advances to agriculture, hunting and forestry, in spite of an increase of Rs13.6 billion during the year, were only Rs127.1 billion, or 7.5 per cent of total bank advances. The saving-investment gap, has been widened. For this, RE 05 observes: “The gap is not large by historical standard and, by itself, should not be a source of concern. However, given that the gap has emerged from a fall in savings rather than a rise in investment, even this low deficit is troubling.
Interestingly, the saving-investment gap stems from the short fall in private saving relative to private investment, while public sector emerged as a net saver.”
The concept of autonomy of central bank demands that it should frame even handed policies, which serve the overall long-term interest of the economy and let the chips fall where they may. It should not be pre-occupied with the parochial interests of the vested groups, be that government or influential industrialists, businessmen, stock brokers, etc.
It is time that the process should be initiated to rectify the serious imbalances created by subordinating monetary policy to fiscal policy, particularly the exploitation of the individual saver. Self-reliance through promotion of domestic saving, reversing the declining trend in house hold saving, which can alone help break the begging bowl, should be one of the primary objectives of monetary policy. Injection of money by the central bank on a massive scale, as a primary source of capital and not just as the lender of last resort, is a clear negation of philosophy of market economy.