KARACHI -- The market capitalization of the Pakistani stock market has grown by about $4 billion since November thanks to several positive developments, analysts said.
In less than four months, the market capitalization of the Karachi Stock Exchange (KSE) has surged from US $34 billion in October, to US $38 billion as of January 12, said Ahmed Nabil, chief investment adviser of the Pak-Oman Asset Management Company.
“Foreign investors’ continued interest in making investment in Pakistani stock market, release of $633m worth coalition support fund by the United States, IMF’s decision to extend deadline of levying the Reformed General Sales Tax (RGST) and impressive growth in remittances supported growth (of the) market and encouraged new investment,” Nabil said.
The market has recorded $70m in foreign investment since November that encouraged local investment at the bourse, improved its market capitalization and value of blue chip instruments, he said.
In Pakistan local investors usually follow foreign investment in the stock market, Nabil added.
The government has deferred the enforcement of the RGST after opposition parties came out strongly against it. But the tax will be enforced in July to increase the tax-to-GDP ratio, government revenues and to promote better documentation of sales and purchases, he said.
About 9% of Pakistan's GDP comes from tax revenues, well below the international standard of 15%. The IMF had sought to have Pakistan impose the RGST as of January 1, but has agreed to its postponement to July. Both the tax ratio and RGST are conditions for loans to Pakistan.
Tax changes needed to control budget deficit
Nabil said the government should collect taxes from the country’s rich, otherwise, it would be difficult for the rulers to control the fast-growing budget deficit and to raise the tax-to-GDP ratio to the required level.
“Foreign investors’ continued interest in making investment in Pakistani stock market, release of $633m worth coalition support fund by the United States, IMF’s decision to extend deadline of levying the Reformed General Sales Tax (RGST) and impressive growth in remittances supported growth (of the) market and encouraged new investment,” Nabil said.
A majority of parliament and the country’s rich oppose the government’s plan to increase taxes because they fear it will deteriorate the government’s fiscal discipline as the government has already borrowed some $4.75 billion from the State Bank of Pakistan and the commercial banks to meet its expenditures from July 2010 to January 1, Nabil added.
“The stock market is still attractive for investment as the shares of more than 450 companies are available at very reasonable rates,” Naeem Rafi, CEO of the Rafi Securities told Central Asia Online.
The majority of foreign and local investment has gone to oil and gas companies, while shares of other firms are still available at an attractive price, he said. Presently, some 600 companies trade shares on the KSE.
Rafi said medium- and long-term investment could ensure a good return to investors as the country’s economy seems poised to grow in 2011.
Rafi said the country received $5.3 billion dollars in remittances from Pakistanis working overseas during the second half of 2010, an increase of $761m over the corresponding period for 2009.
All of these positive developments have raised the foreign exchange reserves of the country to a current record high of $17.3 billion, which has improved investor confidence and paved the way for the stock market's steady growth, Rafi said.
He said the government should reduce its budgetary expenditures to control the deficit, impose taxes on the rich, eliminate subsidies and reduce dependency on foreign and domestic loans to strengthen the national economy.
Otherwise, he warned, the current improvement in the capital market, foreign exchange reserves, exports and remittances could prove momentary and once again key segments of the economy could end up in reverse gear.
Growth in value was year-long effort
The growth in valuation has been going on throughout the past year, points out Lahore Stock Exchange managing director Aftab Ahmed Chaudhry. He said the KSE-100 index of leading companies showed impressive growth in 2010.
“In January 2010 the benchmark index took off from 9,387 points … and it amounted to 12,020 points by gaining 1,633 points amid gradual improvement in trading and investment,” Chaudhry said.
The KSE hit a record 16,000 points in April 2008, but later dropped after the imposition of emergency rule by then President Pervez Musharraf, as well as the Lal Mosque operation that triggered a series of suicide blasts, followed by global and domestic economic downturns, he said.
From January 2009 the market gradually moved towards growth and this pattern continued in 2010, Chaudhry said. He predicts the index could reach 15,000 in 2011.
To sustain the momentum of market growth, the government should introduce new investment products, a margin trading system and provide incentives to investors and other stakeholders, he said.
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