Daily Times: KSE is a joke

LATE NEWS: ‘Casino mentality’ casts doubt on the rise of KSE

KARACHI: Three years ago it was the world’s best performing index, and Pakistan’s stock market has grown more than tenfold since the end of 2001.

But the astronomical increase has prompted stakeholders and analysts to wonder whether the Karachi Stock Exchange (KSE) can sustain that growth, while lax regulation has raised questions about money laundering. “There is no difference between the stock market and a casino and the gain we see all seems fictitious and engineered,” said Abid Sulheri, of Pakistan’s Sustainable Development Policy Institute, an independent economic watchdog.

Former World Bank vice president Shahid Javed Burki last month warned that Pakistan was facing symptoms that preceded the 1994 Mexican financial crisis. These include a big current account deficit, weak banking system and what he called excessive speculative business activity. Separately a Merrill Lynch report late last month advised investors to slash their holdings in Pakistan’s stock market by two-thirds. The words of caution come at a time when the KSE is worth a total of $56 billion - 25,000 times what it was when the market was founded in 1950.

In 2003, its growth of 110 percent made it the biggest gainer in the world. In the following year it increased by 65 percent and in 2005 it further rose by 55 percent.

Independent economists and watchdogs however attribute this rise to reckless speculation, coupled with allegations that some groups have been manipulating the market.

“The Pakistani market is a sheer speculative market and governed by some groups or influential individuals having inside information,” said Qazi Masood, professor of public finance at Pakistan’s Institute of Business Administration.

The experts point to the fact that private sector companies raised a record Rs 410 billion of credit from banks last year, despite the state bank’s efforts to curb borrowing by raising interest rates. In contrast, the floating of bonds, which are more stable than stocks, remains almost non-existent.

Recent sell-offs of several state-run giants, mainly in the energy sector, have also “artificially jacked up” the market, Masood added. Such initial public offerings now account for more than $17 billion of the market’s total. Burki last month also cited what he called a “casino culture” fuelled by easy credit in Pakistan. He further disputed an assessment by Shamshad Akhtar, the first woman to head Pakistan’s central bank, that Pakistani banks were in reasonably good shape.

Meanwhile Pakistan’s largely undocumented economy also provides opportunities for money laundering, analysts say. “There is no documentation of losers and gainers and this has made the stock market and the real estate business the most attractive venues now for whitening black money,” Sulheri said.

Small investors have often been the victims of this speculative trading. In March 2004, hundreds of them rioted after the exchange stopped them from selling their loss-making holdings for a week in a crashing market.

Investigations showed the market was being manipulated by “someone big” so they could buy shares cheaply from desperate small holders. Mutual funds, regarded as the safest investment mode for small investors, have not developed in Pakistani despite some being listed as far back as 1967, analysts say.

The funds account for a mere 2.5 percent of Gross Domestic Product in Pakistan compared to 28 percent in India. Analysts said strong regulation was also needed to steady the market. Reforms initiated in 1997 under the Asian Development Bank (ADB) assistance have not worked yet, they said.

“Despite the reforms and other measures the market has been not matured enough to lead investment - rather it is still led by speculators and collusion of the cartels making short-term profits,” Masood said. AFP