Low rates of domestic savings and investments

Mohammed Arifeen

The Securities and Exchange Commission Pakistan is facing a difficult task in developing the capital market. In Pakistan the savings rate is only 13 percent of the GDP and there are only around 250,000 investors; a bulk majority of whom are based in the three large cities e.g. Karachi, Lahore Islamabad.
If other countries are compared with almost same GDP as Pakistan such as the Philippines, it will be observed that the number of individual investors there is more than double i.e. 600,000.
It is especially important for a country like Pakistan where savings rate is just 13 percent of GDP whereas in India, it is 31.9 percent and in Bangladesh it is 29.7 percent.
Despite one of the best performing markets in Asia for the last year, Pakistan Stock Exchange faces many acute problems. One of them is distrust.
Often Pakistan’s stock market is afflicted by stories of investors being deprived of their hard earned money. Due to this doubt, many problems arise.
The investors mistrust is low market capitalization. The total market cap of Pakistan Stock Exchange is $89 billion while Philippines Stock Exchange has a market cap of $230.3 billion but both countries have roughly the same GDP.
This investor mistrust also means that investor’s money is put to other less productive resources e.g. property, etc. which ultimately translates into a slowdown in economic growth.
Due to this doubt less than 50 percent of the national savings are channelized towards the financial sector while the rest are channelized towards real estate and other informal sectors of the economy.
During fiscal year 2015 – 16, only six new companies listed themselves at Pakistan Stock Exchange.
The main reason of investor mistrust is less efficiency, too much human handling and low level of automation.
Everywhere in the world, stock markets are being automated fully to every possible extent for avoiding such human errors and mishandling.
The home grown IT companies such as InfoTech are doing capital market automation projects for the stock exchanges of emerging markets in Africa and Asia.
The complete capital market automation will have the benefits. It will improve the efficiency of capital markets to bring in more capital inflow.
Keeping in view the needs of the economy, CPEC and investors, it is imperative to introduce advanced level automation in the market so that the financial market can grow, investor confidence can be build up.
The bulk of the savings in Pakistan go away in the form of risk free assets. A few of blue chip scripts form a major part of the leading index and total market capitalization.
A serious liquidity risk is faced by investors due to lack of intensity in the capital market.
Without the political will and active support to tackle the existing fiscal and monetary policy issues the Capital Market Development Plan (CMDP) introduced by the government will be meaningless
The capital market is one of the most essential indicators in determining an economy’s health.
The SECP has framed the CMDP (2016-2018) around the essential targets.
The plan largely focuses on introducing key structural reforms, revising existing laws and enacting legislations for new products, as a measure to encourage new listings on capital markets.
The SECP has enacted the Debt Securities Trustee Regulations (DST) 2016 through Statutory Notifications.
These regulations intend to tighten risk management characteristic of the market in a hope to stimulate business activity and growth.
Also national savings needs to be improved along with both the risk management and controls.
The capital market development plan suggests integrating the NSS into the capital market for growth purpose only.
The real purpose is to increase the sovereign borrowing pie and reduce cost under the pretext of capital market development.
The level of capital market development is determined by its efficiency, regulatory framework and national savings, and finally the rate of economic growth.
The ratio of market capitalization of listed domestic companies to GDP was as low as around 24 percent, according to the CMPD.
Domestic and foreign investors are mostly interested in a few blue chip stocks.
Institutional buyers hold a large portion of capitalization in a few scripts due to limited interest of a typical householder.
Most individuals are involved in leveraged trading; restricting their choice to blue chip accounts.
Demutualization has not enhanced market depth, either of the number of buyers and sellers or of the trading instruments at a given price.
The Savings-Investment gap for the year 2005 to 2016 was negative except, for year 2010-11, as per the Pakistan Economic Survey 2015-16; with declining foreign direct investments.
The problem in the non-development of capital markets is not the lack of better controls but low rates of domestic savings and investments.
The SECP’s efforts will be meaningless without the support of monetary policies and fiscal measures.
The savings to GDP ratio should be enhanced, along with measures to make saving more attractive by offering good returns.
Mobilization of savings and investments through the capital markets is imperative but cannot be achieved merely by introducing regulations.