The PSX should hold awareness sessions in educational institutes and train fresh graduates
sk Pakistanis what comes to mind when they hear the word stock market, and in many cases you will be met with an empty stare.
The stock market is one of the capital markets that connects buyers and sellers through an online platform and enables them to trade in shares of various businesses. It plays an essential role in the country’s economic development as it helps small companies raise capital from the general public and grow into big companies. For retail investors, it provides an opportunity to make profits through capital gains or earning income through dividends or both.
In Pakistan, the Pakistan Stock Exchange regulates all the listed companies and monitors their actions. It sets rules for the listed companies, like filing quarterly financial reports and informing the exchange about significant corporate developments to keep investors posted.
We must understand that investors’ sentiment drives the market; their confidence in the economy is of utmost importance. Here in Pakistan, governments have tended to scare the investors away with their erratic policies. We need consistent economic policies so that it is easier for investors to bring their capital with confidence to the market for long-term investment.
In a country of 220 million people, we have 306,000 retail investors as of November 2022. Less than half of them trade actively. The narrow investor base allows a few in the market to decide the fate of many. To tackle this issue, we need to attract more investors by starting an awareness campaign and simplifying the trading process.
The PSX needs to educate retail investors on investment products and saving benefits to channelise savings to the stock market. For this purpose, it should conduct awareness sessions in educational institutes and train fresh graduates through demo accounts. A course should be designed for business graduates.
As far as simplification of the trading process is concerned, PSX should allow all bank account holders to trade through their accounts instead of going through lengthy account opening procedures. Recently, non-resident Pakistanis were allowed to invest in capital markets through Roshan Digital accounts.
The capital gains tax is currently 15 percent in Pakistan. Investors in the UAE, the KSA and New Zealand pay nothing on their capital gains. In Qatar, Malaysia, Sri Lanka and Indonesia, the capital gain tax is much less than Pakistan. The government should consider reducing the rate to 10 percent and provide more incentives to those holding shares for more than one year to divert funds to the stock market.
We must understand that investors’ sentiment drives the market; their confidence in the economy is of utmost importance to the stock markets. But here in Pakistan, governments have tended to scare the investors away with their erratic policies. We need consistent economic policies.
The corporate tax on the public sector is not in line with other countries in the region. A listed company pays 29 percent, unlike the average rate of 19.62 percent in Asia. It is proposed that the burden be reduced to increase new listings in the PSX.
In the past five years, the number of new listings is 24 compared to 38 de-listings. This indicates that we need to do more to bring in new players in the market and retain the existing ones.
“Pakistan has had a serious capital outflow problem over the last five years, especially from the PSX. This significant outflow is mainly due to political uncertainty, questionable economic policies and lack of transparency. To attract foreign inflows, Pakistan has to provide a business-friendly environment that assures the foreign investors that their capital is safe and gives them confidence about the potential that Pakistan carries as a growing economy,” says Arsalan Khan, a researcher in web3 and a commentator on the capital markets.
To revive the market, we need to find out where the capital is going in Pakistan. Is it going into the real estate state or the stock market? While exact data is not available from the government, generally, a real estate investment is perceived as safer than stocks.
The government must ensure that the real estate sector is strictly regulated and taxes are collected from it; otherwise, most savings will continue going into this sector at the cost of industry. Only increased taxes on this sector can result in funds flowing out of this unproductive sector and into manufacturing or some other productive sector.
The economy gets into trouble and faces a balance of payments crisis every time it grows at high rates for extended periods, unlike in the neighbouring countries. When demand for goods grows faster than supply, bridging the gap through imports becomes the only option.
It’s time to go for import substitution not only for the sake of the market that reflects the economy but also for long-term progress. Otherwise, we are going nowhere and will always keep moving in the same cycle.
We need to formulate a strategy for financial inclusion, build capacity for capital formation, digitalise and innovate the markets, and make things easy for investors by bringing a fair and simple tax system and making policies in line with the global markets. Else, we may lose business to the competition.
The writer is a certified public accountant and holds a bachelor’s degree in economics and law. He can be reached at ca_numanyahoo.com