Emerging markets

Pakistan has re-entered the Emerging Markets Index.     The federal government and business community seem to be jumping with joy at the decision. The bullish sentiment has been replicated in the Karachi Stock Exchange (KSE), which has cross the 39,000 threshold. Finance Minister Ishaq Dar has rushed to classify Pakistan’s re-entry into the index as ‘historic’. Dar suggests the change could bring in a new portfolio of around $475 million into the stock market. The business community has also responded with optimism. But we must look at what becoming an emerging market status actually means. The declaration is limited to the regulation and stability of a country’s stock market. It means nothing about the larger macro-economic performance of a country’s economy. This can be witnessed by the fact that China is not considered an emerging market economy despite almost a decade of growth in excess of seven percent a year. Why has it not been accorded emerging market status? The problem is not its economy, but how it regulates its stock market. China still imposes stricter laws for the inflow and outflow of foreign capital and limits how much its stock markets can fall in a single day. Pakistan presents a strange case. Its economy has only grown by around 4.7 percent but its stock market has gone up by around 15 percent. This leads us to a key question: is there a connection between stock market performance and the real condition of the economy?

In Pakistan’s case, this is a fairly serious question. The fact that the stock market has continued to boom despite the announcement of rather dismal economic outcomes for the year 2015-16 should be cause for worry. We missed our economic growth target by one percent while the agricultural sector actually shrunk. A similar situation existed almost eight years ago, when Pakistan was downgraded to a Frontier Market after a liquidity crisis in the KSE forced it to close temporarily. The country’s economic indicators and the performance of the stock market in the years leading up to 2008 were similar to those under the sitting government. The KSE had been booming in the late Musharraf era with the then prime minister Shaukat Aziz announcing year after year of stable economic growth built on a steady inflow of American aid and consumer spending. Under the PML-N government, Pakistan’s stock market has continued to outperform most Asian stock markets in the current year. In the last two days alone, the stock market reached a new peak as other Asian stock markets either shrunk or remained stable on the back of falling oil prices and the US Federal Reserves’ decision to keep interest rates stable. Pakistan’s stock market seems disconnected from the country’s own economic performance as well as regional trends. The country’s democratic transition has put greater trust in the stability of its stock market but this is a road we have been down before. The new Emerging Markets status is not a goal that has been achieved, but an opportunity not to repeat the mistakes of the past. The federal government’s response should be a more measured one.