ADB approves $300 million loan for capital markets

ISLAMABAD: Asian Development Bank (ADB) on Monday approved $300 million in policy-based loan for Pakistan to support development of capital markets and encourage private sector’s investment in the country.

Manila-based lender said Pakistan’s capital markets currently play a limited role in financial intermediation and resource mobilisation. Pakistan Stock Exchange (PSX) lacks depth in terms of the number of investors and the number of companies raising capital.

Fewer than 250,000 individual investors, or less than 0.1 percent of the population, have a stock investing account, and the PSX lags most of its regional peers on market capitalisation as a percentage of gross domestic product.

“Capital markets act as a major catalyst in transforming the economy into a more efficient, innovative, and competitive marketplace,” ADB Senior Project Officer Sana Masood said in a statement. “The reforms proposed under this program will lower the cost of financial intermediation and facilitate private sector investment to generate sustainable growth and job opportunities. It will also mitigate the negative impact of capital market instability on the economy and help to diversify Pakistan’s financial system.”

ADB has supported the development of Pakistan’s financial markets through three policy-based loans over the past two decades. The third capital market development program will augment the size and capacity of capital markets and support reforms that enhance the institutional and regulatory capacity of relevant government bodies. ADB said it will also diversify the investor base, develop important market infrastructure such as surveillance systems, and improve the supply of alternative financial instruments. Additionally, the program will help the government to strengthen its debt management proficiency.

The government and ADB have agreed to anchor the program to the design of a long-term national capital market master plan to build strong government ownership and coordination across the agencies. ADB will also provide an $800,000 technical assistance to support the implementation of key reform actions under the program.

“Institutional strengthening of the debt management office will develop the government bond market on a sustainable basis,” said ADB Principal Financial Sector Specialist Ali Mumtaz. “Establishing a special tribunal for capital market-related cases would significantly enhance investor confidence in the equity market.”

There will be four key areas of focus under the ADB funded program including market stability, market facilitation, supply measures and demand measures, according to ADB’s program documents.

The market stability focuses on legal framework for strengthening Securities and Exchange Commission of Pakistan’s autonomy, establishment of a special tribunal for capital markets related cases, implementation of customer custody regime for brokerage firms and risk-based capital for intermediaries in the capital market.

The supply measures involve introduction of netting of financial contracts law, and streamlining taxation regime for non-resident investing in debt securities.

The demand measures cover establishment of a technically proficient debt management office (DMO), empowerment of DMO, elimination of institutional investors from National Savings, and introduction of volume-driven auctions.

In Pakistan, netting arrangements are currently established bilaterally between the counterparties to the financial contracts through privately negotiated agreements or globally used standardized agreements.

“However, enforceability of such netting rights under such agreements are not always certain as currently there is no clear law that could provide a legal cover to such netting arrangements in Pakistan,” said an ADB document.

“Hence, the absence of legal coverage under a clear law hampers appropriate risk management, obstructs the development of the domestic financial markets and also becomes restrictive for counterparties (both local and international) to transact with each other.”

The program also envisages the National Financial Stability Council to improve inter-agency policy coordination and effectively deal with systemic risks that cut-across regulatory domains.