Wednesday September 27, 2023

Shares disaster

By Editorial Board
December 04, 2021

As share prices came tumbling down, hopes for an economic recovery by the end of the year also disappeared. The latest economic data is presenting a dismal picture of the financial sector with hardly any silver lining in sight. The trade deficit is increasing at an alarming speed and there is a likelihood that interest rates may also surge in the near future. Though the stock market in Pakistan has rarely been stable in the past over three years, the KSE-100 index lost 2,135 points in a single day on Dec 2, 2021. That is more than 4.7 percent of the total value in the Karachi Stock Exchange. When the benchmark loses that many numbers of points in a day, the writing on the wall is clear: the economy of the country and the financial sector associated with it are on a sharp decline. According to reports, this was the fourth largest fall ever in terms of index points. Looking at it in conjunction with the trade deficit for November, an even bleaker picture emerges.

The trade deficit for November amounted to a staggering figure of over five billion dollars. Similarly, the cut-off yields of treasury bills also recorded a major jump in the latest auction – signaling a strong possibility of an interest-rate increase in the next monetary policy. Then there is an ever-present fear of higher inflation numbers in the coming months on the back of low-base effect. To top it all, there is rapid depreciation in the value of the rupee which is eroding investor confidence. Pakistan cannot afford any more volatility in the stock market and to disentangle the country from this morass there is a pressing need to bring about some stability to the foreign exchange market.

There has been a widespread perception that the government is simply unable to control inflation that is putting extraordinary pressure on common citizens of Pakistan across the country. The government needs to do at least two things on a priority basis: one, it must control inflation; and two, it should take measures to curb imports. If the government is unable to take these two steps and the stock market also keeps losing money from investors, there is a bleak future for the economy of Pakistan. Stock market losses, rising inflation, and depreciating currency – these are the factors that are creating extreme nervousness across the country. When yields on treasury bills jump close to 12 percent so quickly, there is a clear signal that interest rates would increase sharply; and in this situation investors prefer to sell their positions aggressively, creating a panic-like situation. If the government does not take this seriously, the economy will take a long time to recover, if at all.