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Pakistan asked to implement second generation capital market reforms

According to an official document, the Bank anticipates the market capitalisation swelling to 60 per cent despite the current frightening plunge in the Pakistani market caused by an air of political uncertainty.

GDP

Pakistan's GDP had touched the $140 billion figure in 2006-07 from $90 billion. The Karachi Stock Exchange (KSE), which withstood the fierce winds of judicial crisis, threats of suicide bombings and even the May12 massive killings in the heart of the country's financial capital, had to dip by four per cent on Tuesday following rumours of imposition of martial law/emergency.

This has given further authenticity to a belief almost commonly being held by the managers of international financial institutions that what matter a lot for the Pakistani equity markets are not simply the law and order situation or any violation of human rights or constitution, but continuity of economic reforms and political commitment to ensure their implementation or simply a strong government with a central authority. The ADB, which is providing $400million for the Second Generation Capital Market Reforms, also projects increase in the volume of outstanding capital bonds from 0.5 per cent of GDP in 2005 to 3 per cent in 2009 while taking into account the new political set up and its economic policies.

And, during the same period, the bank expects increase in the number of companies listed on the equity market to 700 from 526, issuance of equity capital from 12 issues to 50 and corporate bonds from ten to 50.

For a more efficient and balanced financial sector, the ABD expects increase in the longest available bond maturity from seven years to twelve years, a sign of lenders trust in the government's policies.

Reforms

Under the reform process, for which the government has made its commitment with the ADB before making an official request for funds, the Karachi, Lahore and Islamabad stock exchanges would also disclose plans for self regulation within the next ten months. This may provide a safeguard to small investors.

The bank is of the view that liquidity in the KSE could be attained by a few possible measures including more listing on companies on the stock market and introduction of new products by the SECP like the Voluntary Pension Scheme (VPS) and Real Estate Investment Trusts (REITs).

Through an improved financial sector intermediation, the ADB forecasts an increase in money supply to 65 per cent of GDP by 2012 from 44 per cent of GDP as recorded in 2005.

Savings rate

In this period, the country's savings rate is expected to increase to 19 per cent of GDP from the present 16 per cent. Similarly, savings mobilised by non-banking financial institutions (NBFIs) is expected to go up to 4 per cent of GDP in the next six years from the level of 0.5 per cent. Such progress would be recorded in the government's economic statistics and country reports of the International Monitory Fund (IMF), the ADB has stated.

The reform process's hallmark is the restructuring of the SECP and its conversion into the Financial Services Commission of Pakistan (FSCP). The ADB also sees development of domestic and institutional investment with a hefty increase in assets managed by private mutual funds from Rs17 billion level in financial year 2005 to Rs55 billion in the next fiscal year. An increase is also expected in the paid-up capital of the non-banking financial companies (NBFCs). Funds accumulated under the voluntary private pension schemes are also expected to hover around one percent of the GDP by 2009.