Our economy is not so much globally integrated as to have any significant impact of the financial turmoil in the US and the EU despite the recent efforts to integrate the national economy into the international market.

Our bourses were opened up for the international investors a few years back as a measure of [partial] capital account convertibility. These bourses were described as the best performing ones in the world, even though they had created worst crises for the small investors in 2005 and 2006. Now as per reports, equities valuing .$2 billion are currently held by foreigners.

The situation has become more critical in 2008 as the KSE 100 index has fallen from 15,750 [April,2008] to 9183 points - a hefty decline of over 42 per cent. The sufferers are ordinary persons with small resources, while a few dozen big brokers may be the gainers later. The share prices have remained frozen at that lower level since August 27, and the floor has been extended till such time more liquidity can be pumped into the market..

The government is working on a Rs50 billion package for the equity market. It includes a Rs20 billion market support fund which would be managed by the National Investment Trust [NIT} and used for investment in seven giant state-owned entities i.e. Oil and Gas Development Corporation, Kot Addu Power Company, Pakistan Petroleum Limited, Sui Southern Gas Company, Sui Northern Gas Pipelines Limited, Pakistan State Oil Company and the National Bank of Pakistan. The shares of these state enterprises may be offered to the overseas Pakistanis.

The package also includes the government guarantee of Rs30 billion for the comfort of the overseas investors for reimbursement of the loss in case stocks falling below the ‘floor’ [frozen level]in one year. A foreign consultant is being hired to advise on the ‘put option’. The fall in the KSE 100 index and depreciation of rupee against dollar have taken place simultaneously. Have the people possessing large resources moved to the currency market for speculative gains?

Was permitting [partial ]capital account convertibility vis-a-vis the bourses compatible with our vulnerable foreign exchange resources [mind that we had for a number of years been financing (external) current account deficit from the proceeds of foreign direct investment (FDI) and while our economic managers knew that foreign portfolio investment [FPI] is hot money that exits in times of distress.

Will it be advisable for us to continue with the capital account convertibility vis-a-vs FPI in future or the reconsideration of that policy has become imminent ?

Will it be a prudent policy to guarantee a specific price of the shares held by the foreign investors, bear the loss, if any, from the poor tax payers’ money and let such foreign investors get away with profits, if any, they make during the guarantee period of one year without paying any taxes to the government exchequer ?. Will the government underwrite the losses incurred by entrepreneurs in other businesses?

Is it a responsibility of the government/ State Bank of Pakistan or a prudent policy to ensure financing investors in the bourses and come to their rescue whenever they create an awkward situation ? Why do the stock investors not make their own funding arrangements from whatever source they choose, including banks in accordance with the SBP’s Prudential Regulations ? Why should the SBP and the government coerce the banks to finance such investors by creating “market support funds” etc, ?

It has been observedthat the ministry of finance and the SBP immediately came to the rescue of the big guns of the share market by asking the banks/financial institutions including the government-owned mutual funds to embark on the “purchase” spree to raise the market, when these investors are neither contributing anything to the real economy nor they are prepared to support the national exchequer by paying capital gains tax on their huge earnings..

One recalls that during the bourses crisis in 2005, the then prime minister had immediately summoned back the SBP governor who was outside Pakistan on an official assignment to resolve the crisis. Such governmental sympathies are never seen in case of other sectors of the economy.

The continuous finance system (CFS) was introduced some time ago to replace “badla’ system under pressure from bourses when in India the system has been done away with.

The government/SBP need to gradually phase out the CFS system with firm and final date fixed. Thereafter, investors including the brokers may fund their investment from sources of their choice including banks in which case, borrowing should be strictly in accordance with the SBP’s Prudential Regulations and the government should not be under any obligation to provide funds for stock exchange transactions under any special arrangements.

There should be no question of underwriting a particular price of any stock from the tax payers’ money. The decision needs to be taken back. The capital account convertibility vis-a-vis the stocks should be suspended at least temporarily for such time as the foreign exchange position gains real strength [not merely the build-up of reserves based on borrowed money] as it brings in hot money which creates problems for already vulnerable foreign exchange balance of payments position.

The writer is a retired additional director/foreign exchange SBP)