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Capital Market Reforms

Capital Market Reforms

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Published by: SHAHEDMEHMOOD on Oct 21, 2009
Copyright:Attribution Non-commercial


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A modern and efficient capital market is the backbone of an economy. It plays acrucial role in mobilizing domestic and foreign resources, and channeling them to promote investment activities both for the short and the long-term periods. No countrycan prosper without developing its equity market (Rizvi, 2002).Reflecting upon the Asian currency crisis, more attention is being paid to theimportance of consolidation for the domestic financial and capital markets, as well asinternational cooperation to avoid disturbing factors from abroad, such as massiveinflows of speculative capital (Kishi, 2002).The government of Pakistan and its respective regulatory agencies has beenstriving hard to tame negative speculations, restore investors' confidence and stabilizestock market for the last many years and numerous regulatory, financial and other corrective measures have already been taken to obtain these objectives. But even then, bythe end of 1997, the index was at the bottom, market was vacillating between the spell of greed and gloom, investors were living in the state of despair and the country's financialimage had been shattered. The market mechanism has not been working under the principle of demand and supply, as well as the economic fundamentals for as long as can be remembered (State Bank Report, 2000).1
The Capital Market in Pakistan has two main components: an Equity marketrepresented by the three stock exchanges in Karachi, Lahore and Islamabad; and anintermediated financial system dominated by an increasing number of Non- Bank Financial Institutions (NBFIs).In the development of its capital markets, Pakistan has faced issues similar tothose in other emerging markets in Asia. But the economic turmoil presents Pakistan withsome unique problems. The downturn in the capital market dates back to late 1994. After several attempts to address the country’s macroeconomic imbalances and deep-rootedstructural problems, shortcomings in policy implementation came to light, bringing thecountry to the brink of a foreign exchange crisis in October 1995. Between the end of 1995 and April 1998, the rupee depreciated by 24 percent. Since 1995, the threat of currency de-valuation has deterred foreign portfolio investment. From 1996 onward,deteriorating law and order in Karachi, the Government’s prolonged tussle with foreignindependent power producers (IPPs), and the constitutional crisis in late 1997 alldampened growth of the capital market. In March 1998, the withdrawal of tax exemptiongranted to corporate holders of Term Finance Certificates (TFCs) also hit the corporate bond market (Chou, 1998).The country has already achieved a moderate level of capital mobilization throughthe bond and equity markets at 43 and 22 percent of gross domestic product (GDP),respectively, at the end of 1997. However, the figures are deceptive as government issuesdominate the corporate bond market—with corporate bonds accounting for only 1 percent2
of GDP
Similarly, the equity market became more skewed from 1996-1998, resulting inthe top five stocks representing more than 70 percent of market capitalization by May1998.Finally, in the aftermath of the nuclear tests of 28–30 May 1998, austeritymeasures were imposed. With the freezing of foreign currency accounts and sanctionsimposed by G-8 countries, activities in the foreign exchange market almost ground to ahalt and so did foreign portfolio flows. The currency plunged in the market amid fears of an impending debt default. Under the threat of a recession, the bond and equity marketsreceived a grave setback. The negative market sentiment was reflected in the decline of the key Karachi Stock Exchange (KSE)-100 index, which plunged 56 percent during1998, reaching a record low in July of that year (Chou, 1998).The first vital step taken by the government to counter all these problems was thedissolution of Corporate Law Authority in 1997 due to its total failure to manage thestock market and the involvement of some of its bosses in financial bungling.Constitution of the Securities and Exchange Commission of Pakistan (SECP), anindependent and powerful regulatory body to purge rotten system, create level-playingfield and bring all stakeholders under a new regulatory framework was another step inthis regard. The establishment of the Central Depository Company (CDC) was also amilestone in the corporate history of Pakistan aiming to create transparency in trading,eliminate the trading of fake shares and facilitate electronic transfer.3

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Sehar Sajjad added this note
Could you please let me know where is the Appendix 1 which has a detail about the list of capital reforms in Pakistan? As I needed that, and could not find it anywhere in this document. Waiting for your reply. Best Regards.
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