On Current Economic Situation and Trends for the Future at

Karachi Stock Exchange

By Bismillahi-Rehmanir- Rahim

Mr. Yasin Lakhani, Chairman, Karachi Stock Exchange,

Distinguished Guests
Ladies and Gentlemen.

I am very pleased to be here with you on this important occasion of honoring the 25
top performing companies of the Karachi Stock Exchange. Such occasions are the
bloodline of a competitive environment. They are not merely for the recognition and
acknowledgment of those who have excelled, but also for inducing and motivating others
whose performance remained wanting.

I extend my heartiest congratulations to those of you who have performed

remarkably well and earned the distinction for which you. are being honored today. In an
economy that is trying feverishly to revive its normal rate of growth, the top performers
are the harbingers of a positive change emerging on our economic horizon. It is a
manifestation of the early dividends accruing to the sustained process of reform initiated
by the present government. These performers offer a great deal for emulation. Those
having left behind would like to examine closely the circumstances that made it possible
for these companies to post such impressive results while others could not match their
performance. This we must do, so that next year we may observe keener competition in
the selection of the 25 top performing companies.

Let me hasten to add that I am not attempting to undermine the role of external
factors operating adversely on the performance of listed companies. I am fully aware of
the fact that in a modern economy nothing reflects more sharply, fairly and decisively on
the state of the economy than the performance of the Stock Exchange. Clearly, the stock
market, for greater part of 2001, has not performed to its potential. While capital market
has a critical role in reviving the economy, a great deal has to be done outside the market
to restore the health of the economy. And this what has engaged our attention all along,
particularly in recent months, over which I would like to dilate at length.

In fact, I would like to move away from the standard stock market discourse to a
wider assessment of where does our economy stand and what do we see as its future.

As you all know, our government has initiated a basic program of reforms that takes
into account the needs of an efficient and growing economy. It is widely acknowledged
that we had inherited an extremely weak and declining economy. Its credibility was low
and growth prospects were blighted both due to widespread distortions as well the
mounting debt burden that the country was facing. To top it all, Pakistan was also faced
with sanctions and suspensions imposed by the creditors in reaction to the nuclear tests
we had conducted. Under the circumstances reform was necessary not only for reviving
growth but also for restoring the confidence of the creditors so that we could seek relief
from the unsustainable debt burden.

The reform agenda we have implemented over the last two years is fairly broad
based, It covers all the key sectors of the economy, most notably fiscal management,
taxation, agriculture, petroleum pricing and regulation, privatization, monetary and
exchange rate management, banking and finance and capital markets. Space will not
permit me to give all the details of these reforms, but suffice it to say that following major
objectives are intended to be achieved from their implementation:-

! First, we believe that business is primarily the domain of private individuals

and groups. Thus we have to significantly expand the space available to the
private sector in running the economy of the country.
! Second, the role of the government is that of a regulator and umpire. It must not
engage in any economic activity directly. It is not the business of the
government to engage in business.
! Third, markets should be left alone to determine price and output decisions.
Interventions are justified only in the case of market failure or when the
vulnerable groups of the society are being affected by major swings in market
conditions.
! Fourth, external trade would be the main engine of growth, particularly in the
emerging world trade regime exemplified by the WTO. Accordingly, our
industry has to reorient to be competitive in the world market.
! Fifth, Pakistan would move toward greater openness and integration with the
world markets and as such foreign investment will not only be provided a level
playing field but would be given the necessary guarantees for its protection.
! Sixth, poverty is a major challenge our society is facing. The government not
only has to play an active role in combating this problem, but the entire focus of
economic planning would be redirected toward poverty alleviation. However,
we believe that growth will be the primary instrument to achieve this goal.
! Finally, let me add the dimension of governance, which no one has addressed in
the past. Besides devolution, reforms in civil services, tax administration,
judiciary and police are all aimed at reconstructing the nearly demolished
institutions of governance so that the state regains its efficiency and capacity to
positively influence the lives of its citizens.

Even though we came up with a bold and aggressive reforms agenda, our efforts
remained handicapped for two major reasons, . namely the IMF program and dispute with
HUBCO. It would not be an exaggeration to state that these were sort of prior conditions
for creating an enabling environment for rapid economic growth in the country. None of
them was easy and each of them engaged enormous attentions of the policy makers for its
resolution. There was much that was missing in our own conduct. Our credibility had
completely eroded. Unfortunately, a new government, totally committed and sincerely
working for the betterment of the economy was not perceived as such. We paid the price
of mistakes that we had not committed. Pakistan had in its history almost all the IMF
programs that remained unfinished. We were known as one tranche country, i.e. after
getting the first tranche we would not carryout the reforms and derail the program.

The Stand-by program was the first major break for the country. We performed quite
well. We also resolved the apparently intractable and festering problem of HUBCO.
However, just when it appeared that a take-off was in sight, and as we were successfully
wrapping the stand-by program in the month of September, we had the single most
important event of our lives, namely the 9-11 terrorists attacks in New York and
Washington.

Clearly new challenges were faced to deal with the situation. Pakistan became the
main focus of the US response to the 9-11 and we ended up playing the role of a
front-line state yet again.

Events in the aftermath of 9-11 had cast a shadow of uncertainty on medium term
prospects for economic growth. It posed new challenges for the economy of Pakistan. The
global economic slow-down, in general, and our role as a front-line state, in particular,
represented serious implications for the stability of country's macroeconomics framework.
Indeed, these developments had the potential to seriously undermine the reform agenda,
which until then was so meticulously implemented.

The repercussions of 9-11 were felt in every facet of economic life. Our trade was
affected as both imports and exports declined. The unwarranted hike in insurance costs
further aggravated the trade slow down. The slow economic activity inevitably meant a
relatively low revenue collection that in turn strained our fiscal position. The war in
Afghanistan warranted additional security measures and influx of refugees posed new
challenges for their settlement. Both these developments meant additional expenditures
on an already tightening fiscal situation.

One need not go any farther to trace the impact of 9-11 , as the stock market was
the immediate victim of its aftermath. Despite strong fundamentals, stock values fell like
proverbial ninepins as the KSE 100 Index plunged to close to 1000, lowest since its
historic low in June 1998.

At a time when we were anxiously looking forward to secure a medium term growth
facility, this change in economic scenario was ominous. However, it goes entirely to the
leadership of President Pervez Musharraf that he took a principled and unfettered position
against terrorism and sided with the international coalition. Although in the hindsight this
may look trivial but it was truly an historic and heroic decision. With this single decision,
the landscape was cleared of all uncertainties and the future of economic reforms was
protected. Here again, it was the President who made it abundantly clear to his economic
team that there will be no relenting in the pace of economic reforms and the country will
remain wedded to economic program .that it has followed since the government assumed
office in October 1999.
! Clearly, these decisions turned the adversity brought about by the events of
9-11 into an opportunity for the country. Now that the dust is settling down
after the war in Afghanistan, we may count some of the major achievements
made by the country on the economic front :-

! First, and perhaps foremost, the Pakistan has succeeded in securing a medium
term (3 year) poverty reduction growth facility (PRGF) from IMF. This is the
sine quo non for achieving stability in our external account;
! Second, the PRGF was followed by the Paris Club rescheduling. We have
achieved in Paris Club what few others, such as Poland, Jordan, Egypt and
Yugoslavia were able to achieve. Our entire stock of debt of about $12.5 billion
has been rescheduled for a period of 38 years for concessional component and
23 years for non- concessional component, with grace periods of 15 and 5 year
respectively. To gauge the relief implicit in this exercise, one only needs to note
that nearly 50% of this debt was due for payment in the next 5-6 years. Then
there are individual creditors who have either canceled their debts or have
shown their willingness to swap them for social sector spending for up to $500
million. The true extent of relief will be determined once Pakistan has worked
out bilateral agreements with its creditors. However, it may be noted that a
principle agreed at the Paris Club is that Pakistan will be offered terms that
would be twice as favorable as in the previous rescheduling arrangements. This
gives a 30% reduction in net present value of out stock of debt. With downward
pressure on interest rates globally, we are confident that significant additional
savings will accrue once the bilateral agreements have been signed. Lastly, it
should also be mentioned that Pakistan has got nearly HIPC terms without
facing its adverse consequences. Thus it will remain eligible for accessing the
international capital markets.

Both Asian Development Bank and World Bank would be providing

significantly funding of about $1.5 billion through their concessional windows
to support the reform effort in the medium term.

! Third, and as part of our decision to side with the international coalition,
Pakistan has freed itself from numerous sanctions that it had faced since it
tested it nuclear device. U.S. has lifted all sanctions on Pakistan and has offered
a hefty assistance package totaling $673 million, all in the form of grants. Japan,
Britain and other European countries have followed the suit. We expect that in
the next 2-3 years, additional aid flows of nearly $2-3 billion will come from
these countries;
! Finally, we have succeeded in securing better market access for our exports in
European markets, which would translate into a net gain of $400 million. A
similar exercise is currently under consideration of US Government and we are
hopeful that this would also materialize. Together these developments would
augur well for the future of exports.
 With these achievements, we are confident that country's balance has been secured at
least fro the next three years. However, there is no cause for complacency, as concerted
National efforts are required to leverage the gains made with donors. It is important that
we fully understand the challenges that lie ahead of us.

! First, investment has to be the key for securing the future of economy on a
sustainable basis. The external account stability is a signal for the strength of
the economy that should inspire the necessary confidence among investors to
take long-term decisions. The country no longer faces a risk of default and
hence the country risk normally inhibiting investment is no longer excessive.
! Second, of the many good things that have happened in the aftermath of 9-11,
is the widespread feeling that offshore accounts are not as secure as they were
thought to be. In fact, there is a general tightening of the capital movements
together with increasing pressures on so-called safe havens to open up their
books for scrutiny. These developments have already discouraged the flight of
capital, which has contributed, among other reasons, to the stability of foreign
exchange regime. It is a challenge for us to ensure positive deployment of such
resources, by enhancing the confidence of our own people in the economy and
relevant institutions of Pakistan. May I note here that there is no tax on
remittances from abroad and hence these can be used for business and
investment.
! Third, in a related development, the Hundi market has also come under intense
pressure. Already there has been a phenomenal increase in the flow of
remittances from the normal banking channels. We need to sustain this change
and organize our forex market in a way that would eliminate the need for Hundi
like operations. Indeed, the State Bank is currently working out the details of
embarking on a plan to integrate the two markets.
! Fourth, the expatriate community has also started looking back to Pakistan. The
interest and keenness shown in inquiries is a clear indication of the seriousness
with which options are being explored to take a long-term position in the
country. This is not surprising, for the dynamics unleashed by 9-11 also entail
forces that would to some extent check the speed of immigration and settlement
in alien societies.
! Finally, as the reconstruction begins in Afghanistan, Pakistan will have to play
a major role both directly as well as through facilitation. Even under most
conservative of scenarios Pakistan will get a sizable share of development work
that would stimulate aggregate demand and consequently spur economic
activities.

These developments point to a buoyant economic state that is likely to be witnessed

in Pakistan. It is a combination of hard reform work and judicious positioning in the
international community that has primarily contributed to this prospect. But these
opportunities would not yield economic rents to us. Rather, these will have to be
exploited through additional efforts that inspire business confidence and increase the level
of investment.
 In the backdrop of these challenges, the role of stock exchange in the coming days
would be critical. It is the first place where the bells of change will ring. We must assess
whether we are prepared for this occasion. I find it necessary to make few important
observations in this regard.

As you all know, investment would come through the stock exchange, provided the
investors have confidence over the integrity and fairness of the market. The market in
terms of investors has to be broad based, which would prevent speculation and insider
trading.

It is essentially these considerations that have formed the basis of government's

reform agenda in the stock market. Risk management measures, governance
improvements, institution of T+3 clearing system, establishment of future market and
National Clearing Settlement System are some of the measure that are aimed at increasing
the overall integrity of the market and consequently inspire the trust of investors. The
SECP and the Stock Exchanges need to be congratulated for improving the quality of
governance infrastructure for capital markets.

The government is fully determined to help stock market play their due role in the
development of the country. The way we handled the September crisis of Stock exchange
was a testimony to our professional approach as well as commitment to help the market
iron out unusual situations. Having learnt from recent experiences, and in a bid to broaden
the base of stock exchanges, we plan to promote fund management in the corporate sector,
in general, and in the public sector corporations in particular. This latter part represents a
major avenue of resources that still lie outside the market whereas for purely economic
reasons a part of them has to be deployed in the stock exchange. The institutional
investors we had brought in the market are likely to remain there in the long run, and
would be a source of stability in the market.

As a determined change in our privatization policy, we are assigning an increasingly

important role to the stock exchanges. The recent experience with the floatation of
National Bank shares In the market is highly encouraging in this regard. Part of the
success was due to the fact that the government was not interested in making money out
of this deal. Rather it was meant to stimulate stock market activity and to encourage small
and individual investors to come to the market. This would be followed by many other
such issues and you can look forward to some activity from the side of the privatization
commission in the stock market.

Before I conclude, let me paraphrase what the Quaid-e-Azam had said on numerous
occasions:

In the shape of Pakistan we have earned a country that has vast resources
and potential for development and prosperity of its citizens. What is needed is the
spirit of dedication, devotion realize its potential. This cannot be achieved
without hard work, work and more work.

I sincere believe that Pakistan is again poised to make a radical break from its past.
We have to seize this moment of opportunity and turn it to gain advantage. If we succeed,
there will be no looking back and we may justifiably join the comity of those nations that
are proud and independent.

I thank the management of the stock exchange for inviting me to this ceremony and
once again congratulate the winners of top 25 companies awards.

Thank you.
source: http://www.pak.gov.pk