Well formalized, vibrant and dynamic capital markets can help mobilize funds for investment, making use of the idle funds and thus utilizing them for production in the economy. Developing countries around the globe are working towards redefining the paradigms of capital markets and mobilizing resources efficiently to meet the urgent needs of the private sector. India provides a good example; decentralization of capital markets has helped tap potential gains from local investors, this complemented growth in the country.
It has been reported by the Chief of Lahore Stock Exchange that stock markets in Pakistan have recorded a current market capitalization of $44 billion in May 2013, contributing almost 17 percent to the Gross Domestic Product. Pakistan has the potential to grow and compete with the developed capital markets. A recent example could be consistently improving trends at the Karachi Stock Exchange (KSE) exhibits. On May 27, KSE-100 index stood at 13,925.06 points, a year later, KSE-100 index has reached the level of 21,590.66 points, reflecting an impressive increase over the year. All stock markets in the country have generated wealth up to US $ 15 billion in the last one year alone. None of other South Asian stock market has shown such resilience.
There are certain steps that the new government should prioritize in order, to boost the capital market and to better utilize resources that this market can offer for economic growth in the country.
Firstly, an independent central bank, world has accepted this idea two-decades ago but in Pakistan central bank is still under the influence of the government. The major roles of the State Bank of Pakistan (SBP) must be: i). Assuring price stability, ii). Freedom to set independent monetary policy without any influence from other government institutions and departments, and, iii). Utilize its policy instruments to safeguard the stability of financial system.
Secondly, public sector borrowing requirements from the central bank and other banks must be curtailed. As most of the funds availed by the federal government are for development purposes, this could be financed by long-term bonds, external borrowings on soft terms and conditions and non-banking instruments such as National Saving Schemes, floating of shares of public enterprises etc. This could give ample space of reallocation of financial resources for the private sector.
Thirdly, for an economy like Pakistan, there is a dire need for rapid growth in information technology sector and welcoming new small and medium enterprises. The software industry in the India is the clear example of this; they have allowed new companies into the markets and to be judged by the market forces rather than by the regulators. Smooth financial regulations of the stock exchanges have paved the way for raising capital with ease.
Fourthly, there is a need of deepening corporate bond and warrants markets. It is highly suggested that corporate bonds, warrant and interest-free future markets be regulated and streamlining of securities lending and borrowing by i). allowing pension funds in corporate bonds, and ii). allowing insurance companies to invest in corporate bonds and warrants.
As discussed above Pakistan’s equity market have developed significantly over the past few years, in comparison debt market significantly underdeveloped. Usually, equity markets tend to develop earlier and set a stage for debt markets, so Pakistan is at a perfect position to take advantage of the vibrant and efficient debt market.
Last but not the least is quick and proactive approach and strategies for credit starved sectors of the economy. These sectors are crop production, livestock and fisheries, food processing, agro-based industries, small and medium manufacturing, transportation and dairy farming, poultry, meat, fruits, and vegetable and housing for own occupation. These sectors need urgent attention of the new government in terms of easy and accessible finance through Microfinance schemes, agri-loans and through second tier of financial institutions because they add significant amount to the GDP of the country and helps in lower levels of inflation.
Previous government have developed 3 year capital market development plan from 2012-14, which couldn’t bore fruit and targets are missed. This plan emphasized on key structural and regulatory reforms, development of equity, derivative, debt, commodities and currencies markets, development of Shariah complaint investment alternatives and improved governance and transparency in the capital markets. This plan also need to be formulated in such a way that it includes independent SBP, alternate resource utilizing by the government, strategies aimed at encouraging young and new entrepreneurs and working towards capital markets that are friendly towards the credit starved sectors of the country.