Surprising strength in Pakistan market

But domestic instability is never far from the surface and foreign investors remain wary

Pakistan’s stock market has started the year on a strong note. By Feb. 17, it was up 32.8% in U.S. dollars on the MSCI Emerging Market Price index, making it the second-best market in Asia, behind only India. Last year, the market gained 42.2% on the MSCI index. Should the current pace of growth continue, the market could achieve a record-breaking year. However, caution is necessary when talking about Pakistan because the country has been at this juncture before, only to disappoint investors.

The surprising strength in Pakistan’s market puts a stamp of approval on the country’s military government, which came to power last October following a bloodless coup. Instead of renewing the fears of political uncertainty that have historically dogged Pakistan, the fourth military regime since independence in 1947 appears to have been awarded the status of a civilian government with a military leader.

Shortly after coming to power, Gen. Pervez Musharraf divested power to the National Security Council and the cabinet, which comprises a group of hand-picked professionals and technocrats, some of whom are internationally recognized. The strategy has lent credibility to the government, unlike previous military regimes. Nonetheless, skepticism remains because past regimes have not lived up to their initial promises.

Could this regime be different? Although it is still too early to tell, if the plans announced so far are successful, history will not likely repeat itself.

The government has declared a war on corruption, targeting tax evasion and the recovery of diverted national assets and defaulted loans. It also plans to revive the economy, accelerate privatization, strengthen public sector institutions, use local products instead of importing and emphasize transparency and good governance.

Among measures announced last December to support the government’s plans are: a tax on agriculture effective June 2000; an across-the-board general sales tax; substantial deregulation of the petroleum sector; a cut in domestic interest rates; several initiatives to promote the development of information technology; creation of a poverty alleviation fund, with assistance of the World Bank; transparent privatization of the state sector, with proceeds to be used to retire debt; establishment of the Micro Credit Bank for community lending; increased domestic production of wheat and edible oil to save on foreign exchange; and a voluntary cut in defencse spending.

Pakistan’s Karachi Stock Exchange, established in 1947, listed 766 companies at the end of 1999, with a market capitalization of US$6.5 billion. The number of listings grew significantly during the 1990s mainly because of privatization initiatives that were supported by the IMF on the condition that proceeds are used to pay down the country’s debt.

Pakistan has attracted widespread interest from international investors who are encouraged by a wide range of incentives. For example, Pakistan offers area-specific incentives for investment in underdeveloped regions, made up of a combination of tax holidays, sales and import tax exemptions, government assistance with technology and enhanced access to financing. The government also offers industry-specific incentives in several key sectors, including electronics, fertilizers, pharmaceuticals, mining, dairy farming, cement, engineering and power generation.

Historically, Canada has had a strong connection to Pakistan, mainly through membership in the British Commonwealth, although this relationship has cooled somewhat since Pakistan conducted nuclear tests in 1998 and, more recently, with the overthrow of the democratically elected government.

Canada has donated more than $2 billion in aid to Pakistan since 1957, two-thirds of it in bilateral assistance and the rest through multilateral institutions. Since the mid-1980s, Canadian development co-operation with Pakistan has leaned toward improving the efficiency of the public sector and encouraging policy changes in support of sustainable development. With a cooling of the relationship, Canada has refrained from providing any non-humanitarian bilateral assistance to Pakistan.

Bilateral trade between Canada and Pakistan is currently more than $300 million annually, with Pakistan enjoying a favourable trade balance. Canada’s main exports include cereals, vegetables, mineral fuels, pulp, machinery and equipment, and steel. Imports are mainly cotton, textiles and apparel, leather products and processed foods.

Canada’s Department of Foreign Affairs and International Trade sees opportunities in Pakistan for Canadian businesses in areas such as telecommunications, information technology, agri-food processing equipment and technology, metals and minerals equipment and technology, and power and energy.

Despite its surging markets, growth in Pakistan’s economy remains sluggish.

In reality, the country has never been economically stable, mainly because of persistent political upheavals that have marred the planning process. Its relationship with the IMF has been disrupted three times during the past decade because of its inability to meet IMF targets.

The new military government would be hard-pressed to improve on the record of its predecessors. Other risks in the market include its volatile relationship with India over the Kashmir region and the ever-present potential for domestic upheaval. Although the country’s military government has pledged to reform the electoral process, it hasn’t yet set a timetable.

For now, the Pakistani market appears set to provide investors with significant gains in an environment that remains risky – a phenomenon that’s not unusual for emerging markets at Pakistan’s stage of development.

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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