Islamabad: Pakistan’s high-flying stock market has returned to earth with a bump as worries about the nation’s stability spook investors, who had looked past the spectre of terrorism to the chance at juicy returns.

The stratospheric performance of the Karachi Stock Exchange’s (KSE) benchmark index became an emblem of how President Pervez Musharraf has sought to modernize the country. But with Musharraf ceding power to an increasingly fractious coalition of his opponents, the KSE-100 index recently shed nearly one-quarter of its value amid deepening political uncertainty and a series of alarming economic indicators.

Ominous signs? Traders at the Karachi Stock Exchange. The KSE-100 has fallen 23% from its April highs.

After seizing power in a 1999 coup, Musharraf accused Pakistan’s main civilian leaders—Benazir Bhutto and Nawaz Sharif—of bringing the nation to the brink of bankruptcy through corruption and incompetence.

But he managed to turn things around only after making an alliance with the US following the 11 September terrorist attacks. Being a key ally in Washington’s global war on terror allowed Pakistan to repair the damage done to its reputation by the coup and a 1998 nuclear bomb test that drew international sanctions.

An economic team headed by Shaukat Aziz, a former Citibank executive picked by Musharraf to be his finance minister and later prime minister, renegotiated Pakistan’s crushing debts to foreign governments and banks. It also embarked on a privatization and market liberalization drive that revitalized moribund sectors such as banking and telecommunications, drawing in foreign investment and stoking an economic boom led by domestic consumption.

Investors enjoyed a bonanza, with the KSE-100 index rising 10-fold since the anxious days after suicide hijackers hit the World Trade Center in the US. In his 2006 autobiography, Musharraf bragged about how the Pakistani stock market had become “constantly bullish".

Last year’s 40% rise in the Karachi index, one of the best performers in Asia, reflected fast-growing earnings for firms such as MCB Bank Ltd and Oil and Gas Development Co. Fertilizer and telecoms firms also did well.

Foreign multinationals, including Dutch bank ABN Amro and tobacco maker Philip Morris, invested hundreds of millions of dollars to buy up Pakistani firms and get a foothold in a growing market.

But the market has fallen sharply since the index hit an all-time high of 15,676 on 18 April. It tumbled as much as 23% before recovering some. On Thursday, it closed more than 16% below its peak.

Now the outlook is darker.

Musharraf has taken a back seat since the parties of Sharif and Bhutto—who was assassinated in December—formed a new coalition government after winning February elections. But he remains under intense pressure to step down even as strains within the ruling coalition threaten to paralyze the government.

The turbulence has coincided with economic problems rooted in the global boom in commodity prices, especially crude oil. Inflation topped 17% in April, and is running higher for food. The currency has fallen, dropping to 70 Pakistani rupees per US dollar for the first time last month.

Power shortages are hurting industrial production and the country has yawning budget and current account deficits.

The central bank forecast last weekend that economic growth will fall below 6% in the 12 months through June for the first time in five years.

The Pakistani rupee has climbed back to 66.5 to the dollar, partly thanks to a May increase in the central bank’s main interest rate to 12% from 10.5%, and the KSE-100 has rebounded somewhat on fading fears that the government will raise taxes on trading profits.

Aslam argued that worries about economic doom are overblown. Big investments in infrastructure and higher prices for farm goods could boost Pakistan, whose economy is still dominated by agriculture. Backers, including China and Japan, have agreed to extend loans with favourable terms to plug the current account deficit and Pakistan can still count on substantial US aid.

“Do we have sufficient resources to weather this shock? I think yes," Aslam said.

Some analysts say Pakistani stocks remain cheap compared with those in other developing economies. Investcap, a Pakistani brokerage firm, projects that the benchmark Karachi index will rally to a record 16,000 points by the year-end.

But critics say the boom has largely enriched the same narrow elite that has dominated the country’s politics and business throughout its 60-year history, and that rising fuel and food prices could spark strikes and protests. Scores of small investors demonstrated last week outside KSE.

“People voted them into Parliament so that they could solve problems, but they are fighting with each other," said Mohammed Arif, a 45-year-old who said his family of six had lived from his day-trading profits for the past decade.

Qazi Masood, a professor of public finance at Pakistan’s Institute of Business Administration, said Musharraf’s reforms did little to remedy a lack of investment and competitiveness in industries such as food processing, one of the few sectors where water-rich Pakistan has potential to increase exports.

The share price boom had “nothing to do with the real sectors of the Pakistan economy", Masood said. “The corollary of that is that if it is now on the decline, I don’t think it will damage the real economy."


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