ISLAMABAD, 27 May — Business and portfolio investment has been hit hard as war drums beat again across India and Pakistan — the everlasting twins-in-tension. Bourses, however imperfect, the mirror image of the economy, have plunged both in Pakistan and India as war rhetoric reaches a pitch.
Pakistani bourses hit a low and lost 132.57 points when Karachi Stock Exchange (KSE) index KSE-100 plunged to 1,647.19 — a one-day loss of 7.45 percent in share values, on Black Monday — May 20. This was the worst one-session crash. The overall market capitalization tumbled Rs.29 billion to Rs.382.33 billion.
The KSE board of directors, in an emergency meeting, reduced the downward price fluctuation limit of shares, popularly known as the circuit breaker limit, to five percent, or rupee 1, whichever higher, in order to check a further crash. But it did not help stop the crash. The existing circuit breaker limit then was 7.5 percent or Rs.1.50 a share.
Within three days — until May 21 — the bourse collapsed further and came down crashing to 1,527.58 leading to closure of the exchange. The KSE-100 index had fallen from 1,817.76 on May 16 to 1,527.58 on May 23 — a loss of 290.18 points in seven days.
International agencies threatened both the countries that they will downgrade financial ratings of the two countries if the war threats escalates any further — and culminates into actual hostilities.
Pakistani currency appeared stable earlier in the week at Rs.60.07/60.09 to a dollar in the interbank market and Rs.60.40/60.50 to a greenback in the kerb.
But, as the war rhetoric continued and shut the bourses, investors shifted from stocks to forex. At the weekend Pakistani currency dropped to Rs.61.40 to a dollar on panic buying spurred by fears of war. But later, dollar was moving around Rs.60.65/60.75, after SBP shored up the market by buying a few million dollars. However, SBP did not disclose the size of its intervention. Money changers also arranged supplies of greenbacks from Dubai, after SBP officials warned them that the central bank will take “a stern action” against them if they did not stop speculating and bring the dollar rate down.
Gold touched an all-time high of Rs.6,267 for 10 grams, because dollar had become costly, even though it had come down from $319 to 316 an ounce in the international market.
Investors, businessmen, 40 million Pakistani and 440 million Indian poor who live on a dollar-a-day, or below, are this week wondering alike where they are going to end up?
The budget for fiscal 2003 that starts July 1, is scheduled to be unveiled in mid-June. With guns booming across the borders, what will the budget look like? What will it have for business, industry, the sorely slow economic growth, and above all the unemployed? What hope does it hold for the very poor whose number is growing fast despite governmental claims to the contrary? Aren’t half of the world’s poor already live in South Asia?
The budget makers in the Ministry of Finance (MoF) stress, the government is committed to pursuing the taxation reforms and administration reforms of the Central Board of Revenue (CBR), the country’s key tax collector that is the butt of criticism of all taxpayers and International Financial Institutions (IFIs) who lend to Islamabad, and want their money back.
These reforms will focus on introduction of information technology (IT) against which the CBR itself has been the main stumbling block for the last one decide, as transparent transactions will reduce chances of its officers getting money under the table, from harried taxpayers. Discretion of the tax officials will be minimized in order to curb corruption. An expanded self-assessment plan and a greater utilization of computers in filing and analyzing tax returns has also been announced.
The MoF officials involved with budget making are projecting 3.3 to 3.5 percent GDP growth for 2002, up from 2.7 percent in the drought-stricken fiscal 2001. They are projecting GDP growth in 2003 at around 4.5 percent. Agriculture, however, may not see much growth in fiscal 2003.
Shah Mahmood Qureshi, a former finance minister and an agricultural experts, says “ the agricultural sector growth has remained stagnant for the last two years,” mainly because of high prices of farm inputs and reduced availability of irrigation water. Dr. Pervez Tahir, chief economist, Planning Commission, concurs, and says, farm sector “growth will not be rosy this year also.” In the field of forex, Aziz has just announced a step that the government of Pakistan expects will change the face of ‘hawala’ or ‘hundi’ business that, for years, has unofficially been handling remittances of expatriate Pakistanis from abroad to back home. He said effective July 1, the State Bank of Pakistan (SBP) the central bank, will license legally functioning Exchange Companies (ECs). The companies will operate under SBP’s prudential regulations, and will replace the existing kerb market money changers.
There are more than 300 SBP-licensed money changers, but several hundred more are operating without any such permission.
The domestic and foreign banks operating in Pakistan will also be permitted to buy and sell forex. The SBP will intervene in the forex market through these banks, if and when required. The government’s big hope is that the new ECs will bring in $4.0 billion a year through these official channels during fiscal 2003, up from the projected $2.0 billion for the whole of fiscal 2002. The home remittances in the first 10 months of fiscal 2002, mainly from UAE, Gulf, Saudi Arabia, Middle East and North America, have doubled to $1.8 billion, compared to the like period of fiscal 2001.
Increased inflow of remittances through official banking channels, and reduction in ‘hawala’ transactions is one of the factors for the rupee appreciating by 7 percent against the dollar in last eight months. Although it is a positive development by itself, but it has started hurting exports because a stronger rupee makes Pakistani exports more costly compared to exports of other competing countries.
In the wake of Sept. 11 tax collection was down by Rs.42 billion because of reduced production and smaller imports. Exports suffered a 1.8 percent decline.
The export target was slashed from $10 billion to $9 billion.
The Ministry of Commerce (MoC) is also currently working on a mechanism to protect the domestic industry from the likely negative impact of lowering of customs duties, and to make the domestic industry internationally competitive.
This was the picture of economy until now — and just before the guns started booming across the borders. Though still very fragile, there are several plus points upon which to build the economy on. But, if hostilities break out, will there be anything left to build upon — both in Pakistan and India?
