What’s brewing in the Pakistan Stock Exchange (PSX) is a sight to behold. An unprecedented bullish rally is being witnessed with the index rising as high as up to 94,000 points. This intense rally is providing a sigh of relief for Pakistan’s macroeconomy which had seen a cycle of high inflation and low growth in recent years. So does this achievement mean something more than mere symbolism or does it manifest a renewed sense of confidence among investors regarding Pakistan's economic stability and growth potential? The bourse's unprecedented rise to 94,000 points signals a strong recovery of the financial market and shows the resilience of Pakistan's financial sector despite both domestic and global challenges.
Economists watching Pakistan's growth patterns have long believed that the country is trapped in the cycle of boom and bust where booms are short-lived while the busts are long and painful. Moreover, the looming sword of political instability has worsened matters pertaining to governance. Against this backdrop, the landmark achievements coming out of the stock market signal that Islamabad's painstaking decisions are bearing fruit of recovery for the PSX which had previously faced volatility due to political uncertainty, high inflation, and external economic pressures.
The approval of a $7 billion Extended Fund facility by the International Monetary Fund (IMF) to Pakistan has indeed allayed concerns regarding Pakistan's economic insolvency. Furthermore, the reforms agenda under the current finance minister is leading to optimism. The surge in stocks was witnessed in October, when the stock market surpassed the threshold of 84,000 points. It was earlier believed that short-term speculation was expounding the surge in the stock market. However, the continuation of the pattern due to growing confidence in the government's economic policies — including lowering of interest rates to 15% — and the betterment of Pakistan's overall macroeconomic prospects. This optimism is continuing to lead to increased investor confidence who are increasingly confident of Pakistan's ability to overcome its burgeoning challenges.
A cursory look at Pakistan's economic performance over the past year shows that Islamabad has indeed achieved some macroeconomic stability thanks to the government's prudent policy of belt-tightening as inflation has come down to single digits. Subsequently, the central bank has cut the policy rate up by 250 basis points from 17% to 15% to rejuvenate a stagnant economy. Likewise, the October Outlook Report shows that the current account deficit has reduced substantially. Moreover, the government is actively following the deregulation policy by reducing its footprint which is close to 67%. Similarly, as of September 2024, Pakistan’s debt-to-GDP ratio has dropped to 65.7p%, marking its lowest level since June 2018. The surge in remittances is also reinforcing this optimism that the economy is on the mend. All of these are some of the reasons why we are seeing major positive signals in the PSX. These signals thereby show that Pakistan's economy is somewhat recovering, and is creating an environment favorable for both domestic and international investments.
The news coming out of the stock exchange does reflect that investors are keenly optimistic about the future growth prospects of Pakistan's financial markets. Islamabad must ensure that predictability and stability in policies remain
But the million dollar question remains: is the economy really on the path of sustained growth? The answer is both yes and no. The decision-makers in Islamabad are indeed pulling a rabbit out of the hat to attract foreign direct investment. For instance, the government tried to walk the talk of privatisation by attempting to auction white elephants like the Pakistan International Airlines (PIA) which has been bleeding money. However, it failed to attract a substantial bid price. Likewise, it is failing to carry out even basic reforms in the FBR as evidenced by the low number of traders registering for the ‘voluntary’ Tajir Dost Scheme. The proposed plans to abolish around 150,000 vacant positions manifests that Islamabad is making serious changes in its economic approach. The recent high level official visits to Middle Eastern nations to woo foreign investment has helped pull strings to achieve tangible results. However, without undertaking structural reforms these initiatives will not yield substantial results. The IMF is projecting a modest growth of 3.2% in fiscal year (FY) 2024-25 which is abysmal for a population of 240 million people. Meanwhile, the World Bank has lowered its growth projection for Pakistan to 2.8% in 2024-25. These numbers show that Islamabad will not be able to maintain a sustainable growth pattern. Islamabad is employing various strategies and tactics to attract investment like creating an august body. The Single Investment Facilitation Council (SIFC) is extending special incentives to foreign investors but it will not bear tangible results as the investment ratio has plunged to a mere 13.1%, the lowest in the region. Moreover, further spending cuts and exorbitant tax collection will squeeze the domestic investment environment.
Similarly, the increased attacks on foreign development partners like the Chinese personnel and infrastructure is exacerbating the uneasiness in Beijing as questions are being raised over the capability of Pakistan's security architecture. Pakistan is indeed facing the most consequential endemic of terrorism since the change of guard in Kabul. As the number of attacks surged 90% in the third quarter of 2024 with terrorist groups like the Tehreek-e-Taliban Pakistan (TTP) and Baloch insurgents employing renewed operational tactics by targeting soft targets. In this backdrop, no investor will invest in a country where insecurity is high, so the road map must be to adopt effective coordinated intelligence-based operations and end this menace of terrorism.
Coming back to the economy, the news coming out of the stock exchange does reflect that investors are keenly optimistic about the future growth prospects of Pakistan's financial markets. Islamabad must ensure predictability and stability in its policies. Secondly, policymakers in Islamabad should avoid adopting tools of price distortion mechanisms which are prevalent in the form of subsidies to various sectors like energy and agricultural markets. Thirdly, heavy investment in human capital is the need of the hour to create a workforce that meets investor requirements. Fourthly, such infrastructure must be developed which augments high-potential sectors such as technology hubs, logistics, and agri-business. Fifthly, local investors must be facilitated by establishing single window points because if local investors see value in investing in Pakistan, it will signal to foreign investors that the investment environment is secure and potentially profitable. Sixthly, inefficient public entities like the PIA, Railways, and Pakistan Steel Mills must be run at least on public-private partnerships in pursuit of sustainability and profit, and lastly, it is imperative that privatisation efforts remain transparent so that a level playing field can be established for all.