As reported two weeks ago in The Economist, the Karachi Stock Exchange (KSE) has boomed for the past two years, with returns over 40 percent, albeit on rather low volume. The article cites a range of factors for the KSE’s strong performance, including investors’ appetites for risky markets, a new IMF loan for Pakistan, and general optimism after the country’s reasonably peaceful elections in May. Those elections marked the first time that a democratically-elected government served out its full term and handed over power to another civilian government.
On top of that, the new PML(N) government is considered largely pro-business, both by the local private sector and international observers. PML(N) came into office having made a wide range of assurances on needed economic reforms, and as CIPE’s Pakistan Country Director Moin Fudda has written, it was the business community that was instrumental in pushing the political parties to offer concrete policy platforms in the run-up to the May elections.
But digging deeper shows that caution is in order. The $5.3 billion IMF package still requires approval by the Fund’s board in September, and the government must show that it can deliver on a long list of preconditions. Among those are reforms to the crippled energy sector. But in a recent meeting of the Council of Common Interests, which brings together leaders of the four provinces with key federal ministers, agreement on the PML(N) national energy plan was deferred for further discussion.
Another IMF condition – improving governance in state-owned enterprises (SOEs), is now being held up, despite passage of a set of rules for corporate governance of SOEs, as the government wants to retain control by appointing these companies’ CEOs – a right that is reserved to the board of directors. Fudda explored this issue in greater detail in Dawn this week.
There are many other IMF requirements, but one we should highlight is the need to improve tax collection and broaden the tax base. But this needs to happen without squeezing those industries that already bear an outsize tax burden, as this could hamper badly needed growth.
Last, as The Economist concedes, another reason for the influx of cash on the KSE is an “amnesty… which allows people to buy stocks until June 2014 with no questions asked about the source of funds.” Of course, countries can use such measures to legalize “gray” funds, expand the tax base, bring capital out into the open and boost the economy. But in Pakistan, this measure was criticized for a range of reasons, including weak oversight that failed to block outright criminal or corrupt money. Further, the main regulator, the Securities and Exchange Commission of Pakistan (SECP) has been accused of being too close to certain brokerages, and not filling seats on its policy board reserved for independent members.
In this light, it remains too early to assume that Pakistan’s path toward economic reform is guaranteed. There is there an exhaustive list of issues that must be tackled, and the measures that must be put into place all come with their own unique and complex technical hurdles – at the design, passage and practical implementation stages. The new government must give clear signals that it intends to follow through on its pledges, and that it has the political will to do so. Certainly, concerted advocacy efforts by the Pakistani business community must continue to ensure that electoral campaign promises are met.
Marc Schleifer is Senior Program Officer for South Asia at CIPE.
Published Date: August 07, 2013