Pakistan's Market Policy: Economistan.com

FREE MARKETS:Pakistani economy along with the Pakistani rupee would be better served if the floor on KSE remainson for another month or so.

NO TO FLOOR REMOVAL FROM KSE

By Saad Sarwar Muhammad

Friday, October 10, 2008

Pakistan’s main index, the Karachi Stock Market (KSE) has witnessed a dramatic fall in market capitalization during the year 2008; falling from ahigh of approx 16,000 points in April in a steep fall to 9,000 points in a span of a few months. Resultantly, the Karachi Stock Market (KSE) put a floor of 9000 points on the index to arrest the unrelenting flight of capital. The market capitalization of the KSE has decreased by about $36 billion dollars during the last year. Around the same time the total liquid foreign exchange reserves have fallen from an all time high of $16.5 billion to $8.4 billion. This dollar flight has resulted in gradual erosion in the value of rupee, which has fallen from 60.74 to a dollar in October 2007 to around 80 to a dollar in October 2008 within a span of one year.

Statistically speaking, it was found after calculation that capital movement away from the stock market had a strong correlation with the depreciation of the rupee and it was found to be around 0.6057, while capital flight from the total liquid foreign exchange reserves was found to have a very weak positive correlation of 0.0525 with the depreciation of the rupee.

Foreign investors have repeatedly asked for the KSE index to be traded free from the floor imposed at 9000 points. If such a demand is met anytime soon and the market capitalization goes down by $15 billion, it would result in the further devaluation of the rupee from its current parity of 80 to a dollar to 90 to a dollar or beyond according to our extrapolation of data.

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