The question is why is there such disparity between the perception of foreign and local portfolio investors? A look at the foreign portfolio investment for the past four years as uploaded on the State Bank of Pakistan (SBP) website reveals that FIPI was 119.6 million dollars in 2013, and rose to 622.8 million dollars in 2014, with a further rise to 917.3 million dollars in 2015 and last calendar year (2016) it declined to 319 million dollars. With respect to foreign public portfolio investment inflows the entire amount since 2013 has been in debt securities (none in equity security) accounting for an impressive 2115 million dollars in fiscal year 2014, down to 927 million dollars in 2015.
During the first four months of 2017 total equity securities (private as well as public) were 11,926 million rupees (no doubt sourced entirely to the private sector) as per the SBP; long term debt security (defined as loans and obligations of a company lasting over a year that may also apply to the Pakistan government) was estimated at 30,513 million rupees with a major investment from Cayman Islands (offshore) and countries which have received major public sector contracts that include Turkey, Qatar, Japan (due to its engagement in the auto sector) Indonesia and, by far the largest, the United Arab Emirates. The UK and Saudi Arabia were the only countries that invested greater amounts in equity as opposed to long-term debt securities.
Local investors, it has been repeatedly pointed out by Business Recorder, are susceptible to government manipulation and in Pakistan it is feared that many a finance minister proactively seeks the support of the limited number of stock market players, around 40 or so, to reflect favourable market perceptions when this may not be the case. This manipulation takes the form of taxes levied on sale/purchase of securities and in this context it is relevant to note that the tax on the stock market players in Pakistan compares extremely unfavourably with that imposed in other countries, including India. Total tax collections under this head have never been more than 4 to 5 billion rupees per annum whereas studies reveal that if the tax levied is the same as in India actual collections from this source can be as high as 100 billion rupees.
Dr Hafeez Sheikh, the Finance Minister appointed by the Zardari led government, made a deal with the stockbrokers that would have gradually raised the tax payable by this sector; however, once Ishaq Dar headed the Finance portfolio the deal was abandoned and Dar said in his second budget speech that it was due to the sector's good performance though the major contributor to FIPI in fiscal year 2014 was foreign public investment in debt securities which included sale of Eurobonds, treasury bills, Pakistan Investment Bonds and sukuk. China likely to emerge as the largest investor in Pakistan under the China Pakistan Economic Corridor is clearly not using the stock market to invest in this country.
As per the SBP website total foreign investment (direct as well as portfolio) rose to an impressive 4437 million dollars in 2014 but thenceforth continued to decline - to 2767 million dollars in 2015 and 1575 million dollars in 2016. So far the slack is being picked up by the local investors though one may safely assume that the bubble would burst unless the inflow of FIPI is fuelled.
Copyright Business Recorder, 2017