There is a visible disconnect between two statistics routinely uploaded on the Finance Division’s website in the monthly Outlook and Update dating back to the time the incumbent government was installed in March 2024: a buoyant domestic stock market reflecting keen interest of local market players and a gloomy picture of portfolio investment inflows by foreign market players.
The Pakistan Stock Exchange (PSX) has shown a consistent upward trend since the incumbent government took over the reins of control – a trend that continued in August 2025 as noted in the Finance Division’s uploaded August Economic Update and Outlook: (i) on 27 August 2024 PSX was at 78,084 rising to an impressive 147,497 on 27 August 2025 – a positive change of 88.89 percent; and (ii) market capitalization (defined as the market value of a publicly traded company’s outstanding shares calculated by multiplying the current share price by the total number of outstanding shares) at 10,424 trillion rupees in 27 August 2024 against 17,529 trillion rupees on 27 August 2025 - a rise of 68.16 percent.
The PSX declined on 5 May 2025 and plunged by 6.32 percent following Indian missile strikes on 7 May, prompting a halt in trading on 8 May. KSE-100 then began an upward trajectory and quickly recovered losses by 12 May, as hostilities ceased, and thenceforth has continued to reach historical highs with minor downward fluctuations.
Foreign portfolio investment however has rarely kept pace with local market sentiment. In 2024-25, foreign portfolio investment was negative 650.2 million dollars - negative 44.6 million dollars in July 2025, the first month of the current fiscal year.
The discount rate higher than the regional average, that attracts foreign portfolio investors, has yet to play its role in this regard at present even though a significant inflow under this head was witnessed in 2019 when the then newly appointed Governor State Bank of Pakistan, Reza Baqir, raised the discount rate to 13.25 percent in June (from the 10.75 percent in March) as negotiations for a programme loan with the International Monetary Fund (IMF) concluded.
True there is a real and present danger of foreign portfolio investment leaving a country at the press of a button on the keyboard, a factor that accounted for the 1997 Asian financial crisis that led to havoc in countries like Malaysia, Indonesia, South Korea through devaluations, asset price decline and recession.
Be that as it may, for foreign portfolio investment to be in the negative realm with high degree of buoyant sentiment of local investors merits further study.
Three empirical studies highlight the root of the problem. University of Chicago students, Ali and Saqib, in their thesis titled “Stock Market Efficiency: Evidence from Pakistan” dated 2009 concluded that “results indicate that proper measures need to be taken in order to improve informational efficiency and thereby assist potential into investors to invest in securities that are correctly priced.
In short, policymakers have to go a long way to achieve even the weak form efficiency level in Pakistan. There should be a proper database, through which all the companies should be obliged to improve the quality of information provided to potential investors.”
Another study titled “Economic Development of Pakistan through Stock Market: a causal relationship of stock prices and macroeconomic indicators” dated 2013 by Institute of Business Administration, (authors Rizwan Raheem Ahmed, Yaseen Ahmed Meenai and Fazal Hussain) found that “the Code of Corporate Governance dictates that the Board of Directors act as a trustee to protect all investors of the firm, whether they belong to the sponsor group or are classified as minority shareholders.
However, the study finds that within firms that constitute the KSE100 index, members belonging to a few sponsor families serve on multiple boards. This raises the risk of these board members acting in concert to protect sponsor interests over the interests of minority shareholders. Thus, future research could analyse the motives for public listing if the shareholding remains concentrated amongst a select few despite higher costs (and penalties) associated with disclosure requirements for listed entities.”
The study concluded that “the Stock market does not lead the economy, rather the economy leads the Stock market. Therefore, individuals, institutions, and government should be aware of the resulting speculative bubbles.
In the absence of other strong economic indicators, all the stakeholders should be cautious when stock prices shoot up. It is further recommended that the government should take appropriate steps in order to rectify the market development and offer better financial infrastructure for operation of stock markets. These include strengthening of regulatory provisions and better enforcement, improvements in information systems and mechanisms for payments, more neutral application of fiscal policy to all types of financial instruments, higher standards of disclosure of financial information by companies, and greater scope for financial innovation within a flexible regulatory framework.”
A 2021 study by Pakistan Institute of Development Economics, titled “A Small Club: Distribution, Power and Networks in Financial Markets of Pakistan” (authors Nadeemul Haq and Amin Hussain) found that “KSE is heavily skewed with the top 10 companies constituting more than half of total market capitalisation. Annual reports show that directors or significant shareholders (73 percent of total) hold ownership of over 4.963 trillion rupees out of a total market cap of 6.8 trillion rupees. This means that minority shareholders, holding less than 5 percent each, hold about 25 percent of the shares in each KSE-100 firm.
Large firms such as Philip Morris, Pakistan Tobacco, and Pak Suzuki are listed as mostly accounted for, as one or two legal owners hold over 90 percent of shares in the company.”
There is clearly a linkage between the handful of market PSX players and the country’s economic team leaders, who routinely cite upswings in the PSX index as proof positive of improved market sentiments due to the success of their economic policies. Critics contend that a stock market upswing is easily engineered in return for the low tax applicable on market players, evident from the fact that the total tax collected from the PSX was, at last count, around 15 billion rupees, compared to say India collecting more than 100 billion rupees annually. It is relevant to note that the 15 billion-rupees figure was extracted from the relevant officials in the Federal Board of Revenue (FBR) who did not provide any corroborating data.
To conclude, it is relevant to note that the lower, middle and the majority of upper middle classes do not invest in the stock market, which explains why the buoyant stock market has no role in luring foreign portfolio investment or in reducing poverty levels – 44.7 percent as per the World Bank at last count.
There is an urgent need to draw from the conclusions of these three studies to ensure that the stock market can play a developmental role in our economy.
Copyright Business Recorder, 2025
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