The scandal behind Pakistan's raging bull run
By Syed Saleem Shahzad and Masood Anwar

KARACHI - A small group of players in the Karachi Stock Exchange (KSE) have raked in Rs3.5 trillion (US$5.83 billion), engineering another huge stock-market scam in Pakistan.

The 100-companies index of the KSE started going up from the first day of the new calendar year, without any perceptible reason, moving from 6,218 points to touch a high of 10,300 points on March 15 - adding more than 4,000 points in just two-and-a-half months.

Blue chip Oil Gas Development Corp (OGDC) was the star draw in the market, contributing 60% of that phenomenal increase. According to market experts, the real index figure for the KSE should be about 5,500 points.

The market has been so heated that trading volumes hit a new record of 6.8 billion shares, generating millions of rupees for the brokerage houses daily. The brokerage fee to sell one share is Rs0.50, and to buy, Rs0.15. The brokers thus earned Rs4.42 billion in just one day, March 14. This had been going on for months without any intervention by any government body, including the Security Exchange Co - supposedly the watchdog authority for Pakistan's bourses.

According to information on the KSE website - which, incidentally, was last updated on January 31 - the average daily turnover of shares stood at 640.47 million before frenzy set in and volumes began to be quoted in the billions. After the bubble burst, the trading volume dropped to 108.520 million shares on Friday.

There are 200 registered brokers in the KSE, with 156 active ones. But only a handful of them were the main beneficiaries of this game. Pakistan's economic managers, in fact, encouraged one of the top brokers - among the three bigwigs who monopolize 90% of KSE business - to pump some life into the stock market to ramp it up for luring foreign investors. These economic spin doctors have been trying to conjure up a picture of prosperity in Pakistan, citing rapid gains in real estate, overflowing foreign exchange reserves and an hyperactive stock market.

"This is nothing but asset inflation," columnist Farukh Saleem wrote in The News International, well before the stocks headed back to their real levels. "To be sure, Pakistan's asset inflation has at least three of the most critical ingredients: rapid accumulation of foreign exchange reserves, high bank liquidity and low interest rates. What's missing is export growth. In the case of Japan - followed by South Korea, Hong Kong, Taiwan, Thailand and Singapore - foreign-exchange buildup was export-driven. Our foreign-exchange buildup, on the other hand, is not export-driven but, perhaps, fear-driven (Pakistanis sending money back)," wrote Saleem.

Predicting that the economic bubble would burst, he asserted, "In Pakistan, two precursors to asset inflation (high price of land and stocks) are already changing direction. First, home remittances that came in at $382 million in January 2004 dropped to $321 million in January 2005. That amounts to a drop of 16%; not a major drop, but a change in direction nevertheless. Second, interest rates are now on their way up. In June 2001, the average weighted lending rate was 13.74%. By March 2004, the same had dropped to 4.69%, but has since gone through a nearly 100% upward movement ... Nikkei kept on rallying for a decade, while the bubble at Nasdaq burst in two years. For the record, the rally at the Karachi Stock Exchange is less than three years old ... Bubbles go higher than most expect them to and when they burst, they go lower than most anticipate."

According to Saleem, the pseudo-hype in the stock market did achieve its goal, as it helped Pakistan to lure several Persian Gulf and Saudi companies that signed investment contracts with the government. But the bull run, artificial as it was, was obviously unsustainable, and the bubble burst with a vengeance, hurting small investors the most.

To raise money, brokerage houses recruited smart girls for marketing purposes and assigned them to look for people desperate to get rich quick. The main target for these girls were the women residing in Karachi's posh areas, such as Clifton, the Defense Housing Authority and Gulshan-e-Iqbal. The girls would first call up these women up, meet them and convince them to invest their money in the brokerage houses for quick returns. As share prices kept breaching new highs, it was not a particularly hard thing to do. By February, these "investors" were earning thousands of rupees a day, bringing in more gullible enthusiasts.

But with the beginning of the second half of March, the market began to creak; the artificial steam was no longer able to hold up the fancy figures. The last straw was the exposure of brokers and investors in OGDC shares far above their availability. Only 5% of OGDC shares (107.5 million) were off-loaded by the government in November 2003. But by March 14, the trading volume of OGDC was 180.455. The next day, 167.773 million shares of the same chip were sold.

By then the settlement for the March contract was due and sellers were under pressure to deliver the shares, but of course there was no sign of them. Failure to deliver shares entails a 20% penalty. So investors now had to pay out millions of rupees to settle the account. To ease the pressure, the KSE board of directors increased the settlement date by one week. The KSE has Rs30 billion as outstanding in March trading. Since the trade is two-way - sale and purchase - the amount doubles to Rs60 billion while the bourse holds only Rs18 billion in exposure from its members. Clearly, a disaster is in the making.

This scam could adversely impact the off-loading of the United Bank Ltd and the State Life Insurance Corp, shares that the government has scheduled in June. The question is, will the government take any action against the people who played havoc in the bourses?

Syed Saleem Shahzad is Bureau Chief, Pakistan, Asia Times Online. He can be reached at saleem_shahzad2002@yahoo.com

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