Karachi Exchange May End Curbs as Pakistan Fund Props Up Stocks

By Naween A. Mangi

Nov. 20 (Bloomberg) -- The Karachi Stock Exchange may end rules barring investors from selling equities once the government puts in place a $252 million fund to support share prices and the economy improves, the bourse’s managing director said.

“It would be irresponsible to remove the curbs without the necessary stabilization measures,” Adnan Afridi, managing director of the exchange, said in an interview in Karachi. The timing will become clearer “over the next few days,” he said.

The government is planning a 20 billion-rupee ($252 million) fund to help lift stocks after the exchange prohibited investors from selling shares below their Aug. 27 closing prices, a move that effectively kept investors from pulling out of the market after the benchmark index plunged 49 percent this year. Pakistan is in a stronger position to start the fund after agreeing to $7.6 billion of International Monetary Fund loans last week.

While the Karachi 100 Index rose 11-fold as Pakistan’s economy expanded at least 4.7 percent a year between 2001 and 2007, the gains diminished as the global credit freeze sent the rupee to a record low, the balance of payments deficit to its widest level ever and inflation to a 30-year high.

The market has also been rocked by protests as police last month surrounded Pakistan’s biggest stock exchange to quell violence by investors angry over the price curbs. Authorities sought to avoid a repeat of July, when hundreds of investors stoned the bourse and shouted anti-government slogans.

Trading Curbs

The exchange first imposed the trading curbs in August then extended them indefinitely on Oct. 27. It also bailed out individual investors in July and banned short selling in September, measures aimed at stemming the market’s decline.

Pakistan’s rupee fell 0.2 percent yesterday to 79.375 per dollar, extending its decline this year to 22 percent.

The KSE 100 is down 0.2 percent since the start of the trading restrictions, leaving it at 9.4 times estimated profit, or 40 percent lower than its valuation at the start of 2008.

“The trading floor effectively stopped the process of price discovery and prevented buyer-seller interaction,” said Farid Khan, director of equities at Credit Suisse Pakistan in Karachi. “This effectively blocked the exit of existing investors and scared away potential investors.”

Overseas investors sold $175.4 million of stocks between July and October, after buying $313.9 million of shares in the same period a year earlier, according to central bank data. Foreign investors hold $2 billion of stock, a fifth of the amount that is freely floated, Afridi, 38, said in the interview yesterday.

Pakistan reached an agreement Nov. 15 with the Washington- based IMF on the loan package, which is aimed at preventing the nation from defaulting on its foreign debt. The country of 165 million people sought assistance after its foreign-exchange reserves shrank 75 percent in the past year to $3.5 billion on Nov. 8.

“We’re waiting for the fund and for our macroeconomic conditions, particularly foreign exchange reserves, to stabilize,” Afridi said. “A big step has been taken in that direction with the IMF.”

To contact the reporter on this story: Naween A. Mangi in Karachi, Pakistan, at nmangi1@bloomberg.net.