Six-day slump on Pakistan exchange sparks ban on lower stock prices

STOCK MARKET investors are routinely warned that "the value of your investment may go down as well as up". Not in Pakistan, however, where authorities have responded to spiralling political and economic instability by banning lower prices in the near term.

After a six-day, 16 per cent slump, the Karachi Stock Exchange 100 hit 9,144 last week. But it's not going lower for now, with prices forbidden to trade "below the floor-price level" of last Wednesday's close, "in the interests of investors".

Pakistan was late to the global bear market, with prices peaking at 15,676 in April of this year.

It has been almost all downhill since then, however. Stocks rallied a fortnight ago after the resignation of president Pervez Musharraf, but any hopes of an end to the prevailing political uncertainty were quickly dashed when former prime minister Nawaz Sharif pulled his Pakistan Muslim League-Nawaz party out of the ruling coalition. Prices plunged by 8.5 per cent in two days before the price freeze was introduced.

This is not the first such attempt to shore up the Karachi index. Shortselling, whereby investors seek to profit from a declining market, was banned in June. Trading curbs were also modified: the limit on daily declines was reduced from 5 to 1 per cent, whereas the cap on daily gains was doubled from 5 to 10 per cent.

Trading volumes quickly dried up, however, prompting the lifting of the measures in July. Shares then went on a 15-day losing streak that led to angry investors stoning the exchange and burning shareholder statements and car tyres.

Protesting that "the regulators only favour big brokers and investors", the head of the Small Investors' Association warned that, "if things continue this way, you will hear of suicides". He demanded that "all stock prices be frozen at current levels", a wish that was granted last week.

With the index now languishing at 26-month lows, investor anger is unlikely to have dissipated.

Despite the falls, however, the Karachi market has enjoyed strong gains over the past few years. It rose for six consecutive years from 2002, enjoying a 14-fold increase in the process.

Whether the latest rule will be any more successful than the failed attempts at manipulation in June is a moot question. Inflation is at its highest in 30 years, there is a Taliban insurgency in the northwest, and recriminations continue among the political factions who investors had hoped would usher in a new era of stability for Pakistan's fledgling democracy.

Credit default swaps, which provide insurance in the event of a default on debt, have soared to a record high, meaning traders believe Pakistan's government debt to be the riskiest globally.

The rule will be reviewed in the next 10 days, with Pakistan's market regulator "monitoring the price movement following the decision" and possibly finding "some other measures" for "achieving stability in the capital markets".