The 1990s have seen the emergence of a number of countries including  Pakistan in the capital market. During this period four main ideas have dominated its development. First, the privatization of public sector units gave a boost to the capital market especially in mexico, Malaysia, Pakistan, Philippine and India. Second, the capital market was opened to foreign investors through its internationalization and hence it encouraged the foreigners to make direct investment in a number of south asian countries. Third, due to the fall of soviet union and some other socialist countries, the command economies were transforming into the capitalist system. Along with other changes, the transformation also led to the emergence of new capital markets even in china, Vietnam and Mongolia, the citadels of the socialist system. Finally, the tremendous increase in the services for trading, settlement and depositing system and the introduction of automation and computerization of stock exchanges accelerated the emergence of capital market.

 The present paper deals with the performance of stock market in Pakistan. To make the discussion more systematic, it is divided in to two parts. The first part deals with the capital market till the end of 1994. the second part is concerned with the recent developments in capital market since January 1995.

The growth in market capitalization was slow in eighties. It was 0.317 billion dollars in 1981 rising to the 0.833 billion in 1985 and reached 1.982 billion in 1990. at the end of 1994, the market capitalization is almost 44 times mare than that was in 1980. the performance of capital market is elaborated in table 1 where annual turnover of shares Is presented.

                                                     Table  3.1

                             Annual Turnover Of Shares

1987       157,298,550

1988       169,263,025

1989       214,571,710

1990       255,396,705

1991       616,914,235

1992       799,336,000

1993       1,276,312,000

1994       1,770,526,0

 in 1987 we had an annual turnover  of 157.30 millions. In 1990 it went to 255.4 millions. Then from 1991 onwards the increase in the annual turnover was very steep reaching 1.77 billions in 1994.These figures indicate that since 1989, on an average, there was about 1.2 million daily turnover of shares.

 Table 3.2 gives us for four years, 1990-1994, the month wise picture of stock market both in KSE and SBP indices. The KSE index started rising in the beginning of 1991 but in December 1991 it fell abruptly. The KSE remained fluctuating around 1200 during the first quarter of 1992. however, it rose from12969 to 1545 in June 1992 and again started coming down gradually till June 1993. at the end of 1993, it started rising again and touched the peak in April 1994. it started coming down after that till the end of 1994. a similar trend can also be seen in the state bank index. The companies listed were 487 in 1990 and kept on increasing reaching 764 in December 1994. the number of listed companies was the highest, eighty six, in 1992 and then 73 in 1994.

 A comparison of the four years KSE and SBP indices reflect that the capital market performed well by the end of 1991 but remained in low profile during 1992 and 1993. it picked up in 1994 reaching the peak in april 1994. however, since October 1994 the index started falling reaching 1630 in april 1995. what are the factors that made the Pakistan capital market perform so well? First, Pakistan despite the balance of payments difficulties and fiscal deficit problems has enjoyed reasonable degree of macroeconomic stability. The average GDP growth rate has been around 5% but most important was the perception of foreign investor about the economy which was very favourable particularly during 1994. second, and the more important factor, was the radical policy of liberalization and opening of the entire economic system and the financial sector in particular. Perhaps the more significant development in last three years has been the measures taken by the government to replace the age-old system of administered interest rate structure, quantitative credit control system by market oriented interest rate structure and open market operation for the management of the monetary system. These macroeconomic policy measures have been accompanied by deregulation and relaxation of sanctioning procedures. The third factor which has a direct impact on boosting the securities market is in the realm of exchange control regime. With the exchange control regime liberalized, a number of incentives were given to domestic investors and foreigners were allowed to come in.

 The fourth factor which has been critical to the development of capital market is the expansion and development of corporate sector. Securities market can grow in an environment with encourages the incorporatisation of investment and business activity. It is not only necessary that more companies should come into service but companies should grow in size, so that there is compulsion to seek funds from public. Though this process is linked with the overall development of the country, policies of government can also accelerate the process. A number of measure were taken such as the extension in capital gain tax exemption for another two years and introduction of a simplified tax system.

 The fifth factor is, the sustained supply of securities either through new issues, disinvestments or the right issues. All these there have been followed in Pakistan. Not only new issues have come, the government has disinvested some of its units and right issues have been forthcoming as well. The sixth factor in this connection is the nature and character of the regulatory framework. The key element of such system is a comprehensive institutional arrangement for the protection of investors, based on requirement of transparency of transaction and code of behavior of market participants. Although we may not have done much, but steps were taken towards this direction and still to be taken not only by the regulatory authority i.e CLA, but also by the stock exchanges themselves. Self regulations have come in to existence and stock exchanges themselves regulating their affairs to a greater extent. Of course there are drawbacks in the system and we need to make them perfect.

 An inhibiting factor is the slow moving legislation system of Pakistan. For example, the company law of 1956, after its revision in 1979, was submitted to the government in 1980. it took four years for the national assembly to pass the revised company law. New regulations affecting securities and the company’s law in 1992 and 1993 have been to the submitted to the government, which are still awaiting presentation in the assembly. If we wait for inordinate long periods for the legal approval in a world which is moving at a fast pace, we are bound to be left behind.

 Before ending discussion of this part, let us look at the composition of stock market table 3.3 gives the comparative view of the number of companies in 1991 and 1994 in different sectors of the economy. The comparison is made by looking at two aspects, the number of companies in different sectors and the change in their paid up capital. The figure reported in table 3 reflect that the services sector like banks, the finance, mudarbas, and insurance have increased from 16.36 percent to 25,43 percent while the manufacturing sector has gone down.. this is a very significant factor. The stock exchange will increase its volume, if a strong manufacturing base is provide. Unfortunately, we are manufacturing base. This, of course, is because of the high interest rate and high infrastructure cost.

Another thing to look at in table 3.3 is transport and communication sector. It remained 10 percent of the total paid up capital in 1994. in terms of absolute amount, because of PTC, it has increased tremendously. The total paid up capital of PTC was 4.773 billion in 1993 and 11.529 billion rupees in 1994. hence the PTC is dominating not only the communication sector but is influencing the overall capital market.

 The second part of this paper is to analyze the performance of stock exchange since the beginning of 1995. in table 3.4 a weekly review of KSE index (on every Monday ) from the second of January till the third week of April 1995 is presented.

 The table shows that the biggest fall came in the third week of march (of about 134 points). Along with the fall in index, there was fall in market capitalization.the market capitalization was Rs.404 billion on 2^nd of January 1995, which dropped to Rs.360 BILLION ON 30.1.95 thereby losing about Rs.44 billion in one month alone. Even though capitalization rose in February to Rs.379 billion did not reach the level as of the beginning of the year.

 What are the reasons of this tremendous fall of stock market in the last few months? There are following possible reasons of this deterioration. First, it started with the devaluation of Mexican peso and the rise in interest rate in USA and the consequent flight of international investors from the emerging economies. The second factor of this deterioration has been the liquidity crunch. A number of mega-issues, like PTC, hub co,

And others were brought in to the capital market, which took away all the access liquidity (whatever was there in the economy). This was augmented by uncapping of the interest limit by the state bank of Pakistan. The third factor has been the effectiveness of prudential regulations. These regulations are the good measures for the capital market but we can relax them looking at the downturns of the economy. They should move along with the economy. Unfortunately, the laws are very rigid and their interpretation does not provide due flexibility. The fourth factor is that since 1970s we have hostage to revenue collection with the result that other policies have suffered. The stock exchange markets are also adversely affected by this action. The result is that stock exchanges themselves are not getting sufficient funds. Finally, and the most important factor is deteriorating law and order situation and growing political instability – two vital factors which adversely affected the stock market.