Pakistan’s stock market is a riddle which nobody has been able to solve. It behaves arbitrarily and is described as a gamblers’ playground. Big players turn it in any direction they want with their calculated interventions at critical points.

The PSX has been on a downward trend for the last several months, but on December 2, it saw a massive bloodbath. On that day, stocks recorded their worst single-day fall in more than 20 months, with investors in the grip of a selling frenzy over fears about the economic fallout of a ballooning trade deficit and another rate hike.

According to market watchers, it was a “Black Thursday” for the country’s capital market that suffered its third largest one-day loss ever. With a loss of 2,134.99 points or 4.71 percent, the benchmark KSE-100 Shares Index plunged to 43,234.15 points at the Pakistan Stock Exchange (PSX), touching a day high and a low of 45,369.14 and 43,089.07 points, respectively.

The market opened on a negative note, marking an intraday low of 2,282 points as investors were concerned about multiple issues, like a soaring trade deficit and higher-than-expected secondary market yields. The decline of 2,135 points, the largest fall in 2021, caused about $1.9 billion losses to investors. Traded shares, however, increased 145 million shares to 386.75 million shares from 241.06 million shares, while trading value rose to Rs14.06 billion from Rs9.22 billion. Market capital decreased to Rs7.418 trillion from Rs7.750 trillion. Out of 365 companies active in the session, 16 posted gains, 338 losses, while 11 remained unchanged.

Sector-wise, cements were major losers in the trading session as major blue chips closed at their respective lower circuits. Further, technology, energy, and fertiliser sectors followed suit dragging the index further down. The highest increase was recorded in the shares of Unilever Foods, which rose by Rs1400 to Rs20,400 per share, followed by Shield Corp, which increased by Rs19.31 to Rs293.77 per share. A major decline was noted in the shares of Nestle Pakistan, which fell by Rs171.54 to Rs5,350 per share, followed by Rafhan Maize that decreased by Rs124 to Rs9,775 per share.

As noted by market watchers, share prices started to decline following the State Bank’s decision to boost its key policy rate by 150bps to 8.75pc at the Nov 19 Monetary Policy Committee meeting. The trend reached its zenith on Thursday with the benchmark KSE-100 index suffering an erosion of 4.7pc of its value in a single day since March last year when Covid-related curbs were first imposed.

A deeper analysis shows that the main reason for the sudden fall was the widespread apprehension over new PBS data showing that the trade deficit had worsened last month, raising the prospect of an increase in interest rates and greater pressure on the deteriorating current account and weakening rupee. Already, the rupee has declined to over 176 to a dollar in the interbank market confirming that the investors’ anxiety isn’t misplaced. Another factor that contributed to the slump was the expectation of a higher CPI (Consumer Price Index) number next month due to the low base effect and further devaluation of the rupee.

It may be added here that the country recorded the highest ever monthly trade deficit of $5.1 billion as exports clocked in at $2.9 billion and imports $8 billion. Secondly, the expectation of interest rate increase in the upcoming monetary policy as 3-month T-bill cut-off yields increased 229 basis points to 10.79 percent, 6-month at 11.50 percent, and 12-month paper’s yield came in at 11.51 percent.

What has happened at the stock exchange also needs to be seen in the perspective of the larger picture of the economy. The general public feeling is that the government has failed to contain inflation and gradual rupee erosion because of the burgeoning current account deficit. The common man’s budget is totally upset and prices have gone sky high. Average headline inflation is anticipated to rise from 9.3 percent in the first five months of the current fiscal year to nearly 12 percent for the remaining months, with more inflationary measures in the proposed “mini-budget” to meet IMF demands. Likewise, the current account deficit is predicted to spike to nearly 5 percent of GDP this year, much beyond the State Bank estimates of 2-3 percent.

The worries over harsh IMF terms also act as a threat to economic stability. The reported stringent Saudi conditions linked to the Kingdom’s loan, have made people lose their confidence in the government’s ability to bring the situation under control. In the opinion of independent economists, until inflation is brought under control and the rupee’s slide is stopped, share prices will remain in the danger zone. An urgent need in this connection is to stabilize the foreign exchange market and bring the cost of money down. Without this, the stock market will remain in the doldrums.