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The budget bypasses the all-important stock market

Zahid Huq | June 11, 2024 00:00:00

The main index of the Dhaka Stock Exchange (DSE) shed 66 points to reach its 39-month low last Sunday, the first day after the presentation of the national budget for fiscal 2024-25 by Finance Minister Abul Hassan Mahmood Ali. Such a response from the market was not unexpected. The index plunge could have been deeper, for the budget has not only bypassed the market but also proposed a few measures that, rightly or wrongly, will leave a negative psychological impact on investors' minds.

The proposal to impose a capital gain tax on individual investors if their gain exceeds Tk.5.0 million is unlikely to affect investors' interest. Only a few big ones are likely to be affected. Yet the proposed move has not gone well with investors, who consider it a barrier to the market's growth.

Moreover, the proposal relating to gain tax contradicts yet another budgetary move to allow undisclosed funds to flow into the stock market. The holders of such funds will feel encouraged to invest in less risky areas.

The proposed change in tax rates for publicly traded and non-publicly traded companies has also not gone well with investors. This is because of the market's inherent fragility and dull and drab state.

The market has been experiencing a free fall for the last couple of months or more, with both daily value and volume of transactions remaining very low.

Investors and other stakeholders expected some positive moves in the budget to help retrieve the market. Their expectations got strengthened following a statement made by Private Industry and Investment Adviser to the Prime Minister Mr Salman F Rahman.

Speaking at a function on May 30, Mr Salman Rahman highlighted the need for making the country's stock market 'stronger' and said he had talked to all concerned, including the National Board of Revenue, the Securities and Exchange Commission, and the Bangladesh Bank on the issue.

As far as the securities regulator is concerned, it has done little to revamp the market. During the last few years, BSEC honchos talked a lot but could not do anything tangible to remove the market's inherent weaknesses and make it stable and dynamic. Rather, it enforced floor price mechanism to stop the market slide and prolonged its withdrawal unnecessarily.

The Bangladesh Bank (BB) right at this moment can hardly do anything to help the stock market become buoyant. Banks, being the big institutional investors, can boost the market. However, they are not in the mood to invest in the capital market, as the sector has been experiencing severe liquidity shortages for months. Banks have their exposure limit to the capital market fixed by the central bank. The exposure, however, is now at its lowest level in recent times. It is unlikely that banks will be in a position to venture into the equity market afresh anytime soon.

As mentioned above, the NBR has soured investors' moods instead of helping the stock market. The proposed capital gain tax is a mood spoiler. The tax rate changes for both publicly traded and non-traded companies are well-intentioned, but people concerned are still determining the outcome.

It is hard to blame the NBR chairman when he says what good the tax benefits offered to investors or listed companies have caused to the stock market during all these years. The market needs to utilize even the minimum official incentives better.

Why blame the incumbent finance minister or the NBR? The stock market needed streamlining and disciplining soon after its first crash in 1996. But policymakers have consistently overlooked the importance of the equity market, which remains a viable source of long-term financing for projects and business enterprises in many countries.

Everybody talked about the 1996 market collapse, but no meaningful actions were taken to put the house in order. In the midst of such neglect and indifference, manipulators succeeded in taking the market to a new high and then led it to yet another collapse in 2010. After the second crash, the market existed only in name. Investors are more or less clueless about what the securities regulator has been doing in recent years.

The capital market is a vital part of a country's financial market. The money market has a strong bearing on the capital market. We all know the state of affairs with our banking sector, which is in a crisis, mainly because of huge non-performing loans (NPL). Officially, until March last, the total NPL size was estimated at Tk.1.8 trillion. But its actual size is reportedly far bigger. According to an unofficial estimate, it is nearly Tk.5.0 trillion if the amounts stuck in rescheduling, bank cases and written-off are considered. Banks could have played an essential role in the stock market, even operating within allowable exposure to the stock market. But they need more money to invest in stocks.

As policymakers have preferred to remain indifferent to the cause of the stock market, investors of all hues have gradually deserted it. What is needed most to salvage the market is tough reforms, as is the case with the banking sector or the revenue administration. But who will do that? Does anyone have an answer to that million-dollar question?

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