The share market of the country, variously called the stock market, the capital market or the bourse, has been in the doldrums ever since billions of taka was siphoned off from the market in 2010 by scammers through fraudulent means. The elaborate scam encouraged a hype that led to very sharp increases in the share prices from about mid-2009. The bubble eventually bust at the end of 2010 with a spectacular crash of share prices.
Although a probe committee was constituted and a report was filed no one was brought to justice. Confidence of the stakeholders in the market was severely shaken. Investment in the share market dried up: the daily turnover that had risen to Tk 32.5 billion toward the end of 2010 fell to Tk 3.8 billion during the last month (April 2015).
To put it in a sharper perspective, the daily turnover at the end of 2010 was 0.43 per cent of the country's gross national income (GNI), but in 2015 it fell precipitously to 0.03 per cent.
The DGEN index fell from an average of well over 8300 in December 2010 to only 4500 during July 2013. Dhaka Stock Exchange (DSE) introduced a new index styled DSEX index in January 2013 and discontinued the estimation of DGEN index after July 2013. The new index shows that there has been very little increase in the index from February 2013 to April 2015. The downward movement of the stock market index was halted by April 2013, but it did not gain much traction since then.
The current state of the stock market is a good example of the role of business confidence or expectations on business performance. The 2010 stock market crash no doubt severely eroded confidence of the investors in the stock market, but the regulators or the government did very little to restore the confidence. Consequently business expectations remained gloomy and the stock market stagnated.
A myth about the share market perpetrated in ordinary discourse with some success is that it is an important source of funds for investment (in macroeconomic sense). Facts, however, speak otherwise. Professor F. Mishkin has provided evidence that the US share market accounted for only 2.1 per cent of total external financing of the American business enterprises as late as 1970-85. The bourses of Germany and Japan show a similar trend.
It should be borne in mind that the daily transactions in the share market, which the share market participants term 'investment', are trades in pre-existing capital and reflect only changes of ownership of capital. Such trades may be 'investment' to individuals, but they do not constitute investment in macroeconomic sense. Only the initial public offerings (IPOs) and perhaps bonus shares may be regarded as investment funds used for expansion of the capital base of business enterprises. The record of IPOs shows that they are an insignificant contributor to the total investment of Bangladesh (Tk3.9 trillion in fiscal year, or FY, 2013-14). Data on bonus shares are not readily available, but they are not likely to be significant either.
It is, therefore, a bit surprising that the Chief Economist (CE) of the Bangladesh Bank (BB) should call for the improvement in the performance of the share market an objective of a substantial change in rates of return on National Savings Directorate's (NSD's) saving instruments and rates of interest on time deposits. His statement made in a keynote speech of a seminar attracted the banner headline of The Financial Express, in its issue on April 27 last, which reported: "He expressed his frustration over the present state of the capital market and urged the government to take immediate measures to lower rates on saving instruments and term deposits with banks".
The CE was worried that money was flowing from bourses to time deposits and national saving certificates because of the high rates of return on these saving instruments. Given his high position, it is likely that his publicly stated views may be in sync with the thoughts of BB senior management and even the Ministry of Finance (MoF). The fact that the announcement about reduction of rates of return on NSD savings certificates was made soon after, strengthens such a belief. It is, therefore, pertinent to sound a caution about the simplistic solution to what is a complex problem.
The CE might have been unduly influenced by share market participants in assuming that investment would be significantly influenced by the stock market. The discussion above should dispel this view.
The suggestion to reduce rates of return on saving instruments to raise stock demand and hence stock prices has a similar implication as slapping tariffs on imported textile in order to raise the demand for, and hence the price of, domestic textile and reduce the demand for foreign textile. This rewards the domestic textile industry at the expense of both foreign textile industry and domestic consumers. A reduction in the interest rates on savings will reward some stock market players at the expense of millions of depositors, but it is unlikely to do much good to the real economy.
Is it a fact that money was flowing out of the bourses and into the saving instruments in recent time? A look at the daily turnover of Dhaka Stock Exchange in Chart 1 below shows that after a very large rise in 2009 and 2010 and the equally large fall at the beginning of 2011, the turnover appears to have fallen to a lower level (but considerably higher than the pre-scam level) with occasional blips up and down. There is no discernible upward or downward trend in the turnover.
Thus, it is not so much the case that money has moved out of the stock market, but rather that it has not attracted sufficient additional funds during the last four years as would be normally expected of a vibrant capital market of an economy growing at six per cent plus rate.
The trend of time deposit shows rather clearly that its growth has slowed down quite markedly since FY 2011-12. This should not be surprising since time deposit comprises more than three-quarters of the money supply. The BB had reined in money supply after the share market crash, consequently its growth rate declined. This caused a similar decline in the growth rate of time deposits.
Investment in NSD saving instruments on the other hand increased quite sharply during the last two years. The large differential between rates of interest on time deposits and rates of return on the NSD saving instruments obviously had a large role in encouraging investors to move into NSD saving certificates. It is a mystery why the MoF had maintained the large differential for such a long time. It had substantial budgetary cost. If the NSD scheme were restricted to retirees and low income groups, the differential could be justified.
The writer is Professor of Economics, University of Dhaka.
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