Removing barriers to stock market growth

Starting its journey from the Coffee House in London in the 17th century, the stock market across the world has reached its highest peak in the present century. Realising its economic and financial importance, it could now be seen in most developed and developing countries around the world. Stock market has now become a global issue to economists, entrepreneurs and state policy-makers. Even in politically and economically undeveloped countries, the stock market has got its strong foothold. Many countries in Asia, Africa and America, either economically matured or gullible, rely mostly on stock markets to raise capital and give investors great opportunities and incentives to invest in new ventures for expansion of industries and businesses. It has offered the best way of mobilising idle money lying with the people and investing in ventures that provide employment, increase production and earn foreign exchange.
A stock market is an indicator of a nation's financial health. It witnesses ups, downs, and shifts that are the yardsticks of a country's capital infrastructure. The synergetic relationship between a country and its stock market can be synchronised to such a high degree that can instill confidence encouraging more investment based on previous performance of products and the health of the companies issuing these stocks. There's no alternative for emerging and developing countries like Bangladesh for developing and expanding stock market. Bangladesh's stock market had started its operation in 1976 but presently it faces huge problems in its further development and growth.
Stock market crashes are common. But the volatile stock market in China has been reversed through efforts of the government. A number of macroeconomic and ?nancial variables that in?uence the stock market have been recognised in various studies conducted by economists and researchers. The variables are GDP (gross domestic product), price level, industrial production rate, interest rate, exchange rate, current account balance, unemployment rate, ?scal balance, etc. These variables that directly affect the stock market behaviour are invariably found in developing countries of Africa and Asia.
The rationale for a relationship between interest rates and stock market return is that stock prices and interest rates are negatively correlated. A higher interest rate resulting from contractionary monetary policy frequently affects stock market return. This is because higher interest rates shrink the value of equity as stipulated by dividend discount model; ?xed income securities have to be made more attractive as an alternative to holding stocks. On the other hand, lower interest rates resulting from expansionary monetary policy tend to heave the stock market. There are interactions between national stock markets and exchange rates through changes in foreign investment. Rates of return on foreign investment in stocks are converted from one currency into another through changing spot exchange rates. When rates of return in a depreciating currency are translated into a stronger currency, the adjusted rates of return decline. In contrast, when rates of return in an appreciating currency are translated into a depreciating currency, the adjusted rates of return upsurge.
 Foreign portfolio investors pay close attention to timing of their return conversions based on the anticipated exchange rate movements. Moreover, increasing foreign investments in a country's stock market cause the local currency to appreciate vis-à-vis a related foreign currency through larger foreign currency in?ows. Conversely, sales of a country's stocks by foreign investors cause foreign capital out?ows. Such relationships between stock and foreign currency markets have possible ?ows of multi-directional causality. As currency depreciation and uncertainty sceptically affect stock market returns, international fund managers readjust their stock market investment decisions.
?NANCIAL SECTOR is BANK-BASED: The ?nancial sector of Bangladesh is bank-based. Both institutional and individual investors invest their savings predominantly in banks and ?nancial institutions on ?xed term deposits. In addition, individual investors take long-term government securities as one of their priority investment instruments. High interest rates offered by banks and ?nancial institutions on ?xed deposits and by government in long-term saving instruments have held a brake on development of a stock market. The government, however, has taken steps for reduction and rationalisation of interest rates. Interest rates on deposits in banks continued to decline in FY2015. But investment rates have not been reduced substantially. On the contrary, the government savings instruments give much higher rate of interest than than that of fixed deposits in commercial banks. Because of the uneven interest rates, general people go for investment in government savings instruments rather than invest in shares or deposits in banks. The interest rates in Bangladesh are conflicting in comparison to other developed and emerging countries.The stakeholders of the listed companies and non-listed companies are worried that money is flowing from bourses to time deposits and national saving certificates because of the high interest rates on these saving instruments.Different trade bodies recently expressed their concern in this regard.
The high interest rates in Bangladesh are the most formidable obstacle to smooth investment, expansion of business, investment in stocks and generation of employment for millions of unemployed and under-employed people in Bangladesh. Economists and financial analysts term high interest rate in Bangladesh as a disincentive to growth of industries, businesses and stock market. It is recognised that interest rates, inflation rates, corporate taxes and exchange rate policy act as disincentives to investment. The foundation of investment is interest rate. Interest rates directly influence borrowing of credit.  
The central bank of Bangladesh and the government can play an important role by lowering  interest rates on national savings instruments, interest rates on deposits and on borrowings. This will definitely change the present sluggish investment scenario and will help grow stock market. The chief economist of the Bangladesh Bank has expressed his concern over the present state of the stock market and urged the government to take immediate measures to lower interest rates on savings instruments and term deposits with banks, as reported in a local daily.
THE SKY-HIGH CORPORATE TAX: High corporate taxes affect investment. The corporate tax level within a country is often considered before investment. The reality is that different countries have different fiscal policies and various capital gain taxes. Also, the reality is that different countries have developed or weakened capital market. Fiscal policy is a major factor influencing stock markets. It is worth mentioning here that the tax rates, especially the corporate tax, are very high in Bangladesh.
The sky-high corporate tax provided by the fiscal policy helps the government to achieve its revenue target but in contrast it drastically affects the investment scenario of the country including stock market. The tax structure of the country is not investment-friendly. The investors' investment is taxed from the operating profits of a corporate body. The same investor has to pay again 15 per cent tax on dividend, pay VAT on his/her electricity, water, telephone bills, to give road tax for vehicles, pay VAT on tuition fees for children and on medical bills. After paying all taxes and VAT, no savings remains in hand for further investment in stock or business and trading. Fiscal policy can be used by the government as a very effective means to deal with potential market irregularities and to attain redistributive goals. The fiscal policy of any country must be investment-friendly and not anti-investment.
RESTORING CONFIDENCE OF THE INVESTORS: The 2010 stock market crash, no doubt, severely corroded the confidence of the investors in the stock market and the regulators or the government did very little to restore it. Consequently, business expectations remained gloomy and the stock market hibernated. Restoring the lost confidence of the investors on stock market should be one of the main tasks to improve the present sorry state of stock market. Confidence of the stakeholders in the market has been severely shaken: the daily turnover that had risen to Tk 325 billion toward the end of 2010 fell to Tk 35.61 billion on October 21, 2015. The daily turnover at the end of 2010 was 0.43 per cent of the country's gross national income, but in 2015 it fell to 0.03 per cent. The present scenario of Bangladesh's stock market deserves special attention of the government and its central bank to come out with pragmatic solution to the on-going problems.
The DGEN index fell from an average of well over 8300 points in December 2010 to only 4647 points during October 2015. Dhaka Stock Exchange 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 October 2015. The stock market activity must be enhanced along with economic activities. The fall in Index and also turnover of the stock market is a bad sign and it will have adverse effects on the economy in the long run
The intricate problems arising from corruption has dreadfully affected trades, businesses, industries and investments including investment in stock markets. Manipulation of documents, data and information is very common. It's very difficult to make investment decision and correct speculation based on fake or fabricated data. Lack of genuine information or absence of correct financial and operational data discourages investors from investing in stock market. The authorities' actions on defaulters and wrong-doers are noticed off and on but no attempt is being made to correct the situation and upgrade the confidence of the investors. Combating and curbing corruption at all levels of the country should be on the top most agenda of a developing country like Bangladesh.

The writer is the CFO of a private group of companies.
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