The 2015-16 budget and stock market

One of the important determinants of economic development of a country is an effective and strong stock market. Stock market is globally recognised as one of the best tools for accelerating economic growth by accumulating savings for investment in productive and profitable sectors of the economy. It helps increase quantity and quality of investment. Stock market thus is an important institution for capital formation geared towards economic development.
The development of stock market aims at ensuring full efficiency of capital formation and allocation. While banks finance only for short term, stock markets can provide funds to risky and productive long-term investment projects. In principle, a well-developed stock market mops up savings and efficiently allocates capital for productive investments. This leads to an increase in the rate of economic growth. Stock market contributes to the mobilisation of domestic savings by enhancing a set of financial instruments available to savers to diversify their portfolios. The Bangladesh economy  needs investments in productive sectors. A strong and stable stock market can help increase investment flow to such sectors.
Bangladesh's stock market has not been performing well for the last few years. Many small and big investors lost their investments due to crash of the stock markets in 2011. The abnormal behaviour of the market has created an unfriendly investment environment. The confidence of investors in stocks has reached a zero level. The daily buying and selling of stocks in Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) shows a very frustrating picture. The share prices of most of the listed companies are dwindling.
The stock market capitalisation in Bangladesh and other countries is calculated as the number of shares traded on the stock exchange in terms of their prices. It is a measure of the size of the stock market in the country. It is usually reported as percentage of the GDP (gross domestic product) so that the size of the stock market relative to the size of the economy can be assessed. Bangladesh's stock market capitalisation  as percentage of the GDP in comparison to other countries is really frustrating.
The government took a few steps to reverse the continuous declining trend of the stock market like tax rebate of capital market investors, exemption of credit for marginal level investors as well as influencing banks to generate more investment in the capital market.  But all the steps have proved to be inefficient and ineffective due to lack of policy adjustments, absence of confidence of investors, liquidity problem, regulatory issues, structural problems, high charges like bank interest, L/C opening and acceptance charges and so on. The performance of the listed companies, in most of the cases, is not satisfactory in terms of profitability. The profitability of many listed companies has been downsized due to political turmoil, instability and investment-adverse environment prevailing in the country. Downsizing of profitability directly hits hard the dividend that the investors get from their investments in stocks. Low dividend and absence of bonus share have forced the investors to divert their investment to savings instruments of the government and commercial banks that the investors consider as more secure, stable and lucrative.
Stock price depends on some important factors. The important ones are earnings per share (EPS), dividend per share (DPS), oil price (OI), gross domestic product (GDP), consumer price index (CPI), interest rate (IR), net asset value (NAV) and money supply (MS). EPS and DPS are the most vital determinants in stock prices as investors always consider these as important factors before taking decisions on investment in any particular share. Stock determinants always vary from country to country and from place to place. In the context of Bangladesh's stock market, the most vital factors that determine the SP are EPS, DPS, IR and NAV.
Revitalisation of the market by refurbishing the investors' confidence, increasing the share index and increasing the daily turnover are not taking place. Fiscal and monetary policy support to resuscitate the slow-moving stock market is the crying need of the hour. The Bangladesh Bank (BB) can play a big role in stabilising the stock market. The Bank of Japan, the Bank of England (United Kingdom), the Federal Reserve (USA), the European Central Bank (ECB) and the Bank of China always play a strong and proactive role to bring the economies, including stock markets, to the right track.
Bangladesh's stock markets crashed in 2011 and since then it has been falling continuously. The share index of the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) was 9500 in 2011 and it stands at 4500 in 2015. This gives a gloomy picture of Bangladesh's stock market.
 Because of contractionary monetary policy of the BB, the interest rate increased and the liquidity crisis deepened in the banking sector. As the liquidity crisis further deepened, the capability of the investors to borrow and invest in shares rapidly dropped and remained constrained. In case of a contractionary monetary policy, the rising price level always contributes to a liquidity crisis in the financial sector. Besides, the government's deficit financing from the banking sector has risen significantly which created crowding out of private investment from the capital market.   
The sky-high interest rates prevailing in the country are not economically ideal. The interest rates in developed economies, including Japan, are very low that help stabilise the economy, stock markets, generate more economic activities, bring inflation under control etc.
The present interest rates in the country need to be reviewed and immediate steps need to be taken to bring down it to a level that is congenial for the economy, stock markets and the investors.
 'Stock markets surge globally as central banks soothe sentiment!' This was the headline of  the Money and Markets magazine on December 18, 2014. The central bank of Russia announced seven measures designed to stabilise currency, bond, and stock markets. Central banks are catalysts, designers and players to save the economies and stock markets of their countries.
In 2009, just after the financial crisis, the economic outlook and stock market situation in the EU and the US looked bleak. But the outlook has changed dramatically in just four years with the stock markets hitting new highs with government interventions. Can't we expect the same role of the central bank of Bangladesh?
The government's fiscal support for the ailing stock market is necessary. More so, because stock markets contribute immensely to investment, job creation, productivity and GDP growth. The government's fiscal policy and the BB's monetary policy should not be contradictory nor should these be conflicting. The BB's contractionary policy to keep inflation under control conflicts with the government's fiscal policy to increase gas, oil and energy prices spurring inflation. Central banks and government entities around the world are now dominant players in the stock market with some $30 trillion invested in equities and other assets, according to a new survey offering the first comprehensive analysis of public sector investments. About half of that is from central banks.
The national budget for FY 2015-16 is scheduled to be announced in early June, 2015. The country needs investment-friendly environment, adequate infrastructure for industrial development and a strong and stable stock market. The fiscal measures undertaken by the government during the last few years hardly made any improvement in the stock market. The coming national budget may take some special measures to bring the sector on the right path in addition to reduction of capital gains tax, dividend from shares from the listed companies and interest on government savings instruments. The structure of the regulatory body, the Securities Exchange Commission (SEC), needs to be improved by manning highly qualified, experienced and dynamic professionals who can help establish a strong and stable stock market in Bangladesh.
The writer is the CFO of a
private group of companies.  [email protected]