Pakistan's Stock Exchange Needs Life Support

Here’s a quick quiz: Which Asian stock market has declined the least in the past two months? The answer is the Karachi Stock Exchange , which thanks to a “circuit breaker” that put a price floor on all shares on August 28, the index hasn’t moved since then. Since then, trading has all but halted. On Monday October 27, less than 250,000 shares traded hands.

When I spoke to Karachi Stock Exchange CEO and managing director Adnan Afridi about 10 days ago, the plan was to remove the floor and allow normal trading to resume by now. But the October 27 deadline has passed and things have been pushed back until the end of the month, ostensibly to give the government enough time to tee up a stock market stabilization package. worth about $600 million. That’s right, just $600 million, not billion. That may sound like chump change compared to the mammoth bailouts U.S. and European governments are coughing up, but Afridi says the package should do the trick. About 40% will be used to invest in seven state-owned companies [call it reverse privatization] and 60% will go to financing a put option available to foreign investors who can buy it to minimize further losses when the market goes south.

What I can’t figure out is how they are going to price this put option. Considering the stock market has been in paralysis for two months while other bourses have plunged, the KSE has at least 30% to fall just to catch up with the rest of the pack. The KSE is only down less than 35% so far this year. But the longer the authorities delay the lifting of the price floor, the further things will fall once normal trading does resume. And then there’s an additional downside for the country risk—both because of its highly unstable security situation, and the fact that Pakistan may be just days away from seeking an IMF bailout.