Bangladesh is an emerging Asian economy - an economy that grew at an accelerated rate of 8% in recent years. The per capita GDP in nominal US dollars increased from $576 in 2009 to $2000 in 2020. Bangladesh outperformed India in education, health and gender equality. Its record in reducing economic vulnerability is also remarkable.
However, its capital market has been dismal over the last decade. Stock prices kept sliding with no respite. Since December 6, 2010, investors have only seen their portfolios to bleed, and lifelong savings to disappear. Majority investors have become net indebted instead; their portfolio accounts turned out to be illiquid.
Banks, non-bank financial institutions, merchant banks, stockbrokers, and mutual funds found their stock market exposure as cancerous. The Investment Corporation of Bangladesh (ICB), the only specialised financial institution for the stock market, is now de facto insolvent because of mounting bad loans and persistent diminution in the fair value of their investments in stocks. Illiquidity of investors’ portfolios turned margin loans of merchant banks, investment subsidiaries, mutual funds, and brokers to be ‘non-performing.’ Their balance sheets saw persistent erosion in the quality of assets. Their profitability waned and finally turned negative. Operating cash flows have declined over time with free cash flows drying up and turning negative. Many of these financial institutions are more or less bankrupt.
Stock exchanges and the Bangladesh Securities & Exchange Commission (BSEC) now appear to be resigned and clueless. They are showing total disregard to investors’ never-ending financial tragedies. The Dhaka Stock Exchange (DSE) which is the nation’s premier bourse, is a private-sector corporation in legal form but is de facto a national organisation. Since April 2019, the DSE lost many thousand crore taka of market capitalisation. A new wave of sale was triggered as a liquidity crisis deepened in the country’s financial system. Many stock prices collapsed since then.
As the COVID-19 pandemic began to paralyse the country by mid-March 2020, stock market crisis just worsened. The market turned out without buyers and illiquid. Investors began the panic sale of their shares. BSEC issued an emergency regulation that opening stock prices from the next working day (i.e., March 22, 2020,and onwards) would be the average of five closing prices as of March 19, 2020. The regulation stipulated that a rational investor would have to buy shares following this fictional pricing. It was the killing of the arbitrage process in the stock market. This regulation was insane and caused the stock market to shutdown from April 26, 2020. Investors were denied access to their money and liquidity.
A few broker-leaders argued that the Covid-19 pandemic posed a grave health risk and that it would not be wise to reopen the market. This argument is baseless and without merit because the overall financial market is open and vibrant. Households and firms have unimpeded access to their money and liquidity. If banks and financial institutions can do their business and if thousands of payments can be settled on real-time by the central bank, I do not comprehend why two small stock exchanges cannot organise trading in their platforms.
Critics who argue against the reopening of the bourses aredenying investors of their fundamental right –access to their money. This scenario is giving the foreign investors an idea that their capital invested in Bangladesh can go illiquid for an indefinite period. This is disastrous.
The Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) lost enormous value over the last decade.The two bourses’ annual turnovers plummeted and revenues evaporated; profitability declined over time. Media reported that staff salaries and dividends are currently paid out of interest generated from fixed deposits. This is grossly inconsistent with a remarkable real economy which registered an accelerating growth rate during the same time under the leadership of Prime Minister Sheikh Hasina. A long-underperforming capital market is damaging her hard-earned goodwill.
The main reasons for this dismal functioning of our stock markets include:
- overpricing of initial public offers (IPOs) and repeat public offers (RPOs),
- abuse of IPO and RPO proceeds by a nexus of controllingshareholders, political cronies, and/or corporate management for unlawful ends,
- man-made deaths of listed companies because of unlawful corporate resource tunnelling,
- regulatory capture of key state institutions including Bangladesh Bank and BSEC by vested interests,
- prohibitive governance shortages of the listed companies because of no effective oversight of the Bangladesh Bank and the BSEC,
- pervasive insider and serial trading practices with de facto total impunity,
- mounting bad loans via the culture of directed credits in the financial sector,
- illicit dealings including unlawful placement business,
- prohibitive transaction costs including costs of borrowings, and
- missing markets providing no opportunity of hedging against risks of investing in stocks.
Another macroeconomic reason is that Bangladesh incurred substantial current account deficits in recent years. In a smallopen economy, a persistent current account deficit will imply external indebtedness to rise or potential foreign exchange reserves to deplete or both. Like other developing countries, Bangladesh maintained a de facto fixed exchange rate against the US dollar over the last decade and experienced a persistent real appreciation via greater inflation at home than abroad. Exports growth, therefore, slowed down, and imports surged in the backdrop of rising government budgetary deficits. The economy observed soaring current account deficits as an outcome. Bangladesh Bank primarily sold foreign exchange reserves to support taka against the dollar. Crushing illiquidity has thus plagued the money market over time. Investors’ confidence has waned. Now a panic sale of stocks was in progress and another spade of the stock market crisis was seemingly unfolding. The COVID-19 pandemic only led to the closure of the stock markets. It will prove disastrous for future stock market development.\
Dr. Mizanur Rahman is a Professor of Accountancy & Public Policy, University of Dhaka. He won the Global Development Network (GDN) Medal for Research on Development in 2010. He can be reached at [email protected].