Moaaz Manzoor

The stock exchange rally reflects growing investor confidence amid improving economic indicators, but the underlying structural challenges can hinder long-term economic stability, reports WealthPK.

Speaking with WealthPK, Tahir Abbas, Director of Equities at Arif Habib Limited, attributed the rally at the Pakistan Stock Exchange (PSX), which crossed the 98,000 mark, to notable improvements in macroeconomic fundamentals. He highlighted a steady decline in inflation and recent interest rate cuts as pivotal factors bolstering business confidence and driving economic recovery. Abbas further noted a surge in trading activity, with the market reaching a 7.5-year high in daily traded value at Rs45.5 billion ($164 million). He remarked that this marked the highest level of trading activity in the regular market since May 31, 2017, the day of the MSCI reclassification, and the highest outside that event since April 11, 2008, nearly 17 years ago.

He added that the rally reflected improved market sentiment and broader expectations for economic recovery. Declining inflation eases cost pressures on businesses, while reducing interest rates lower the borrowing costs, enabling greater investment activity. Investors appear optimistic about the economy’s near-term trajectory, with key economic indicators showing a gradual recovery. Similarly, Ahmad Mobeen, Senior Economist at S&P Global Market Intelligence, said the recent performance of the PSX signaled a positive investor sentiment, driven by the initiation of the IMF’s Extended Fund Facility (EFF) program. However, he emphasized that historically, there had been no consistent or direct correlation between the stock market trends and Pakistan's broader macroeconomic growth.

Sustainable growth, according to Mobeen, hinges on addressing structural bottlenecks such as the high share of consumption in GDP, a persistently low investment-to-GDP ratio, elevated energy costs, under-taxation of key sectors like agriculture and retail, and the dominance of the informal economy in Pakistan's economic landscape. The stock market's strong performance underscores a sense of renewed optimism among investors. However, experts caution that Pakistan’s long-term economic trajectory will depend on its ability to address deep-rooted structural issues. Short-term gains are encouraging, driven by an easing inflation and lower interest rates.

Still, the economy's reliance on consumption overinvestment, high energy costs, and a vast informal sector threaten long-term stability. The government must leverage this market momentum to pursue reforms in taxation, energy efficiency, and investment frameworks. Without addressing these bottlenecks, optimism in the market may not translate into sustained economic growth or inclusive development. Balancing immediate recovery with structural transformation is essential for a lasting progress.

Credit: INP-WealthPk