Stock market crisis: Impact on the economy

Capital markets such as the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) have multiple roles in a nation's economy. They provide avenues for investment and capital acquisition and can provide an indication of overall economic condition. There are several functions of a stock market, but the main function is economic function. Stock markets also provide facility for transfer of capital from investors to users of capital. They allow corporations looking to expand to raise capital from investors in the primary market and facilitate trade between buyers and sellers of stock in the secondary market.
An organised and well-managed stock market prompts economic development by recognising and financing productive projects that lead to economic activities. An unpredictable stock market causes a lag in financing of productive projects and allocation of capital proficiency; and lacks in diversification of risk, market instrument, domestic saving, corporate governance and facilitation of exchange of goods and services.

Effects on the economy:
On the financial front, the uncertain nature of stock market has a major macroeconomic impact, leading to inevitable contraction of credit, business bankruptcies and firing of workers, and banks could face failures and a linked decline of money supply. Moreover, the impact of high volatility of a stock price will accelerate the speed at which the cycle moves, which means it may intensify an economic downturn if it is already in motion, or slow down the rate of growth of GDP in a growing economy.

Macroeconomic stability:
Bangladesh stock market is still not broad and deep enough. Current and prospective issuers do not use the full potential of the market for raising equity capital by issuing shares and borrowing funds by issuing corporate bonds. Moreover, people with savings feel uncomfortable in investing in Bangladesh capital market instruments. Rather they feel more comfortable in maintaining their savings with banks as FDRs and Savings Certificates. It seems that regulators have failed to address the problems faced by both the issuers and the investors adequately.
Volatility in share markets has become a matter of concern in recent times for investors, regulators and brokerage firms. This concern centres on the perception that high volatility can lead to a general erosion of investors' confidence and flow of capital away from the share market.
Banks are facing liquidity crisis due to rising value of greenbacks, increased borrowing by the government from banks, and a fall in remittance flow in 2011. This liquidity crisis is evident from the recent scramble for luring depositors by some banks by hiking interest rates on deposit.
Some common problems are: (a) Rapid expansion of money supply, (b) rise in asset price due to increased inflation, (c) rise in interest rate due to less credit facilities for private sectors, (d) instability of domestic reserve and exchange rate mismanagement, (e) commercial banks making huge profit from the asset price surge, (f) lack of corporate governance and non-implementation of financial reporting act, and (g) illegal business of MLM companies.

Strategic tasks facing Bangladesh capital market:
Stock market should diligently implement the macroeconomic regulatory policies of the central government and make good use of the function of capital markets in optimising resource allocation to ensure sound development of the financial sector and the economy as a whole. Stock market in Bangladesh learnt a very expensive lesson. To overcome this uncertain situation, policy makers, regulatory bodies and authorities should come forward and prescribe proper and prudent configurations to restore macroeconomic stability, and they should also link up with government by strengthening financial sectors like mutual fund, merchant banks, and insurance companies other than banks. They should establish demutualisation of stock exchange. There should be a special tribunal, with proper monitoring by SEC. Last but not least, they should conform to financial reporting act and reform the microstructure for healthier economy.
In a nutshell, the Bangladesh capital market has become an important platform for promoting strategic restructuring of the economy and accelerating transformation of the pattern of economic development. The need is to accurately assess the strategic tasks confronting Bangladesh stock market in order to ensure long-term, stable and rapid economic development.

The writer is a Stock Market Analyst and professional management trainee at BRAC.
E-mail: [email protected]