***Both the DSE and the SEC will have to be reorganized to make sure that there are no legal loopholes in their constitutions and both the investors and the brokerskiealers are given fair deal Strict enforcement of surveillance, accountability, and monitoring of the behaviour of all participants in the market will have to be ensured.

ALTHOUGH a great deal has happened In the stock market over the last one year and the accused in the share scam have been taken to the court, yet the stock market has been functioning without much vigour and vitality. Nevertheless, the performances of stocks in recent months seem to be indlcat Ing something quite Important. It Is worth analysing the underlying Issues systematically.

Price Trend in the DSE

Since the beginning of 1997, the All Share Price Index (ASP1) of the premier bourse of the country, the Dhaka Stock Exchange (DSE). which leads the Chittagong Stock Exchange also, seems to be continually declining in a somewhat step-wise fashion. That is. after a period of continuous decline, the Index reaches a point and then oscillates around that point for a while, and then it slides again continuously for a while reaching a new low point and fluctuates around that point for a few days before It takes another downward plunge. This process has been continuing without developing a strong upward trend trying to reach, or even getting anywhere near, the former peak point. It is this latter phenomenon of reaching the old peak point of the price cycle and breaking through it from a trough that one sees happening In the wellmanaged and properly functioning stock markets in the growing economies that is of Interest to the analysts. There are various hypotheses to explain such a phenomenon which are outside the scope of such a short article. However, in the DSE. so far it is only a one-way track that one sees over the last six months following the major November-December crash.

These observations can be supported by the following available data. After Its rapid rise from a level of 959 on June 30. 1996 to the peak of 3627 on November 16. 1996. It crashed to 2241 in a matter of a month. December. 22. 1996. being the last date of this phase of decline. The index fell by 38 per cent then. People at that time expected that it would perhaps stabilize around this level since It was hovering around it for a few days. But it didn't and soon it began to slide further downwards. The subsequent pattern of decline seems to indicate a different story. There was a continuous decline from January to March without much oscillations. It stood at 1962 on

January 30, at 1702 on Febru-tuy 27. and at 1265 on March 30. 1997. The rapidity of decline was very pronounced In the month of February. However, it reached its bottom on April 30 at 935. then rose to 1216 on May 30. and fell again to 1111 on June 30. In the first week of July, it fell again to 1098. Although some market observers commented that the index had stabilised at around 1200 by the end of May. It again went down in a listless manner during the month of June and. it looks like. It is beginning to slide again in July.

A few points should be noted at this stage. First of all. It is interesting to see that the lowest price level that the Index reached In April. 1997. was also the level where It stood in June 1996. To dramatise it. one can say that after a long space flight, as it were, the price Index has come crashing down to its base point of June 30. 1996. and tn the process, thanks to the efficiency of big manipulators and Inefficiency of the regulators. it "slaughtered (minions of) innocents" In thf market, as The Economist has correctly described it. It has left a deep scar on the psyche of the poor struggling nation Secondly, the last Three months' price behaviour Indicates a short cycle ranging from the bottom of about 900 to the peak of about 1200 which was the range between June and August 1996 before all the price manipulations took place. Finally, from the highest peak to the lowest trough, there is a price fall of about 74 per cent which Is a unique event In the history of stock markets in the world.

Some Basic Questions

The above facts, data and analyses raise a number of fundamental questions which every rational person, well wisher of the country as well as the policy makers should try to reflect on. and. if possible find objective answers to. The most Important one is the following : If the economy has been growing at an annual rate of 5.7 per cent, a rate slightly faster than those of the pervious few years, as has been officially presented In all the recent government statements and budget documents, why hasn't such high growth had any positive impact on thestock price index over the last six months, which Is a fairly long time for any stock market? Any one Interested In the healthy developmenl of the market would like to know when and how will this conUn-ulng downward price trend come to an end and a vigorous upward trend begin? What measures can be adopted to bring this about?

The Puzzle

From the data quoted above, there Is no doubt that the officially claimed 5.7 per cent Krowth of the economy hasn't ad any Impact on the stock market, or. at least, it could not arrest the continuous slide of the index. This is a jig-saw puzzle. There are two possible explanations of this puzzle. The first Is that the economy may not have actually grown at 5.7 per cent. It might have grown at a smaller rate. There is a need to check this. The second explanation Is that the economy might actually have, on the ag-gregate. grown at 5.7 per cent but the major growth has taken place In agriculture and other sectors which have very little to do with stock markets in Bangladesh. The available data also show that in 1996-97. agriculture has grdwn at 6 per cent while Industry has grown at a paltry 3.3 per cent, down from previous years' 8 10 per cents, mostly because money market was extremely tight due to heavy government borrowing.

However, for agricultural growth in Bangladesh, capital doesn t have to be raised through stock market. Most of the Industries producing Inputs for agriculture like fertilizer, diesel engine, water pump etc. are already Installed and additional supplies are usually 1m-Sorted and not much attempt as been made to establish new industries in this area. In any case, the entrepreneurs of the newer Industries of this and other kinds have not come to the capital market during the last six months for raising capital. Nor is there any commodity futures market in the stock exchanges of Bangladesh which could have some Impact on the stock prices. Whatever little growth of Industry (3.3 per cent) there has been over the last year. It hasn't had any powerful impact on the stock prices and hence the downward trend of stock prices continued.

But inspite of all these explanations. the question still remains that any small saver from higher Income would like to find outlet for small investment yielding higher return In the stock market rather than depositing that money in the fixed deposit accounts in their banks for a pittance. Why hasn't that happened over the last six months? The answer seems to lie somewhere else as discussed below. Similarly, the second and third questions raised above, which are tied with same line of argument, are also dealt with In that section.

In the meantime, one side point should be made clear. There seems to be a thinking In the present government that this year's 6 per cent rate of growth in agriculture can be sustained in the medium to long run and hence it would be easy to reach a 7 per cent overall growth rate ol the economy in the near future. This is extremely risky. Long swings of development history has shown that agriculture cannot sustain more than 3-4 per cent growth for long. This Is particularly Important for Bangladesh where one can see that high agricultural growth in one or two years has been preceded or followed by low growth years. Therefore. It has never been possible to sustain high growth In agriculture for a number of years in a row. Attention, therefore. has to be paid to the development of Industry and service sectors which have to bear the major brunt of high growth in the medium to long terms.

Why is the Stock Market Sliding for So Long?

There seem to be two main reasons for the continuous slide of stock prices since last December : Shattered confidence and the government s economic policy.

Investors' confidence was shattered with the market crash of November-December. The authorities first didn't ac-cept that It was a crash and that there was insiders' trading and □rice manipulations. When information were coming out and available data were analysed (this writer also published a number of articles in his weekly column of this daily during November-December analysing the available data and showing the possibility of insiders' trading and calling for some drastic steps), government. in their wisdom, quickly set up a Commission to investigate the reasons for the market crash which reported in March. 1997. The report clearly indicated that there were willful manipulations by the major players in the market and also that there were weaknesses of the Security and Exchange Commission (SEC) In properly handling the situation at the right time. Unless the offenders are properly dealt with, healthy enthusiasm for investment In the stock exchanges will not return. Further, there Is a need for separating the DSE's elected council and the administrative body with some clearly delineated autonomy for the latter. There Is also the need for improved management and establishment of modern technology with sufficient number of trained personnel to operate the new technology.

Secondly, there is a need for complete overhaul of the SEC as a regulatory body. It was not able to use Its authority effectively when it was needed.

Surveillance of market operations on the trading floor, monitoring of activities of the market players and ensuring all round transparency InclutL ing the scrutiny of the prospectuses of the companies done by the SEC Itself, were far from the ethically acceptable standard. Unless these are remedied confidence in the stock market will not return. People are waiting to see what the court Judgements are and what the government do with the manipulators. Until then, market is unlikely to show any vigorous upward trend. In the meantime if a new National Stock Exchange is established, which will be another para statal organisation run by civil servants who know very little of the trade, it will not be able to rescue the market.

The government s economic policies during the last year did not seem to have contributed to the healthy development of the market. It has borrowed too much money from the banking system (no official figure has been announced so far) which has crowded out private investment on the one hand, and raised interest rate too high (about 16 per cent), on the other. The latter has given wrong signal to the market making small investments in the riskless government saving certificates etc. more attractive than investments in the risky shares of private companies in the stock market.

What Can be Done?

In order to turn the market around, confidence will have to be restored. Until the court’s Judgment Is out. nothing substantial can be done. There is a need for very careful handing of the situation. But the government will have to ensure that ethics and laws prevail. Laws will have to be tightened and strictly enforced. Both the DSE and the SEC will have to be reorganized to make sure that there are no legal loopholes in their constitutions and both the investors and the bro-kers/dealers are given fair deal. Strict enforcement of surveillance. accountability, and monitoring of the behaviour of all participants in the market will have to be ensured. All these cannot be achieved in one month or even six months, but steps must be taken towards achieving these goals immediately.