New Trad­ing Pos­si­bil­i­ties

SAARC could be­come one of the strong­est eco­nomic blocs in the world if its mem­ber na­tions joined hands to form a cen­tral­ized com­mod­ity ex­change.

Southasia - - CONTENTS - By Shab­bir H. Kazmi

SAARC coun­tries have mil­lions of acres of arable land and a rea­son­ably ro­bust agri­cul­tural and man­u­fac­tur­ing base. Even then, a very large per­cent­age of the pop­u­la­tion of SAARC coun­tries lives be­low the poverty line. It is be­cause they still sur­vive on agri­cul­ture us­ing prim­i­tive meth­ods which keeps the yield low while wastage is high. Hos­til­i­ties among most of the coun­tries have kept the in­tra-bloc trade at the low­est level when com­pared to other re­gional blocs.

In some of th­ese coun­tries, the stock mar­kets have emerged stronger be­cause of for­eign in­vestors who hold a sub­stan­tial stake. Ac­cord­ing to re­ports, for­eign in­vestors owned nearly one-third of the listed cap­i­tal in Pak­istan, mainly due to the ease

of in­flow and out­flow of port­fo­lio in­vest­ment. As against this, sim­i­lar in­cen­tives are not of­fered to in­vestors of com­mod­ity mar­kets. There are other rea­sons as well that have ad­versely im­pacted the growth of com­mod­ity markes, par­tic­u­larly the fu­tures mar­ket be­cause pro­duc­ers, traders and even fi­nan­cial in­sti­tu­tions pre­fer en­ter­ing into de­liv­er­able con­tracts.

This part of the world has al­ways been rich in agri­cul­tural pro­duce, par­tic­u­larly sta­ple food grains (wheat, rice, maize and pulses), sug­ar­cane, spices, edi­ble oil and cot­ton. As the re­gion has a huge pop­u­la­tion, there also ex­ists a huge do­mes­tic mar­ket. Over the years, the ex­portable sur­plus be­came big­ger, which re­sulted in the ex­port of com­modi­ties and in­ter­me­di­ate goods.

The tra­di­tional mar­ket sys­tem com­prises pro­duc­ers, mid­dle­men (whole sell­ers) and re­tail­ers. Mid­dle­men have also been play­ing a dou­ble role, pro­vid­ing cash to the pro­duc­ers for the pur­chase of in­puts de­spite de­vel­op­ment of the com­mer­cial bank­ing sys­tem and pur­chase of pro­duce, mostly at a highly dis­counted price.

In the days of yore, there al­ways ex­isted mar­kets even in the small­est towns where farm­ers could sell their pro­duce. In mod­ern ter­mi­nol­ogy, the buyer and seller used to en­ter into de­liv­er­able con­tracts, at times with­out any for­mal doc­u­men­ta­tion. In those days ver­bal com­mit­ment was con­sid­ered good enough. While the de­vel­oped mar­kets in­tro­duced fu­tures con­tracts or de­riv­a­tives, de­liv­er­able con­tracts re­main the pre­ferred choice in this part of the world.

Within SAARC, In­dia, Pak­istan and Bangladesh are con­sid­ered rel­a­tively big coun­tries both in terms of com­modi­ties pro­duced and con­sumers. While de­liv­er­able con­tracts are common here, only a se­lect group of in­vestors deal in fu­tures, which is gen­er­ally con­sid­ered a zero-sum game. The quantum of fu­tures trade has also re­mained low due to the ex­is­tence of mar­kets where com­modi­ties could be bought and sold.

This could be best un­der­stood if one looks at the trad­ing of cot­ton in Pak­istan. The coun­try is among the world’s top five pro­duc­ers of cot­ton and sup­plies raw ma­te­rial for the tex­tile and cloth­ing in­dus­try. Cot­ton trade con­trib­utes nearly 60 per­cent to the to­tal ex­port earn­ings of Pak­istan. The Cot­ton Ex­change has been op­er­at­ing in Karachi for decades but trans­ac­tions con­cluded at the ex­change have de­clined con­sid­er­ably. Spin­ning mills pre­fer to buy cot­ton di­rectly from the gin­ning fac­to­ries lo­cated through­out the coun­try.

Ide­ally, the SAARC mem­ber coun­tries should be com­ple­ment­ing each other’s re­quire­ments be­cause of their common bor­ders and road and rail­way links. How­ever, it is of­ten felt that hos­til­i­ties, cre­ated by the hawks prove spoil­ers. This state­ment gets cre­dence if one looks at the in­tra-SAARC trade as well as the ex­ist­ing far from cor­dial diplo­matic re­la­tion­ship among the three largest SAARC coun­tries, i.e. In­dia, Bangladesh and Pak­istan. Th­ese coun­tries en­joy com­pet­i­tive ad­van­tage in some sec­tors. If they join hands, SAARC could be­come one of the strong­est eco­nomic blocs in the world.

The stock mar­ket in Pak­istan has at­tracted huge for­eign in­vest­ment. Three stock ex­changes op­er­ate in the coun­try, but only one com­mod­ity ex­change is in op­er­a­tion. Con­trary to the stock mar­ket, the in­ter­est of for­eign in­vestors in com­modi­ties has re­mained very low. The pre­vail­ing sit­u­a­tion can be at­trib­uted to the fact that the bulk of in­vest­ment in com­modi­ties is made in crude oil, gold and sil­ver. There­fore, there is no in­cen­tive for for­eign in­vestors to trade in th­ese com­modi­ties at ex­changes lo­cated in th­ese coun­tries.

One of the ways to at­tract for­eign par­tic­i­pa­tion in the lo­cal com­modi­ties is to fa­cil­i­tate trad­ing in in­dige­nous pro­duce, i.e. rice, cot­ton, sugar, jute and guar. Lately for­eigner in­vestors showed enor­mous in­ter­est in guar be­cause of its ex­ten­sive use in shale oil and gas ex­plo­ration. Another ex­am­ple of the de­vel­op­ment of a niche mar­ket is palm oil, mostly pro­duced in Malaysia and In­done­sia. Yet another ex­am­ple could be sugar, both raw and re­fined and its byprod­ucts, i.e. mo­lasses and ethanol. In­dia and Pak­istan are among the top pro­duc­ers of sugar. The re­cent drought like sit­u­a­tion in Brazil, one of the largest ex­porters of sugar and ethanol, high­lighted the fact that other sugar pro­duc­ing coun­tries have to in­crease their foot­print.

The Pak­istan Mer­can­tile Ex­change is the coun­try’s first and only mul­ti­com­mod­ity fu­tures ex­change, which is li­censed and reg­u­lated by the Se­cu­ri­ties and Ex­change Com­mis­sion of Pak­istan. It is the big­gest ex­change of the coun­try in terms of mem­bers and the sec­ond big­gest in terms of value traded, after the Karachi Stock Ex­change. The com­modi­ties traded at the PMEX can be clubbed in four groups – agri pro­duce, pre­cious met­als, crude oil and fi­nan­cial fu­tures. The new com­modi­ties to be in­cluded will be cop­per mills and spe­cific sugar con­tracts. A unique prod­uct in the PMEX port­fo­lio is the ‘Milli Tola Gold’ in which an in­vestor can be­gin in­vest­ment with an amount as lit­tle as Rs.50 and get phys­i­cal de­liv­ery when the in­vested amount be­comes equal to the price of 10 tola gold.

In­dia has the largest num­ber of ex­changes which in­clude the Na­tional Stock Ex­change of In­dia ( NSE), the Bom­bay Stock Ex­change (BSE), the Multi Com­mod­ity Ex­change (MCX), the MCX Stock Ex­change (MCX-SX), the Na­tional Com­mod­ity and De­riv­a­tives Ex­change (NCDEX) and the Na­tional Spot Ex­change.

In Bangladesh there are two stock ex­changes and one com­mod­ity ex­change, namely the Dhaka Stock Ex­change (DSE), the Chit­tagong Stock Ex­change ( CSE) and the Bangladesh Com­mod­ity Ex­change (BDCOMEX).

The ex­changes op­er­at­ing in Nepal in­clude the Com­modi­ties and Metal Ex­change Nepal Ltd. ( COMEN), the De­riv­a­tive and Com­mod­ity Ex­change Nepal Ltd. (DCX), the Mer­can­tile Ex­change Nepal Limited (MEX), the Nepal De­riv­a­tive Ex­change Ltd. (NDEX), the Asian De­riv­a­tive Ex­change Ltd. (ADX) and the Wealth Ex­change Limited (WEX).

Since South Asian coun­tries are de­pen­dent on im­ported crude oil and gold, com­mod­ity ex­changes can’t gen­er­ate sub­stan­tial business in th­ese com­modi­ties. As against th­ese, sub­stan­tial quan­ti­ties of cot­ton, rice, sug­ar­cane, gaur, jute, list­ing of cash set­tled and de­liv­er­able con­tracts of th­ese com­modi­ties can gen­er­ate con­sid­er­able business. The quantum can in­crease if ar­range­ments are made whereby in­vestors from other coun­tries can also invest, trade and hedge. How­ever, this ob­jec­tive can­not be achieved un­less the out­stand­ing is­sues, par­tic­u­larly be­tween In­dia, Pak­istan and Bangladesh, are re­solved.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.