1. THE IMPACT OF THE PAKISTAN CAPITAL MARKET ON ECONOMIC GROWTH
Hafiz abdurrasheed, Hailey college of commerce, University of Punjab, Lahore.
Ha.rasheed@hotmail.com
Lecturer
Zainulabideennasir, Hailey college of commerce, University of Punjab, Lahore
Zainali240@hotmai.com
Asimkabir, Hailey college of commerce, University of Punjab, Lahore.
Asim_kabir@yahoo.com
ABSTRACT
This paper seeks to examine the impact of the Pakistan capital market on its economic growth.
This means that the performance of the stock market is an impetus for economic growth and
development. This paper results show that the Pakistan capital market and economic growth are
co-integrated. This implies that a long run relationship exists between capital market and
economic growth in Pakistan. This is a clear indication of the relative positive impact the capital
market plays on the economic growth of the country. The evidence from this study reveals that
the activities in the capital market tend to impact positively on the economy. It is recommended
therefore that the regulatory authority should initiate policies that would encourage more
companies to access the market and also be more proactive in their surveillance role in order to
check sharp practices which undermine market integrity and erode investors’ confidence.
Keywords: Pakistan, impact; stock market performance; capital market; economic growth
INTRODUCTION
No economic activity operates in a vacuum. Market reacts promptly and uncharacteristically to
rumours of war, changes in regulatory environment; political climate seen as a negative factor by
the business (investing) community; and interest rate variation to general performance of the
economy.It is a common trend for stock prices of some quoted companies to rise and fall or fall
and risetwice or thrice within a year. The stock prices of quoted companies on the Nigerian
Stock Exchange(NSE) are affected either positively or negatively by a number of factors
occurring within and without the economic system. According to Corrado and Jordan (2002),
some of the factors influencing stock International Research Journal of Finance and Economics
- Issue 25 (2009) 54price behaviour include company profits; political factors; and economic
performance. Others areinterest rates; inflationary rate; Real Gross Domestic Product; and
shareholder-level taxes.
Investment in stock market is long-term in nature; any development that could affect thestability
of the polity or economy usually has serious impact on the stock prices. In recent times, theNSE
has consistently lost points and the prices of stocks have experienced sharp decline.
Thedownward trend in the market performance was attributed to varying reasons in line with

2. those statedbyCorrado, et al (2002)However, On agoruwa (2006) was of the view that stocks
with history of good performance andfundamental attributes are good to buy at times like this
when their prices are down and more affordable because they are most likely to bounce back
since they have the capacity to absorb the depression in the market.
The injection of new funds through public offer could turn around the fortune of the
marketbecause of the expected liquidity. Hence, it is important for investors to get an
understanding of the working of stock prices of quoted companies.
According to the Central Bank of Nigeria (CBN) Governor, Professor Charles Soludo, investors
should not panic at the present downward trends in the market arena. Of interest to them should
be interest rates, inflation rates, liquidity, and the growth of their investment In well-developed
capital markets, share ownership provides individuals with relatively liquid means of
diversifying investment risk. Stock prices, however have a high degree of volatility due tomarket
fluctuations especially when pressure is being exerted to keep the controlled interest rate closer
to market prices, which are more likely to reflect inflation and scarcity of funds.
The effect of inflation on stock prices are reflected especially where there is a change in
theexpected inflation rate. If the earning streams of a company remain unchanged and inflation
changes from expected, stock prices will experience a decline. Hence, investors who own stock
in such a company will experience negative returns.
The Real Gross Domestic Product (RGDP) which is the sum of the value added in the economy
during a given period or the sum of incomes in the economy during a given period adjusted for
the effect of increasing prices will impact on the liquidity of the capital market; hence its
influence on stock prices.
1. Capital Market Efficiency and Economic Growth: The Case of India
The literature of the paper states the impact of capital market of India on economic growth by
using the time series data on market capitalization. The multiple regression models state that
capital market has a potential impact on the economic growth of the country. As a result there is
high market capitalization and high liquidity. Thus, the large number of domestic and foreign
investors enters into the market with huge investment and trading to allocate economic resources
for the growth of the country. In this course, the growth of a sound dogmatic structure through
improvement of incompetent economic institutions, whether through competition or privatization
of firms to reform the economic system through removing prejudiced taxes or other elements.
2. CAPITAL MARKET DEVELOPMENT AND ECONOMIC GROWTH: THE CASE
OF ROMANIA
It explores the condition of the Romanian capital market which is in a bad position from five
decades. The effect of this position is still today due to which capital market has not reached the
level of development and fails to contribute in the progress of capital market due to the heavy
gap between the European countries and Romania. In 2007 it is showed that there is an upward
trend in the market capitalization due to evolution in the economy of Romania But it is too far

3. from the Central Europe. Regarding the impact of growth rate on capital market, it shows a
positive improvement and efficiency.
3. Effects of Capital Markets Development on Economic Growth of Western Balkan
Countries
Capital Market of a country plays an important role in the mobilization of resources and
encouraging foreign direct investment. Capital market is considered a development indicator for
the rising economies and considered as the supporter of growth rate of the developing countries.
The literature stated that there is a positive correlation between the enterprise and growth of
capital markets and economic growth but experiential studies have diverse outcome.
Numerous studies conducted that if a developing country establishes a capital market it will add
to positive economic growth of a country. But the literature of several studies shows that the
establishment and the development of capital market have not contributed to economic growth
but it has a negative impact rather than positive. The capital markets of Western Balkan countries
are considered small and in early stage as compared to the developed countries. All Western
Balkan countries financial sector is covered mostly by banks so role of capital market is
marginal. Establishment and economic decisions and interference are creating problems for
investors to invest in stock exchanges so stock exchanges are not successful in promoting capital
market.
4. Capital market: An engine for economic growth
Focus on the implications of effective working financial markets. Operating financial markets
has many effective markets. Fundamental it means these are traded in market on blond price. In
United States major banks are recommended to allocate investment portfolio from major
markets. This fair investment portfolio’s whether they are in Bonds or stocks both are beneficial
for domestic and foreign investors. Due to the fluctuations in short term trend, long term trend
help the rising markets to flow on large scale. The efficiency of financial markets also affects the
allocation of capital and it encourages the small investor’s to access the capital market. Finally it
explores the relation between capital market and economic growth.
5. Appraisal of Capital Market Efficiency on Economic Growth in Nigeria
The study explores that there is relation between the capital market efficiency and development
of market capitalization and economic growth, money supply, transaction in stock and rate of
interest. Development of government, market capitalization and rate of interest are important

4. variables for influencing economic growth of Nigeria. If government development stock and
large market capital invested in an un-lucrative sector that does not have the capability of growth
incentive. Interest rate acts as a purpose of what occurring in the capital market. Similarly, total
transaction in stock and money supply are probable growth remind macro-economic variables
that are competent of attractive economic growth in Nigeria. But the study obviously shows that
Nigeria economy has slight absorptive ability, that is financial capital cannot be captivated
effectively to motivate development economic growth. Furthermore, the market is characterized
by illiquidity and extreme government system.
Stock market fluctuations and its effect on gross domestic product is measured by how much
there is foreign investment in a domestic country stock market through international financial
integration(Millani, 2011). Macro economic variables such as unemployment, inflation,
government regulations will be affected of domestic country which will have higher foreign
equites to debt ratio means ( having a large amount of foreign equities in portfolio of that
country) due to which gross domestic product of country will suffer from fluctuatations in
foreign direct investment.(Millani, 2011)
Cross borders wealth affects macro variables in open economies(economies which are free from
trade barriers) due to which these economies are adversely affected by fluctuations in foreign
stock market. impact of stock market on macro economic variable.(Millani, 2011)
Openness to foreign financial markets also affectgdp of domestic country which is estimated as
ratio of foreign equity holdings to total equity investments in country. (Millani, 2011).
Stock prices in economies with higher per capita gdp moves in a relatively un synchronized
manner, while stock prices in economies with lower per capita gdp tend to moves up or down
together. The extent to which stock prices and gdp moves together depends upon firm-level and
market level information capitalized into stock prices. The information content of stock markets:
(Morck, Yeung, & Yu, 2000)
cyclicalmovemetns in oil prices affects negatively on stock markets , as these movements in oil
prices will create inflation and affect the growth of gdp of country. Countries facing these
problems should focus on their fiscal policy rather than monetary policy.(Fills, 2010)
In developed countries bigger electricity consumption bigger the production of goods and
services which will have positive impact on gdp and fix stock market, while it is opposed in
developing countries where to icrease production of goods and services much stress occurs for
electricity due to which valu added services are not nor properly bring into manufacturing
process and poor quality of raw material brings lower production of goods and services which
has negative impact on gdp and fix capital stock market. (Kamimura, Guerra, & Sauer,
2004)(Edwards, 2002)The data is used to investigate the effects of capitalmobility on economic

5. growth. capital mobility indicator is used in thisanalysis in two respects: (1) It allows
forintermediate situations, where a country’s capital account is semi-open; and (2) itis available
for two different periods in time. Results suggesting that an open capital account positively
affects growth only after a country have achieved a certaindegree of economic
development.According to this view, increased capital mobility inflicts many costs and generates
limited benefits to the emerging nations. . Broadly speaking, these results support the view that
while for financially sophisticated countries an open capital account is a boon, atvery low levels
of local financial development a more open capital account may have anegative effect on
performance. In that sense, then, emerging markets are essentially“different” from advanced
nations.
(chkrabotrti, 2003)The model of Mankiw et al. (1992) was extended to establish a relationship
between financial development and economic growth.Results show that capital–output ratio and
rate of growth of human capital have positive effects on real rate of growth of GDP, irrespective
of the indicator of stock market development.. Real wealth, debt burden, real effective exchange
rate and the rate of growth of labor have negative effects.. An increase in the market
capitalization dampens economic growth, whereas turnover has no significant effect, and an
increase in the money market rate of interest has a positive effect on economic growth. The
findings lend no support to the theoretical prediction that the stock market development would
play an important role in enhancing economic growth in India. On the contrary, reform measures
on the market rate of interest that were introduced in the Indian banking system appear to have
promoted economic growth significantly.
(Hussain Abdullah, 2009 January)Fiscal policies have a benign role for economic growth in
the Asian region, namely to provide a stable macro environment for investment. Examines two
different channels through which fiscal policy can affect long run economic growth in Asia. The
first channel is when components and aggregate government expenditure affects the real per
capita GDP and the second channel is when the components and aggregate of other fiscal
variables affects the real per capita GDP.Overall, we concluded that fiscal policy is one of the
most important instruments of government economic policy. To establish the relationship
between fiscal policy and economic growth, the mechanisms through which fiscal policy affects
the above mentioned factors of economic growth have been investigated in the long run. The
significance arises for two reasons. First, they can have opposite impacts on the economy.
Second, there is an outside lag inherent in fiscal policy.

6. Conclusion and Recommendation
However, the findings aligns with Ariyo and Adelegan (2005) and Ewah et al.(2009) who found
that the capital market in Nigeria has the potentials to induce growth but has not contributed
significantly to economic growth of Nigeria due to low market capitalization, small market size,
few listed companies, low volume of transactions, illiquidity among others. Also our result
supports Demirgue-Kunt and Asli (1996) and Harris (1997) who found no hard evidence but
strong positive relationship between stock market and economic growth which is contrary to the
literatures that there is positive relationship between stock market and economic growth.
Based on the discussion of findings of the study, the following recommendations are made
-Encouraging more private limited liability companies and informal sector operators to access
the market for fresh capital.
-Trading impediments such as high transaction costs should be reviewed to encourage more
active trading in stocks.
-SEC should be more proactive in its surveillance role in order to check sharp practices which
undermine the capital market integrity and erode investors’ confidence.
Recommendation for further study: Contrary to our aprioriexpectation, GDP and the volume of
transactions (LVLT) are not only inversely related, but also have a bi-directional causal
relationship. This, in our opinion deserves further investigation.
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8. ASSIGNMENT: THE IMPACT OF THE PAKISTAN CAPITAL MARKET
ON ECONOMIC GROWTH
SUBMIITED TO: SIR HAFIZ ABDUR RASHEED
SUBMITTED BY:
ZAIN-UL-ABIDEEN NASIR ROLL NO:240
ASIM KABIR ROLL NO:230
SECTION: D MORNING
SEMESTER: 8TH
ZAIN: 03244269894 ASIM:03324409839