In 2023, Bangladesh's capital market faced a challenging environment characterised by internal constraints and external difficulties. It proved to be a tumultuous year for the stock business marked by unprecedented lows in average turnover and foreign investments, not seen since the collapse in 2010.

The Dhaka Stock Exchange's (DSE) primary index, DSEX, saw a modest gain of 0.64 percent, the lowest among comparable nations such as India, Vietnam, Indonesia, the Philippines, Malaysia, Sri Lanka and Pakistan. The latter rebounded strongly with timely policy support, with Pakistan's KSE All Share Index becoming the global best performer after receiving short-term loan support from the International Monetary Fund.

Approximately 60 percent of the total stock market value remained immobilised on the floor in 2023, with shares of 165 out of 392 companies listed on the DSE constrained by floor prices as of January 2, 2024. The extended stagnation negatively impacted investor confidence amid heightened market uncertainty, influenced by concerns related to the 2024 national election and recent macroeconomic turbulences.

The DSE's average daily turnover declined by 39.83 percent, dropping to Tk 578 crore in 2023 from Tk 960 crore in the previous year. The market capitalisation to GDP ratio decreased to 17.59 percent from 19.14 percent in 2022.

Foreign investors' interest waned due to the lack of liquidity, resulting in a continued decline in foreign portfolio investments. FTSE Russell downgraded Bangladesh's capital market rating from "restricted" to "not met" in the efficient trading mechanism criterion.

Foreign investment in the stock market almost halved over the last five years due to a confidence crisis, currency depreciation, and the introduction of the floor price.

Market governance issues were evident as non-performing companies, such as Khan Brothers PP Woven Bags, experienced surges in share prices despite consistent losses and factory closure.

To revitalise the market, immediate policy interventions and regulatory adjustments are crucial. The removal of floor-price regulations by the regulator is paramount, allowing the stock market to trade freely and regain efficiency, even if it initially leads to index declines. A liberated market will restore liquidity and bolster confidence. As of January 21, 2024, the securities regulator lifted floor price curbs for all stocks except 12.

Simultaneously, addressing macroeconomic challenges, controlling inflation, stabilising the foreign exchange sector, and enhancing money market liquidity are vital government actions.

Economic revival will instill confidence, attracting both local and foreign investors. Stable foreign exchange rates are imperative to lure offshore investments, while an infusion of liquidity into the money markets is crucial for investor participation.

Long-term strategies, both in terms of supply and demand, are vital for the sustained growth of the capital market. Encouraging large, profitable and well-established businesses to seek capital from the stock markets through fiscal and regulatory incentives, including tax cuts, is a strategic imperative.

Concurrently, mobilising institutional capital from corporates, pension funds, and provident funds, and diverting these funds from stagnant banking deposits will augment market stability and liquidity.

A visionary approach also calls for the establishment of a robust bond market. This market not only serves as a source of capital for both corporations and governments but also acts as a benchmark for interest rates, influencing stock valuations and investment decisions.

The coexistence of a well-developed bond market with the stock market creates a diversified investment landscape, attracting a broader investor base and fostering overall market maturity. The transparency and creditworthiness assessments inherent in the bond market can significantly enhance investor confidence, contributing to sustained financial market stability and robust growth.

The author is an economist