MSCI Barra has announced that it is removing Pakistan from its MSCI Emerging Markets Index. The index provider will still provide a stand-alone benchmark for the country, but it will no longer be included in broader indexes.

The reason, according to an MSCI press release, is the market "floor" that was instituted on August 27 that prevented Pakistan-listed securities from trading below their levels on that day. MSCI said that the trading curb "resulted in the practical shutdown of the Pakistani equity market." With prices artificially skewed, Pakistan's stock market had essentially lost its transparency and became uninvestable by MSCI's standards.

In an interesting twist, the floor rule was lifted on December 15, sending the Pakistan market into a spiraling decline of more than 30% that was still continuing as the end of the year neared. And Pakistan is slated for removal from the MSCI indexes effective December 31.

With the trading curb abandoned, is MSCI's decision likely to be reversed? Not likely. The index provider noted that if the curb were lifted, it would take some time for the market to return to normalcy. MSCI also expressed some concerns about the "sustainability" of such a reversal. MSCI further stated that it would revisit the issue if Pakistan's markets should return to normalcy but implied that it may be reclassified as a frontier market instead of an emerging market.

As of December 26, the MSCI Pakistan Index was down nearly 70% year-to-date versus a roughly 44% decline for the MSCI World Index. MSCI said in the press release that it would apply a discount to the Pakistan index going forward from its date of removal to ameliorate any distortions caused by the trading curb, but it is not clear if that will still be considered necessary.

FTSE removed Pakistan from its global indexes in June 2008.