KARACHI: Risks to financial stability will be largely determined by the dynamics of the COVID-19 pandemic and the accompanying economic implications, the central bank said on Wednesday.
“A rapid vaccination campaign across the world, including efficacy against emerging viral strains and a contained epidemic, could strengthen global economic momentum and create a favorable external environment. However, normalizing social conditions and increasing aggregate demand can push up oil and commodity prices, putting pressure on the current account. In addition, the normalization of monetary policy in AEs [advanced economies] may increase external financing costs, ”the State Bank of Pakistan (SBP) said in the Financial Stability Review 2020.
The SBP said the country’s economic system has withstood economic adversities. The political support measures have avoided borrower defaults and increased the creditworthiness of banks. The available data suggests that borrowers allowed to defer and restructure / reschedule generally meet their financial obligations on a regular basis.
“The third wave of COVID-19 in Pakistan appears to have reached its peak, the pace of the vaccination campaign is picking up and will receive an additional boost due to local vaccine production in collaboration with China. In addition, the twin balances started to improve, with the external balance turning positive and the budget deficit narrowing. These positive developments increase the likelihood of a large-scale and sustainable recovery of economic sectors, ”the SBP said. “With encouraging developments on the pandemic front and improving macroeconomic conditions, residual risks to financial stability are expected to ease, with the industry anticipating better prospects for the coming year. However, the sustainability of such a renaissance largely depends on the likelihood of resurgence or emergence of new viral variants and the success of vaccination campaigns. In addition, any delay in the global and domestic recovery can affect borrowers’ ability to repay, which could lead to credit problems. “
The SBP asked banks to continuously assess the situation, in particular the repayment capacity of borrowers, and, if necessary, to make the necessary adjustments to their business models in consultation with the relevant stakeholders. “The SBP, for its part, continues to closely monitor developments and stands ready to take all necessary measures to preserve financial stability.”
Pakistan experienced two waves of coronavirus during CY20. However, their impact on human health and economic indicators has remained relatively low. The pandemic and the resulting precautionary measures, lockdowns and freezing of global trade resulted in a 0.47% contraction in national economic activity in FY20, which was one of the smaller declines among emerging markets and developing economies.
The performance of the financial sector in the face of the challenges induced by the pandemic has remained satisfactory. The consolidated financial sector asset base grew 14.1 percent during CY20 and financial depth as measured by financial assets to GDP increased further to reach 77.5 percent.
Financial markets observed high tension during the first half of CY20 due to heightened and persistent uncertainties. The KSE-100 index exhibited a V-shaped recovery. Past volatility in the forex market eased during the second half of CY20 due to an increase in foreign exchange reserves mainly due to the increase remittance flows, reduction of service and primary income deficits and improvement of external financial flows. The banking sector, holding around 75 percent of the financial sector’s assets, posted strong growth of 14.2 percent in its asset base. Non-bank financial institutions grew by 26.9% in CY20 (13.0% in CY19. The insurance and takaful sector maintained its performance, with the asset base increasing by 13. 0% during CY20.