‘Covid economic fallouts to drive financial stability risks’

KARACHI: Risks to financial stability will largely be driven by the dynamics of COVID-19 pandemic and concomitant economic implications, the central bank said on Wednesday.

“A speedy vaccination drive across the world including effectiveness against emerging virus strains and contained outbreak may bolster global economic momentum and create a favorable external environment. However, normalcy in social conditions and increased aggregate demand may push-up oil and commodity prices, exerting pressures on current account. Also, monetary policy normalisation in AEs [advanced economies] may raise external funding 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 policy support measures have avoided delinquencies of borrowers and augmented the solvency of banks. Available data suggest that the borrowers allowed deferments and restructuring/rescheduling in general are regularly servicing their financial obligations.

“The third wave of COVID-19 in Pakistan seems to have peaked out, the pace of inoculation drive is picking up and will get an additional boost due to local production of vaccines in collaboration with China. Furthermore, the twin balances have started to improve, with the external balance turning positive and the fiscal deficit shrinking. These positive developments are increasing the probability of a full scale and sustainable revival of economic sectors,” said the SBP. “With encouraging developments on the pandemic front and improvements in the macroeconomic situation, residual risks to financial stability are expected to subside, with the sector anticipating better prospects for the year ahead. However, the sustainability of such a revival is largely contingent upon the likelihood of the resurgence or emergence of new virus variants and success of vaccination campaigns. Further, any delays in the global and domestic recovery may affect the repayment capacity of borrowers, which could lead to solvency issues.”

The SBP asked banks to continuously assess the situation, particularly the repayment capacity of borrowers, and if required, carry out necessary adjustments in their business models in consultation with relevant stakeholders. “The SBP, on its part, continues to closely watch the unfolding situation and remains ready to take whatever actions are necessary to safeguard financial stability.”

Pakistan experienced two waves of the coronavirus during CY20. However, their impact on human health and economic indicators remained relatively mild. The pandemic and its attendant precautionary measures, lockdowns and the freeze of global trade induced a 0.47 percent contraction in domestic economic activity during FY20, which has been one of the smallest declines among emerging markets and developing economies.

The performance of the financial sector amid pandemic-induced challenges remained satisfactory. The consolidated asset base of the financial sector rose by 14.1 percent in CY20 and financial depth measured by financial assets to GDP further increased to 77.5 percent.

Financial Markets observed elevated stress in the first half of CY20 owing to heightened and lingering uncertainties. KSE-100 index manifested a V-shaped recovery. Erstwhile volatility in the foreign exchange market abated during the second half of CY20 due to an increase in FX reserves mainly on account of the rise in the flow of remittances, reductions in the services and primary income deficits and improved external financial flows. The banking sector holding around 75 percent of financial sector assets posted strong growth of 14.2 percent in its asset base. Non-bank financial institutions grew by 26.9 percent in CY20 (13.0 percent in CY19. The insurance and takaful industry maintained its performance as the asset base expanded by 13.0 percent during CY20.