Pakistan’s central bank has advised the government to implement essential economic reforms such as increasing tax revenue collection and reducing expenditures to strengthen the economy and achieve sustainable growth in the medium to long term.
In its annual flagship publication ‘Financial Stability Review (FSR) for CY2023,’ State Bank of Pakistan’s (SBP) Governor, Jameel Ahmad, stated, “To put the economy on a sustainable growth path and address internal and external imbalances, it is imperative for the government to implement much-needed structural reforms, including fiscal consolidation and broadening of the tax base, achieving debt sustainability, and improving productivity and export competitiveness.”
He noted that the domestic economy continued to face unprecedented economic challenges, particularly on the external front. Inflation reached a multi-decade high during the calendar year 2023, affecting the purchasing power of households. Concurrently, weak inflows kept the external account under pressure, translating into “pressure on the domestic currency (rupee depreciation).”
In response to these challenges, SBP continued to implement necessary policy and regulatory interventions, including timely monetary and exchange rate policies along with other demand-management measures. Additionally, SBP introduced reforms in the exchange companies sector to improve transparency in the foreign exchange market, such as asking small exchange companies to merge with larger ones or wind down and requesting commercial banks to open exchange companies.
These stabilisation measures have begun to yield desired results. Inflation is gradually decreasing from its May 2023 peak (38% to 12.6% in June 2024); the domestic currency has stabilised and appreciated towards the end of CY23 (remaining stable at Rs278-278.63/$); and the macro-economy is on a recovery path.
To recall, the central bank had cumulatively increased the benchmark policy rate (interest rate) by 15 percentage points over three years (2020-2023) to a record high of 22% in June 2023 to control inflation. This measure also helped stabilise the rupee-dollar parity. Subsequently, the bank made its first cut in the policy rate in four years in June 2024, reducing it by 1.5 percentage points to the current 20.5%.
The central bank’s statement on the report noted that the banking sector remained resilient and grew by 29.5% during the review period. The growth in assets was primarily driven by investments in government securities, while private sector advances contracted due to stressed macro-financial conditions. The expansion of banks’ balance sheets was mainly funded by deposits, which posted a 20-year high growth in a high return environment.
Credit risk did not present a serious concern as the non-performing loans (NPLs) to loans ratio marginally increased to 7.6% by the end of December 2023 from 7.3% in December 2022, and the provisioning coverage further improved to 92.7%. Earnings of the banking sector remained healthy due to the high interest rate and expansion in earning assets, supporting the solvency position.
The SBP governor further stated that to navigate emerging challenges and capitalise on potential opportunities posed by the ever-changing economic and financial landscape, SBP has set out its future trajectory with the launch of a five-year Strategic Plan – SBP Vision 2028. The vision delineates strategic goals and activities and aspires to focus on five cross-cutting themes: strategic communication, climate change, technological innovation, diversity and inclusion, and productivity and competitiveness to attain the statutory objectives effectively and efficiently.
