Daily Times

Political uncertainties and macroeconomic vulnerabilities such as deterioration in balance of payments and exchange rate dynamics pose a risk to the stability of financial system in the next six months, said the State Bank of Pakistan (SBP).

Meanwhile, the Pakistan economy has managed a decade-high growth of 5.37 percent during Fiscal Year 20117 (FY17), despite rising external sector vulnerabilities and fiscal slippages, revealed SBP.

The SBP has released Financial Stability Review – 2017 on Monday in which the central Bank reported that the first-hand information received from the market participants in January 2018 through SBP Systemic Risk Survey also suggests that political uncertainties and macroeconomic vulnerabilities such as deterioration in balance of payments and exchange rate dynamics pose a risk to the stability of financial system in the next six months. Among all the risks, the highest cited, at present, are deteriorating balance of payments position, volatility in exchange rate, and widening fiscal deficit. For the next six months, respondents believe that political uncertainty, deterioration of balance of payments and uncertainty over exchange rate could potentially undermine financial stability. The likelihood of occurrence of a high-risk event in the financial system of Pakistan over the short term is relatively higher than the medium term, according to the SBP Systemic Risk Survey findings.

The momentum in economic expansion has continued in FY18 with estimated growth of 5.79 percent. Until April 2018, Large Scale Manufacturing Industries (LSMI) has expanded by 5.76 percent, reflecting broad based expansion across various sectors of the economy. Headline inflation has been subdued, though core inflation has remained at an elevated level.

The rising macroeconomic vulnerabilities have translated into short-lived financial markets volatility. FX market, in particular, has experienced continuous pressures resulting in exchange rate depreciation in the second half of CY17 and the first half of 2018. The equity market, after touching an historic high, has seen notable correction due to political uncertainty, unmet expectations of higher inflows from Pakistan’s inclusion in MSCI’s emerging market category, and rising yields in AEs, added the SBP Financial Stability Review.

The SBP said in the short-term, risks to domestic financial stability may elevate further if external account challenges remain, fiscal imbalances persist, and savings in the economy (especially, deposit growth) stay low. Equity market volatility, within reasonable bounds, is essential to restore investor confidence.

The projected path of financial vulnerability index does not show any major deviations in CY18, it added. Nevertheless, the uncertainties surrounding the projections reflect rising odds of upside risk.

The Central Bank further said in the medium-term, risks to the financial system may decline in perspective of sustained growth momentum, rising opportunities from CPEC, improving energy availability, and expected increase in exports on the back of improving global demand.

In the wake of challenging operating environment, Financial Institutions have performed reasonably well; however, some low to moderate levels risks have emerged. Financial sector’s consolidated assets have increased by 12.8 percent during 2017 (5-year average growth: 11.7 percent) resulting in greater financial depth. The financial assets to GDP ratio has been recorded at 74.7 percent in 2017, it revealed.

Published in Daily Times, August 7^th 2018.