A new edition of the Financial Stability Review (FSR) for the calendar year 2021 has been published by the State Bank of Pakistan (SBP). Many financial institutions and markets are profiled in this report, including banks as well as non-bank financial organizations such as hedge funds and insurance companies. The study of global dynamics reveals that the subsequent recovery in global economic activity, which began in the second half of CY20 and gained additional pace in CY21, was aided by better management of the pandemic and an extensive vaccine inoculation effort. Although supply chain disruptions fuelled inflationary pressures, new COVID-19 variations continued to pose hurdles to global economic activity and the financial markets. Economic activity rebounded well after two COVID-19 outbreaks were successfully managed in CY21, according to an assessment of economic activity. The GDP increased by 5.7pc in FY21 (after contracting by 1pc in FY20), and the upward trend continued in FY22 when it is expected to rise by a further 6pc. External account pressures have been caused, however, by a vigorous recovery in demand and rising international commodity prices, particularly for crude oil. With these objectives in mind, the SBP implemented a variety of macro-prudential and monetary policy tools to stabilize the external account and limit domestic demand. In the context of strong economic expansion, the financial sector manifested steady performance while its financial and operational resilience remained intact. The financial sector’s asset base expanded by 15.6pc in CY21, while financial markets observed relatively contained volatility compared to last year. The FSR indicates that the banking sector- the major part of the financial system-posted a strong growth of 19.6pc (CY20: 14.2pc), which was particularly aided by a surge in private sector advances. The expansion was well supported by healthy deposit growth of 17.3pc, while banks also increased reliance on borrowing from the banking system. Encouragingly, the credit risk of the banking sector remained contained as the gross NPLs ratio declined by 130 bps to 7.9pc, while the provisions coverage ratio improved by 291 bps to 91.2pc. Accordingly, the net NPLs ratio declined to 0.7pc, indicating lower residual risk to the solvency from delinquent loans. On the performance front, the earning indicators observed improvement as ROA stood at 1.0pc and ROE improved to 14.1pc. Due, in part, to the improved earnings, banks’ solvency remained strong as reflected in the high Capital Adequacy Ratio of 16.7pc which stayed well above the minimum domestic regulatory benchmark of 11.5pc and international benchmark of 10.5pc. The Islamic banking segment also posted strong performance with a 30.6pc increase in its asset base during CY21, extending their share by 160 bps to 18.6pc in the banking sector. Microfinance Banks, which exhibited a reasonable growth, observed an inch up in infection rate and deterioration in earning indicators. From the demand side perspective, the FSR reveals that Non-Financial Corporate sector showed a marked improvement in profitability, business turnover, efficiency and debt repayment capacity. While this improvement bodes well for credit risk of the financial system, it also signifies a likely boost in the corporate sector’s demand for financial products and services. In the absence of any substantial disruption, the report states that the FMIs remained robust and continued to operate properly. As part of the National Payment Systems Strategy, the SBP launched Pakistan’s Raast’s Instant Payment System. The number of Raast IDs registered since the P2P component’s introduction in February 2022, has exceeded 10m, with the aggregate transaction value exceeding PKR 36b. Pakistan’s Diaspora Roshan Digital Account was launched in late CY20, and by the end of May 2022, 416 thousand accounts had been opened with an estimated cumulative inflow of over USD 4.44b. Pakistanis can now open bank accounts from the comfort of their own homes thanks to a completely digital onboarding framework. Financial Inclusion in the country is also projected to benefit from these initiatives. SBP has taken a variety of measures this year to further protect the industry from cyber security threats, which are mostly due to the rising use of technology and the expanding digital payment ecosystem. The review also highlights various measures taken by SBP during the year to strengthen the regulatory and supervisory regime, including the introduction of a forward-looking Risk framework and lender of last resort (LOLRBased Supervisory ) facility to enhance its financial safety nets. Importantly, the amended SBP Act 1956 has clearly delineated financial stability as one of the objectives of SBP. Going forward, risks to financial stability are contingent upon the strength of external buff continuity, and overall macroeconomic conditions in the context of developments, policy political front in Europe, global commodity prices, and global financial conditions. Stress test results, in the meantime, show that the banking sector is expected to maintain a reasonable resilience against various hypothetical adverse economic shocks over the projection period of three years. Amid the dynamic and challenging environment both on domestic and global fronts, SBP, on its part, will continue to undertake initiatives to keep pace with the evolving financial landscape and remains vigilant to the emerging risks, while standing ready to take necessary measures in pursuit of its statutory objectives of price stability, financial stability, and economic growth.