KARACHI: Pakistan corporate sector’s total external debt climbed to $7.4 billion as 2017, up 41.5 per cent, from $5.2bn in December 2016, said the State Bank’s Financial Stability Review — 2017 on Friday.

Corporate sector’s external debt during 2017 swelled to 15.8 pc of the sector’s total obligations — including both domestic and foreign debt — clocking in at $2.2bn. Foreign borrowing by country’s corporates went up by 41.5pc from the December 2016 tally.

Pay-back for foreign financing could lead to a spike in demand for dollars in the country already facing an acute shortage for green-back amid volatile exchange rate.

According to the review, corporate sector performed well during the calendar year 2017 but its reliance on banks has also increased. Banking sector has been the key source of financing to the corporates.

“Out of a total Rs6.6 trillion lending as of December 2017, around Rs4.6tr has been lent to the corporate sector by banks,” said the publication.

With bank lending constituting 70pc share in the overall corporate debt, there is a strong interconnectedness between the two sectors. As such, shock in any one of the two could adversely affect the operating performance and solvency of the other, said the SBP report.

The review said the domestic economy has managed decent growth of 5.4pc in FY17 and the momentum has carried on in FY18 with estimated growth of 5.8pc.

“However, the economy is confronted with significant challenges. The foremost being the pressures developing in the external sector because of widening trade deficit followed by fiscal slippages,” said the SBP Review.

In the short-term, external account challenges, fiscal imbalances, low savings in the economy (especially deposit growth) pose risks to domestic financial stability, it warned.

However, the report mentions that the risks to the economy may subside in medium-term with current growth rate momentum, rising opportunities from CPEC, improving energy infrastructure and expected increase in exports on the back of improving global demand.

The rising macroeconomic vulnerabilities have translated into short-lived volatility in the financial markets (particularly, foreign exchange and equity markets) and impacted the performance of financial institutions, it added.

The banking sector has registered an asset expansion of 15.9pc owing to robust growth in advances to private sector.

The key thrust in financing demand has come from textile, sugar, cement, and agribusiness sectors.

“Owing to rise in advances, Non-Performing Loans to Advances ratio — at 8.4pc — has touched decade low level,” highlighted the review.

According to the resilience analysis done by SBP in the review, banks are well-equipped to absorb shocks in domestic and global stressed scenarios in the medium-term. Nevertheless, declining profitability and deceleration in deposit growth will remain key concerns.

Furthermore, review mentions that Islamic and microfinance banks are maturing with improved performance, expansion in advances, deposits and customer base and growing share in assets of the financial sector.

Published in Dawn, August 4th, 2018