KARACHI: Pakistan’s banking sector will continue to face headwinds in 2019 and 2020 on the back of rising interest rates and slowing economic growth, warned Fitch Solutions on Wednesday.

In an assessment of the country’s banking sector, the research agency also highlighted the rising risk of reduced transparency as the government continues to borrow directly from the State Bank of Pakistan (SBP) which could eventually lead to higher inflation in the country.

The authors of the report note that the “rapid pace of public sector growth [accelerated from the 17.3pc in February, the highest since September, 2015] from the SBP, if continued, poses a latent risk to the health of the banking sector.”

Heavy government borrowing from the central bank has led to crowding out the private sector investment as well as increasing pressure on the already high inflation.

Sector’s profitability to remain under pressure amid rising interest rates

The country’s average inflation during the July-March period rose by 6.79 per cent on a yearly basis and touched its five-year high in March when it clocked in at 9.4pc.

The report adds that “a continuous downward trend in profitability [is likely] to weigh on growth of the banking sector, limiting the pace of banking sector expansion.” The central bank has already pointed out that the country’s banks have seen their profitability fall during the recent quarters.

The banking sector profits are on a downward trend since January, 2018 in tandem with the SBP’s tightening stance in the monetary policy.

The decline in sector’s growth will likely be accompanied by “rising loan impairments from households and corporations” as around 77pc of the total advances are concentrated in the corporate and small and medium sector enterprises with agriculture, consumer, commodity financing and staff loans making up for the rest, the authors illustrate in the report.

In this backdrop, Fitch anticipates the sector’s non-performing loans ratio to rise to 8.3pc in 2019 from 8pc in 2018 reflecting a decline in asset quality.

Moreover, as interest rates rise, the credit growth will slow down as the cost of borrowing surges.

The agency anticipates further rate hikes from the SBP’s monetary policy by the end of 2019 in the face of mounting inflationary pressures.

Published in Dawn, April 11th, 2019