In 2020, the management of interest and exchange rates remained in line with the need to limit the deceleration in economic growth and help revive this growth afterwards.

But political and governance chaos created by Covid-19 and intensified by political polarisation made it difficult for the inexperienced PTI-led federal government to prepare the entire financial sector to play its due role in economic development. Its focus remained on banks and foreign exchange and stock markets. They performed fairly well.

Banks’ interest rates fell with the easing of monetary policy, but did not affect their interest earnings first because repriced private-sector lending remained limited. Secondly, government borrowing from banks at even a low price created huge incomes due to large volumes. The dollar spiked in the first half of the calendar year when the external sector was still in deep trouble, but the rupee recovered some of its lost value against the greenback in the second half of the year when the external sector’s performance improved. The wedge between the exchange rates in interbank and open market that used to be 100 paisa or even more eventually narrowed as the State Bank of Pakistan (SBP) tightened rules governing the open market and refrained from being a net buyer of foreign exchange from banks at the end of every quarter.

In the third quarter of 2020, after-tax profit of banks witnessed a phenomenal year-on-year increase of 61.6 per cent to Rs194 billion, according to the latest statistics.

What remained essentially unchanged in the outgoing year was the focus on ‘financing’ growth instead of ‘enabling’ sectoral growth

Non-performing loans (NPLs) of banks understandably rose 12.5pc to Rs853bn as Covid-19–triggered lockdowns affected the borrowers’ capacity to service their loans on time.

Delays in the actual disbursement of low-priced loans but immediate cuts in the returns paid on deposits made it easier for banks to earn higher net interest income in the three-month period. But going forward as the interest earned on repriced loans will start declining and the room for further reduction in interest payments of banks’ deposits will squeeze, growth in net interest income may decelerate.

In 2020, the open foreign exchange market became more disciplined as the crackdown on the illegal transfer of foreign exchange intensified. That helped in keeping the exchange rate from going berserk even at times when large external debt payments were made. And, it also encouraged foreign exchange companies to sell more foreign exchange in the interbank market.

The SBP and Federal Investigation Agency (FIA) jointly kept a more watchful eye on all businesses of foreign exchange companies also in part to comply with the requirements of the Financial Action Task Force (FATF). More disciplined open foreign exchange market and unique Roshan Digital Accounts opened by overseas Pakistanis in the last quarter of 2020 also helped in boosting the inflows of home remittances. A massive interest rate cut between March and May as part of the stimulus package to help the economy revive had a smaller impact on stock market investors than it could usually have simply because some better-performing sectors like banks, cement, food and pharmaceuticals kept the investors’ interest glued to the market.

Hundreds of billions of rupees worth of concessional financing was approved for small and medium enterprises but a common Pakistani still does not know how much of that largesse actually reached SMEs

What remained missing was the progress of the development finance sector in 2020 — and understandably so. The Covid-19–triggered economic slump at home and internationally made it difficult for the government to pursue its development agenda and even CPEC-related projects suffered delays due to this as well as diplomatic reasons rooted in the Pakistan-US relationship. The advances-to-deposit ratio of development financial institutions (DFIs) — a key indicator of how aggressively they are operating — fell in September to just 312pc from 857pc in September 2019. Unlike banks, DFIs’ advances are usually several times higher than their deposits.

With a new US government in place in 2021, it is expected that the anti-CPEC rhetoric will subside and help Pakistan pursue new mega projects and expedite work on the existing ones.

Digital banking gained momentum in 2020 — thanks to the need arising for it after the spread of the first and second waves of Covid-19. E-banking transactions, for example, surged close to 253.7m at the end of September from 224.3m in September 2019.

The disbursement of Covid-19 hardship allowance to people was partly made through microfinance banks. Even otherwise, these banks tried to remain on the forefront of concessional credit disbursement. These two factors together boosted gross distribution of microfinance to Rs227bn in September from Rs209bn a year ago.

Apart from operational efficiencies or shortcomings of the financial sector seen in 2020, what remained essentially unchanged was the focus on financing growth instead of enabling sectoral growth. And even within this premise of financing growth, we saw a serious lapse. Hundreds of billions of rupees worth of concessional financing was approved for small and medium enterprises but a common Pakistani still does not know how much of that largesse actually reached SMEs. Enabling SME growth undoubtedly needs more than financing it — or, to put it rightly, more than just approving finance for it.

Towards the end of 2020, Prime Minister Imran Khan was found lecturing a large audience in Khyber Pakhtunkhwa on the benefits of promoting economic growth via SMEs in tourism and IT sectors without telling the nation how many tens of billions of rupees were actually “pumped into” — and not just “approved for” — the SME sector in 2020.

Published in Dawn, The Business and Finance Weekly, December 28th, 2020