KARACHI: The economy experienced serious imbalances in the calendar year 2022 while the existing troubles were compounded by an unfavourable external environment.

The State Bank of Pakistan (SBP) on Friday issued the annual Financial Stability Review for 2022 and found that financial system performance and resilience remained firm during the year.

“The domestic headwinds including the twin deficits, high inflation, catastrophic flooding, delay in the completion of IMF programme reviews as well as the global challenges such as a fast-paced increase in commodity prices and monetary tightening by major central banks in advanced economies, manifested in the deteriorating macroeconomic conditions,” said the report.

However, the central bank maintained that the financial sector showed resilience against these stresses and posted steady performance.

Financial sector showed resilience against these stresses

“The financial sector’s asset base grew by 18.3 per cent in CY22—mainly supported by the banking sector,” said the report. The banking sector was the biggest investor in the government papers while the lending to the private sector has touched the bottom.

According to the report, the SBP and the government took various policy steps to address widening imbalances, which included further increases in the policy rate and macro-prudential policies pertaining to consumer financing and administrative measures to contain external imbalance.

“Resultantly, the current account deficit improved towards the year-end while economic momentum weakened. Against this backdrop, the gross domestic product grew only by a meagre 0.29pc in FY23,” said the report.

The FSR highlights the increased volatility of financial markets in CY22. “The banking sector witnessed a strong growth of 19.1pc in its assets. This expansion was mainly driven by investments while advances decelerated,” said the report.

Since deposits observed a notable slowdown,banks’ reliance on borrowings remained substantial, it added.

The credit risk remained contained as the gross non-performing loans (NPLs) ratio lowered to 7.3pc by the end of CY22 from 7.9pc at the end of CY21, while the net NPLs ratio slightly inched up to 0.8pc from 0.7pc a year earlier, remaining at one of the lowest levels of last two decades.

“Banks’ after-tax earnings improved during CY22, primarily due to a rise in interest income. As a result, Return on Equity (ROE) improved to 16.9pc in CY22 from 14pc in last year,” said the report.

The contained delinquencies and higher profitability supported banks’ solvency as Capital Adequacy Ratio stood at 17pc — well above the minimum regulatory requirement of 11.5pc.

“The Islamic banking segment also observed robust growth of 29.6pc during CY22. The asset quality indicators improved and earnings rebounded from the previous year,” said the report.

Microfinance banks, however, remained under stress as the asset quality indicators deteriorated along with after-tax losses. The FSR reveals that the non-financial corporate sector posted a moderate decline in earnings due to elevated economic stress and an increase in taxation and financing costs.

“The overall financial standing of top 100 listed companies remained steady and the corporate sector in general continued to serve its obligations to financial institutions,” said the report.

Financial Market Infrastructures (FMIs) remained resilient during CY22. Importantly, SBP implemented the second phase of Raast during CY22, enabling an instant and free Person-to-Person (P2P) funds transfer. At the same time, a comprehensive licensing and regulatory framework for digital banks was also issued.

Published in Dawn, July 8th, 2023