KARACHI, May 13: Governor of State Bank of Pakistan Dr Shamshad Akhtar has said that historically low domestic interest rates have spurred credit availability to the manufacturing sector, subsequently proving to be the real determinant of GDP growth.

Dr Shamshad was reading out a paper on ‘Financial Sector of Pakistan — the Roadmap’ as a key note speaker in the inaugural session of the two day Asia Finance Conference organised by daily Dawn.

While expressing confidence on “promising near-term economic prospects” of Pakistan’s financial sector, the State Bank governor warned about demand pressures if “the trade deficit grows out of proportion and inflationary tendencies continued to persist”.

“A consequent fall in demand for credit or a possible impairment of the debt repayment of borrowers does carry the risk of reversing the current gains enjoyed by the banking system,” she declared.

“But these risks are being well managed,” the SBP governor added in the same breath to allay apprehensions and pointed out that if the economy continued the growth momentum for the next decade or so, Pakistan’s financial system would reap benefits out of rising incomes, consumption and emerging investment demands.

The Senate Chairman Mr Mohammedmian Soomro delivered a special address while Mr Hameed Haroon, CEO of the Dawn Group of newspapers offered brief welcome remarks for the guests.

She said that she was developing a strategy for financial sector for the next decade and she was offering “some ideological thoughts on the long-term vision paper for the central bank, which will be developed in consultation with the stakeholders”. After which, she indicated, the banking industry and the central bank would make joint efforts to set up an implementation task force.

Pakistan’s financial system, she said, had grown substantially, benefiting from multi-pronged financial reforms that had been pursued persistently and vigorously over a decade. However, she pointed out, the task of financial sector reforms was far from being accomplished while stressing upon all the stakeholders in the banking system to strive for continuity, broadening and deepening of reforms, build and sustain the already implemented reforms and fill the remaining fissures.

She dilated upon the factors which, according to her, were likely to play a more dominant role in shaping the future complexion of the financial sector and its institutions. She said that these factors entailed far-reaching implications in terms of increased competition, greater consolidation, increased diversification and enhanced dynamism in financial players and markets.

The SBP governor highlighted the 8.4 per cent growth in GDP last year and said she expected higher than six per cent growth in the current fiscal year because of “easy availability of funds on the back of historically low level of interest rates” that proved to be the real catalyst for the subsequent sharp growth in credit availability to the manufacturing sector and eventually proved to be the real determinant of GDP growth.

Strong credit demand of the manufacturing sector translated into a sharp increase in the interest income of banks, giving rise to unprecedented profits and healthy balance sheets, Dr Shamshad said.

Redeployment of these profits to augment financial services will help meet the growing economic requirements.

The SMEs, agriculture, micro-finance and infrastructure projects to be set up in public-private partnership are the few areas from where credit demands are expected to emerge.

Dr Shamshad said market forces had unleashed strong forces of competition and private sector had virtually displaced the public sector from its dominant position. She said the stiffening licensing policy and regulatory capital requirements were a challenge to small banks, adding that injection of more capital and mergers of financial institutions were likely.

The State Bank governor regretted that financial sector in Pakistan had been found lacking in developing innovative products to meet the market’s diversified needs. She said Pakistan offered a big opportunity for development of derivatives and synthetic products.

She said that Pakistan’s banks would seek opportunities in the world market. Within the country, foreign banks appeared to be on retreat before local banks in certain areas in which they used to enjoy a virtual monopoly.

She said that financial institutions would have to invest heavily in the technology besides developing adequate safeguards.

Earlier, Chairman of Senate Mr Mohammedmian Soomro spoke about challenges being faced by bankers and highlighted the role of financial sector in the growth of national economy.