Amid external account challenges, fiscal imbalances risks to domestic financial stability may elevate further: SBP FSR
By M J Hayat
LAHORE: In the short-term, risks to domestic financial stability may elevate further if external account challenges remain, fiscal imbalances persist, and savings in the economy (especially, deposit growth) stay low. Nevertheless, declining profitability and deceleration in deposit growth are the key concerns. Islamic Banks (IBs) continues to face liquidity management challenges due to dearth of shariah compliant investment instruments.
These points were expressed in the State Bank of Pakistan (SBP)’ flagship annual publication upon Financial Stability Review (FSR) for the calendar year 2017.
The Review presents performance and risk assessment of various components of the financial sector including banking, non-banking financial institutions, financial markets, exchange companies, non-financial corporates and financial market infrastructure. It also discusses the possible implications of the assessed risks for the overall stability of the financial sector.
FSR suggests that the level of overall risks to financial stability, as measured by Financial Vulnerability Index, has bottomed out in CY17. However, despite tightening of macro-financial conditions, financial institutions have performed fairly well. The consolidated asset base of the financial sector has expanded by 12.8 percent during CY17. Asset to GDP ratio has inched up to 74.7 percent in CY17 from 72.0 percent in CY16 indicating higher degree of financial deepening.
On the global front, the review highlights that the pace of global output growth—aided by rebound in trade and investment—has remained above expectations. The world economy has delivered 3.8 percent growth in 2017 up from 3.2 percent in 2016. However, the review notes that short-term risks to global financial stability—after receding in 2017—have risen recently in 2018 due to equity market volatility and trade disputes.
The domestic economy has managed decent growth of 5.37 percent in FY17 and the momentum has carried on in FY18 with estimated growth of 5.79 percent. 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. Headline inflation has been subdued, though core inflation has remained at an elevated level.
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.