BANKING SECTOR IMPACTS PAKISTAN'S ECONOMY
MULAZIM ALI KHOKHAR
Aug 24 - 30, 2009
Banks and the other financial institutions are the heart (centre) of any economy and they help the different sectors of the economy to move along with high degree of attraction to the centre so that the economy remains strong and resilient to the external factors. Any greater attraction from outside always distorts the attraction to these institutions and the system collapses.
The same phenomenon has been witnessed in the world and the failure of the financial institutions to maintain proper stable forces in the system has resulted in the overall failure of economies. The world is now observing the second largest depression since World War II, and world economies have contracted by 1.3% until April-09 during FY-09. As per IMF's report, every economy was hit and everyone missed the economic & financial targets in the FY-09 except China & India. They still enjoyed very decent growth rates at 6.5% & 4.5% respectively while going ahead they are expected to grow by 6%-8% in the FY-10.
Similarly, Pakistan was also under stress of the global meltdown but the system was less integrated with the financial systems of the rest of the world and therefore enjoyed a GDP growth of 2.0% in FY-09, thanks to the stringent risk management policies of the banking system, low uncovered banking loans in the market, and high degree of recovery achievements of the NPL.
Net Non Performing Loans, as of 30th June 2009 stood at 3.6% to net loans and now NPL picture is improving for the banks. This is a good sign indicating start of better earnings prospects for banks.
The financial services' sector along with banks holds about 6% contribution towards GDP at factor cost. The banking sector, in Pakistan, is relatively small to the economy and it adds little to GDP. The banking sector serves borrowers & depositors totaling 3.6% & 15% from total population of 163.7 million respectively. The ratio of Pakistanis holding a bank account is 1:4, with only one bank branch to serve 20,000 people and only 14% of the rural population is banked while 67% of the population resides in countryside/rural areas.
But, the sector has a momentous involvement in the GDP growth by organizing and disseminating the money in a structured way. Banks loan the government and private sector and invest directly in the economy. Banking sector in Pakistan excluding SBP, as of 30th Jun-09, holds about Rs.4.12 trillion (74.74% of GDP) in deposits, Rs.3.17 trillion (57.49% of GDP) advanced to the different sectors of economy, and Rs.1.35 trillion (24.47% of GDBP) invested directly in different sectors.
Banks loan government an amount equal to about 20-30 percent of GDP. The amount and % vary as the loan disbursement & payoff procedure continues for the whole year. During FY-09 the debt was recorded at Rs. 3.76 trillion equal to 23.3% of GDP. These loans are mostly used for public spending on various projects, which help the economy to accelerate. In this way, banks indirectly have significant contribution towards economic growth of the country.
ECONOMY IN FY-09
Pakistan was under the continuous stress of financial market risks and terrorism. The country failed to achieve many of the economic targets for the FY-09 as set in budget 2008-09.
The GDP growth target of 4.5% was largely missed which finally settled at 2% only. The details of the breakup of GDP are: Manufacturing sector contracted by 3.3% as against target of 6.1%; Services sector grew by 3.6% as against target of 6.1%; Financial sector witnessed a contraction by 1.2%; Industrial productions dropped by 3.58% and construction industry contracted by almost 11%; Only agriculture sector grew by 4.7% against target of 3.5%.
Net inflow of foreign direct investment (FDI) in Pakistan was declined by 51% from $5.45bn to $2.67bn. The exports witnessed negative growth of 2.6%. The privatization process remained halted for the whole year and no deal was registered.
REASONS BEHIND THE FINANCIAL SECTOR MELTDOWN IN PAKISTAN
What caused such a worst performance of financial & industrial sector were high interest rates, lower investments & demand, high investment risks with poor country ratings and continuous power shortages.
Inflation rates climbed sky high and averaged at 20.77% of CPI inflation for the year. Discount rate was increased by 200bps to 15% during the year, which resulted in very high interest rates in the market.
Government has unveiled the annual development plan 2010 in which economy is predicted to be back on track towards the growth & development with 3.3% YoY growth rate. Along with that agriculture, services and manufacturing sectors are predicted to grow at 3.8%, 3.9%, & 1.8% YoY respectively.
To achieve this, huge development expenditures have been announced on the back of expected heavy foreign aid inflows. Government has announced an increased Public Service Development Expenditure (PSDP) to Rs. 646 billions. Funds allocations will be:
* 52% for infrastructure development &
* 39% for social services
* Rs. 47 billion for DAMS,
* Rs. 60 billion for water sector
* Rs. 82 billion for transport & communication
To make this achievable the state bank of Pakistan is gradually easing tight monetary policy stances and recently it has reduced 100 bps of discount rate to 13%. Cumulatively 200 bps cut in the discount rate has been witnessed during the year and it is highly expected that the rates will soon be reduced to 10% to help trigger the economic growth.
Banks' deposits are also increasing at a normal rate. This will help improve the liquidity in the financial market and improve investment scenario in the market.
The SBP has also proposed structural reforms to help improve coordination between the Fiscal & Monetary Policy measures. The reforms include: increase in the frequency of Monetary Policy announcements from 4times to 6times a year, constitute a reverse repo corridor to seal the rates lower at 10% and shifting the pricing of auctions to the Ministry of Finance.
These measures will help ease liquidity problems and will accelerate the growth mechanism. Analysts are expecting a V-shaped recovery of the economy and main credit goes to the SBP's reforms.