KARACHI: Pakistan is making substantial progress in developing its financial sector through regulatory improvements and other reforms, according to Economic Survey 2020/21 released Thursday.
Financial development (i.e. financial depth) can be measured by different macroeconomic variables such as domestic credit to the private sector as a percentage of gross domestic product, measures of money supply and stock market indicators.
Financial depth is measured by the M2 / GDP ratio, which is widely used as an indicator of financial sector deepening, where higher values represent a more developed financial sector.
“This [M2/GDP] The ratio has seen a substantial increase and rose from 36.6% in fiscal 2011 to 50.3% in fiscal 2020, indicating a more developed and efficient financial sector thanks to various SBP initiatives for the development of the financial sector ”, indicates the survey.
The upward trend continued in the current fiscal year and the ratio increased to 47.3% as of April 30, 2021, from 46.9% in the same period last year.
A well-developed financial sector plays an important role in overall economic development, he said.
Financial sector liberalization in Pakistan has continued since the late 1980s. Financial sector reforms were primarily aimed at promoting the country’s economic development in general and financial intermediation in particular, the survey added.
The SBP introduced financial sector reforms in July-March for fiscal year 2021 to create an enabling and prosperous environment for the banking sector.
In line with international best practices, the SBP has introduced a comprehensive set of reforms to improve supervision and the resilience of the banking system while balancing the need to mitigate the effects of Covid-19. The SBP has also taken steps to help banks, depositors and borrowers from all segments withstand the economic shocks of the coronavirus pandemic.
It relaxed the requirements of the Basel III capital framework, according to which the capital conservation buffer was reduced by 1%, from 2.50% to 1.50%.
Likewise, the limit of the retail portfolio has also been raised from 125 million rupees to 180 million rupees to support the growth of credit to the retail sector and to small and medium enterprises.
The margin requirement for equity exposure has been reduced from 30% to 20% and margin calls from 30% to 10%.
The SBP has reorganized the regulatory regime for combating money laundering and terrorist financing to align it with the recommendations of the Financial Action Task Force.
SBP enabled non-resident Pakistanis and Pakistani-origin cardholders (POC) to open Roshan digital accounts (Foreign Currency Value Account (FCVA) and NRP Rupee Value Account (NRVA) ). In addition, Pakistani residents with overseas assets, duly declared to FBR, were also allowed to open a Roshan digital account (FCVA only).
The SBP, over time, has relaxed restrictions on foreign exchange transactions, making these transactions effective and efficient while improving the ease of doing business.
It has launched an online platform, the Regulatory Approval System (RAS) to facilitate the online submission of foreign exchange-related cases to SBP.
The survey said the banking sector performed rather well in 2020, despite the vulnerabilities brought about by the pandemic.
The banking sector’s asset base expanded to 14.2% in 2020, up from 11.7% in 2019. The strong increase in assets was mainly due to a strong increase in investments (mainly in government securities) which increased by 33.5%. Advance growth, however, remained weak due to the economic slowdown caused by the pandemic.
Deposits in the banking sector rose 16.1 percent to 18.5 trillion rupees last year, according to the survey.
The banking sector’s after-tax profit rose 42.9% to Rs 244 billion in 2020 from Rs 171 billion the previous year.
The solvency of the banking sector continued to strengthen, indicating a high capacity of banks to cope with stresses resulting from unforeseen shocks. The banking sector’s capital adequacy ratio stood at 18.6% at the end of December 2020, well above local and international minimum benchmarks of 11.5% and 10.5%, respectively.