Economic Survey 2010-11: Financial markets witness slowdown

Pakistan's financial markets have witnessed slowdown in the deposit mobilisation and profitability in the sector, however, generally the financial sector remained immune to contagion of the global financial crisis. According to Economic Survey 2010-11 Pakistan is living in a highly integrated world and a major turmoil of this magnitude certainly had implications for Pakistan economy.
"The ripple effects of global financial crisis had not hit with same intensity or severity as it had done to the developed world but still there are various channels through which the crisis had impacted financial sector in particular and Pakistan economy in general," the Survey said. Pakistan sensitively reacted to the structural changes in the financial space.
The banking and the entire financial system is stronger after years of restructuring, deregulation and improved supervision by the SBP, it said and added that Banking Companies Ordinance (BCO) has been amended recently to enhance surveillance and vigilance mechanism of the SBP. The Survey revealed that Pakistan's financial institutions had not invested in derivatives that had exposure to risky investment bankers. According to the Survey credit to private sector registered marked slowdown in the aftermath of the financial crisis but it is more to do with domestic peculiar economic conditions.
The credit availed by the private sector during July-April, 2011 was Rs 156.7 billion as compared to Rs 144.2 billion in the corresponding period last year. Non-performing loans (NPLs) have also surged but still NPL-to-deposit or credit ratio remained competitive versus developing economies.
The Survey said that monetary policy as an important stabilising tool ensures the sustainable economic growth as well as significantly influences the expectations about the future direction of economic activity.
"Therefore, a stable financial system is a prerequisite for stronger economic growth, as it enables the financial intermediation process to facilitate the smooth and efficient financial intermediation that allocate savings to profitable investment opportunities, and proper transmission of monetary policy, whose effective conduct and implementation in turn ensures price stability," it added.
Thus a strong and efficient financial system plays a vital role in improving the performance of the economy. According to the Survey, global financial stability has improved during 2010-11 on the back of better macroeconomic performance and continued accommodative macroeconomic policies but improvement remain fragile as the health of financial institutions has not recovered in tandem with the overall economy.
The challenge for governments remained un-addressed as to how the financial sector should intersect with the broader economy to avoid future crises. The confidence in the banking systems of many advanced economies has not been restored and there is a need to restore market confidence and reduce excessive reliance on central bank funding, considerable further strengthening of bank balance sheets and capital buffers will be necessary.
Financial systems must enhance transparency through more rigorous and realistic stress tests and recapitalize, restructure, and even eliminate weaker institutions. Without these financial sector reforms funding difficulties may lead to another systemic liquidity episode. The drastic curtailment of external demand during the last two years has helped shaving off external demand, however, security and intensification of war on terror kept the government's demand for resources under pressure, the Survey revealed.
On the other hand, lower than expected GDP growth, acute energy shortages and a high cost of doing business contributed to the revenue shortfall. Thereby, fiscal deficit sharply increased from 5.3 percent in fiscal year 2008-09 to 6.3 percent in fiscal year 2009-10. This kept monetary policy under enormous pressure to strike a balance between supports to growth and keep inflation under check.