KARACHI: With encouraging developments on the Covid-19 pandemic front and improvements in the macroeconomic situation, the residual risks to financial stability are expected to subside, besides better prospects for the financial sector for the year ahead, the State Bank of Pakistan (SBP) said Wednesday.
However, the SBP said that the sustainability of such a revival is largely contingent upon the likelihood of the resurgence or emergence of new virus variants and success of vaccination campaigns. Further, any delays in the global and domestic recovery may affect the repayment capacity of borrowers, which could lead to solvency issues. According to the SBP’s flagship annual publication, the Financial Stability Review (FSR) for CY20, banks need to continuously assess the situation, particularly the repayment capacity of borrowers, and if required, carry out necessary adjustments in their business models in consultation with relevant stakeholders.
The SBP, on its part, continues to closely watch the unfolding situation and remains ready to take whatever actions are necessary to safeguard financial stability. The FSR mentioned that risks to financial stability will largely be driven by the dynamics of Covid-19 pandemic and concomitant economic implications. A speedy vaccination drive across the world including effectiveness against emerging virus strains and contained outbreak may bolster global economic momentum and create a favorable external environment.
However, the normalcy in social conditions and increased aggregate demand may push-up oil and commodity prices, exerting pressures on current account. Also, monetary policy normalization in advanced economies may raise external funding costs, the FSR mentioned. On the local front, Pakistan’s financial sector has withstood economic adversities. The policy support measures, thus far, have avoided delinquencies of borrowers and augmented the solvency of banks. According to the SBP, available data suggest that the borrowers allowed deferments and restructuring/rescheduling in general are regularly servicing their financial obligations.
The FSR mentioned that the third wave of Covid-19 in Pakistan seems to have peaked out, the pace of inoculation drive is picking up and will get an additional boost due to local production of vaccines in collaboration with China. Furthermore, the twin balances have started to improve, with the external balance turning positive and the fiscal deficit shrinking. These positive developments are increasing the probability of a full scale and sustainable revival of economic sectors.
Copyright Business Recorder, 2021
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