Financial stability review 2007

THE Financial Stability Review (FSR), released by the State Bank of Pakistan on 17th December, 2007, gives a candid perspective and provides an in-depth and exhaustive overview of the financial institutions and markets. Discussing the global markets, it says that in the recent past world economy has enjoyed good economic growth and increasing depth in financial markets, accompanied by significant financial innovation. This growth was accompanied by favourable economic indicators and relatively benign inflation under the watchful eyes of more independent central banks around the world. However, low risk premia, an easy access to finance, rising oil and commodity prices and continuing global imbalances remained significant risk factors for the sustainability of economic growth. The first signs of current market turmoil appeared in February-March, 2007 and assumed serious proportions from mid-July, 2007 onward when the impact of credit squeeze on financial markets was felt by the central banks and market participants around the world. Pakistan’s progressive and dynamic financial sector, according to the FSR, has witnessed a tremendous growth due mainly to the reform process undertaken by the authorities. Its overall size grew by 32 percent or almost Rs 900 billion to reach a new peak of Rs 6.9 trillion by June, 2007. Banks with a share of 72 percent in total assets continue to dominate the asset base of the financial sector. Some 17 percent yearly increase in assets pushed up the overall size of the banking sector to Rs 4.3 trillion by the end of 2006, which further increased to Rs 5 trillion by the close of June, 2007. The reform process is paving the way for a more diversified financial sector, equipped to facilitate the economic growth of the country. The outreach of the financial sector, albeit slow, continues to gain ground with the expanding network of commercial banks, microfinance institutions and Islamic banks in all parts of the country. Banks have also made inroads into the previously under-served segments which is evident in the rise in the credit shares of SMEs, agriculture and consumer finance. In addition, the process of gradual shift towards fixed deposits has already started, as evidenced by the narrowing of banking spreads.
However, the State Bank is not oblivious to the weaknesses still existing in the system. The FSR emphasises that since Pakistan continues to be categorised among low savers of the world, the financial system now needs to focus on providing innovative liability products to give the investors and savers more options to choose from according to their risk/return preferences. In this context, the role of Private Pension Schemes is particularly important as an incentive to smooth out consumption patterns over the life-cycle, by providing a forced saving mechanism aimed at overall social security. The FSR also shows concern about the rising level of non-performing loans (NPLs). Banking sector wrote off loans worth Rs 42.5 billion during 2006 as compared to Rs 17.1 billion during 2005. There was a fresh inflow of Rs 49 billion of NPLs in the first six months of 2007, the highest level since 2004. Spread over 184 pages, the FSR gives a detailed account of the financial sector of the country, with particular reference to the recent developments which have taken place in response to the changes on the domestic and international financial horizon. After going through the document, one certainly feels satisfied about the progress of Pakistan’s financial sector which has improved a lot in terms of coverage, sophistication and product development during the recent years.

 

GCC common market

GCC states have embraced the new year in fine style, setting up a common market with a combined economy of $715 billion, achieving one of the prime objectives stated when the Council was set up in 1981. The move opens avenues for numerous economic and political initiatives by the bloc, though it also prompts challenges that will need careful handling. In the first place it allows free movement of capital, besides removing hurdles from cross-border labour traffic. The latter will be particularly beneficial for the workforce, principally expatriate, which will no longer face residency, employment or medical problems anywhere in the six countries. For the capitals, the moment for enhancing mutual trade is finally at hand. Currently at 10 per cent of overall foreign trade, there is tremendous potential for increase in inter-GCC business, both investments and trade. Already there is talk of increasing the number to approximately 25 per cent in the coming two years, with more improvements to follow. Also, since the move has placed the GCC as one of the largest economies on the globe, it significantly increases the bloc’s international clout, economic and political, especially since it sits on more than half of Opec’s oil reserves. And considering how troubled times these are for the wider Arab and Muslim world, the increased advantage could not have come at a time more appropriate. As it grows, the region will find it easier to fend off outside interference in its internal affairs. It is important to note that the graduation from the customs union agreement (2003) to the common market now and on way to monetary union by 2010, the GCC is fast integrating, somewhat on the lines of the successful EU experiment. And while free trade agreements and enhanced business activity that make for the hallmark of the modern globalisation era are part and parcel of this process, its biggest advantage lies in the common foreign and economic policy that it eventually requires.
The Europeans take pains to appear cohesive because they are simply not willing to let internal disputes wash away very hard work achieved in more than half a century. By integrating economically, GCC countries are following a similar path politically. That is why there has been considerable aligning of state opinion within GCC circles over the last two and a half decades. All six members have to keep a close watch on their respective economies to keep the advantages from slipping, though. Already very high inflation and rapidly dipping dollar are raising concerns about meeting the monetary union target. Success stands to benefit more than just Arabs since unlike Europe, the Gulf is home to almost all nationalities in the world. It is hoped the process will proceed without undue hiccups.

—Khaleej Times