ISLAMABAD: Pakistani banks are operating on sound footing, despite the domestic rush for dollars, cash withdrawals and the international financial turmoil.
The health of the banking system was illustrated by the fact that bank mergers and acquisitions are going apace, and profits stay good. It’s a sound sector for foreign and domestic investment. This contrasts with the government’s ongoing efforts to internationally mobilize $4 billion to $5 billion, and the talk of an economic downturn.
The banking system escaped any serious raging effects of the current turmoil emanating from the United States which also infected the European financial institutions and businesses.
While the banking system is performing well, there have been some recent hiccups. “In my assessment, Pakistan’s economy, to date, has been affected mainly by the indirect impact of the international events which led to the rise in the global commodity prices.”
This is how Shashmad Akhtar, governor of the State Bank of Pakistan (SBP), sees the situation. “Pakistan is perhaps the worst-hit economy by the surge in the global commodity prices as it has been a predominant factor in derailing the macroeconomic fundamentals,” the central bank chief told a large group of Asian bankers meeting in Karachi.
How deep is the impact of international commodity prices, soaring until recently? Nearly 80 percent of the external current account deficit in fiscal 2008 that ended June 30 is equivalent to the oil import bill that shot up beyond $11 billion. Until two or three years ago it used to be just $3 billion annually. At the same time a large increase in fiscal 2008 budget deficit was on account of the delay in pass-through of international price rises at retail level. While the central bank was worrying about the depleting forex reserves and the government was trying to cope with the growing fiscal deficit, the SBP enforced financial sector reforms in July which saved the banks from losses.
Akhtar, the central bank chief, supports the positive impact of the reforms by saying that the capital adequacy ratio of the banking system is 12.1 percent - as of June 2008 - which is well above the internationally acceptable minimum requirement of 8 percent. The core capital constitutes nearly 80 percent of the total capital and Tier-1 to risk-weighted assets ratio of the banking system is 9.7 percent - more than double the 4 percent minimum international standard.
The SBP chief also unveils several other performance features that have kept the banking system on a sound ground. The balance sheet footing of the banking system, for instance, on Oct. 4 this year was nearly Rs.5.1 trillion. The loans advanced by banks, at the same time, were Rs.2.8 trillion. The deposits totaled Rs.3.8 trillion.
The banking system faced a liquidity crunch for several reasons including a heavy borrowing by the government to meet its fiscal deficit and to pay for the subsidies it was providing to consumers on high-cost imported oil and other commodities.
At the same time, people rushed to banks to withdraw money so that they can buy the rapidly rising greenback. To face the situation, central bank repeatedly injected liquidity in the financial system. Since August this year, SBP has injected liquidity on 13 occasions and provided temporary liquidity in excess of Rs.300 billion. The banks also have been provided with cash from the SBP’s discount window.
