Economy remained severely imbalanced in 2022, says SBP report

Unfavorable external climate made matters worse; financial sector showed resilience and performed strongly

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In 2022, the economy faced severe imbalances, while the difficulties have exacerbated by the unfavorable external environment.

The State Bank of Pakistan (SBP) has released its annual financial stability review for the year 2022, which showed that the performance and resilience of the financial system remained stable during the year.

“Domestic problems, including twin deficits, high inflation, devastating floods, delays in the completion of IMF program reviews, as well as global challenges such as rapid rise in commodity prices and financial tightening by major central banks in developed economies, have emerged in deteriorating macroeconomic conditions,” the SBP report said.

However, the central bank said the financial sector showed resilience against this pressure and performed strongly.

The report said that during the year 2022, the asset base of the financial sector increased by 18.3 percent, mainly with the help of the banking sector. The banking sector was the most invested sector in government papers, while private sector debt reached the lowest level.

According to the report, the SBP and the government took various policy measures to address the growing imbalance, including a further increase in interest rates and macroprudential policies related to consumer financing and administrative measures to control external imbalances.

“As a result of these measures, the current account deficit improved by the end of the year while the economic momentum weakened, in which case the gross domestic product increased marginally by only 0.29 percent in FY23,” the report added.

Fiscal Year 2022 highlighted the increasing volatility of financial markets in FSR.

“The banking sector saw a strong growth of 19.1 percent in its assets. This expansion was mainly through investment, while advances decreased.” As deposits saw a significant slowdown, banks’ dependence on loans remained largely intact.

“The after-tax income of banks improved during the year 2022 mainly on account of increase in interest income, resulting in improved returns on equity to 16.9 percent from 14 percent in the previous year,” it said.

In addition, Islamic banking also witnessed a strong growth of 29.6 percent during FY22, asset quality indicators improved and revenues recovered compared to the previous year.

However, microfinance banks remained under pressure as asset quality indicators deteriorated along with post-tax losses, the FSR showed, adding that the non-financial corporate sector saw a marginal decline in revenue due to high economic pressures and increased tax and financial expenditure.

“The overall financial position of the top 100 listed companies remained stable and the corporate sector continued to fulfill its obligations to financial institutions in general,” the report said.