Moody’s latest report Banking System Outlook – Pakistan stated, “that high-interest rates, government’s narrow revenue base and heavy debt burden coupled with substantial structural constraints to economic and export competitiveness will weigh on economic growth.”
The Gross Domestic Product (GDP) is predicted to be below 2.9% in the year 2020 keeping the inflation and interest rates will remain high. As per the Banking System Outlook – Pakistan, “We expect real GDP growth of just 2.9 percent for the fiscal year ending June 2020, down from 3.3 percent in 2019 and 5.5 percent in 2018. Interest rates have increased by 7.5 percentage points since January 2018.”
Ongoing infrastructure projects will result in the improvement of economic activity in the country, furthermore, rupee depreciation will raise the private sector investments. Due to the highest interest rate of 13.25% set by SBP, Pakistan’s economic growth will be restrained.
Although the investments in energy infrastructure projects under the China-Pakistan Economic Corridor (CPEC) have reduced some of the country’s long-term economic constraints yet, Pakistan is still facing challenges, including substantial structural constraints to economic competitiveness. Despite these challenges, the exchange rates are still stable since June 2019, however, the market is expecting policy rates lower than 13.35% for the next two years.
The report also states, “We expect government exposure to remain high over our outlook horizon because Pakistani banks will remain the main source of financing for the government. We expect the government’s commitment to stop borrowing from the central bank to increase government reliance on banks for meeting its financing needs.”
Deposits will be the only funding source for Pakistani Banks and the high-level remittances will be obtained from overseas Pakistani workers.
“We expect Pakistani banks to maintain comfortable liquidity buffers, with core liquid assets (cash and bank placements) accounting for 12 percent of assets as of September 2019, complemented by the banks’ investments in government securities (40 percent of total assets)”, added Moody.
The State Bank of Pakistan (SBP) accepts 64% of the government securities as treasury bills for repo funding.
Due to the delay in meeting AML requirements, the leading international banks cut correspondent bank relationships, affecting banks’ foreign-currency liquidity, business generation capabilities and also leading to higher refinancing and compliance costs. As a result of which Habib Bank and the United Bank have surrendered their US banking licenses and closed their US branches.