While the International Monetary Fund (IMF) has agreed to extend the
stalled bailout package to Pakistan by up to one year and to increase the loan
size to $8 billion from $6 billion, meeting the stringent conditions of fund would
prove to be an uphill task for the new Pak government. The just agreed upon
conditions of the IMF aim to remove distortion in the economy including some
subsidies. But meeting these demands would require a great deal of revenue
generation which does not seem possible sans a sound industrial base.
Since the economy has failed to match up with the industrial advances
made by most of fellow Asian countries, a huge gap in its infrastructure has
been created. The colossal infrastructure shortfall calls for a significant inflow
of investments into Pakistan’s economy. However, the economy’s problems
are structural and deep rooted. The global economic shocks caused by the
Covid-19 pandemic and the Russia-Ukraine war would further complicate the
task of new Pak Finance Minister Miftah Ismail.
The World Bank, in its recent ‘Pakistan Development Update’ highlighted
that long-standing structural weaknesses of the economy include low
investment, low exports, and low productivity growth cycle. Also, high domestic
demand pressures and rising global commodity prices would lead to doubledigit inflation (10.7% for FY 2021-22) in the country. A sharp rise in the import
bill would also impact the Pakistani Rupee adversely. Hence, without financial
sector reforms, the growth momentum cannot be expected to pickup in
Pakistan in the near future.
The WB report cites financial sector’s inadequacy as one of the reasons
for this low growth. The Federal government in Islamabad is the dominant
borrower. The sector is burdened with government financing at the cost of
private sector. Further, the government’s borrowings from the banks are at high
interest rates but earn nominal interest for its cash balances. This is forcing the
exchequer with heavy indebtness as well as liquidity crunch for private sector.
Public sector credit accounted for 66.8% of total credits extended by banks at
end-December 2021. Pakistan has a gross NPL (non-performing liabilities)
ratio of 8.9% and a recovery rate of 41 cents/dollar against 70 cents/dollar for
OECD countries. These trends are not limited to the banking sector but
permeate across the financial sector in Pakistan, according to the World Bank.
Investments are derived from savings. The quality and magnitude of
savings in the country provides a hint of domestic investment potential. Less
than 50% of domestic savings find their way to the financial sector with the rest
used in real estate, being intermediated through informal channels, or are
soaked up directly by the government through National Savings. There are also
large gaps in financial inclusion in the country with vulnerable segments having
limited access to finance. In terms of access to accounts, 7% of adult women
in Pakistan have access to finance compared to 35% of adult men, and 15%
of young adults (15–24 age group).
The weakness of institutions in the country is another area of concern.
Islamabad lacks transparent, predictable, and judicious insolvency and credit
rights regime which is critical to lower the cost of credit, expand access to
finance, and foster entrepreneurship.
From the investor point of view, there is limited awareness among retail
investors about capital market products. Limited financial literacy has
exacerbated the informality challenge in Pakistan. According to the Standard
& Poor’s Ratings Global Financial Literacy Survey 2015 (S&P Global FinLit
Survey), only 26% of the adults in Pakistan are financially literate.