Assessing the Fallout from the Coronavirus Pandemic on the Banking Sector of Pakistan

The domestic economy was already undergoing stringent reforms aimed at reducing the twin deficits and lowering the aggregate demand, with the economic growth rate for FY20 expected to be lower than 3 percent, the recent shock due to the COVID-19 outbreak has further adversely affected the business sentiment. Consequently, the SBP had to lower the policy rate by 425 bps to 9 percent in a matter of days and to come up with schemes to boost long-term investments in the country. However, in line with the global economic scenario, these measures are not expected to yield immediate results1, and much is dependent on the lowering of the number of COVID-19 affected cases and fatalities. With the economy now in a further depressed growth outlook it is imperative to have a careful look at the macro-financial linkages and the transmission of COVID-19 shock on the financial sector in general and the banking sector in particular. Historically, the banking sector of Pakistan has largely been immune to macroeconomic vulnerabilities during 2000s and despite lower growth rates than the trend, the banking sector has posted huge profits and improved their capital base accordingly. A careful examination of the dis-connect between macro-financial performance would reveal the banks to benefit from fiscal distress being the dominant borrowers to the fiscal authority with virtually no risk on its exposures. Moreover, the supervisory role of the State Bank of Pakistan (SBP) of not letting any idiosyncratic or systemic bank failures take place, because of relaxing risk management and prudential measures, has further enhanced the profits of the banks.