The State Bank of Pakistan (SBP) has stressed on the need for “continued perceptible progress” on structural reforms to achieve sustained economic growth amidst heightened global uncertainty.
In its annual Financial Stability Review for 2024, the central bank said the country must focus on building external buffers and reducing external financing risks, noting the recent wave of protectionist measures pose risks to the domestic economy. “Nonetheless, results of the latest stress testing assessment of the banking sector reveals that the sector is expected to remain resilient to various severe hypothetical but plausible shocks over the projected horizon of three years and is expected to maintain its compliance with minimum capital adequacy requirements,” it said.
The Financial Stability Review, prepared and published in accordance with Section 39(3) of the State Bank of Pakistan Act, 1956, presents the performance and risk assessment of various segments of the financial sector including banks, microfinance banks, development finance institutions, non-bank financial institutions, insurance, financial markets and financial market infrastructures. It also assesses the financial soundness of non-financial corporate sector.
According to the report, macroeconomic conditions improved considerably in 2024, as reflected by receding inflationary pressures and significant monetary easing, fiscal consolidation, stable rupee-dollar parity, pick-up in economic activity, and improved external account balance. The financial sector’s 17.8% growth maintained its operational and financial resilience, it added.
The improving macroeconomic environment, said the central bank, reduced volatility in financial markets, while the banking sector exhibited steady performance. The balance sheet of the banks expanded by 15.8%, driven by both investment as well as advances. Private sector advances witnessed a strong rebound due to revival in economic activity, easing in monetary policy, and advances-to-deposit ratio linked tax policy for income from government securities.
This tax policy, read the report, also dampened deposit mobilization, further increasing banks’ reliance on borrowings. It said the revival of economic activity is expected to improve borrowers’ repayment capacity, adding the current level of credit risk of the banking sector also remained within a comfortable range, with non-performing loans to gross loans ratio falling to 6.3% in December 2024 from 7.6% in December 2023.
Within the banking sector, Islamic banking institutions witnessed a strong increase in asset base and a marked expansion in branch network. However, microfinance banks continued to remain under stress.
The report recorded a mixed performance from the non-bank financial sector. It said the supply side presented a comfortable position, but the demand side was hampered by the erstwhile tighter financial conditions and subdued economic activity. In particular, it said, the sales of non-financial large corporate sector witnessed pressure and moderation in earnings. Encouragingly, it noted, the credit worthiness and repayment capacity of large borrowers remained steady.
The reports highlights that national CPI dropped to 7.2% in March 2025 from 28.7% a year earlier, triggering a policy rate cut of 1,000 basis points to 12 percent in January 2025. Lower policy rate, combined with improved external account position and stable exchange rate, is likely to further induce demand for private sector credit and enhance repayment capacity of the banks’ borrowers.
The report warned that cybersecurity has emerged as a key risk to financial stability, noting the central bank is enhancing cyber resilience through various measures. Under its Vision 2023–28, the central bank is also prioritizing technological innovation, cybersecurity, and data privacy.
The SBP noted that the global environment presents a mixed picture for the domestic economy. Global commodity prices are trending down and major central banks in advanced economies, excluding Federal Reserve, continue to lower key interest rates. Nonetheless, change in trade policy by the U.S. may have implications for FED’s monetary policy as well as global financial conditions.