Pakistan's central bank, the State Bank of Pakistan (SBP), has described the last fiscal year as "extraordinarily challenging" for the national economy, highlighting the impact of domestic and external shocks, structural weaknesses, and rising inflation. Despite these hardships, the bank's Governor's Annual Report (GAR) outlines positive developments in financial inclusion and banking sector growth.
Key takeaways:
- Tough times: FY23 was marked by inflation, political uncertainty, and a GDP contraction of 0.2%. Fiscal targets were missed due to lower tax revenues and subsidy cuts.
- Inflation fight: The SBP raised interest rates significantly and vowed to continue taking measures to prevent "high inflation from becoming entrenched." The target is to bring inflation down to 20-22% in FY24 and reach the medium-term goal of 5-7% by FY25.
- Financial inclusion: Despite the economic woes, the bank focused on financial inclusion through digitization, leading to significant growth in the banking sector. Total assets grew by 17% in FY23.
- Islamic banking shines: Islamic Banking Institutions (IBIs) outperformed conventional banks in growth and investments during the year.
- Challenges remain: The report acknowledges the pressure on the external account due to floods, high global commodity prices, and delays in the IMF program.
Looking ahead:
The SBP faces a delicate balancing act of combatting inflation while supporting economic growth. Its commitment to financial inclusion and the strong performance of Islamic banking offer some positive signs for the future. However, addressing structural weaknesses and political uncertainty will be crucial for long-term economic stability.
