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Pakistan economy to return to growth in 2021: Moody's report

Dubai - The government and central bank responses and reforms will partially soften the pandemic's impact and help revive the economy: Moody’s Investors Service

Pakistan economy will return to growth during the ongoing fiscal year 2020-21, but economic activity will remain below pre-outbreak levels, according to a latest report.

Moody’s Investors Service said the economy should return to modest 1.5 per cent gross domestic product (GDP) growth in financial year 2021, which ends on June 30.

"Pakistan economy will return to growth in fiscal year 2020-21, gaining a modest 1.5 per cent and accelerate to 4.4 per cent in 2022. The government and central bank responses and reforms will partially soften the pandemic's impact and help revive the economy," according to the rating agency's latest report.

Last year, Pakistan economy contracted for the first time in 68 years by registering 0.4 per cent negative growth due to outbreak of the Covid-19 pandemic. It posted 1.9 per cent growth in fiscal year 2018-19 compared to a record-high 5.8 per cent GDP growth in 2017-18 when the Imran Khan-led Pakistan Tehreek-e-Insaf came to power for the first time in Islamabad.

Moody’s Investors Service further said the long-term credit growth potential is strong, given Pakistan's large unbanked population.

The State Bank of Pakistan, the central bank, has targeted 65 million active bank accounts, with total deposits accounting for 55 per cent of GDP, through increased use of mobile bank accounts, biometric verification systems and QR codes.

"Despite a difficult environment, the government's credit profile is stable due to ongoing reforms and increasing policy effectiveness – a positive for the banks given their outsized holdings of Pakistani government debt link their credit profiles to that of the government," says Constantinos Kypreos, a Moody's senior vice-president.

The rating agency expects the slow economic recovery to affect loan quality, with nonperforming loans (NPLs) are expected to rise over the coming months from a sector-wide level of 9.9 per cent of gross loans in September 2020. Banks' foreign operations, export-oriented industries and companies reliant on government payments and subsidies will be hit hardest, but loan repayment holidays and other government support measures should help contain some risks, the report said.

Meanwhile, banks' profitability, which has materially increased during 2020, will come under pressure on lowered margins, higher loan-loss provisions given the challenging operating environment, and subdued business generation.

"Profitability will come under pressure this year after a huge 625-basis-point interest rate cut in 2020," the rating agency said, adding that private-sector lending to grow between five per cent and seven per cent in 2021, below inflation expectations of eight per cent.

Moody's said Pakistan’s banking system reflects banks’ solid funding and liquidity, although a challenging – but improving – operating environment will weigh on asset quality and profitability. It projects rising asset risk as non-performing loans will rise from a sector-wide level of 9.9 per cent of gross loans as the economic slowdown takes its toll on borrowers’ repayment capabilities.

"Deposit-based funding and good liquidity buffers also remain strengths, while the probability of government support in a crisis is high, even if its ability to do so is limited by fiscal challenges," said Kypreos.

--- muzaffarrizvi@khaleejtimes.com