The banking sector has been reaping the rewards of high inflation. Is their winning streak coming to an end?

Unchanged cost of funds coupled with declining yield on assets put pressure on bank’s income

Avid followers of this publication will have observed our unwavering stance on critiquing the transformation of Pakistan’s banking sector into leverage hedge funds facilitated by the Government of Pakistan.

While we maintain our analysis of the strategies implemented by prominent banks and financial institutions, it is important to acknowledge another aspect often overlooked in this narrative. The evolving situation is partially influenced by the government’s monetary and fiscal stance, which, in turn, is impacted by the prevailing macroeconomic crisis and the necessity to align with the International Monetary Fund’s (IMF) conditionalities. 

Part of our critique revolves around the crowding out of private sector credit. This issue, currently, is primarily attributed to the elevated policy rate. Pakistan’s central bank cumulatively raised the policy rate by 15% between September 2021 to June 2023. Almost a year later, the rate still stands at an all-time high. The SBP’s tight monetary approach is, to some extent, influenced by the conditions imposed by the IMF.

“With inflation still well above target, monetary policy should remain appropriately tight and vigilant against emerging pressures. The recent deceleration of inflation is welcome and will reduce the high burden on Pakistani society, and particularly the most vulnerable. Monetary policy should remain data-driven and attentive of stickiness in core inflation, as well as resolutely address any emerging risk. Guiding inflation back to target is imperative not only to buttress a sustainable recovery but also to build central bank credibility,” read the staff report released last week.


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Mariam Umar Farooq
Mariam Umar Farooq
The author is a business journalist and a member of the staff. She can be reached at [email protected]


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