A recent report points out the urgent need to rebalance the structural imbalances and enforce sound, sustainable, and consistent policies in the economy. Indeed, bright opportunities in export diversification, import substitution, and agriculture growth exist.

Most of the leaders emphasized reforms in taxes, extending to the broadening of the tax base, the process of privatization, and public-private partnerships. M/S A. F. Ferguson & Co. (PwC Pakistan) released its second annual banking publication for 2024, titled “Road to Sustainability”. The theme of discussion in the report provides an insight into the economy, financial performance, banking sector, and themes such as financial inclusion, priority sector financing, digital transformation, and Islamic banking.

This includes a summary of various findings from customer experience, risk management, anti-financial crime, and digital onboarding journeys in Pakistan. Global comparisons are represented through the analysis of banking sector developments and best practices from different regions around the world. Credit expansion is an important focus area. The report indicates that Pakistan’s Advances-to-Deposits Ratio (ADR) decreased from 50% in December 2022 to 37% by June 2024, whereas the Investments-to-Deposits Ratio (IDR) increased from 77% to 94% in the same period. Although recent adjustments associated with the ADR tax have made some difference, there is substantial headroom for intervention. Pakistan’s ADR of 37% lags behind regional peers, including Bangladesh (88%), India (75%), Sri Lanka (63%), and Kenya (62%). Conversely, its IDR of 94% far surpasses Bangladesh (22%), India (34%), and Sri Lanka (42%).

A lot of hype has been built on lending to priority sectors, but the practice still lags behind. SMEs account for just 3.7%, and agriculture 4% of the total loans. The lending to SMEs is much higher in Indonesia (20%), Bangladesh (19%), and India (16%). The report urges the banks to come up with an appropriate strategy to corner that sector.

Although financial inclusion has improved a lot in Pakistan, with 60% of its population included, it still lags behind other regional and emerging economies. The country’s cash-in-circulation ratio, that is at 35% of the value of the US dollar, is significantly higher than that of Bangladesh, which is at 15%; India, which stands at 16%; and Kenya, which is at 10%.

In Pakistan, the adoption of digital payments improves but still grapples with several challenges. Enrollment in mobile banking is only at 20% while cash continues to dominate over 40% volumes of retail payments. Transactions remain paper-based and constitute 20% of all transactions, a far cry from less than 1% in regional economies. ATM usage also accounts for 30% of e-transactions in Pakistan, which is an enormous 5% compared to the neighbouring countries.

The report concludes that despite the growth made so far, there is a huge scope for growth in credit expansion, priority sector lending, financial inclusion, and digital payments as against regional and global benchmarks.

Banks would have to catalyze behavior change through loyalty programs and other initiatives of digital engagement. However, what is most needed is a much more holistic governmental and regulatory push towards setting up an overarching ecosystem for encouraging digital transactions and discouraging cash usage. Of late, the Pakistan Constitution has imposed the 26th Amendment requiring the elimination of Riba-Interest by December 2027. This amendment would hugely impact not just banking but the whole services industry. With respect to this report, the amendment is seen as propelling this transition into Islamic finance across industries, especially banking, which has already recorded strong growth in this particular area.

The report also sets out the challenges that come along with transition and offers recommendations to ensure seamless and smooth conversion processes. There is evidence of the State Bank of Pakistan’s endeavor in easing access to financial services for marginalized communities and small enterprises. Its credit guarantee scheme for small and rural enterprises, the microcredit guarantee facility, and the technical assistance fund have all been successful indicators of its efforts toward moving ahead. It also has the Financial Innovation Challenge Fund to fuel initiatives like government-to-person (G2P) payments, innovative rural and agricultural financing, and promoting excellence in Islamic finance.

The report provides insight into Pakistan’s high IDR that has been discovered according to the IMF’s October 2024 Staff-Level Agreement. It was established through interdependence among the sovereign (government), commercial banks, and the central bank. This interdependence means changes in one sector create ripples beyond the financial sector, echoing onto the real sectors with related economic activities. It further impacts monetary policy transmission, where it affects how policy rates influence private credit, which further trickles down to investment and consumption decisions.

It also points out that government borrowing remains at a higher level, yet most of the borrowed funds go to finance current expenditure as opposed to developmental projects that lead to economic growth. This tactic demonstrates an urgent need to review borrowing mechanisms by governments.

Savings Centres, by sucking in private sector deposits entirely appropriated by the government as unfunded debt, should ideally be used to finance private sector investments. As it is now, the government manipulates the savings rate on these products more on the basis of its needs and capacity to pay interest than other economic considerations.

Dealing with the expenditures will require drastic cuts on the existing expenses and that will demand voluntary sacrifices on the elite beneficiaries, while pension reforms are essential for sustainability purposes. At present, the taxpayer-funded pensions are drawn by only 7% of the workforce in this country, mainly government employees.

Addressing such structural inefficiencies would be the first step for Pakistan toward sustained economic growth in the context of creating an enabling environment for digital adoption, financial inclusion, and advancements in Islamic finance.