Banks, finance and 2020.

In 2020, the management of interest and exchange rates remained in line with the need to limit the deceleration in economic growth and help revive this growth afterwards.

But political and governance chaos created by Covid-19 and intensified by political polarisation made it difficult for the inexperienced PTI-led federal government to prepare the entire financial sector to play its due role in economic development. Its focus remained on banks and foreign exchange and stock markets. They performed fairly well.

Banks' interest rates fell with the easing of monetary policy, but did not affect their interest earnings first because repriced private-sector lending remained limited. Secondly, government borrowing from banks at even a low price created huge incomes due to large volumes. The dollar spiked in the first half of the calendar year when the external sector was still in deep trouble, but the rupee recovered some of its lost value against the greenback in the second half of the year when the external sector's performance improved. The wedge between the exchange rates in interbank and open market that used to be 100 paisa or even more eventually narrowed as the State Bank of Pakistan (SBP) tightened rules governing the open market and refrained from being a net buyer of foreign exchange from banks at the end of every quarter.

In the third quarter of 2020, after-tax profit of banks witnessed a phenomenal year-on-year increase of 61.6 per cent to Rs194 billion, according to the latest statistics.

What remained essentially unchanged in the outgoing year was the focus on 'financing' growth instead of 'enabling' sectoral growth

Non-performing loans (NPLs) of banks understandably rose 12.5pc to Rs853bn as Covid-19-triggered lockdowns affected the borrowers' capacity to service their loans on time.

Delays in the actual disbursement of low-priced loans but immediate cuts in the returns paid on deposits made it easier for banks to earn higher net interest income in the three-month period. But going forward as the interest earned on repriced loans will start declining and the room for further reduction in interest payments of banks' deposits will squeeze, growth in net interest income may decelerate.

In 2020, the open foreign exchange market became more disciplined as the crackdown on the illegal transfer of foreign exchange intensified. That helped in keeping the exchange rate from going berserk even at times when large external debt payments were...