IMF stresses need to rely more on market forces

ISLAMABAD (November 13 2002) : At end of June, 2002, about 40 percent of total financial savings were still channeled to the government through the National Saving Schemes. No paper, except government bonds, was eligible to refinancing of the SBP, and credit to the agriculture sector was still directed y authorities.

Distortions affecting deposit collection or credit allocations prevented banks' fair competition with other finance institutions. This was stated in the IMF Country Report and Article IV Consultation documents.

It said that in order to improve financial sector the SBP has identified four directions for further reforms, (a) further restructuring/privatisation of specialised banks and non-bank financial institution; (b) enhanced judicial/regulatory/supervision framework; (c) improved monetary policy and market mechanism for interest rates and (d) improved supply to financial instruments.

While broadly agreeing with this strategy, IMF has insisted on the need to rely more on market forces to reshape a modern financial system. In addition, staff stressed the need to improve the SBP's monitoring of the banks' resilience to macroeconomic shocks, and raised three additional challenges.

Although adequate regulations for the stock exchange and for the leasing industry have been in place for some years, the development of modern long-term financial intermediation instruments is still hampered by state-sponsored savings schemes and public non-profitable development finance institutions and insurance companies.

The regulatory and judicial framework needs further reforms. The recovery of bad loans is still excessively long and costly. The treatment of non-performing loans is hampered by the lack of clear guidelines for writing off bad loans. Banks should be given more opportunities to diversify their loan portfolio and reduce their vulnerabilities to cyclical shocks, in particular the textiles sector, through legal steps to improve the solvable demand for credit in housing and agriculture as well as measures to improve corporate governance and companies financial disclosure. The recent adoption of regulatory framework may promote the development of sound micro-finance institutions, while key for poverty reduction could also offer new development perspective for banks.

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