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Pakistan faces tough challenges in developing markets

News: Pakistan faces tough challenges in developing markets

Publication: The News International
Date; November 1, 2012
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ISLAMABAD: Financial systems across the world are stagnating, leading to challenges for a global economic recovery, according to the fifth edition of the World Economic Forum’s Financial Development Report 2012 released on Wednesday.

The Financial Development Report shows that financial systems in advanced and emerging economies are stalling,” said Giancarlo Bruno, senior director at the World Economic Forum. “Macroeconomic uncertainty, as well as concerns related to regulation, contributes to inhibiting the financial industry

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from funding the much-needed growth.”

Amir Jahangir, Chief Executive Officer of Mishal Pakistan, a country partner institute of the Center for Global Competitiveness and Performance, World Economic Forum, said: “The Financial Development Report 2012 ranks 62 of the world’s leading financial systems and capital markets, analysing the drivers of financial system development in advanced and emerging economies to serve as a tool for countries to benchmark themselves and establish priorities for reform.”

The rankings are based on more than 120 variables spanning institutional and business environments, financial stability and size and depth of capital markets, among other factors, he said. Pakistan continues to show stability on the Financial Development Index of the World Economic Forum on the indicators. The cost of closing a business, where the rank of five was maintained, also showing stability in the frequency of banking crises and output loss during the banking crises, Pakistan again secured the top rank of one among 62 economies.

Similarly on the public ownership of banks, which is a percentage of assets held by the 10 largest banks that is located in banks that are more than 25 percent government-owned, Pakistan again secured the top rank.

The report also shows an improvement in the total number of active borrowers from microfinance institutions per 1,000 adults, where Pakistan has improved its position from 12th in 2011 to ninth in 2012.

Pakistan has shown slight improvement on the strength of auditing and reporting standards, where it is ranked 48 in 2012 as compared to 52 in 2011. On the pillar of legal and regulatory issues, Pakistan has shown significant gains, by improving the burden of government regulations, securing 21st rank as compared to 32nd last year, it revealed.

The regulation of securities exchanges has also improved by five points with a rank of 37 of 62 economies globally. The current account balance to GDP, a variable, which is the three-year average of the current account balance to GDP, indicates the difficulty Pakistan had in mobilising the foreign exchange necessary for debt service (from 2009 to 2011), which also improved from 53 last year to 40 in the current year.

The economy has also shown improvement in the “aggregate profitability indicator”, which is based on a three-year average of three measures of profitability: net interest margin, bank return on assets and bank return on equity, which was measured on an average from 2008 to 2010.

Pakistan improved eight points on this, securing 41st rank on the Financial Development Index 2012.

Other area where Pakistan showed improvement of 14 ranks was the real growth of direct insurance premiums, where it stands at 30th rank. However, Pakistan showed discouraging performance on various key indicators, where it lost its development advantage on multiple factors, whereas intellectual property protection (53) and effectiveness of law-making bodies (47) as compared to 48 and 43 from last year.

The distortive effect of taxes and subsidies on competition, which is to what extent does government subsidies and tax breaks distort competition, Pakistan lost its rank from 46 in 2011 to 53 in 2012. In terms of Internet users, Pakistan has seen a decline in its internet penetration, where it lost its position of 54 to 61 as compared to 2011 and 2012, respectively.

On the external vulnerability indicator, which is the sum of several measures of external exposure as a percentage of foreign exchange reserves, Pakistan has lost an alarming 14 points and it stands at 20 in 2012. However, it still maintains a development advantage in this area, whereas the world has shown improvement in the banking system, such as Tier 1 capital ratios and non-performing loans to total loans, Pakistan has declined in these two indicators, securing 26 and 57 of 62 economies in 2012.

The decline in the deposit money bank assets to GDP (52); the private credit to GDP, which is a variable, showing private credit by deposit-money banks and other financial institutions as a percentage of GDP also declined from 48 in 2011 to 56 in 2012. The Financial Development Report (FDR) shows an alarming increase in banks overhead costs, which as a percentage of total assets has increased from the rank of 22 in 2011 to 45 in 2012, impacting a probable profitability of the banks in the coming years. On the equity market development pillar, Pakistan has shown discouraging performance, where the stock market capitalisation to GDP has slipped from 43 to 50, stock market value traded to GDP from 33 to 43 and Pakistan’s rank on the number of listed companies per 10,000 people has dropped from 36 to 43.



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