ISLAMABAD: An American credit rating agency on Thursday lauded the recent measures taken by the State Bank of Pakistan (SBP) to address the economic challenges amid coronavirus pandemic.

The recent report released by Moody's states that the central bank's decisions to cut the policy rate by 150 basis points to 11 percent, reduce banks’ capital conservation buffers (CCB) by 100 basis points to 1.5 percent, and relax terms for new and existing loans were likely to soften the impact of the ongoing health crisis in the country on banks.

“We expect the measures to mitigate banks’ asset-quality deterioration amid less business generation and loan growth in an economic slowdown,” Moody’s Investors Services said in its assessment of the country’s financial system in a document circulated on Thursday.

On March 26, the SBP reduced the policy rate to 11% following a 75-basis-point cut on March 17 which, according to the rating agency, will "help maintain credit growth."

"Lower interest rates on loans will also improve borrowers’ repayment capacity," the agency noted in its report. However, it said that lower rates will reduce net interest margins and diminish banks' earnings. 

Reducing the capital conservation buffer to 1.5% will free up PKR800 billion of capital, or 10% of outstanding loans, according to the SBP's estimate. The lower CCB will support banks' lending activities, but creates potential asset-quality pressure, the report stated.

“We expect Pakistan’s real GDP growth to slow to 2.0%-2.5% for fiscal 2020 (which ends 30 June 2020), lower than our earlier forecast of 2.9%, reflecting the impact of the coronavirus pandemic,” it added. “Consumption of services, which has underpinned growth in recent years, will be adversely affected by the movement restrictions.”

With nearly 2,300 confirmed cases of coronavirus in the country, Pakistan’s provinces went for partial lockdowns to implement social distancing and prevent the spread of virus. The restrictions, which have been extended until April 14, not only require people to stay at home and self-isolate themselves but has drastically limited economic activities.

With a little more than pharmacies and grocery stores operating, the pandemic is beginning to take its financial toll gradually.

“The textile sector, the country’s key manufacturing sector which accounts for around 60% of exports, has also been hit by supply-chain disruptions and a decline or postponement of orders,” the report said, adding: “Manufacturing loans (mainly to the textile and food sectors) accounted for 62% of private-sector loans as of 29 February 2020.”

Moody's noted that “the SBP has offered cash-flow relief through loan refinancing schemes and loan payment holidays to borrowers such as exporters and manufacturers affected by the coronavirus disruptions.” 

“The central bank is allowing delayed principal payments (but not interest) for up to one year at the discretion of the lender, but application for the delays must be by 30 June 2020. The grace period lowers the risk of asset impairment and supports the value of securitized assets over the longer term,” the report stated.