erode their repayment capacity. so far the exposure and default rates on advances to the consumer, sme and agriculture sector have been manageable but potential losses in view of high credit risk cannot be ruled out. in a stark contrast to past practices, the risk management systems within banks have improved significantly. the greater disclosure requirements, strengthened corporate governance structures and the enhanced capacity of sbp ’ s credit information bureau, which will allow access to the credit reports of all borrowers, irrespective of the loan amount, all contribute as risk mitigants. nevertheless, banks ’ classification strategies of their liquid assets portfolio contributed to increasing the liquidity constraints. loans to deposits ratio, an important liquidity indicator, also increased to 70. 2 % from 65. 9 % in cy04. market risk, dominated mainly by interest rate risk, also depicted increasing concerns. while the upward movement of interest rates started to erode the value of banks ’ investment portfolio, especially the proportion held in longer - term securities, investments in capital markets garnered precious capital gains due to the rise in the stock market index. the absence of any fresh issue of long - term paper gave rise to heightened uncertainty regarding the future movement of interest rates, and market displayed greater interest in short - term paper leading to a significant rise in the banks ’ holding of mtbs. despite these positive results, pakistan can ill - afford to be complacent. with an average credit growth of 30 % over the last three years, and the rapid diversification of banks ’ loan portfolios, there is need for vigilance in the future. recognizing this, pakistan is embarking on the next phase of financial sector reforms. broadly, this would involve reforms that would focus on : ( i ) further consolidation and restructuring of the banking sector ; ( ii ) strengthened risk management ( iii ) developing capacities to cater to unmet requirements of special segments of the economy and catering to diverse needs ; ( iv ) diversification of the financial sector by further development of the equity and debt markets which, while fairly vibrant, need to play a more significant role in meeting the country ’ s financing requirements. ( v ) promoting financial product innovation furthering consolidation and restructuring of the banking sector following the privatization of banks, today almost two - thirds of the banking sector consists of local private banks and 9 percent is owned by foreign banks ; consequently the share of the public sector for a well - capitalized bank the capital adequacy ratio should be

large - scale industry which has met domestic requirements and has generated an exportable surplus which facilitated almost doubling of the exports to $ 16. 5 billion in fy06 relative to $ 7 - 8 billion in the preceding decade. normally real sector development precedes the development of the financial sector, but strong credit growth in the wake of a low interest rate environment in the last few years helped pakistan stimulate economic activity. consistent and stable economic policies enhanced business confidence. in the absence of alternative sources of funding, businesses relied heavily on banks to finance their needs. growth in advances coupled with gradually rising interest rates has provided a unique opportunity for banks to generate unprecedented profits and redeployment of these funds in the banking and economic system has helped strengthen banks ’ balance sheets and continue to meet the growing economic requirements, respectively. after having achieved high economic growth, the key question posed to the pakistani economic - policy makers is how sustainable is this high economic growth path? some even contest that the economy is showing signs of overheating. this debate is triggered by few emerging trends which are typically observed when economies are set to achieve new heights of growth. economic sustainability is being questioned on the grounds that : ( i ) pakistan ’ s growth has been primarily driven by growth in real consumption expenditure – this is partly true but is also a manifestation of rising per capita income that in fy06 is around $ 850, and higher remittances inflows that have now reached close to $ 4. 1 billion. ( ii ) after a consistent reduction in macroeconomic imbalances over fy00 - 04, the fiscal and external current account deficits have been above the targeted levels for fy06 and are likely to remain in that range in fy07. most notable is the concern regarding trade deficit which is around $ 8. 2 billion in fy06. 1 around 45 % of the increase in trade deficit for july - may fy06 over the comparable period in the preceding year is on account of the rise in import bill for crude oil and petroleum products, 39 % due to higher imports of machinery, 11 % because of iron and steel and 14. 3 % for food and fertilizers. ( iii ) government is offering a renewed and aggressive fiscal stimulus in fy07, but as is well known, pakistan has no choice but to accelerate social and infrastructure development and offer relief to certain segments of population and businesses to sustain its economic achievements