IMF wants SBP to roll back housing finance measures

KARACHI: The International Monetary Fund (IMF) has asked the State Bank of Pakistan (SBP) to “untie” the two key measures for promoting housing and construction activities.

In July 2020, the SBP made it mandatory for banks to increase their share of loan portfolios for the housing and construction sectors to 5% by December 2021. 100pc from 200pc on banks’ investments in REITs or real estate investment trusts.

The staff report, which the IMF released with the $1 billion tranche under the resumed lending program, says the international lender “urged the central bank to end the measures” out of concern for stability. financial”.

“Banks’ targets for housing loans could pose risks to financial stability and lead to credit misallocation,” he said.

Says lending goals can pose risks to financial stability, lead to misallocation of credit

“The IMF considers such interventions to be contrary to the principles of a free market economy. But this is only a recommendation to be implemented in the medium and long term. We should not expect the SBP to remove these incentives tomorrow,” said Syed Atif Zafar, director of research at Topline Securities. Dawn the Saturday.

The IMF said a “well-targeted budget subsidy program” for the vulnerable population should be a more effective way to achieve social policy goals such as affordable housing. He called on Pakistani authorities to address long-standing structural deficiencies to support lending to the private sector.

Pakistan has agreed to set up a working group by the end of February to produce a strategy document, which will propose solutions to structural problems in the development of the housing and construction sectors.

Talk to DawnIsmail Iqbal Securities Head of Research Fahad Rauf said the IMF first called for the removal of these incentives in April 2021. Instead of reducing, the SBP has expanded the scope of the incentives even more aggressively, in line with the favorable position of the government towards housing and construction. sectors.

“So far, it seems that the IMF and the government are not on the same page. Let’s see how the SBP acts in the future given that it has become autonomous now,” Rauf said.

The government will want the SBP to continue its efforts for housing and construction, he added. “The IMF program will end in September. I think any progress on dismantling these incentives may be delayed until then. We will not subscribe to another IMF program until the next general election,” he noted.

If implemented, however, the removal of construction and housing incentives could hurt demand for cement, glass, steel and tiles, he said.

The IMF has also asked the SBP to take a “more proactive approach” to addressing the issue of undercapitalization of two private sector banks. Although the IMF did not name the troubled banks, Topline Securities’ Zafar said the international lender was referring to Summit Bank Ltd and Silkbank Ltd, which lack capital by SBP criteria.

Both banks can bring themselves into compliance either by receiving a capital injection from their current sponsors or by being bought out by other cash-rich investors.

Sponsors of Silkbank Ltd have been trying to sell it for about a year, Mr Zafar said. Similarly, there has been talk of a new capital injection into Summit Bank, which will lead to better capital adequacy for the second-smallest lender by total share value.

The IMF has also asked the Pakistani authorities to establish a development finance institution to transfer the refinancing programs from the SBP to the government. “We understand it will take time. If implemented, it may increase working capital costs for exporters, primarily in the textile sector,” said a research note released Saturday by Ismail Iqbal Securities.

The Washington-based lender also recommended that the government remove sales tax exemptions on fertilizers and tractors in the next budget. The government, however, has been looking for time to replace exemptions with subsidies, which could hurt the fertilizer industry. Higher taxes can reduce the demand for tractors, he added.

The brokerage said the government plans to change the structure of personal income tax by reducing the number of tax rates and brackets to increase “progressiveness”. The bill will be ready by February and implemented in the 2022-23 budget, he added.

“This measure will harm the purchasing power of the working class, which could have consequences for the demand for goods and services,” he said.

Posted in Dawn, February 6, 2022

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