The International Monetary Fund (IMF) has asked the State Bank. of Pakistan (SBP) to roll back the two key measures for the promotion of housing and construction activities.
It is pertinent to note that in July 2020, the SBP made is required for banks to increase theirs share of loan portfolios for housing and construction at 5% by December 2021. In addition, the SBP changed capital adequacy rules in June 2021 to lower the applicable risk weight per 100 pcs of 200 pcs on bank investments in REIT or real real estate investment funds.
The staff report, which the IMF released together with the $ 1 billion tranche under the resumed loan program, said the international lender “pressed” by the central bank wrap down these measures “out of concerns for financial stability”.
“Banks’ real estate lending targets could present risks financial stability and lead to incorrect allocation of credit, “he said.
“The IMF believes that such interventions are contrary to principles of the free market economy. But it is only a recommendation to be implemented in the medium long term. We shouldn’t expect SBP to eliminate with these incentives tomorrow, “said Topline Securities Research Director Syed Atif Zafar.
The IMF said a “well targeted budget grant program ” for the vulnerable population should be a more effective way to achieve social policy aims like affordable housing. It called on the Pakistani authorities to address long-standing structural deficiencies support private- sector loan.
Pakistan agreed to set up a work group in the end of February to produce a strategy paper, which will offer structural solutions problems in the development of housing and construction sector.
Ismail Iqbal Head of Securities of Research Fahad Rauf said the IMF first called for rolling back these incentives back in April 2021. Instead of sizing backl’SBP has broadened the scope of incentives too more in aggressively in line with the government favorable position towards the housing and construction sectors.
“So far, it seems like the IMF and the government they are not on the same page. We see how the SBP acts by going forward as it has now become autonomous, ”Rauf said.
The government want want the SBP to continue its push for housing and construction, he added. “The IMF program will end in September. I think any progress on the unfolding of these incentives can be delayed until then. We won’T sign up for another IMF program before next general elections, ”he noted.
If implemented, however, rollback of incentives for construction and housing can damage the demand for concrete, glass, steel and tile, he said.
The IMF also asked the SBP to take a “more proactive approach ” in addressing the issue of undercapitalization of Two private- sector banks. Although the IMF has not named the banks in difficulties, Mr. Zafar of Topline Securities said the international the lender refers to Summit Bank Ltd and Silkbank Ltd, which do not have the capital adequacy according to the SBP criteria.
The two banks can become compliant by receiving a capital injection from theirs current sponsor or be acquired by others cash-rich investors.
Sponsors of Silkbank Ltd tried to sell it for the last year or so, said Mr. Zafar. Likewise, it has been talked about of new capital injection in Summit Bank, which will do it lead to improved capital adequacy for the second smaller lender in terms of the total value of shares.
The IMF has also asked the Pakistani authorities to set up a development financial institution in to transfer refinancing schemes from SBP to government. “We know it will take time. If implemented, it can increase the costs of working capital for mainly exporters in the textile sector ”, said a research note issued by Ismail Iqbal Securities on Saturday.
The brokerage reported that the government intends to change the structure of personal income tax by reducing the number of income tax rates and brackets to increase “progressivity”. The bill will be ready by February and implemented in budgeted 2022-23 added.
“This measure will harm the purchase power of the wage class, which could have consequences for the demand for goods and services “, we read
The Washington-based lender also recommended that the government should remove sales tax exemptions from fertilizers and tractors in the next budget. The government however, it sought time to replace the exemptions with subsidies, which could harm the fertilizer sector. Higher taxes can affect the demand for tractors, it added.
