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

In July 2020, the SBP made it mandatory for banks to increase their share of lending portfolios for housing and construction sectors to five per cent by December 2021. In addition, the SBP changed capital adequacy regulations in June 2021 to lower the applicable risk weight to 100pc from 200pc on banks’ investments in REITs or real estate investment trusts.

The staff report, which the IMF released along with the $1 billion tranche under the resumed loan programme, said the international lender “urged” the central bank to wind down these measures “out of concerns for financial stability”.

“Banks’ housing lending targets could present risks to financial stability and entail a misallocation of credit,” it said.

Says lending targets can pose risks to financial stability, cause misallocation of credit

“The IMF believes such interventions are contrary to the principles of the free market economy. But it’s only a recommendation to be implemented in the medium to long term. We shouldn’t expect the SBP to do away with these incentives tomorrow,” Topline Securities Research Director Syed Atif Zafar told Dawn on Saturday.

The IMF said a “well-targeted budget subsidy programme” for the vulnerable population should be a more effective way to achieve social policy objectives like affordable housing. It called upon the Pakistani authorities to address longstanding structural deficiencies to support private-sector lending.

Pakistan has agreed to establish a working group by the end of February to produce a strategy paper, which will offer solutions to structural problems in the development of housing and construction sectors.

Speaking to Dawn, Ismail Iqbal Securities Head of Research Fahad Rauf said the IMF first called for rolling back these incentives back in April 2021. Instead of scaling back, the SBP expanded the scope of incentives even more aggressively in line with the government’s favourable stance towards housing and construction sectors.

“So far, it looks like the IMF and the government aren’t on the same page. Let’s see how the SBP acts going forward given that it’s become autonomous now,” Mr Rauf said.

The government will want the SBP to continue its push for housing and construction, he added. “The IMF programme will end in September. I think any progress on the unwinding of these incentives can be delayed until then. We won’t sign up for another IMF programme before the next general election,” he noted.

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

The IMF also asked the SBP to take a “more proactive approach” in addressing the issue of undercapitalisation of two private-sector banks. Although the IMF didn’t name the troubled banks, Mr Zafar of Topline Securities said the international lender is referring to Summit Bank Ltd and Silkbank Ltd, which lack capital adequacy as per the SBP’s criteria.

The two banks can become compliant by either receiving an equity injection from their current sponsors or getting acquired by other cash-rich investors.

The sponsors of Silkbank Ltd have been trying to sell it for the last year or so, Mr Zafar said. Similarly, there’s been talk of fresh capital injection in Summit Bank, which will lead to improved capital adequacy for the second smallest lender in terms of the total value of shares.

The IMF has also asked the Pakistani authorities to establish a development finance institution in order to transfer refinance schemes from the SBP to the government. “We understand this will take time. If implemented, it can raise working capital costs for exporters, mainly in the textile sector,” said a research note issued by Ismail Iqbal Securities on Saturday.

The Washington-based lender also recommended that the government should remove sales tax exemptions from fertiliser and tractors in the next budget. The government has, however, sought time to replace exemptions with subsidies, which might hurt the fertiliser sector. Higher taxes can dent the demand for tractors, it added.

The brokerage reported that the government is planning to change the structure of personal income tax by reducing the number of rates and income tax brackets to increase “progressivity”. The draft legislation will be ready by February and implemented in the 2022-23 budget, it added.

“This measure will hurt the purchasing power of the salaried class, which might have consequences for the demand for goods and services,” it said.

Published in Dawn, February 6th, 2022