IMF Directs SBP To Cut-Short Funding for Housing, Construction

By Web Desk — According to the International Monetary Fund (IMF), the State Bank of Pakistan (SBP) has been asked to “unwind” two key measures to promote housing and construction.

By December 2021, the SBP made it mandatory for banks to increase their share of lending portfolios for housing and construction to five percent. Additionally, SBP changed its capital adequacy regulations in June 2021 to lower the risk weight on banks’ investments in REITs from 200pc to 100pc.

In a staff report released alongside the $1 billion tranches under the resumed loan program, the IMF urged the central bank to wind down these measures “out of concern for financial stability”.

According to the report, banks’ housing lending targets could entail a misallocation of credit and threaten financial stability.

“The IMF believes such interventions violate the principles of a free-market economy. However, it’s only a recommendation to be implemented in the medium to long term. “We shouldn’t expect the SBP to do away with incentives tomorrow,” Topline Securities Research Director Syed Atif Zafar said.

Ismail Iqbal Securities Head of Research Fahad Rauf said the IMF first called for scaling back these incentives back in April 2021. Instead, the SBP expanded the scope of incentives even more aggressively in line with the government’s favourable attitude toward housing construction.

Currently, it appears that the IMF and the government aren’t on the same page. Let’s see how the SBP behaves now that it has become autonomous, Mr Rauf said.

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