The International Monetary Fund (IMF) has asked the State Bank of Pakistan to roll back the two policies in the area of affordable housing and construction activities. Last year, 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 also reduced the applicable risk weight to 100% from 200% on bank’s investments in Real Estate Investment Funds (REITs).
The IMF claims that the SBP needs to halt these policy measures to reduce risks to financial stability. It justifies the risk based on the fact that banks housing lending targets can expose the financial system to the risk of misallocation of credit. According to the IMF, these policy interventions like the one introduced by the SBP are contrary to the principles of the free market economy. Although a full roll-back of the policy is not expected, the SBP needs to reduce these measures significantly in the medium and long term. The IMF also recommends that Pakistani authorities need to address longstanding structural deficiencies to support private-sector lending. Furthermore, it also encourages the implementation of a well-targeted budget subsidy programme for the vulnerable population as it will be a more effective way to achieve social policy objectives like affordable housing.
Ever since the government introduced its stance on housing finance, the IMF called for rolling back these incentives. However, instead of scaling back, the SBP expanded the scope of these incentives further in-line with the government’s objective on the housing and construction sector.
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