Washington DC February 7 2022: The SBP introduced two key measures one in July 2020, mandatory targets on banks to double to 5 percent the share of their domestic private sector lending portfolio to the housing and construction sectors by December 2021; and the other one in June 2021, amendments to the capital adequacy regulations to lower the applicable risk weight to 100 percent (from 200 percent previously) on bank and development finance institution investments in real estate investment trusts.
Staff urged the authorities to unwind these measures out of concerns for financial stability. It noted that a direct and well-targeted budget subsidy program for the vulnerable parts of the population would be a more effective way to achieve social policy objectives.
A L S O || R E A D
Pakistan economy once again at crossroad says IMF
It also recommended stronger focus on addressing long-standing structural deficiencies to support private sector lending, in particular on mortgages and housing finance. The authorities will establish a working group comprised of relevant stakeholders to produce a strategy paper by end-February 2022 aimed at offering solutions to the structural impediments to the development of the housing and construction sector.
Pakistan has embarked on a significant effort to close the gap with peers in financial development, which is hindering private sector growth.
The authorities and staff agreed that further efforts at fostering financial deepening and inclusion were important to increase economic resilience, growth, and formalization of the economy, while also enhancing the credit channel of monetary policy. In addition to removing impediments to financial deepening, the authorities’ current strategy also includes suboptimal measures, including providing highly subsidized lending through refinancing schemes from the SBP, setting bank-level sectoral lending targets, and expanding existing government schemes backed by guarantees.
Already prior to the crisis, the SBP had been expanding refinancing schemes to address long-standing large credit gaps and market failures. It has further expanded those since March 2020 by (i) establishing three new temporary facilities, one of which is still disbursing; (ii) expanding the existing ones, including in recent months; and (iii) introducing a new facility for SMEs.13 As of end-September 2021, the outstanding amount for all facilities was PRs 1,225 billion (15.5 percent of private credit), of which PRs 322 billion were related to temporary COVID-19 schemes. Staff warned that this expansion, if not temporary, would undermine the SBP’s efforts to credibly implement monetary policy, achieve its primary objective, and improve monetary policy transmission channels. To support the eventual phasing out of the refinance facilities, the authorities agreed: (i) for the Ministry of Finance and SBP to jointly design a plan, in consultation with other stakeholders, to establish an appropriate Development Finance Institution by end-April 2022 (new end-April 2022 SB) as a basis for a plan to transfer the refinancing schemes to the government; and (ii) assess the Export Refinancing Scheme (EFS) by end-February 2022 and take needed actions to improve its effectiveness. Going forward, the amended SBP Act allows refinancing facilities only in pursuit of the SBP’s mandate and without compromising the primary objective of price stability.
