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Benefits of low interest rates need to reflect in consumer finance, home loans

The State Bank of Pakistan in view of the low inflation rate which is expected to remain well anchored going forward has decided to keep the policy rate unchanged at 5.75 percent.

It is said that the interest rate in Pakistan is at 42-year low primarily due to slashed inflation rate as well as international oil prices for the last four years, which lent a strong supporting hand to manage the current account deficit for the noticeable cut in oil import bill as well as maintaining the stable foreign reserves in the country.

According to latest figures released by the State Bank of Pakistan the total liquid foreign reserves held by the country stood at US$22,050.2 million on March 17, 2017, which actually indicates that we are lagging far behind of other economies even in the region. A strong foreign exchange is the primary need for strengthening the economy on sound footings, which calls for accelerating foreign investment as well as flow from external resources including export receipts, home remittances and foreign investment in various segments of the economy.

The global economic slowdown has an impact on the flow of home remittances as well as export earnings of all the countries and Pakistan is not an exception to this phenomenon. In this scenario we need policies to beat this slowdown by generating economic activity at home by putting the low interest rate to good use especially for generating the economic activity within the country.

However the trickledown effects of the low interest rate are not visible especially in the consumer finance and home loans, which need to be looked after by the financial regulators. The interest rate being charged by the banking sector on personal loans, credit cards and home loans does not reflected the policy rate and the soft monetary policy maintained by the State Bank of Pakistan despite pressures from international donor to tighten the Monetary Policy.

Pakistan is a huge market property development in the backdrop of a huge backlog of over 12 million new house hold units required in the country while the demand increases progressively in the face of population explosion. It is said that Pakistan has an approximately around 200 million plus population, however, the current exercise for census would provide an accurate number of population in near future.

At present the annual demand for new housing units is estimated to five lakh in the country. In this backdrop there is a need for national policy to address the of shelter less population in Pakistan in which the financial sector can play a leading role.

According to experts in the property development industry, if the home loans are available at an affordable price the property or real estate industry a huge demand for new housing units would be stemmed to generate economic activity in over 80 allied industries within construction field.

However owning a house has become a dream for the general public because of exorbitant construction cost and abnormal rise in land prices, the development of properties both in the urban and semi urban areas is of vital significance to stop influx of population from rural to urban areas and to plug the fast emerging slums in the major cities. An effective check on surfacing slums in the urban areas is extremely important while we are in a state of war against extremism and terrorism.

According to recent Monetary Policy Review, the inflation expectations in the current fiscal year continue to remain well anchored. This has been largely due to the near-absence of any major supply side pressures. However, rising real incomes in a low interest rate environment since FY14 are indicating signs of pick up in domestic demand, which is broadly reflected in the core inflation measures. Going forward, improving consumer confidence, as depicted by IBA-SBP Consumer Confidence Survey of March 2017, indicates further increase in consumer demand. Hence, barring any major cost shocks, domestic demand will define the underlying trend of headline inflation in FY18.

The real economic activity continues to gather pace at the back of better agricultural output, increase in key Large-scale Manufacturing sectors, and a healthy uptick in the credit to private sector. This expansion is helped by a range of factors including low cost of inputs, upbeat economic sentiments, improved energy supplies, and CPEC related investments. As a result, GDP growth is expected to further improve in FY17.

Also, prudent monetary policy stance has translated well into low and stable market interest rates, which incentivized private sector to borrow from commercial banks to finance their businesses and investment activities. Accordingly, private sector credit increased by Rs 349 billion during July-Feb FY17 as compared to Rs267 billion in the same period last year. Encouragingly, fixed investment category led the rise in private sector businesses loans by posting Rs159 billion uptick during this period, compared to Rs102 billion last year. Similarly, consumer financing continued the uptrend in the first eight months of the current fiscal year. Improved interbank liquidity conditions also spurred the growth in private sector credit.

This was led by both net government retirement to commercial banks and a decent increase in bank deposits compared to the withdrawals seen last year. Furthermore, interbank liquidity was managed well with calibrated open market operations that kept the weighted average overnight repo rate close to the policy rate.

The expansion in economic activity has also translated into significant increase in imports, which along with lack of any sustained improvement in exports and a small decline in remittances has pushed the current account deficit to US$ 5.5 billion during July-Feb FY17. While net financial flows remained higher, these were not sufficient to finance the current account deficit.

However, accounting for positive impact of the recent policy measures to augment exports and check non-essential imports, the current account deficit may be contained in the coming months. Also, continuation of the financial inflows, CPEC related imports, and any major fluctuation in the global oil price will determine the overall position of the external sector in FY18.

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