Feb 15 - 21, 2010

Housing and construction sector is a driver of economic growth. It has direct linkages with 40 building materials industries. Progress of this sector means working of these industries.

Importance of housing and construction sector can be gauged from the fact that majority of overseas Pakistanis prefer to invest their money in the sector. Property dealers and constructors go on to claim that major portion of remittances coming in Pakistan recently is injected in to the property sector. Overseas Pakistanis are taking full interest in construction projects announced in all major cities of Pakistan.

In Pakistan that has annual shortage of 8.8 million housing units, however low cost housing is what is needed not only to meet the demand and supply shortfall of houses in the country, but also to increase share of construction sector in the GDP from 2.4 percent.

Inflexible loans and high financial charges are the underlying hindrances of sector's growth. House building finance corporation limited, the largest institution providing investment facility for construction and purchase of house unit, has not fared well in satisfying housing needs across the country. In over 55 years of operation across Pakistan, it has only financed one and half million units. Its interest rate for house financing is too exorbitant. In 2009, its total disbursement was not over Rs700 million.

Stimulus to construction industry is prerequisite to give impetus to economic development. Equally, soft financing is necessary to overcome housing shortfall. High interest rate on financing of flats/housing units entraps borrowers for long credit cycle and thus payments go much beyond the principal amount at the debt maturity level.

Government decided to administer a massive cut in public sector development programme to have fiscal space as a fiscal consolidation measure. This slash would squeeze the consumption of cement in development projects such as dams and infrastructure expansion and repairs, which are crucially important for socioeconomic developments. Cement sector continues to build up however bottom line from exports on the back of depreciating rupee and rising demand in Middle East and Afghanistan. Financial charges for cement sector would increase further because of high interest rate.

It was two-month back when industrialists were expressing hopes of acceleration in industrial outputs in view of declining interest rate. Banks were also preparing to reignite advances with the monetary loosening that would be necessary to avoid spiralling non-performing loans. The recent announcement of monetary policy dampened the hopes of private sector, which utterly disliked discount rate stagnant at 12.5 percent.

Since the rise in interest rate, activities in major economic sectors have collapsed. Businesspersons claim that it is very difficult to come out of the recession cycle until soft loans are disbursed to construction, agriculture, and other growth-prone economic sectors. Private sector credit declined substantially in recent time in comparison to five-year period of FY02-08, when the annual private credit growth rate was not less than 24 percent.

An insignificant growth was recorded in real sector in first half of this fiscal year. Nonetheless, it was a positive restart following fall of 8.1in growth last fiscal year.

State bank of Pakistan did not opt for cut in discount rate and kept it at 12.5 percent in the recent policy announcement. This would not allow interest rate to come down in the market, a fact which private sector does not afford in a slumped economy that requires heavy stimulus to catch pace. Cost of production would gain weight from two sides: first prices of international commodities are going up and second cost of funds is adamant. According to market forces, a 100 percent cut in discount rate would be sufficient to add power to slow moving manufacturing sector, which exhibited under one percent growth in first half.

Resurgent inflation and slippage in fiscal deficit target were two important reasons central bank presented for keeping interest rate unchanged. Perhaps, policymakers are also realizing the gravity of the situation, but they had not explored other substitutes to control inflation. One of them could be slash in government non-development expenditures, a suggestion that has been repeated several times in media. It is very tough decision to choose between fiscal consolidation and economic growth.

World Bank country director in a press interview says, "Pakistan is on the right track after taking some tough decision". The bank has committed up to $1.3 billion to Pakistan for FY10 for poverty reduction programme, power projects, and improving port facilities.

The policy rate upward revision is one such risky measure that can take toll on stabilization programme. Can central bank stop fiscal deficit at 4.9 percent of GDP this fiscal year by moping up money through fiscal measures? It is unlikely since the economy is seeking fiscal breadth from external budgetary supports. Notably, regulatory measures such as up in cash reserve ratio could have served the objective of curbing inflation, analysts contend. One thing worth remembering is that achieving fiscal deficit target of 4.9 percent needs realization of all committed external flows. Otherwise, the deficit would reach to a dangerous mark of over 5 percent. July-September fiscal deficit was 1.5 percent. Out of 5.7 billion dollars pledges made during friends of democratic Pakistan moot in Tokyo, only $300 to $400 million has been disbursed so far.

The fiscal deficit is a global phenomenon. For example, fiscal deficits of United States, European countries, middle east states have run up in trillion of dollars. A large number of European economies are preparing to induce austerity measures and slash expenditures to reduce fiscal deficit. Similar is the case in Middle East.

Federal Board of Revenue has issued notification for the imposition of capital value tax on real estate. The new tax would be levied on flats below 1500 Sq.ft and plots of 120 Sq.yds, Farooquz Zaman chairman association of builders and developers of Pakistan said in a press statement. The tax is levied in Sindh only, he said. Impartial imposition does not serve the revenue target. In fact, such tax imposition would affect the housing and construction sector.