IMF urges authorities to unwind certain measures for greater financial stability

ISLAMABAD: The International Monetary Fund (IMF) has urged the authorities to unwind 5 percent share domestic private sector lending portfolio to the housing and construction sectors capital adequacy regulations to lower the applicable risk weight to 100 from 200 percent previously on bank and development finance institution investment in real state investment trusts.

The IMF in staff report prepared for the executive board’s consideration on February 2, said the SBP introduced two key measures: (i) 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 (ii) 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. The Fund 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. 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.

Refinancing schemes: 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.

As of end September 2021, the outstanding amount for all facilities was Rs 1,225 billion (15.5 percent of private credit), of which Rs 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. 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.

Copyright Business Recorder, 2022