Naya Pakistan: Low-Cost Home Loans and Construction Subsidies to Boost Economy

Pakistani Prime Minister Imran Khan has recently announced a new housing construction incentives package that includes down payment assistance and expansion of home loans portfolios by commercial banks at discounted rates for affordable housing for the poor. Shariah compliant financing is also included in it. Pakistan’s mortgage finance to GDP ratio is just 0.25%, among the lowest in the world, according to the World Bank. The average for South Asia 3.4%.  New housing drives a large number of sectors of the economy from banking and building materials to construction and manufacturing of furniture and home appliances. These incentives are designed to stimulate the economy, boost employment and deal with the growing shortage of affordable housing in the country.




Naya Pakistan Housing:

Pakistan government's Naya Pakistan housing program offers Rs. 33 billion in direct subsidies for down payments for the first 100,000 applicants, according to media reports. In addition, the commercial banks are required to allocate 5% of their portfolio amounting to Rs330 billion for construction activities under this program. Pakistan’s mortgage finance to GDP ratio is just 0.25%, among the lowest in the world, according to the World Bank. A person earning Rs30,000 to Rs100,000 can build a house on a 5-marla lot with the mortgage financing at 5% and that of 10-marla at 7%.

Importance of Housing:

New Housing Starts are considered a reliable economic indicator in any country that collects routine economic data. Housing sector drives a large number of other sectors of the economy from banking and building materials to construction and manufacturing of furniture and home appliances.

These sectors, in turn, create jobs, improve people's living standards and widen the tax base. In the United States, for example, homes are the biggest contributors to net worth of Americans. Home equity loans allow people to take out loans for other purposes, including education, business startups and home improvements.  Hence, the governments' interest in pursuing pro-housing policies that ensure secure property rights, set aside land for housing and require banks to offer low-cost home loans.

Secure Property Rights:

Secure property rights are a pre-requisite for a thriving housing sector. Hernando de Soto Polar, Peruvian economist known for his work on the informal economy and on the importance of business and property rights, told Reuters back in 2016 that “(T)here is no such thing as an investment without property rights that are negotiable and transferable”.

In the United States, the world’s largest economy, the most important source of funds for new businesses is a mortgage on the entrepreneur’s house, de Soto wrote in his book “The Mystery of Capital”. He says that secure property rights for world's poor could unlock trillions in 'dead capital'.

Unfortunately, Pakistan's land title system is among the most corrupt in the country. A patwari, the title for the official keeping land records, is among the most resourceful government officials in much of Pakistan.  Patwaris have a well-deserved reputation for corruption. Legally protected and enforced property rights are the key source of the developed world’s prosperity, and the lack thereof is the reason why many nations remain mired in poverty, de Soto has argued.

Housing Finance:

Construction loans and mortgages at reasonable rates are essential for people to afford to build and own houses. Policies promoting discount loans and mortgages are the cornerstone of housing policies in the developed world.

Typical Low Cost Home. Source: Dawn 
In the United States, government-backed mortgage giants like FNMA (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) deploy vast resources to buy mortgages and ensure liquidity in the mortgage market. When lenders make loans for housing based on FNMA or Freddie Mac rules, they are confident they can sell in a highly liquid mortgage market.

Other developed countries also support mortgage financing in similar ways to make housing affordable.  Pakistan’s mortgage finance to Gross Domestic Product ratio is just 0.25%, among the lowest in the world.  The average for South Asia 3.4%. It's much higher in developed nations. It is over 65% in the United States, 40% in France and 20% in Italy.

Mortgage Debt to GDP Ratios in Developed Nation. Source: Urban Institute


Land at Discount Rates:

Land is a significant part of the cost of housing, particularly in or around big cities where land is highly appreciated. The government can help reduce this cost by offering land at discount for affordable housing.  There are news reports that Pakistan government has identified tracts of land to offer it to builders at discount rates for affordable housing.


Summary:

Naya Pakistan housing program offers Rs. 33 billion in direct subsidies for down payments for the first 100,000 applicants and requires the commercial banks to allocate 5% of their portfolio amounting to Rs330 billion for construction activities. Shariah compliant financing is also included in it.  It will boost Pakistan’s mortgage finance to GDP ratio which is only 0.25%, among the lowest in the world, and lower than 3.4% for South Asia. New housing drives a large number of sectors of the economy from banking and building materials to construction and manufacturing of furniture and home appliances. These incentives are designed to stimulate the economy, boost employment and deal with the growing shortage of affordable housing in the country.


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Riaz Haq said…
‘Pakistan's economy may return to positive trajectory this month’
Finance Ministry predicts end to economic downturn, also sees rising inflation

https://tribune.com.pk/story/2257044/pakistans-economy-may-return-to-positive-trajectory-this-month

The Finance Ministry said that, in the previous fiscal year, there was small but positive growth of about 1% in the first quarter. The economic growth accelerated in the second quarter to 2.58%. But it turned negative in the third quarter of the last fiscal year by 0.19% following the COVID-19 pandemic. In the fourth quarter, the economy contracted 4.9%.

Over the complete FY 2019-20, the MEI showed average growth of a negative 0.4%, which coincides with the provisional Gross Domestic Product (GDP) growth published by PBS, it added.

The Ministry of Finance has also said that it was expected that exports would further recover in July and may find themselves within a broad margin around $2 billion to $2.1 billion. Similarly, it was expected that imports would recover in June and July and may find themselves within a broad margin around $3.5 billion to $4 billion.

For July 2020, due to Eid and revival of economic activities, it is expected that workers’ remittances may remain within the range of $1.8 to $2 billion.

The ministry said that domestic economic activities had also accelerated with many businesses beginning operations in accordance with the SOPs issued by the government, and that restaurants and educational institutions were expected to soon follow suit.

The ministry has also highlighted the impact of locust attacks on crops, saying the peak period of the attacks was not yet behind us.

According to the Q Block, in addition to COVID-19, the desert locust situation has worsened and is likely to be at its peak between July 15 and September 15, which will cause crops to suffer.

For this fiscal year, the agriculture sector’s growth is targeted at 2.8% on the basis of better growth in crops, livestock, fisheries and forestry. A meeting of the Federal Committee on Agriculture (FCA), held on July 8, 2020, reviewed inputs’ availability for the 2020 Kharif Crop. It was informed that weather patterns and the availability of water, seed, fertilizers and machinery would be better as compared to last year.

The Consumer Price Index (CPI) inflation rate was recorded at 8.6 year-on-year in June, 2020. Petroleum prices, which had fallen sharply during the last couple of months, again increased during the last week of June, which will have an impact on next month's CPI, said the Finance Ministry.

The deflationary effect of the decline in oil prices was compensated by a depreciation of the USD/PKR exchange rate. Historically, a combined increase of commodity prices and exchange rate depreciation of 1% increases the CPI level by around 0.9% in the long run, said the Finance Ministry.

However, the money supply was increasing in the economy. In the last fiscal year, the M2 increased by Rs3.1 trillion as compared to Rs 1.8 trillion, showing growth of 11.3%. Net Foreign Assets (NFA) of the banking sector also increased by Rs 992.2 billion against the contraction of Rs1.3 trillion in preceding year. Net Domestic Assets (NDA) increased by Rs2.1 trillion, showing growth of 11%.

The Finance Ministry said that the growth rate of M2 was still above pre-corona levels. This is mainly due to increased pace of government borrowing for budget support, as the government was supporting economic activity to curb deflation due to COVID-19. Also, in June, the growth rate of government borrowing remained above pre-crises levels. Historically, an increase of M2 by 1% tends to increase the CPI level by around 0.35% in the long run.
Riaz Haq said…
According to the details shared by Pakistan LNG, PLL was the lowest bidder, which quoted a remarkable rate of *5.7395%* of Brent (approx. USD 2.2/mmbtu) for the cargo. Prices quoted by the other three bidders are Gunvor 7.8421%, PetroChina 8.3500%, Trafigura 10.3811%.

https://propakistani.pk/2020/07/28/pakistan-is-buying-its-cheapest-lng-cargo-ever-at-a-record-low-price/


PLL received an offer for an Aug 27-28 delivery cargo at about $2.20/mmbtu. It is worth mentioning that Pakistan has been out of the spot market in 2020, and this is their first tender since November 2019.

A.A.H Soomro, managing director at Khadim Ali Shah Bukhari Securities told ProPakistani,

This is a game-changer! It’s time for Pakistan to relook at long term LNG contracts and move towards Spot purchase. Let’s assess the possibility of cancellation of the contracts. Bargain in your favor. This solves half of Pakistan’s problems if we speedify the LNG terminals. The economy would grow in leaps and bounds if we reduce energy costs now.

This is lower than the Asian LNG spot price LNG-AS for August which on Friday was estimated to be about $2.35 per mmBtu. The prices are expressed in the document as a “slope” of crude oil prices, a percentage of the Brent crude price, and are typically a pointer for the opaque spot LNG market.

Pakistan LNG has a separate tender to buy two LNG cargoes for delivery in September which closes on August 4.

Fitch Solutions stated that Asian spot LNG prices continue to hover at historical lows as COVID-19 continues to drag economic activity and demand.

The spot prices in Asia have remained depressed accordingly, falling by more than 50% since the start of the year to hit USD 2.5/mmBTU at the time of writing in July, from USD 4.0/mmBTU in January. YTD prices are shown to have averaged USD 2.7/mmBTU, halved from USD 5.4/ mmBTU in 2019 and less than a third of the USD 9.7/mmBTU averaged in 2018.

LNG imports into key importing markets in Asia – apart from China – have registered large y-o-y declines across the board as gas consumption across industry and commercial sectors slowed to a crawl as strict COVID-19 containment measures were observed.

The outlook for LNG prices was hardly rosy coming into the year even before the onset of the coronavirus pandemic, amid a negative backdrop of slowing coal-to-gas switching in China and a milder winter, although it looks to have deteriorated further as energy demand sinks across the region.

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