State Bank says housing, construction ‘foremost’ growth drivers

KARACHI: The State Bank of Pakistan (SBP) is betting on labour-intensive construction sector as ‘the first and foremost’ driver to bring back the economy on the positive path, the central bank’s governor said on Tuesday.

SBP Governor Reza Baqir in an interview with CNBC pointed at the housing and construction when asked about whether services or agriculture sectors would bring back growth.

“First and foremost is construction and housing,” Baqir said.

“The government has recently coordinated a consistent and holistic policy to promote housing and construction. At the central bank’s side, we are working with the banks to help them support this sector.”

SBP expected the economy to grow about 2 percent during the current fiscal year compared to contraction of 0.4 percent last fiscal after economic activity restriction related to coronavirus outbreak derailed the budding stabilisation process.

The SBP governor said housing financing in Pakistan is less than one percent of GDP, “which is a lot less than our peers”.

“Cement sales, steel sales… all indicators of domestic construction activity are picking up. And, that’s going to provide us big boost.”

The growth for FY2020 turned from a projection of positive 2.4 percent due to negative economic shock of COVID-19, the SBP said in its latest annual report.

However, construction sector posted 8.1 percent growth last fiscal year following a significant contraction of 16.8 percent in FY2019, according to the Pakistan Bureau of Statistics.

In the mid of COVID-19, the central bank also rolled out temporary economic refinancing facility that gives concessional financing targeted for investment.

“We are seeing very healthy pickup in that with over a billion dollar committed for new investments over the last four months,” Baqir said.

“Overall, we are seeing light at the end of the tunnel.”

The monetary committee decided to maintain the benchmark interest rate at 7 percent after considering that risks to the outlook for both growth and inflation appear balanced, the SBP said in a monetary policy statement on Monday.

The SBP’s decision was according the market expectation as the SBP already delivered rate cuts of 625 basis points between March and June to bolster economy severely hit by lockdown related to coronavirus.

The monetary policy committee considered the activity of the last two months. It noted that many of the domestic activity indicators are picking up.

“Automobile sales are above pre-COVID level. Cement sales are at record levels. So on the one hand, it’s a good momentum. On the other hand, there is an increase in cases of corona both in Pakistan and worldwide,” said Baqir. “So, net net, the committee kept unchanged its projection for growth this fiscal year at about 2 percent.”

The committee didn’t see any sign of demand-side pressure on inflation and therefore decided to keep interest rate unchanged, he said.

The SBP governor said the projection of around 2 percent for this fiscal year, “which ends in July is based upon continued momentum in activity as well as the fact that the good news on vaccine will give boost to aggregate demand, particularly in our exports”.

“So, we are hoping that by December of the coming year we will see our exports beginning to exceed the pre-COVID level,” he said.

Exports have recovered to their pre-COVID monthly level of around $2 billion in September and October, with the strongest recovery in textiles, rice, cement, chemicals, and pharmaceuticals, according to the SBP.