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February 14, 2021

Construction sector borrows Rs88bln in Jul-Dec

Business

February 14, 2021

KARACHI: Construction sector borrowed Rs88 billion from banking institutions during the first half of the current fiscal year of 2020/21, showing 44 percent growth over the preceding same period, as the tax incentives and lower interest rate encouraged participation in real estate, analysts said on Saturday.

Companies attached to residential sector borrowed Rs41 billion in the six months ended December 31, 2020 compared to Rs29 billion, showing 41 percent growth, the analysts said, citing the central bank’s data. Borrowing for non-residential sector showed a rise of 51 percent to Rs47 billion.

Topline Securities Deputy Head of Research Shankar Talreja said the borrowing of the construction sector is likely to gain more momentum going forward due to increase in economic activity and subsidised markup scheme of the State Bank of Pakistan (SBP).

Furthermore, a regulatory change by the SBP wherein banks are required to lend 5 percent of their advances to construction sector will also result in higher borrowing by the construction sector, Talreja said.

The government last year announced the tax amnesty scheme and gave it an extension for one year. Moreover, low-cost housing scheme aims at to provide cheaper loans with a subsidy of Rs30 billion, he said.

The SBP slashed the key interest rate by 625 basis points to 7 percent in couple of months last year to support the economy that contracted 0.4 percent during the last fiscal year due to coronavirus lockdown.

Pakistan has the lowest construction-to-GDP ratio of 2.5 percent compared to regional average of 7 to 8 percent due to multiple issues ranging from structural to financial issues, Talreja added.

The country’s construction sector has the region’s lowest financing-to-advances ratio of 2.3 percent compared to 14 percent in Sri Lanka, 7.4 percent in Bangladesh and 4 to 5 percent in India.

“Borrowing from the construction sector has recently witnessed an uptick,” said Tahir Abbas, director research at Arif Habib Limited.

Pertinently, the SBP has stipulated banks to enhance mortgage loans to at least 5 percent of their private sector credit by December this year to encourage construction activity in the country.

Demand has also been triggered by construction package comprising lucrative tax benefits to builders announced by the government early last year, which changed the sector’s status to industry, Abbas said.

Moreover, low borrowing rates together with recovery in the economic demand accelerated work on new infrastructure and development projects, particularly housing, he added.

Abdul Azeem, head of research at Spectrum Securities said the local cement sector borrowing from banks remains strong as post COVID-19 the industry has borrowed the loan for short term and long term needs.

“We foresee the cement companies’ borrowing from banks to remain on the higher side during the remaining part of the year,” Azeem said.