Wednesday May 22, 2024

Financial meltdown?

By Nauman Ahmad Bhatti
January 19, 2022

The 2008 global financial crisis was one of the worst human-made economic catastrophes. It cost millions of people their homes and billions of dollars in damages. Some economists were of the view that the crisis could have resulted in a 1930s-style Great Depression.

In the early 2000s, banks in the US approved countless house mortgages at low-interest rates. To attract an even large number of customers, competitive bankers started to offer even lower interest rates and set more relaxed eligibility criteria. Successfully enough, millions of people applied for and received low-interest, easy mortgages on their houses. The American dream was living itself.

Investors from inside and outside the US started to purchase bundles of ‘wholesale’ mortgages from the banks. This was assuring a profitable and secure investment. The only seemingly downside of this investment was mortgage default. However, theoretically it had a simple solution: sell the houses. Then, the demand for housing units was exceeding supply. Huge stacks of mortgages drove the prices higher.

The situation went out of control around 2007 when borrowers could not keep up with the mortgage payments and eventually defaulted. This put a plethora of houses on the market for sale. Now, the supply of housing units exceeded its demand. This is where the worst happened – no one was there to buy the houses. The prices started plummeting. The customers, bankers and investors began to lose money to the point of bankruptcy. These events, including the stock market crash, put the economy in terrible recession by 2008.

If there is one lesson to be learned from the Great Recession, it is that bankers should not facilitate customers with loose mortgage lending. But, today, banks in Pakistan, under the direction of the federal government, are doing otherwise. The Mera Pakistan Mera Ghar (MPMG) housing programme, initiated by the State Bank of Pakistan (SBP), is one such scheme. It offers an incredibly low markup on house financing. The initiative is primarily directed towards the middle class, a majority of which lives in rented houses. In a survey held in 2019 by Gallup, 22 percent of Pakistanis were found to be living on rent.

According to the banks hosting this programme, a person with a salary of Rs25,000 is eligible to acquire a loan of up to Rs6 million. Some banks, like the Bank of Punjab (BOP), go one step further. They have not set a minimum limit on the amount of salary. As far as the bank cares, a person with even a meagre income is eligible for financing.

This scheme is wrong for a developing, poverty-ridden and economically short-sighted country like Pakistan for a number of reasons.

The economy is in dire straits. A report published by the Pakistan Institute of Development Economics (PIDE) revealed that nearly 24 percent of graduates are jobless at the moment. In 2021, 1.5 million people alone applied for a peon’s position in a high court. Among those applicants, there were many MPhil degree holders. At least 20.7 million people were unemployed during the pandemic. The unemployment rate was getting low, but it is bound to increase because of the wretched governance of the PTI government, which has imposed an 11.5 percent inflation rate on citizens. It will increase once the supplementary budget begins to exhibit its effects on different commodities. The Economist has already placed Pakistan 4th on the list of most-inflated countries.

Those with jobs and a better income are also worried. According to the Global Consumer Confidence Index (GCCI) 2019, 83 percent of Pakistanis experienced job insecurity due to inflation, mass unemployment and poverty. The economic conditions that followed have only added to that uncertainty. It was not long ago that 16,000 government employees were let go. Even government jobs are not secure.

These miserable statistics raise some critical questions. How are the people of the lower middle class going to continue to pay to save their mortgages? With such a high percentage of job insecurity, can someone be so sure as to keep on paying the increasing mortgage even for five years, which is the minimum financing period under the MPMG programme? Is the government too myopic to infer that a person with a Rs25,000 salary cannot, under any circumstances, pay a mortgage in addition to affording his/her house rent and basic necessities? How can the banks be so obtuse as to let financially illiterate people sign their bankruptcy certificates? Perhaps this is one of the evils of capitalism the socialists often talk about.

The latest variant of Covid-19, Omicron, has begun to hit Pakistan. A subsequent lockdown could further put the economy on a downhill trajectory.

This scheme could cause a perverse incentive. The country is in no position to put a roof over millions of people. And it is certainly in no position whatsoever to bail out the people if the scheme fails with forewarned outcomes.

To save people from cutting their own throats, the government needs to direct the SBP regarding scheme-related banking policies. To start, people with bad credit and low income should not be allowed to avail such offers. Lending rules must be revised. Low interest rates must not be used as bait for achieving populist goals. If the government does not tighten its grip on financial policies, the housing scheme will drown, taking down the people with it. If the government moves to bail them out, it will do so by moving tax revenues in motion. Either way, an economic meltdown is a probable fate.

The writer is a scholar of history and politics. He tweets @naumanbhatti_1 and can be reached at naumanahmadbhatti@