Opening View: Engineering A Boom

Are the government’s recent incentives enough to jump-start the desired turnaround?
Published 12 Jul, 2021 11:48am

In developing countries like Pakistan, the construction industry is regarded as one of the most important sectors of the economy because of its ability to quickly drive growth and development. This sector is considered to be one of the largest employers of millions of unskilled, semi-skilled and skilled workers across countries.

The industry plays a key role in generating disposable incomes for individuals and high profits for businesses operating in both the formal and informal sectors in countries such as Pakistan.

Furthermore, the industry significantly influences the macroeconomic environment, as any expansion in construction activity stimulates growth within allied industries. About 30 to 40 different industries, including cement, ceramics, glass, paint and steel, are linked to the construction sector.

This impact is usually substantial because most of the building materials are supplied by relatively unsophisticated, labour-intensive domestic resources and by basic industries such as cement and steel manufacturers. The forward linkages of the construction industry are relatively obscure and less extensive than those of the industry’s backward linkages. Yet, different studies show that infrastructural development steadily propels sustainable growth in an economy, creating jobs and reducing poverty and vulnerabilities.

According to a study, The Economy and the Construction Industry published by the Department of Building, National University of Singapore, data has shown that there have been dramatic increases in construction employment in most developing countries.

“The fact that the construction industry is more labour intensive than many other industries, especially relative to manufacturing, makes the industry a traditional focus for employment-generation policies in many countries through labour-intensive public works projects. The labour created in these projects in turn spends their income on other locally produced goods and services, thereby stimulating demand in the rest of the economy through the multiplier effect. As a result, during periods of slack demand and high unemployment, infrastructural construction projects funded by the government are often implemented as a counter-cyclical instrument. Similarly, the government can stabilise the economy by postponing these projects during boom periods. Through fiscal policies such as adjusting the amount of public expenditure or the interest rates of the loans financing these infrastructure projects, the government can generate changes in the economy.”

In most developing countries, governments try to boost public and private investments in housing and construction, as well as public works programmes to achieve a combination of policy objectives: poverty alleviation, employment generation and provision of infrastructure. Therefore, it is not surprising to see a country relying on construction spending to jump-start the economy for job creation. Many countries have included construction of infrastructure such as railways, highways, airports and power grids into their fiscal stimulus packages. Pakistan is no exception.

According to the Pakistan Economic Survey, the construction industry accounts for 2.5% of the Gross Domestic Product (GDP) and the sector provides up to Rs 380 billion in GDP, up from Rs 318 billion in 2019, and employs 7.61% of the labour force. Construction activity grew by 8.1% last year owing to an increase in government expenditure. Fitch Solutions projects an industry value of Rs 1,739.9 billion in 2025 and Rs 2,705 billion by 2028 from Rs 1095.8 billion in 2021, representing the potential of the housing and construction industry.

“Fitch Solutions projects an industry value of Rs 1,739.9 billion in 2025 and Rs 2,705 billion by 2028 from Rs 1095.8 billion in 2021, representing the potential of the housing and construction industry.

Like many other countries, governments in Pakistan have used public works schemes to build economic infrastructure, as well as boost employment and reduce poverty, and in doing so have successfully stimulated economic activities and boosted growth. It therefore came as no surprise when the PTI administration adopted this route last year with a huge package of tax and interest rate subsidy incentives for the construction and housing sector.

The most attractive concession available to real estate investors and owners as well as builders, contractors, developers and potential homeowners is the tax amnesty, aimed at whitening undocumented money. In addition, further concessions and subsidies were offered in the budget to encourage affordable housing for low-income segments.

To support this effort, the State Bank of Pakistan (SBP) made it mandatory for banks to ensure that their financing for housing and construction rises to at least five percent of their domestic private sector credit by December 2021. Both the SBP and the Security Exchange Commission of Pakistan have implemented measures to prioritise the development of real estate investment trusts (REITs) to streamline and document the real estate sector while allowing small investors to earn profits from this sector. Furthermore, in the budget for FY 2021-22, the government has announced a major public sector infrastructure development programme worth more than Rs 2.1 trillion to boost construction activities ahead of the next elections.

Will these measures succeed in putting the economy on the road to growth? Evidence from the last financial year suggests that although the government may not be able to build as many houses as it plans to (five million units) and fiscal problems may force it to cut back on development stimulus, the construction and housing sector will bring a significant boost to GDP growth over the next few years.

According to Samir Ahmed, CEO, Knightsbridge Capital, “there is a growing demand for houses owing to a 2.4% annual population growth rate. Pakistan’s annual demand for housing is estimated to be about 700,000 units, while only about half is currently being met and the housing deficit is estimated at 10 million units, which is growing every year. This shows the potential for investment and growth in this sector.”

The Naya Pakistan Housing Development Authority (NAPHDA) has developed different land use models to collaborate with private investors to build affordable housing in urban, peri-urban and rural areas. However, so far, the government has been able to launch projects offering only several thousand units.

“Hundreds of new schemes have been registered as investors are rushing to take advantage of the concessions and subsidies. However, I doubt the target of five million houses will be achieved any time soon,” says Ahmed. He is also sceptical of the banks meeting the mortgage finance target given by the Central Bank. “The banks are under pressure to increase mortgage financing, which is a new area for them. But there are a number of odds stacked against them, such as credit risks and an unclear legal status of housing schemes. I don’t see a momentum so far.”

Nasir Jamal is Chief Reporter, Dawn Lahore