By Muskan Naveed ISLAMABAD, Feb. 21 (INP-WealthPK): The housing and construction sector is considered to be a major driver of economic growth in Pakistan. The construction industry has backward and forward linkages with around 40 sectors of the small and medium manufacturing industry, which enables it to cause an immediate pleasant trickle-down effect in the overall economy. Housing’s contribution to the gross domestic product (GDP) of Pakistan stands at 7 percent, while construction contributes 2.5 percent to GDP and employs 7.6 percent of the Pakistani labor force. The State Bank of Pakistan (SBP) had previously set the exposure limit for housing and construction of buildings (residential and non-residential) for banks and designated financial institutions (DFIs) at 5 percent of their private sector portfolio. The exposure was to be considered on an aggregate basis – up to 15 percent of mandatory targets for the housing and construction sector. However, the mandatory target was recently revised to 25 percent from 15 percent, a 10 percent increase. The mandatory target was raised to 25 percent in an effort to boost the housing and construction sector because of its benefits for the economy. Through the SBP’s measures, the supply-side bottlenecks in the form of reluctance on banks and DFIs part to give out loans for housing and construction will be cleared out. The current step of the central bank comes after the government and the monetary authority re-focused their efforts on the housing and construction sector as it took a hit amidst the pandemic. Need for reforms The construction industry was severely impacted by the pandemic which is why the government re-focused on the sector as it has the potential to help Pakistan on the road to economic revival. The issues of unemployment, low tax revenue and slowed economic growth can be addressed through this sector. The construction sector received some of the lowest shares of loans in manufacturing — at 3.4 percent or Rs8.9 billion during the fiscal year 2020-21. Out of the total credit to the private sector, construction’s share had seen the average growth rate to have declined by 19.1 percent during 2019-20, but in 2020-21 revived to 6.9 percent. The government announced an incentive package for the construction industry in 2020. The construction package was seen to have immediately pulled related sectors of engineering and cement through a boost of demand. The consumer financing flows also show an increase of 17.2 percent of house building loans against a negative growth of 6.1 percent last year – due to SBP’s efforts to increase house financing by setting up a mandatory target of 5 percent exposure to housing and construction for banks. The SBP has also incentivised banks by allowing them a lower cash reserve requirement in the next quarter after meeting the quarterly house financing requirements. The initiatives taken by the State Bank to increase house financing are in line with the agenda of the current government. The government’s Mark-up Subsidy Scheme is a move towards making house ownership affordable for the low to middle-income group. The government has allocated Rs36 billion for the scheme which will be disbursed among individuals who do not currently own a house for the construction or purchase of a house at a subsidised rate. The subsidy falls under the government’s Naya Pakistan Housing Scheme which has the goal of delivering five million housing units. The China Pakistan Economic Corridor is also playing a vital role in boosting the construction sector through a variety of infrastructural projects including dams, highways and power plants.