Should we expect a construction boom?
Tnext challenge would be to kickstart the economy and that is when the construction package is likely to help
The Prime Minister has recently announced an ambitious incentives package for the construction sector, including a fixed tax regime for builders and developers, elimination of withholding taxes, reduced tax on low cost housing projects, and more. But the real game changer is the ‘no-questions-asked policy’ for any funds invested in the construction sector. This amnesty scheme is likely to bring in a significant volume of undeclared wealth into the formal economy and could potentially be even more successful than the previous amnesty schemes. This is because there is a general consensus that the country would not be in a position to offer any more such schemes in the future. Even this one is a godsend and an exception made in the wake of the coronavirus pandemic. Although it is not clear how the Financial Action Task Force (FATF) would react to this measure, it would be safe to assume that it would adopt a relaxed criteria for scrutiny in these difficult times. Furthermore, the real estate sector has been stagnant for too long, owing to FATF-induced tightened regulatory environment and increase in valuation of real estate. Moreover, given the adverse economic situation in the recent past, even other avenues of domestic investment have been drying up. Therefore, investors are likely to jump on to this opportunity to whiten their money.
Infrastructure development is closely associated with economic growth, and even in the West, policymakers are making a case for pumping in money for infrastructure to stimulate growth. However, the incentives package alone may not be the ultimate solution to get Pakistan out of the current economic crisis or even to create a construction boom.
First and foremost, the construction industry needs to adapt to the ongoing Covid-19 crisis and find a way to operate under the threat of infection. The construction industry is prone to high contamination risks being a labour-intensive sector and therefore needs special safety measures and protocols to operate. The UK government, for instance, has come up with new site operating procedures under the Covid-19 threat. A similar approach is also needed here.
Secondly, most of the measures introduced by the government are for the supply side. Without adequate demand these are not going to work, especially in the wake of slowed-down economic activity. Demand for low-cost housing will be especially low, despite the fact that the government has introduced a Rs30 billion subsidy for low-income homebuyers. The government needs to ensure availability of sufficient credit for mortgages at reduced rates to tap into a wider market.
Lastly, the government should focus on a broader infrastructure development agenda, rather than only narrowing it down to traditional housing or commercial projects. Why not enable vertical growth of cities and prevent urban sprawl? Why not bring in health, ICT or logistics infrastructure into this package, for which there is going to be substantial demand? Why not recalibrate the public investment portfolio and initiate a public works programme to create jobs for the unemployed?
The Prime Minister has been criticised by many because of his hesitation to enforce a blanket lockdown, due to economic concerns. An initial lockdown was indeed required to flatten the curve and enable the government and the private sector to find new ways to operate under the shadow of the coronavirus. But this lockdown cannot continue for long and will have to be lifted in bits and pieces in the coming weeks. Lives are more important than economic well-being but not to the extent where we end up losing more lives due to poverty. As soon as we adapt to the ‘new normal’ of working in the Covid-19 world, the next challenge would be to kickstart the economy and that is when the construction package is likely to help.
Published in The Express Tribune, April 7th, 2020.
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