Revisiting the Mera Pakistan Mera Ghar Subsidy
I haven’t written much here for while. For the year-end, just wanted to revisit the following tweet from April 2021 (Some of the calculations were wrong in the table in the below tweet).
KIBOR was around 7% at the time and no one could foresee that KIBOR would rise to the 16.5% that is prevailing today. The calculations I made in the tweet assumed 7% KIBOR prevailing for 10 years. Let’s see how it looks assuming 16.5% of the ten years.
As per the SBP website, there are 4 tiers. Tier 1 for NAPHDA projects. Tier 0, Tier 2, and Tier 3 for non-NAPHDA projects.
As per the SBP circular, the GoP has budgeted Rs.36 billion for the subsidy for ten years.
Government of Pakistan has increased the total funding allocation to Rs36 billion on account of markup subsidy payment for financing over a period of 10 years and has assured continuity of the facility.
Using the KIBOR of 16.5% and for simplicity assuming that KIBOR was 7% for the first year of mortgages, I calculate the following.
Two things stand out:
At the assumed rates (7% KIBOR in year 1 and 16.5% KIBOR in years 2-10), the subsidy that mortgage buyers are getting is almost equal to the loan amount. Compare the cells highlighted in yellow (10-year subsidy) with cells highlighted in cyan (max loan amount).
The last three columns are what I wanted to draw attention to. If we look at the first row, what it is showing is that at 7% KIBOR, the Rs. 36 billion subsidies could have subsidized 180,000 Tier 0 mortgages. However, at 16.5% KIBOR, that subsidy is only sufficient to subsidize 18,848 houses i.e. 10% of the original houses. If the commercial banks had given out 180,000 mortgages, the subsidy would have run out within the first year of KIBOR reaching 16.5%.
Similarly, for Tier 1, the current subsidy is only sufficient to subsidize a quarter of the mortgages (11k mortgages at 16.5% vs 44k mortgages at 7%). For Tier 2, the subsidy is only sufficient to subsidize 10% of houses at 16.5% than it could have subsidized at 7%.
Needless to mention, the commercial banks would not have given out the maximum amount and number of mortgages that the aforementioned table is assuming nor the KIBOR is expected to remain around 16.5% for the remaining 9 years of mortgages. The assumptions in the table are an edge case to show that if the rate remains high and banks had given out mortgages left, right, and center, the subsidy would not have been sufficient to subsidize mortgages over a 10-year period.
Coming back to point 1 above, this is the first time a common man has been offered such a subsidy. I hope anyone who could have afforded it maximized this opportunity. It is not every day that the Government of Pakistan or the State Bank of Pakistan provides a benefit to the middle class.
Though Mera Pakistan Mera Ghar was in essence for those people who didn’t own a home, it was the first time such a subsidy was made available and widely marketed to the common man. Though it was for those who didn’t own a home, however, aggressive targets by SBP, the need for self-promotion of the previous SBP governor, and considering that well-off borrowers that don’t need the money are better credit, it is no surprise that the push resulted in some (not all) of the people who took the subsidized loans took it out for investment purposes.
Large businessmen are experts in using each and every subsidy that comes their way. If you go through the financial statements of large corporates, you will see that they will max out on each and every subsidy and incentive that is made available. The financial system exists to serve only them.
To give you an example, the below is from Javedan Corporation Limited’s 2022 Annual Report where it is stating that the operations and results of the company haven’t been materially impacted by Covid-19.
And yet, it availed Rs.60 million at an extremely subsidized rate of 3% from SBP’s Rozgar scheme which was mainly for those companies which were having difficulty meeting payroll due to Covid-19 slowdown.
So yes, people should not have used Mera Pakistan Mera Ghar subsidy scheme for investment properties but this is what large businessmen have been doing with subsidies since forever.