IMF Reforms and Real Estate: What They Mean for Sri Lanka’s Affordable Housing Plans

IMF Reforms and Real Estate: What They Mean for Sri Lanka’s Affordable Housing Plans

Over the last few years, Sri Lanka has been confronted by some of the worst economic headwinds in terms of skyrocketing inflation, a foreign currency crisis resulting in its maiden sovereign-default. Following this meltdown, the International Monetary Fund (IMF) intervened with a bailout plan to help stabilize the macro environment. Sri Lankan government is currently faced with the responsibility of restructuring its fiscal and monetary priorities as specified in the structural reforms demanded by the IMF; and these directly target the real estate and housing sectors.

Although a large part of media reporting has emphasized on debt restructuring, tax policy and exchange rate liberalization, there is minimal talk on the consequences of the change in the field of affordable housing. To a nation with more than 70 percent of the population not being able to afford the little 500-square-foot house, housing is both a social and economic necessity. However, with IMF control, the fiscal constraints can cause the government to have difficulty fixing the much needed imminent housing shortage without viewing the housing as the infrastructure vital to long- run growth rather than an item of welfare.

This blog discusses how IMF reforms are transforming both directly and indirectly the housing sector, how it affects affordable housing and also whether the 2025 Budget reflects a seriousness in addressing the housing crisis. We disaggregate it on five key aspects that are finalised by reflection of more contemplation on the future of equitable development in Sri Lanka.

Austerity and the Shrinking Fiscal Space for Public Housing

The reforms packages by IMF are more or less a backed pack and the case of New Zealand is not an exception in the case of Sri Lanka. Having an aim to reach 2.3 percent primary surplus by 2025, the government is cutting subsidies, restricting employment in the civil service, and also focusing on paying off the debt. Although this sphere of influence is of much significance in recapturing investor confidence, it has its price of creating fiscal room to new public investment-including that in housing.

Within the 2025 budget, the Ministry of Urban Development, Construction and Housing had minimal allocations that were aimed at solving general infrastructure challenges in urban centres and housing at estates. These are programs, which are more towards conservation or repairing settlements than building new ones. In addition to this, the on-going projects are targeted at the needs of specific group of people- such as plantation workers or conflict areas- but do not attempt to deal with the structural urban housing shortage of low-income and middle income earners in Colombo, Gampaha, Kandy and other fast urbanizing areas.

Housing programs provided by the government (first of all, Urban Regeneration Project) in Sri Lanka are based on budget support and donor investments in the past. These initiatives have gone nowhere with a tight fiscal envelope and a focus on macroeconomic stability. There is practically no new large-scale housing construction and maintenance of the existing public housing has been restricted to the bare minimum operations.

The true issue is that housing as a social amenity cannot be part of such an IMF influenced development paradigm that gives more emphasis in tightening up the purse-strings. At present, without creating a new picture of housing as an economic driving force similar to energy or roads, the existing system will also not close the affordable housing gap much.

Taxation, Land Use, and Developer Incentives in a Post-Reform Economy

Tax restructuring has been one of the keys in the IMF reform strategy. Personal income taxes are being reintroduced, corporate taxes are being increased in addition to VAT taxes being raised all of which have hit both the disposable income and developer margins. Such reforms though necessary in terms of improving state revenues have unintentionally impacted upon the housing demand and economics of real estate development.

The developers have seen their profit level on mid-range or affordable home decrease. There are increases in cost of construction material, labour is becoming more expensive and the easier access of credit has been cut off by higher interest rates and prudent lending policies. Within this context, developers have more incentives to construct luxurious apartments or business premises where returns are more substantial. Already a low margin investor, affordable housing is being viewed as an investor risk.

Another obstacle is land use policy. Nevertheless, over the decades of debate, Sri Lanka has still failed to implement significant changes in terms of land titling, zoning flexibility, and land banking. The percentage of land in both urban and semi-urban setup which is neither under the government possession nor on informal standing is a very large number to the extent that developers cannot expand affordable housing at a very high rate.

Neither has there been much progress in relieving the complicated nature of land acquisition, moderating zoning requirements, or providing density benefits in the cities. Inadequate vertical development in the key corridors, as well as the failure by local authorities to develop a suburban network of infrastructures has further constrained the working-class households to the informal housing sector or a long commute.

What is required is an intelligent bonus system. The tax credit on buildings specifically dedicated to affordable housing, subsidies on development of infrastructure around low-income developments, and streamlined land access can do much good in encouraging supply. However, in light of the government to tighten its fiscal situation, this type of incentive is off the policy radar.

Interest Rates, Mortgage Access, and Affordability Challenges

Tightening of the monetary policy has been another major effect of the IMF-imposed restructuring course. Central Bank of Sri Lanka has maintained relatively high policy interest rates in order to curb inflation. Although this has been used to stabilize rupee and reduce the pace of inflation, it has made borrowing much costly to the common man and housing developers.

In reality, mortgage interest rates are still too high among those earning middle income. Home loans are giving long tenures and stern down payment and eligibility requirements. In the case of an average and even dual-income household residing in an urban setting the gap in terms of affordability is enormous. An apartment of 500 square feet in Colombo may set a buyer back as much as LKR 12 million yet a household that makes LKR 150,000 a month cannot afford a mortgage unless they are assisted by an outside source of income or a remittance.

The official housing finance chain is limited. Lending products are not very innovative, there is almost no subsidized loans on houses and the secondary mortgage market is weak. Microfinance institutions are not at a size which can provide funds to finance some of the homes with minor repair. The housing affordability will not be available unless the policies of housing finance in Sri Lanka change, because the process or priority to control the interest rates by IMF is not going to help and, in fact, it is working against the affordability. The property sector risks being transformed into a two-level system where the rich foreign investors and domestic elites can enjoy their ownership and the urban poor continue to be prevented to own property at all.

The government can consider interest rate buy downs, down payment assistance, or a national housing guarantee fund as the solution to this. Such tradeoffs, however, need fiscal flexibility which is in limited stock in the present IMF standards.

Missing opportunities and Public-Private Partnerships

With the shortcomings of the governmental sector and risk aversion of the developers in the private sphere, it is possible to assume that Public-Private Partnerships (PPPs) will bridge the housing divide. Theoretically, PPPs are capable of using the governmental land, the private capital and a shared-risk framework to construct affordable housing on an expanded scale. However, in Sri Lanka, such a model is underdeveloped and under utilised.

One of the problems is legal. The major sectors of usage of PPPs in Sri Lanka have been the energy and infrastructure sectors. The housing-related PPPs are not heavily legislated or regulated. Besides, government credibility in the long term contracts has suffered through refusal to honor certain contracts attributed to delays on the project, political interference of the project.

The other issue is perception. Affordable housing is a social liability that is not considered as a commercial viable industry. This stigma deters players with funds to pursue an endeavour except when high-value land in urban areas is provided or huge tax concessions offered which is not currently politically or economically possible. In principle, the topics of the IMF reform might aid PPPs in terms of promoting more efficient use of the money by the government agencies, as well as improved procurement systems. Nevertheless, these benefits are not going to happen any time soon because of an absence of clear guidelines regarding housing.

It requires a national housing strategy that would be long term and transparent on who are going to do what concerning the government, developers, financiers and the communities. It should not only regard housing as something critical to post-crisis recovery, but as an economic asset, which creates labor, boosts demand, as well as enhancing societal resilience-not as some sort of charity.

Urban Inequality, Informality, and the Risk of Housing Apartheid

The urban population of Sri Lanka is advancing at a very high rate with an increase in the informal settlements due to this population growth. Urban areas are getting more unequal without a well-funded, well-regulated affordable housing plan. The city gap is evident in the concrete wall surrounding mansions of the elite of Colombo to sprawling slums on the fringes.

This spatial inequality is not directly concerned with the IMF program. It is macro-stabilization-oriented rather than socially equity-oriented. However, one cannot do without urban informality. It causes more strain on the services offered to society, a poor output, health risks, and social unrest. Without affordable housing, the family is given to over low-level or dangerous view.

That risk is a type of housing apartheid- where one group reside in those enclaves that are securitized and well maintained whilst the others are assigned places of degradation without secure tenure, infrastructure or prospect. This in the long-run segregates cities and undermines the basis of inclusive economic growth. Sri Lanka should put its informal housing on formal basis. This implies lengthening security of tenure, cracking the infrastructure in the underserved quarters and making informal communities a part of urban designs. It will involve a coordination between municipal authorities, national agencies, and community organizations, something that should not be supplied from the outside with the strokes of the whip by some external commandments.

The Missing Middle: Why Middle-Income Earners Are Falling Through the Cracks

Although many households are targeted due to their poverty and need in housing, the “missing middle” is an under-covered group when it comes to the real estate dilemma in Sri Lanka, the households who earn more than what the government subsidises and less than what can purchase a home on a commercial basis. This segment of the population consists of teachers, nurses, business owners of small scale, civil servants, and young professionals who represent the urban backbone of Sri Lanka. But they are becoming more and more unable to afford homeownership, in cities such as Colombo, Galle, Kandy, etc.

IMF reform route has, unconsciously, increased the gap in affordability of this segment of the middle income group. On one hand, an increase in the level of interest rates and stricter loan policies have complicated the process of obtaining mortgages. Conversely, inflation has washed away real incomes, and it is now all the more challenging to cater to a down payment or installment rates on a monthly basis. With the escalation in construction prices and developers vying over luxury profits, not many people are constructing to this middle audience.

When such families have no targeted housing products, both of these alternatives are not appealing. They have a choice between overcommitting themselves financially and buying priced out apartments with long-term debts, or staying in the rental industry forever, with zero stability or ability to build up equity. None of them favors social mobility or in the long-term prospects. When even 2-earner college-educated families could not afford a small, 700-square-foot flat near their workplace, then it is the society which faces the risk of long-term disappointment.

The house policy frameworks adopted by Sri Lanka in the past used to treat affordability as a binary concept- low-income subsidy or no subsidy and full-scale private ownership. However, international house experts are now focusing on the merits of sharing the equity, rent to own and co-operative housing arrangements which can help to accommodate the squeezed middle. Such experimental models are financial sustainable, combined with access and play the key role in opening housing opportunities to the urban working population.

A possible option is to create a special Middle-Income Housing Fund one, in which it could collaborate with the developers so it can provide subsidized rates, smaller down payments or even co-investing arrangements where the state or a financial institution would be keeping a piece of the property. The other alternative is zoning reform in a way that lesser and well-designed unit can be constructed in well-connected territories where the overall price would be lowered, and the quality of life would not be decreased.

The missing middle is to be also backed by digital tools that will enable transparent home-buying procedures, easier access to finance, and financial planning education. The increasing technology awareness of the population in Sri Lanka will facilitate the reinforcement of the information gap and make an informed choice.

In the larger reform policy, IMF suggestions tend to focus on inclusive growth and social protection. However, the middle-income housing is sidelined. This has to change in order to enable Sri Lanka to achieve a stable, equitable and productive urban economy. When a housing policy fails to look after its underlying workers, it is not only socially maleficent, it is also a development disaster in mid action. It is not a charity to take care of housing of middle class people. It is an investment in the most important resource of the country; Human resource.

Conclusion

The IMF reforms are admittedly the essentials toward stabilizing the economy of Sri Lanka which literally collapsed historically. They introduce discipline to the fiscal management, promote transparency and urge them to work structurally. Nevertheless, these reforms also present severe issues with social investment, especially in areas such as affordable housing which does not lend appropriately financially but which have overwhelming value to our communities.

The 2025 Budget is an instance where housing is not prioritized in any way that transforms it. It allocates very little and is more concerned with the macro agenda than provision of shelter to the growing urban poor and also working class. Such a chance is lost. Housing Affordability would have been able to place it as the voice of recovering economically and providing job creation, community stability, and equity in the long run of nations.

Sri Lanka needs to redefine housing as a national investment so that it can come out stronger. That will call for fiscal innovation, institutional reform agenda, modernization of land policy, and the new social contract among the government, the privates as well as citizens. It is still possible to promote this transformation through a reform route on the IMF, but it is possible to achieve this only when housing will be taken out of the periphery of the policy-making process and addressed as a central concern. What the country constructs next is what determines the future of the cities within the country and the people that inhabit them. Hopefully, homes are a part of it and everybody will be able to afford them.

Also read: The Role of International Organizations in Promoting Affordable Housing