Upload
trinhdung
View
219
Download
2
Embed Size (px)
Citation preview
BUDGET FY18 – SNAPSHOT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE
PROVIDERS
PACRA Analytics (Pvt.) Limited
www.pacraanalytics.com
Page 1 of 6
The Government presented its fifth consecutive budget for FY18 with total outlay of PKR 5,104bln. The focus of initial
three budgets was fiscal consolidation. However, there is a gradual shift and the Government now aims to stimulate growth
through promotion of exports, job creation, and better agriculture productivity, as macroeconomic indicators have
stabilized.
During FY17, Pakistan became a USD 300bln economy. The country continued its growth trajectory by achieving a GDP
growth of 5.3% and increased per capita income of USD 1,629. The fiscal deficit is projected to be 4.2% (3.8% in July-
April FY17) while inflation remained subdued at 4.1%. The remittance and foreign reserves slowed down amid tough
conditions in GCC region and higher than expected trade deficit.
The agriculture sector bounced back and posted growth of 3.4% against the target of 3.5%. Better availability of agricultural
inputs and higher credit disbursement were stimulus to 3% growth in crops vis-à-vis negative growth of ~5% in FY16.
Large scale manufacturing growth stood at 5% while small scale manufacturing posted a growth of ~8.2%. Services sector
grew by 5.9% (FY16: 5.5%) as wholesale and retail segments attained 6.8% growth.
Government’s drive to document the economy, focus on enhancing tax revenues, and increasing cost for non-filers persists.
Social net is expected to strengthen further with allocation of grants for Benazir Income Support Programme (BISP), low
rate loans for farmers, and various initiatives and loan schemes to generate employment.
Economic Indicators FY16 FY17 (Jul-Apr) FY18 Target
i) Per-Capita Income (USD) 1,531 1,629 N.A
ii) Inflation (Average) 2.9% 4.1% below 6%
iii) Policy Rate (Average Discount Rate) 6.0% 5.8% N.A
iv) Fiscal Deficit to GDP 4.6% 3.8% 4.1%
v) Remittances (USD mln) 19,917 15,600 N.A
vi) Forex Reserve (USD mln) 23,099 21,019 4 Months of Import Cover
Social Safety
i) BISP disbursements (PKR mln ) 102,000 112,000 121,000
ii) Prime Minister's Initiatives (Expenditure Incurred, PKR mln) 20,000 5,219 20,000
FY17 (R) FY18 (B) % change
Total Budget Outlay 4,841 5,104 5.4
Inflows 4,841 5,104 5.4
Internal Resources 3,086 3,826 24
i. Tax Revenue 3,825 4,330 13.2
ii. Others 1,382 1,880 36
iii. Provincial Share -2,121 -2,384 12.4
External Resources 996 838 -15.9
Privatization Proceeds 18 50 181.3
Bank Borrowings 741 390 -47.4
Outflows 4,841 5,104 5.4
Current Expenditure 3,905 3,764 -3.6
i. General Public Services 2,741 2,554 -6.8
ii. Defence Affairs & Services 841 920 9.4
iii. Others 322 290 -10
Development Expenditure 936 1,340 43.1
i. Federal PSDP 715 1,001 40
ii. Others 221 339 53.2
Budget Summary - PKR Bln
BUDGET FY18 – SNAPSHOT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE
PROVIDERS
PACRA Analytics (Pvt.) Limited
www.pacraanalytics.com
Page 2 of 6
Areas Proposals
FUNDING
SCHEMES
Positives:
BISP Beneficiary Graduation Program: Grants to Self-Sustaining Individuals of BISP
beneficiary families willing to start their own business. One time cash grant of PKR 50,000
along with training to be provided to 250,000 families initially.
Impact: Successful implementation of this scheme will provide potential market for MFPs to
expand the lending portfolio in future.
Allocation of funds for Crop Loan Insurance Scheme, Livestock Insurance Scheme and Credit
Guarantee Scheme for small farmers. Credit Guarantee Scheme for small farmers provides
50% coverage against loan losses.
(PKR) FY17 (B) FY17(R) FY18 (B)
Crop Loan Insurance 500mln 500mln 700mln
Livestock Insurance Scheme - - 1,000mln
Credit Guarantee Scheme 1,000mln - 1,000mln
Impact: These schemes will protect microfinance lenders against potential losses and may reduce
financing cost for borrowers.
Phase II of the Prime Minister’s National Health Insurance Program has been launched with
a cost of PKR 10bln.
Impact: The scheme will provide coverage against expenses due to health problems to 3.1mln
beneficiaries with a coverage limit of PKR 50,000 for secondary care services and PKR 250,000 for
tertiary care for specified diseases as per the program. Thus, it protects MFPs against potential losses
and expenses.
Risk Sharing Guarantee Scheme for home financing. Government to provide 40% Credit
Guarantee Cover to financing institutions including MFBs for home financing for up to PKR
1mln. For this purpose, PKR 6bln have been allocated.
Impact: This presents an opportunity for MFBs to expand and diversify their portfolio with an
additional benefit of credit cover against potential losses. MFBs can increase their loan size as well.
Financial inclusion fund of PKR 8bln to be setup at SBP to provide loans to low-income
segments through MFBs.
Impact: This scheme will provide funding for MFPs and is beneficial for the industry. The exact
mechanism of distribution remains to be seen.
Enhancement in Agriculture Credit to PKR 1,001bln.
Impact: For FY18, the target for agriculture credit through has been at PKR 1,001bln, which is 43%
higher than last year and equal to PSDP. This will be beneficial for MFPs as they may extend credit
facilities to meet targets.
BUDGET FY18 – SNAPSHOT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE
PROVIDERS
PACRA Analytics (Pvt.) Limited
www.pacraanalytics.com
Page 3 of 6
Neutral:
Prime Minister’s youth schemes to continue with allocation of PKR 20bln
Impact: These schemes cover: (i) Business loan scheme, (ii) Interest free loan scheme, (iii)
Training scheme, (iv) Skill development programme, (v) fee reimbursement, and (vi) Provision
of laptops. These loans are offered at subsidize rate are in direct competition with MFPs. However,
loans routed through PPAF will continue to provide funding for MFPs and are beneficial for the
industry.
It remains to be seen how these interest free loans will be disbursed considering PPAF has been
classified as non-profit organization and incorporation of Pakistan Microfinance Investment
Company (PMIC).
Rise in allocations for BISP by 5% and 50% for Bait-ul-Maal
BISP (PKR) FY17 (B) FY17(R) FY18 (B)
Allocation 115bln 112bln 121bln
Targeted Families 5.3mln 5.4mln 5.5mln
Bait-Ul- Maal 4bln 4.5bln 6bln
Impact: BISP is disposable income meant for basic necessities. Hence, it is not likely to impact
MFPs and may reduce the risk of micro loans being used for consumptive purposes.
Negative:
Agriculture loans with a low mark-up rate of 9.9% per annum to be provided to small farmer
with land holding of up to 12.5 acres. These loans will be given to two million farmers with
loan size of up to PKR 50,000 through ZTBL, NBP and other banks.
Impact: This scheme is not only in direct competition, the low mark-up rate will put MFPs at a
significant competitive disadvantage.
BUDGET FY18 – SNAPSHOT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE
PROVIDERS
PACRA Analytics (Pvt.) Limited
www.pacraanalytics.com
Page 4 of 6
FISCAL
MEASURES
Positives: Exemption from withholding tax on cash withdrawals by Branchless Banking Agents.
Impact: The bill proposes exemption from withholding tax on withdrawal of cash from branchless
banking (BB). This will be beneficial for MFBs (due to their vast network of agents and BB
operations) and is a positive incentive from the SBP and Ministry of Finance for the industry.
Use of Land Revenue Records for Mortgage Financing.
Impact: SBP will take required measures to align banking system with the Land Record
Management Information System. This will help the farmers in attaining credit by mortgaging their
properties. This provides MFPs an opportunity to collateralize and expand their portfolio.
Various relief incentives and concessions on inputs of Agriculture sector to continue.
Impact: The budget offers several measures to support agriculture sector. The continuous
concessional fertilizer prices and reduction in GST on DAP from PKR 400 to PKR 100 will enable
farmers in earning better profits, which, in turn, will improve their repayment ability.
Tax credit on tax payable for enlistment in stock exchange to be made available for 4 years
instead of 2.
Impact: MFBs intending to get listed will gain tax benefit for 4 years in the following way:
Period Rate of tax credit
Year of enlistment and following one year 20% of tax payable
Subsequent two years 10% of tax payable
Advance tax on telephone and internet users reduced.
Impact: Reduction in the rate of collection of tax from 14% to 12.5% for the mobile, internet
subscription and pre-paid internet or telephone card will result in lower operating expenses for the
MFPs.
Neutral:
Rationalization of Capital Gains Tax on disposal of securities to a flat 15% (for filers) and
20% (for non-filers).
Impact: The three tiered taxation structure that incentivized holding securities for a longer period
has been replaced with a flat rate of 15%. This will be applicable for securities acquired after July
01, 2013.
Exemption to Income of certain Non-Profit Organizations – Gulab Devi Chest Hospital,
Pakistan Poverty Alleviation Fund (PPAF) and National Academy of Performing Arts.
Impact: PPAF is now declared a Non-Profit Organization with no budgetary allocation in the
backdrop of establishment of Pakistan Microfinance Investment Company. The exact role and
activities undertaken by PPAF remains to be seen.
BUDGET FY18 – SNAPSHOT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE
PROVIDERS
PACRA Analytics (Pvt.) Limited
www.pacraanalytics.com
Page 5 of 6
Negatives:
Increase in Capital gain tax on dividends from stocks and mutual funds.
Type of Dividend Existing Proposed
Dividend other than dividend declared by power projects 12.5% 15%
Dividend from Stock Fund 10% 12.5%
Impact: MFPs that intend to have an investment portfolio will have to pay more tax on dividends.
Super Tax Rate of 4% on banking companies extended for another year.
Impact: The extension of super tax for another year will impact the profitability of MFBs.
Tax on undistributed profits of public companies at 10%.
Impact: Any public company (other than a scheduled bank, a modaraba or an IPP and a Government
owned public company) will be subject to 10% tax provided that it does not distribute 40% of its
after tax profits either through cash dividend or bonus shares. This will be applicable on MFIs
registered as public companies and MFBs.
Tax Credit for Not for Profit Organizations (NPOs): “Surplus Funds” to be taxed at 10%,
Limit on administrative expenses upto 15% of receipts.
Impact: NPOs were tax exempt till 2014. A special regime was introduced through section 100C
in the Finance Bill where tax exemption was replaced by 100% tax credit on fulfillment of certain
conditions. This included that 75% of income/receipts of a NPO has to be spent on charitable
activities. The Finance Bill 2017 proposes that in case of NPOs: i) the management and
administrative expenditure does not exceed 15% of total receipts, and ii) the “Surplus Funds” of
NPO will be taxed at 10%.
There seems to be some ambiguity as the clause in Finance Bill is not in line with Finance Minster’s
speech where he said that if the NPO does not spend more than 75% of its income/receipts on
charitable activities, the amount not spent shall be taxed at the rate of 10% while the non-profit
status will remain intact. Further clarity on the matter will be sought.
Slabs for Profit on Debt lowered to PKR 5mln.
Existing Proposed
Amount Rates Amount Rates
Does not exceed
PKR 25mln 10%
Does not exceed PKR
5mln 10%
Exceeds PKR 25mln but
not exceed PKR 50mln
2.5mln+12.5% of the
amount exceeding PKR
25mln
Exceeds PKR 5mln but
not exceed PKR 25mln 12.5%
Profit on debt exceeds
PKR 50mln
PKR 5.625mln +15% of the
amount exceeding PKR
50mln
Profit on debt
exceeds PKR 25mln 15%
Impact: The slab for profit from debt has been lowered as summarized in the above table. This will
result in higher tax expense for non-corporate clients of MFBs. However, since this is applicable
across the board, it will also impact banks.
BUDGET FY18 – SNAPSHOT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE
PROVIDERS
PACRA Analytics (Pvt.) Limited
www.pacraanalytics.com
Page 6 of 6
OTHERS/
REGULATORY
Positives:
China Pakistan Economic Corridor (CPEC): Addition of 10,000 MW of electricity to the
national grid by summer 2018.
Impact: A major macroeconomic factor for Pakistan CPEC and various infrastructure projects
initiated under it, especially energy projects. Availability of energy will improve the business
environment and assist MFPs in portfolio expansion as benefits of these projects reach common
person.
Low Inflation scenario envisaged to continue.
Impact: Continuous low average rate of inflation, though slightly higher than previous year (FY17:
4.09%; FY16: 2.8%), is positive for MFPs target market. The inflation is expected to rise from
preceding year. However, this is not expected to put significant strain on borrowers as the
Government aims to keep inflation below 6% in FY18.
Poverty Reduction and inclusion of women in work force: Vision 2023
Impact: The Government, over the next five years, aims to focus on poverty reduction while
targeting to bring it down from current 29% to 10%. Moreover, 30% of women are envisaged to be
part of labour force. These initiatives are in line with MFPs and could offer areas of potential
collaboration and synergies.
Access to financing for SMEs through PKR 3.5bln Risk Mitigation facility to be made
available with SBP, Establishment of E-gateway at SBP with a cost of PKR 200mln,
Establishment of Innovation Challenge fund of PKR 500mln.
Impact: This will provide support to MFPs to mitigate the potential loss risk against their SME
financing portfolio.
Neutral:
Policy rate remained unchanged at 5.75% in FY17
Impact: The low policy rate environment is expected to prevail barring unforeseen events. It will
have two-prong effect on the sector. The cost of funds for MFPs will go down in line with low
interest rate environment. However, return on interest bearing deposits and investments will also
come down. The proportionately higher decline in cost of funds will improve spreads.
Minimum wage rate enhanced from PKR 14,000 to PKR 15,000.
Impact: All employees of MFPs earning below PKR 14,000 will now be paid more impacting the
institutions’ bottom-line. On the other side, micro-borrower’s disposable income will go up, in turn,
enhancing their ability to repay loans.
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
June 2017 www.PacraAnalytics.com
TABLE OF CONTENTS – DETAILED REPORT
CONTENTS PAGE
SECTION I
Report:
Macro Economy – An overview 1
Budget FY18 – Highlights 3
Impact on Microfinance Providers 5
SECTION II
Annexures:
Law Referencing A
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 1 of 11
June 2017 www.PacraAnalytics.com
1. MACRO ECONOMY
– AN OVERVIEW
USD 300bln
economy
Significant (3.5%)
growth in
Agriculture sector
contributed to
strong GDP Growth
(5.3%)
Improving
Economic
indicators evident
by upgraded credit
rating by S&P
1.1 GDP Growth (FY17): During FY17, Pakistan became a USD 300bln economy.
The country continued its growth trajectory by achieving GDP growth of 5.3%. Services
sector remained the largest contributor to the GDP followed by industrial manufacturing
and agriculture. The agriculture sector bounced back and achieved its targeted growth of
3.5%. Better weather conditions, availability of agricultural inputs, and higher credit
disbursement
provided stimulus to
3% growth in crops
vis-à-vis negative
growth of ~5% in
FY16. Large scale
manufacturing
growth posted 5%
while small scale
manufacturing grew at ~8.2%. Services sector grew by 6.0% (FY16: 5.5%) as wholesale
and retail segments attained 6.8% growth. The adjacent table highlights respective
sector’s contribution to GDP and their growth.
1.1.1 Industrial sector, contributing 20.9% in GDP, has posted a growth of above 5%
during the last three years showing increased investors’ confidence. This is also evident
from 65% rise in credit to private sector during July–April, FY17. Continued government
efforts to improve law & order situation, energy reforms and progress on CPEC were
major stimulus for this revival. Construction continued to be the largest contributor
(growth: FY17: 9%; FY16: 14.6%) towards the growth of industrial sector followed by
small scale manufacturing (growth: FY17: 8.2%; FY16: 8.2%). Better YoY performance
of Finance & Insurance (growth: FY17: 10.8%; FY16: 6.1%) and wholesale and retail
(growth: FY17: 6.8%; FY16: 4.3%) led to strong performance of services sector.
1.2 Economy at a Glance: Major macro-economic factors exhibited improvement
in FY17. The outgoing year saw assortment of positives to take hope from and few
challenges to be addressed.
Economic Indicators FY16
FY17 (Jul-
Apr) FY18 Target
i) Per-Capita Income (USD) 1,531 1,629 N.A
ii) Inflation (Average) 2.9% 4.1% below 6%
iii) Policy Rate (Average Discount Rate) 6.0% 5.8% N.A
iv) Fiscal Deficit to GDP 4.6% 3.8% 4.1%
v) Remittances (USD Mln) 19,917 15,600 N.A
vi) Forex Reserve (USD Mln) 23,099 21,019 4 Months of
Import Cover
Social Safety
i) BISP disbursements (PKR Mln ) 102,000 115,000 121,000
ii) Prime Minister's Initiatives (Expenditure
Incurred, PKR Mln) 20,000 5,219 20,000
Per-Capita Income: The country’s per-capita income in US dollar terms
continued to increase and reached USD 1,629, showing an increase of 6.4% YoY.
Leading factors contributing to rise in per capita income were (i) higher real GDP
growth, (ii) relatively slow growth in population, and (iii) stable exchange rate.
Pakistan is currently classified as lower-middle income country (threshold of
USD 1,046) as defined by World Bank Development Indicator.
Inflation Rate: During FY17, inflation though increased YoY, remained
subdued at 4.1%. Low global oil and commodity prices led to lower inflation
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 2 of 11
June 2017 www.PacraAnalytics.com
despite rise in aggregate demand on the back of improved economic activities.
The government aims to keep inflation in single digit in coimg years. This will
provide respite to MFP borrowers as their repayment ability is directly impacted
by inflation.
Policy Rate: The overall macroeconomic stabilization as evident by higher
credit expansion, better crop production, uptick in CPEC related activities in
energy sector and lower inflation provided an opportunity for SBP to keep policy
rate stable at 5.75% during FY17. This is the lowest rate since early 1970s. This is
positive for MFPs’ since they can mobilize funds at lower rates and can pass on
this benefit to borrowers as well.
Fiscal Deficit to GDP: The government continued to follow its policy of
fiscal consolidation, which resulted in curtailment in the fiscal deficit at 4.2%
(10M FY17 3.8%) during FY17 as against 4.6% in FY16. This has been achieved
mainly through significant rise in tax revenues, reduction in total expenditures and
higher provincial surplus. Furthermore, higher tax collection enabled the
government to achieve the Tax-to-GDP ratio of 13.2% in FY17 (FY16: 12.6%;
FY15: 11%). The government aims to curtail the fiscal deficit at 4.1% in FY18
through increase in tax revenue collection and prudent management of
expenditures. Better revenue collection and lower fiscal deficit gives financial
flexibility to the government and frees up funds for economic activities.
Forex Reserve: As at end-Apr17, the country’s total forex reserves stood at
USD 21bln, showing an aggregate decline of 9% from June 2016. This was
mainly due to widening current account deficit. Moreover, worker’s remittances
were recorded at USD 15.6bln depicting ~3% YoY decline during Jul-Apr17.
Remittances are expected to slow down due to prevailing conditions in GCC
region putting pressure on reserves. In FY18, government is targeting to keep
foreign exchange reserves at a minimal level that can cover 4 months of imports.
The government’s concerted efforts to improve socio-political scenario and investor
sentiments have supplemented the macro-economic conditions of the country. This is
evident from the fact that Standard and Poor’s upgraded Pakistan’s long-term credit
rating from “B-” to B with stable outlook in October, 2016. Furthermore, Pakistan’s
capital market touched its historic highs, signifying investor’s confidence. Based on its
strong performance, the Pakistan Stock Exchange has been reclassified from Frontier to
“Emerging Markets” category by Morgan Stanley Capital International.
1.3 FY18 – Prospective Assessment:
The government is targeting to achieve 6% GDP growth for FY18. It appears that
Pakistan’s economy is now geared to achieve higher growth after several years of
consolidation and focus on stabilization. The positive sentiments stem from several
factors including successful war on terror, improving law and order situation, and energy
reforms. Another key development has been CPEC. The USD 46bln project is now set to
take off. Out of this USD 46bln, energy related projects are estimated to be USD 34.7bln.
CPEC is not only a short term economic growth catalyst, but it will also have trickle-
down effect in future. The extent of success of this initiative and actual flow of funds and
investments in Pakistan’s economy will have a direct bearing on the country’s growth.
Meanwhile, government’s fiscal discipline and political stability are crucial for future
prospects. Inflation is expected to remain low (~6%). This could change if international
oil/commodity prices increase significantly. Managing trade deficit will be a challenge
for the government as exports are slowing down and imports pick up. This will also put
pressure on country’s foreign exchange reserves.
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 3 of 11
June 2017 www.PacraAnalytics.com
PKR bln
FY17 (B) FY17 (R) FY18 (B)
Total Outlay 4,895 4,841 5,104A. Outflows 4,895 4,841 5,104
a Current 3,844 3,905 3,764
b Development (i+ii) 1,051 936 1,340
i Federal PSDP 800 715 1,001
ii Others 251 221 339
B. Fiscal Deficit [A-(c+d)] 1,776 1,936 1,830
c Net Revenue Receipts (i+ii) 2,780 2,616 2,926
i Gross Revenue (a+b) 4,916 4,737 5,310
a Tax Revenue 3,956 3,825 4,330
b Non-Tax Revenue 959 912 980
ii Provincial Share (2,136) (2,121) (2,384)
d Estimated Provincial Surplus 339 290 347
C. Financing of Deficit (e+f+g+h) 1,776 1,936 1,830
e Net Capital Receipts (i+ii) 454 180 553
i Capital Receipts (a+b) 641 325 641
a Recoveries of Advances 102 108 113
b Public Debt 539 217 528
ii Disbursements (187) (145) (88)
f External Receipts 820 996 838
g Privatization Proceeds 50 18 50
h Bank Borrowings 453 741 390
(B): Budgeted , (R):Revised
Budget - FY18
2 BUDGET FY18 -
HIGHLIGHTS
Growth stimulus
through promotion
of exports and better
agriculture
productivity
Drive for
documenting the
economy continues
2.3 Budget Strategy: The government presented its fifth consecutive budget for
FY18 with
total outlay of
PKR 5,104bln.
The focus of
initial three
budgets was
fiscal
consolidation.
However,
there is a
gradual shift
and the
government
now aims to
stimulate
growth
through
promotion of
exports, job
creation, and
better
agriculture
productivity,
as macroeconomic indicators have stabilized. In FY18 budget, the government continues
its focus on reducing fiscal deficit through revenue augmentation as evident by additional
tax collection of PKR 505bln. The government’s drive to document the economy and
increasing cost for non-filers persists. On the expenditure side, emphasis has been made
on development expenditure by assigning additional amount of PKR 404bln mainly to
Federal PSDP (PKR 286bln). A decline has been observed on account of reduced foreign
loans’ repayment (FY18: PKR 286mln; FY17: PKR 507mln) as the country’s total debt
tilts more towards domestic borrowing. Meanwhile, social net is expected to strengthen
further with allocation of grants for Benazir Income Support Programme (BISP), low rate
loans for farmers, and various initiatives and loan schemes to generate employment.
However, evolving an effective mechanism for outreach and distribution mechanism is
critical to achieve meaningful results. This is an area where MFPs can play an effective
role.
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 4 of 11
June 2017 www.PacraAnalytics.com
1,228
133
507 245
841
382
169
399 -
1,231
132
287
248
920
430
139
377 -
Current Expenditures
Mark-up (Domestic)
Mark-up (Foreign)
Foreign Loan
RepaymentPensions
Defence
Grants & Transfers
Subsidies
Civil Government
Provisions
2.4 Expenditures: For FY18, the government has budgeted expenditure of PKR
5,104mln – up by 5% from revised estimates of FY17. Current expenditure continues to
occupy major (74%) share in the budgetary expenditures while remaining 26% is
developmental expenditures. Under the current expenditure head, General Public
Services hold 68% share
(FY17: 70%). Meanwhile, a
significant increase of 37% in
PSDP allocation has been
made (FY18: 2,113bln;
FY17(R): 1,539bln). In the
Federal PSDP, additional
allocation of PSDP includes
PKR 115bln assigned for
Special Federal Development
Programme (PKR 40bln),
Energy for All (PKR 12.5bln),
Clean Drinking Water for All
(PKR 12.5bln) and Relief and
Rehabilitation of IDPs (PKR
45bln). Moreover, PKR 110bln have been allocation for National Highway Authority
(FY18: ~PKR 320bln; FY17 (R): PKR ~210bln). However, the actual utilization of
PSDP remains to be seen since government adjusts this amount to manage deficit. Higher
utilization of PSDP is expected since FY18 will be election year. The total subsidies for
the year have been estimated at ~PKR 139bln, 18% lower than the revised allocation for
the outgoing year. The subsidies are mainly (85%) allocated for power sector.
2.5 Receipts: The Federal Government is forecasting to generate gross revenue of
PKR 5,310bln through tax and non-tax sources. Out of this, PKR 2,384bln will be
provincial share. To meet the deficit of PKR 1,830bln, the government will use different
source of funding including external borrowings, bank borrowings and surplus generated
by provinces. For FY18, considerably lower amount of bank borrowings has been
estimated (FY18: PKR 390bln; FY17 (R): PKR 741bln). This will result in better
availability of funds for the private sector.
2.6 Tax Collection: The tax receipts were PKR 3,825bln in FY17 and are budgeted
to be PKR 4,330bln in FY18.
Out of this, direct taxes are
expected to increase from
PKR 1,379bln in FY17 to
PKR 1,595bln in FY18 and
indirect taxes from PKR
1,379bln in FY17 to PKR
1,595bln in the FY18. The
government has not made any
drastic changes to the tax net
and has focused on increasing
collection from existing
avenues rather than bringing
new segments in tax net.
Certain measures have been
undertaken to charge higher
tax from non-filers in multiple
areas. During July-April FY17, FBR made 8% higher tax collection as compared to same
period last year. Meanwhile, the proportion of indirect tax (60%) remains high. Increase
in indirect taxes may inflate prices of goods in the country.
FY18 (B)
FY17 (R)
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 5 of 11
June 2017 www.PacraAnalytics.com
3 IMPACT ON
MICROFINANCE
PROVIDERS
Increased focus on
agriculture
Funding and
guarantee schemes
likely to supplement
lending
Tax burden
continues for
banking sector
Exemption from
withholding tax on
withdrawal of cash
from branchless
banking (BB)
positive for
Microfinance
3.1 The budget FY18 has several implications for the microfinance sector. Some of
these provisions have a direct impact, while others are likely to create opportunities or
present competition. There are certain areas which remain ambiguous and need further
clarity as to their impact on MFPs and their repercussion – positive, negative or neutral –
for microfinance sector in Pakistan.
3.1.1 FUNDING SCHEMES The increased budgetary allocation of PKR 152bln (FY17 (R): PKR 127bln) for
development expenditure to improve socio-economic conditions is positive for MFPs.
The allotment has been made for various grants and schemes to support agriculture
sector and underprivileged society.
POSITIVES:
I. Crop Loan Insurance Scheme, Livestock Insurance Scheme and Credit
Guarantee Scheme: The government, through State Bank of Pakistan, will continue to
provide guarantee to participating financial institution for up to 50% loss sharing. For
this purpose following allocations have been made:
(PKR) FY17 (B) FY17(R) FY18 (B)
Crop Loan Insurance 500mln 500mln 700mln
Livestock Insurance Scheme - - 1,000mln
Credit Guarantee Scheme 1,000mln - 1,000mln
All commercial banks, MFBs and specialized institution are eligible to participate. Credit
guarantee limits will be assigned to financial institution based on their exposure and
potential in agriculture sector disbursements. CLIS introduced in 2008, mitigates the
default risk of small farmers, in case of occurrence of natural calamities. Under this
scheme, the government is bearing the cost of premium up to 2 percent per crop per
season for small farmers.
Impact: Loss coverage of 50% is likely to encourage lending under this scheme. The
loan up to amount of PKR 100,000 will be provided to farmers having up to 5 acres
irrigated or 10 acres non-irrigated land holdings. The microfinance sector is expected to
reap benefits from this opportunity as the loan size falls under limits allowed to
microfinance lenders. Considering the eligibility criteria for participating financial
institution, MFBs are well positioned to capitalize on this opportunity as they are already
working with small and marginalized farmers. The cost sharing under CLIS for small
farmers, with land holdings of up to 25 acres, is likely to reduce their financing cost. On
the other hand microfinance lenders will be protected against potential losses.
II. BISP Beneficiary Graduation Program: Under this scheme, grants will be
given to Self-Sustaining Individuals of BISP beneficiary families who are willing to start
their own business. For this purpose, onetime cash grant of PKR 50,000 along with
training will be provided to 250,000 families initially.
Impact: This is a good initiative towards self-sustainable instead of reliance on support
programs. This scheme will provide potential market for MFPs to expand the lending
portfolio in future.
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 6 of 11
June 2017 www.PacraAnalytics.com
III. Prime Minister’s National Health Insurance Program - Phase II: The access
to better medical care facilities is becoming costlier in Pakistan. Under this initiative,
cover will be provided to persons meeting poverty score for hospitalization. The program
has been launched in phases in 23 targeted districts during 2016.The government has
allocated PKR 10bln for this program.
Impact: The scheme will provide coverage against expenses due to health problems to
3.1mln beneficiaries with a coverage limit of PKR 50,000 for secondary care services
and PKR 250,000 for tertiary care for specified diseases as per the program. Thus, it
protects MFPs against potential losses and expenses.
IV. Risk Sharing Guarantee Scheme for home financing: Government will
provide 40% Credit Guarantee Cover to financing institutions including MFBs for home
financing for up to PKR 1mln. For this purpose, PKR 6bln have been allocated.
Impact: This presents an opportunity for MFBs to expand and diversify their portfolio
with an additional benefit of credit cover against potential losses. MFBs can increase
their loan size as well.
V. Financial Inclusion Fund: A fund amounting to PKR 8bln is to be setup at SBP
to provide loans to low-income segments through MFPs.
Impact: This scheme will provide funding and impetus for MFPs and is beneficial for
the industry. The exact mechanism of distribution remains to be seen.
VI. Enhancement in Agriculture Credit to PKR 1,001bln: In FY17, Agriculture
Credit Advisory Committee (ACAC) had set the agricultural credit disbursement targets
of PKR 700bln. This was to be disbursed by 52 participating institutions including 20
Commercial banks, 2 Specialized Banks, 4 Islamic Banks and 10 Microfinance Banks
and 16 Microfinance Institutions/Rural Support Programmes (MFIs/RSPs).
Impact: For FY18, the target for agriculture credit through has been set at PKR
1,001bln, which is 43% higher than last year and equal to PSDP. This will be beneficial
for MFPs as they may extend credit facilities to meet targets. We assume that this facility
will be available to participating institutions like last years.
NEUTRAL:
I. Prime Minister’s youth schemes to continue: In FY18, PKR 20bln (FY17:
PKR 20bln) are allocated for Prime Minister Youth Programme. Under this initiative,
various support schemes to promote youth involvement in the economy. These schemes
are mainly directed towards encouraging entrepreneurship and support education. These
schemes cover: (i) Business loan scheme, (ii) Interest free loan scheme, (iii) Training
scheme, (iv) Skill development programme, (v) Fee reimbursement, and (vi) Provision
of laptops.
Impact: These loans are offered at subsidized rates and are in direct competition with
MFPs. However, loans routed through MFPs will continue to provide funding and are
beneficial for the industry.
It remains to be seen how these interest free loans will be disbursed considering PPAF
has been classified as a non-profit organization and incorporation of Pakistan
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 7 of 11
June 2017 www.PacraAnalytics.com
Microfinance Investment Company (PMIC).
II. Rise in allocations for BISP by 5% and 50% for Bait-ul-Maal: The program
was initiated as an effort to provide relief to the underprivileged of the society.
Allocation of funds under this scheme has been enhanced as given below:
(PKR) FY17 (B) FY17(R) FY18 (B)
Allocation 115bln 112bln 121bln
Targeted Families 5.3mln 5.4mln 5.5mln
Bait-Ul- Maal 4bln 4.5bln 6bln
Impact: BISP is disposable income meant for basic necessities. Hence, it is not likely to
impact MFPs and may reduce the risk of micro loans being used for consumptive
purposes.
NEGATIVE:
I. Provision of agriculture loans with a low mark-up rate: Loans with a mark-
up rate of 9.9% per annum will be provided to small farmer with land holding of up to
12.5 acres. These loans will be given to two million farmers with loan size of up to PKR
50,000 through ZTBL, NBP and other banks.
Impact: This scheme is not only in direct competition, the low mark-up rate will put
MFPs at a significant competitive disadvantage.
3.1.2 FISCAL MEASURES
POSITIVES:
I. Exemption from withholding tax on cash withdrawals by Branchless
Banking Agents: The bill proposes exemption from withholding tax on withdrawal of
cash from branchless banking (BB).
Impact: This will be beneficial for MFBs (due to their vast network of agents and BB
operations) and is a positive incentive from the SBP and Ministry of Finance for the
industry.
Ref: Section 231A of Income Tax Ordinance 2001.
II. Use of Land Revenue Records for Mortgage Financing: SBP will take
required measures to align banking system with the Land Record Management
Information System.
Impact: This will help farmers in attaining credit by mortgaging their properties. This
provides MFPs an opportunity to collateralize and expand their portfolio.
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 8 of 11
June 2017 www.PacraAnalytics.com
III. Various relief incentives and concessions on inputs of Agriculture sector to
continue: The budget offers several measures to support agriculture sector. The
incentives are mainly focused toward reducing cost of inputs. In this regard, continuation
in the concessional fertilizer prices and reduction in GST on DAP from PKR 400 to PKR
100 have been proposed.
Impact: These measures will enable farmers in earning better profits, which, in turn,
will improve their repayment ability.
IV. Tax credit on enlistment: In order to encourage organized sector tax, the tax
credit period has been enhanced for 4 years instead of 2 years in the following manner.
Period Rate of tax credit
Year of enlistment and following one year 20% of tax payable
Subsequent two years 10% of tax payable
Impact: MFBs intending to get listed will gain tax benefit for 4 years.
Ref: Section 65C of Income Tax Ordinance 2001.
V. Advance tax on telephone and internet users reduced: Reduction in the rate
of collection of tax from 14% to 12.5% for the mobile, internet subscription and pre-paid
internet or telephone card.
Impact: It will result in lower operating expenses for the MFPs.
Ref: Section 236 of Income Tax Ordinance 2001.
NEUTRAL:
I. Rationalization of Capital Gains Tax on disposal of securities to a flat 15%
(for filers) and 20% (for non-filers):
Impact: The three tiered taxation structure that incentivized holding securities for a
longer period has been replaced with a flat rate of 15%. This will be applicable for
securities acquired after July 01, 2013.
Ref: Section 37A of Income Tax Ordinance 2001.
II. Exemption to Income of certain Non-Profit Organizations: Income generated
by certain institutions – Gulab Devi Chest Hospital, Pakistan Poverty Alleviation Fund
(PPAF) and National Academy of Performing Arts – has been proposed to be exempted
from income tax by inclusion of their names in Clause (66) of Part I of the second
schedule to the Income Tax Ordinance 2001.
Impact: PPAF is now declared a Non-Profit Organization with no budgetary allocation
in the backdrop of establishment of Pakistan Microfinance Investment Company. The
exact role and activities undertaken by PPAF remains to be seen.
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 9 of 11
June 2017 www.PacraAnalytics.com
NEGATIVES:
I. Super-tax extended: Imposition of one-time 4% super-tax on income of
banking companies in excess of PKR 500mln, extended for another year.
Impact: The extension of super tax for another year will impact the profitability of
MFBs.
Ref: Section 4B of Income Tax Ordinance 2001.
II. Increase in Capital gain tax on dividends: The bill proposes to increase the
rate of tax on dividend from stocks and mutual funds in the following manner:
Type of Dividend Existing Proposed
Dividend other than dividend declared
by power projects 12.5% 15%
Dividend from Stock Fund 10% 12.5%
Impact: MFPs that intend to have an investment portfolio will have to pay more tax on
dividends.
Ref: Section 5 of Income Tax Ordinance 2001.
III. Tax on undistributed profits of public companies at 10%: Any public
company (other than a scheduled bank, a modaraba or an IPP and a Government owned
public company) will be subject to 10% tax provided that it does not distribute 40% of
its after tax profits either through cash dividend or bonus shares.
Impact: This will be applicable on MFIs registered as public companies and MFBs.
Ref: Section 5A of Income Tax Ordinance 2001.
IV. Slabs for Profit on Debt lowered to PKR 5mln: The slab for profit from debt
has been lowered as summarized in the given table:
Existing Proposed
Amount Rates Amount Rates
Does not exceed
PKR 25mln 10%
Does not exceed
PKR 5mln 10%
Exceeds PKR 25mln
but not exceed PKR
50mln
2.5mln+12.5% of
the amount
exceeding PKR
25mln
Exceeds PKR 5mln
but
not exceed PKR
25mln
12.5%
Profit on debt exceeds
PKR 50mln
PKR 5.625mln
+15% of the
amount exceeding
PKR 50mln
Profit on debt
exceeds PKR
25mln
15%
Impact: This will result in higher tax expense for non-corporate clients of MFBs.
However, since this is applicable across the board, it will also impact banks.
Ref: Section 7B of Income Tax Ordinance 2001.
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 10 of 11
June 2017 www.PacraAnalytics.com
V. Tax Credit for Not for Profit Organizations (NPOs): “Surplus Funds” to be
taxed at 10%, Limit on administrative expenses up to 15% of receipts.
Impact: NPOs were tax exempt till 2014. A special regime was introduced through
section 100C in the Finance Bill where tax exemption was replaced by 100% tax credit
on fulfillment of certain conditions. This included that 75% of income/receipts of a NPO
has to be spent on charitable activities. The Finance Bill 2017 proposes that in case of
NPOs: i) the management and administrative expenditure does not exceed 15% of total
receipts, and ii) the “Surplus Funds” of NPO will be taxed at 10%.
There seems to be some ambiguity as the clause in Finance Bill is not in line with
Finance Minster’s speech where he said that if the NPO does not spend more than 75%
of its income/receipts on charitable activities, the amount not spent shall be taxed at the
rate of 10% while the non-profit status will remain intact. Further clarity on the matter
will be sought.
Ref: Section 100C of Income Tax Ordinance 2001.
3.1.3 REGULATORY & OTHERS MFPs are likely to avail the benefit of stable macro-economic conditions:
POSITIVES:
I. China Pakistan Economic Corridor (CPEC): Addition of 10,000 MW of
electricity to the national grid by summer 2018.
Impact: A major macroeconomic factor for Pakistan is CPEC and various infrastructure
projects initiated under it, especially energy projects. Availability of energy will improve
the business environment and assist MFPs in portfolio expansion as benefits of these
projects reach common person.
II. Low Inflation scenario envisaged to continue.
Impact: Continuous low average rate of inflation, though slightly higher than previous
year (FY17: 4.1%; FY16: 2.8%), is positive for MFPs target market. The inflation is
expected to rise from preceding years. However, this is not expected to put significant
strain on borrowers as the Government aims to keep inflation below 6% in FY18.
III. Poverty Reduction and inclusion of women in work force: Vision 2023
Impact: The Government, over the next five years, aims to focus on poverty reduction
while targeting to bring it down from current 29% to 10%. Moreover, 30% of women are
envisaged to be part of labour force. These initiatives are in line with MFPs and could
offer areas of potential collaboration and synergies.
IV. Access to financing for SMEs through PKR 3.5bln Risk Mitigation facility
to be made available with SBP, Establishment of E-gateway at SBP with a cost of
PKR 200mln, Establishment of Innovation Challenge fund of PKR 500mln.
BUDGET FY18 – REPORT
IMPACT ON MICROFINANCE PROVIDERS
BUDGET FY18 – IMPACT ON MICROFINANCE PROVIDERS Page 11 of 11
June 2017 www.PacraAnalytics.com
Impact: This will provide support to MFPs to mitigate the potential loss risk against
their SME financing portfolio.
NEUTRAL:
I. Policy rate remained unchanged at 5.75% in FY17.
Impact: The low policy rate environment is expected to prevail barring unforeseen
events. It will have two-prong effect on the sector. The cost of funds for MFPs will go
down in line with low interest rate environment. However, return on interest bearing
deposits and investments will also come down. The proportionately higher decline in
cost of funds will improve spreads.
II. Minimum wage rate enhanced from PKR 14,000 to PKR 15,000.
Impact: All employees of MFPs earning below PKR 14,000 will now be paid more
impacting the institutions’ bottom-line. On the other side, micro-borrower’s disposable
income will go up, in turn, enhancing their ability to repay loans.
Disclaimer:
PACRA Analytics has used due care in preparation of this document. Our information has been obtained from sources we consider to be
reliable but its accuracy or completeness is not guaranteed. PACRA Analytics shall owe no liability whatsoever to any loss or damage
caused by or resulting from any error in such information.
ANNEXURE A
June 2017 www.PacraAnalytics.com
LAW REFERENCING
Previous Section Reference:
Income Tax Ordinance,
2001
Change
New Reference Number:
Income Tax Ordinance,
2001
231A
Amendment:
Exemption from withholding
tax on withdrawal of cash
from branchless banking
(BB).
Same
65C
Amendment:
The tax credit has been
enhanced for 4 years instead
of 2 years with tax credit
equal to 20% of tax payable
available in first 2 years and
then 10% credit in the
subsequent two years.
same
Section 236
Amendment:
Reduction in the rate of col-
lection of tax from 14% to
12.5% for the mobile, internet
subscription and pre-paid in-
ternet or telephone card.
same
Section 37A
Amendment:
A flat rate of 15% (for filers)
and 20% (for non-filers) CGT
has been proposed instead of
previously applicable three
tiered taxation structure. This
will be applicable for securi-
ties acquired after July 01,
2013.
same
4B
Amendment: Levy of one-time super tax of
4% extended for another one
year
same
5
Amendment: Increase of 2.5% in the rate of
tax on dividend from stocks
and mutual funds
same
ANNEXURE A
June 2017 www.PacraAnalytics.com
5A
Inserted:
Imposition of 10% Tax on un-
distributed profits of public
company (other than a sched-
uled bank, a modaraba or an
IPP and a Government owned
public company) provided
that it does not distribute 40%
of its after tax profits either
through cash dividend or bo-
nus shares.
7B
Amendment: Tax rates on the slab for profit
from debt has been lowered in
the following manner
i. 10% tax on profit (less
than PKR 5mln) from
debt,
ii. 12.5% on profit more
than PKR 5mln but less
than PKR 25mln) and
iii. 15% on profit
amounting above PKR
25mln
same
100C
Inserted:
In case of NPOs: i) the man-
agement and administrative
expenditure should not exceed
15% of total receipts, and ii)
the “Surplus Funds” of NPO
will be taxed at 10%.