BUDGET FY18 REPORT IMPACT ON MICROFINANCE PROVIDERS

Transcription

1 BUDGET FY18 REPORT

2 BUDGET FY18 SNAPSHOT Budget Summary - PKR Bln FY17 (R) FY18 (B) % change Total Budget Outlay 4,841 5, Inflows 4,841 5, Internal Resources 3,086 3, i. Tax Revenue 3,825 4, ii. Others 1,382 1, iii. Provincial Share -2,121-2, External Resources Privatization Proceeds Bank Borrowings Outflows 4,841 5, Current Expenditure 3,905 3, i. General Public Services 2,741 2, ii. Defence Affairs & Services iii. Others Development Expenditure 936 1, i. Federal PSDP 715 1, ii. Others 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 ii) Prime Minister's Initiatives (Expenditure Incurred, PKR mln) 20,000 5,219 20,000 BUDGET FY18 IMPACT ON MICROFINANCE PROVIDERS Page 1 of 6 PACRA Analytics (Pvt.) Limited

3 BUDGET FY18 SNAPSHOT Areas Proposals 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 FUNDING SCHEMES 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 IMPACT ON MICROFINANCE PROVIDERS Page 2 of 6 PACRA Analytics (Pvt.) Limited

4 BUDGET FY18 SNAPSHOT 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 IMPACT ON MICROFINANCE PROVIDERS Page 3 of 6 PACRA Analytics (Pvt.) Limited

5 BUDGET FY18 SNAPSHOT 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. FISCAL MEASURES 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 Subsequent two years 20% of tax payable 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, 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 IMPACT ON MICROFINANCE PROVIDERS Page 4 of 6 PACRA Analytics (Pvt.) Limited

6 BUDGET FY18 IMPACT ON MICROFINANCE PROVIDERS Negatives: BUDGET FY18 SNAPSHOT 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 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. Does not exceed PKR 25mln Existing Proposed Amount Rates Amount Rates 10% Does not exceed PKR 5mln 10% Exceeds PKR 25mln but not exceed PKR 50mln Profit on debt exceeds PKR 50mln 2.5mln+12.5% of the amount exceeding PKR 25mln PKR 5.625mln +15% of the amount exceeding PKR 50mln Page 5 of 6 Exceeds PKR 5mln but not exceed PKR 25mln Profit on debt exceeds PKR 25mln 12.5% 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. 15% PACRA Analytics (Pvt.) Limited

7 BUDGET FY18 SNAPSHOT Positives: China Pakistan Economic Corridor (CPEC): Addition of 10,000 MW of electricity to the national grid by summer 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 OTHERS/ REGULATORY 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 IMPACT ON MICROFINANCE PROVIDERS Page 6 of 6 PACRA Analytics (Pvt.) Limited

8 BUDGET FY18 REPORT TABLE OF CONTENTS DETAILED REPORT CONTENTS PAGE SECTION Report: Macro Economy An overview 1 Budget FY18 Highlights 3 Impact on Microfinance Providers 5 I SECTION Annexures: Law Referencing A II

9 BUDGET FY18 REPORT 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 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. FY17 (Jul- Economic Indicators FY16 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 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 Page 1 of 11

10 BUDGET FY18 REPORT 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 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, 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 trickledown 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 Page 2 of 11

11 2 BUDGET FY18 - HIGHLIGHTS Growth stimulus through promotion of exports and better agriculture productivity Drive for documenting the economy continues BUDGET FY18 REPORT 2.3 Budget Strategy: The government presented its fifth consecutive budget for FY18 with Budget - FY18 PKR bln total outlay of FY17 (B) FY17 (R) FY18 (B) PKR 5,104bln. Total Outlay 4,895 4,841 5,104 The focus of A. Outflows 4,895 4,841 5,104 initial three a Current 3,844 3,905 3,764 budgets was b Development (i+ii) 1, ,340 fiscal i Federal PSDP ,001 consolidation. ii Others However, B. Fiscal Deficit [A-(c+d)] 1,776 1,936 1,830 c Net Revenue Receipts (i+ii) 2,780 2,616 2,926 there is a i Gross Revenue (a+b) 4,916 4,737 5,310 gradual shift a Tax Revenue 3,956 3,825 4,330 and the b Non-Tax Revenue government ii Provincial Share (2,136) (2,121) (2,384) now aims to d Estimated Provincial Surplus stimulate C. Financing of Deficit (e+f+g+h) 1,776 1,936 1,830 growth e Net Capital Receipts (i+ii) through i Capital Receipts (a+b) promotion of a Recoveries of Advances b Public Debt exports, job ii Disbursements (187) (145) (88) creation, and f External Receipts better g Privatization Proceeds agriculture h Bank Borrowings productivity, (B): Budgeted, (R):Revised 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 Page 3 of 11

12 BUDGET FY18 REPORT 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 1,231 1,228 BUDGET FY18 Page 4 of Current Expenditures FY17 (R) FY18 (B) Mark-up (Domestic) Mark-up (Foreign) Foreign Loan Repayment Pensions Defence Grants & Transfers Subsidies Civil Government Provisions 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.

13 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 BUDGET FY18 REPORT 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 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 Page 5 of 11

14 BUDGET FY18 REPORT 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 Page 6 of 11

15 BUDGET FY18 REPORT 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 markup 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 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 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 Page 7 of 11

16 BUDGET FY18 REPORT 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 Year of enlistment and following one year Subsequent two years Rate of tax credit 20% of tax payable 10% of tax payable Impact: MFBs intending to get listed will gain tax benefit for 4 years. Ref: Section 65C of Income Tax Ordinance 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 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, Ref: Section 37A of Income Tax Ordinance 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 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 Page 8 of 11

17 NEGATIVES: BUDGET FY18 REPORT 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 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 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 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 10% Does not exceed PKR 5mln 10% 2.5mln+12.5% of Exceeds PKR 5mln the amount but exceeding PKR not exceed PKR 12.5% 25mln 25mln Does not exceed PKR 25mln Exceeds PKR 25mln but not exceed PKR 50mln Profit on debt exceeds PKR 50mln PKR 5.625mln +15% of the amount exceeding PKR 50mln Profit on debt exceeds PKR 25mln 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 BUDGET FY18 Page 9 of 11 15%

18 BUDGET FY18 REPORT 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 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 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 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 Page 10 of 11

19 BUDGET FY18 REPORT 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. BUDGET FY18 Page 11 of 11

20 ANNEXURE A Previous Section Reference: Income Tax Ordinance, A 65C Section 236 Section 37A 4B 5 LAW REFERENCING Change Amendment: Exemption from withholding tax on withdrawal of cash from branchless banking (BB). 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. Amendment: 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. 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 securities acquired after July 01, Amendment: Levy of one-time super tax of 4% extended for another one year Amendment: Increase of 2.5% in the rate of tax on dividend from stocks and mutual funds New Reference Number: Income Tax Ordinance, 2001 Same same same same same same

21 ANNEXURE A 5A 7B 100C Inserted: Imposition of 10% Tax on undistributed profits of public company (other than a scheduled 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 bonus shares. 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 Inserted: In case of NPOs: i) the management and administrative expenditure should not exceed 15% of total receipts, and ii) the Surplus Funds of NPO will be taxed at 10%. same