BUDGET FY19 REPORT IMPACT ON MICROFINANCE PROVIDERS. May PACRA Analytics (Pvt.) Limited

Transcription

1 BUDGET FY19 REPORT PACRA Analytics (Pvt.) Limited

2 BUDGET FY19 IMPACT ON MICROFINANCE PROVIDERS FY18 (R) FY19 (B) % change Total Budget Outlay 5,361 5, Inflows 5,361 5, Internal Resources 3,545 3, i. Tax Revenue 4,147 4, ii. Others 1,714 1, iii. Provincial Share -2,316-2, External Resources 1,230 1, Privatization Proceeds Bank Borrowings 586 1, Outflows 5,361 5, Current Expenditure 4,298 4, i. General Public Services 2,977 3, ii. Defence Affairs & Services 999 1, iii. Others Development Expenditure 1,063 1, i. Federal PSDP ii. Others (R): Revised, (B): Budgeted Budget Summary - PKR Bln BUDGET FY19 SNAPSHOT The Government achieved an historic moment by presenting its sixth consecutive budget. The total outlay of FY19 budget is PKR 5,932bln 16% higher than FY18. In this budget, the government continues its focus on economic growth promotion of exports, job creation, enahncing agriculture productivity etc. and documenting the economy. Pakistan Economy recorded growth of 5.8% in FY18 (FY17: 5.4%), which is highest in last 13 years. However, per capita income largely remained stagnant at USD 1,641. Inflation was curtailed to 3.7% (4.0% in July-Apr FY17) due to subdued food prices. The fiscal deficit is expected to be around 5.5% of GDP in FY18 (FY17: 3.8%). The rise in deficit is due to higher imports and lower than expected growth in exports. This poses a challenge and could impact multiple fronts including foreign reserves, exchange rate, and inflation. The remittances from oversees workers registered a growth of 3.9% and were recorded at USD 16.2bln at end-apr18. They are estimated to cross USD 20bln mark by June. Foreign reserves further declined owing to a surge in import bill. Pak Rupee (PKR) witnessed depreciation with USD averaging at PKR in July-Apr FY18. The rupee has further depreciated to PKR 115 per USD since. This, coupled with surge in crude oil prices, may lead to inflationary pressure in coming months. In FY18, industrial sector grew by an impressive 5.8% as large scale manufacturing, small scale manufacturing and construction segments recorded growth of 6.1%, 8.2% and 9.1%, respectively. The agricultural sector continued its forward momentum by posting growth of 3.8%. Better supplies of agricutural inputs and continued credit disbursement served as key catalysts. A considerable 11.4% growth in general government services and 7.5% in wholesale and retail segments helped services sector in achieving growth of 6.4% in FY18. Government is committed to its drive of documenting the economy and expanding tax net. Cost for non-filers is set to rise on multiple fronts including higher withholding tax rates and restriction on purchase of vehicles and property. Government is further strengthening its social net for the poor by allocating additional funds for Benazir Income Support Programme (BISP), low rate loans for farmers, and various other initiatives and loan schemes to generate employment. However, quantum of certain schemes has been reduced. Pakistan s poverty headcount has witnessed a persistent reduction both at national and regional levels. The percentage of people living below the poverty line has declined from 50.4% in FY06 to 24.3% in FY16. The decline in poverty is more pronounced in urban areas than rural areas. However, a large segment living just above the poverty line is very vulnerable and could fall back into poverty even if there is a mild economic shock. Economic Indicators FY18 FY19 Target i) Per-Capita Income (USD) 1,691 N.A ii) Inflation 9 months FY18 (Average) 3.8% below 6% iii) Policy Rate (Average Discount Rate) 5.85% N.A iv) Fiscal Deficit to GDP below 5.5%* 4.9% v) Remittances (USD Mln) 20,000* N.A vi) Forex Reserve (USD Mln) 17,286** 15,000 Social Safety i) BISP disbursements (PKR Mln ) 113, ,700 ii) Prime Minister's Initiatives (Expenditure Incurred, PKR Mln) N.A 10,000 * Budget Estimates ** July-MayFY18 Page 1 of 6 PACRA Analytics (Pvt.) Limited

3 BUDGET FY19 SNAPSHOT Areas Proposals Positives: Continuation of 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: Continuation of this scheme will help MFPs to expand their lending portfolios. Increased allocation of funds for Crop Loan Insurance Scheme (PKR) FY18 (B) FY18(R) FY19 (B) Crop Loan Insurance 700mln 700mln 1,000mln Impact: Under this scheme, the government is bearing the cost of premium on account of small farmers up to 2% per crop per season. This will allow farmers to hedge their risk. Phase II of the Prime Minister s National Health Insurance Program has been launched and 3mln families benefited from it in 41 districts. The program is being expanded to all districts of Pakistan. FUNDING SCHEMES Impact: The scheme will provide coverage against expenses due to health problems 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. Enhancement in Agriculture Credit to PKR 1,100bln. Impact: The government has further enhanced allocation for Agriculture Credit to PKR 1,100bln 9% higher than last year. However, this amount is higher than FY19 s budgeted Federal PSDP of PKR 800bln. Increase in this credit facility will be favorable for MFPs in meeting their credit disbursement targets. Budgeted allocation of PKR 3.5bln for Prime Minister s Interest Free Loan Scheme. Impact: This scheme aims to provide interest free loans to poor, vulnerable and marginalized households categorized under 0-40 on the Poverty Score Card. PPAF has successfully implemented this loan facility in 45 districts. In FY18, ~PKR 4bln were disbursed through this scheme while an amount of PKR 3.5bln is planned in FY19. BUDGET FY19 IMPACT ON MICROFINANCE PROVIDERS Page 2 of 6 PACRA Analytics (Pvt.) Limited

4 BUDGET FY19 SNAPSHOT Neutral: Prime Minister s youth schemes to continue with a revised allocation of PKR 10bln (FY18: 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 subsidized rates and are in direct competition with MFPs. However, loans routed through PPAF will continue to provide funding for MFPs and are beneficial for the industry. Rise in allocations for BISP by 3% while 17% decline in budget for Bait-ul-Maal (PKR) FY18 (B) FY18(R) FY19 (B) BISP 121bln 113bln 124.7bln Bait-Ul- Maal 6bln 6bln 5bln 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: Reduction in the allocation of Livestock Insurance Scheme and Credit Guarantee Scheme for small farmers. Credit Guarantee Scheme for small farmers provides 50% coverage against loan losses. (PKR) FY18 (B) FY18(R) FY19 (B) Livestock Insurance Scheme 1,000mln 1,000mln 100mln Credit Guarantee Scheme 1,000mln - 100mln Impact: These schemes protect microfinance lenders against potential losses and offer reduced financing cost for borrowers. Under Livestock Insurance Scheme, the government is bearing the cost of premium (upto 4% per annum) of small farmers who have obtained loan up to 10 animals. Significant reduction in allocation of this scheme may lead to higher cost of premium for MBFs. Meanwhile, a huge cut in the budgeted allocation of Credit Guarantee Scheme would lower the government s contribution in loss sharing with participating financial institution. BUDGET FY19 IMPACT ON MICROFINANCE PROVIDERS Page 3 of 6 PACRA Analytics (Pvt.) Limited

5 BUDGET FY19 SNAPSHOT Positives: Profit on debt from deposits with Microfinance Banks proposed to be eligible for tax credits. Impact: Income earned by non-profit organizations from investment in deposits with scheduled banks is eligible for tax credit. It is proposed to include income derived from deposits with MFBs shall also qualify as income eligible for 100% tax credit. In line with tax reforms package, Individuals tax rate slabs have been revised. Impact: To provide relief to individuals, including the salaried class, tax rates have been revised. Five new tax slabs have been introduced and PKR 2,000 tax is proposed for income up to PKR 1.2mlm per year. This will not only increase the purchasing power of individuals but would also raise the repayment capacity of those borrowers of MFPs that fall in lower tax brackets. Tax on undistributed before tax profits of public companies reduced to 5% from 7.5% and condition of distributing 40% of after tax profits is revised to 20%. FISCAL MEASURES Impact: Tax rate on undistributed profits of any public company (other than a scheduled bank or a modaraba) is proposed to be revised from 7.5% to 5%. Moreover, the mandatory requirement to distribute at least 40% of its after tax profits for a tax year is to be reduced to 20%. Furthermore, bonus shares have been excluded from the purview of dividend distribution for this purpose. This will be applicable on MFIs registered as public companies and MFBs. Reduction in distribution rate would help these institutions in strengthening the retained earnings, in turn, equity base. Reduction in Corporate Tax from 30% to 25% by 2023 and onwards Impact: It is proposed in the budget to decrease the corporate tax rate by 1% each year till 2023 when it will be 25% instead of existing 30%. This will be beneficial for MFPs that are planning to launch for profit operations. Withholding tax of 5% on issuance of bonus shares is abolished. Impact: The withholding tax of 5% on issuance of bonus shares is omitted in this budget to ease the cost for companies. This will be beneficial for MFBs that plan to issue bonus shares in future. Various relief incentives and concessions on inputs of Agriculture sector to continue. Impact: The government continues to offer several measures to support agriculture sector. In this regard, rate of 7% tax on certain agricultural items/equipment is proposed to be reduced to 5%. Moreover, sales tax rate on supply of all fertilizers has also been proposed to be slashed to 3%. The government would continue to provide electricity for agricultural tube wells at subsidized rates. These initiatives would eventually provide relief to the farmers in shape of lower input costs and will enable them to earn better profits and will improve their repayment ability. Exemption of FED on commission paid by the SBP to NBP or any other banking company, acting as agents Impact: Exemption from Federal Excise Duty (FED) is being granted on commission paid by State Bank of Pakistan (SBP) and its subsidiaries to NBP or any other banking company acting as agent for handling banking services of Federal or Provincial Governments. MFBs falling under this category will get the benefit. BUDGET FY19 IMPACT ON MICROFINANCE PROVIDERS Page 4 of 6 PACRA Analytics (Pvt.) Limited

6 BUDGET FY19 SNAPSHOT Neutral: Capital gain on sale of securities Impact: The Bill proposes to keep tax rates in respect of capital gains on sale of securities unchanged for the tax year Advance Tax on Banking Transactions other than cash Impact: Advance tax collection by banks on banking transactions (other than cash transactions) is proposed to be maintained at 0.4% instead of 0.6% for FY19. This will not have any impact on MFBs as this is applicable on all banking institutions and there is no change since last year. Negatives: Super Tax, though to be successively abolished, extended up to tax year 2020 Impact: Presently the Super Tax is 4% for banking companies and 3% for persons other than banking companies having income of PKR 500mln and above. This tax is proposed to continue up to tax year However, it is planned to be abolished in a phased manner by cutting tax rate by 1% every year starting from FY19. Thus it will impact the profitability of MFBs for another 3 years although at a lesser degree. Carry forward of depreciation losses has been limited to the extent of 50% of the business income for a tax year Impact: It is proposed to limit the carrying forward of depreciation and amortization losses up to 50% of business income for a tax year except where taxable income is up to PKR 10mln. Positives: Investment in water and electricity projects to continue and long awaited construction of Diamer-Bhasha dam has finally been approved. OTHERS/ REGULATORY Impact: Investment in water and electricity projects is a priority agenda of the government. In FY19 budget, allocation for power sector investment has been increased to PKR 138bln while for water sector it is proposed to be PKR 79blnn (FY18: 36.7bln). Moreover, long awaited construction of Diamer-Bhasha dam has finally been approved. The dam, with an estimated cost of PKR 474bln, will have 6.4 million acres feet live storage capacity and an installed power capacity of 4,500 MWs. This project will increase national water storage capacity from 38 days to 45 days. Availability of energy will improve the business environment and assist MFPs in portfolio expansion as benefits of these projects will reach general population. Low inflation scenario envisaged to continue. Impact: Inflation has largely been curtailed and was recorded at 3.8% in FY18 vis-à-vis last year s inflation of 4.0%. Low average rate of inflation is positive for MFPs target market. Inflation is expected to be higher than the preceding year on account of rising fuel prices and PKR depreciation in FY19. However, this is not expected to put significant strain on borrowers as the government aims to keep inflation below 6% in FY19. BUDGET FY19 IMPACT ON MICROFINANCE PROVIDERS Page 5 of 6 PACRA Analytics (Pvt.) Limited

7 BUDGET FY19 SNAPSHOT Relief limit to widow borrowers from House Building Finance Corporation increased. Impact: Currently the government is paying the loans of widow borrowers from House Building Finance Corporation up to the value of PKR 0.35mln. In FY19, this limit has been increased to PKR 0.6mln. This relief may benefit borrowers of MFPs in terms of better repayment capacity. Interest Rate Environment: Expectations of interest rate hike. Impact: Interest rate environment in Pakistan remained stable on the back of low inflation and government s focus on growth. SBP raised interest rates in Jan 2018 by 25bps and the policy rate now stands at 6.0%. It is expected that interest rates will gradually increase as PKR has depreciated and inflation might go up. Higher interest rates will affect cost of funds for MFPs and could squeeze their spread if they are not able to pass it on to the borrowers. BUDGET FY19 IMPACT ON MICROFINANCE PROVIDERS Page 6 of 6 PACRA Analytics (Pvt.) Limited

8 BUDGET FY19 REPORT TABLE OF CONTENTS DETAILED REPORT CONTENTS PAGE SECTION Report: Macro Economy An overview 1 Budget FY19 Highlights 3 Impact on Microfinance Providers 5 I SECTION Annexures: Law Referencing A II

9 BUDGET FY19 REPORT 1. MACRO ECONOMY AN OVERVIEW Continued growth momentum Significant growth in Agriculture sector contributed to strong GDP Growth Rising Inflation and Fiscal Deficit Pressure on Exchange Rate Negative Outlook by Fitch Ambitious GDP growth target 1.1 GDP Growth (FY18): During FY18, Pakistan s Economy continued its growth momentum by recording GDP growth of 5.8% (FY17: 5.4%). It is now the 24 th largest economy of the world GDP Growth and Sectoral Contribution standing at USD 313bln. FY18 (P) FY16 (F) FY17 (Revised) FY18 (P) Services sector remains Sectors GDP Contribution Actual Growth Actual Growth Actual Growth the largest contributor to GDP N.A 4.6% 5.4% 5.8% GDP followed by industrial Service 60.0% 5.7% 6.5% 6.4% Industrial 21.0% 5.7% 5.4% 5.8% manufacturing and Agriculture 19.0% 0.2% 2.1% 3.8% agriculture. The Source: Economic Survey FY17-18 P: Provisional adjacent table highlights respective sector s contribution to GDP and their growth During FY18, agriculture sector, which caters to 42% of the country s labour force, registered a growth of 3.8% (FY17: 2.1%). Positive growth other crops and forestry segments, as compared to their negative share last year, and better YoY production of important crops (growth: FY18: 3.5%; FY17: 2.1%) were stimulus for higher growth During FY18, higher development expenditure, favorable monetary policy and continuous spending on CPEC related projects along with global economic recovery continued to support Pakistan s economy. This is also evident from higher credit to private sector on YoY basis (9MFY18: 15.9%; 9MFY17: 13.4%). Resultantly industrial sector grew by 5.8% in FY18 as compared to 5.4% last year. Large scale manufacturing posted growth of 6.1% (FY17: 5.6%) while small scale manufacturing stayed at ~8.2%. Construction continued to be the largest contributor (growth: FY18: 9.1%; FY17: 9.8%) towards the growth of industrial sector. Mining & quarrying registered positive share (growth: FY18: 3.0%; FY17: -0.3%) whereas electricity generation & distribution & gas distribution grew modestly (FY18: 1.8%; FY17: 5.8%) Services sector, the highest contributing sector in GDP, sustained its growth at 6.4%. Higher YoY performance achieved by General Government Services (growth: FY18: 11.4%; FY17: 5.9%) and maintained growth of wholesale and retail (FY18: 7.5%; FY17: 7.4%) added in robust performance of the sector. 1.2 Economy at a Glance: During FY18, major macro-economic factors presented a mixed trend. Though few positive indicators were sustained, many challenges persist and need to be addressed. Economic Indicators FY18 FY19 Target i) Per-Capita Income (USD) 1,691 N.A ii) Inflation (Average) 3.8% below 6% iii) Policy Rate (Average Discount Rate) 5.85% N.A iv) Fiscal Deficit to GDP 5.5%* 4.9% v) Remittances (USD Mln) 16,257** N.A vi) Forex Reserve (USD Mln) 17,286*** 15,000 Social Safety i) BISP disbursements (PKR Mln ) 113, ,700 ii) Prime Minister's Initiatives (PKR Mln) N.A 10,000 * Budget Estimates ** Jun-AprFY18 ***Jun-MayFY18 BUDGET FY19 Page 1 of 12

10 BUDGET FY19 REPORT Per-Capita Income: During FY18, Pakistan s per capita income largely sustained (FY18: USD 1,641; FY17: USD 1,632) 1. Pak Rupee (PKR) witnessed depreciation with USD averaging PKR in Jul-Apr FY18 (Jul-Apr FY17: PKR per USD). Nevertheless, better YoY GDP growth helped in sustaining per capita income. Pakistan is currently classified as lower-middle income country (threshold of USD 1,026) as defined by World Bank Development Indicator 2. Inflation Rate: During 9MFY18, Inflation was curtailed at 3.7% (4.0% in Jul-Apr FY17) due to subdued food prices offsetting the impact of rising petroleum prices. Inflation is expected to rise due to higher international oil prices and pressure on exchange rate. However, the government aims to keep inflation in single digits in coming years (less than 6% inflation targeted for FY19). This will provide respite to MFP borrowers as their repayment ability is directly impacted by inflation. Policy Rate: Overall macroeconomic stabilization provided an opportunity for SBP to keep policy rate stable at 5.75% during FY17. This monetary stance continued in 1HFY18. However, considering (i) PKR depreciation, (ii) rise in oil prices, and (iii) policy rate adjustments by number of central banks, SBP raised policy rate to 6% in January It is expected that interest rates will gradually increase in FY19 as PKR has depreciated and inflation might go up. Higher interest rates will affect cost of funds for MFPs and could squeeze their spread if they are not able to pass it on to the borrowers. Fiscal Deficit to GDP: Owing to higher imports and lower exports, the fiscal deficit is expected to be around 5.5% of GDP in FY18 (FY17: 3.8%). Better revenue collection and lower fiscal deficit gives financial flexibility to the government and frees up funds for economic activities. Foreign Exchange Reserves: During 9MFY18, the country s foreign reserves further declined down owing to surge in import bill. As of May 4, 2018, foreign exchange reserves stood at USD 17.2bln from USD 21.4bln at end-jun17. The current account deficit reached USD 12.0bln during 9MFY18 compared to a deficit of USD 7.9bln in the same period last year owing to widening of trade and services account deficits. However, the remittances from oversees workers registered a growth of 3.9% and were recorded at USD 16.2bln at end-apr18. The trend is expected to continue in coming months and is estimated to meet the target of USD 20.6bln remittances for FY18. In budget FY19, the government has targeted USD 15bln foreign exchange reserves. Pakistan, being net importer, of oil is facing pressure due to rising oil prices. This coupled with rising import bill is depleting our foreign exchange reserves. Considering, decline in foreign currency reserves of the country and widened fiscal deficit, Fitch revised the outlook on Pakistan s long-term foreign and local currency issuer default ratings to Negative from stable and has affirmed B rating for both the categories in Jan Moreover, during 1HFY18, the Pakistan Stock Market remained volatile. The PSX index touched the peak of 47,084 in August It then started to move down and reached the lowest level of 37,919 in December However, since January 2018, the market gained momentum and KSE 100 index closed at 45,560 at end-mar FY19 Prospective Assessment: The government is targeting to achieve 6.2% GDP growth for FY19. However, considering the ongoing uncertainty on political front and challenges on fiscal side, this target seems ambitious. Though the positive sentiments stem from several factors including successful war on terror, improving law and order situation, and energy reforms. Another key 1 As per PBS, Per Capita Income during FY17 is PKR 162,230/- based on provisional figures of population census held in March 2017 i.e. 207,774,520. The revise series of Per Capita Income will be compiled after finalization of 6th Housing and Population Census results. 2 Lower middle-income economies are those with a GNI per capita between USD 1,026 and USD 4,035. BUDGET FY19 Page 2 of 12

11 BUDGET FY19 REPORT 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. However, the rise in deficit due to higher imports and lower than expected growth in exports, poses a challenge and could impact multiple fronts including foreign reserves, exchange rate, and inflation. Meanwhile, foreign reserves have further declined. Pak Rupee witnessed depreciation and is currently at PKR 115 per USD. This, coupled with surge in crude oil prices, may lead to inflationary pressure in coming months. The country s fiscal discipline and political stability are crucial for future prospects. 2. BUDGET FY19 HIGHLIGHTS Growth stimulus through promotion of exports and better agriculture productivity Drive for documenting the economy Revision in tax brackets and lower tax rates for individuals and AOP 2.1 Budget Strategy: The government achieved a historic milestone by presenting its sixth consecutive budget. The total outlay of FY19 budget is PKR 5,932bln 16% higher than FY18. The government continues its focus on economic growth promotion of exports, job creation, enhancing agriculture Budget Summary - PKR Bln productivity etc. and FY18 (R) FY19 (B) % change documenting the economy. In FY19 budget, with the aim to reduce fiscal deficit, the Total Budget Outlay Inflows Internal Resources 5,361 5,361 3,545 5,932 5,932 3, government continues its i. Tax Revenue 4,147 4, revenue augmentation drive ii. Others 1,714 1, by targeting an additional tax iii. Provincial Share -2,316-2, collection of PKR 741bln. Moreover, significant increase in bank borrowings has been planned, with lesser reliance on external resources. On the expenditure side, amounts of PKR 363bln and PKR 101bln have been budgeted on account of General Public Services and Defence Affairs & Services, respectively. While an additional PKR External Resources 1,230 1, Privatization Proceeds Bank Borrowings 586 1, Outflows 5,361 5, Current Expenditure 4,298 4, i. General Public Services 2,977 3, ii. Defence Affairs & Services 999 1, iii. Others Development Expenditure 1,063 1, i. Federal PSDP ii. Others (R): Revised, (B): Budgeted 50bln has been allocated under the head of Federal PSDP in budget FY19. Total planned Federal PSDP for FY19 would be PKR 1,030bln out of which PKR 230bln would be selffinancing by the corporation/authorities and PKR 800bln is provided through budget FY19. A rise has been observed on account of foreign loans repayment (FY19: PKR ~776bln; FY18: PKR 326bln) as external loans increased by 47% in revised estimates of FY18 as against the budgeted amount of PKR ~838bln. Meanwhile, social net is expected to strengthen 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, quantum of several schemes has been reduced including Prime Minister s Youth Program and others. 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 FY19 Page 3 of 12

12 BUDGET FY19 REPORT 2.2 Expenditures: The budget for FY19 projects total expenditure of PKR 5,932bln, ~11% higher from revised estimates of outgoing fiscal year. The budgetary outlay constitutes ~81% of current and 19% developmental expenditures. General Public Services expenditure, constituting 70% of current expenditure, is estimated at PKR 3,340bln. For FY19, PKR 1,650bln has been planned for PSDP, which is 4.3% of GDP. Out of this, PKR 850bln is allocated to provinces. Whereas, Federal PSDP allocation (FY19: 800bln, FY18(R): 750bln) has risen by only 6.7%. In the Federal PSDP, no allocation has , Current Expenditures FY18 (R) FY19 (B) been made for Special Federal Development Programme (FY18 (B): PKR 40bln), Energy for All (FY18 (B): PKR 12.5bln), Clean Drinking Water for All (FY18 (B): PKR 12.5bln). Whereas an additional amount of PKR 10bln has been estimated for FATA 10 Year Plan. However, the actual utilization of PSDP remains to be seen since government adjusts this amount to manage deficit. The development expenditure, outside of PSDP, has been estimated at PKR 180bln in the budget FY19, higher by 17.7% over revised estimates of FY18. Under this head, PKR 124.7bln has been provided for Benazir Income Support Programme and an additional provision of PKR 3.5bln has been made for Prime Minister's Interest Free Loan scheme. Total subsidies for FY19 has been estimated at PKR 174.7bln, which increased by 18.4% over revised estimates of FY18. In this, subsidies to power sector continue to have major (85%) share. The government has not allocated any money for subsidy to fertilizer sector despite making allocations in the revised budgets over the years (FY19(B): PKR Nil, FY18(R): PKR 10.7bln, FY17(R): PKR 25bln). 1.4 Receipts: For FY19, the Federal Government is forecasting to generate gross revenue of PKR 5,932bln 16% higher than budgeted estimates of FY18 through tax and non-tax sources. Out of this, PKR 2,590bln will be provincial share. To meet the deficit of PKR 1,890bln, the government will use different source of funding including external borrowings, bank and non-banking financing, and surplus generated by provinces. For FY19, the government has planned considerably higher amount of bank borrowings as compared to last year (FY19: PKR 1,015bln; FY18(R): PKR 586bln). This could result in relatively lower growth in private sector credit, especially if interest rates rise. 1.5 Tax Collection: The tax revenue for FY19 is budgeted at PKR 4,888bln, ~18% higher than revised estimates of FY18. For FY19, FBR tax collection is targeted at PKR 4,435bln. For the ongoing fiscal year, FBR revenue is projected to increase to PKR 3,935bln, which is two times higher than the tax collection of FY13. Moreover, in this budget, the government is planning to meet tax target through better tax administration and compliance rather than introducing new tax measures. Furthermore, tax brackets for Individuals and Association of Persons have also been revised with reduction in tax rates. This will provide relief to salaried class. The proportion of indirect tax (61%) remains high. Increase in indirect taxes may inflate prices of goods in the country. While cost for non-filers is set to rise on multiple fronts including higher withholding tax rates and , , Mark-up (Domestic) Mark-up (Foreign) Foreign Loan Repayment Pensions Defence Affairs and Services Grants & Transfers Subsidies Civil Government BUDGET FY19 Page 4 of 12

13 restriction on purchase of vehicles and property. The non-tax revenue is projected at PKR ~772bln in FY19 as compared to PKR 845bln in revised estimates of FY18. BUDGET FY19 REPORT 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Tax Receipts ,595 1,563 1,735 2,418 2,372 2,700 FY18 (B) FY18 (R) FY19 (B) Indirect Taxes Direct Taxes Others Amount: PKR bln 3. IMPACT ON MICROFINANCE PROVIDERS Increased focus on agriculture Phase II of the Prime Minister s National Health Insurance Program Profit on debt from deposits with Microfinance Banks proposed to be eligible for tax credits Super Tax, though to be successively abolished, extended up to tax year The budget FY19 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 repercussions positive, negative or neutral for microfinance sector in Pakistan FUNDING SCHEMES The increased budgetary allocation of PKR 180bln (FY18(R): PKR 153bln) 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. Continuation of 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: Continuation of this scheme will help MFPs to expand their lending portfolios. II. Increased allocation of funds for Crop Loan Insurance Scheme (CLIS). CLIS introduced in 2008, mitigates the default risk of small farmers, in case of occurrence of natural calamities. Under the scheme, which is mandatory for five major crops cultivated by small farmers having land holding up to 25 acres, the government is bearing the cost of premium on account of small farmer s up to 2% per crop per season. More than 3.8 million farmers have benefitted from this scheme since its inception. For FY19, the government has allocated higher funds for this scheme. BUDGET FY19 Page 5 of 12

14 BUDGET FY19 REPORT (PKR) FY18 (B) FY18(R) FY19 (B) Crop Loan Insurance 700mln 700mln 1,000mln Impact: Under this scheme, the government is bearing the cost of premium on account of small farmers up to 2% per crop per season. This will allow farmers to hedge their risk. III. Phase II of the Prime Minister s National Health Insurance Program has been launched Impact: The access to better medical care facilities is becoming costlier in Pakistan. The program is being expanded to all districts of Pakistan in FY19. Around 3mln families benefited from it in 41 districts in FY18. The scheme will provide coverage against expenses due to health problems 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. Enhancement in Agriculture Credit to PKR 1,100bln. This amount 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) in FY17 and FY18. It is expected that the same mechanism will continue in FY19. Impact: The government has further enhanced allocation for Agriculture Credit to PKR 1,100bln 9% higher than last year. However, this amount is higher than FY19 s budgeted Federal PSDP of PKR 800bln. Increase in this credit facility will be favorable for MFPs in meeting their credit disbursement targets. V. Budgeted allocation of PKR 3.5bln for Prime Minister s Interest Free Loan Scheme Impact: This scheme aims to provide interest free loans to poor, vulnerable and marginalized households categorized under 0-40 on the Poverty Score Card. This programme supports female participation and inclusion in economic activities by disbursing at least 50% loans to women. It also enhances the entrepreneurial competencies by extending capacity building services, e.g. enterprise training & counseling, market linkages, financial literacy and numeracy training. This scheme encourages behavioral change by demanding loan beneficiaries to ensure specific health and education practices. Pakistan Poverty Alleviation Fund (PPAF) has successfully implemented this loan facility in 45 districts. In FY18, ~PKR 4bln were disbursed through this scheme while an amount of PKR 3.5bln is planned in FY19. BUDGET FY19 Page 6 of 12

15 NEUTRAL: BUDGET FY19 REPORT I. Prime Minister s youth schemes to continue with a revised allocation of PKR 10bln (FY18: PKR 20bln) Impact: 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. These loans are offered at subsidized rates and are in direct competition with MFPs. However, loans routed through PPAF will continue to provide funding for MFPs and are beneficial for the industry. II. Rise in allocations for BISP by 3% while 17% decline in budget for Bait-ul- Maal: The program was initiated as an effort to provide relief to the underprivileged of the society. Allocation of funds under these scheme for FY19 is given below: (PKR) FY18 (B) FY18(R) FY19 (B) BISP 121bln 113bln 124.7bln Bait-Ul- Maal 6bln 6bln 5bln 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. Reduction in the allocation of Livestock Insurance Scheme and Credit Guarantee Scheme for small farmers. Credit Guarantee Scheme for small farmers provides 50% coverage against loan losses. (PKR) FY18 (B) FY18(R) FY19 (B) Livestock Insurance Scheme 1,000mln 1,000mln 100mln Credit Guarantee Scheme 1,000mln - 100mln Impact: These schemes protect microfinance lenders against potential losses and offer reduced financing cost for borrowers. Under Livestock Insurance Scheme, the government is bearing the cost of premium (upto 4% per annum) of small farmers who have obtained loan upto 10 animals. Significant reduction in allocation of this scheme may lead to higher cost of premium for MBFs. Meanwhile, a huge cut in the budgeted allocation of Credit Guarantee Scheme would lower the government s contribution in loss sharing with participating financial institution. BUDGET FY19 Page 7 of 12

16 BUDGET FY19 REPORT FISCAL MEASURES POSITIVES: I. Profit on debt from deposits with Microfinance Banks proposed to be eligible for tax credits Impact: Income earned by non-profit organizations from investment in deposits with scheduled banks is eligible for tax credit. It is proposed to include income derived from deposits with MFBs shall also qualify as income eligible for 100% tax credit. This will have a positive impact for MFBs as they will be on equal terms with commercial banks. Ref: Section 100C of Income Tax Ordinance II. In line with tax reforms package, Individuals tax rate slabs have been revised Impact: To provide relief to individuals, including the salaried class, tax rates have been revised. Five new tax slabs have been introduced as against twelve slabs currently available. Proposed slabs and revised rates are as follows: Proposed Amount Where the taxable income does not exceed PKR 400,000 Where the taxable income exceeds PKR 400,000 but does not exceed PKR 800,000 Where the taxable income exceeds PKR 800,000 but does not exceed PKR 1,200,000 Where the taxable income exceeds PKR 1,200,000 but does not exceed PKR 2,400,000 Where the taxable income exceeds PKR 2,400,000 but does not exceed PKR 4,800,000 Where the taxable income exceeds 4,800,000 PKR Rates 0% PKR 1,000 PKR 2,000 5% of the amount exceeding PKR 1,200,000 PKR 60, % of the amount exceeding PKR 2,400,000 PKR 300, % of the amount exceeding PKR 4,800,000 This will not only increase the purchasing power of individuals but would also raise the repayment capacity of those borrowers of MFPs that fall in lower tax brackets. Note: There seems to be some ambiguity in the amended Ordinance. No tax is required to be paid by individuals deriving annual income up to PKR 1,200,000. However, the finance bill proposes the above mentioned tax for the individuals deriving income from PKR 400,000 to PKR 1,200,000. Ref: Division I Part I - First Schedule of Income Tax Ordinance BUDGET FY19 Page 8 of 12

17 BUDGET FY19 REPORT III. Tax on undistributed before tax profits of public companies reduced to 5% from 7.5% and condition of distributing 40% of after tax profits is revised to 20% Impact: Tax rate on undistributed profits of any public company (other than a scheduled bank or a modaraba) is proposed to be revised from 7.5% to 5%. The mandatory requirement to distribute at least 40% of its after tax profits for a tax year is to be reduced to 20%. Moreover, bonus shares have been excluded from the purview of dividend distribution for this purpose. It has also been sought to give relief to companies by treating this tax as advance tax. This will be applicable on MFIs registered as public companies and MFBs. Reduction in distribution rate would help these institutions in strengthening the retained earnings, in turn, equity base. Ref: Section 5A & 8 of Income Tax Ordinance 2001 IV. Reduction in Corporate Tax from 30% to 25% by 2023 and onwards will lessen the tax burden on entities Proposed Tax Year Rate % % % % 2023 and onwards 25% Impact: It is proposed in the budget to decrease the corporate tax rate by 1% each year till 2023 when it will be 25% instead of existing 30%. This will be beneficial for MFPs that are planning to launch for profit operations. Ref: Division II Part I - First Schedule of Income Tax Ordinance V. Withholding tax of 5% on issuance of bonus shares is abolished Impact: The withholding tax of 5% on issuance of bonus shares is omitted in this budget to ease the cost for companies. This will be beneficial for MFBs that plan to issue bonus shares in future. Ref: Section 236M & 236N of Income Tax Ordinance 2001 VI. Various relief incentives and concessions on inputs of Agriculture sector to continue including fertilizer, agricultural machinery and electricity used in tube wells Impact: The government continues to offer several measures to support agriculture sector. In this regard, rate of 7% tax on certain agricultural items/equipment is proposed to be reduced to 5%. Moreover, sales tax rate on supply of all fertilizers has also been proposed to be slashed to 3%. The government would continue to provide electricity for agricultural BUDGET FY19 Page 9 of 12

18 BUDGET FY19 REPORT tube wells at subsidized rates. These initiatives would eventually provide relief to the farmers in shape of lower input costs and will enable them to earn better profits and will improve their repayment ability. VII. Exemption of FED on commission paid by the SBP to NBP or any other banking company, acting as agents Impact: Exemption from Federal Excise Duty (FED) is being granted on commission paid by State Bank of Pakistan (SBP) and its subsidiaries to NBP or any other banking company acting as agent for handling banking services of Federal or Provincial Governments. MFBs falling under this category will get the benefit. Ref: Section 16 - Third Schedule of Income Tax Ordinance 2001 NEUTRAL: I. Capital gain on sale of securities to remain the same Impact: The Bill proposes to keep tax rates in respect of capital gains on sale of securities unchanged for the tax year Ref: The Part I - First Schedule of Income Tax Ordinance 2001 II. Advance Tax on Banking Transactions other than cash kept at 0.4% Impact: Advance tax collection by banks on banking transactions (other than cash transactions) is proposed to be maintained at 0.4% instead of 0.6% for FY19. This will not have any impact on MFBs as this is applicable on all banking institutions and there is no change since last year. Ref: Section 236P & Division XXI Part IV - First Schedule of Income Tax Ordinance NEGATIVES: I. Super Tax, though to be successively abolished, extended up to tax year 2020 Sr. # Tax Payer Rate of Super Tax (%age of Income) Banking Company 4% 3% 2% 0% 2 Other taxpayer with income of PKR 500mln and above 3% 2% 1% 0% BUDGET FY19 Page 10 of 12

19 BUDGET FY19 REPORT Impact: Presently the Super Tax is 4% for banking companies and 3% for persons other than banking companies having income of PKR 500mln and above. This tax is proposed to continue up to tax year However, it is planned to be abolished in a phased manner by cutting tax rate by 1% every year starting from FY19. Thus it will impact the profitability of MFBs for another 3 years although at a lesser degree. Ref: Section 4B & Division IIA Part I - First Schedule of Income Tax Ordinance II. Carry forward of depreciation losses has been limited to the extent of 50% of the business income for a tax year Impact: It is proposed to limit the carrying forward of depreciation and amortization losses up to 50% of business income for a tax year except where taxable income is up to PKR 10mln. Ref: Section 57 of Income Tax Ordinance REGULATORY & OTHERS MFPs are likely to avail the benefit of stable macro-economic conditions: POSITIVES: I. Investment in water and electricity projects to continue and long awaited construction of Diamer-Bhasha dam has finally been approved Impact: Investment in water and electricity projects is a priority agenda of the government. In FY19 budget, allocation for power sector investment has been increased to PKR 138bln while for water sector it is proposed to be PKR 79blnn (FY18: 36.7bln). Moreover, long awaited construction of Diamer-Bhasha dam has finally been approved. The dam, with an estimated cost of PKR 474bln, will have 6.4 million acres feet live storage capacity and an installed power capacity of 4,500 MWs. This project will increase national water storage capacity from 38 days to 45 days. Availability of energy will improve the business environment and assist MFPs in portfolio expansion as benefits of these projects will reach general population. II. Low inflation scenario envisaged to continue Impact: Inflation has largely been curtailed and was recorded at 3.8% in FY18 vis-à-vis last year s inflation of 4.0%. Low average rate of inflation is positive for MFPs target market. Inflation is expected to be higher than the preceding year on account of rising fuel prices and PKR depreciation in FY19. However, this is not expected to put significant strain on borrowers as the government aims to keep inflation below 6% in FY19. BUDGET FY19 Page 11 of 12

20 BUDGET FY19 REPORT III. Relief limit to widow borrowers from House Building Finance Corporation increased Impact: Currently the government is paying the loans of widow borrowers from House Building Finance Corporation up to the value of PKR 0.35mln. In FY19, this limit has been increased to PKR 0.6mln. This relief may benefit borrowers of MFPs in terms of better repayment capacity. IV. Interest Rate Environment: Expectations of interest rate hike Impact: Interest rate environment in Pakistan remained stable on the back of low inflation and government s focus on growth. SBP raised interest rates in Jan 2018 by 25bps and the policy rate now stands at 6.0%. It is expected that interest rates will gradually increase as PKR has depreciated and inflation might go up. Higher interest rates will affect cost of funds for MFPs and could squeeze their spread if they are not able to pass it on to the borrowers. 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 FY19 Page 12 of 12

21 ANNEXURE A LAW REFERENCING Previous Section Reference: Income Tax Ordinance, 2001 Change Amendment The Bill proposes to: New Reference Number: Income Tax Ordinance, A & 8 57 i. reduce the tax rate from existing 7.5% to 5%; ii. the minimum profit distribution threshold to be reduced to 20% from prevailing 40%; and iii. exclusion of bonus distribution from the purview of profit distribution for the purpose of this tax. It has also been sought to give relief to companies by treating this tax as advance tax. Amendment Carry forward of depreciation losses has been limited to the extent of 50% of the business income for a tax year except where taxable income is up to PKR 10mln. Same Same 100C Amendment Scope of 100% tax credit available to NPOs on profit on debt from scheduled banks also extended to profit on debt from micro-finance banks. Same 236M & 236N Amendment Withholding tax of 5% on issuance of bonus shares is abolished. Same

22 ANNEXURE A Division I Part I - First Schedule Amendment Substantial reduction in tax rates for individuals and five new tax slabs have been introduced as against twelve slabs currently available. Same Division II Part I - First Schedule Amendment Reduction in corporate tax from 30% to 25% by 2023 and onwards. Same 4B & Division IIA Part I - First Schedule Amendment Super Tax, though to be successively abolished, extended up to tax year Same 236P & Division XXI Part IV - First Schedule Amendment Reduction in rate of advance tax already applicable on banking transactions other than cash withdrawals by non-filers to 0.4% instead of 0.6% for FY19. Same 16 - Third Schedule Amendment Exemption of duty on commission paid by State Bank of Pakistan and its subsidiaries to banking companies for handling banking services of Federal and Provincial Government. Same