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BUDGET FY18

REPORT

IMPACT ON MICROFINANCE PROVIDERS

June 2017

BUDGET FY18 – SNAPSHOT


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

http://www.pacraanalytics.com/




PROVIDERS



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.





PROVIDERS



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.





PROVIDERS



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.





PROVIDERS



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.





PROVIDERS



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


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 – IMPACT ON MICROFINANCE PROVIDERS Page 1 of 11


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





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.





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.





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)





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.





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





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.





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.


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.





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.


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.





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.





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


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


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%.

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