Debt-to-GDP falls to six-year low, boosting business optimism
Lawmakers in Islamabad felt relieved when the State Bank of Pakistan (SBP) announced the debt-to-GDP ratio had fallen to just 65.7 per cent in September. This figure is in stark contrast to the 94 per cent debt-to-GDP ratio in 2020, A time when Islamabad was struggling to pull the nation out of the economic quagmire it found itself in.
Islamabad has achieved this feat by aggressively implementing import controls, restructuring debt and increasing tax collection levels. Restrictions on imports in the past few years have reduced the trend of financing imports via loans. Meanwhile, lawmakers have consistently been on the lookout to reprofile and restructure Pakistani loans to get better conditions on preexisting loans.
However, policymakers are not the only ones celebrating, as the drop in debt-to-GDP ratio spells great news for businesses, too.
With over 90 per cent of the domestic economy depending upon consumption, a drop in consumer-based taxes will greatly boost the growth of the economy. This is because reduced taxes will translate into a fall in the prices of goods, causing an increase in consumers' purchasing power.
The government has already proposed tax breaks for New energy vehicles (NEVs), and business owners across the country are hoping for a decline in taxes for their sectors, too.
The fall in prices due to potential tax cuts is expected to bring about an increase in consumption levels as goods and services will seem more affordable to customers. Businesses are the primary beneficiaries of this expected rise in consumption levels. This is bound to increase profit margins for business owners.
These increased profit levels, in turn, will allow businesses to expand the scope of their operation in the most organic of ways. This is because this trajectory of expansion does not require business owners to take on any debt or to give up an ownership stake to finance new ventures.
Aside from taxation concerns, a drop in the debt-to-GDP ratio is expected to increase government expenditure. This is especially true for projects which are currently not being pursued due to the austerity measures set in place by international lenders such as the IMF (International Monetary Fund).
As it stands, all provincial governments are expected to maintain a fiscal surplus. In simple terms, this is the inflow of funds, and the government should exceed the outflow. With the debt-to-GDP ratio dropping, the government will have more breathing room when it comes to borrowing funds for projects. This will spell great news for businesses that rely on government contracts to make a living.
Economic indicators have been moving in a positive direction recently, which is a great win for Islamabad. What experts are wondering is if Pakistan has finally broken free from the chains of economic destitution or if it will fall back into the vicious cycle of borrowing. Time shall tell.