Government repays 1.9 trillion rupees in debt, unlocking credit for businesses
Lawmakers in Islamabad celebrated as the government managed to repay a total of 1.9 trillion rupees in debt. This is just one of the significant fiscal achievements that the government has managed to obtain, as all economic indicators seem to be moving in the right direction.
The repayment will likely spell good news for businesses as excessive government borrowing from commercial banks can create a crowding-out effect. Essentially, when the government starts to borrow large sums of money, it limits the private sector from being able to access credit. This is usually also true because an increase in the government's demand to borrow money is likely to apply upward pressure on loans.
Businesses in Pakistan, however, will be able to access funds more freely from banks, with the government paying back its outstanding loans. This is likely to increase debt-fueled growth within business circles as banks will likely direct new loans to businesses. This could be especially beneficial for those industries that have struggled to obtain loans.
The KSE-100, which is the benchmark index of the Pakistan Stock Exchange (PSX), crossed a historical 100,000 points. And experts are predicting that the stock exchange numbers might improve as the increase in the extension of credit to businesses will help businesses expand the scope of their operations and, ultimately, increase dividend payments.
Historically, banks in Pakistan have preferred investing in risk-free government securities as opposed to lending to businesses due to the low levels of risk that are associated with holding government debt. Moreover, the Advance-to-Deposit Ratio (ADR) is expected to drop once new private loans are issued.
It is to be noted that the repayment of debt was made possible due to an increase in revenue due to the 70 rupee per litre petroleum levies. While this levy has bolstered government finances, it also indirectly contributes to rising fuel costs for businesses.
Businesses already struggling due to the high petroleum levy will not be pleased to hear that Islamabad is considering an increase in fuel prices. A rise in fuel costs will undoubtedly increase transportation expenses, leading to reduced profit margins for businesses that rely on transporting goods from warehouses to stores.
To the manufacturing sector, the high fuel costs will mean a rise in operating costs and a cut into their meagre profits if they pass the fuel costs without a corresponding rise in prices. The companies, however, may experience reduced demand for their products if they are forced to increase their prices due to the high cost of fuel.
Although the repayment of public debt offers businesses improved credit access and possible growth, the increase in petrol prices is a more immediate and serious concern.