Does Internal Borrowing of Pakistani Government Affect Corporate Leverage?

Abstract

For the past few years, the government of Pakistan has increased its domestic borrowing to a record level. This increased government borrowing could have reduced funds for investment by the non-financial corporate sector. In this study, we empirically investigate the influence of state domestic debt on corporate leverage in Pakistan. This study examines data of 07 non-financial sectors listed at PSX for a period of 2009-2018. The firm-level panel data was analyzed through the fixed-effect method. Results reveal that government domestic borrowings have a negative influence on corporate borrowings. Commercial banks in Pakistan have heavily invested in government debt securities which are the substitute for corporate debts due to the high rate of return and low risk of default. This study recommends that the government of Pakistan should strengthen the Fiscal Responsibility & Debt Limitation Act 2005 to safeguard against the adverse effects of govt. internal borrowing on the financing of the corporate sector. Further, the government should prepare effective fiscal and monetary policies to promote the growth of the corporate sector.