The unprecedented fiscal firepower used to protect the vulnerable from the harsh socio-economic impact of the COVID-19 pandemic and the resulting economic contraction have pushed the average government debt level in the Asia-Pacific region to its highest since 2008.
Public debt distress is expected to worsen amid the global economic slowdown, record high inflation and rising interest rates, and uncertainty induced by the war in Ukraine. And surging debt service payments are expected to put public debt sustainability of several developing Asia-Pacific economies at risk. Most concerning, debt distress risk is highest for countries with the highest development finance needs, including small island developing States.
Public debt is a powerful development tool in need of a major rethink
Yet, a higher debt level is not necessarily a bad thing, according to this year’s edition of the Economic and Social Survey of Asia and the Pacific. Current policy debates on public debt sustainability do not take into account the long-term positive socio-economic and environmental impact of public investments in laying the foundations of inclusive, resilient and sustainable prosperity.
Indeed, left unaddressed, development deficits and climate risks hurt economic prospects and public debt sustainability itself. Our analysis shows that social spending cuts increase poverty and inequality and undermine economic productivity in the long term. Conversely, investing in healthcare, education, social protection and climate action is good economics.
Multilateral lenders and credit rating agencies focus excessively on keeping debt sustainable in the short term. Such perceived optimal debt levels are too low and lead to suboptimal development outcomes. Revisiting current debt sustainability norms has also become necessary with the emergence of major non-traditional bilateral creditors and a drastic fall in concessional development lending to Asian and Pacific countries over the past decade.
It is time for a bold shift in thinking about public debt sustainability. We propose an augmented approach that assesses public debt viability that takes into account a country's SDG investment needs, government structural development policies aiming to boost economic competitiveness, and national SDG financing strategies.
It is time for creditors, international financial institutions and credit rating agencies to consider the positive long-term economic, social and environmental outcomes of investing in the SDGs, while assessing public debt sustainability. Our research finds that public debt is found to decline over the long term when the socio-economic and environmental benefits of public investments are incorporated.
Rather than penalizing bold fiscal support for people and the environment, international creditors should consider if such spending would boost economic productivity. Lenders and credit rating agencies should see debt relief as helping support the fiscal outlook, rather than as a sign of an upcoming debt default.
Developing countries should also strive to balance investing in the SDGs with ensuring debt sustainability. Governments should not feel deterred from borrowing for essential, high-impact sustainable development spending; rather, funds should be used efficiently and effectively. Public coffers should also be boosted by resource mobilization strategies designed to generate social and/or environmental benefits, such as through progressive taxation.
Effective public debt management reduces fiscal risks and borrowing costs, with several examples of good public debt management practices in the Asia-Pacific region. At the same time, countries with high debt distress levels may need pre-emptive, swift and adequate sovereign debt restructuring, while efforts towards common international debt resolution mechanisms and restructuring frameworks needs to be accelerated.
We are in the fourth year of the Decade of Action to accelerate progress towards the SDGs with not much to show in gains. It is time for Asia and the Pacific to rise to the challenge of mobilizing the financial resources to realise the dream of resilient and sustainable prosperity for all.